Transcript
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The biggest risk in crypto is behavioral risk.
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And when you start going above 5% Bitcoin,
historically, Bitcoin becomes the driver of
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what's called the maximum drawdown of your
portfolio.
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That's when your portfolio goes from looking
great to looking pretty poor during a big
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market pullback.
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And in our experience, when Bitcoin starts to
be the tail that's wagging the dog of your
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portfolio, people panic when you have
pullbacks.
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Again, this is a very volatile asset.
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It's had multiple 50% plus pullbacks.
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If you put too much of it in your portfolio and
we get another one of those pullbacks and you
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sell at the bottom, then you've done real harm
to your portfolios.
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What do you think the odds that the Trump
administration will actually invest and put
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Bitcoin on the US balance sheet?
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Great question.
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So how much Bitcoin should the typical
institutional investor have in their portfolio?
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I'd say the starting point is at least 2%.
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If you think about Bitcoin, it's a
$2,000,000,000,000 asset.
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Globally, equities are about a
$100,000,000,000,000 From a benchmarking
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perspective, that gets you to an allocation of
of 1 to 2% depending on how much equity you
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have.
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And that's just a starting point.
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If you're below 1 or 2%, I'd argue that you're
effectively short Bitcoin versus your
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benchmark.
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How did you come up with this 2% number?
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Yeah.
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I think there are 2 ways to approach it.
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So one is that benchmarking exercise, which is
just the starting point for most investors
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should be matching the benchmark of the global
portfolio of assets.
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And, again, Bitcoin has emerged as a multi
$1,000,000,000,000 asset.
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So if you have an allocation of 0, you're
underweight versus the benchmark.
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2% gets you up to neutral.
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So that's one way to approach it.
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The other way to approach it is, you know,
we've done an extensive study of the impact
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Bitcoin has in a portfolio over long periods of
time, looking at all available data.
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And what that data shows is that you can
improve your Sharpe ratio, improve your Sortino
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ratio, improve your risk adjusted returns by
adding more and more Bitcoin to the portfolio.
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Those studies actually suggest that up to about
5% of your overall portfolio, you're getting
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historically what amounts to a free lunch,
which is higher returns with no additional or
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low additional, volatility.
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From a portfolio construction perspective, I
can make the argument up to about 5%, but from
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a benchmarking perception, 2%, but certainly
not 0%.
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In layman's terms, if you had invested in the S
and P 500, but you decided not to invest in one
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of the stocks, Tesla, or a GM, US essentially
be short that stock.
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You would be making a directional bet against
that.
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At 2%, you're basically part of the overall
capitalization for the market.
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That's exactly right.
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Yeah.
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That's a great way of phrasing it.
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Yeah.
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Not investing in Bitcoin as part of your
allocation policy is like deciding to have 0%
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invested in Apple or invested in Tesla or
invested in Meta or another one of these Mag 7
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stocks.
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It's effectively just blanking out a part of
the portfolio that everyone else is neutrally
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investing in.
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And that's where we've gotten to Bitcoin.
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It's now part, in my view, of the global
portfolio, and that means most investors should
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have some allocation to it.
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And then the extra 3% is analyzing the sharp
ratio, which is a form of risk to reward ratio,
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which means that it's logical to hold another
3% based on the risk and reward, of the
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portfolio.
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It's really interesting when you look at what
would have happened if you added 1, 2, 3, 5%
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Bitcoin to a portfolio historically.
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A lot of people think of Bitcoin as this
extremely volatile asset, extremely risky,
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which is true.
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It is itself very volatile.
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But because Bitcoin moves differently than
stocks and bonds, because it has what's called
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a low correlation to stocks and bonds, when you
add it to a portfolio, it doesn't necessarily
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make the total portfolio more volatile.
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In fact, historically, what you see is you get
higher returns without significantly increasing
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your risk.
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And that's a beautiful thing when building a
portfolio.
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I liken it.
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It's a little bit like adding, like, spice to
food.
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If you add a little bit, it makes the food
taste better.
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If you add a lot, for sure, your mouth will
burn and it'll be risky.
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That's true with Bitcoin as well.
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To play devil's advocate, Bitcoin has always
been sold as this inflation hedge, stock hedge.
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But in 2022, we saw the entire market go down,
including Bitcoin.
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So double click a little bit on when Bitcoin is
actually a hedge to equities and when it
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actually correlates with equities.
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The real answer to that lies in your time
frame.
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From a short term perspective, it's absolutely
true that if the market pulls back, Bitcoin,
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which is a risky asset, tends to pull back as
well.
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But what the data shows is that it historically
recovers faster than equities.
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In other words, it gets back up to even faster
than stocks do, and then it continues to
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outperform equities as it rebounds.
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So if you have a view of the market that's, you
know, I'm investing for the next week or the
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next day, it's not a very good hedge.
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If you have a view of the market that you're
investing for the next year or the next 3
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years, it's historically been a very, very good
hedge in a very good way to, again, get those
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higher risk adjusted returns.
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So it comes down to your time frame.
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And when you look at your portfolio
construction, some people YOLO and put 20%, 50%
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of their portfolio in Bitcoin or crypto.
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Why is that not prudent?
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The reason it's not prudent is the biggest risk
in crypto, bigger than regulation or volatility
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or tech risk or adoption risk.
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The biggest risk in crypto is behavioral risk.
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And when you start going above 5% Bitcoin,
historically, Bitcoin becomes the driver of
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what's called the maximum drawdown of your
portfolio.
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That's when your portfolio goes from looking
great to looking pretty poor during a big
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market pullback.
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And in our experience, when Bitcoin starts to
be the tail that's wagging the dog of your
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portfolio, people panic when you have
pullbacks.
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Again, this is a very volatile asset.
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It's had multiple 50% plus pullbacks.
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If you put too much of it in your portfolio and
we get another one of those pullbacks and you
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sell at the bottom, then you've done real harm
to your portfolio.
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So you need to have just enough that it
influences your portfolio, but you're not going
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to panic if the bottom falls out.
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Right?
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I can withstand a 5% loss in my portfolio.
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We see that in the S and P 500 all the time.
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I don't panic.
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But if it was 30% of my portfolio and it had a
massive drawdown, I might have a bad behavioral
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action.
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And so that 5% limit is designed sort of to
protect against that feeling you get in your
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gut when you have a big market pullback.
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And that is why we think that's an appropriate
level.
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There was a famous study where they the study
showed that the more somebody opened their
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public portfolio, the worse their returns were.
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So their management of their public portfolios
was inversely correlated with returns.
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That's exactly right.
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Yeah.
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And that's especially true in Bitcoin.
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Remember, it's more volatile than almost
anything most people invest in.
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It's also in the news.
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It's on the frontier of technology.
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That behavioral risk is absolutely the biggest
risk when you're investing in Bitcoin.
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So you need to adjust for that when you're
building your portfolio.
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Recently, Michael Saylor made this convertible
note product that was very popular with hedge
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funds and really let almost levered himself
into book Bitcoin.
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What do you think about MSTR and what Michael
Saylor did?
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I think what Michael Saylor is doing is
fascinating from one perspective.
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He's found a way to raise money in the public
markets through bonds that pay 0% interest and
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then to buy an asset that's appreciating
historically at a 100% a year.
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That's an incredible trade.
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And as a result, MicroStrategy has been one of
the best performing stocks in the world over
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the last few years.
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The challenge with MicroStrategy, which
investors should think about, is that it trades
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at a premium to its Bitcoin holdings.
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What I mean by that is, let's say, it holds
$1,000 of Bitcoin.
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The stock has traded anywhere from a $1,000 to
3 or $4,000.
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Now there is a mathematical argument for why it
should straight to a premium to its Bitcoin
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holdings, But should that premium be 10%, a
100%, 200%, 300%, 300%, that's very hard to
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figure out, and it really based on momentum in
the market.
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So the the exciting thing for an investor
investing in MicroStrategy is you get something
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like leveraged exposure to the price of
Bitcoin, which can be great.
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The risky thing is if you buy it when it's
trading at a 300% premium and then it starts
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trading at a 100% premium, you can lose money
even though Bitcoin is flat.
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So it's a complex investment.
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Look.
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I love what Saylor is doing.
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He's a real leader in the Bitcoin community,
but you need to understand this premium
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variation element if you're going to buy
MicroStrategy stock.
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We've known each other since 2018.
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You've always been a Bitcoin bull, but you're
also not a Bitcoin maximalist, meaning you
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believe in other cryptocurrencies.
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Tell me about how institutional investors
should look at other cryptocurrencies.
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I think blockchain is a fundamentally
transformative technology, one of our most
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important technological leaps.
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It can be applied to do many different things.
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Bitcoin uses blockchain to create a public form
of money, a digital gold, and I think it's one
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of the most important financial innovations in
a long time, has plenty of room to run.
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But there are other things you can do with
blockchain.
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If you look at Ethereum, they're using
Blockchain to create sort of a new Internet for
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money and finance and social networks.
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That's very exciting.
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I think about Ethereum as a technology
investment.
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Like, it almost belongs in the Nasdaq.
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People are building applications on it like you
would build an application in the Apple App
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Store.
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So if Bitcoin is money or gold, Ethereum is
technology, sort of belongs amongst the the Mag
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7 tech stocks.
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I think that's a good way for investors to
start thinking about this asset class.
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And what are the arguments for diligence in all
the non Bitcoin assets and and picking your
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favorite versus buying a basket?
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Man, it's so hard to diligence them and pick
your favorites.
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I mean, I come
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Why is that?
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I think it's always hard in early stage
technology to predict the winners.
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You know, my family owned a Betamax.
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That turned out to be the wrong bet.
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I remember Myspace before Facebook.
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We all had Blackberries, and then there were
iPhones.
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Sometimes the first mover is the winner.
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Right?
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Apple, Amazon.
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Sometimes it's not the 1st mover.
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If we got into comparing Ethereum and its other
competitors in these non Bitcoin coins, if we
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talked about Solana, which is maybe the next
largest coin after Ethereum, or Cardano or
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Aptos or Monad, I could actually make a pretty
good argument for each of them.
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They all have different design choices.
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They all have different communities.
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There are reasons to be excited about each and
every one of those.
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But how would I invest?
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I would buy the basket because I have a high
degree of confidence that programmable
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blockchains are gonna be more important in the
future than they are today and a low degree of
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confidence that I can pick the winner.
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So it's like going back to the early days of
search.
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Could you have chosen Google over Yahoo?
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Maybe.
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But if you would just bet the field, you would
have done extremely well.
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I think the same is true in crypto.
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I think most investors will be best served just
by buying a basket of these and making sure
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they always own the leading crypto assets than
trying to pick and choose 1 or the other
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winners.
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I think it's interesting because it's one of
these lessons that's consistent across many
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different platforms.
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You mentioned Amazon.
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If you had bought Amazon just at the IPO price,
so as a public company and held it to say, you
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would have a 25100 x return.
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Now imagine that there was another 9, you know,
promising IPO companies or promising technology
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companies.
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If you had invested in each one of those and if
9 of them would have gone to 0, you would have
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gotten a 250x return.
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Now, of course, 225100 is much better than 250
x.
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But if you wanna make sure you're investing a
$100,000 and you wanna make sure that, you
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know, you take advantage of of a platform shift
or a new technology, I think it's hyperrational
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to actually diversify.
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I think that's right.
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You know, it's better to be generally right
than precisely wrong, and it's absolutely true.
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Look.
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If you're thinking about crypto today in a
serious format, you're ahead of most investors
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in the world.
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That to me, is your alpha opportunity.
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Do you really wanna conflate that alpha
opportunity with trying to pick Ethereum,
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Solana, etcetera?
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It's just it's very hard.
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I'd rather get the big trend right than try to
focus on the specifics.
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But I know that people love to go and try to
chase things, particularly in crypto.
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If you talk to people who love Ethereum, they
only love Ethereum.
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If you talk to people who love Solana, they
only love Solana.
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I do this 247, 365.
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00:14:30,904 --> 00:14:33,065
I can't tell you exactly how it's gonna turn
out.
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So just just buy the basket.
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Make sure you get that 250 x return.
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I love that analogy.
239
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Today's episode is brought to you by Reed
Smith.
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00:14:42,049 --> 00:14:46,929
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241
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They know that your time is valuable and that
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244
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Their deep industry insights and local market
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your needs.
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Reed Smith delivers purposeful, highly engaged
client service that drives progress for your
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business.
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00:15:10,059 --> 00:15:13,180
Also to that point, it's not even that you may
not know.
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It's that if this was simulated 10 different
times, there might be a different winner.
250
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And the reason for that is that the
cryptocurrencies are driven by developers and
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communities, which are very difficult to
predict.
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00:15:24,220 --> 00:15:26,214
This is beyond just the technology.
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You need to see where the developers are going
to and that could change on the dime.
254
00:15:30,674 --> 00:15:32,855
Sometimes these are irrational decisions.
255
00:15:32,914 --> 00:15:36,834
Sometimes the founder of a cryptocurrency could
do something that the developers don't like and
256
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they just switch chains.
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00:15:38,159 --> 00:15:41,440
So I don't even know if it's possible to have a
quote, unquote right answer.
258
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I think that's exactly right.
259
00:15:42,720 --> 00:15:47,519
And in fact, we have already seen that in the
crypto space over the last 5 years.
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We've seen exactly the example you gave.
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I agree.
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It's probably unknowable.
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And so, you know, why make a 100% bet on
something that's unknowable?
264
00:15:57,204 --> 00:16:02,964
It's just not how I approach any other part of
the market, and it's not how I approach crypto
265
00:16:02,964 --> 00:16:03,444
either.
266
00:16:03,444 --> 00:16:06,809
What are the first principles reasons why
crypto is so cyclical?
267
00:16:07,049 --> 00:16:10,509
It's because it's so early, and it's so
promising.
268
00:16:10,970 --> 00:16:12,669
Let me unpack that a little bit.
269
00:16:12,970 --> 00:16:17,870
Mostly, traditional investors don't get
involved in markets until they're relatively
270
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mature.
271
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Right?
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Until they're public equities.
273
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And these are companies that have grown up and
maybe have a $100,000,000 in revenue or more,
274
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and they're well established.
275
00:16:25,745 --> 00:16:27,424
Crypto opens that up.
276
00:16:27,424 --> 00:16:31,204
You can invest in a protocol that is just
emerging today.
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00:16:31,584 --> 00:16:36,940
Indeed, when Bitcoin started, it was publicly
traded before basically anyone knew what it
278
00:16:36,940 --> 00:16:37,419
was.
279
00:16:37,419 --> 00:16:39,120
So you're getting in early.
280
00:16:39,500 --> 00:16:45,899
And then these are very exciting, promising
technologies that are going after very large
281
00:16:45,899 --> 00:16:46,379
markets.
282
00:16:46,379 --> 00:16:48,700
Bitcoin is the best performing asset of all
time.
283
00:16:48,700 --> 00:16:51,695
It's compounded at a 100% per year.
284
00:16:52,315 --> 00:16:55,055
What happens in markets that go up a lot?
285
00:16:55,115 --> 00:16:57,355
And this explains the cyclical piece of it.
286
00:16:57,355 --> 00:17:04,670
What happens in any market that goes up a lot
is investors start building leverage on top of
287
00:17:04,670 --> 00:17:05,410
their positions.
288
00:17:05,869 --> 00:17:07,650
They start maybe overinvesting.
289
00:17:08,430 --> 00:17:10,849
They get overexcited and overhyped.
290
00:17:11,470 --> 00:17:13,170
We see this outside of crypto.
291
00:17:13,230 --> 00:17:15,230
You see this in any technology area.
292
00:17:15,230 --> 00:17:20,164
It goes from skeptics to mainstream to
overhyped, and then there is a reset.
293
00:17:20,625 --> 00:17:22,244
The same thing happens in crypto.
294
00:17:22,545 --> 00:17:28,065
Because it performs so well, it attracts a lot
of money, and the market gets overheated, and
295
00:17:28,065 --> 00:17:29,365
then there is a pullback.
296
00:17:29,789 --> 00:17:34,910
But the important thing to remember is we've
had multiple of these sort of boom and bust
297
00:17:34,910 --> 00:17:35,970
cycles in crypto.
298
00:17:36,590 --> 00:17:39,570
But when it pulls back, it doesn't go back to
where it started.
299
00:17:39,710 --> 00:17:45,525
I think there's a mix of fundamental investors
and fundamental market changes and then
300
00:17:45,765 --> 00:17:51,224
speculators that ride on this, you know, on the
growth of Bitcoin.
301
00:17:51,525 --> 00:17:56,484
No other asset class in the world has this
reflexivity to it where everybody's tracking in
302
00:17:56,484 --> 00:17:57,125
and it goes up.
303
00:17:57,125 --> 00:18:01,990
If you look at Nasdaq, people aren't obsessed
with Nasdaq always refreshing it or they don't
304
00:18:01,990 --> 00:18:03,990
feel FOMO for missing on it.
305
00:18:03,990 --> 00:18:08,950
So I think what happens fundamentally, to give
an example, a sovereign country like an El
306
00:18:08,950 --> 00:18:12,390
Salvador may switch to having Bitcoin on their
balance sheet.
307
00:18:12,390 --> 00:18:16,765
That's a fundamental change in the TAM or the
total addressable market for Bitcoin.
308
00:18:16,765 --> 00:18:17,664
That's really good.
309
00:18:17,884 --> 00:18:21,005
That also means that maybe other countries will
also join.
310
00:18:21,005 --> 00:18:23,664
So that increases the price, let's call it by
20%.
311
00:18:24,205 --> 00:18:30,000
And then there's another increase of 20, 30% of
the speculators that are literally buying it
312
00:18:30,160 --> 00:18:33,460
because it has gone up, which is the worst
possible reason to buy an asset.
313
00:18:33,839 --> 00:18:36,980
And then it basically draws back to this new
normal.
314
00:18:37,039 --> 00:18:38,240
That's absolutely right.
315
00:18:38,240 --> 00:18:43,059
And what you would expect with that
characterization is this effect will reduce
316
00:18:43,279 --> 00:18:45,924
over time, and that's in fact what we're
seeing.
317
00:18:46,224 --> 00:18:51,265
You would expect the volatility of Bitcoin to
reduce over time, and I know it feels like it's
318
00:18:51,265 --> 00:18:53,525
still extraordinarily volatile, and it is.
319
00:18:53,585 --> 00:18:57,940
But the volatility is down about 50% from 10
years ago.
320
00:18:58,160 --> 00:19:02,900
So we're making progress, but it's exactly the
mechanism that you described that drives this.
321
00:19:02,960 --> 00:19:06,799
Just to double click on that, the reason the
it's becoming less volatile is because there's
322
00:19:06,799 --> 00:19:10,960
a shift from speculators to more fundamental
investors, or is is it just because it's
323
00:19:10,960 --> 00:19:11,359
larger?
324
00:19:11,359 --> 00:19:15,815
It's there's 2 1, there's a from speculative to
more fundamental investors.
325
00:19:15,815 --> 00:19:17,015
That's absolutely true.
326
00:19:17,015 --> 00:19:20,055
And there are more types of investors coming
into the market.
327
00:19:20,055 --> 00:19:20,375
Right?
328
00:19:20,375 --> 00:19:25,195
Institutional investors, financial advisors,
those didn't exist in the market beforehand.
329
00:19:25,815 --> 00:19:31,809
But there is also just the reality that it's
becoming less risky over time.
330
00:19:31,809 --> 00:19:37,589
You know, 10 years ago, there is a reasonable
chance that there was some unknown in crypto
331
00:19:37,970 --> 00:19:40,309
that would cause it to not work in the market.
332
00:19:40,450 --> 00:19:40,690
Right?
333
00:19:40,690 --> 00:19:43,029
There is something that would blow up in the
space.
334
00:19:43,625 --> 00:19:44,765
That no longer exists.
335
00:19:44,984 --> 00:19:45,225
Right?
336
00:19:45,225 --> 00:19:46,984
We've now been around for 15 years.
337
00:19:46,984 --> 00:19:51,805
The likelihood that crypto goes to 0 has been
dramatically reduced, and that naturally
338
00:19:52,025 --> 00:19:54,684
compresses the volatility in the market.
339
00:19:54,904 --> 00:19:57,884
I know you take a very precise and academic
view on Bitcoin.
340
00:19:57,945 --> 00:19:59,500
I'm gonna ask you a question.
341
00:19:59,500 --> 00:20:05,500
What do you think the odds that the Trump
administration will actually invest and put
342
00:20:05,500 --> 00:20:07,519
Bitcoin on the US balance sheet?
343
00:20:07,660 --> 00:20:08,480
Great question.
344
00:20:08,700 --> 00:20:10,799
I think I'm gonna answer it at 2 levels.
345
00:20:11,025 --> 00:20:16,945
So the first level is the US already owns about
200,000 Bitcoin from seizures, particularly in
346
00:20:16,945 --> 00:20:21,605
the very early days of Bitcoin from Silk Road
in 2013 and 2014.
347
00:20:22,224 --> 00:20:27,809
I think the odds that we keep that Bitcoin
instead of selling it are extremely high.
348
00:20:27,869 --> 00:20:29,650
I would say above 90%.
349
00:20:30,110 --> 00:20:30,430
Right?
350
00:20:30,430 --> 00:20:31,490
Almost a certainty.
351
00:20:31,789 --> 00:20:32,990
And that's really important.
352
00:20:32,990 --> 00:20:38,924
One of the reasons Bitcoin traded sideways for
much of 2024 is that governments were selling
353
00:20:38,924 --> 00:20:40,524
their Bitcoin around the world.
354
00:20:40,524 --> 00:20:42,384
So will we keep that Bitcoin?
355
00:20:43,005 --> 00:20:43,744
Almost certainly.
356
00:20:44,044 --> 00:20:49,264
The likelihood that the government starts
buying Bitcoin, I think, is something like 25%.
357
00:20:50,125 --> 00:20:51,569
I should put a note on that.
358
00:20:51,889 --> 00:20:57,889
25% doesn't sound like much, but that is an
extraordinary fact compared to where we were.
359
00:20:57,889 --> 00:20:59,429
Is it already priced in?
360
00:20:59,569 --> 00:20:59,809
No.
361
00:20:59,809 --> 00:21:01,490
I think it's not priced in at all.
362
00:21:01,490 --> 00:21:05,904
I think if the US government's not not one bit
not one bit.
363
00:21:05,904 --> 00:21:10,705
If the US government starts buying Bitcoin, I
think you're looking at Bitcoin at 500,000 or a
364
00:21:10,705 --> 00:21:13,845
$1,000,000 a coin within, you know, a period of
a year.
365
00:21:13,904 --> 00:21:16,305
If because it won't just be the US government.
366
00:21:16,305 --> 00:21:21,490
If the US government is buying Bitcoin, you can
believe that nearly every other country around
367
00:21:21,490 --> 00:21:23,269
the world is going to buy Bitcoin.
368
00:21:23,889 --> 00:21:30,609
And if that happens, you know, the the supply
demand imbalance will be so large that I think
369
00:21:30,609 --> 00:21:33,269
it'll put past bull markets in Bitcoin to
shame.
370
00:21:33,409 --> 00:21:37,625
So the fact that I'm talking about there's a a
real chance we could see this is an
371
00:21:37,625 --> 00:21:42,525
extraordinary fact, and I don't think it's
priced in in any way into the market.
372
00:21:42,744 --> 00:21:47,085
We've all seen our friends in Silicon Valley be
drafted into the incoming Trump administration.
373
00:21:47,950 --> 00:21:51,250
What practical effects will the Trump
administration have on crypto?
374
00:21:51,789 --> 00:21:56,369
It's gonna be an extraordinary change on
crypto, and I think it's gonna unleash
375
00:21:57,309 --> 00:22:03,205
thousands of high quality entrepreneurs and
bring many institutional investors into the
376
00:22:03,205 --> 00:22:03,705
space.
377
00:22:04,005 --> 00:22:05,705
I'll hit on that last point first.
378
00:22:06,085 --> 00:22:10,644
We've done a survey of professional investors
in crypto every year for the past 6 years and
379
00:22:10,644 --> 00:22:13,705
asked them, what's keeping you from investing
in crypto?
380
00:22:14,029 --> 00:22:18,109
And you might think it's something like,
Bitcoin is so volatile, or I don't know how to
381
00:22:18,109 --> 00:22:20,369
value it, or I don't fully understand it.
382
00:22:20,509 --> 00:22:26,190
What they've said in each of the last 6 years
on an overwhelming basis is the number one
383
00:22:26,190 --> 00:22:30,715
thing keeping institutions out of the market is
regulatory concerns.
384
00:22:31,335 --> 00:22:37,015
The fact that we now have a pro crypto
administration and a pro crypto congress means
385
00:22:37,015 --> 00:22:40,955
we're going to have regulatory clarity in the
US on crypto.
386
00:22:41,255 --> 00:22:45,779
And that means that, I would argue, the vast
majority of institutional investors who are
387
00:22:45,779 --> 00:22:51,059
currently on the sidelines are going to come
into this market and start building that 1, 2,
388
00:22:51,059 --> 00:22:53,880
or 5% position that we spoke about earlier.
389
00:22:54,180 --> 00:22:55,400
That's a sea change.
390
00:22:55,700 --> 00:23:02,795
The other half of the piece is I think crypto
has been sort of held down by this regulatory
391
00:23:03,174 --> 00:23:09,095
cloud, and that has kept entrepreneurs from
coming into this space and building massive
392
00:23:09,095 --> 00:23:10,555
real world crypto applications.
393
00:23:11,240 --> 00:23:17,640
If you were a promising entrepreneur or a
promising developer, you could build in AI, you
394
00:23:17,640 --> 00:23:21,259
could build in crypto, you could build in any
other area of the technology.
395
00:23:21,799 --> 00:23:26,174
You might have stayed away from crypto because
it had this regulatory cloud over it.
396
00:23:26,414 --> 00:23:32,255
Once that's removed, once we establish, as the
Trump administration has said, that crypto is a
397
00:23:32,255 --> 00:23:36,735
major part of the US economy and the US wants
to win in crypto, you're gonna see those
398
00:23:36,735 --> 00:23:37,695
entrepreneurs come in.
399
00:23:37,695 --> 00:23:42,809
So I think we're gonna have a golden age of
crypto applications and crypto development that
400
00:23:42,809 --> 00:23:45,230
the market probably isn't expecting.
401
00:23:45,609 --> 00:23:46,990
I think it's a real change.
402
00:23:47,289 --> 00:23:51,070
I want to double click on both of those because
I think there's a lot to unpack there.
403
00:23:51,369 --> 00:23:55,690
In regards to the regulatory uncertainty for
institutional investors, a lot of people might
404
00:23:55,690 --> 00:24:01,125
not be aware is that when you're managing
pension funds, when you're managing endowments,
405
00:24:01,265 --> 00:24:06,464
when you're managing very large family offices,
it's as much of a asset management game as
406
00:24:06,464 --> 00:24:08,244
sometimes a political game.
407
00:24:08,384 --> 00:24:12,849
And specifically, you could get your hands
burned by investing in the asset class that
408
00:24:12,849 --> 00:24:19,329
maybe the expected value was very high, but for
some reason, you know, went to 0 or had a huge
409
00:24:19,329 --> 00:24:19,650
swing.
410
00:24:19,650 --> 00:24:26,255
So there's a lot of career risk that has thus
far been been, institutions.
411
00:24:26,255 --> 00:24:31,394
That's why as far as I understand, only 1
pension fund has actually invested in crypto,
412
00:24:31,454 --> 00:24:31,775
SWIP.
413
00:24:31,775 --> 00:24:33,795
Chris Presto, who is on the podcast previously.
414
00:24:34,414 --> 00:24:39,134
The second thing is goes back to the developer,
in the career risk.
415
00:24:39,134 --> 00:24:45,419
If you look at what's more risky than putting
5, 10, 20 percent or whatever amount of money
416
00:24:45,480 --> 00:24:48,359
into crypto is actually betting your entire
career on it.
417
00:24:48,359 --> 00:24:53,960
If you're a really top engineer and you have
the choice to work at OpenAI or set crypto
418
00:24:53,960 --> 00:24:58,934
company and you have a family, that's gonna
dissuade some meaningful percentage from going
419
00:24:58,934 --> 00:25:03,115
into crypto knowing that, you know, your equity
overnight could evaporate.
420
00:25:03,734 --> 00:25:04,694
That's exactly right.
421
00:25:04,694 --> 00:25:07,920
And I think people underestimate the impact
that that's had.
422
00:25:08,080 --> 00:25:08,400
Right?
423
00:25:08,400 --> 00:25:11,539
Because people are asking, where are all the
real world applications?
424
00:25:11,759 --> 00:25:14,160
And there's a few explanations for that.
425
00:25:14,160 --> 00:25:19,039
But one is that we've been keeping the talent
out of the industry, and they're now flooding
426
00:25:19,039 --> 00:25:22,365
into this market because it has everything else
going for it.
427
00:25:22,605 --> 00:25:25,025
It has a breakthrough disruptive technology.
428
00:25:25,565 --> 00:25:27,724
It has a lot of money that is looking at it.
429
00:25:27,724 --> 00:25:29,664
It has large addressable markets.
430
00:25:30,045 --> 00:25:35,424
I think there's going to be this incredible
flowering of really exciting crypto
431
00:25:35,484 --> 00:25:40,329
applications that we start to see hit the
market as soon as, you know, the next 6 to 12
432
00:25:40,329 --> 00:25:40,809
months.
433
00:25:40,809 --> 00:25:45,369
Do you foresee that Bitcoin specifically will
have any other application except a store of
434
00:25:45,369 --> 00:25:46,509
value in the future?
435
00:25:46,570 --> 00:25:47,529
I absolutely do.
436
00:25:47,529 --> 00:25:48,009
Yeah.
437
00:25:48,009 --> 00:25:52,650
I think what's going to happen is it's
establishing itself as a store of value, a form
438
00:25:52,650 --> 00:25:53,710
of digital gold.
439
00:25:53,930 --> 00:25:58,404
But But I think sometime in the next 5 years,
it's going to be used to settle international
440
00:25:58,625 --> 00:26:00,484
transactions between countries.
441
00:26:00,785 --> 00:26:06,929
To unpack that a little bit, today, most
international trade is settled in dollars, but
442
00:26:06,929 --> 00:26:10,609
there are an increasing number of countries who
are uncomfortable doing it.
443
00:26:10,609 --> 00:26:15,889
And they're investigating different ways to
settle their transactions, be it in the Chinese
444
00:26:15,889 --> 00:26:22,275
renminbi, be it in in current the BRIC nations,
be it indeed in gold.
445
00:26:22,275 --> 00:26:27,634
They're searching for alternatives to just
relying on the dollar because the US has sort
446
00:26:27,634 --> 00:26:31,475
of politicized the dollar and made it a
geopolitical weapon.
447
00:26:31,475 --> 00:26:34,890
So we're moving into this new multipolar world.
448
00:26:35,450 --> 00:26:41,049
My bet is that at some point in the near
future, in a multipolar world, countries will
449
00:26:41,049 --> 00:26:44,829
wanna settle transactions using a nonpolitical
currency.
450
00:26:45,210 --> 00:26:51,224
In other words, not the renminbi, not the
dollar, not the rupee, a currency that belongs
451
00:26:51,224 --> 00:26:52,765
to no state or government.
452
00:26:53,065 --> 00:26:58,265
The only currency where you can settle
meaningful transactions that's nonpolitical is
453
00:26:58,265 --> 00:26:58,765
Bitcoin.
454
00:26:59,144 --> 00:27:04,345
So as we take these continued steps into this
multipolar world, I think you're going to start
455
00:27:04,345 --> 00:27:09,230
to see Bitcoin used for major transactions
around the world between different trading
456
00:27:09,230 --> 00:27:12,609
parties that can't agree on the currency to
use.
457
00:27:12,670 --> 00:27:17,470
And that's, again, a multi $1,000,000,000,000
use case that I think is not bet baked into the
458
00:27:17,470 --> 00:27:20,930
market at all, but I do think is coming in the
next few years.
459
00:27:21,065 --> 00:27:24,684
Given that Bitcoin doesn't produce cash flows,
it has no dividends.
460
00:27:24,904 --> 00:27:27,724
One of the reasons Warren Buffett hasn't liked
it historically.
461
00:27:28,424 --> 00:27:30,984
How do you go about valuing Bitcoin today?
462
00:27:30,984 --> 00:27:32,825
It comes down to supply and demand.
463
00:27:32,825 --> 00:27:35,085
And in fact, you know the supply of Bitcoin.
464
00:27:35,160 --> 00:27:37,820
There will only ever be 21,000,000 Bitcoin.
465
00:27:38,119 --> 00:27:39,900
So it really comes down to demand.
466
00:27:40,279 --> 00:27:44,940
What I do is I look at the size of the markets
that Bitcoin is going after.
467
00:27:45,080 --> 00:27:45,320
Right?
468
00:27:45,320 --> 00:27:47,740
Let's say Bitcoin is trying to match gold.
469
00:27:48,255 --> 00:27:51,394
Gold is, say, an $18,000,000,000,000 asset.
470
00:27:51,615 --> 00:27:57,615
If Bitcoin indeed rises to be as important in
the world as gold, every Bitcoin will be worth
471
00:27:57,615 --> 00:27:58,595
roughly $1,000,000.
472
00:27:59,615 --> 00:28:00,869
So what do you do with that?
473
00:28:00,869 --> 00:28:06,009
Well, you look at Bitcoin today at a $100,000,
and you say it's about 10 per 10% penetrated
474
00:28:06,470 --> 00:28:07,849
into the market for gold.
475
00:28:07,990 --> 00:28:12,970
Over the next 5 years, do you think that
penetration will go up or down?
476
00:28:13,234 --> 00:28:14,855
I think it might go up significantly.
477
00:28:14,994 --> 00:28:18,615
In fact, I think it could reach parity with
gold within that time frame.
478
00:28:18,914 --> 00:28:23,815
You can use that to then discount backwards to
a net present value for today.
479
00:28:23,875 --> 00:28:28,595
So I think it's as easy as thinking about how
big are these markets that Bitcoin is going
480
00:28:28,595 --> 00:28:31,150
after, How many Bitcoin exist?
481
00:28:31,769 --> 00:28:33,869
How much of that market will it take?
482
00:28:34,009 --> 00:28:37,069
And you do a simple division and you end up
with a price target.
483
00:28:37,369 --> 00:28:42,970
When I look at Bitcoin at a $100,000, I know
people are very impressed that it's gone from a
484
00:28:42,970 --> 00:28:44,349
dollar to a $100,000.
485
00:28:45,345 --> 00:28:47,184
I think it has a long way to go.
486
00:28:47,184 --> 00:28:47,424
Right?
487
00:28:47,424 --> 00:28:52,244
I think until it matches gold, it's still at
the early stage of its development.
488
00:28:52,625 --> 00:28:56,484
I actually think its market that it's
addressing is much bigger than gold.
489
00:28:56,544 --> 00:29:00,065
As I mentioned, I think it's going after
international trade and a handful of other
490
00:29:00,065 --> 00:29:00,565
markets.
491
00:29:00,839 --> 00:29:06,119
But at least that gold level, which is about
$1,000,000 a coin, I think would mark sort of
492
00:29:06,119 --> 00:29:08,220
where it goes from early to mature.
493
00:29:08,839 --> 00:29:11,819
Taking a step back, your chief investment
officer of Bitwise.
494
00:29:12,039 --> 00:29:12,940
What is Bitwise?
495
00:29:13,434 --> 00:29:19,455
Bitwise is a specialist crypto asset manager
that helps everyday investors gain high quality
496
00:29:19,515 --> 00:29:21,934
exposure to the opportunities in crypto.
497
00:29:22,315 --> 00:29:23,934
We started way back in 2017.
498
00:29:24,154 --> 00:29:30,289
We created the 1st crypto index fund, sort of
the S and P 500 of crypto, designed to give you
499
00:29:30,289 --> 00:29:32,309
broad based exposure to the space.
500
00:29:32,609 --> 00:29:37,109
We've been running that strategy for, you know,
7 plus years now.
501
00:29:37,329 --> 00:29:39,890
We've avoided the largest blow ups in the
space.
502
00:29:39,890 --> 00:29:42,005
We didn't invest in FTX.
503
00:29:42,224 --> 00:29:47,744
We didn't invest in the Luna stablecoin, but
we've had exposure to the most successful
504
00:29:47,744 --> 00:29:49,525
assets like Bitcoin and Ethereum.
505
00:29:50,144 --> 00:29:57,119
We've built on that to offer Bitcoin ETFs and
Ethereum ETFs and Alpha Strategies and other
506
00:29:57,119 --> 00:30:00,740
funds that gain exposure to all the
opportunities in crypto.
507
00:30:00,960 --> 00:30:05,599
But, effectively, we want to be the bridge
between investors who are interested in this
508
00:30:05,599 --> 00:30:08,819
space and high quality exposure to this space.
509
00:30:09,034 --> 00:30:13,115
And we've been doing it through bull and bear
markets for 7 plus years, and we'll be doing it
510
00:30:13,115 --> 00:30:17,294
through bull and bear markets, you know,
ideally for decades into the future.
511
00:30:17,835 --> 00:30:20,255
So how would people go about following you?
512
00:30:20,315 --> 00:30:20,554
Yeah.
513
00:30:20,554 --> 00:30:21,674
I'd say 2 things.
514
00:30:21,674 --> 00:30:24,869
1, you can follow me on Twitter, at matt_hogan.
515
00:30:25,650 --> 00:30:27,250
It's h o u g a n.
516
00:30:27,250 --> 00:30:29,269
I post a lot of my insights there.
517
00:30:29,490 --> 00:30:32,549
But I've come over to the Bitwise Investments
website.
518
00:30:33,089 --> 00:30:38,450
If you go to the insights tab on that website,
I write a weekly memo called the CIO memo
519
00:30:38,450 --> 00:30:42,845
that's free, and you can get my thoughts on the
market every week.
520
00:30:43,304 --> 00:30:44,105
It's short.
521
00:30:44,105 --> 00:30:48,505
I tend to write about 500 to 800 words because
I know you have a lot going on.
522
00:30:48,505 --> 00:30:52,904
But that would be a good way to get an
institutional investor's view of what's really
523
00:30:52,904 --> 00:30:56,971
happening in this market, where the most
interesting developments are, and where we're
524
00:30:56,971 --> 00:30:57,710
going tomorrow.
