Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg.
Speaker 1: I'm Moldona hi across asset reporter with Bloomberg, And this
Speaker 1: week on the show, well, they've been calling this year's
Speaker 1: bear market and cryptocurrencies a crypto winter, but it's starting
Speaker 1: to look more like a crypto ie age. Hat tip
Speaker 1: to Voldana for that turn of phrase. But the implosion
Speaker 1: of the ft X exchanges and the rest of Sam
Speaker 1: bankman Fried's digital asset empire is reverberating throughout the industry.
Speaker 1: Many many billions of dollars have been evaporated, jobs have
Speaker 1: been lost, and institutions and retail investors of well, they've
Speaker 1: been left holding the bag. So where's all this heading.
Speaker 1: We'll get into it with the chief investment officer of
Speaker 1: a crypto focused set manager, But first the I've I
Speaker 1: got to ask you. Do you happen to own a
Speaker 1: pair of birken Stocks? No? I think Okay, this is
Speaker 1: an unpopular opinion. I think they're so ugly. Really yeah,
Speaker 1: all my friends have them. I think they're absolutely heinous.
Speaker 1: I'm sorry to all my friends. Really yeah, why you have.
Speaker 1: I've got a pair. I prefer to wear them with socks,
Speaker 1: which is that also an unpopular opinion? Which is a
Speaker 1: very unpopular opinion. Yeah, my wife gives me a lot
Speaker 1: of grief over that. But this is kind of a
Speaker 1: tease for my craziest thing of the week, And in fact,
Speaker 1: I feel like a lot of our crazy things end
Speaker 1: up revolving around footwear for some reason. I don't know.
Speaker 1: I'm just picturing you with socks and beat up birken
Speaker 1: stocks going to like a soccer game or something. Yeah,
Speaker 1: I'm not going to ask our guests how he feels
Speaker 1: about birkin stocks, but I do want to introduce him.
Speaker 1: I heard I'm snickering at at this little conversation here,
Speaker 1: Matt Hogan. He's the ce io at bit Wise. Thank
Speaker 1: you so much for joining us in, for coming into
Speaker 1: the studio, thanks for having me. And I'm short birkenstocks
Speaker 1: as well. Thank god, I have a feeling. I had
Speaker 1: a feeling, but I didn't want to venture this. Okay,
Speaker 1: tell us just to start out, tell us about bit
Speaker 1: wise and how you guys have been affected over the
Speaker 1: last couple of weeks in what honestly has felt like
Speaker 1: ten years of my lifetime. It does feel like ten years.
Speaker 1: So bit Wise is a specialist crypto asset manager. Crypto
Speaker 1: is all that we do. We serve primarily professional investors,
Speaker 1: financial advisors, family offices, and institutions. We've been in the
Speaker 1: market since so this is not our first bear marketing crypto,
Speaker 1: and we are best known for creating the world's first
Speaker 1: crypto index fund, the bit Wise ten, which holds the
Speaker 1: ten largest crypto assets waited by market cap. People have
Speaker 1: referred to it as the SMP five hundred of crypto.
Speaker 1: In the scale of crypto asset managers were on the
Speaker 1: very conservative side long term investors uh in in diversified
Speaker 1: index funds, and that's what we've been doing. And about
Speaker 1: the last couple of weeks and how that's affected your
Speaker 1: funds and your operations and everything that's been going on
Speaker 1: has been just Yeah, the last couple of weeks have
Speaker 1: been exhausting. I think everyone in the crypto industry would
Speaker 1: agree with that. As an asset manager, we did not
Speaker 1: trade on ft X. We actually never or almost never
Speaker 1: trade on exchanges. We did not custody assets with ft X,
Speaker 1: so we have no losses associated with that. But of
Speaker 1: course we're part of this broader crypto industry and it's
Speaker 1: had huge effects on that market. But I wanted to
Speaker 1: get into that idea of custody a little bit because
Speaker 1: it's so such an important topic. Now. You know, everyone's
Speaker 1: talking about not your keys, not your coins. You know,
Speaker 1: if you don't actually have the crypto blockchain pass keys,
Speaker 1: everyone's pointing the finger looking at everyone else, wondering, you know,
Speaker 1: sort of where the next domino is going to fall,
Speaker 1: and if you know, whoever actually has the custody of
Speaker 1: their coins will be next. From my understanding, you guys
Speaker 1: custody with coin base, right, and that. Yeah, we custody
Speaker 1: different funds with different custodians. So our flagship fund is
Speaker 1: custoded with coin based Institutional, our Bitcoin fund is custodyed
Speaker 1: with Fidelity. We have another fund that's custodied with Anchorage,
Speaker 1: which is a federally chartered digital bank. The thing that
Speaker 1: connects all three of them, and the way I think
Speaker 1: about this custody landscape is that they're all US domiciled,
Speaker 1: regulated institutions with insurance in place on their custody. If
Speaker 1: you think about the various ways that crypto investors can
Speaker 1: custody assets. It's kind of like a barbell. At one
Speaker 1: end of the barbell is what you mentioned, where you
Speaker 1: hold your crypto keys directly, individually in a safety deposit
Speaker 1: box on a Ledger or whatever. On the other end
Speaker 1: of the spectrum is what bit wise does working with
Speaker 1: some of the largest institutions in the crypto space, firms
Speaker 1: like Fidelity, firms like coin Base, that have been in
Speaker 1: the market, you know, for ten years, it's publicly traded entity,
Speaker 1: and then there's this fuzzy middle, and the fuzzy middle
Speaker 1: is where all the bad things have been. What the
Speaker 1: fuzzy middle looks like is centralized institutions that are not
Speaker 1: regulated and often offshore, and that is not a place
Speaker 1: you should custody crypto assets. Either go toward regulated, US
Speaker 1: domiciled established institutions or yes, if you have great security hygiene,
Speaker 1: do it yourself. I would argue that the regulated side
Speaker 1: of the spectrum is safer for the vast majority of investors.
Speaker 1: But you can be on either end of the barbel.
Speaker 1: You just can't be in this fuzzy middle. It's where
Speaker 1: good crypto ideas go to die, right, you know, and Matt,
Speaker 1: I know in you know, when it comes to equity
Speaker 1: index funds. A lot of times, the way they sort
Speaker 1: of keep costs down and bringing a little electure revenue
Speaker 1: is to allow the securities they hold to be loaned
Speaker 1: out to short sellers, basically through through various prickleges. I
Speaker 1: wonder is that it play at all with the custody
Speaker 1: of your crypto, Is anyone sort of lending it out?
Speaker 1: So we never lend out our our crypto assets that
Speaker 1: are under custody for investors. We're one of the most
Speaker 1: conservative crypto asset managers in the world, which is frustrating
Speaker 1: during bowl markets but feels pretty good right now. There
Speaker 1: are other asset managers that engage in what you describe
Speaker 1: what amounts to securities lending lending out customer assets, but
Speaker 1: we consider that too risky and also not what investors want.
Speaker 1: If you think about what investors who are allocating to
Speaker 1: crypto want, they're betting that bitcoin is worth half a
Speaker 1: million or a million dollars. They're looking for asymmetric upside.
Speaker 1: We don't understand why someone would try to earn an
Speaker 1: extra one or two or three percent yield by lending
Speaker 1: out their bitcoin en route to that. Given the risks
Speaker 1: that are associated with it. So we don't trade on exchanges,
Speaker 1: we don't lend out our assets. We buy assets and
Speaker 1: put them in custody immediately and let them sit there.
Speaker 1: And I want to ask you just a bit more
Speaker 1: on this idea of cold charge, because so many people
Speaker 1: have been coming to me over the last two weeks
Speaker 1: saying like, this is what people have should have been
Speaker 1: doing all along to safeguard their assets, etcetera, etcetera. But
Speaker 1: does that not if everybody has their assets in cold storage?
Speaker 1: Does it not sort of suck away some of the
Speaker 1: fun from crypto, suck away some of the fun because
Speaker 1: it's so boring. Yeah, you use the word boring. It
Speaker 1: wasn't doesn't suck away some of the fun. I don't
Speaker 1: know if the past few weeks have been any fun
Speaker 1: build on. I think most investor would say no. What
Speaker 1: it does is recognize what crypto is as an investment,
Speaker 1: which is this is an early stage, disruptive nasset technology
Speaker 1: that exists in a gray regulatory framework, and people who
Speaker 1: are allocating to it, in my view, should be making
Speaker 1: five or ten year bets. And if you want to
Speaker 1: make a five or ten year bet, you do want
Speaker 1: to put this crypto in a vault and not look
Speaker 1: at it. And that's what cold storage is all about.
Speaker 1: You know. Keeping it on exchange where you can day
Speaker 1: trade and eight evolve asset is maybe fun for some people,
Speaker 1: but I think it's a recipe for high risk, right
Speaker 1: you know, Man, I kind of fell down the rabbit
Speaker 1: hole on this topic just aut of curiosity. And one
Speaker 1: of my weird hobbies is I love reading the risk
Speaker 1: factors of various public companies. Tells you a little bit
Speaker 1: about what a nerd I am. But you know, I'm
Speaker 1: reading coin bases risk factors about custody and their whole
Speaker 1: thing is we're doing. I I can actually read them
Speaker 1: right right for you. Here we we placed great importance
Speaker 1: on safeguard and crypto assets we custody and keeping them
Speaker 1: quote bankruptcy remote from our our general creditors. The problem though,
Speaker 1: is that and they say this here, we believe that
Speaker 1: a court would not treat custodied crypto assets as part
Speaker 1: of our general estate, meaning you know, they're talking about
Speaker 1: a hypothetical bankruptcy here. And again this is risk factors
Speaker 1: where you you have to disclose the works possible scenario.
Speaker 1: You know, no no one's you know, saying coin bases
Speaker 1: is not big of trouble. But they say, however, due
Speaker 1: to the novelty of crypto assets, courts have not yet
Speaker 1: considered this type of treatment for custody crypto assets. But
Speaker 1: I guess the hope really here is that these courts
Speaker 1: would decide, uh, you know, creditors cannot get their hands
Speaker 1: on custody assets. I mean, it seems to me like
Speaker 1: that's a pretty good reasonable thing to assume. But how
Speaker 1: are you thinking about that idea? Yeah, well, first I
Speaker 1: should say, I'm never going to shake the image of
Speaker 1: you and birkenstocks and fleece stocks reading risk factors late
Speaker 1: at night. That's now every time I hear your voice,
Speaker 1: that's what I'm going to see. Yeah, that's it. Yeah,
Speaker 1: that's me. It's a great question and one that we
Speaker 1: think about a lot. You know. I do think it
Speaker 1: points to something in crypto that's really important, which is
Speaker 1: that we need greater clarity from a regulatory perspective so
Speaker 1: that the best actors in the space can build on
Speaker 1: a strong foundation. We agree with coin bases interpretation of
Speaker 1: that that it's highly unlikely in the event of a
Speaker 1: corporate bankruptcy that they would reach across to customer deposit assets.
Speaker 1: We need regulatory clarity that makes this exquisitely clear for
Speaker 1: all the regulated custodians in the space. We think if
Speaker 1: you look at trust charter law and you look at
Speaker 1: national bank account charter law, we view coin based as
Speaker 1: a very sound, very solid institution in place to custody crypto.
Speaker 1: It's also a publicly traded company with audited financials, which
Speaker 1: you can see in a strong balance sheet. But you
Speaker 1: point out that there is a need in crypto for
Speaker 1: greater regulatory clarity. I think we're going to get that
Speaker 1: on an accelerated freight train basis as a result of FTX,
Speaker 1: and I actually think that's going to be great for crypto.
Speaker 1: I think that is going to sew the seeds for
Speaker 1: the next bull marketing crypto. But you're absolutely right, you're
Speaker 1: taking on lots of risk in crypto. There's no free
Speaker 1: lunch in investing. Crypto is the best performing asset class
Speaker 1: in the world over the last three years, five years,
Speaker 1: and ten years. It's up over a hundred thousand percent.
Speaker 1: Even with the current draw down. You don't get those
Speaker 1: kind of returns without risk. There is still risk in
Speaker 1: this market, which to my mind mean there is still
Speaker 1: the opportunity for great returns, but you will need to
Speaker 1: work with glow gold plated providers that are very conservative
Speaker 1: the space to to tap into those. Yeah, and you know, Matt,
Speaker 1: the reason why I bring this up and was thinking
Speaker 1: about it is I look at the you know, you
Speaker 1: look at the bit Wise ten crypto index fund. UH,
Speaker 1: you know about million in assets. It holds the ten
Speaker 1: biggest cryptos, basically a passive index fund UH in the
Speaker 1: crypto world. The net asset value is like fifteen bucks
Speaker 1: and change per share. Uh. The share prices less than
Speaker 1: seven bucks, So we're talking about sort of a fifty
Speaker 1: five discount to the actual assets that you're holding in
Speaker 1: that fund. Why is that? Do you think? Is it?
Speaker 1: Is it the exact things we've just been talking about,
Speaker 1: basically that people are just worried about where the next
Speaker 1: domino is gonna gonna hit? Well, I should start by
Speaker 1: saying we have three different ways that investors could gain
Speaker 1: access to the bit Wise ten, depending on whether they're credited,
Speaker 1: whether they work with advisors, or whether they're buying retail.
Speaker 1: One way is through a private placement for credited investors
Speaker 1: that's available Bowle with with access you know, on a
Speaker 1: weekly basis at NAV, so no premium and discount. Another
Speaker 1: way is a separately managed account that a financial advisor
Speaker 1: can set up that holds the assets directly held at NAV.
Speaker 1: And the third way is the one that you mentioned,
Speaker 1: which is b I t W, which is a publicly
Speaker 1: traded over the counter O t c q X traded security.
Speaker 1: Those securities operate given the regulatory limitations in the crypto
Speaker 1: space like closed end funds, which means they can trade
Speaker 1: at premiums and discounts, and given the volatility of the
Speaker 1: crypto market, not surprisingly they traded larger premiums and discounts
Speaker 1: than you would say, see in a MUNI bond closed
Speaker 1: end e t F. So what that discount reflects is,
Speaker 1: you know, more more sellers than buyers over a period
Speaker 1: of time. What we've stated publicly to investors and what
Speaker 1: I hope the long term outcome is is once we're
Speaker 1: allowed to, we will convert this fund to an e
Speaker 1: t F, which is likely to you know, largely, if
Speaker 1: not entirely, eliminate that discount. The sec is not allowed
Speaker 1: there to be a crypto et F. I think that's
Speaker 1: another good example of regulators not helping investors by pushing
Speaker 1: forward regulatory clarity. Investors want to gain access to bitcoin,
Speaker 1: they want to gain access to other crypto assets. If
Speaker 1: they could do it in an e t F, there
Speaker 1: wouldn't be this question of premiums and discounts. Asset managers
Speaker 1: like bit wise are trying to help investors gain exposure
Speaker 1: to the space within the regulatory limitations we face, and
Speaker 1: so we have these O t c q X traded
Speaker 1: securities that can trade at premiums and discounts. I don't know,
Speaker 1: it's a complex answer. I hope it helped, but that's
Speaker 1: what's going on there. So you sent some notes before
Speaker 1: the podcast and it says it holds the largest and
Speaker 1: digital assets, but it's screened out f t T even
Speaker 1: when that token, which is the doomed f t X
Speaker 1: utility token, um when it would have classified for inclusion.
Speaker 1: So can you tell us about that process, because it
Speaker 1: sounds like you purposefully and cognizantly. Yeah, I I really
Speaker 1: appreciate that question, and I do think in a frontier
Speaker 1: market like crypto, you can't have a simple index fund.
Speaker 1: You need to have lots of rules that screen out assets.
Speaker 1: If you went to coin market cap dot com and
Speaker 1: looked at their list of crypto assets by market cap,
Speaker 1: you'd have to get to asset about twenty one or
Speaker 1: twenty two before you found the tenth asset in our funds.
Speaker 1: So we're screening out a large number of assets. We
Speaker 1: screened out ft T, We screened out Luna. We've never
Speaker 1: held dose coin, we don't hold tron. There are a
Speaker 1: variety of screens that protect us from those examples. We
Speaker 1: look at the fundamental token omics of an asset. That's
Speaker 1: what protected us from Luna. We saw the potential for
Speaker 1: the death spiral that claimed that quote unquote stable coin.
Speaker 1: We look at assets that are at undue risk of
Speaker 1: being found in violation of federal securities laws. F t
Speaker 1: T fell into that framework because we thought it was
Speaker 1: likely or possible to be deemed a security by regulators.
Speaker 1: It was it was largely internally control old. In our view,
Speaker 1: it could potentially meet the Howie test, and so we
Speaker 1: won't hold it in our fund. There are other screens
Speaker 1: as well that that are really important screens around liquidity.
Speaker 1: I'll put on my index geek hat I used to
Speaker 1: edit the Journal of Indexes which is the world's most
Speaker 1: boring publication probably with absolutely absolutely. I used to check
Speaker 1: check Bogol and I I interviewed him a few times
Speaker 1: and and he was a big He could quote chapter
Speaker 1: and verse of that from Yes he was he was.
Speaker 1: He was a big fan and and and wrote some
Speaker 1: articles for us, which was amazing. We free flow adjust
Speaker 1: crypto assets, which means we don't count in the market
Speaker 1: cap of an asset the assets that are held by insiders.
Speaker 1: And that's important because you're hearing things around FTX about
Speaker 1: Serum about these other assets that they were counting the
Speaker 1: full market cap of the maps. Those would never enter
Speaker 1: our index because we will only hold the publicly traded assets,
Speaker 1: which means they're publicly traded. Market cap up it was
Speaker 1: like eighty eight millions. So yeah, we were fortunate to
Speaker 1: have these screens in place. We've been doing it for
Speaker 1: five years. We've we've avoided a number of blow ups.
Speaker 1: That doesn't mean we'll avoid all of them in the future,
Speaker 1: but we do try our best. No doge coin, what
Speaker 1: a buzz kill, Matt, Come on, that was your your
Speaker 1: no dog meme screen? I take it, or although that
Speaker 1: that was that was a case where the float was
Speaker 1: sort of half held in in some burn wallet too, right,
Speaker 1: or the total market cap it would half held in
Speaker 1: a burn wallet. It also piggybacks on other assets proof
Speaker 1: of work, which introduces some security risks into it. You know,
Speaker 1: we have a ten person research team. It takes that
Speaker 1: much effort to screen all these assets and maintain what
Speaker 1: from the outside looks like just the top ten ten assets.
Speaker 1: We put a lot of work into it. And yeah,
Speaker 1: so no doge coin. We think it had a fundamental
Speaker 1: security flaw. It also had that that internal control and
Speaker 1: I'm not sure it was engaged in true price discovery.
Speaker 1: There were so many outstanding coins in such a limited
Speaker 1: trading volume that I think it had that risk too.
Speaker 1: You know, man, I wanted to ask you about a
Speaker 1: lot of the pain in the industry right now is
Speaker 1: centered on these sort of high yield deposit accounts where
Speaker 1: you know, you give the Winklevoss twins your coins and
Speaker 1: you you collect out on a seven eight percent and
Speaker 1: they loaded out to uh someone else where. Do you
Speaker 1: see that whole sort of both centralized and decentralized high
Speaker 1: yield component of crypto going Because I feel like it
Speaker 1: really is, really, really helped bring a lot of assets,
Speaker 1: a lot of attention into the market, a lot of interest.
Speaker 1: And now it seems like the whole notion of that
Speaker 1: concept of getting a really high yield and crypto seems
Speaker 1: to be questionable whether that business model can continue to exist.
Speaker 1: How are you looking at that? Yeah, I think that
Speaker 1: business model is going to go very quiet and then
Speaker 1: emerge as a much smaller, much more regulated, much more
Speaker 1: institutional model. I would actually argue that the yields weren't
Speaker 1: high enough to reflect the underlying risks. Um. You know,
Speaker 1: there is no free lunch. If you were looking at
Speaker 1: doing what amounts to securities lending of a bitcoin asset
Speaker 1: or an ethereum asset and expecting to get, you know,
Speaker 1: a yield on those working with unregulated counterparties with an
Speaker 1: E D E voll asset, the yield should have been very,
Speaker 1: very high because you were taking on a huge amount
Speaker 1: of risk. What turned out in those examples is, uh,
Speaker 1: those were bad loans. The collateral didn't match up. I
Speaker 1: think some of it's gonna migrate to D five platforms.
Speaker 1: It's worth noting D five platforms work perfectly through this,
Speaker 1: which is really remarkable. There were no losses on things
Speaker 1: like A A and other D five platforms, and then
Speaker 1: there's going to be, of course an institutional prime brokerage,
Speaker 1: but people will only work with regulated entities. I don't
Speaker 1: think retail investors should be leaning out their crypto trying
Speaker 1: to get five percent yields anyway. I really don't think
Speaker 1: that's the bet most people want to make. People thought
Speaker 1: it was a free lunch, they thought it was riskless.
Speaker 1: It turned out they were wrong. Um, and so I
Speaker 1: think that that retail focused lending is just going to
Speaker 1: go away. And what about the DEFY space, because this
Speaker 1: is the other thing that I keep hearing that Defy
Speaker 1: is going to benefit amidst all this because when we
Speaker 1: think of f t X and coin Base, etcetera, those
Speaker 1: are more centralized places versus Defy maybe coming out possibly
Speaker 1: stronger from it, or what is your view? Definitely true,
Speaker 1: It's definitely true. I go back to that Barbell image.
Speaker 1: Regulated centralized institutions that are trustworthy will benefit. Coin Base
Speaker 1: will pick up share. I think it's the most important
Speaker 1: exchange in the world. And defy exchanges, lending platforms, etcetera.
Speaker 1: Where you can trust the code and don't have to
Speaker 1: trust you know Sam Bankman freed with his crazy hair,
Speaker 1: wearing shorts and berken stocks. Almost certainly now he now
Speaker 1: he wears he wears grungey old new balances. Don't you
Speaker 1: are right? You are right? There's a funny, funny meme
Speaker 1: about that. No. I think Defy will benefit tremendously. There's
Speaker 1: there is a argument to make that's uncomfortable to make
Speaker 1: right now, that the flaw of f t X was
Speaker 1: that it wasn't crypto enough. That rings hollow in the
Speaker 1: current market because the market is crashing and people are
Speaker 1: unable to disambiguate between good crypto and bad crypto. But
Speaker 1: it's subjectively true if investors did hold their own keys,
Speaker 1: if those loans were really collateralized and overcollateralized in a
Speaker 1: way people could see, you wouldn't have these blow ups.
Speaker 1: I think if you look a year from now, you're
Speaker 1: going to see many investors who favor doing it internally
Speaker 1: migrate to DEFY, and other investors the kind of investors
Speaker 1: that bit wise serves migrating to well regulated centralized institutions.
Speaker 1: I think the question I have though, is that this
Speaker 1: notion of defied decentralized exchanges and finances it's a great concept,
Speaker 1: but in practice it often seems like, well, there is
Speaker 1: some sort of central party that is a very big
Speaker 1: player in it. And I think Tera Lune is a
Speaker 1: good example of that. You know, technically a defied project,
Speaker 1: but do quan and and Terraform Labs were basically in
Speaker 1: control of it. Um so when it blew up up,
Speaker 1: you know, there was no halting of withdrawals there were
Speaker 1: there was no bankruptcy. But you know, you you you've
Speaker 1: got your coins out at sort of pennies on the
Speaker 1: dollar of what you they were a week ago. Um,
Speaker 1: So how do you think about that? You know, is
Speaker 1: it are we really at the point where these things
Speaker 1: are everything is truly defy or is there still sort
Speaker 1: of that big player risk in a lot of these projects.
Speaker 1: I think if you look at the better projects, there
Speaker 1: is relatively low big player risk, but not zero. I
Speaker 1: think you're right to point out that in most projects
Speaker 1: there is still an obvious big player that has significant
Speaker 1: control or a worry that that is true. Even even
Speaker 1: the best projects need to continue to migrate down that platform.
Speaker 1: But if you look at something like unit Swap, you know,
Speaker 1: I think Hayden Adams could go on vacation in in
Speaker 1: UH for for a year, and the team at UNI
Speaker 1: Swap Labs could go away and un swap would still
Speaker 1: be processing almost the same volume of transactions as coin base,
Speaker 1: which is a really remarkable thing. When you think about
Speaker 1: an and T with no employees, no offices, no no
Speaker 1: centralized entity that's matching coin based on a volume perspective,
Speaker 1: I think that's pretty incredible. Um. But absolutely the DeFi
Speaker 1: space needs to get more decentralized. I think there is
Speaker 1: a centrifugal force from the fallout of FTX that is
Speaker 1: going to push that people are going to insist on
Speaker 1: that happening. In the case of Luna, that was just
Speaker 1: an up, a failed design from the start. If you've
Speaker 1: been in crypto, you've seen algorithmic stable coins come and
Speaker 1: they always go. They just don't work, They will never work,
Speaker 1: and so I think that one was one where you
Speaker 1: could you could have trusted the code and if you
Speaker 1: thought about the code long enough, you knew it was
Speaker 1: going to end up at zero. But but you're right,
Speaker 1: DEFY needs to get more Defy it needs to be
Speaker 1: truly decentralized so that we don't have these issues of trust.
Speaker 1: And you mentioned your clients, and I'm wondering, like, who
Speaker 1: is buying crypto products right now? Are people buying or
Speaker 1: is it mostly so absolutely people are buying at least
Speaker 1: from the institutions we serve. So again, we serve prime
Speaker 1: early financial advisors, family offices, and institutions. Most financial advisors
Speaker 1: today have zero exposure to crypto, and they have clients
Speaker 1: who want exposure in a trustworthy format. Some of these
Speaker 1: clients were doing it on their own right. Coin Base
Speaker 1: has more customers than e Trade, Charles Schwab, tdum merit Trade,
Speaker 1: and interactive brokers combined, and so advisors are now helping
Speaker 1: those those customers move into a more sound format. We've
Speaker 1: had very low outflows and continued significant inflows into the space.
Speaker 1: One of the reasons for that the reason that it
Speaker 1: may seem counterintuitive, but I think it makes sense if
Speaker 1: you think about it. If you're a professional investor, if
Speaker 1: you're a financial advisor or family office, and you're allocating
Speaker 1: to crypto, two things are true. One, you're doing it appropriately,
Speaker 1: which means you have a small percentage of your portfolio,
Speaker 1: and crypto one to five of your portfolio. If you
Speaker 1: have one percent of your portfolio and it goes to zero,
Speaker 1: you're down one percent. Well, the SPID goes down one
Speaker 1: or two percent on a normal day. Portfolio sizing means
Speaker 1: they don't have to panic and sell. The other reason
Speaker 1: is that those investors have to have very high conviction
Speaker 1: to allocate in the first place. It's not like choosing
Speaker 1: to allocate to the S and P five hundred, where
Speaker 1: you may be convicted. You have to be confident that
Speaker 1: this is a good long term bet. And so what
Speaker 1: we've experienced in this bear market, and what we experienced
Speaker 1: in is net inflows from these professional investors. Uh. You know,
Speaker 1: one fund stat the number of clients that bit wise
Speaker 1: serves has doubled in the past year. Uh. And that's
Speaker 1: that's a it's a big number. And I want to
Speaker 1: ask you about the crypto E, T, F ETP space
Speaker 1: in general, because we've seen some liquidations recently as well.
Speaker 1: I'm wondering if you think the space was oversaturated with products.
Speaker 1: Launches have dwindled. I think we saw I mean a
Speaker 1: bunch in the first half of the year, actually, but
Speaker 1: since the third quarter, I think they've only been for
Speaker 1: teen or fifteen or so. So are you expecting more
Speaker 1: liquidations in the space in general, and and did we
Speaker 1: have too much do you mean on on bitcoin futures
Speaker 1: et fs, on crypto equity e t f yes, all
Speaker 1: of them, yeah, across the space, and sorry not just
Speaker 1: in New US, I mean yeah. Uh you know, look
Speaker 1: there there was a giant bowl marketing crypto in one
Speaker 1: and that attracted a lot of tourist companies to the space.
Speaker 1: That we're launching products, trying to seize on that momentum,
Speaker 1: and they're now being filtered out. I suspect there'll be
Speaker 1: more crypto et fs in five years than there are today.
Speaker 1: But yes, during this bear market, you'll see a winnowing,
Speaker 1: as you would in any other asset class. I think
Speaker 1: that's completely normal. Um. But you know, long term, e
Speaker 1: t f s are going to be one of the
Speaker 1: primary ways that investors gain access to crypto, and I
Speaker 1: suspect long term you'll see significant flows into the into
Speaker 1: the space, you know, Matt. I think one of the
Speaker 1: issues that really maybe is not being talked about enough
Speaker 1: from the ft X blow up is this notion that
Speaker 1: in crypto, you actually your balance is held by the
Speaker 1: exchange itself, whereas you know inequities, Uh, you know, it's
Speaker 1: in a brokerage account. The n y SC or NASDAC
Speaker 1: never actually holds your assets. They just match up the
Speaker 1: buyers and sellers. Or whether you're talking about a dark
Speaker 1: pool or electronic market maker whatever. Is that something you
Speaker 1: know that needs to be changed in crypto The notion
Speaker 1: that these exchanges are also basically your broker and that
Speaker 1: they have control of your assets. Yes, yes, yes, is
Speaker 1: the answer. There should be a separation of custody and exchange.
Speaker 1: Finance has existed for hundreds of years. We've built up
Speaker 1: many norms for very good reasons, and you only disrupt
Speaker 1: those norms, you know, very carefully and significant peril. The
Speaker 1: reason we've had a separation of exchange and custody is
Speaker 1: exactly the reason that we saw on FTX. You don't
Speaker 1: want to commingle those pools. That's the reason why bit
Speaker 1: wise doesn't keep assets on exchanges, settles direct to our
Speaker 1: custodian and just leaves them there. I think that's an
Speaker 1: example of the kind of UH regulatory clarity that we
Speaker 1: will get in the next twelve months, and that will
Speaker 1: create a stronger foundation for crypto to grow in the future.
Speaker 1: But there are many, many examples in the space where
Speaker 1: we need that kind of push forward, and I think
Speaker 1: we'll get there. But it's a great point. Another thing
Speaker 1: that it's not gone unnoticed, but it just hasn't gotten
Speaker 1: as much attention recently, just because the news flow has
Speaker 1: been so heavy, is that bitcoin did sell off. But
Speaker 1: I keep seeing all these notes where people are saying,
Speaker 1: I expect a bitcoin to be at like ten thousand
Speaker 1: or like thirteen thousand at this point versus it being
Speaker 1: around sixteen or just like slightly below seventeen thousands. Why
Speaker 1: do you think that is? It's incredible. It's like the
Speaker 1: honey Badger of risk assets. It doesn't care about what's
Speaker 1: going on out there in an asset class that's a
Speaker 1: trillion dollars and the flagship asset is down. You know,
Speaker 1: it's absolutely incredible. One reason for that is that all
Speaker 1: the people who would sell have have have not all
Speaker 1: of them, many of them have already left. This is
Speaker 1: not the first bad piece of news this year. Remember
Speaker 1: we were in a risk off regime that took crypto
Speaker 1: down significantly, and then we had Luna and three a
Speaker 1: C and Celsius and block Fi and Voyager, and it
Speaker 1: took crypto down more. And now we have ft X,
Speaker 1: there's a lot of bad news, there's a lot of
Speaker 1: uncertainty and doubt. If you look on chain at data,
Speaker 1: the percentage of investors who are holding bitcoin at a
Speaker 1: loss is at or near it's all time high. So
Speaker 1: there's max pain in the crypto market. And it may
Speaker 1: be that, at least in the short term, we've run
Speaker 1: out of sellers. That doesn't mean it can't go lower.
Speaker 1: Of course, it can go lower longer term. Investors get
Speaker 1: tired of the market. People who are watching, you know,
Speaker 1: inflation continue to print it eight percent, may not want
Speaker 1: to hold a non yielding asset. All of those things,
Speaker 1: but it is really remarkable. Um. And you know, it's
Speaker 1: worth noting crypto has had blow ups before and it's
Speaker 1: gone on to be the best performing asset class in
Speaker 1: the world. It's worth noting there's more venture capital money
Speaker 1: in crypto. It raised more money in the last eighteen
Speaker 1: months than it's in first twelve years. They're more engineers
Speaker 1: working in crypto today than at any point in the past. Um.
Speaker 1: You know, this too shall pass. This isn't the end
Speaker 1: of crypto by any means. Uh. It's a disruption, it
Speaker 1: will It's a hangover. It will take time to reset.
Speaker 1: But I think the resiliency you're seeing in bitcoin, not
Speaker 1: just Bitcoin, in Ethereum, in Maker, in many other leading assets,
Speaker 1: points to the resiliency of the space and the fact
Speaker 1: that it will be back. Matt. The other day, someone
Speaker 1: in the newsroom asked me a good question, uh that
Speaker 1: I did not have the exact answer too, so I
Speaker 1: pulled out the you know, the Irish blarney, trying to
Speaker 1: trying to figure out a good answer. You're admittedly to them,
Speaker 1: but you know, the question was, basically, bitcoin miners are
Speaker 1: under a lot of stress these days. What happens to
Speaker 1: bitcoin if that issue worsens? If miners just start unplugging
Speaker 1: their rigs and there are just you know, the economics
Speaker 1: of mining don't make as much sense for as many
Speaker 1: people as many uh mining companies. UM. And my guess was,
Speaker 1: you know, while transactions slowed down, that sort of thing,
Speaker 1: what what what do you think what would happen if
Speaker 1: that if that mining stress gets worse and worse to
Speaker 1: the point of crisis. Yeah, well, first they're going to
Speaker 1: be bitcoin miners that go out of business. There's no
Speaker 1: question about that. If you look at the marginal cost
Speaker 1: of bitcoin production by miners. It ranges from a low
Speaker 1: of around ten thousand, which means they're still extremely profitable,
Speaker 1: to things like which means it doesn't make sense to
Speaker 1: be in business. Many of them are highly levered, but
Speaker 1: not all of them. Some of them will go out
Speaker 1: of out of bankruptcy. For the Bitcoin network, it won't
Speaker 1: mean much. You know, the the difficulty adjustment happens every
Speaker 1: two weeks in bitcoin, So if a lot of miners
Speaker 1: come off over the next two weeks, it will become
Speaker 1: easier to mind bitcoin. The cost of mining will go
Speaker 1: down for the remaining miners that are in the space,
Speaker 1: So it's set up to adjust to this kind of volatility.
Speaker 1: I don't think we're anywhere close to not having enough
Speaker 1: hash power in the Bitcoin network to it not being secure.
Speaker 1: We're way over that burden. It's the most secure database
Speaker 1: in the world. So even if you know half or
Speaker 1: two thirds or three quarters of miners went out of business,
Speaker 1: there's still be enough mining power in the space to
Speaker 1: maintain the network. I don't even think you'd see transactions
Speaker 1: slow down for more than a couple of week period,
Speaker 1: but I do think there's stress in that market. I
Speaker 1: think the companies that survive will be well positioned to thrive,
Speaker 1: but you'll you'll see companies, including possibly publicly traded companies,
Speaker 1: go bankrupt under that stress in the coming days. And
Speaker 1: you mentioned recovery a couple of times, So what does
Speaker 1: recovery even look like at this point, Like, how does
Speaker 1: scripto start to recover and what does it look like?
Speaker 1: I think you mentioned six months. Yeah, I think there
Speaker 1: are three milestones the crypto investors should look for in
Speaker 1: the recovery. So first we have to get past the hangover, right,
Speaker 1: crypto investors are going to be uncomfortable jumping in until
Speaker 1: they know they're no more shoes to drop, and I
Speaker 1: think that period could take four months, six months, eight months,
Speaker 1: a year something in that zone before we're like, Okay,
Speaker 1: the credit crisis has really abated, there are no more genesis.
Speaker 1: Is there are no more block fives? Um, we've we've
Speaker 1: we've hit that bottom. The next milestone we need regulatory progress.
Speaker 1: So we need to see regulatory progress around CBD, around
Speaker 1: stable coins, around crypto exchanges. I suspect that will happen
Speaker 1: in the next year as well. We'll start to see
Speaker 1: legislation move forward that I think will be very positive
Speaker 1: for the crypto market. And then ultimately what always sparks
Speaker 1: the next bowl marketing crypto is products that people like
Speaker 1: to use. I know that sound goofy, but if you
Speaker 1: think about crypto, it's had three big Bowl markets. One
Speaker 1: was fourteen That was when bitcoin emerged. Coin based launched
Speaker 1: in twenty eleven. All of a sudden, you could buy bitcoin,
Speaker 1: big product product market fit. It went up a lot.
Speaker 1: The next one was Etherorium was created in product market fit.
Speaker 1: We found I c O s went up a lot.
Speaker 1: Regulators reset us by saying I c A s were illegal.
Speaker 1: The most recent one was DeFi n F T s
Speaker 1: and stable coins. Those words didn't exist. Now they're in
Speaker 1: the pages of the New York Times, of the Wall
Speaker 1: Street Journal, of every major media outlet. So the next
Speaker 1: real Bowl market is when we see crypto develop useful apps.
Speaker 1: I actually think the next Bowl market will be marked
Speaker 1: by apps that people use in their everyday lives that
Speaker 1: are mainstream, and for that reason, I think it will
Speaker 1: be the biggest Bowl market in crypto from a market
Speaker 1: cap perspective. But that will be the third milestone when
Speaker 1: we see new applications emerged that people are using talking
Speaker 1: about sharing with their friends and colleagues. So six months,
Speaker 1: twelve months, and then twenty four months from now, I
Speaker 1: think it'll be pretty exciting. So what what kind of
Speaker 1: apps are you thinking? You know? Is this uh metaverse stuff?
Speaker 1: Do I need to do? I need to get the goggles.
Speaker 1: I think there's so many potential applications. I don't think
Speaker 1: you need to get the goggles yet and put them on.
Speaker 1: They are fun. Yeah, you probably should get the goggles yet.
Speaker 1: The metaverse is one kind of application, you know. I
Speaker 1: think n f t s have a huge place to
Speaker 1: play in society and culture uh and and n f
Speaker 1: t s as digital property rights have an even bigger
Speaker 1: place to play. UM. I think defy could be substantially bigger.
Speaker 1: I think stable coins could be substantially bigger. I think
Speaker 1: one of the breakthroughs that will see in the next
Speaker 1: round of applications UH is individual identity on chain uh
Speaker 1: and and zero knowledge proves the ability to prove something
Speaker 1: on chain without revealing that information. A good example for
Speaker 1: investors of how that might matter. If you run I
Speaker 1: don't know, institutional funds, you have to do you have
Speaker 1: to prove that you're invest stars are accredited. In order
Speaker 1: to do that, today everyone has to disclose their brokerage
Speaker 1: statements or have their advisor a test that they are accredited.
Speaker 1: No one wants to do that with twenty different firms
Speaker 1: that they're trying to invest in, because it reveals their
Speaker 1: public information twenty different times. Well what if that could
Speaker 1: be stored on chain and you could use cryptographic functions
Speaker 1: to prove that you're accredited without revealing that underlying data.
Speaker 1: I think those are the kind of applications we're going
Speaker 1: to see in the next round. That's what I mean
Speaker 1: by real world examples. This technology of public blockchains, of
Speaker 1: cryptographic proofs has significant real world utility, and we're just
Speaker 1: at the earliest phase of unlocking it. I think you're
Speaker 1: going to see I don't know, dozens, maybe more of
Speaker 1: those applications in the next bull market. Oh good stuff, Matt,
Speaker 1: really really appreciate your time, but we can't let you
Speaker 1: go just yet. Unfortunately, I know you probably want to
Speaker 1: dodge this next thing, but it's time, Bill Donna for
Speaker 1: the craziest things we saw in markets this week. The
Speaker 1: markets have blessed us with a lot of crazy things.
Speaker 1: They really have, They really have. What do you got
Speaker 1: for us. Okay, this is from Matt Levine, So I'm
Speaker 1: quoting one of his columns from earlier this week, and
Speaker 1: it was so good. It went through the entire FTX
Speaker 1: balance sheet and everything that was going on in there.
Speaker 1: But then at the end he said, quote cryp, cryp.
Speaker 1: This is separate from ft X. Crypto dot com said
Speaker 1: it recovered almost four million in crypto acid ether from
Speaker 1: Asian exchange gate dot io after it accidentally transferred the
Speaker 1: funds to the wrong account. Not now crypto dot com.
Speaker 1: That's that's funny. So even even something like that almost
Speaker 1: want unnoticed because the rest of the newsful has been
Speaker 1: So how did the owner that wrong account? They must
Speaker 1: have They must have been living large from hot minute,
Speaker 1: they not crypto dot com. How about you, Matt? You
Speaker 1: see anything crazy this week? Pretty boring week? Had nothing
Speaker 1: going on, Pretty boring week. Uh, nothing to talk about?
Speaker 1: Yeah to two bar bells are crazy. When we talked
Speaker 1: about the world imploded in crypto and bitcoin shrugged trading
Speaker 1: at sixteen thousand, I think that's pretty crazy. Uh. The
Speaker 1: other thing, just so I'm not seen as a Pollyanna
Speaker 1: for crypto, f t T token is still trading for
Speaker 1: half a billion dollars UH in emotional market cap, and
Speaker 1: that is just nuts. I wonder why, what do you
Speaker 1: what do you think? Is there any possible reason for that?
Speaker 1: Is it, uh, some kind of squeeze or something. I
Speaker 1: don't know, I don't I don't know why did game
Speaker 1: stop trade to a million? I think it's a little
Speaker 1: bit of that and a little bit of limited supply,
Speaker 1: and people maybe can't access most of it because it's
Speaker 1: held on ft X exchange can't. It's all locked up.
Speaker 1: It's a zombie coin, right, um. But still, if you
Speaker 1: look there, it is half a billion dollars of worthless money.
Speaker 1: That's pretty good. I think that might that might take it.
Speaker 1: But I'll give you mine here this courtesy of our
Speaker 1: own Drake Bennett at Bloomberg. I'm just gonna read the
Speaker 1: first two paragraphs paragraph story, yes, because because he really
Speaker 1: wrote this pretty well. On Sunday, the auction house Julian's Auctions,
Speaker 1: which is a specialist in memorabilia, closed a bidding for
Speaker 1: a pair of used suede birknsock standals barkensock sandals not
Speaker 1: scandals that the two strap Arizona model. I didn't know
Speaker 1: there were there was more than one model. I think
Speaker 1: I have the Arizona model. The sandals don't appear to
Speaker 1: be in great shape. The best the auctioneers could say
Speaker 1: is that they quote appear intact. However, the cork and
Speaker 1: the jute footbeds also retained the imprint of their one
Speaker 1: time owner's feet. That owner was Steve Jobs, the founder
Speaker 1: of Apple Computers. So it's time to play our favorite
Speaker 1: game show, The Prices Precise built prices, right, this is
Speaker 1: not the prices, the prices percise. I'll give you one
Speaker 1: extra point of price discovery for this item that that
Speaker 1: may or may not help your answer. Six years ago,
Speaker 1: these sandals sold for two thousand dollars. So what do
Speaker 1: you suppose winning anonymous bidder paid for Steve Jobs is
Speaker 1: broken down, falling apart pair of Birkenstocks. Oh my gosh. Okay,
Speaker 1: I'm gonna go with one hundred fifty nine thousand, one
Speaker 1: fifty thousand U S. Dollars token. Alright, Matt, how about
Speaker 1: you all? I was hoping I get to play. I'm
Speaker 1: going with five hundred and thirty two. Okay, but if
Speaker 1: you're way over, you lose. I'm willing to take that risk. Okay,
Speaker 1: all right, let's see for for once the donna has
Speaker 1: taken the w on this one. Two eighteen thousand, seven
Speaker 1: hundred fifty dollars for Steve Jobs is old Birkenstocks. I
Speaker 1: have a feeling that Julian's Auctions is going to be
Speaker 1: reaching out to Matt for the next Berken sock auction,
Speaker 1: though after after they heard what he's willing a bit
Speaker 1: on these things. But think about what this is. You're
Speaker 1: buying another person's old shoes. And y' all thought pictures
Speaker 1: of monkeys selling for hundreds of thousands of dollars was silly.
Speaker 1: I mean, that's it, right, that's it. It's you know
Speaker 1: what's it worth? Well? Hey, what are you willing to
Speaker 1: pay for it? There you go. That's where all we
Speaker 1: live in. Matt Hogan, real pleasure to talk to you
Speaker 1: and tap your brain on all these developments. Wish you
Speaker 1: the best of luck and hopefully we can get you
Speaker 1: back on the show again someday. Thanks for having me.
Speaker 1: This is fun. Thank you, Matt. What goes up, we'll
Speaker 1: be back next week and so then you can find
Speaker 1: us on the Bloomberg Terminal website and app or wherever
Speaker 1: you get your podcast. We love it if you took
Speaker 1: the time to rate and review the show on Apple
Speaker 1: Podcasts so more listeners can find us. And you can
Speaker 1: find us on Twitter. Follow me at Rea Anonymous. Bildonna
Speaker 1: Hierrich is at Bldonna high Rich. You can also follow
Speaker 1: Bloomberg Podcasts at podcasts. What Goes Up is produced by
Speaker 1: Stacy Won. Thanks for listening. To see you next time.