#1341 Research Panel | Fidelity, ARK, VanEck Reveal How They Evaluate Bitcoin

Chris Kuiper is the Director of Research for Fidelity Digital Assets. Yassine Elmandjra is the Director of Digital Assets at Ark Invest. Matthew Siegel is the Head of Digital Assets Research for Vaneck. Will Clemente is the Co-Founder of Reflexivity Research. This conversation was recorded at Bitcoin Investor Day in New York. In this conversation, they discuss bitcoin evaluation process, bitcoin ETFs, client demand, regulation, crypto industry, and future outlook. ======================= Core Scientific (NASDAQ: CORZ) is one of the largest public Bitcoin miners and hosting solutions providers for Bitcoin mining in North America. To learn more about Core Scientific, please visit: ⁠www.corescientific.com⁠ ======================= In this podcast, we dive into the revolutionary concept of PropyKeys, an application that allows anyone to mint home addresses all over the world on blockchain. PropyKeys.com is a part of the Propy ecosystem, that has a grand mission to make homeownership more affordable and user friendly. We will explore the journey of Propy’s founder and how this innovative technology provides benefits for homeowners, and for the real estate industry. Join us as we discuss the Propy’s latest collaborations, including Coinbase, and its new fun project PropyKeys. X (Twitter): @PropyKeys Website: Mint an address at propykeys.com. dApp: ⁠⁠⁠⁠⁠⁠https://dapp.propy.com/⁠⁠⁠⁠⁠ ======================= 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 a little bit different. We have Will Clemente interviewing the Director of Research for Fidelity Assets, Chris Cooper. We have Yasin Alomandra for the Director of Digital Assets at Arch Invest, and Matthew Siegel, the Head of Digital Assets Research for VanEck.

• 0:46Anthony Pompliano?

  This conversation was recorded at Bitcoin Investor Day. Will did a fantastic job with the interview questions, and Chris, Yasin, and Matthew all knocked it out of the park in terms of their answers. They talk about what their process looks like, how they're evaluating Bitcoin today, and what they expect the market to look like coming in the next few months. This conversation is highly informative, and I'm excited to bring it to you here. Again, once you get done listening, jump on Twitter and let us know what you liked, what you didn't like, what you agree with, and what you don't. The feedback is always helpful. Here is Will's conversation with Chris, Yasin, and Matthew.

• 1:19Speaker 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.

• 1:43Anthony Pompliano?

  Today's episode is brought to you by Core Scientific. They are one of the largest public Bitcoin mining companies and hosting solutions in North America. They specialize in transforming energy into high-value compute with exceptional efficiency at scale, and recently announced a contract with CoreWeave, a leader in AI cloud compute, to provide up to 16 megawatts of data center capacity. With a substantial fleet of their own miners, Core Scientific not only earns Bitcoin for their own account, but also provides hosting services for large-scale Bitcoin mining customers operating out of seven data centers in Georgia, Kentucky, North Carolina, North Dakota, and Texas. You can learn more about Core Scientific by visiting corescientific.com. That's corescientific.com. Go check them out today.

• 2:30Anthony Pompliano?

  Today's episode is brought to you by Propy. Imagine a world where you could buy and sell your home wallet to wallet. With Prop Keys, you can mint your home address and upgrade it to a real world asset. This not only protects your home's title from fraud, but when you are ready to move, you could sell it through an NFT auction as well as through the traditional way. There's optionality here. Propy Keys is part of the Propy ecosystem. Their mission is to make home ownership more efficient, affordable, and user-friendly. Propy Keys is a fun entry point to placing title on the blockchain. Now, anyone can start their on-chain journey by minting home addresses via Propy Keys and staking them for profit until they are ready to sell their home. Visit propykeys.com to learn more. Again, that's propykeys.com to learn more.

• 3:14Speaker 02

  All right, hey, everybody. What's going on? My name is Will Clemente. I'm the co-founder of Reflexivity Research. It's great to see everybody here. Impressed by the turnout today. When we started this thing, we knew the halving was coming up, but I don't think we thought Bitcoin was going to be trading above 60K before the halving. So it's great to see everybody interested in Bitcoin here today, and hopefully we can teach you a few things. So I'd like to welcome off the panel today a couple of great research guys that I know and a couple of guys that I really look up to. All right, cool. We're going to get started. Maybe first we could just go around and do quick intros. Matt, we'll start with you.

• 3:55Speaker 03

  Yep. Matthew Siegel, I'm head of digital assets research at VanEck and one of the portfolio managers there. VanEck is a TradFi institution, about $100 billion in assets under management. We've got $1.5 billion across 18 different crypto strategies, both passive and active. We're building some NFT technology, active investors in VC. And I, yeah, try to pick the top. We've been involved in number go up technology since 1955, but specifically in Bitcoin since 2017, the first TradFi manager to file for a Bitcoin ETF, the first to file for an Ethereum ETF. And we've got a lot of skin in the game.

• 4:40Speaker 03

  Firm's run by one guy, Jan VanEck, who has been severely red-pilled. So we're going to be around here for a while.

• 4:50Speaker 04

  All right. My name is Chris Kuiper, Director of Research at Fidelity Digital Assets. For those who don't know, Fidelity Digital Assets is a separate entity, a subsidiary of the Fidelity that you probably do know. Our core products are custody. So we built our own custody solution many years ago. We've been in the space since 2018 officially. Fidelity's been working on Bitcoin for over a decade now. And that core custody solution is what you see that's powering and is providing the custody for all the different Fidelity digital asset products that you've been seeing in the news. And then we also have a platform for buying, trading Bitcoin and Ether as well.

• 5:31Speaker 05

  My name is Azin Elmandra, Director of Digital Assets at ARK Invest. If you're not familiar with Arc, we are an asset manager focused exclusively on disruptive innovation. We were the first public fund manager to gain exposure to Bitcoin back in 2015 when Bitcoin was trading around $200. Since then, you know, we've been really focused on the asset class. I've been at Arc for around six years now, really focused on trailblazing a lot of the research and sort of publishing why Bitcoin is really the birth of a new asset class.

• 6:03Speaker 02

  Awesome. I think we have a lot of traditional financial folks in the audience that are looking to kind of get into crypto for the first time. So I think maybe where we can kind of start the discussion is, how do you guys think about evaluating Bitcoin and broader crypto assets? Maybe Matt, we can start with you.

• 6:22Speaker 03

  Well, we have some core beliefs in the space, namely that open source technologies tend to take market share from walled gardens. And when we observed the margins of big tech, they look ripe for disruption, whether that's from technology or from regulation is really the principal question. But the core belief is that this asset class is 50 basis points of global finance. It shouldn't be too much of a lift to get to 5%. Most digital Digital networks tend to be winner take all dynamics.

• 7:02Speaker 03

  So that remains to be seen just how much there'll be a concentration of profits in the space. But we're looking to buy the projects and the tokens that have these winner take all characteristics, can be category killers, where there's an undoxed, non anonymous, sorry, a doxed, non anonymous team building a product where the token can accrue value. And then we want to buy, stake and risk manage those assets to outperform Bitcoin.

• 7:36Speaker 04

  Yeah, I think for people who are just getting into the space, the biggest thing we emphasize is understanding the difference between Bitcoin and everything else. One of the first reports I did with an analyst when I first joined Phility was called Bitcoin First. It's still our most widely read, widely downloaded piece. It's Bitcoin First, Why Investors Need to Consider Bitcoins Separate From All Other Digital Assets. And we try to be intellectually honest on the team all the time. We're not necessarily saying everything else is terrible or bad, but you have to approach it with the right framework and the right lens. And so for us, we do take the viewpoint, we stick our necks out and say, we do think Bitcoin is very different. It's the most secure, it's the most decentralized. And I know I'm probably preaching to the choir here, since this is a Bitcoin Investor Day.

• 8:20Speaker 04

  But you have to take that lens because everything else makes trade offs on those things. Not necessarily a bad thing if you're trying to do something else, but if you're trying to store trillions of dollars, you want the most decentralized, the most secure asset out there. And so I think that's the number one starting point. And then from there, you can begin to evaluate everything else and things start to fall in place a lot easier.

• 8:43Speaker 05

  And then I guess in terms of how to evaluate Bitcoin specifically, and well, you probably have a lot to say about this, but I think much of Bitcoin skepticism stems from, you know, its inability to fit neatly within traditional asset class frameworks, especially from a fundamental valuation standpoint. Can't really apply a discounted cash flow model to Bitcoin. It's not, you know, a yield bearing asset like a bond. And so the natural conclusion for a skeptic is to say there are no fundamentals. Bitcoin sort of presents an entirely new framework to analyze fundamentals through sort of this underlying blockchain infrastructure on-chain data. You can think of on-chain data as this 24/7 global fact sheet that allows you to assess Bitcoin's fundamentals,

• 9:26Speaker 05

  its economic state, its buyer and seller behavior, and in turn, it indeed has fundamentals. So we spent a lot of time kind of building out, not just the framework, but using that framework to assess Bitcoin, both from a long-term and short-term standpoint. I think the really interesting thing that we're starting to see is that, you know, in addition to some of the raw data that you're able to audit on Bitcoin's blockchain, whether it's transparent monetary policy, its transaction volumes, its active addresses, you're also able to sort of use that to actively manage Bitcoin at the margin. If you think about Bitcoin as this non-productive asset,

• 10:07Speaker 05

  where value is driven really as a function of demand relative to supply, if you're able to assess capital flows at any given time, that can be really interesting for price discovery. And so I think that there's an entirely new framework that's being built upon this on-chain infrastructure to assess fundamentals, not just on a long-term basis, but across every timeframe.

• 10:31Speaker 02

  Yeah, you're seeing, I know you guys have done a ton of work on this blockchain data stuff. Could you maybe even dive in a bit further? And you know, you guys have kind of walked through compartmentalizing fundamental analysis, the valuation analysis that's made possible through on-chain data. Talk through some of those things and what types of insights are able to be derived from these things that aren't possible in traditional assets?

• 10:54Speaker 05

  Yeah, absolutely. I mean, it's a rabbit hole in and of itself. We have published a lot of work on this and we published our first piece on sort of on-chain data as a new framework to assess fundamentals. You can kind of think of this as, I'd say, threefold. You have called the raw core data that allows for you to assess sort of the long-term fundamentals and the health of the network. Something like monetary policy or the ability to audit Bitcoin's monetary policy is a really great example of that, like I said, transaction volume and active addresses. One step above that is because Bitcoin allows for you to at any given time assess capital flows both on a volume and time weighted basis.

• 11:39Speaker 05

  You're able to also derive really interesting sort of proxies for cost basis. A really interesting metric that was developed in the early days by Nick Carter is a metric called realized capitalization, where instead of multiplying the total circulating supply by the current price of Bitcoin, instead you're multiplying the supply by the time in which that single supply last moved, the price in which that single supply last moved, which gets you an aggregate cost basis of the market. That allows for you to really assess where the capital flows are at any given time in the market. And then you can sort of further dimension that by having a ratio

• 12:23Speaker 05

  between, let's say, the realized capitalization and the market capitalization, which allows for you to assess where, on average, the market is, whether they're trading above or below their cost basis. And in so doing, you can assess the relative valuation. So when, let's say Bitcoin as price is trading below its market cost basis, that tends to mark generational bottoms and buying opportunities. And so it's quite an interesting framework that a lot of data providers are now

• 12:55Speaker 05

  leveraging to allow investors to assess these fundamentals.

• 13:00Speaker 02

  Hundred percent. And what are some of those data providers that people can kind of use to look into some of this blockchain data stuff?

• 13:05Speaker 05

  Yeah, Glassnode, Coinmetrics, Amberdata, there are a ton out there. And they all provide sort of really interesting data. I think to your point, Chris, of Bitcoin first, one of the unique things about Bitcoin is the transparency and simplicity of its data. Part of the sort of on-chain framework, the reason why it works so well with Bitcoin, is because of how simple its base layer is and the ability to parse that data so granularly and assess the economic state at any given time. It is really primarily Bitcoin. And of course, you can do that with other assets, but not to the granularity that you can with Bitcoin.

• 13:47Speaker 02

  Totally makes sense. Chris, to turn it over to you, Fidelity has been one of the earliest institutions, if not the earliest, large institution that came into Bitcoin early on, I believe dating back to 2013. And you guys have done a ton of work, basically putting Bitcoin on your guys' back early on and kind of pushing it into the institutional world. How do you guys think about Bitcoin in terms of portfolio construction? You know, Robbie was just here talking about the correlation to real rates. How should investors think about Bitcoin as part of their portfolio? And just, you know, how does it behave relative to other assets in macro?

• 14:23Speaker 04

  Yeah, that's a great question. Similar thoughts to Robert, what he just said in the last session here. We do think it's highly correlated, or at least our research shows it's highly correlated to monetary policy. So changes in M2, money supply growth, Fed balance sheets, whatever you want to look at, and highly correlated to inflation expectations. And this is one that a lot of people get wrong. They say, "Oh, we had CPI at one of the highest levels in 40 years since the 70s. Bitcoin went down. What gives? I thought this was supposed to be an inflation hedge." And I'm actually trying to figure this out, so I'd be curious to chat with people about this. When they disagree with that, is the disagreement that they don't believe money creation, especially in large amounts, leads to inflation at all?

• 15:08Speaker 04

  Or is it, no, they do believe inflation, in terms of price inflation, like everyday CPI inflation is linked to money creation, but they just don't think Bitcoin's a good hedge against that? And so I think there's some nuance there. And I think if you look at, say, something like a chart of inflation expectations, like five-year forward inflation expectations, and you chart the percentage change in those inflation expectations. So not trying to commit any data fraud or crimes here, because you're doing a change on a percentage rate. But it makes sense, right? If your inflation expectation is going from 3% a year to 6, that's a huge change. And Bitcoin tracked that perfectly, COVID and post-COVID, with all the money creation.

• 15:53Speaker 04

  And so the fact that we got CPI lagging after that, to me, is not that different. That's not...

• 16:03Speaker 04

  Saying Bitcoin isn't an inflation hedge, I think it is. And so that's one of the big things we look at, money creation, inflation expectations. And going forward in our 2024 Look Ahead Report, we did stick our neck out a little bit and kind of say, I wonder if this year, if past years was, Robert was talking about this, how Bitcoin was highly correlated to things like tech stocks and people are just trading it like a tech stock. And I can pound my fist on the table all day and say Bitcoin is not a tech stock. It's very different. It's fundamentally different. But if they're going to trade it like a tech stock, that's how it's going to trade. But I think we're seeing those correlations break down. And I think we're seeing, as people get educated, that Bitcoin is not the same as a tech stock. And so I think going forward, people are going to realize that and hopefully it's

• 16:48Speaker 04

  going to trade differently. And we're going to get lower correlations again, which is good for your portfolio. It's the only free lunch in finance. If you can add a positive returning asset with low correlation or no correlation, everything else, you can enhance your risk-adjusted returns. That's the holy grail, right? And so we stuck our neck out in this forward-looking report. We said, maybe it's not tech stock on steroids, maybe it's now gold on steroids. And the reason I say this, Robert was talking exactly about what we're looking at of how Bitcoin tracks real rates and it's decoupled and people are going, hmm, I wonder why. And to me, I think Bitcoin's sniffing something out on the macro front. It could be sniffing out another wave of inflation. We just got three hot CPI reports.

• 17:32Speaker 04

  And I always look back at the 70s. People think, oh, high inflation of the 70s, that was a bad decade. Like, it was just one homogeneous decade of just double-digit inflations the whole time. It was two major waves. Went up, went down, they thought they had inflation beaten. It came back and roaring back again. So we have to consider that as a possibility here with inflation staying stubborn. Maybe it comes back, maybe Bitcoin's sniffing that out. Maybe it's sniffing out the structural deficits, the stuff that Mike Novogratz just talked about. That's also been a pretty good indicator. So those are the things we're watching and looking at and thinking in terms of portfolio construction right now.

• 18:09Speaker 02

  Totally makes sense. And do you think as Bitcoin becomes a more legitimized macro asset in investors' portfolio, and also combined with the fiscal situation that you just kind of briefly touched on, do you think that takes away these traditional four-year cycles that we've seen for Bitcoin? It's kind of up for debate whether that falls, the kind of macro liquidity cycles, is it the halving? Is it a little bit of both? Is it behavioral dynamics in the market? But do you think as the assets now become a legitimate piece of an investor's portfolio, does that kind of change the way that these kind of broader two- to three-, four-year cycles kind of play out for BTC moving forward?

• 18:44Speaker 04

  Yeah, we're all waiting the halving because we're all asking, is this halving going to be the same as the last with big price run-up post-halving? But the halving has also corresponded to election cycles. It's also corresponded to liquidity cycles. So we have no counterfactual yet. But to your point, I think it will dampen them. I don't think it will ever go away, just because it's becoming a larger asset class. So all new flows are coming into a larger and larger base. And I think it was Robert who mentioned, long-term volatility continues to go down. You draw a regression line through that. It's going down overall. So I think it will get dampened, but I would be hard-pressed to see the cycle ever go away in the near term.

• 19:27Speaker 02

  Totally makes sense. I think I'm in your camp as well. So all three of your guys' firms, VanEck, Fidelity, and Arc, all have spot Bitcoin ETFs that are live. Matt, how do you think this changes market structure now that we potentially have passive flows coming in? Do you think this kind of changes the way that BTC trades, less volatility, et cetera? What can kind of investors be able to expect moving forward now that we have these ETFs live?

• 19:51Speaker 03

  The very specific impact to market structure has been that the 3:00 to 4:00 PM Eastern close is now by far the most liquid part of the Bitcoin's day. It used to be like 3% of the trading day. Now it's 6 or 7. So in terms of market structure, you can see it shift to New York.

• 20:17Speaker 03

  What we haven't really seen yet are the systematic passive buyers who are following the 6040 model portfolio set up by the wirehouses and then all the brokers get on the phone and either put those clients into some version of that macro framework or put their wrinkle on it. And of course, we're all expecting those 6040 portfolios to migrate to 60391. And Fidelity has done some pioneering work on that in Canada. We're working with an asset manager called AssetMark, which is using one of Vannax's models to run a thematic disruption portfolio that has a 5% weight in Bitcoin and which may adjust tactically.

• 21:02Speaker 03

  So I think it's those types of inclusion in broader models that will really accelerate this cycle. And that just hasn't happened yet, partially because banks and brokers are still not really allowed to touch this asset class. And part of it is, I think, just the passage of time. But some of our larger clients in the space are literally have not opened up the Bitcoin ETFs to their clients yet. So we're optimistic that is going to change and that will really power this bull market.

• 21:35Speaker 02

  You obviously talk to a ton of institutions on a regular basis. How has the sentiment kind of shifted amongst that crowd now that we have these ETFs in regards to Bitcoin? Are they now taking it more serious? Do they now feel like it's a legitimate asset?

• 21:49Speaker 03

  They definitely are. And there's a top three US bank who I was on the phone with a week ago, who said, "We were planning to wait two quarters to roll these ETFs out to our clients, but because of client demand, we're going to accelerate that ASAP." So there has been momentum, but there is also a fervent no-coiner cohort whose minds cannot really be changed. I think it's almost like, you know, the election in Ohio. If you change 200 people's minds, you literally might change the outcome of the election. And Bitcoin, because it Is supply constrained and doesn't respond to higher prices.

• 22:30Speaker 03

  Changing 1% of people's minds can be a 10x for this asset. So still encountering a lot of skepticism, a lot of kind of no coiner views. I'm someone who watches Bitcoin miners a lot, the publicly traded stocks, because we have an ETF DAP that owns all these miners and, you know, we vote our proxies and I look at these companies. And if we think of the problems of 2022 as about governance, there's still issues with governance just in Bitcoin miners. Look at the executive compensation. I'm not going to name the company, but one of them just came out with a $200 million executive compensation plan. Their revenues for last year were like 280 million. And this is a recurring problem of dilution and overpaying executives in the space.

• 23:15Speaker 03

  And I think that might, you know, be keeping some institutional investors on the sidelines. So that's the wall of worry, right? That's where incremental change can drive, I think, new investors.

• 23:27Speaker 02

  Thanks, Tana. Since you just touched on the miners, you see, and I'd like to turn it over to you and walk through some of the research that you guys have done on the miners. I think there's a huge misconception and it seems like the energy kind of community and industry is starting to warm up to the idea of Bitcoin miners and some of the benefits that they can have on the grid, etc. Can you kind of walk through some of the research that you guys have done on miners? And kind of what are the most interesting developments that you've seen recently? And are people starting to kind of warm up to the idea of embracing Bitcoin miners in the energy community?

• 23:56Speaker 05

  Yeah, I think there's a massive misconception in general about Bitcoin's energy consumption. And it starts with, you know, what the use of Bitcoin's energy is relative to securing this hard digitally native scarce asset, where in many ways the design that Bitcoin has of explicit computational effort to secure this asset is a trade off that is made, that is intended. And we see kind of the free market principles at play where there is a clear demand to mine this scarce asset. Sorry, this scarce asset converting kind of electricity to money. And then the second kind of component is, okay, if we, if we sort of address or acknowledge

• 24:40Speaker 05

  that Bitcoin's energy consumption is here to stay, let us look at kind of that energy mix or the implication for just broad, the nature of that energy consumption.

• 24:52Speaker 05

  And in many ways, what we're seeing is Bitcoin acting as this really compelling ancillary service to already existing power plants and energy providers that are now basically able to overbuild their capacity because they now have this revenue generator that is able to, in many ways, act as a stabilizer to the grid. And we're starting to see that with everything from the excess flare that a lot of these miners now are using Bitcoin to mine that excess flare, to some of the... We've modeled out the solar industry as well,

• 25:36Speaker 05

  and how you're able to overbuild capacity if you add on a Bitcoin rig. And so I think the broad dynamics of Bitcoin energy is bad for the environment are largely misconstrued.

• 25:49Speaker 03

  I'll just add to that. El Salvador gets brought up a lot because of the volcano mining, but there's now five countries that are mining Bitcoin for their state reserves. So El Salvador, Oman, Bhutan, UAE, and then just last month, a lot of people missed it, but Ethiopia, there was this story on Bloomberg that they spent billions of dollars on a hydro dam, and all these Chinese Bitcoin miners had flocked to Ethiopia, and there was this outrage, "Oh, this is a country with $900 a day, $900 a year per capita income, and you've got Chinese Bitcoin miners." The next week, the Ethiopians leaked a story, "They also have set up Bitcoin mines next to that hydro dam." So there's just an extreme

• 26:31Speaker 03

  geopolitical incentive for countries on the fringe of the financial system who are negotiating with an IMF, telling them not to do crypto. Some percentage of them will go the other direction, partially because of the energy dynamic that you illustrated. So we're running emerging markets debt, emerging markets fixed income strategies. We bought El Salvador debt a couple of years ago. That was a very good trade because of the, I guess, narrative in the mainstream media that it was a dumb move, but when you look under the hood, tourism was increasing, GDP continues to outperform. So we also look at emerging markets debt and equity through that lens of Bitcoin.

• 27:11Speaker 02

  What do you think the future of mining looks like? Are we going to have a Dyson Sphere one day around the sun harvesting energy to mine Bitcoin? How do you think people will kind of, you know, find new ways to use, you know, kind of low cost, cheap energy and kind of creative ways moving forward?

• 27:28Speaker 03

  Well, I mean, I approach energy from a philosophy of abundance. We're seeing some increased traction in the nuclear arena, both Europe and a little bit in the US. So, energy will get cheaper, we'll find better things to do with it. But, the comment on mining, I'll say, is if you look at the total amount of hash rate on the Bitcoin network, and then you look at the percentage of which controlled by publicly traded miners, it's at an all-time high. So, these miners, they all went bankrupt, they learned some lessons, maybe a little bit of capital discipline, but the capital markets are the source of competitive advantage. Scale is a huge deal in this industry, and we continue to see listed miners take share.

• 28:10Speaker 03

  The largest Bitcoin miner in the world just went public in Abu Dhabi in an IPO. So, access to capital is a differentiator in this space.

• 28:20Speaker 02

  Totally makes sense. Chris, have you guys kind of dove into a lot of the recent developments in terms of activity around Bitcoin with BitVM and Ordinals? And how do you guys kind of think about that as the evolution of Bitcoin from, you know, this hard money that we've, you know, kind of developed and established Bitcoin as, to potentially serving as something much more moving forward?

• 28:41Speaker 04

  Yeah, great question. So, the two kind of North Stars I have for our research team, as cliche as they are, I think they're great. One is, we have a missionary, not mercenary mindset. And, you know, we talked about how Fidelity made a big push into the space. I started just a few years ago, we had 120 people at Fidelity Digital Assets, now we have 700. So, we've been building through the bear market, we obviously believe in the space. How do we take that where we want to say something of value and actually have our opinion, a pretty good opinion on something versus our other North Star, which is intellectual honesty? And ordinals and all this L2 stuff just falls right in there. And we've had really good debates on the research team about this of is this,

• 29:25Speaker 04

  you know, quote, good or bad for Bitcoin? What are the risks? What are the implications? So we did do one little report when ordinals and inscriptions came out, kind of an FAQ for our audience who, you know, are institutional investors. So it's like, what are they? Does this affect the code? Is there dangers with this? How could this evolve? So we should revisit that again and see where it's at. But so far, personally, I'm pretty agnostic about it. I'm not like a huge supporter or anything, but it hasn't, it hasn't had that bad of an effect or negative externalities. Ordinals and inscriptions, that is what I'm talking about. It's maybe raised the base fee of the network up a little bit. If you can think of these ordinals, like sopping up any extra block space that nobody wants, they'll come in and they'll buy it up cheap.

• 30:10Speaker 04

  And as long as they're not doing like, I have to get this minted today. They don't, they don't really care about time. They're not like someone who needs like, I needed this transaction done now. So they're very low time preference. They'll, they'll pay a cheap fee. They haven't really pushed the, the median fee up. You know, there, there's a big spike, but now economics has taken care of that. And we're back down to really cheap fees with Bitcoin again. And then the other stuff, the BitVM, an analyst on my team just started digging into that. I think it's fascinating. I've heard of some companies doing some stuff in this space. And so that's something we're currently looking at, but I don't, I don't have as good of an opinion yet on it.

• 30:47Speaker 05

  Yeah, I mean, echoing Chris, I think, I go back to the idea of free market principles here relative to ordinals. And you can kind of think of Bitcoin as this open source network that in itself is agnostic to experimentation. At least that's my, my opinion. I think it should be. And so when you see, you know, applications being built on top, I think the free market will, will, will regulate itself accordingly. You know, what we're looking at as well is, is L2s outside of Lightning. So you know BitVM is certainly, I think, one of the more compelling projects out there. Kind of bringing rollups to Bitcoin. You know, outside of that, I think Bitcoin as a store of value doesn't necessarily need

• 31:31Speaker 05

  the, you know, bells and whistles that some might claim that are happening on other public blockchains. I think Bitcoin really stands in a category of its own and the principles that it stands by are relatively conservative by design. You know, there are no solutions, there are only trade offs. And I think Bitcoin has made that explicit trade off of, you know, high fidelity assurance and settlement guarantees at the base layer and perhaps at the cost of, you know, not being a Turing complete chain and then sacrificing some of the, call it, composability that you see with other chains. So we're again focused on more of the on-chain activity, the capital flows, seeing kind of

• 32:16Speaker 05

  the nature of the buyer at the margin and, you know, whether they're long-term focused or not, I think is something that, you know, we're more focused on on the research side.

• 32:26Speaker 04

  I think too, there's a distinction here between people who approach Bitcoin from an engineering technical background and crypto in general, and they say, oh, Bitcoin's cool. Oh, and we can do all this other stuff. And their engineering mind just goes, like, that's, that's natural, right? They, they want to learn and explore and play with this stuff. And then on the finance side, it's like, well, Bitcoin is the killer app. Like, we don't need anything else. This is, this is great. Why, why are you messing this up or trying to do something more with it? So not, I mean, it's a little tongue in cheek, but I'm just saying it helps to know who's coming at it from what perspective, I think.

• 32:59Speaker 03

  I'm going to take the slightly other side of the coin here and a bit more bullish on L2s. I think it's human nature. People want to do things with their Bitcoin once it goes up a lot. And last cycle that was, oh, let me lend it to BlockFi and earn some interest. And all those centralized lenders went bankrupt, but now we have some on-chain innovations that are going to allow people to lock up Bitcoin in some type of smart contract and maybe earn some yield. And I think that's a narrative that's going to take off in the second half of this year, and it's enabled by some of this L2 innovations.

• 33:33Speaker 02

  It's a ton of sense. We're all super bowled up on Bitcoin. What do you guys feel like are the biggest tail risks to the asset? Is it as simple as just regulatory concerns around countries potentially implementing capital controls if capital is leaving the country and devaluing currency to go into Bitcoin? How do you guys kind of think about the risk to Bitcoin as an investable asset?

• 33:54Speaker 03

  Yeah, I think you nailed it. There's been a lot of talk here about Bitcoin's negative correlation with real interest rates and why it didn't act as an inflation hedge in 2022, 2021. I think that's because policymakers observed the rising inflation and the parties that were in control decided that they needed to address it with control freak-type policies that were deglobalizing and harmful to the free flow of capital. And Bitcoin was a target. And I think that's probably a secular trend of deglobalization, but there'll be periods of more intent policymaker actions. And we're coming out of that now. The tail risk is that it would reignite.

• 34:39Speaker 03

  But we always have to remind ourselves, this is an emerging market asset, frontier market asset. Americans are into it because we can speculate easily with our ETFs. But for the rest of the world, if you look at a chart on who's optimistic about Bitcoin, it's Nigeria, India, Indonesia, Vietnam, the youngest countries in the world. And who's pessimistic on Bitcoin? It's France, Japan, Germany, the oldest countries in the world, right? So focus on where the youth is. They're touching the chain more directly. And don't get too caught up in what's going on in US politics. It's probably going to change anyway.

• 35:15Speaker 04

  Yes, we wrote a report on common criticisms to Bitcoin and their answers. A lot of the FUD, as they say out there. And in the spirit of intellectual honesty, we also said, what do we think are real risks that you have to assign a probability to? Regulation is one, although not as much, I don't think. I think that window's passed. Two is just a bug in the software. It's happened twice before in Bitcoin, so let's acknowledge that. Probably not as likely to happen just because you have so many people pouring over the code now, the bounty is so much higher, but you have to assign a non-zero chance to that. And then number three, to me, it's just the unknown unknowns. Like, as an investor especially, you have to be honest that there is a non-zero chance that there is a risk that you aren't even aware of is a risk that could happen to this.

• 35:59Speaker 04

  And so, as much as your conviction is increased as you study this more and more and more, it's still, I think, important to zoom out and realize, wait, there's not, you know, absolute certainty here.

• 36:10Speaker 05

  Yeah, and I'd say a potential risk is the over-institutionalization of Bitcoin in many ways. I think the ethos of Bitcoin as maintaining sovereignty, the idea of, you know, self-custody, and in general, kind of what Bitcoin represents as its freedom technology, sometimes, you know, there is that risk of perhaps over-institutionalization where you might have, you know, again, with regulation, centralization of Bitcoin, but I think, you know, we're starting to see, you know, some glimpses of hope there. Everything from, you know, Fidelity having its own custody stack to El Salvador self-custoding.

• 36:53Speaker 05

  So, in general, I think just maintaining the Bitcoin ethos as these institutions, you know, start to take Bitcoin a lot more seriously is top of mind for us as well.

• 37:07Speaker 02

  Absolutely. Before we wrap up, I follow all of your work extremely closely. All of your firms put out excellent stuff. Where can people go to find all of your research and any other content that you guys produce?

• 37:19Speaker 05

  You can find us at ark-invest.com. We publish Bitcoin monthly report going through all of the on-chain data. We have a Bitcoin brainstorm that we publish as well. Ark-invest.com.

• 37:32Speaker 04

  Yeah, their monthly report's really good, and all their other stuff. For us, it's fidelitydigitalassets.com. Click on the research tab.

• 37:41Speaker 03

  I think we're the only ones who've put out price targets and DCFs on Ethereum and Solana, so if you follow the VanEck intern on Twitter or myself Twitter or LinkedIn, you'll see all of our research. Thank you.

• 37:54Speaker 02

  Shout out to the VanEck intern. Give it up for these guys.