WEBVTT - Evolving Money: Birth of a New Asset Class (Sponsored Content)

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<v Speaker 1>Since you're a subscriber to this Bloomberg podcast, we thought

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<v Speaker 1>you'd be interested in a new four episode sponsored podcast

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<v Speaker 1>called Evolving Money, produced by Coinbase and Bloomberg Media Studios.

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<v Speaker 1>It explores some of the monetary system's biggest changes over

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<v Speaker 1>the centuries and today's companies that are making big bets

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<v Speaker 1>that cryptocurrency could be money's next evolution. You can subscribe

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

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<v Speaker 2>It was twenty ten, about a year had passed since

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<v Speaker 2>the first bitcoin was created. In Jacksonville, Florida, a twenty

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<v Speaker 2>eight year old computer programmer named Laslohnyez decided it was

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<v Speaker 2>time for someone to use this new kind of money,

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<v Speaker 2>like real money, to actually buy something. Laslow went online

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<v Speaker 2>and posted a question on a bitcoin forum under the

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<v Speaker 2>subject line pizza for Bitcoin. A nineteen year old in

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<v Speaker 2>California named Jeremy Sturdivant responded and took him up on

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<v Speaker 2>the offer. Laslow paid Jeremy ten thousand bitcoin, and then

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<v Speaker 2>a few days later, two Papa John's pizzas were delivered

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<v Speaker 2>to Laslow's front door. The first known commercial transaction involving

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<v Speaker 2>bitcoin was completed Back then ten thousand bitcoins were worth

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<v Speaker 2>about forty one dollars, so it wasn't a horrible deal

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<v Speaker 2>at the time. But today those ten thousand bitcoins are

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<v Speaker 2>worth hundreds of millions, enough for Laslow to buy an

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<v Speaker 2>entire chain of pizzerias. That's a pretty dramatic increase in

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<v Speaker 2>value for a currency over such a short period of time,

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<v Speaker 2>maybe the greatest ever. And for that very reason, bitcoin

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<v Speaker 2>is much better known today as a store of value

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<v Speaker 2>for investors rather than a medium of exchange a currency.

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<v Speaker 2>From Coinbase and Bloomberg Media Studios, this is Evolving money,

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

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<v Speaker 2>different look at cryptocurrency. It's been cast as a radical

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<v Speaker 2>departure for the monetary system, but what if it wasn't

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<v Speaker 2>radical at all, just the next logical evolution of how

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<v Speaker 2>we pay for things and store long term value. Along

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<v Speaker 2>the way, we'll explore how money has changed over the centuries,

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<v Speaker 2>looking for lessons that predict its next evolution. Why did

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<v Speaker 2>bitcoin move from a currency to an investable asset in

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<v Speaker 2>just fifteen years. It was because of mainstream adoption by

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<v Speaker 2>retail investors who believed there was money to be made,

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<v Speaker 2>But behind that mania for all things Crypto was a

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<v Speaker 2>much more serious undertaking, the birth of a new asset class.

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<v Speaker 2>Investors came to understand that there was a market for

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<v Speaker 2>crypto and that it behaved differently from other assets in

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<v Speaker 2>their portfolios. It's not the first time the monetary system

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

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<v Speaker 2>the rise of crypto has striking parallels to the creation

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<v Speaker 2>of stocks in the sixteen hundreds. Will also be joined

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<v Speaker 2>by Kathy Wood, CEO of ARC invest who was one

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<v Speaker 2>of the earliest believers in crypto, will explore what her

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<v Speaker 2>research shows could be a smart use of crypto in

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<v Speaker 2>a diversified portfolio of assets. Back in the sixteen hundreds,

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<v Speaker 2>Europeans got rich sailing the world, taking spices from far

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<v Speaker 2>away lands and trading those spices back home. The most

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<v Speaker 2>coveted spice was pepper, and the trade of pepper yielded

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<v Speaker 2>enormous profits.

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<v Speaker 3>The Portuguese had started the pepper trade.

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<v Speaker 2>That's Maria lane Uthart, professor of history at Vraya University

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<v Speaker 2>in Amsterdam.

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<v Speaker 4>Very soon it was known that the Portuguese merchants who

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<v Speaker 4>were trading the pepper that they made amazing profits with it.

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<v Speaker 3>So the Ditch wanted to get the pepper trade.

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<v Speaker 2>But for the Dutch to catch up to the Portuguese

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<v Speaker 2>required massive investment. The Dutch were face with that classic

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<v Speaker 2>money conundrum. In order to make it, you've got to

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<v Speaker 2>spend it. To fund the voyages, the Dutch created the

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<v Speaker 2>feinigd Orsendische Company of VOC, also known as the Dutch

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<v Speaker 2>East India Company. The government gave the East India Company

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<v Speaker 2>a charter for twenty years, and according to the charter,

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<v Speaker 2>anyone could invest in it. Even the maid of one

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<v Speaker 2>of the directors of the company participated. She put in

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<v Speaker 2>ten month salary. All investors were given the option to

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<v Speaker 2>cash out after ten years, but that was kind of

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<v Speaker 2>a long time to wait, so the directors of the

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<v Speaker 2>VOC added a line to the charter that would change

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<v Speaker 2>the history of money forever. That line read quote, conveyance

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<v Speaker 2>or transfer may be done through the bookkeeper of this chamber.

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<v Speaker 2>In other words, if you wanted your money back before

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<v Speaker 2>those ten years were up, you could sell your share

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<v Speaker 2>of the company to anyone who was interested in buying it.

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<v Speaker 4>This resulted in the fact that a lot of smaller

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<v Speaker 4>investors sold their shares to the big investors who didn't

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<v Speaker 4>mind the wait.

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<v Speaker 3>People would sell their share on this market.

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<v Speaker 2>At first, shares were sold on a city bridge. Then

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<v Speaker 2>when that bridge got too crowded, the trading moved to

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<v Speaker 2>a new building that became the world's first stock market.

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<v Speaker 2>The VOC shares were just one of a panoply of

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<v Speaker 2>other investment opportunities open to merchants at the time.

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<v Speaker 4>A very safe kind of investment was also the public

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<v Speaker 4>debt of the state. It had a very safe return.

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<v Speaker 4>A lot of the merchants owned, about half of their investments,

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<v Speaker 4>were in government stock.

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<v Speaker 2>Which today we'd call government bonds. Very much like today.

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<v Speaker 2>Merchants were diversifying their portfolios by balancing stocks and bonds,

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<v Speaker 2>and they were reaping the benefits. What were the kind

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<v Speaker 2>of rewards that might have been available to someone who

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<v Speaker 2>invested if they invested well with the VOC.

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<v Speaker 4>The total capital that was invested in sixteen oh two,

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<v Speaker 4>that is six point four million guilders, and in sixteen

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<v Speaker 4>thirty seven this was worth seventy eight million guilders.

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<v Speaker 2>A nifty return of more than one one hundred percent

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<v Speaker 2>returns a lot like that. Bitcoin pizza money centuries later

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<v Speaker 2>for crypto to become an asset class, it needs to

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<v Speaker 2>go through the same process as stocks did. First, a

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<v Speaker 2>market needs to be created, a place where owners of

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<v Speaker 2>the asset can talk to and trade with each other. Second,

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<v Speaker 2>investors need to understand how the asset behaves differently than

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<v Speaker 2>existing classes. In other words, what role it can play

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<v Speaker 2>in an investor's portfolio. Both developments are well underway with

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<v Speaker 2>cryptocurrencies today, although in very different ways than in the

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<v Speaker 2>Netherlands of the seventeenth century. As we're about to see.

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<v Speaker 5>One of our analysts at my last firm on my team,

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<v Speaker 5>the strategic research team, came in to one of our

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<v Speaker 5>brainstorms and started talking about bitcoin and we thought it

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<v Speaker 5>was in interesting, amusing, maybe interesting.

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<v Speaker 2>This is Kathy would CEO of asset manager arc Invest.

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<v Speaker 5>And then he kept coming into the brainstorms and throwing

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<v Speaker 5>it out there. And this was twenty eleven, twelve thirteen.

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<v Speaker 5>The more research we did into it, the more captivated

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<v Speaker 5>we became.

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<v Speaker 2>Years before bitcoin would take off, Kathy was like a

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<v Speaker 2>trader in Amsterdam and the sixteen hundreds, on the leading

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

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<v Speaker 2>research team wrote a paper which outlined the versatility of

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<v Speaker 2>bitcoin Kathy and her team were surrounded by skeptics. One

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

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<v Speaker 2>said as late as twenty twenty one that bitcoin was

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<v Speaker 2>quote worthless and described it as a quote hyped up fraud.

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<v Speaker 2>But for Kathy, turmoil overseas had prompted a light bulb moment.

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<v Speaker 5>When we first took our position in bitcoin. So twenty fifteen,

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<v Speaker 5>Greece was threatening to pull out of the European Union,

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<v Speaker 5>and I noticed that when the Greek sovereign debt crisis

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<v Speaker 5>was flaring up, Bitcoin would rally, and I remember mentioning

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<v Speaker 5>it at the time and I said, Wow, wouldn't that

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<v Speaker 5>be amazing if this were a risk off asset too.

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<v Speaker 5>Then March of twenty twenty three, regional banks started imploding

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<v Speaker 5>and the KRI which is the original bank index, was plummeting,

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<v Speaker 5>and Bitcoin was down too, and it got down to

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<v Speaker 5>about nineteen thousand. Bitcoin started out that way, and then

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<v Speaker 5>all of a sudden turned up as that bank index

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<v Speaker 5>kept going down. And again I was commenting to everyone

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<v Speaker 5>in the office our morning meetings, said, look at bitcoin

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<v Speaker 5>is going up.

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<v Speaker 2>Bitcoin's performance in a crisis was more evidence that the

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<v Speaker 2>cryptocurrency wasn't just a cool technology.

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<v Speaker 5>It's a technology, it's a new asset class, and it's

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<v Speaker 5>a new monetary system.

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<v Speaker 2>To Kathy, it was becoming clear that bitcoin could be

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<v Speaker 2>like those stocks in the sixteen hundreds in the Netherlands,

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<v Speaker 2>a new asset class that performs differently from other assets,

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<v Speaker 2>earning it a place in the modern investor's portfolio. As

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<v Speaker 2>an evangelist for active portfolio management, she maintains that if

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<v Speaker 2>investors add exposure to cryptocurrency, their portfolios could produce higher

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<v Speaker 2>returns without overindexing on risk.

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<v Speaker 5>We were out there clearly saying this is a new

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<v Speaker 5>asset class. If you don't own it, you better have

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<v Speaker 5>a good reason why, because you know, a new asset

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<v Speaker 5>class for an asset allocator is very important in terms

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<v Speaker 5>of low correlations of returns, increasing returns per unit of risk.

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<v Speaker 5>If you look at the correlation of bitcoin to other

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

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<v Speaker 5>to stocks and bonds, so it just behaves differently.

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<v Speaker 2>Crypto has historically shown very low correlations with traditional asset classes,

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<v Speaker 2>according to data compiled by coinbase, but in twenty twenty two,

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<v Speaker 2>bitcoin took a hit, a big hit, at the same

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<v Speaker 2>time that both stocks and bonds were both headed south.

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<v Speaker 5>It collapsed like everything else. But if you look over

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<v Speaker 5>a five and ten year period, you'll see very low

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<v Speaker 5>correlation of returns, and.

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<v Speaker 2>In four of the last five years, she says, bitcoin's

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<v Speaker 2>performance has significantly exceeded most other major asset classes. If

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<v Speaker 2>you popped a relatively small amount of your portfolio into

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<v Speaker 2>that investment, say between one and five percent, what could

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<v Speaker 2>that do for you?

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<v Speaker 5>Potentially, we did that study in the last five years.

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<v Speaker 5>If you had slotted in five percent proportionately and took

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<v Speaker 5>it out of both equities and bonds, your rate of

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<v Speaker 5>return over the five years would have gone up from

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<v Speaker 5>sixty percent over a five year period to ninety three percent.

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

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<v Speaker 5>interesting thing about that, what did you have to give

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<v Speaker 5>up for that? You had to pay in the form

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<v Speaker 5>of more volatility, So the volatility went up fifteen percent

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<v Speaker 5>for that fifty five percent return, you're looking at a

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<v Speaker 5>sharp ratio, which is the return per unit of risk

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<v Speaker 5>going up thirty percent from point six eight to point

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<v Speaker 5>eight seven.

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<v Speaker 2>That's the sharp ratio that even maybe Jamie Diamond could

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<v Speaker 2>like yes, Yes, Indeed it coin turned out to be

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<v Speaker 2>so much more than Kathy imagined when she initially bought

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<v Speaker 2>it at two hundred and fifty dollars.

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<v Speaker 5>I was doing it mostly because I thought it was

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<v Speaker 5>a big idea. Now I think it is as much

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<v Speaker 5>an insurance policy against what can go wrong out there, inflation.

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<v Speaker 5>It's a hedge against inflation.

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<v Speaker 2>There are currently almost twenty million bitcoin in circulation, but

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<v Speaker 2>the rules are coded in there will never, at any

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<v Speaker 2>point in the future be more than twenty one million

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<v Speaker 2>in circulation, and this means that bitcoin has a disinflationary

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<v Speaker 2>supply schedule. It will not be subject to inflation because

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<v Speaker 2>it cannot be printed into perpetuity like many fiat currencies.

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<v Speaker 2>But bitcoin has also shown a resilience against monetary policies

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<v Speaker 2>like interest rates, an area where stocks and bonds tend

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<v Speaker 2>to correlate.

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<v Speaker 5>The FED, with its twenty fourfold increase in interest rates

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<v Speaker 5>over little more than a year's time, has unleashed I

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<v Speaker 5>think think what's turning out to be real disaster in

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<v Speaker 5>other markets. It is because of that move that some

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<v Speaker 5>of these devaluations are taking place, and that is really

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<v Speaker 5>hurting people in countries, hurting people who work very hard

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<v Speaker 5>every day to earn their currency. So I think my

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<v Speaker 5>thinking has changed more from this risk off point of view.

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<v Speaker 5>I knew it was risk one before. Now I truly

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<v Speaker 5>believe it is a risk off asset as well. And

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<v Speaker 5>how many assets do you know out there that are

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<v Speaker 5>risk on and risk off? There are not many.

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<v Speaker 2>As Bitcoin's role in a portfolio has become clearer, adoption

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<v Speaker 2>amongst institutions has grown exponentially, and that's fueled the second

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<v Speaker 2>key component of developing an asset class, making a market.

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<v Speaker 2>Bitcoin got a big boost in that respect in January

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<v Speaker 2>twenty twenty four when the SEC approved the creation of

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<v Speaker 2>ten you exchange traded funds invested directly in bitcoin. Those

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<v Speaker 2>ETFs allow investors to invest in the cryptocurrency much more

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<v Speaker 2>easily than they could before. Now they don't need to

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<v Speaker 2>worry about where to store their bitcoin. They can simply

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<v Speaker 2>buy shares in the ETF, which holds the crypto itself

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<v Speaker 2>and lets investors trade it as easily as a share

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<v Speaker 2>of stock. The result, by the start of May, those

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<v Speaker 2>ETFs had garnered net inflows of twelve billion dollars, according

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<v Speaker 2>to data compiled by Bloomberg and that made them the

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<v Speaker 2>most successful debut of all ETFs in history. Kathy is

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<v Speaker 2>steadfast in the belief that bitcoin is going to transform

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<v Speaker 2>the world. As she says, it's a new technology, a

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<v Speaker 2>new monetary system, and a new asset class.

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<v Speaker 5>It's still a big idea. We think it's just begun.

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<v Speaker 2>More and more investors today are trading in cryptocurrency, fully

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<v Speaker 2>aware that its volatility is as unpredictable as the ocean

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<v Speaker 2>waters in a grueling, year long journey in the Dutch

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<v Speaker 2>spice trade. With the passage of time and the creation

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<v Speaker 2>of market it's like the Bitcoin ETFs. The role of

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<v Speaker 2>crypto in a portfolio is being defined, just like that

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<v Speaker 2>new asset class called stocks popularized by the Dutch so

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<v Speaker 2>many years ago. Thank you to Mariolen Outheart and Kathy Wood.

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<v Speaker 2>Tune into our next episode when we dig into another

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<v Speaker 2>component to the digital revolution that's upending the financial industry,

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<v Speaker 2>the blockchain. How could blockchain technology transform our financial system

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<v Speaker 2>and make it better? This is Evolving Money, a podcast

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<v Speaker 2>from Coinbase and Bloomberg Media Studios. If you like what

0:15:33.680 --> 0:15:36.640
<v Speaker 2>you hear, please subscribe and leave us a review. I'm

0:15:36.680 --> 0:15:38.400
<v Speaker 2>Patty Hirsh thanks for listening,