Talk Your Book: The Macro Case for Crypto

0:00Today's Animal Spirits Talk Your Book is brought to you by Fidelity Digital Assets. on September 19th, 11 a.m. Eastern. Fidelity will be having their next edition of The Value Exchange. They're going to discuss their latest research report, Ethereum Investment Thesis, Ethereum's Potential as a Digital Money and a Yield-Bearing Asset, which we're going to talk about on the show today. If you want to learn more, we're going to have a link in our show notes. You can also go to fidelitydigitalassets.com to learn more. 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.

0:35All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This 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.

0:55All right, so it's Wednesday, August 30th. On Tuesday, big news hit the crypto industry. GBTC, the trust, not an ETF that has been at the center of a lot of ups and downs over the years inside of the crypto industry, won their case against the SEC, which is notable. I think just So the idea of an asset manager suing the SEC and winning is something that most people probably would have thought unlikely. Although I guess in this case, a lot of industry insiders did actually expect this outcome. But definitely a watershed moment. People say the caveat is it doesn't necessarily mean an ETF is for sure.

1:37The SEC could, I guess, try to fight back. But it sounds like at this point, it's inevitable. Yeah. And it wasn't like the court ruled against the SEC and said, oh, yep, there's an ETF coming November 1st. Right. Right. Because of where we are in the cycle, in the crypto winter or whatever, where the speculative excess has been totally wrung out and there's not much talk about it anymore, I'm really curious to see what this means. I mean, if the ETF would have come out when Bitcoin was at$70 ,000 or whatever, wherever it peaked, I think it would have been a way different scenario than where it is at$27 ,000 or wherever it is when it happened.

2:15And there was a little bump in the price, but not a huge bump. So I'm really going to be interested to see how big one or multiple of these Bitcoin ETFs will be once it happens. Yeah. And again, short term, but whatever. It's giving back a little bit today. So yeah, we'll see. Definitely interesting news. All right. Don't want to step into the tutorial. We got into this with the guys at Fidelity Digital Assets. So with that, here's our conversation with Jack and Ramin.

2:43We're joined today by Jack Newrider. Jack is the Senior Digital Analyst at Fidelity Digital Assets. We're also joined by Ramin Bigdeli-Azari. Ramin is the Director of Product at Fidelity Digital Assets. Good to have you guys back on the show. We're going to start today talking about the elephant in the room, which was the GBTC ruling. Today is Wednesday, August 30th. Before we get to that, Jack, describe for us, this came at an interesting time because the vibes, the overall sentiment, almost apathy, it feels like towards crypto. I don't even know if it's a winter or what you would call it, but it seems like there was very little going on.

3:28So prior to the announcement on Tuesday, how would you describe, maybe with some data if you have it, the state of crypto? Yeah, I think you kind of summed it up there a little bit. It's not a whole lot going on. I mean, you could say that sentiment is poor, but I don't even know if I would say it's poor. It's just the only people left are the people that have been here for a while, for the most part. Broadly summarizing that, of course, there are net new faces here and there. But it's a lot of, people like to call it a PVP-type environment, player versus player, where it's the same capital sort of sloshing back and forth alongside some of these protocols based on small things happening in different corners of crypto markets.

4:15But you don't see necessarily a huge new use case that brings in a whole slew of new users. So what I would say is that's kind of classic crypto market cycle and what you saw back in 2018 after the drawdown in the first half of 2018. from mid 2018 through 2020, it was kind of just a, I don't want to say boring as the word. There's stuff happening underneath the surface, but from the traditional asset manager that's just looking at crypto, they're probably not spending much time paying attention to it because it's not making a bunch of news headlines the way that it is during a bull market. And so low volatility, you do lose some of the correlation during these time periods because traditional asset managers aren't as deep into the space or aren't paying as much attention to the space.

5:08But it's not necessarily for great reason, right? Because you're not seeing a bunch of outperformance from crypto assets. So it's kind of your classic bear market. Ramin, we got a question from a listener actually earlier this week. He said they've been kind of following the ETF stuff and saying, hey, hey, I've never put any money into Bitcoin or crypto before, but with an ETF coming, I'm starting to think about it more for something like my IRA. And their whole thesis was, I'll read here, they said, we're thinking an ETF would make sense because it would be considerably more mainstream and therefore maybe entice more investors to take the plunge and possibly drive up the price.

5:46Obviously, with the caveat that we never know what's priced into these things, what do you think the expectations are? because obviously we saw the stuff from the court hit and the price went up. It didn't go up a ton. It went up, I don't know, 6 % to 10 % or something. But how much money do you think coming into this space has been priced in, or is that impossible to know? It's pretty impossible to know exactly how much has been priced in, but I think more theoretically the offering of an ETF does exactly what is being proposed. It provides a really easy entry point, a really efficient entry point for those that have existing access to broker-dealers and through their advisors, through retirement accounts.

6:27In today's environment, because of the regulatory frameworks, you see that there are distinct providers that have been set up specifically to offer services for digital assets. So for someone to come and access digital assets, they need to onboard to a completely new experience, exchange your custodian, access liquidity through them. And that's just generally a burden or a hurdle for those that get into the space. And so I think the general sentiment is that with an ETF offering, it just becomes much more seamless. You go through your traditional channels, you get with any other ETF, you have the options of different types of accounts that you can access.

7:02So you have more tax advantage accounts, which generally with the optionality, more seamless opportunity to access the asset class, you would imagine that more money would flow in. In terms of exactly how much is priced in, I think it's very difficult to say. I'd say, you know, expect the market to be fairly efficient in such that, you know, so much of this would be priced in by now. But I think it's just very difficult to say right now, given what we're seeing in terms of activity, exactly what the result will be in the price. Michael, you had a number. What was it? What did you say? A hundred billion dollars eventually within a certain?

7:34What was your number? Oh, so I threw out$100 billion in the first year, and Balchunas set me straight. He's like, dude, GLD has$55 billion in assets. So maybe I was a bit optimistic. But let's say I was over-optimistic by two. Let's say$50 billion. Although, I don't know. Do you guys know how much are in the ETFs in Canada? I think it's only a billion or two. I don't know if it's a great proxy, but. You got to fact check me. All right. Well, so we got the news yesterday, and Bitcoin underneath popped. although not like crazy. I don't know. It's 5%, 6%. GBTC, of course, the discount now, it's substantially, I think from like 25 to 17 or something thereabouts.

8:16And the judges ruled three to zero. I don't know if the SEC is going to appeal. Maybe they will, maybe they won't. I don't know how any of this works. But what they said was like, they used words like the SEC was arbitrary and capricious in their ruling and that you have to treat like cases as like. And of Of course, the futures Bitcoin ETF, which currently exists, is not too dissimilar from the spot Bitcoin that they're wanting. And then going beyond that, there's a leveraged futures ETF, which is, I mean, I just, you know, that just sounds a little wild to me. But be that as it may, it sounds as if a spot Bitcoin ETF is on the horizon.

8:54And this has major ramifications because I would suspect that, pick a number, 90 % of of all people that want to open up an account and buy physical Bitcoin or ETH or whatever, have probably already done that, right? There's been like several speculative manias. And if you haven't done it at this point, you're probably waiting for an easier way to do it because it's still, it still could be a bit, a bit cumbersome. So this, this has to change the dynamics going forward, do you think that the ETF is going to simultaneously kill demand or dampen demand for the actual coins, but also bring more people in?

9:38And if so, sorry for the rambling question. And if so, like, where do we, what sort of impacts do we think this is going to have on the overall market? I don't know about dampened demand for the actual coins. I think there's a, There's an explicit reason why people would utilize the spot Bitcoin ETF as opposed to going through the entire process. You kind of named it out of all the operational and other considerations that go along with creating a separate relationship for a small portion of your traditional portfolio. So maybe for Bitcoin, you would see flight to just a simple ETF-like product.

10:17as the crypto industry is trying to bring crypto to traditional investors rather than historically it's been traditional investors have to go out of their way explicitly to come to the crypto industry to make an allocation. And so this would be like a huge move towards bringing crypto to traditional investors in a way that wasn't previously possible. But it is at the moment anyways only Bitcoin exposure here. And so I think for a lot of traditional investors, Is that enough? It's an easy way to get exposure to what makes up 50 % of crypto's market cap. I think you can make that argument. But at the same time, the ancillary services and offerings that custodians can offer don't exist in products and probably won't for the time being, which is the fact that you have proof of stake assets.

11:11You have alternative assets that aren't going to sit inside of these products, at least at the moment anyways. Ramin, do you think – I'll use the word Bitcoin here. Let's just focus on Bitcoin for a second and not ETH or any of the other stuff. Can Bitcoin be an asset class if the use case that started this whole thing never really materializes? And that being mostly Heyman's use cases, what you're referring to? Yeah, just self-sovereign, non-censorable. If people never really use Bitcoin in the way it was intended, can it still stand on its own as an asset class for investors in their portfolios?

11:56Could it be like millennial or Gen Z gold? Yeah, I mean, I was going to say the ETF is going to be a monumental shift, right? In the kind of dynamics of how people access the asset class. but bitcoin is very much a global asset and so you think about those that do not have access to traditional broker dealers right i think one of the primary use cases initially was you know banking the unbanked as well right so those that do not have access to traditional financial services products accessing bitcoin as an alternative really as a store of value so we're to maintain that value outside of kind of local currencies um so that that use case still stands firm right so the same people would not have access necessarily easily to this etf product right there's not just the us etf there's been one launched in europe now uh one there's some in canada as well so i think there will be more and more products available on a global basis but i think the use case still stands i think people will continue to hold this the spot physical dematerialized bitcoin um and you need to think about it for you know real use cases so if you do want to use it for a payments use case.

13:00I think that we haven't seen as much activity, I think, as expected early days of Bitcoin, but it's still a use case. And then, you know, in terms of really store of value on a global basis, I think, you know, that thesis still stands. Finance people are so stuck in the past because we still call it a coin and we still call it physical. Shouldn't it be called digital Bitcoin? Exactly. Yeah. Just to add to some of what Ramin was saying, with Bitcoin, there's basically two use cases, right? It's censorship resistant payments, and it's an aspiring store value asset. There's only going to be 21 million of them.

13:34And it's ruled by this decentralized governance process that would have to determine that there should be more than 21 million coins. And like, that's not in the broader consensus interest. So those two properties still exist, even if spot Bitcoin ETFs become large holders, of Bitcoin. And that's the way that investors that live in large developed countries allocate to the space, right? Maybe they allocate not because it's this censorship resistant payment network, but because it's a store value asset. And the way that they get access to that is via an investment product with a custodian on the end that they're trusting.

14:14But that doesn't take away the fact that people in emerging countries can utilize it as a payment network or can utilize scaling technology on top of it. And so just because one of the value propositions is more important to a certain set of investors doesn't take away the other use case that exists. And that's a really fair point. As an American, we forget that not everybody has global reserve currency in their pocket. So that's a really, really good and often overlooked point. There is a great irony that one of the largest holders of Bitcoin in a couple of years could be a large traditional financial asset manager, whether it's iShares Fidelity, whoever.

14:57So I don't, you know, whatever. Well, it's not the result of those people looking at existing payment providers and saying like, oh, this is so much better for payments, right? It's more the result of, hey, look at global sovereign debt levels and look at what the likely outcome is, right? Is fiscal policy going to become more restrictive? Are we going to have austerity and less spending? Or are we going to have debasement in a central bank that monetizes debt over time? If you think that that's more likely, then maybe you look at Bitcoin as this aspiring store of value asset. And I think that's the framework that most large investors that are looking at this space, they see the value prop through that potential store of value asset.

15:41Well, if Bitcoin has an ETF approved, I would assume the Ethereum ETF would not be too far behind. And the way that it was always explained to me is that Ethereum is kind of taking the building blocks of Bitcoin and building on it. And it was kind of like, this is, if you could have invested in like the internet when it was first started, like the network of it, you're investing in like the computer network or however it is, however you want to describe it. where do we stand in terms of Ethereum? Because it does seem like Bitcoin is kind of pigeonholed into this store of value, you know, censorship resistant, and Ethereum was supposed to be, okay, we're going to build on that, and now you can do something on this network.

16:17So where do we stand with Ethereum these days? So I think, again, and we probably mentioned this before, is Ethereum added this idea of smart contracts and programmability that we could have other use cases outside of simply peer-to-peer payments and potentially being, you know, this alternative monetary system that can serve as a store of value. And with it comes this whole idea that if you can build applications on top of it, could we put other assets on top of this network and create more transparent banking and financial markets infrastructure? Or could we decentralize some of the idea of content ownership on the web?

16:58You hear this idea of Web3 and taking out the middleman in some of these situations. It is necessarily more speculative, especially today, given that if you want to bring real-world assets onto these chains, the regulatory environment hasn't really given you a lot of clarity and reassurance that your token is a claim on a real asset. Right. And like large capital can't really interact with these networks necessarily on chain because of certain KYC AML laws that don't factor in the fact that if you interact with a decentralized application, you could be interacting with somebody money laundering or something like that.

17:39Right. I mean, it's an extreme scenario, but that prevents a lot of would be allocators or users of these networks from using them. And so with Ethereum, what I like to say is it is a technology platform. It is necessarily more speculative in its use cases at the moment. It's also five, six years younger than Bitcoin. And so we have to kind of think about it from a timeline perspective and where Bitcoin was five or six years ago, because that's kind of where Ethereum is at the moment. And then that changes sort of the risk-reward outcome, right? There's probably more risk embedded in it because the use cases are more speculative, but also at the same time, that could have a higher payout rationally.

18:22Yeah, I think just to add on that, the use case for Bitcoin is Bitcoin versus Ethereum is a foundational technology that creates a decentralized computing network, essentially, where you can build the use cases on top of it. And so the collection of these decentralized applications then create value in the network. And so it's dependent on the delivery of those use cases, the proliferation of those. And so I think we're seeing some interesting use cases come to life now, but it has been a little bit slow. We're seeing most of the activity in the world really DeFi activity. So decentralized financial applications, tokenization of money with stable coins.

19:00I think there's a number of use cases that have been looked at, but it has taken some time. And so as Jack mentions, right, the foundational technology is out there. They're continuing to upgrade that technology in order to make it more scalable, to really think about the future use cases and make sure that the platform itself can handle those. But there's more work to do. The platform's not done. And I don't know if it ever will be, you know, quote unquote, done. But the more we see use cases build on top of it, the more use there will be of the network and therefore kind of the value grows of the underlying technology.

19:35DeFi has not, I don't think, correct me if I'm wrong, taken off to the extent that people might have hoped. Also interesting to note that MasterCard is hitting an all-time high right now. Visa is not far behind. So the traditional payment rails, they're fairly entrenched. And I think it's going to be maybe more difficult to disrupt than people might have thought. As far as the Ethereum stuff goes and the smart contracts and the Legos, which was a good analogy, do you think a lot of the wind was sucked out of that space because of the proliferation of AI, just in terms of where capital and talent is flowing these days?

20:15Yeah, I mean, I think talent has been driven out of all kind of spaces towards AI, right? I think you see some of the valuations and the activity from some of those AI-focused companies. And yeah, I think there's just a lot of excitement there. It's truly foundational technology that could change the way that we live. I think just like it has any other industry, it's impacted blockchain developers. I don't know that I would say that it has a direct impact specifically to DeFi that I've seen, unless, Jack, you have any data that says differently. No, I don't. But what I would say also is while crypto is easy to look at price volatility because it trades 24-7, 365, at the same time, these are like networks that are trying to take core primitives that exist in centralized finance and then recreate them in an on-chain, transparent way that anybody can get access to.

21:10And when you say, what's sustainable, ultimate success of DeFi? It's, in my mind anyways, 50 years from now, we have a more transparent financial system where anybody can get access to it or they could go through a third party to get access to it. But underneath the surface, the entire system operates in a more fair, transparent way. And so if that's the ultimate goal, like, sure, we are always going to measure things on the surface of where do prices go and what is usage over a six-month time period. But you're not going to change the entire financial services industry and the way that people interact with it over a one, two, three-year time horizon.

21:59And like if we go back, you know, Uniswap 2018, Aave, same time period, like the core primitives of DeFi, of trading, borrowing and lending, the true adoption of like stable coins in any meaningful way. It was in like the 2017 to 2019 time period. And so those have existed for like four years with the idea of like making a more transparent version of the existing financial system without true like regulatory clarity. It's just the big picture of what could make this sustainably successful won't happen over the micro 6, 12 months. It will happen over the span of 10, 20, 30 years if it's successful.

22:39We talked to both of you almost a year ago. Now, I guess it was last fall in Boston. And you were saying, listen, in the crypto winter, I think, had already kind of begun, or at least the pretty nasty bear market. And you said, we're seeing an exodus of people from the space. said they're coming and Fidelity is trying to bring some of those people in. Where do we stand in terms of that, in terms of people becoming available, interesting, smart people in this space that are kind of up for grabs? We've done a lot of hiring in the last few years. So we've grown pretty substantially in the digital asset space at Fidelity.

23:14I think what we saw is that the market was incredibly tight for a while, right? Through kind of the bull runs that happened, And I guess it was about two years ago now. It was very difficult to bring people in. I think there were a lot of new ventures that were starting up. There was a lot of excitement. What we saw, though, is that that changed a bit and we were able to do a lot of hiring. We've been able to get a lot of talent from outside in the market. And then also what I'd say is even internal to Fidelity. As years have passed, people have been able to explore the space themselves and built a level of expertise such that when we bring them into the digital asset space, they come with a level of knowledge that they're able to gain on their own, but it's very valuable to us.

23:56And so I think just as time has passed, you've seen that there's just a greater population of folks that have actually dealt in the space, either on a personal level or professionally. I think it's been a little easier to kind of find that talent in market recently. Of course, still fairly tight, but has become a bit more favorable. Can we get back to, Jack, you were talking about earlier the case for Bitcoin on the macro front. I think it's really interesting. The interest expense on our debt, I think is going to exceed, if not already exceeds our defense spending budget, which is a ludicrously large number.

24:33So whether there's debasement in our currency, which of course, there always is, to me, that is a reasonably objective bulk case for an alternative store value like Bitcoin. And yet, you could never really draw one-to-one conclusions like, oh, Bitcoin is up today because people are afraid of the federal deficit. It's very difficult to draw those direct lines. But are you surprised at how Bitcoin has been acting over the last, I don't know, couple of quarters? Not necessarily, because if you look at what's the traditional store of value asset, if we call it cash or if we call it fixed income instruments, they've arguably become more attractive over the past six, 12 months, right?

25:21Because cash isn't trash if it pays five and a quarter percent, give or take, and inflation is, I don't know, three percent over the past year. I mean, that is a positive carry on your cash position. Whereas before it was, you were getting paid nothing on cash and inflation was one and a half, 2%. And so it was a drag on your portfolio, right? It was a melting ice cube, as some in the Bitcoin space would say. And now that's not necessarily the case in the short term. But again, you mentioned this whole idea of like, okay, well, what does interest expense become, right? And when does that start to become problematic?

25:59And who's going to buy all of that debt? That's the big picture that, again, on a micro, you know, six, 12 month time period, Sure, can we paper over larger interest expense? Yes. But it becomes problematic on a five and 10 year time horizon if we're rolling over all of this debt at far higher rates with debt to GDP at 120%. The only other time you had that in US history was post World War II, which was a period of financial repression, negative real interest rates. well jack you've i know you've written a piece in the past trying to value bitcoin do you take things like real interest rates into account because that's always kind of been the thing i've heard for gold is if real interest rates are rising that's bad for gold because gold doesn't really pay a dividend obviously there's always other other variables at stake here but is that something that that makes sense to you if real interest rates are rising that that would be should be bad for crypto is a headwind i guess yeah so there there's sort of uh i would argue kind of like two elements here, right?

27:00There's the macro things that like ultimately Bitcoin's not controlling. That's like the extrinsic variables. Then there's the intrinsic variables of like Bitcoin itself, its supply schedule, there's only 21 million. And then, you know, there's it posing itself based on its monetary properties against traditional monetary assets, fiat currencies, fixed income instruments, golds, precious metals. And if you look at like the adoption curve, this is what I talked about or wrote about in the piece on valuing Bitcoin. We know Bitcoin's supply schedule is inelastic or irresponsive to changes in demand, right?