Talk Your Book: The Bitcoin Halving

0:00Today's Animal Spirits Talk Your Book is brought to you by Fidelity Digital Assets. Go to Fidelity Digital Assets.com to check out all of their research and learn more about Bitcoin crypto crypto. Very interesting. They got some nice research pieces up there, including understanding the Bitcoin halvening. I learned how to pronounce that on today's show. Halvening, halvening. Yes. Dealer's choice. FidelityDigitalAssets.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management.

0:38This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:53So it's been almost a month since the Bitcoin ETFs launched and they're just on fire. Not only the price, which hit an all-time high, but yesterday Jim Bianco tweeted, and we're recording this on Friday, March 8th. The 10-spot Bitcoin ETFs had 709 ,820 trades yesterday on March 5th. This is more trades than SPY and QQQ combined. Wow. I was bullish on the launch. This has exceeded my expectations by a factor of, I don't know, pick a number. The volume might be even more impressive than the assets that's growing because the volume is, there's a crazy high amount of turnover in these things. So that like how liquid it is now, that's pretty crazy.

1:35Yesterday, Fidelity, the ETF hit a record daily inflows of four, this is from the block, of 473.4 million. Again, these are massive numbers. So do you remember when the dream in 2017, that first really big bull market was, okay, this is all retail, but what happens when institutions come in? Pensions and endowments and foundations. Yeah, but I don't think RAs was at the top of the list really for many people of this is going to make big changes. But obviously, that has to be a big part of it. Yeah, I think that's a good point. I think during that bull run, it was just way too early for advisors to even consider getting involved in most cases.

2:13Yeah, I think most people assumed the institutions would be the first ones that would want to. But obviously, giving them this vehicle in the ETF structure has opened up a lot of avenues that people weren't really considering. So today's show, we talked to Matt Horn from Fidelity Digital Asset Management and Chris Kuyper, also from Fidelity Digital Asset Management, just to learn more about the launch of the ETF, what's going on in crypto, behind the scenes stuff. Great timing for this conversation. So here is our talk with Matt and Chris. We're joined today by Chris Kuyper. Chris is a director of research at Fidelity Digital Asset Management.

2:50Also with us is Matt Horn. Matt is the head of business development for Fidelity Digital Asset Management. Gentlemen, welcome to the show. Thank you for joining us. Thank you. My pleasure. Thanks, guys, for having us. All right, Chris, we're going to start with you. We had you on, let's see, November 13th. And it was good timing because this was just a couple of weeks after the tweet that sparked the recent rally. This was from Bitcoin Magazine. Just in, U.S. Court of Appeals issues mandate that the SEC must review Grayscale Spot Bitcoin ETF application. So that sent the price of Bitcoin from$29 ,000 to start the day and end of the day significantly higher,$34 ,000, something like that.

3:33And then over the next couple of weeks, we got a rally into the ultimate approval and launch of the Bitcoin ETFs, which took the price from$34 ,000 all the way to, let's see, January 11th was, it was the peak. All right. So like$49 ,000. And then we got a little bit of a pullback to 38 ,000. Here we are today at 66 ,000. Bitcoin is such an interesting asset class, just in terms of the price, the supply, the demand, what moves it. People thought that, boy, this is a long introduction, forgive me. People thought that everything was priced in, that the ETF was priced in, that whatever flows were going to happen were priced in.

4:13Again, they ran 33 ,000 to 49 ,000. Well, it's been not even two months. And here we are at 66 ,000. So safe to say it wasn't priced. And when you think about or where you hear like normie midwits like me talk about things that are priced in with crypto specifically, how do you think about what's priced into the market? Yeah, it's a great question. One I obviously don't have the answer to. Nobody does. But just to go through your timeline there, I'll say one thing we kind of got right on the research side and one thing we got very wrong. What we did get right was we did think it was going to be the classic Wall Street adage buy the rumors, sell the news.

4:50And no offense to my colleague Matt here, but I did think there would be kind of a sell-off after it was finally approved because you saw this in a lot of the data, like the speculative data, the derivatives, the open interest on the futures and options for Bitcoin. There's perpetual futures on Bitcoin. And so you saw those perpetual rates, those funding rates spike up to 30 % annualized into the end of last year, the calendar year and the beginning of the year. And then they all just collapsed once it was finally approved. So - Chris, I'm sorry. I'm sorry. What does that mean? 30 % funding rate?

5:20So it gets a little technical, but Bitcoin has futures that don't expire. They're called perpetual futures. And so to balance these, to match the buyers and sellers, if there's more people that want to go long, they have to pay a funding rate to the shorts and vice versa. And so when the funding rate gets really positive, that means more people want to go long and they have to pay the shorts. And it was at a rate. These are assessed every eight hours, but if you annualized it was at a 30 % annualized rate, meaning there was just super bullishness from the speculators in these derivatives going into the ETF.

5:55And then we got the approval and it was classic Wall Street, buy the rumor, sell the news. All these things collapsed, came back, you mentioned the pullback. And I thought, okay, we got that call right. And then I said, I think these products will have a nice start out of the gate because they're highly anticipated, but it's going to be a slow burn. If you think of these products, they're going into the RIA market, advisors. It takes a long time to get onto all these platforms, as you well know. That's your expertise, not mine. And you got to educate people on them. So I thought we'll see a nice slow burn of demand in the next one to two years.

6:26And I'm happy to say I was dead wrong. I mean, these things are trading enormous volumes, even larger volumes today than they were in the first week. And we've seen massive flows. And so that's the thing that you're seeing. And just one other quick point. I think on the last podcast you had me on, I probably talked about how we saw some potential for a tight supply environment. And I think that's what you're seeing. We saw coins leave exchanges. We saw people holding onto their coins a lot longer, illiquid coins. And then you've got this new demand from these ETF and ETP products. And then that's meeting this constrained supply.

7:04And that's why I think you're seeing it in the price action. I was in the same boat as you of the, okay, sell the news thing makes sense because you had a huge ramp up. And then I thought the same thing. I thought it's going to be a slow trickle in because people will be very defensive right away. They'll wait, especially the advisor community, wait and see, see how it trades a little bit. And there was that kind of wait and see period for a couple of weeks, maybe a month. And then all of a sudden the flows kept coming and coming and coming. And to your point, the volume too. It's hard to tell with ETFs because you don't know exactly who's putting the money in, but do you have a sense of how much of this is advisor driven and how much of it is more people who are hedging or trading on a daily basis or just individuals?

7:41Yeah, I'll give that one to Matt. I'm a bit hopping here, Chris. Great question, Ben. I would say it's really all investor types we're seeing at this point. To your point, it is hard to know with ETFs and the granularity with which market participants are trading in a particular product. However, it is fair to say, just based on my interactions and my team's interactions, it is pretty widespread. read. Obviously, retail is here. I think there's a number of reasons why this is happening, right? But we're also seeing other investor types come in. This is really a capital accessibility story, in my opinion.

8:19For over 10 years, Fidelity has been active in the digital asset space, building a bunch of different capabilities for different investor types. However, the ETP structure here really does democratize access to a variety of different pools of capital, which really didn't exist before this. You guys are obviously financial advisors. All day long, you deal with clients, registration types, account types, et cetera. It's a lot easier, frankly, in many cases to use an ETP in those types of accounts than trying to go direct to some maybe crypto native exchange. And that was sort of the case for the first wave of this.

8:55Bitcoin and other digital assets are pretty interesting because it is one of the only things I can think of, only asset classes or emerging asset classes I can think of, where retail could access it easily first. And then really institutions that I'd argue maybe ease of access for financial advisors is kind of here now. So it's a capital accessibility story where a lot of entities, whether it's retail or financial advisors on behalf of clients, or even some institutions that didn't want to go direct with a crypto entity, can now easily access exposure to the spot price of Bitcoin through a vehicle with which the probably accessing other asset classes right now.

9:32So I think that's a big part of the story, it's just the accessibility issue here. One more thing bad too, it's on the investor experience to a degree where this doesn't apply to every investor, but there definitely are investors out there that want to see all their assets in one spot. They don't want to have multiple logins or try to kind of API something in. It can get complicated for certain investor types. Now, there's plenty that happen to go multiple platforms, multiple logins. I'd argue institutions have been doing that for years with private investments. But for a decent amount of investors that we've come across and advisors too, it's just easier to have it all in one spot.

10:07And I think the ETP structure does give you that too. I was bullish on the launch in terms of how many assets this thing would gather. I think I underestimated how quickly it would happen. The numbers are astonishing. So there's an account on Twitter, HODL15 Capital, that does a really nice job talking about the different ETFs and all their holdings. So between the Fidelity Wise Origin Bitcoin ETF and the other biggest one, it's been not even two months and already almost 270 ,000 Bitcoin, which is, I don't know,$15,$16 billion. That is an insane amount of money. and it has to be coming from REAs.

10:55Just the pools of capital that we control, there's no other explanation. So I guess I didn't think that it would happen this quickly, especially given the run-up in price. I thought maybe advisors would be more sober. But I guess the counterpoint to what I just said is that if you're allocating 1 % to 2 % of your client's money, which I'm sure is probably generally the case, then I don't want to say what difference doesn't make where you get in price, but at one to 2%, you'd be a much less price sensitive buyer than if you were coming in with a 10 % allocation, of course, you're probably going to be more likely to take your time.

11:31Is that how you see it? For sure. There's an adoption curve here, right? I think there's always a cohort of advisors who maybe are early to something emerging like this, right? If you think of the advisor community, obviously REAs have a bit more autonomy than other types of advisors. So I would say for years, There's been a handful of REAs that may have been leading the charge here on this adoption. I'd say it's still early, though, Michael, because as we know, a lot of these bigger platforms still haven't approved a lot of these products just yet. It's potentially in flight here. Like the Morgan Stanley's of the world.

12:07Exactly. The bigger platforms. And obviously, that's a whole other sort of pool of assets that could potentially come in here. so like I said before it's definitely broad activity across all investor types retail with you know like I said you know IRAs can now buy spot Bitcoin via in ETP right so that's a big pool of capital as well and just the how many assets in the US are in IRAs I don't have a stat in front of me but it's substantial there's obviously a migration out of college you know higher friction products that were meeting the need before into these more liquid ETPs, right? So there's that migration happening too.

12:50I know you can't say it, but we can. So GBTC, I think 198 ,000 Bitcoin has come out of GBTC. I don't think, so there's like an argument, like, should you net that out of all the other ETF flows. My answer is absolutely not. Because if you had the foresight to invest in GBTC, you are likely sitting in a large gain, right? And so fine, if you were doing it in an IRA, then sure, you're going to get out of that product, which is, you know, multiple times more expensive on the expense ratio than a Fidelity Bitcoin ETF, for example. That makes a lot of sense. But in a taxable account, you're not paying capital gains just to save 100 basis points or whatever it is.

13:34So I think that the money that's coming out of GBTC is, I'm making this number up, is 10 % of it coming back into other ETFs? Is it 15? It's not half, no way. So even if you were to net out half of the flows, which I think is aggressive, still by any stretch, the Bitcoin ETFs have been spectacularly successful. And I'll end with this data point. Will Clemente III tweeted, Bitcoin ETF inflows have absolutely blown golds out of the water, not even close. So he shows a chart, GLD flows, and he even adjusted for inflation. And still, GLD flows, it was nice, but Bitcoin's just gone vertical. It's apples to oranges.

14:16So how do you guys think about, I don't know what you could say there, but just the terms of the money coming in and netting it out and just the size of this thing? I would agree with you. Despite the offloads of legacy products, there's still overwhelming demand. It was seeing that it flows, right? And you're seeing it in the asset growth for sure. It's very exciting. It's very encouraging. Again, it's hard to say exactly where it's coming from. I think you're seeing with some of the bigger products now, a pretty mature trading activity, right? And these kind of two-month-old products here, which is kind of pretty encouraging.

14:50We'll see where it goes. And what's interesting, back to Chris's earlier point on just the supply issue, right? these spot products are buying bitcoin is they're not using any sort of derivative of bitcoin they have to physically go out and buy they saw this demand and what's interesting and chris i like your thoughts here too if they could gold or other kind of scarce assets the stores of value when there's more demand gold miners will generally mine more gold more quickly and get it on market and kind of supply these demand etc you don't have that here you have this sort of a fixed supply schedule.

15:23We're entering the halving here in about a month and a half, where there is sort of a finite supply here in scarcity element, where I think a lot of folks are kind of waking up to that reality. You have this wall of new accessible capital meeting a finite supply digital asset. So I think that's what we're seeing right now with the activity. That's one of the things Michael has talked about. And Michael, I didn't know we were talking in terms of number of Bitcoins now. That's like Josh talking about stock prices. Nope. Sorry, rejected. That's not... Nope. Talking about the number of Bitcoin is very valid.

15:54Okay. No, I'm just saying, I didn't know. You talked about how there's 198 ,000 flowing out of GBTC. I didn't know we were, you're just like on it with that. I didn't realize it. Anyway. So the supply thing is something actually Michael's been harping on for a while. So we've also talked in the show how pronouncing words is kind of hard. So the halving, it's not halving because I'm sorry, the L in there is like, hurts my brain to look at. So you guys have a new piece of it. It's like half and half cream. I don't know. The halving, halving. So, Chris, explain that a little bit to us, too, because as sort of noobs in this space, sometimes it's hard to understand.

16:28But the way that I understood crypto the first time that it really made sense is like trying to wrap my head around it was it's an incentive system. And so maybe you can explain that side of it and what the having actually means for that incentive and the supply. Yeah, sure. So the debate, first of all, between having or having-ing, I've heard, I think they're both valid. I mean, this is language. We have to come to a consensus among a distributed, non-centrally controlled thing of language. So I'll allow either it. For the Tolkien fans, it reminds me of like Hobbit says, having, I don't know.

17:00Oh, there you go. Anyway, the having. So it's written in the Bitcoin code. And this is the protocol itself, where approximately every four years, the number of new Bitcoin coming out gets cut in half. So currently, approximately every 10 minutes, 6.25 Bitcoin are created. So this is new Bitcoin coming out. You can think of them being minted, right? And around April 18 or so, that's going to be cut in half. And it gets cut in half immediately, like overnight. It's not a gradual thing. So it's going to go from 6.25 to 3.125. So there's currently 900 new Bitcoin coming out per day, and that's going to get cut down to 450 Bitcoin per day.

17:39So why is that important? Well, I mean, first of all, why does it do that? And this is how Satoshi, the creator of Bitcoin, made it. And it was so the number of Bitcoin that come out get released really, really quickly. So if you had a curve, it would go way up and then it starts to taper off. So there's currently 19 ,644 ,000 Bitcoin out there already. And remember, there's a 21 million supply cap. So most of the Bitcoin are already released. And then if you're cutting that in half every four years, we're not going to see that near 21 millionth coin into the year 2140. And so it was kind of a way to bootstrap the network because who's getting the new coins?

18:16It's the miners, the people securing the network. And that's their reward. That's their incentive to do it. They're not doing it altruistically. They're doing it because they get these newly minted coins that they can then go sell and hopefully make a profit. There's all kinds of Bitcoin miners and miner company out there today. So getting back to our supply conversation, this is important because if the supply gets cut in half overnight, new incoming supply, and demand stays the same, Econ 101 says the price has to adjust. And also on that point too, you kind of touched on it or alluded to, the supply is very interesting because as you said, it's completely inelastic to the price.

18:51So unlike other commodities, you mentioned gold, oil, especially one of my favorite stats is to look at our demand for oil. It's insatiable. It just keeps going up and up and up. But the price of oil, especially on inflation adjusted terms, is actually down from 10, 20, 30 years ago. So how can our demand just keep going up, but the price of oil goes down? Well, it's because we keep bringing on new supply. The higher price induces more people to bring on supply. You cannot do that with Bitcoin. It's fixed. It's programmed. Nothing can change it. So the price cannot bring on more supply. It can only bring out more sellers who may want to sell at a higher price.

19:27Investing 101 states that known facts will be priced into the market. So the halvening, you said, is on around April 18th. And Bitcoin has continued to go back parabolic. It's now at$67 ,269 a coin. I don't know if it's anticipation of this or the supply things. But the way that I've been thinking about Bitcoin is I'm keeping it extremely simple. This is nothing more than supplier demand, Chris, as you just mentioned. I think last time we spoke, I threw out a number that like 70 % of all Bitcoin hasn't been traded in over a year. Most people are, you have to rip the Bitcoin from their cold dead body.

20:06Like they're just not selling. Of the 19 million you mentioned, I know a lot of it's just been lost, like just wallets that just are never going to be recovered. there was a tweet last week again from HODL15 Capital, new Bitcoin produced by miners last week, 6 ,160. Bitcoin purchased by ETFs last week, 30 ,029. So there is just a demand supply imbalance that is taking prices higher. And it's just really fascinating to watch because to your point, there's no other assets like this. Not all stocks, but if a stock was going up as much as this is, guess what? You issue more stock, right? Like that's what companies do.

20:46They take advantage. Isn't the retort here though, that there's all these other types of cryptos available as well. Isn't that the only retort that yes, Bitcoin is fixed supply, but we have all these other coins coming on too. Is that a valid, you know, that yes, but there's other coins that do other things as well. It's valid in that if, if someone's just looking for exposure to digital assets, they might do that. Right. But Bitcoin is Bitcoin and everything else is not Bitcoin. And there's a reason we think Bitcoin is superior in terms of its security and its decentralization. And that's why people want to store value in it, because it's the most secure, it's the most decentralized.

21:21If you want to store trillions of dollars of wealth in something, you want it to be the most secure, the most decentralized, the one that's had the longest history, the longest uptime, the one that hasn't been hacked. And everything else is just a copy. And we talked about this before. It's the network effect, right, where I could create my own Wikipedia. No one's going to come there. There's no network effect there. You could create your own watch that's just as good as a Rolex, but it's not a Rolex, right? Are you surprised at all, though, that some of these other coins have such high market cap still?

21:49That's the thing that kind of boggles my mind, the ones that really haven't done anything. Yeah, Dogecoin is over, Doge is 20 billion, I think. Does that surprise you at all? This is like another psychology lab sort of thing, but are you surprised that all these coins are still around in some cases? Yeah, if you look at the long arc, the top coins of even a few years ago are not the top coins today. and aren't even existing for many of them. They're completely defunct or have a zero price. But I'll agree with you. I mean, I'll put myself in that camp. I'm a little older than some people in the space.

22:20And there's some areas where I just say, I don't get it. But value is subjective. And the market is a free market. If people want to put value on it, I guess they're going to. But I'll continue to make the case for why I think Bitcoin is very different than a lot of these things. There's a lot of people that say like, oh, it doesn't do anything. I'm waiting for a use case. I said to Ben a couple of weeks ago, you know what Bitcoin does? It works. It does exactly what you think it's going to do. The code works, the purpose of it, whether you say there is a purpose or not, it does what it does and it's doing what it's doing.

22:53I know it's not very profound, but maybe that's enough. I think that's exactly it. Ben, back to those coins you're talking about that have a large market cap, but maybe apparent no use case. Obviously, if someone tried to liquidate any substantial portion of some of these, right, you might find quickly that there is no value there, right? So it is definitely part of it too. It's getting price in the margin, right? All right. So Bitcoin is going parabolic. Are we surprised? So a lot of the narrative in 2022 and 2023, listen, Bitcoin took a nosedive for reasons that are very apparent, right? Like the SBF FTX blow up did not inspire confidence.

23:32But now we're rapidly approaching all-time highs. Guess where interest rates are? They're still pretty high. I think one of the interesting things about crypto is that it's so hard to pin down what's going to move. And I think in this particular environment, it's incredibly crystal clear that it's more demand than supply. But it is doing that in the face of more restrictive monetary policy. How are you thinking about? What's the current framework for crypto and macro? Is there one there or is it secondary to like what we should be focused on? No, you hit exactly what we've talked a lot about in our research notes, which is Bitcoin, according to our research at least, is very responsive to monetary conditions.