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Speaker 1: Since you're a subscriber to this Bloomberg podcast, we thought

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Speaker 1: you'd be interested in a new four episode sponsored podcast

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Speaker 1: called Evolving Money, produced by Coinbase and Bloomberg Media Studios.

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Speaker 1: It explores some of the monetary system's biggest changes over

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Speaker 1: the centuries and today's companies that are making big bets

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Speaker 1: that cryptocurrency could be money's next evolution. You can subscribe

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Speaker 1: wherever you listen to your favorite podcasts. Here's a recent episode.

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Speaker 2: It was twenty ten, about a year had passed since

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Speaker 2: the first bitcoin was created. In Jacksonville, Florida, a twenty

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Speaker 2: eight year old computer programmer named Laslohnyez decided it was

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Speaker 2: time for someone to use this new kind of money,

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Speaker 2: like real money, to actually buy something. Laslow went online

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Speaker 2: and posted a question on a bitcoin forum under the

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Speaker 2: subject line pizza for Bitcoin. A nineteen year old in

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Speaker 2: California named Jeremy Sturdivant responded and took him up on

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Speaker 2: the offer. Laslow paid Jeremy ten thousand bitcoin, and then

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Speaker 2: a few days later, two Papa John's pizzas were delivered

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Speaker 2: to Laslow's front door. The first known commercial transaction involving

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Speaker 2: bitcoin was completed Back then ten thousand bitcoins were worth

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Speaker 2: about forty one dollars, so it wasn't a horrible deal

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Speaker 2: at the time. But today those ten thousand bitcoins are

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Speaker 2: worth hundreds of millions, enough for Laslow to buy an

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Speaker 2: entire chain of pizzerias. That's a pretty dramatic increase in

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Speaker 2: value for a currency over such a short period of time,

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Speaker 2: maybe the greatest ever. And for that very reason, bitcoin

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Speaker 2: is much better known today as a store of value

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Speaker 2: for investors rather than a medium of exchange a currency.

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Speaker 2: From Coinbase and Bloomberg Media Studios, this is Evolving money,

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Speaker 2: and I'm your host on this podcast. We're taking a

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Speaker 2: different look at cryptocurrency. It's been cast as a radical

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Speaker 2: departure for the monetary system, but what if it wasn't

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Speaker 2: radical at all, just the next logical evolution of how

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Speaker 2: we pay for things and store long term value. Along

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Speaker 2: the way, we'll explore how money has changed over the centuries,

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Speaker 2: looking for lessons that predict its next evolution. Why did

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Speaker 2: bitcoin move from a currency to an investable asset in

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Speaker 2: just fifteen years. It was because of mainstream adoption by

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Speaker 2: retail investors who believed there was money to be made,

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Speaker 2: But behind that mania for all things Crypto was a

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Speaker 2: much more serious undertaking, the birth of a new asset class.

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Speaker 2: Investors came to understand that there was a market for

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Speaker 2: crypto and that it behaved differently from other assets in

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Speaker 2: their portfolios. It's not the first time the monetary system

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Speaker 2: has absorbed a new asset class. In fact, as we'll see,

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Speaker 2: the rise of crypto has striking parallels to the creation

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Speaker 2: of stocks in the sixteen hundreds. Will also be joined

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Speaker 2: by Kathy Wood, CEO of ARC invest who was one

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Speaker 2: of the earliest believers in crypto, will explore what her

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Speaker 2: research shows could be a smart use of crypto in

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Speaker 2: a diversified portfolio of assets. Back in the sixteen hundreds,

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Speaker 2: Europeans got rich sailing the world, taking spices from far

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Speaker 2: away lands and trading those spices back home. The most

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Speaker 2: coveted spice was pepper, and the trade of pepper yielded

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Speaker 2: enormous profits.

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Speaker 3: The Portuguese had started the pepper trade.

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Speaker 2: That's Maria lane Uthart, professor of history at Vraya University

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Speaker 2: in Amsterdam.

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Speaker 4: Very soon it was known that the Portuguese merchants who

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Speaker 4: were trading the pepper that they made amazing profits with it.

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Speaker 3: So the Ditch wanted to get the pepper trade.

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Speaker 2: But for the Dutch to catch up to the Portuguese

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Speaker 2: required massive investment. The Dutch were face with that classic

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Speaker 2: money conundrum. In order to make it, you've got to

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Speaker 2: spend it. To fund the voyages, the Dutch created the

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Speaker 2: feinigd Orsendische Company of VOC, also known as the Dutch

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Speaker 2: East India Company. The government gave the East India Company

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Speaker 2: a charter for twenty years, and according to the charter,

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Speaker 2: anyone could invest in it. Even the maid of one

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Speaker 2: of the directors of the company participated. She put in

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Speaker 2: ten month salary. All investors were given the option to

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Speaker 2: cash out after ten years, but that was kind of

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Speaker 2: a long time to wait, so the directors of the

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Speaker 2: VOC added a line to the charter that would change

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Speaker 2: the history of money forever. That line read quote, conveyance

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Speaker 2: or transfer may be done through the bookkeeper of this chamber.

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Speaker 2: In other words, if you wanted your money back before

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Speaker 2: those ten years were up, you could sell your share

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Speaker 2: of the company to anyone who was interested in buying it.

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Speaker 4: This resulted in the fact that a lot of smaller

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Speaker 4: investors sold their shares to the big investors who didn't

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Speaker 4: mind the wait.

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Speaker 3: People would sell their share on this market.

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Speaker 2: At first, shares were sold on a city bridge. Then

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Speaker 2: when that bridge got too crowded, the trading moved to

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Speaker 2: a new building that became the world's first stock market.

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Speaker 2: The VOC shares were just one of a panoply of

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Speaker 2: other investment opportunities open to merchants at the time.

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Speaker 4: A very safe kind of investment was also the public

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Speaker 4: debt of the state. It had a very safe return.

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Speaker 4: A lot of the merchants owned, about half of their investments,

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Speaker 4: were in government stock.

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Speaker 2: Which today we'd call government bonds. Very much like today.

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Speaker 2: Merchants were diversifying their portfolios by balancing stocks and bonds,

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Speaker 2: and they were reaping the benefits. What were the kind

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Speaker 2: of rewards that might have been available to someone who

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Speaker 2: invested if they invested well with the VOC.

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Speaker 4: The total capital that was invested in sixteen oh two,

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Speaker 4: that is six point four million guilders, and in sixteen

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Speaker 4: thirty seven this was worth seventy eight million guilders.

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Speaker 2: A nifty return of more than one one hundred percent

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Speaker 2: returns a lot like that. Bitcoin pizza money centuries later

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Speaker 2: for crypto to become an asset class, it needs to

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Speaker 2: go through the same process as stocks did. First, a

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Speaker 2: market needs to be created, a place where owners of

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Speaker 2: the asset can talk to and trade with each other. Second,

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Speaker 2: investors need to understand how the asset behaves differently than

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Speaker 2: existing classes. In other words, what role it can play

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Speaker 2: in an investor's portfolio. Both developments are well underway with

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Speaker 2: cryptocurrencies today, although in very different ways than in the

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Speaker 2: Netherlands of the seventeenth century. As we're about to see.

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Speaker 5: One of our analysts at my last firm on my team,

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Speaker 5: the strategic research team, came in to one of our

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Speaker 5: brainstorms and started talking about bitcoin and we thought it

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Speaker 5: was in interesting, amusing, maybe interesting.

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Speaker 2: This is Kathy would CEO of asset manager arc Invest.

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Speaker 5: And then he kept coming into the brainstorms and throwing

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Speaker 5: it out there. And this was twenty eleven, twelve thirteen.

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Speaker 5: The more research we did into it, the more captivated

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Speaker 5: we became.

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Speaker 2: Years before bitcoin would take off, Kathy was like a

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Speaker 2: trader in Amsterdam and the sixteen hundreds, on the leading

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Speaker 2: edge of a new asset class. In twenty fifteen, Kathy's

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Speaker 2: research team wrote a paper which outlined the versatility of

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Speaker 2: bitcoin Kathy and her team were surrounded by skeptics. One

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Speaker 2: of bitcoin's most notable critics, JP Morgan Chase CEO Jamie Diamond,

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Speaker 2: said as late as twenty twenty one that bitcoin was

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Speaker 2: quote worthless and described it as a quote hyped up fraud.

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Speaker 2: But for Kathy, turmoil overseas had prompted a light bulb moment.

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Speaker 5: When we first took our position in bitcoin. So twenty fifteen,

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Speaker 5: Greece was threatening to pull out of the European Union,

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Speaker 5: and I noticed that when the Greek sovereign debt crisis

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Speaker 5: was flaring up, Bitcoin would rally, and I remember mentioning

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Speaker 5: it at the time and I said, Wow, wouldn't that

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Speaker 5: be amazing if this were a risk off asset too.

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Speaker 5: Then March of twenty twenty three, regional banks started imploding

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Speaker 5: and the KRI which is the original bank index, was plummeting,

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Speaker 5: and Bitcoin was down too, and it got down to

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Speaker 5: about nineteen thousand. Bitcoin started out that way, and then

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Speaker 5: all of a sudden turned up as that bank index

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Speaker 5: kept going down. And again I was commenting to everyone

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Speaker 5: in the office our morning meetings, said, look at bitcoin

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Speaker 5: is going up.

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Speaker 2: Bitcoin's performance in a crisis was more evidence that the

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Speaker 2: cryptocurrency wasn't just a cool technology.

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Speaker 5: It's a technology, it's a new asset class, and it's

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Speaker 5: a new monetary system.

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Speaker 2: To Kathy, it was becoming clear that bitcoin could be

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Speaker 2: like those stocks in the sixteen hundreds in the Netherlands,

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Speaker 2: a new asset class that performs differently from other assets,

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Speaker 2: earning it a place in the modern investor's portfolio. As

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Speaker 2: an evangelist for active portfolio management, she maintains that if

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Speaker 2: investors add exposure to cryptocurrency, their portfolios could produce higher

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Speaker 2: returns without overindexing on risk.

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Speaker 5: We were out there clearly saying this is a new

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Speaker 5: asset class. If you don't own it, you better have

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Speaker 5: a good reason why, because you know, a new asset

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Speaker 5: class for an asset allocator is very important in terms

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Speaker 5: of low correlations of returns, increasing returns per unit of risk.

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Speaker 5: If you look at the correlation of bitcoin to other

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Speaker 5: asset class returns, you'll see that it's very low relative

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Speaker 5: to stocks and bonds, so it just behaves differently.

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Speaker 2: Crypto has historically shown very low correlations with traditional asset classes,

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Speaker 2: according to data compiled by coinbase, but in twenty twenty two,

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Speaker 2: bitcoin took a hit, a big hit, at the same

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Speaker 2: time that both stocks and bonds were both headed south.

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Speaker 5: It collapsed like everything else. But if you look over

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Speaker 5: a five and ten year period, you'll see very low

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Speaker 5: correlation of returns, and.

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Speaker 2: In four of the last five years, she says, bitcoin's

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Speaker 2: performance has significantly exceeded most other major asset classes. If

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Speaker 2: you popped a relatively small amount of your portfolio into

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Speaker 2: that investment, say between one and five percent, what could

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Speaker 2: that do for you?

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Speaker 5: Potentially, we did that study in the last five years.

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Speaker 5: If you had slotted in five percent proportionately and took

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Speaker 5: it out of both equities and bonds, your rate of

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Speaker 5: return over the five years would have gone up from

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Speaker 5: sixty percent over a five year period to ninety three percent.

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Speaker 5: That's a fifty five percent increase in returns. Now, the

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Speaker 5: interesting thing about that, what did you have to give

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Speaker 5: up for that? You had to pay in the form

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Speaker 5: of more volatility, So the volatility went up fifteen percent

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Speaker 5: for that fifty five percent return, you're looking at a

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Speaker 5: sharp ratio, which is the return per unit of risk

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Speaker 5: going up thirty percent from point six eight to point

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Speaker 5: eight seven.

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Speaker 2: That's the sharp ratio that even maybe Jamie Diamond could

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Speaker 2: like yes, Yes, Indeed it coin turned out to be

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Speaker 2: so much more than Kathy imagined when she initially bought

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Speaker 2: it at two hundred and fifty dollars.

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Speaker 5: I was doing it mostly because I thought it was

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Speaker 5: a big idea. Now I think it is as much

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Speaker 5: an insurance policy against what can go wrong out there, inflation.

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Speaker 5: It's a hedge against inflation.

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Speaker 2: There are currently almost twenty million bitcoin in circulation, but

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Speaker 2: the rules are coded in there will never, at any

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Speaker 2: point in the future be more than twenty one million

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Speaker 2: in circulation, and this means that bitcoin has a disinflationary

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Speaker 2: supply schedule. It will not be subject to inflation because

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Speaker 2: it cannot be printed into perpetuity like many fiat currencies.

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Speaker 2: But bitcoin has also shown a resilience against monetary policies

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Speaker 2: like interest rates, an area where stocks and bonds tend

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Speaker 2: to correlate.

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Speaker 5: The FED, with its twenty fourfold increase in interest rates

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Speaker 5: over little more than a year's time, has unleashed I

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Speaker 5: think think what's turning out to be real disaster in

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Speaker 5: other markets. It is because of that move that some

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Speaker 5: of these devaluations are taking place, and that is really

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Speaker 5: hurting people in countries, hurting people who work very hard

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Speaker 5: every day to earn their currency. So I think my

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Speaker 5: thinking has changed more from this risk off point of view.

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Speaker 5: I knew it was risk one before. Now I truly

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Speaker 5: believe it is a risk off asset as well. And

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Speaker 5: how many assets do you know out there that are

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Speaker 5: risk on and risk off? There are not many.

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Speaker 2: As Bitcoin's role in a portfolio has become clearer, adoption

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Speaker 2: amongst institutions has grown exponentially, and that's fueled the second

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Speaker 2: key component of developing an asset class, making a market.

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Speaker 2: Bitcoin got a big boost in that respect in January

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Speaker 2: twenty twenty four when the SEC approved the creation of

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Speaker 2: ten you exchange traded funds invested directly in bitcoin. Those

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Speaker 2: ETFs allow investors to invest in the cryptocurrency much more

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Speaker 2: easily than they could before. Now they don't need to

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Speaker 2: worry about where to store their bitcoin. They can simply

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Speaker 2: buy shares in the ETF, which holds the crypto itself

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Speaker 2: and lets investors trade it as easily as a share

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Speaker 2: of stock. The result, by the start of May, those

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Speaker 2: ETFs had garnered net inflows of twelve billion dollars, according

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Speaker 2: to data compiled by Bloomberg and that made them the

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Speaker 2: most successful debut of all ETFs in history. Kathy is

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Speaker 2: steadfast in the belief that bitcoin is going to transform

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Speaker 2: the world. As she says, it's a new technology, a

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Speaker 2: new monetary system, and a new asset class.

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Speaker 5: It's still a big idea. We think it's just begun.

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Speaker 2: More and more investors today are trading in cryptocurrency, fully

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Speaker 2: aware that its volatility is as unpredictable as the ocean

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Speaker 2: waters in a grueling, year long journey in the Dutch

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Speaker 2: spice trade. With the passage of time and the creation

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Speaker 2: of market it's like the Bitcoin ETFs. The role of

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Speaker 2: crypto in a portfolio is being defined, just like that

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Speaker 2: new asset class called stocks popularized by the Dutch so

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Speaker 2: many years ago. Thank you to Mariolen Outheart and Kathy Wood.

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Speaker 2: Tune into our next episode when we dig into another

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Speaker 2: component to the digital revolution that's upending the financial industry,

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Speaker 2: the blockchain. How could blockchain technology transform our financial system

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Speaker 2: and make it better? This is Evolving Money, a podcast

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Speaker 2: from Coinbase and Bloomberg Media Studios. If you like what

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Speaker 2: you hear, please subscribe and leave us a review. I'm

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Speaker 2: Patty Hirsh thanks for listening,