#1339 Robert Mitchnick | The REAL Reason Why Blackrock is Buying Bitcoin

Robert Mitchnick is the Head of Digital Assets at BlackRock. This conversation was recorded at Bitcoin Investor Day in New York. In this conversation, we talk about process of BlackRock launching bitcoin ETF, client demand, regulation, future outlook for bitcoin, crypto industry, and more. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. They have a brand new offer waiting for you. ======================= BetOnline.ag is a proud sponsor of the the Pomp Podcast. Use crypto to bet on sports, play poker and enjoy casino games at BetOnline. Visit https://promotions.betonline.ag/pomp and use promo code POMP100 to receive a 100% matching bonus on any crypto deposit. BetOnline boasts no crypto transaction fees, and processing is anonymous, instantaneous and secure. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Robert Mitchnick. He is the Head of Digital Assets at BlackRock. This conversation was recorded at Bitcoin Investor Day in New York City a few weeks ago. And Robert does not disappoint. In this conversation, he explains how BlackRock got convinced to eventually go all in on Bitcoin

• 0:47Anthony Pompliano?

  and launch the Bitcoin ETFs. Then we go ahead and we talk about what are their clients saying? How exactly are people buying these assets? What are different advisors going to do in terms of allocation sizes? And what is Robert excited about moving forward in this space? We also get into many of the inside stories of how the actual funds got approved and what we should expect for the ETFs moving forward. It's always awesome to talk to someone who's been so instrumental in helping a company like BlackRock get involved in this space. And Robert is that person at BlackRock along with a number of his colleagues. So I'm excited for you all to listen to this conversation. Here is my episode with Robert Michnik.

• 1:26Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:50Anthony Pompliano?

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• 3:19Anthony Pompliano?

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• 4:03Anthony Pompliano?

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• 4:10Anthony Pompliano?

  All right, next up, we have Robbie Mitchnick, who is the Head of Digital Assets at BlackRock. Robbie is by far, I think, one of the smartest institutional investors and operators that has figured out some of the value proposition of Bitcoin, and then done immense work internally at BlackRock to get them on board. And we'll see if he was part of the Larry Fink orange pill. But Robbie, come on up.

• 4:44Anthony Pompliano?

  All right. How did BlackRock decide that you guys wanted to get into the Bitcoin game?

• 4:52Speaker 03

  Well, we didn't just wake up one day and make that decision. I think that, you know, you look at our journey, it goes back really now six, seven years. And it starts with studying the technology and this emerging asset class in a very measured way out of the gate, right? And I think if you look at the state of what it was then versus what it's become, that really paints the picture of how we ended up making the moves that we did, right? In terms of the state of infrastructure and institutionalization,

• 5:37Speaker 03

  you know, that has come a very long way, particularly in the last three or four years, right? The state of the regulatory climate, it's not perfect, obviously, but that has come a long way. And then, most importantly for us, the level of interest that we had from our client base that was consistent and enduring even through the bull and bear market cycles. We saw that very clear pattern that our clients were increasingly interested in this and increasingly frustrated by the availability of efficient, turnkey, convenient, secure exposure solutions with which to get into this space. Because when you put all those together...

• 6:23Speaker 03

  And you add sort of the capabilities that we've built over multiple years, then you get to where we are today.

• 6:30Anthony Pompliano?

  So take me inside the organization. You all do this work. At some point, there's kind of a zero to one decision. Hey, we should do something in the space. ETFs, you all have a stellar track record. I think at the time of filing was 575 and one. Is there a fear that I don't want to be the one to be the second, you know, 535 and two? Or why ETFs? And kind of how did you build the confidence to say, hey, look, we think actually we can get this through with regulators?

• 7:04Speaker 03

  Well, there's certainly a lot of things that we considered in that decision, but I can tell you that one thing that we never considered was what will it do to our win-loss approval record? You know, it came down to if you think about some of the things that we did that laid the foundation, right? Starting in 2021, we began working with Coinbase, Coinbase Prime, to integrate from a technology capability standpoint, their prime brokerage, trading, custody into our Aladdin investment solution. So that crypto, specifically Bitcoin, out

• 7:40Speaker 03

  of the gate, could be part of the whole portfolio for the Aladdin clients that chose it to be. And then in 2022, we launched a private Bitcoin fund, right? Which was really important in terms, one, that was all I could do from a regulatory standpoint at that time. But two, in terms of developing the capabilities as an asset manager in the space, that was limited to our largest institutional clients in the US. But it was a really critical stepping stone. Then you get to start at 2023 and that's when we started to put the pieces in place

• 8:21Speaker 03

  to take that next step and deliver the ETF, which at that point, we had massive and clear client demand, right, that they were frustrated with how difficult it had been to get exposure. You had some clients who had tried to get exposure in this space and they'd, you know, been subjected to high fees, high risk, underperformance of the price of Bitcoin, in many cases, all three, or maybe even worse, they missed it entirely, which was, you know, Bitcoin is the top performing asset in the world the last decade and seven of the last 10 years, and they missed it because they didn't have the wrapper, the format in a convenient, accessible way.

• 9:03Anthony Pompliano?

  Once you get the approval, I was pretty bullish on the ETF. So I thought, hey, this is going to be quite exciting. I did not think we would see the inflows that we saw as quickly as we saw. Did you all think this would happen? And what has been your kind of reaction or, you know, analysis as to why so much capital has flowed so quickly into these funds?

• 9:27Speaker 03

  Yeah, it's been, it's been an interesting couple of months. Yeah, I think investors are resoundingly choosing iBit for Bitcoin access, whether that's, you know, new investors to the space who weren't willing to do it when it had the frictions that, you know, for some Bitcoin direct investing incurred, or investors who are already in the space but are choosing this as a, you know, more efficient, lower cost, more accessible, convenient exposure solution. So when you put those together, it's been obviously a lot. But when we think about our, you know, business and our client base, you have really kind

• 10:08Speaker 03

  of three buckets you could, you could put it in, right? One is end investors direct, and that channel, you know, right out of the gate, you know, has been very strong, obviously a lot of interest and demand right from small dollar up to ultra high net worth type players. Then you have wealth advisory, which, you know, many of those home offices are, are wealth advisory partners. They're still undergoing their diligence processes, right? So for a lot of these firms, it's not approved at all, or it's not approved other than on an unsolicited basis where the client has to ask, the advisor can't propose it. So that's still, you know, pretty early days.

• 10:51Speaker 03

  And then on the institutional side, we're having lots of great conversations, a lot of sort of research and diligence and education happening, but that's early. They just operate on a longer time scale. And so it'll be interesting to see, you know, as the months and quarters unfold, how those other channels start to come on.

• 11:09Anthony Pompliano?

  Now, one of the things I think folks are very excited about BlackRock is there's a trusted name and there's a lot of relationships. And some of the pools of capital that previously have not participated, you know, very large pension funds, sovereign wealth funds, you can kind of go down the line of these pools. Any insight into what those conversations look like so far? Are they open to learning more? Are they, you know, hey, guys, I don't want to talk about this. Where are those like kind of larger pools of capital currently?

• 11:38Speaker 03

  Yeah, I think that there is a really, really important discussion, debate, analysis going on of how to think about this from a risk and portfolio construction perspective. And I would say that the Bitcoin and crypto industry broadly has not done a good job at all of speaking the language of traditional investors, right? And one of the, I think, most confusing, unhelpful things that happened in the post-COVID era was you had people sort of accept this idea that Bitcoin was a risk-on asset, whatever that even means, right?

• 12:21Speaker 03

  It's kind of devoid of fundamental basis, that concept to begin with, but Bitcoin is a risky asset, right? It is volatile, it has a lot of uncertainty. But risk-on is a different thing, right? It implies correlation to equities, fixed income, what have you. And what happened was Bitcoin has one, in our view, fundamental macro variable where it is highly correlated with equities.

• 12:54Speaker 03

  And that is, it is massively short real interest rates, right? It is short nominal rates and it is long inflation expectations. And real interest rates is nominal rates less inflation expectations. So it's massively short real interest rates. And real interest rates drove every asset under the sun between 2020 and kind of early 2023. Right? They collapsed, therefore, a lot of assets, including Bitcoin, rocketed. And then they surged as the Fed started hiking and inflation expectations rolled over. And so the Bitcoin community sort of embraced this idea that it was a risk on asset,

• 13:36Speaker 03

  which I think was problematic for two reasons. One, because it was actually counterproductive to them. But two, more importantly, fundamentally, it's probably wrong. Right? If we think about long-term fundamentals and what it means to be a global decentralized, scarce, non-sovereign asset, a lot of those fundamentals paint, you know, and Mike was talking about some of these dynamics and challenges to the US fiscal situation and otherwise, they paint a very different conclusion in terms of how to think about it versus other assets on a long-term basis. So what's happened is those institutional investors, they get kind of this digital

• 14:17Speaker 03

  gold hypothesis, but then they look at the past data from, you know, 2020 to 2022 and they go, well, you know, long-term correlation was low, but then it spiked. So, you know, how do we think about this in portfolio construction? So that's the kind of education journey that we're on.

• 14:35Anthony Pompliano?

  Now, you guys just, I think, put in application or announced a new type of fund that is going to partner with Securitize. Tell us a little bit about what's the general idea there? And should we expect BlackRock to now go from Bitcoin, you know, kind of building this fund on Ethereum, and here comes everything else? And as Mike said, you know, Dog with Hat is going to be the next fund you guys launch? Like, how do you think about what that fund is and then kind of like the long tail of these assets?

• 15:03Speaker 03

  Yeah, I think that crypto Twitter would love to believe that Dog with Hat ETF is coming next. I actually don't know what Dog with Hat even is and didn't get that reference, but...

• 15:14Anthony Pompliano?

  That answers that question.

• 15:17Speaker 03

  What I can say is that for our client base...

• 15:23Speaker 03

  It is Bitcoin overwhelmingly, number one, their focus. A little bit in Ethereum and very, very little everything else. And when you think about it in terms of, you know, various metrics and dimensions, I mean, Bitcoin, 52% of the mark cap of the whole asset class, Ethereum, but 17 ish today, maybe 18. And the next that is even sort of investable is like three, right? And so it's just worlds apart there in terms of, you know, track record, liquidity, product market fit, investor narrative clarity, all these things, right? So that's where I think there's some misplaced speculation that there's going to be a long

• 16:07Speaker 03

  tail of others from us and that's really not where we're focused.

• 16:11Anthony Pompliano?

  Now, as large pools of capital come in, whether it is actually, you know, the pension sovereign wealth, et cetera, or just a lot of capital flows into the ETFs, it feels like the ground underneath the Bitcoin market is shifting a little bit. There's new types of allocators, things like rebalancing, which is, you know, basically blasphemy in the Bitcoin community, now come into play. And so do you expect volatility to dampen? Do you expect the end of the kind of the four-year cycles and the big boom and bust? How do you see the market moving forward, given these ETFs and other institutional players?

• 16:47Speaker 03

  Yeah, it's a great question. I certainly don't think we've seen the end of cycles in Bitcoin. I think, you know, by its nature, there's reflexivity in it, right? Which is, and that's, and that's hard for a lot of traditional investors to wrap their heads around. As you think about it, you know, if you think about a stock, the stock price goes up and now it looks more expensive on a PE basis or what have you. And it goes down, it looks cheaper on a PE basis. With Bitcoin, when the price goes up, the probabilities of success and adoption in some senses as digital gold are also changing. And when bad things happen, the price goes down, those probabilities are also changing.

• 17:32Speaker 03

  So you create reflexivity and that just reinforces the idea that you're going to have these cycles. I think that they're still here to stay, so people need to be wary of. You will have bull markets, we'll have bear markets too, even in this sort of post-institutional world. And then what becomes interesting is, how do you think about the direction of volatility? Right? Because volatility over time has pretty steadily come down. So maybe that continues to come down. Certainly, returns going forward will come down. It's not going to return 124% a year over the next decade like it has the prior decade. So these are the kinds of conversations that we're having. We're getting lots of questions from our investors, and that's a big part of the education journey.

• 18:17Anthony Pompliano?

  Now, when BlackRock decided to do this, it struck me as literally the executive team, the CEO, all the way on down, there's got to be a lot of buy-in to get to this point. I was shocked when Larry Fink went on television and said, "People are buying Bitcoin because it is a flight to quality." I joked with friends, I may have tweeted, and said, "It's almost like he's the chief marketing officer of Bitcoin." Put aside the honorary title.

• 18:46Speaker 03

  So you came up with that title?

• 18:47Anthony Pompliano?

  Yes, I came up with that title, not you.

• 18:50Speaker 03

  I certainly did.

• 18:52Anthony Pompliano?

  Talk a little bit about this idea of BlackRock going out and talking about it. Because you guys could have just filed an ETF, right? But actually, having Larry or others from the firm talk about this, and this idea of flight to quality, it's very different, right? If a Bitcoiner goes and says that, people, eh, okay, whatever. But when a firm that frankly has built their reputation on helping investors find quality assets and allocate for the long term, has done a very good job of doing that, says it has a different weight to it. And so how do you guys think about, you know, maybe internal thoughts versus what you share with clients versus kind of, you know, public communication around this?

• 19:27Speaker 03

  Yeah, I think when you have topics that are novel and complex, our clients expect us to be a thought leader and a thought partner with them. So that comes with the territory. And that's what made our digital assets journey over six, seven years be a very deliberate, measured process. Because we understood the importance of our weight and our voice. And to get to a point where we are today, that took a lot of study and experience and education. And the things that we say come from a measured thoughtful place. It's not by accident.

• 20:13Anthony Pompliano?

  One of the things you and I have talked about recently is correlations. And I think this is, one, very misunderstood. But also, two, sometimes it can be hard for people to do the work to really understand what the facts are there. And so how do you all think about correlations inside of these portfolios? And maybe positives or negatives based on those analysis?

• 20:31Speaker 03

  Yeah, I think it's probably the single most important debate right now in thinking about Bitcoin, where historically Bitcoin's long-term average correlation's been close to zero, slightly positive but close to zero. But it's had periods where it spiked, similar to gold. Gold has had periods as well where it spiked. Actually, if you put their correlation charts in a time series, they look remarkably similar. But that's a really important thing for institutional investors when they think about portfolio construction, because they're trying to understand, in a small allocation, is this risk additive to the portfolio? Or actually, is it potentially a diversifier or even a hedge? So that's a really critical conversation.

• 21:13Speaker 03

  It also is important for investors to understand, because it's the reason that Bitcoin is generally not appropriate in a large concentration in a portfolio. Because in a large concentration, its volatility becomes a huge driver of risk. But in a more modest concentration, then the fact that generally it's been uncorrelated and has different fundamental drivers, that's where it potentially becomes a different source of return and even in some cases, a diversifier. So that's a big part of the education journey.

• 21:51Anthony Pompliano?

  Is there a like average allocation size you're seeing from clients or a range that you're actually seeing them put out there? And I always joke that, you know, when people ask me, I'm like scared to say anything other than 1 to 5%, right? Like that just seems like, okay, you say that you're not crazy. But I've seen, you know, many large institutions talk about much higher percentages in some cases. And so like, what are you actually seeing people do?

• 22:16Speaker 03

  Yeah, I mean, obviously, it depends on investor archetype and circumstances and all those factors. But, you know, I could say anecdotally, what we're seeing is kind of the normal range for those clients who are allocating, whether we're talking about in, you know, financial advisors on behalf of their clients or large institutions, it tends to be kind of in that 1 to 3% range.

• 22:40Anthony Pompliano?

  And then where are we going with Bitcoin and Wall Street, right? On one hand, I think a lot of people who bought Bitcoin early liked the fact that it was outside the system. BlackRock and other financial institutions creating ETFs and people buying that brings it a little bit closer into the system. But maybe 10 years from now, like, what does Bitcoin on Wall Street look like? And what are these asset managers doing? And what are maybe the changes to the market or even to the players?

• 23:10Speaker 03

  Yeah, well, I think, you know, that there's some irony in the fact that with Bitcoin ETF and iBit, we took a crypto native investment exposure and we put it in a traditional finance wrapper. And with tokenization, we're taking traditional finance investment exposure and we're putting it in a crypto native wrapper. And that may seem contradictory, but it's really not because across our client base, there are those who are not comfortable yet with digital asset rails, but they want those investment exposures and they want that in a, you know, convenient, familiar wrapper. And we have clients who are comfortable and fluent on blockchain infrastructure.

• 23:58Speaker 03

  Interacting with digital assets and they want traditional investment exposures in that format because it's digitally native, global, programmable, instantly transferable, etc. And that dichotomy will persist for a while, but eventually, I think we expect there will be some convergence that looks like sort of the best of the old system and the best of this new technology fused into a next generation infrastructure set in finance.

• 24:27Anthony Pompliano?

  And I'm not going to ask you for a price prediction, but you have been working on this for a while, you, your team, inside of BlackRock. Do you have advice or maybe lessons learned from going through that process inside a large organization for those that work at other institutions that may say, hey, look, you know, we're not doing something or we're just starting our process? What are some of the things that you thought were important and you look back like, hey, I'm glad we did this as part of the research or analysis? And then also maybe things that you personally or people on your team probably would share with them if they want to be part of that group to go and talk it inside of their corporation?

• 25:02Speaker 03

  Yeah, I'd say two things, maybe. One is you have to look for opportunities to get small wins. So you may have ambitions of, you know, what, what you would hope an org might do, but you don't start there. You build familiarity and expertise and trust and credibility with smaller prizes, but demonstrated successes that help people get comfortable with, with the technology and in this case, you know, a new asset type. But you have to be, be careful because it's not throw everything at the wall and see what sticks, right? You want to have a high win rate where the projects that you advocate for are effective

• 25:47Speaker 03

  and well executed. There's lots of orgs that became disillusioned with blockchain and crypto because they took a try everything approach and got bogged down in a lot of bad ideas that went nowhere. So be discerning and have some early wins. And the second piece is you have to be an honest broker. You don't work for crypto.

• 26:10Speaker 03

  You work for your institution. So everything when you think about, you know, strategy and ideas and risks that that may be taken have to be from the standpoint of the institution, not an individual who happens to be passionate about Bitcoin or crypto and wants to see, you know, this come forth in the world.

• 26:32Anthony Pompliano?

  And my last question for you is, through that whole process, what have you been surprised by? The amount of inflows, the type of bill buying the ETF, maybe something internally, like, just what's surprised you? Because I think it would really help us identify like the difference between expectations and what ended up happening. And so like those surprises probably are pretty informative as well.

• 26:55Speaker 03

  You know, I think the biggest surprise has just been the breadth of investor types that the ETF has resonated with and the level of variation in rationales for wanting the ETF. So we talk about, you know, small dollar all the way up to ultra, ultra high net worth. We talk about wealth advisory institutional and myriad use cases and rationales for, well, I used to hold this way and now I prefer to hold to the ETF because X or because Y or because the, there's just been way more of those than I think we ever expected.

• 27:37Anthony Pompliano?

  And for those that would like to work with BlackRock, what is your suggestion so that you don't get harassed when you get offstage? Maybe you share that so we could save you some time.

• 27:48Speaker 03

  Well, I think one of the things that's important to understand, working with large traditional finance institutions, is it's kind of similar to what I was saying a moment ago in a different context, which is you kind of have to build your way up to it, right? We're not going to be someone's first large traditional finance, large asset management client, right? There's sort of a track record that gets built over time. You look at the partners we've worked with in this space, so that's Coinbase or Circle or Securitize. They all started in places and built that credibility long before we ultimately, you know, entered the partnerships that we did.

• 28:26Anthony Pompliano?

  Robbie Mitchnick, everyone. Thank you so much.