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Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing,
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Welcome to Animal Spirits with Michael and Ben.
All right, so Bitcoin is 100% off the lows, but it's still 50% off the highs.
I still can't believe it didn't go to like 5,000 when everything that happened.
We were talking a lot at the time, like Bitcoin should be trading at 5,000.
I say this every cycle it feels like, but the most impressive thing about Bitcoin is
the fact that it just falls down.
Every cycle.
Don't act like you were here in previous cycles.
Well, we've been doing this.
This is your son.
This is your first cycle.
Okay, you can't pull off son, first of all, second of all.
No one can.
We've been doing this since like 2017, how many cycles have there been in that time?
Like eight?
It feels like it.
What I was going to ask you is, is it a bull market or are we selling a bear market?
Oh, that's a good question.
It doesn't feel like a bull market, it does it?
Not really.
In fact, no, it does not.
No, there's not a lot of craziness going on or chest thumping.
When's the last time somebody outside of finance asked you about Bitcoin?
Exactly.
Yeah, it doesn't.
Yeah.
No, it hasn't happened yet.
Maybe that's a sign of maturity, but I still, we talked about this on this show today.
I still view it as a call option to something, is that still the best way to look at it?
The story has certainly evolved and changed a million times over the years for what people
thought it could be, and it should be, and it's the fact that people are not capitulating
at the bottom to sell, and then also when it moons, they're not like getting out of it,
the main holders.
That's one of the more impressive things about it.
Yeah.
In November, when it bottomed, I mean, just think about what happened in November.
I mean, that was the fall of FTX.
It's kind of wild.
It's kind of wild that that was the bottom, although when you think about markets, I guess
markets do bottom when things seem blackest, but it is remarkable that a bottom that what,
like 15,000 is supposed to 5,000?
Yes.
The bottom has moved up a little bit every time, but it just, it won't die, Rasputin, right?
Did you get that one?
I don't know what Rasputin is.
I know.
I've heard of Rasputin.
What is that, what is that, a fable?
I'll let you look it up on Wikipedia.
Okay.
All right.
Today, we talked to Chris Kuiper from Fidelity Digital Assets.
All about their work on it, and how they, they try to put metrics on it, which is interesting.
We look at it like short midterm, longterm.
It's interesting, but yeah, I, this, this latest cycle, I think, is one of the more impressive
about it.
Again, just won't die.
Just look up Rasputin, Michael.
It's going to come to you.
It's going to go out.
I just did.
I just did.
All right.
Here's our talk with Chris Kuiper, the Director of Research at Fidelity Digital Assets.
We're joined today by Chris Kuiper.
Chris is the Director of Research at Fidelity Digital Assets.
Chris, welcome to the show.
Thanks.
Thanks for having me on.
All right.
Last week, there was $300,000,000,000 worth of inflows in, in crypto.
This is a chart that comes from coin shows, and it looks like the biggest flow in, certainly
of this year, and probably even longer.
What do we make of this?
What's changed?
I mean, we know that, like other asset classes, but maybe especially with crypto, it's driven
by momentum, right?
People are more likely to buy the breakout than to buy the dip.
What do you think are, to the extent that there are fundamental reasons for not, not the
chase, and we know why that exists?
But for the price move, I mean, prices went from, I think it was like a $26,000 run to $34,000
fairly quickly.
Maybe an ETF, so other news, what do you attribute this to?
Yeah.
So certainly, if you look at year to date, up 100% now, the first leg of that was all in
the first quarter of the year, basically.
So we had this huge surge up, then we kind of traded sideways for a while, especially
over the summer, and then this next leg has come on the back of a lot of this ETF news
and speculation, right?
So overall, though, it's been a little surprising to us on the research side because our
research shows that Bitcoin, in particular, is most correlated to money, especially broad
money supply changes, central bank balance sheet changes, liquidity metrics, it's almost
always reacting or anticipating these changes in money creation and liquidity, right?
So we haven't seen a lot of that, it's actually been tightening up, and so 2022 made a lot
of sense with central bank's tightening, Bitcoin going down, real rates going up, Bitcoin
going down, that makes sense to us, right?
Because you've got higher real rates, as you know, investing is a relative game.
So of course, these higher yields are looking a lot more attractive.
So it's a little perplexing, especially these last few months, that Bitcoin is moving
up, even as real rates are also going up, right?
So it's usually correlated, so there's this huge decoupling that's happening.
And the trillion dollar question as well, does it re-couple and correlate again, meaning
does Bitcoin have to drop, or, and this is the camp I'm in, is Bitcoin sniffing something
else out, maybe these structural deficits say that it's continuing to hold up and even
go higher, especially when you've got some other catalysts on here.
And I think, you know, in favor of that camp is also gold, gold's also been holding up
and doing better, even as real rates go up.
So that's why I think that's maybe more of what's going on, but of course, we can only
speculate on the past price performance here.
I was going to bring up gold, actually, because it's the same thing.
There's always people have said there's this relationship between real rates and gold,
right?
And that makes sense, because gold, just like Bitcoin, doesn't have a yield that it pays,
right?
And so you would assume, well, when rates are really low, that makes it more attractive,
when real rates go higher.
And real rates have been shooting up really high this year, right?
In a hurry, and kind of at the same time as Bitcoin and gold, I'm going up, right?
These real rates, especially in the long end, that happened really quickly in the last
couple of months, and gold and Bitcoin have both rallied at that same time.
So is that, does this make you think that Bitcoin does share some of those characteristics
or at least the investors in Bitcoin share some characteristics with people who invest
in gold?
Yeah, there's a huge overlap when you talk to people, people who are of a certain mindset
on the macro side and tend to like gold for the reasons of monetary debatement, a hedge
against monetary debatement.
It's the same macro side on the Bitcoin side, if you're thinking of Bitcoin, which we usually
do, as a aspiring form of money, store of value, something that doesn't pay a cash flow
or dividend, but with its cap supply and predictable schedule, it has a clear value proposition
just like gold.
But of course, even it proves upon a lot of the characteristics of gold.
It's more divisible.
It's more audible.
It's scarcer.
It's got a higher stock to flow.
That sort of thing.
To that point, Dr. Miller and Paul Tudor Jones were at a conference last week talking
about the idea of macro forces, gold and Bitcoin, did you catch any of that?
I saw a few headlines haven't seen the whole thing yet.
It was more or less what you're saying, but I think one of the interesting things about
Bitcoin is, and you're right, we're speculating, who knows why it's doing what it's doing.
Earlier in the year, as it retraced a lot of the losses from the previous bear market,
a lot of people were saying that it was just a high-bated trade.
It was going up because the Nasdaq was going up.
It was going up because the risk assets were going up.
Now we're in this interesting time where risk assets are not going up.
For reasons again, unknown, I guess probably the cleanest one is maybe just rallying anticipation
of an ETF, which is sort of a headscratcher to me because I think at least I assumed
that an ETF was always coming.
You would think it would be pricing, but maybe nothing and everything is, who the hell
knows?
It is definitely a confounding move that we've seen over the past two weeks or so.
Absolutely.
I think the ETF stuff, we could argue either way, what comes first, right?
If you can price in it for you can't or how much or how isn't.
Obviously, with that leak that we got, what was it two weeks ago now in a Monday?
Coin telegraph.
Yeah, where there was a ronious report saying it was approved and it shot up about 10%.
So clearly, some people don't think it's priced in.
But I think the whole thing about the beta trade is interesting, too, because you did clearly
see that narrative.
We saw correlation of 0.8, I think, between Bitcoin and Nasdaq.
So I like to say, I can pound my hand on the table all day saying, Bitcoin is different.
Here's why.
Here's the value proposition.
It's not a tech stock, but at the end of the day, if traders are going to trade it like
a tech stock, that's how it's going to trade, right?
And so I think you saw people treating it that way.
And now it's going to be really interesting to see if they're coming around to some of
these other core characteristics and maybe seeing the other side of this, the other narrative.
Malcolm Miller called Bitcoin a brand.
And I would go a step further and say that it's a religion to many people.
And as evidence of this, there was a tweet from Will Clemente and the tweet is as such.
According to GlassNode, there are now 600,000 plus more Bitcoin that haven't moved in 10
years than there are on exchanges.
And there's a chart that we'll link to in the show notes.
And the chart, again, just shows what I described.
Bitcoin's supply that was last acting over 10 years ago with the amount of Bitcoin on
exchanges.
That is some serious conviction.
I would definitely say that stock investors, for example, don't share that conviction.
Maybe Tesla shareholders do.
But just buy and large, that sort of fervor dedication makes it interesting.
Yeah.
I hadn't seen that stat, but that's actually encapsulating two data points that we've
seen.
So you've got two them working for you.
The first one is the number of ill-liquid coins.
So we look at, say, coins that haven't moved in over a year.
That's hit 70% of the total supply.
That's the highest it's ever been.
And then coins on exchanges, since we know these exchanged wallets and stuff like that,
you can see the number of coins on exchanges.
That is down 30% from its peak, just for the number of Bitcoin, right?
So you've got both of those things working in that stat that you just said.
And I agree.
People eventually come around to, this is a core allocation.
Maybe it's very small, but it's very asymmetric, and I'm just going to hold it and put it away.
Like I have conviction that this is either going to work, or it's not, and that's my personal
opinion.
I fail to see in the longer term how this is not very binary, right?
It's either going to work or it's not.
I don't see how it can kind of just sit in the middle at a trillion dollars or less.
But that's me personally.
You think of it as a call option in a lot of ways, because that's kind of how I always
always looked at it as well.
Yeah, I think that's a great way to put it.
It's a long-data call option.
You don't have the decay like you do.
You just have to hold it, and whether you hold it with a custodian, pay a little bit,
or self-custody at yourself.
So you don't have to pay that.
And then, yeah, if it's a small enough part of your portfolio, it's not going to eat
into it meaningfully, but there could be a huge asymmetric return there.
Do you think some part of the reason why there's been no decrease in volatility even
as prices have gone significantly higher?
I'm talking about from like 500 to 1,000 to even at 64,000 and at 34,000 here today, there's
been very little in the way of decreased volatility.
Is that because there's such a permanent portion of Bitcoin that just never trades?
And so it's just sort of like a low-flow type of security.
Yeah, I mean, it depends on the time frame you're looking at, and it's all relative.
We have seen a decline in volatility, but it's gone from like an 80-vol asset down to
a 50, and that was even before this recent move.
So maybe it's gone back up.
But yeah, there's only a few million on exchanges.
We can see that stat, like you said, with, you know, haven't moved in 10 years.
There's tons of coins that are lost, and then there's tons that are just put away for
probably decades in people's minds, right?
And so you don't need a lot of flow to move that marginal price.
So you have a piece that you recently wrote about why investors need to consider Bitcoin
separately from other digital assets.
Is that the brand thing that Michael was talking about?
Is Bitcoin being looked at by you as millennial gold?
Like what's the thinking behind this?
Yeah, that gets at it for sure.
It's called Bitcoin first.
Why investors need to consider Bitcoin in front of other digital assets or something like
that in the subtitle.
I don't quite remember.
But it's kind of twofold.
Number one, Bitcoin was first in that it was the first to do this technologically.
So you do have that first mover brand type thing.
But it was also the first to do that zero to one, the Peter Teal zero to one kind of thing.
It was the first to invent the wheel.
It was the first to create a truly scarce digital money.
And as we know with the blockchain trillema, when you design these things, you can either
optimize for two or three things, decentralization, security, or speed.
And Bitcoin opted to go for decentralization security.
And that makes sense if you think of this as an emerging money and aspiring store of
value, that's what you want.
And so it was first.
It took a whole that market.
Anything that comes after it is going to make a trade off with those things.
So it might improve one thing, but it's going to make a trade off with something else.
And so we think if you think of Bitcoin as a money and the network good there, that's
a whole different bucket than all of this other stuff that's come after it.
And so as an investor, you have to take the same framework.
You need to look at Bitcoin as an aspiring money.
And then everything else through more of a technological VC capital-like investing framework.
And fidelity digital assets, where you mentioned or I mentioned, we're talking about the number
of Bitcoin that are held on exchanges.
I guess those are going where to cold wallets.
Well we don't know.
We just know they're coming off of the exchange wallets and all these different firms like Glass
Note and other ones that we use.
They can identify the exchange wallets.
So they could be going to a custodian-like fidelity digital assets.
We wouldn't be classified as an exchange.
Or they could be going to a personal cold wallet, someone who's just holding the keys themselves.
But yes, more than likely, they're going to some kind of long-term cold storage, at
least as far as we can see from the data.
And again, this also is supported by the number of coins moving around as well.
You mentioned fidelity digital assets as a custodian for, is it Bitcoin and ETH as well
or just Bitcoin?
Correct.
We offer custody services for Bitcoin and Ether.
So what exchange do you all use to purchase and sell?
So we have an execution platform and we have a number of different venues and ways we
try to find liquidity.
But users of the platform can do it right directly on our own platform.
So I'm curious.
So you said the 70% that basically doesn't seem to change hands.
How much turnover is there going on the other 30%?
Is it similar to the stock market?
Have you done work on that?
How much is the other stuff changing hand?
Because I got a man and that stuff is moving around quite a bit.
Yeah, that's an interesting question.
So first of all, the 70% is a new high.
So that's not normally.
It's been as low as 30%.
I think maybe average is around 50.
You don't quote me on that.
Can you remind us what does that number represent?
I forget.
I'm sorry.
Yeah.
So the percentage of coins that haven't moved in over a year.
So if you call those illiquid, then the other 30% are the liquid ones, right?
Which is setting the price.
Right.
Exactly.
The marginal price.
Yeah.
But there was basically like complete apathy.
I saw a tweet like, I don't know, maybe two months ago that the volume on Coinbase was,
I don't know if this is the lowest ever, but it was the lowest in a long time.
There was essentially not no activity, but anemic volume to say the least.
Yeah.
Trading volumes, not just Coinbase, but like all-in, US or USD supported trading volumes.
I think from their peak are down about 90%, still, maybe it's picked up a little bit.
So yeah, you're absolutely right.
There's certainly apathy in the trading speculative world, but because we have these on-chain
metrics, and we put out this thing called the signals report, we bucket these different
on-chain metrics.
So trading activity is one way to look at it.
But if you look at what I call long-term fundamentals, basically, you're wondering if people are
becoming apathetic about the network itself, meaning are they leaving the network or is
activity slowing down on the actual on-chain network, that's actually gone up.
New addresses are up, active addresses are up, hash rate is up.
So I like to say if I was in a coma and I had no idea what Bitcoin's price had done
for the last five years, and you showed me these fundamentals, everything that has to
do with everything but price, I would be surprised we're still in this bear market down 50-60
percent, because the activity keeps going up.
And for me, if you're a long-term investor, that's what you care about.
You only care that people aren't becoming apathetic about the network itself.
So get back to your piece about Bitcoin, treating it different from digital assets.
Are you ready to like pour dirt on most of these other coins because we heard about in
the run-up in like 2020 and 2021 is like, okay, these other cryptocurrencies, they kind
of take a little bit what Bitcoin did and there's a trade-off, but they're going to do it
better.
They're going to do something faster.
They're going to change the network somehow or whatever.
Are most of those, should they all be worthless, like, where are your thoughts on these
other coins?
Yeah, that's certainly not at all what the report says or tries to say.
It just says, you need a different lens.
And so because Bitcoin has solidified itself in our minds as the emerging monetary good
and it emphasizes decentralization security, everything that comes after it, that tweaks
it, tries to improve on it, it might be better at something.
You know, there's networks that are faster, there's networks that are programmable.
They can do more stuff, but they've made a trade-off somewhere else.
And so you just need to be intellectually honest about that and saying, I'm okay with
that, there's a different use case for this.
But because of that, there's also going to be more competition, right?
And we've seen this with Ethereum and others.
There's a lot more competition.
They're trying to match their use case to what the network can do, right?
And they're trying to find that product market fit.
And that's the challenge for them.
And that's what you as investors need to do.
And you can even just look at, you know, the top five 10 market cap from three, four,
five years ago, compared to the top five 10 market cap today, almost every single one
is different except for Bitcoin, Ether, and maybe one other one out there.
And that just shows you the level of turnover and competition at these face.
Well, Bitcoin market cap dominance is, I'm looking now, I'm saying it's 53%, which is
definitely the highest it's been since March of, I'm sorry, April of 2021.
So during the run up, it's not like Bitcoin is taking market share.
It depends.
So, you know, Bitcoin was 100% and now it's down to 50, but it's way bigger on an absolute
basis.
So it's not that Bitcoin's market cap has shrunk and gotten competed away.
It's just that the whole space has gotten bigger overall over the long term.
Now in the shorter term timeframes, yes, there might be some big booms, the ICO boom,
the NFT craze boom, like some of these booms where yet Bitcoin does suffer a little bit.
So if you zoom out and take the long term picture, dominance is still well over half.
And it's only gone down because the pie has gotten bigger, so to speak.
So for Bitcoin, to me, like I view it as an emerging or what's the term that uses an
aspiring store value, that to me is how I think about Bitcoin.
I am not in the camp that it's ever going to be this payment platform that people are
buying and sending and spending, like I view it as an as an as an as an investible
asset class, a theory among the other hand, to me, that should have more observable fundamentals.
Like are people using this technology to create whatever, whatever the next thing is?
Or are they not?
What is the state of the building block, the Lego set that Ethereum has been described
this?
Yeah, I think that's about right.
There's it's built with more of a use case in mind, so to speak, in terms of applications
being built on top of it, obviously, and so you want to see that user activity, and ultimately
you want to see fees being generated on it, right?
So we can look at that, in terms of the fundamentals, we include this in our latest signals report
as well.
We do a whole set on Bitcoin, we do a whole set on Ether, and fundamentals for Ethereum
network are down a bit, addresses and activity are down, fees are down.
Part of that's the market.
I think there is just, you know, people are still building on it, but there's just not
as much of a craze and experimentation around that.
So I think we have to be honest about that, but it gets a little nuanced in that there's
also these L2s being built on it, so they're taking that activity and it's going on on top
of it on the L2s, so it's cheaper up there, but then there's less activity and fees showing
up on the base layer.
And so there's this debate right now of, well, is it going to cannibalize it?
Is this bad for it?
Or is it good for it?
Because if you have better speed and lower fees, that brings more people on, so ultimately
that could be good for the base layer as well of Ethereum.
So we're watching that closely, seeing how that plays out as well.
QXPlay, what is a L2?
So L2 is something that sits on top of Ethereum, like builds on top of it, so you can do a bunch
of transactions, batch them all together, and then send the whole batch to the base layer.
And so that's how you try to solve for the scalability and high fee problem, if that makes
sense.
So what else in your signal report?
Because we said Bitcoin doesn't, it's not like producing cash flows or paying a yield
or anything.
So what are you looking for in terms of trying to figure out different metrics to pay attention
to when you put these reports out?
Yeah, so one of the things we looked at the research marketplace was there's a lot
of on-chain metrics out there, a lot of smart people doing it, but give me a subscription
to one of these platforms, and I can paint any picture you want with these, kind of like
the regular equity markets, as you know, that's my traditional background as well.
So we wanted to be consistent in showing the same metrics every quarter.
And then we also wanted to guide people, because a lot of especially traditional allocators,
they know they're out there, but they don't know how to use them or what they are.
And so the first thing we did was we bucked them by time frame.
So if you're a short-term investor, say less than a year, here's a few things you can
look at.
If you're a medium-term investor, meaning maybe you've got a big lump sum, I mean, sorry,
sorry to interrupt, but I mean, a short-term are sure as like just trend, right?
It's just moving averages, it's it's it's basic price stuff.
There's not actually a lot of on-chain stuff in the short-term.
I mean, there is, but we don't deal with that.
Medium-term, say your investor that's got a lump sum to either invest or take out.
You don't want to hit the absolute top or bottom.
We've seen these four-year cycles, right?
Here's the things you can look at to try to gauge that.
And then long-term is what I mentioned before.
Your long-term investor, you don't really care about price over the next five years.
You just want to make sure your core thesis is intact, which is the network still running
and being adopted.
So I saw a tweet.
I think it was from somebody a bit wise.
I don't remember if it was Matt or somebody else, Matt Hogan or somebody else.
That five percent is a new one percent in terms of portfolio construction.
They said that they've been having a lot of conversations with advisors that are that
are thinking about crypto in a more serious way.
What are you seeing from the advisors or the investors that you're talking to in terms
of how they're thinking about crypto in the context of portfolio construction?
That's interesting.
The five percent is a new one percent.
I didn't see that all to look it up, but I mean on our end, we're still early, so it's
still trying to get people off zero.
Part of that, five versus one is the fact that maybe allocators are looking at and saying,
like, one percent isn't going to do much for me.
I think the challenge is still getting people off zero, but hopefully maybe they'll be
incentivized to look a bit deeper into it as well.
We mentioned earlier about the widening fiscal deficit, obviously, the inflation story.
Do you think that it's just hold that to the side and it's really just as good as that
people will be interested at 50,000, at 60,000, as more and more people chase price?
Isn't it more likely that price will convince people to get in rather than the story that
determined, that defines what Bitcoin is?
What's your thoughts on that?
Yeah, it's a little chicken or egg, and you see this in regular equity markets.
To draw parallel, think of a value investor.
The investor knows the core story and thesis of the stock, and they're going to invest
when the chips are down and nobody believes in it, and they see something someone else does.
But eventually, a few other people notice, and maybe a few other people notice, and maybe
there's a catalyst or something, and then eventually, probably what is carrying that price
more is just people momentum piling it.
I would expect the same dynamics here.
We're still in the bear market.
We're still trying to say, here's the core value proposition, the story, the narrative,
but eventually, the best advertising is price, and so I fully expect that, as you say,
when we get there, that's what's going to pull people into.
But hopefully, they get pulled in, and they start actually learning about it.
We're huge advocates here of education, of understanding what you own and why you own
it, not just for the price.
Maybe if the price peaks their interest, maybe they do more research from us and from others
that do a lot of great work, and then learn that core thesis and narrative.
If Bitcoin ETF comes out, and it's a resounding success, and billions and billions of dollars
flow into it, is there any impact on Bitcoin itself in terms of making the network more robust?
Because there's increased demand.
Is there any flow through there because it's just kind of a secondary holder of this
asset?
Does it actually improve anything with Bitcoin by having more money in the NETF when
it happens?
Yeah, actually, in our Bitcoin first report, we have this little wheel graphic that we
call the virtuous cycle.
I don't think we're the first to do this or propose it, but it's simple, but powerful,
which is if demand goes up, price goes up, and if price goes up, it's more profitable
for miners to mine Bitcoin, so they plug more machines into the network.
That increases the hash rate or a measure of the computing power on the network, which
means security goes up.
Once security goes up, people say this network is even more secure, it's more attractive
that core value proposition is even more attractive to me, and it then increases demand
again.
Of course, it doesn't just happen nicely like that.
There's ebbs and flows and swings, but that is the core adoption cycle of why we continue
to see hash rate go up with price, right, that the two are linked.
Chris, do advisers that want to allocate to Bitcoin or Ether on their other clients
behalf?
Do they need to be working with fidelity, the traditional fidelity, with fidelity, I'm
trying to put, with fidelity, not digital assets, with fidelity, fidelity, the royal
fidelity.
Do they need to be a client of fidelity in order to work with fidelity, digital?
Yes, we have a number of products and avenues.
Our first core product was fidelity digital assets, we're a subsidiary of fidelity, the
big fidelity, right?
So a separate entity dedicated to this space, that's where we have institutional investors,
high net worth individuals, on board to our platform, they can buy and sell to our platform
and then custody with us.
So RIAs could do that, RIAs firms could do that on behalf of their clients.
We've also launched the integration with our well-skate platform, so RIAs who are already
on that can just plug directly into that and then we're the back end custody and service
of that.
But you know, a very streamlined way for them to plug into this.
Chris, where do we send people to learn more?
FidelityDigitalAssets.com and you can click on the Research tab, sign up, get on our
mailing list for all of our latest research as well.
Perfect, appreciate it Chris, thanks for coming on.
Thank you, my pleasure.
Okay, thank you to Chris again, remember check out FidelityDigitalAssets.com, send us
an email, animalspirits at thecompoundnews.com and we'll see you next time.