Institutional Adoption Is Here to Stay with Jack Neureuter

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1:28As ever, I know I start all of these with I'm really excited about this conversation, but I genuinely am. I love being able to interview all sorts of people in the crypto space. And I've been trying to take you on that journey of understanding everything's happening in Web3, what's happening with the regulators, what's happening with the thinkers in the space, the macro people, and also what's happening with the adoption of the technology by the financial system. And these are really important parts. And today I'm bringing you on that thread again about the financial system. This time it's Fidelity.

2:02Obviously, Fidelity has been on Real Vision many times. We're huge fans of what they're doing for the space. I certainly am a huge fan. And this time we've got Jack Newrider. And Jack is the analyst on the digital asset team there. And he's got some interesting perspectives I want to hear to figure out how our institutions are looking at this. What are the stories he's telling them? And where does he see it all going? The world of crypto is an incredibly exciting journey that we're all going on together. We don't know where it's leading to, but we know it's going to be absolutely massive. Join me, Raoul Pal, as I guide you on our adventure to discover just what this new world will look like.

2:43Jack, welcome to Real Vision. Thanks for having me on. I'm a longtime listener, first time caller, I guess you could say. Fantastic. Look, I'd love, as ever, to give what you do today, and then we'll go back. And I want to hear your journey because everybody's journey is different. And I think it's always important to find out what was the trigger points. How did you get here and everything? So give people a bit of an idea of what you do now. Yeah. So I'm a research analyst for Fidelity Digital Assets. We can talk a little bit about Fidelity Digital Assets and what we do, who we support, if that's helpful.

3:19Yeah, we'll come into Fidelity once we've got your journey. When you arrive at Fidelity, we'll talk through what you guys are doing because obviously we've had a lot of the people from Fidelity on. It's always been great. Yeah, so I'm a research analyst for Fidelity Digital Assets. Really, we provide support for, for the most part, traditional investors that are looking to make allocations in the digital asset space. Or some of them are just interested in what are we doing in this space? Why do we care about it? They still are at the step one of this is magic Internet money. And, you know, you can copy Bitcoin and there's no difference between Bitcoin and Dogecoin.

3:55When in reality, if you if you dig a few layers deeper, the education piece, I think, is a huge key. That's where we come in and play a role for our existing clients, potential future clients to provide really a resource on the education and thought leadership front around Bitcoin, Ethereum and the digital asset space at large. How did you start in your journey into crypto? Yeah, I mean, I like to say I was predisposed to looking at Bitcoin and digital assets. I studied finance and economics at school and specifically alternative investments and macroeconomics. And so like what sits right at the sort of center or intersection of those two subjects is Bitcoin and digital assets.

4:39So I went through sort of different phases in college. I graduated in 2020. So really thinking about like valuation and studying sort of some of the greats, the Buffett, Graham Dodd, the classics. And then from there, going a little bit of a layer deeper and saying some of the Joel Greenblatt thoughts of, can we quantify that, right? Factor investing, you know, buy cheap and buy high quality. And we could look at factors instead of all of this valuation brain damage. And then from there, I was writing a thesis around the value trade and thinking about sort of macro and things like weren't adding up for me.

5:16Right. When I think of like the framework of a world from like 1980 through, I mean, you could say 2020 now, but at the time it was maybe like 2017, a world where interest rates kind of just go straight down in a linear line. As a result, the cost of capital coming down equity multiples go straight up. The system never truly deleverages because every single time policymakers step in and it's bigger than ever and it's more coordinated than ever. It's starting to put those puzzle pieces together with the dollar as a reserve currency going on nearly 100 years and reserve currencies only last 100 years.

5:52And then you look at Bitcoin, right? And it's sort of diametrically opposed, completely different system. And I like to say even if you ask someone, the average person, like I have two sisters, how does a financial system work or how does the dollar work? They describe something that sounds a lot more like Bitcoin than it does the dollar system. And you could ask 10 economists how the dollar system works and you get 10 different answers. I guess there's no right answer there. But that to me is what ultimately got me interested in the space. Started at Fidelity in prime brokerage, actually. And that was in 2020.

6:28And that was when, you know, crypto markets are still a relatively inefficient market relative to traditional finance. But even take it back two or three years, even more inefficient. And there's regulatory arbitrage and different arbitrages that hedge funds that maybe don't have a fundamental view on the asset class, but they see the premium on the grayscale funds. And they see that as a potential arbitrage or neutral trade that they can make. the futures curve at CME, right? There were different trades that carry trade there. And I was just the person that wouldn't shut up about digital assets.

7:06And eventually, if you're loud enough about something, you get connected to the right people. And so I've been over here for about two, two and a half years in this role. Amazing. So, you know, we've had obviously Tom Jessup on. We've had a lot of people on from Fidelity. Yuri and Tim has been on as well. your journey of talking to clients you're getting them at different stages in their knowledge journey yeah and you kind of alluded to that where do you think people are now when you speak to them where's the level of openness and understanding or is it still I don't know why you're on this call Jack I've got no interest in you or anything you're talking about where where do you think you are on that scale right now I would say even over the last two years, A, the conversation changes based on where prices are.

7:57So momentum and behavior, it doesn't just impact retail. It certainly impacts institutional investors. And the conversation is different. And they want to talk about Solana, Luna, and Avalanche in 2021. And now nobody asks about, I mean, nobody can ask about Luna now. or nobody wants to talk about Avalanche or very few are asking about Solana. It's all Bitcoin and Ethereum. And there's something to be said for that, right? Where the market moves and people correspond. And I guess that's what makes a market and that's why prices are where they are and you see the consolidation that you have. But even over the past two years, just seeing the questions before really were the vast majority were the basic entry-level questions of just like, tell me what, explain to me why this isn't magic internet money.

8:46And I'm going to not fight you the whole call, but I'm going to be very skeptical during the whole call. And that was a lot of the conversations. Now, more recently, that's a lot less of the conversation. There's a lot more discussion around, OK, there's quite a few people. And clearly, Fidelity has continued to, like, double down in the space. And maybe I already work with the firm on the traditional side and have had a good experience and, you know, have some level of respect for the firm. So now I'm intellectually curious, and I want to know why I might be wrong, rather than before kind of taking the stance of these foolish people in the digital asset space, right?

9:28None of it makes sense, right? It's more rather than skeptical, it's curious if you're at the beginning point. And more broadly, like there is a better level of education where people have just started to take the time on the education front, and you can tell that. So less of the very beginner level conversations and more sort of deeper into the space as well. Yeah. In my conversations with institutions, family offices and other larger players, most have done the work now. Yeah. You know, I just get the feeling that those who are interested have done a lot of work and now it's a matter of price.

10:04So then they want to stay on top of the space. They kind of want to understand and then they want to know when do I really need to allocate capital to that? Is that the kind of impression you get as well? That and also, I think, naively, before I stepped into this role, I had the view that like, when you say the institutions are coming, that it's like they flip a switch and, you know, they decide tomorrow to allocate or something that is not at all the case. And like even today, there are very few actual like what we would call institutions of endowments, sovereign wealth funds, pension funds, foundations that are actually owning tokens.

10:42Like some of them that are interested in the space will go the venture route because it's the traditional wrapper. And then they can also more so pitch like the idea of blockchain and they're getting broad based exposure rather than taking true token asset ownership risk. And so that's still the case today. But the education cycle, I don't think you're at square one with that, again, that skeptical nature. It's more like, OK, now we're up the education curve for a lot of these people. And there's less questions of like, why does Fidelity care about it when all of these other traditional firms are now starting to make partnerships with crypto native firms or file for ETFs, et cetera.

11:23And so there's less skepticism that the space isn't going to be around in five and 10 years and more so thinking about, OK, maybe we're not allocated today, but how we'll get there at some point, maybe. And that's that's largely what I've seen from the larger firms. And even like we do an annual survey and you can see it, the levels of adoption, the perception across what we consider to be institutional, like goes all the way down to delegated wealth managers. So like RIAs and family offices have higher levels of like overall positive perception. They're also closer to the end client. Right. If you think of like a pension board or an endowment board, a lot of it is like these discretionary allocations because the end client is pounding the table and says, I want to own some Bitcoin.

12:08And they don't have a fundamental view on it. They just need to find a solution. And so still like the big piles of money that have investment boards, they're all getting up the education curve. But I would argue most of them don't have true or meaningful allocations to the space today. Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

12:32Have you, I mean, a while ago, I don't know if you ever saw it. I got together, one of our Real Vision members used to build kind of asset allocation risk models for Barra or somebody like that. And for BlackRock or Blackstone. and I got him to put Bitcoin into a traditional portfolio. Have you started going through that again with clients to say, listen, that there is a diversification? Last year was a weird year because every single asset on earth went down. But generally speaking, over time, even with small allocations, it makes a huge difference. It actually lowers your risk and increases your return.

13:07Yeah, there was somebody, not at Fidelity, but externally, and we caught wind of the paper and the story. And maybe you're familiar or not, but they were showing a hedge fund. And they just called it whatever, hedge fund XYZ. And they just showed the return stream and the performance over time. They're showing it around to all the fellow analysts or whatever at their firm and kind of externally. And it was Bitcoin. And everybody was like, oh, this is a great diversifier. and a really interesting asset. And then when they heard it was Bitcoin, they were like, oh man, you got me, right? Because it's just, you have that perception or view on the asset without even digging into the data, right?

13:50It brings out sort of like either a vile hatred for the asset because it has no fundamentals or no cash flows for Bitcoin, or you love it and you think it's going to change the world tomorrow when in reality, there's somewhere in between and there's a happy medium and we should look at the data. Yeah, it's weird. People come with narrative biases with things that are new because they don't like them. They don't fit in because they're like, I'm a commodity guy or I'm an equity guy. Why should I care about this thing? I can't value it in the same way. So that narrative bias is so strong. It's really interesting.

14:23Once you take that away, they're like, yeah, this looks great. We should buy some of this stuff. Yeah, exactly. So the one big issue that I find is when you think about portfolio construction, most of the people making those decisions, especially when you get to larger institutions, they want historical data. And on Bitcoin, you've got to argue where's the starting point, right? When was the asset liquid enough? And oftentimes, they'll use, you know, so some go back to 2015. When we've done reports, we've, like, 2015. And sometimes you see 2018. Well, 2018 was the start of the CME futures market.

15:03And so that's where you get the argument there. But if you use Jan 2018, you're using the peak top of the 2017 cycle, right? So you're necessarily biasing the data one way or another based on the starting point. So arguably, you should be, you know, use a sensitivity range for your starting point, whatever. But then the problem is people will say, well, it's only five years of data. And we're used to CRISPR data sets to go back to 1932 or whatever it is, right? We can use all of these indices that go way back. And with Bitcoin, it's like, OK, anything that goes from being worth nothing, being literally an idea in a white paper, to being worth something, it's going to have incredible returns.

15:43But the law of large numbers, we know that the returns are going to be diminishing. It's just a mathematical fact unless it eats the entire world. And so at that point, you need to have a fundamental thesis to make an allocation in order to think about like like Black Letterman portfolio modeling of like having future return assumptions and then baking that into a portfolio. But most of them use historical like equities will give you 7 percent and then we'll use yield on treasuries to get an idea of what the four or 10 year returns on treasuries are, whatever it is. But they don't want to make a fundamental statement on where Bitcoin or Ethereum or the digital assets are going.

16:20And so then it all falls apart because they say the backwards data is too short and it went from being worthless to being worth 500 billion. But that's never happening again. And we agree on that. But then when you start to talk about like, OK, Bitcoin could be a digital gold and gold is a 10 trillion dollar market cap. And you start looking at the TAM and if we get there in 10 or 20 years, here's what the CAGR could look like. that's where it all falls apart because then you have to have a fundamental investment thesis. And a lot of the portfolio modeling is too quantitative and academic to then make a return assumption going forward.

16:55Yeah. And also, I mean, the reality is even if you took somewhere near the bear market lows, it's like a hundred and something percent a year returns. And maybe he wants to believe it so that they kind of like, well, we can't put that in the model. I'm like, You're using kind of bear market to bear market. So you're not using bear market trough to market peak or anything like that. It's pretty consistent. But then people don't want to do it because it seems so ridiculous compared to all other asset classes that they're like, well, it can't be too. It can't be so. Yeah. One of my favorite things that I've actually seen, you mentioned Urien, and I know you guys are familiar with each other.

17:32He's done just the risk-adjusted analysis, right? And you actually end up, I mean, this was probably a year ago when he had pulled it. And anybody here, if you kind of know Sharpe ratios, you could pull the data yourself. But if you look at the Sharpe ratio on Bitcoin, because the vol is so high, you actually come back with an asset that is realistic in terms of returns. Because the return was really high, but the vol was really high. And on a risk-adjusted basis, it's actually very similar to a 60-40 portfolio. It's just you jack both of those metrics up to get the same risk adjusted return. So that actually, to me, is not too good to be true, because you have the offsetting vol piece alongside it.

18:12But like you said, when you say, oh, this thing could return 50 % a year, it starts to sound super outlandish when anything double digits on most assets is an aggressive return assumption. Although hilariously, if you go to the same investor and say, I've got a VC investment, and we think the fund could produce 50 % a year, they said, yeah, fine, that sounds more than reasonable. It's like, it's very funny. It's the anchoring bias. No volatility either, Raoul, right? With zero volatility. It's magic. The market once a quarter, right? So where are we now? Where are you thinking we are with Bitcoin and then the overall crypto markets overall?

18:52So it's a good question. As you know, I'm ludicrously bullish right now, and I have been for a while, but let's see what you think. So I've heard some of that. So it's a little intimidating coming in here, maybe not being at the same exact level at the moment. But I guess my honest take is I think that the, I'll explain it this way, the endogenous variables, if you look at the charts, right, the price charts, the on-chain data that we follow, So the historical analogs, I mean, it's hard to look at the culmination of all of that and look at sort of prior cycles, knowing that history is not a predictor of the future, but it can be a good guide to what a base case scenario could be.

19:30And it looks, it would be indicative or suggestive that November was a bottom. And of course, you had failures and the space guts of black eye. And it kind of all makes sense that you were below the 200 week moving average more than you had ever been historically. So you lost important support levels. Now you've recovered above them that that was the bottom and we're in a reaccumulation period. And like if you look historically, what have the cycles been around Bitcoin? We all know sort of the I'll assume everybody knows the four year having cycle. Right. And whether or not you believe it's because of the four year having cycle or I've even heard you talk about and something we've looked at is global liquidity cycles.

20:11And it just so happens that because Bitcoin was born out of the financial crisis, that you've had kind of this three to five year time period or four years, give or take, where central banks have been easing at the same time as Bitcoin has its having. And so two coincidental things happening at once, more US dollars and less issuance of Bitcoin at the same exact time kind of has a, whichever one you want to think has more of an impact. doesn't really matter. But I think you add all of the on-chain data and historical analogs, it's hard to be super bearish, right? It feels like we're in a reaccumulation period.

20:45Historically, you get a one-year sharp drawdown from these cycles, from the tops. That was November 21 through November 22. Now you go for, I mean, historically, it's a year of kind of chop and volatility. And we're halfway through that. And there's an upward bias there. I mean, there was in the prior cycle as well, I believe the 2018 into 2019 time period, you start to see a little bit of an upper bias. And we're up 100 % from the bottom, right, at 30 ,000 as we're speaking, but we're still down 50 % from the all-time high because you got to go up 300 % when you go down 75%, right? So I think there's maybe in the short term, a little bit of an upper bias.

21:24And underneath the surface, I think that there's like maturation of the infrastructure that is much needed. Like you see traditional players kind of stepping in and doing things, building exchanges or partnering with different firms. I think that's a good sign for the long-term. And we washed out a lot of highly leveraged, poorly risk managed crypto natives. It's not to say that there aren't crypto natives that will be really important in the long-term. I think there will be, but traditional finance coming in, I don't think is a bad thing. If what you're worried about is like the long-term price movement of this asset class and capital flowing into it.

22:00But to me, that's all the kind of endogenous, like people looking at Bitcoin and Ethereum and like actually using them or actually buying and hoarding Bitcoin. That's all kind of happening. Or we have evidence of that. I think there's exogenous variables that I just don't know where they're going. On the macro front, that's this is one of the things that maybe potentially gives me pause is just I think there's a lot of smart people on both sides of the trade. Some that are saying the Fed's gone too far, right? They were too hawkish at the wrong time. And now we're on the other side of this. And you have commercial real estate and regional banks under pressure, and all of that might come to a head at the end of the year.

22:41And on the other side, you have like the inflation is sticky camp. If you look at core PCE that takes out the volatile components, like energy and food, well, that's not coming down as quickly. And you're also like at a at a point in time, we just had the June release today as we're talking for CPI. You rolled off a very hot month in June 2022 and picked up June 2023, obviously, as a month over month. You got a 3 % number. Can you get back down to 2 % or are you going to be kind of in limbo from 3 % to 4 %? And then what does that mean for nominal yields? Because I think of like Bitcoin as 50 % of the space is a key driver to all of digital assets.

23:19They all kind of have a beta to Bitcoin and Bitcoin's an alternative money. We call it a digital gold as an easy framing. Well, what matters to gold? Forward real rates, right? You can look at 10-year tips is the one I use. And there's been this relationship that's kind of broken down this year. If the relationship comes back, forward real yields are a lot higher than they would suggest where Bitcoin should be trading. So I think just a little bit of exercise and caution when there are a lot of unknowns on the macro side is one thing, and that's an exogenous variable. One bullish exogenous variable is the series of ETF filings, renewed optimism and sentiment around surveillance sharing agreements, trying to sort of appease what the SEC is looking for in terms of trying to prevent market manipulation.

24:06Right. The two key concerns that they've had have been custody of these assets because they're bearer assets. I think many would argue that we're at a point where there are a number of reputable competitive custodians in the United States at this point that are regulated. And now if we have these surveillance sharing agreements, maybe that appeases sort of the other issue concerns around spot market manipulation in trading or transparency, lack of transparency there. So that is an exogenous variable that could add as an upside catalyst. It's just hard to predict or know what's going to happen there.

24:43And then the last one to me is, did we wash out all of the offshore entities that are heavily influential to this space that are unstable, poorly risk managed or highly leveraged? And I don't know if that's the case. And, you know, there are a number of sort of reports and news items surfacing that, you know, just make you pause and say, hmm. And last time, maybe we weren't saying that enough. And so I just kind of exercise caution. So to me, the upside catalyst is ETF potentially. And then sort of the potential downside catalyst could be on the macro side or more to come in terms of these entities that weren't very sustainable in the crypto space.