Description
In this episode of The Bid, host Oscar Pulido delves into the world of cryptocurrencies, exploring their impact on the financial landscape and the potential and risks they hold for investors.
Transcript
Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.
Digital assets have become a fascinating and sometimes perplexing phenomenon in the financial landscape. Cryptocurrencies offer decentralized and borderless transactions challenging the long-established norms of the financial system. And the underlying blockchain technology not only ensures security, but also opens doors to innovative applications beyond currency- impacting industries from finance to supply chain.
Robbie Mitchnick: The ability for the first time to have an asset that is truly global, that anyone with a mobile phone and internet connection can tap into. This asset and the new access to financial opportunities that it creates in a permissionless way is really a significant breakthrough.
Oscar Pulido: But cryptocurrencies receive their share of skepticism due to their volatile nature. So, what does the future hold for this asset class?
Samara Cohen: This era of access and integration is what's here for Bitcoin (BTC-USD) now. So it's going to be critical to see how the integration of Bitcoin in capital markets catalyzes new strategies for investors and differentiated outcomes.
Oscar Pulido: Today I'm joined by Robbie Mitchnick, head of Digital Assets at BlackRock and Samara Cohen, Chief Investment Officer of the ETF and Index Investments business at BlackRock. Robbie and Samara will lend their knowledge and experience to help us navigate the story of digital assets, from their inception to their current state and beyond. We'll explore the unique features that set digital assets apart and the potential they hold for investors seeking new opportunities in the ever-evolving financial market.
Oscar Pulido: Robbie and Samara, welcome to The Bid.
Robbie Mitchnick: Thanks for having me. Good to be back.
Samara Cohen: Thanks for having us, Oscar.
Oscar Pulido: I'm very excited to have you both because, I don't know if it's just me, but when we talk about this space, there's a lot of terminology that we use. We talk about digital assets, there's blockchain, there's crypto, there's Bitcoin, and I've needed to listen to a few of these conversations to make sense of how this all comes together. Robbie, maybe I could start with you, help us make sense of some of these concepts.
Robbie Mitchnick: Sure. Digital assets as the starting point is the umbrella term for this space. And everything in digital assets is enabled by blockchain as the underlying technology.
So, when we think about digital assets, I think that best way to think of its significance is with an analogy to the internet. That is that digital assets through blockchain makes possible for the movement of value, what the internet did for the movement of data multiple decades ago, a global, decentralized, accessible, real-time network.
Then within digital assets, you've got really three buckets that we think of. One is crypto, the most famous -generates a lot of the headlines, you have 10,000 plus different crypto assets today of which Bitcoin is the original and remains today by far the largest with a striking share of market cap north of 50%.
Second bucket, stablecoins where you take the properties of digital assets of crypto in terms of ability to send them anywhere in the world in near real time, at near zero cost in a digitally native, transparent way, and strip out some of the intrinsic volatility that exists today for crypto assets to make them more useful as a payment asset.
The third bucket, tokenized assets, the idea is you're taking real world assets or financial assets, and you're issuing the ownership record of those on a blockchain in digitally native format.
Oscar Pulido: I love the analogy about digital assets, providing the ability of the movement of value, I think is what you said. The way the internet facilitated the movement of information. And thank you for that description. I think that helps categorize these various concepts. But if I'm an investor, what does this all actually mean? What part of what you mentioned actually matters to me as somebody looking at the markets.
Robbie Mitchnick: Yeah. I think sometimes it's tempting to look at this and say, the applications of blockchain technology, maybe Bitcoin or crypto was first, but there's going to be so many vast applications of blockchain that those'll be irrelevant in the long arc of history. And I don't think that's quite correct, Bitcoin's been around for 15 years, the blockchain hype and institutional interest has been here for, let's say six, seven years. When we look at, what are the things that we couldn't solve before as a human society and economy or that we did, but we did them in a really inefficient way. Now through blockchain, we either solved that or we predominantly use blockchain to do it in a much more efficient way. The record so far is pretty thin, and the exceptions are really Bitcoin, Ethereum (ETH-USD) to some extent in a more early-stage way, and stablecoins.
So, Bitcoin, why is it significant? I think it's a really complex question that's not well understood. The way to think about it is in three components, three problems that it solves, which are centuries old problems.
And the first is payments and particularly cross-border payments or moving money across political jurisdictions. That has always been difficult. Domestic payments today actually pretty easy, pretty efficient. A lot of countries have real time digital payment networks. But cross border is another story altogether.
And if we go back a millennia to what was a very pioneering system in the Middle East, the Hawala system. And that was how, money moved across longer distances in that time. And how it worked was you went to a broker, and you deposited something of value, they created a receipt that was then transmitted to another broker, let's say in the next village, who was connected to your broker. And they would pay out to some recipient something of value, and then the two brokers would periodically settle.
It's an innovative system for the ninth century AD. But in fact, our cross-border payment system today looks a lot like that. If you're sending a wire or a money transmission, you're going to your bank or your money transmitter and you're depositing with them, and then they've got a relationship with their bank, and their bank has a relationship with the end recipient's bank, and at the end of it, someone at the other end gets their money, but in the process you incur significant fees and time delays and frictions, and so that has not modernized really in centuries.
When we think about the introduction of Bitcoin and digital assets, this idea of being able to move a digitally native asset globally across borders in near real time at near zero cost, that's an amazing breakthrough.
The second piece is when we think about the predominant form that money lives in today, Now, for most of our history, money was either a commodity itself or coinage that had a linkage to commodity, whether directly or through convertibility. Today the predominant form of money is as government issued fiat currency. And that has all kinds of benefits in terms of efficiency to settle transactions at scale and digital format. But what it doesn't have is security against arbitrary supply increases. And so, what we've seen throughout much of modern history is when fiscal challenges arise in a given country, there's this temptation to increase the supply to base currency and ultimately create inflation. Bitcoin with its rigidly fixed supply cap of 21 million units, 19.5 million of which are already in existence, has a totally different paradigm.
And then finally, the ability for the first time to have an asset that is truly global, that anyone with a mobile phone and internet connection can tap into. There's people who have mobile phones but don't have bank accounts. So, this asset, and the new access to financial opportunities that it creates in a permissionless way is really a significant breakthrough.
Oscar Pulido: So, you're saying that crypto, and you use Bitcoin as the prominent example, is modernizing the financial system. It's making it easier for cross-border payments and is making people think about the currency that they have in their pocket, that fiat currency, those bills, are not fixed in supply, they can't increase in supply. And in fact, we saw central bank responses over the course of many years do that in response to crises. Whereas cryptocurrencies are more fixed in supply, and therefore have a purchasing power that perhaps is more valuable. Let's talk more about cryptocurrency, which perhaps had a lot of critics, that this was a fad, and, to some extent that appeared to be the case at the end of 2022. But here we are again today with crypto and Bitcoin, really prominently in the headline. So, what's changed?
Robbie Mitchnick: Actually, you allude to the major correction that happened in 2022, that was just one cycle in crypto's history. But there've been four. And if you put a price chart of them side by side, they look almost indistinguishable.
So, Bitcoin's created in 2009, and then you have 2010, 2011, this spectacular parabolic rally when it goes from nothing to something. Then crash.
2013 another parabolic rally. This time it enters the mainstream consciousness of a wider number of people. Ultimately that, cycle collapsed when Mount Gox, which was the leading crypto exchange at the time, imploded. Then you have this bear market for a while.
2017 arrives and crypto goes parabolic again, hits all-time highs, order magnitude above where it had ever been before. And now it started to enter not just mainstream investors, but big institutions are thinking about this, Again, that, rally collapses.
Finally, the fourth cycle, which we saw starting in Covid, it was some flight to scarcity value of Bitcoin initially, but then it extended to other crypto assets, that too collapsed in 2022 with some excesses and other bad behavior.
So, it's been this, rollercoaster journey, but when you look back at the long-term trajectory, each of these cycles, tend to be a multiple or even an order of magnitude or higher than the prior cycle.
Oscar Pulido: So, these ups and downs are nothing new. And in fact, your timeline went back to the early 2010s, but we should expect volatility in this asset class. that gets me to think about investments and Samara, when we think about these digital assets and particularly cryptocurrencies, how should investors think about this relative to more traditional investments, things like stocks and bonds. Are there certain advantages they possess or are there certain challenges, or maybe it's a combination of both?
Samara Cohen: Oscar, what I love about the framing that Robbie just gave us is that he not only just did a 14-year history of cryptocurrencies and Bitcoin specifically, but he actually went back a thousand years in talking about the history of money, which I love as a self-professed markets history nerd.
And Robbie has laid out really well the vision for digital assets, they can be traded across borders in a transparent manner without intermediaries and that's the crux of what is the specific change in this new paradigm. And of course, these are markets that don't close, these are 24/7 markets. so that's the vision. Now let's speak to the actual practice of investing in Bitcoin.
When you look to invest in and own Bitcoin directly, as an investor, you're engaging with an entirely new ecosystem. You have to take a more direct role in vendor selection, in onboarding, you need to understand custody and also the differences in tax management. This is a big education curve, and it introduces, complexity as well as potentially trading and operational costs.
So that's the state of play for investors who are, alongside their, asset classes and markets they have traditionally been invested, in looking to overlay bitcoin strategies. Now the attributes of digital assets that we've talked about are actually particularly appealing to millennial and Gen Z investors who, over the past several years, are becoming much more predominant in the investing world. And that's an important part of what's happening in market structure around the world and what's happening in crypto.
Both of these generations are digital natives, they grew up with the internet, they're comfortable transacting their lives in an increasingly borderless space. And they are more likely to own crypto than mutual funds, equities, or ETFs. And as Robbie spoke about, this trend of engaging in Bitcoin has been spreading to institutional investors as well with a number of them, adding Bitcoin as an asset class alongside others in their portfolios. So, the moment right now, and I love Robbie's layout of the four eras of Bitcoin because I think this era is really around integration and access with the availability of access technologies like ETFs.
Oscar Pulido: It sounds like it won't just be the millennials and Gen Z investors that are thinking about crypto, but that it could broaden out to a broader swath of investors. So are there certain developments in the regulatory landscape that have created more legitimacy or acceptance for digital assets that you've seen or that you foresee happening?
Samara Cohen: Yeah, this is important to talk about because evolution in the regulatory atmosphere has not only enabled the rise of digital assets, but where it goes from here is going to be critical to the path forward.
I do want to make the point though, Oscar, to what you said about institutional investors alongside the Gen Z millennial investors. Putting crypto to the side, a huge topic in markets around the world is how market structure is adapting to self-directed retail investors. And that is true, across asset classes with platforms and a huge part of market structure regulation generally. Looking at equity markets, through the lens of how they are accessed directly by investors, is really guiding policymakers around the world in traditional finance as well.
Now policymakers are starting to make moves to develop frameworks around Bitcoin, and the reason they're doing it is because they see the increase in interest in investors and also the evolution in infrastructure across the industry.
We see countries broadly focused on how to bring crypto markets into compliance by creating frameworks, which is what they do, and what they're supposed to do for all parts of the financial system and all parts of emerging technologies.
The European Union will actually be the first major jurisdiction with a comprehensive crypto framework. The Markets and Crypto Assets licensing regime, and that takes effect at year end 2024. In the US, there have been efforts in Congress on a bipartisan basis to create measures aimed at regulating and providing greater market structure to the digital asset industry, those measures have progress that needs to be made. I will say in my own engagement in the industry and with US policymakers, I think the drive to ensure the US is competitive in this space, is going to accelerate and make sure we progress.
Oscar Pulido: Samara, it sounds like what you're saying is that regulators are working to put frameworks in place that give investors some comfort that there are guardrails in place, so that if they want to incorporate Bitcoin and digital assets into their portfolio, they can do so in a more confident manner. And Robbie, I think Samara alluded to this, you mentioned blockchain technology, it has wider application, that it's the foundation for, digital currencies, but it has other ways in which it can be applied. So maybe talk about, where are we there?
Robbie Mitchnick: It's fun that we get to do this together because you were one of the original believers in this Samara. I remember, sitting in your office on a Friday afternoon in October of 2018. And you were so dialed in to what this was, and you were newer to the technology at the time, but thinking about what this could mean for ETF markets, and I remember walking out of that thinking, this is going to be a thing here,
Samara Cohen: And I'm just sad you didn't bring up your thousand-year history of money, Robbie, because I think we would've gotten here faster!
Robbie Mitchnick: Or, you might've said, that guy's crazy and I would've been, looking for another job. But, when we think about going beyond crypto and I mentioned in the sort of three-part framework at the top for digital assets of crypto, stablecoins and tokenized assets. And tokenized assets is how I would answer that question where, there's a lot of interest and, hype around, the potential to take this technology and apply it to existing assets, whether they be financial or physical assets- we could be talking about stocks, bonds, commodities like gold, real estate, art, you name it. And take the properties of blockchain and what it enables in terms of transparency and efficient settlement and, borderlessness and being digitally native and programmable, all these things and modernize how our financial system works and modernize access to, maybe asset classes that weren't easy or efficient for many investors to get access to. And so, I think this is a transformation that is going to take time. This is not a three-year transformation. This is 10, maybe 15, maybe 20 years, but if it happens, it'll be the biggest transformation in our securities market since we moved from paper-based share trading in the 1970s to electronic records.
Oscar Pulido: And the reason it takes that long, the 10, 15, 20 years, is just that financial markets are complex and there's a way in which things are done that takes a long time to unwind. Robbie, I think I've also heard you talk about the issue of property rights and how tokenized assets strengthen this issue of property rights over digital assets. So maybe talk a little bit about that.
Robbie Mitchnick: Yeah, one of the breakthroughs of Bitcoin that then, applies, in other digital assets is, historically, it's been very difficult to create a form of property, a form of value that cannot be seized by force.
Again, go back centuries or millennia, property, whether that was at risk of seizure by an invading army, or by a hostile or authoritarian government. Now for the first time, you have this idea that your wealth can fit on effectively a USB key as stored in your pocket, or even be memorized in your head. We're talking about private key that gives you access to your Bitcoin. that's an amazing breakthrough,
Oscar Pulido: So, Samara, what advancements do you see taking place in the digital asset space that investors should be mindful of? What do you think that's going to mean in terms of the investment decisions that investors need to make going forward?
Samara Cohen: I have to say, the private key, comment is a great example of when we talk about the practical applications and what's new for investors here, like having to memorize seed phrase is very stressful for investors. And so, figuring out how you want to engage and whether that's how you want to own your crypto, that's a perfect example of what it means to actually have to adopt to a new ecosystem.
For all of the reasons that we've talked about, self-directed investors, we know we see it. This is a huge topic for policymakers. They are interested in gaining access to digital assets broadly, to Bitcoin specifically in a way that's convenient and efficient and secure. Importantly, crypto is also becoming a topic for the whole wealth industry and for financial advisors.
And then we're starting to think about crypto in a whole portfolio context, this brings me back to this idea of the era of access and integration. What are the ways to integrate crypto into a broader portfolio? And then the significance of the application of existing and familiar technologies like ETF technology to spot Bitcoin? The use of ETF technology, which is now becoming predominant, in multiple jurisdictions allow investors more access to Bitcoin in a whole portfolio way. So, they can see the integration of risk, they can manage their portfolios holistically. And that's a very significant aspect of what this kind of next phase will be.
And I will also add with respect to whether it takes, years, decades, millennia for market structure to change. We know a few things, like really what moves market structure forward are two things, it's what technology enables and this inexorable march towards more access and more transparency, which investors always want. Competing with that are, entrenched interests often, which can, slow things down. And then as you talked about before, the ability of policy and regulatory frameworks to adapt in a way that supports the new ecosystem.
This era of access and integration is what's here for Bitcoin now. So, it's going to be critical to see how the integration of Bitcoin in capital markets catalyzes new strategies for investors and differentiated outcomes.
Oscar Pulido: It sounds like both of you have a front row seat to the modernization of, financial markets. So, thank you for sharing that with me today, I feel like I've got a little more information on this topic, but I know there's probably more to learn, so we'll look forward to welcoming you both back at some point on The Bid. Robbie and Samara, thank you for joining us on the podcast.
Robbie Mitchnick: Thanks for having us.
Samara Cohen: Thanks for having us, Oscar.
Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, be sure to tune in and check out my conversation with Jeff Spiegel, where he'll provide a holistic overview of major investment themes to help investors navigate the year ahead.
Sources: CFA Institute report Gen Z and Investing: Social Media, Crypto, FOMO, and Family, May 2023; Coin Metrics, as of Aug. 2023. Bitcoin predominance based on its market cap of $530B which accounts for 50% of the total market cap of all crypto–assets excluding stablecoins; The Global Findex Database 2021 identifies opportunities for increasing financial inclusion, July 2022; CoinGecko, as of Jan. 2. 2023. Bitcoin predominance based on its market cap of $860 billion, which accounts for 51% of the $1.7 trillion total market cap of all cryptoassets, excluding stablecoins.
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