Latest / TFTC: A Bitcoin Podcast / #630: Bitcoin's Institutional Adoption Is Just Getting Started with Matthew Sigel

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#630: Bitcoin's Institutional Adoption Is Just Getting Started with Matthew Sigel · TFTC: A Bitcoin Podcast

0:00
You've had a dynamic where money has become freer than free.
0:10
If you talk about a Fed just gone nuts, all the central banks going nuts.
0:16
So it's all acting like safe haven.
0:18
I believe that in a world where central bankers are tripping over themselves to devalue their
0:23
currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor.
0:28
I mean, that's part of the bull case for Bitcoin.
0:31
If you're not paying attention, you probably should be.
0:36
Matthew, welcome to the show. Thank you for joining me.
0:41
Thanks, Marty. First time, long time.
0:45
I was saying that we've met twice this year in D.C.
0:49
We shared an elevator and then in Vegas a few weeks ago,
0:53
we were in line waiting to get our passes into the event.
0:58
and i've been a big fan of all the research you've been doing at vannack and your commentary
1:04
on x for a couple years now so i figured it's it's time to get matthew on the podcast to discuss
1:09
everything going on um and like i said right before we hit record considering what you guys
1:15
are doing at vannack and in your position there starting with the bitcoin etfs um they've been
1:22
extremely hot since they launched the fastest growing ETF segment ever, I'm pretty sure.
1:28
But what are you seeing on your end and how would you describe what's going on with the Bitcoin ETFs,
1:37
especially compared to other of the prominent ETFs that are out there and that have been launched in the past?
1:42
Yeah, it still feels very early from my perspective on the adoption of these ETFs for the advisor community, folks who are running money just for kind of regular high net worth investors.
2:01
A lot of those platforms still can't put the Bitcoin ETFs into their client portfolios without a reverse inquiry.
2:11
And we're starting to see that change. So the zero to one moment is ahead of many advisors.
2:22
And what's been so interesting about the recent price action of Bitcoin since kind of the April tariff announcements is volatility has plummeted.
2:32
limited. Bitcoin didn't have the same drawdown as the NASDAQ. And so for the allocators who work on
2:41
kind of 60-40 type portfolios and look a lot at volatility as a way of determining sizing of the
2:49
position, this downdraft in Bitcoin vol is giving them an excuse to maybe take a larger initial
2:56
position than they otherwise might have. So the reaction to the ETFs from the self-custody crowd
3:07
is sometimes rather polarizing. But what I think that crowd misses a bit is
3:14
when you're a fiduciary and managing money for a client,
3:19
the temptation to steal the money is just too high if you're self-custodying it you know for
3:26
them so there's this like separation of powers uh which you know you see at the government with the
3:33
three branches of government but it also happens in regulated finance where you have to entrust
3:38
those assets to a to a custodian to hold on to and the bitcoin etfs made that process much more
3:46
efficient fit into the normal workflow of a money manager. So yeah, the flows have been good.
3:53
I guess they're being overshadowed by the corporate adoption. So in the last year,
4:01
corporates have actually added more Bitcoin than the ETFs have. That's a big change.
4:06
So we can get into whether or not that's sustainable or not. But if I think about kind of
4:11
several legs to the stool for Bitcoin demand. There's individuals, there's institutions,
4:20
corporates, and then governments. And now with the corporates, we've got another pretty strong
4:25
leg to the stool. So that seems to be setting a floor here. And so it's funny you mentioned the
4:34
wealth managers not being able to market the funds. They can only put their clients in if
4:40
their clients come to them and say, hey, I want to buy the Bitcoin ETF. My neighbor back in Austin
4:45
was a wealth manager or is a wealth manager at Morgan Stanley and was describing this to me
4:51
over the course of the last two years. And we were pretty tight, so I'd catch up with him at least
4:56
once or twice a week on the front lawn in the mornings. And he was telling me a couple of
5:01
months ago that internally, even at Morgan Stanley, they're beginning to sort of prep
5:06
the managers for, okay, here's how you market it. Here's what you're marketing and getting them
5:13
prepped to do outbound instead of waiting for inbound. And so, I mean, you said it's still
5:19
very early days. I imagine, um, once you get the, the managers out there hitting the pavement and
5:26
actually marketing these, these funds, uh, you're going to see significant, more significant
5:34
inflows from here on out who's been driving the inflows up until this point is it people
5:40
that have had bitcoin self-custee decided to sell a portion of that and move uh move it to the etf
5:47
because they just felt more comfortable with sort of diversified exposure that way is it large family
5:54
offices that have been interested in bitcoin but never felt comfortable buying spot and we're
6:00
looking for something like the etf what what is what has the mix been like to date i think it's
6:06
mostly been um the individuals diversifying like you say uh independent advisors who aren't owned
6:14
by these bank holding companies like morgan stanley who kind of hold their themselves to
6:19
maybe what they perceive to be a higher level of um caution um hedge funds was a huge driver
6:29
because the Bitcoin ETFs made it much easier for hedge funds to play the cash and carry trade,
6:37
the basis trade, use the futures market to try to earn an arbitrage. In the first couple quarters
6:44
after the launch of the ETFs, hedge funds holdings of the Bitcoin ETFs outnumbered the advisors by
6:52
more than two to one, even though advisors managed 10 times the money. So it was really this
6:58
kind of early fast-moving hedge fund community that drove the institutional adoption.
7:05
But year to date, we've seen that reverse. And the latest data shows that advisors actually own
7:12
more of the Bitcoin ETFs than hedge funds do. So that should be stickier buyers who don't
7:20
kind of de-risk when funding rates come down. And I think that's been really encouraging.
7:25
um i'm hopeful that these wire houses morgan stanley's morgan stanley's ubs's merrill lynch's
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who uh have basically been providing these on a reverse inquiry basis as you say they're starting
7:39
to do the prep minimums are coming down they're getting they're either soliciting or beginning to
7:44
solicit um but when you read like sell-side research what the uh strategists put out and
7:52
their 60-40 models and model portfolios at these larger bank-owned wealth managers, they're still
7:59
not including Bitcoin in those model portfolios. So I just wonder if adoption by those advisors is
8:09
going to be a lagging indicator. And we at VanEck, traditionally, we sponsor ETFs and mutual funds,
8:19
But a growing part of our business is just the delivery of these model portfolios.
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So we've noticed that the traditional providers are not being innovative enough in our view, not including Bitcoin.
8:32
So we've started a number of model portfolios that are highly diversified, but include Bitcoin, you know, at the appropriate weight, you know, conservative, aggressive, different models.
8:45
And that's one of the faster growing parts of our business.
8:48
So it's, you know, there's a huge innovators dilemma here. As you know, Bitcoin is kind of the anti-bank asset. It's really hard for them culturally, I think, to get very aggressive in this space. And maybe that's going to turbocharge, you know, our market share gains and others like us.
9:06
well staying on the model portfolio like how i mean i've seen the data and we've talked about
9:15
on the show before but i think it bears reminding people just like what is the impact of adding a
9:22
bitcoin allocation to these model portfolios at different sort of weightings it's it's very
9:29
additive um now of course we're dealing with historical performance and as we like to say
9:34
that's not a promise of future performance, but for every conceivable position size up to,
9:46
say, 20%, Bitcoin increases the Sharpe ratio. So that's a fancy way of saying that it's better
9:57
risk-adjusted returns. So yes, it introduces some additional volatility. Bitcoin volatility is,
10:06
depending on the day, kind of three to five times that of the S&P 500, but the performance more than
10:12
makes up for it. So you do notice over history that the drawdowns tend to be larger, of course,
10:19
when you have Bitcoin, but not enough to make up for the additional returns that you get.
10:27
So most of these advisors are looking at it in the kind of 50 basis points to 3% weighting.
10:34
The math, at least the history of it, shows that up to 20%, you know, it's positive, but
10:41
most folks are more conservative than that.
10:44
And I like to compare it to a stock like Facebook, which fell 80% peak to trough in the 2021-2022
10:54
bear market.
10:56
is roughly 3% of the S&P 500.
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So whether you liked it or not,
11:00
you were wearing that 3% drawdown.
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Do you want that in something
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which is correlated with the S&P 500
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being a major weight in it?
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Or do you want an uncorrelated asset?
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And I think that argument is resonating.
11:18
Yeah, and I think that's a big question
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on everybody's mind is,
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is this time different?
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and you never want to say that it is.
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However, I'm sure you've seen the chart that was going semi-viral this week
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of the sort of price movement in cycles past where you had FOMA retail
11:38
and then the price movement over the last year or two
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where it seems like a very structured and sort of, how would I describe it,
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sort of just small step up and to the right pretty consistently,
11:53
as you mentioned, volatility is down. But it seems like we have massive bids and more importantly,
12:02
a wider diversity of massive bids that are typically stickier coming from corporates,
12:09
institutions, hedge funds, nation states, individual states here in the United States,
12:14
family offices. And I think that's the question on everybody's mind is have we
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made a phase transition into an era where bitcoin is accepted broadly as something that's here to
12:27
stay something that makes sense to have at least a small allocation to and if those assumptions
12:35
hold true does that change the dynamic of cycles moving forward i still lean towards the this time
12:44
is not different. Every cycle tends to end with a leverage-driven blow-off top. And last cycle,
12:58
the folks who were providing leverage were rather naive from a financial perspective. It was the
13:07
kind of tech companies like Celsius and BlockFi that got into the balance sheet business,
13:12
blew themselves up. And we like to use the funding rates in the futures market as an indication of
13:24
how hot the animal spirits are. When funding rates are above 10% for Bitcoin for more than
13:31
a month or so, the forward returns look really poor. We had a brief moment of that in December
13:38
after the election. And then indeed, like the next couple of months were a correction for BTC.
13:47
Maybe some of that was gold taking the lead and the two tend to take turns. And now in this most
13:53
recent run up to all time highs, we're not seeing the type of leverage or overheated
14:01
funding markets that would typically mark a top I think that instead it being expressed via dilution in the equity capital markets So yeah the stock market has completely changed its attitude towards these companies
14:18
And the number of investment banks who are willing to underwrite capital formation in the space has increased dramatically.
14:26
A big part of that is deregulation.
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So I think that gets to your point that something's a bit different here.
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other parts of Wall Street are kind of acknowledging that the space is here to say
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they should get in the business of underwriting these deals. So it could be that, you know,
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the hangover comes from the equity shareholders of some of these newly formed treasury companies
14:53
that have, you know, enormous paper gains. And then as their shares become unlocked and available
14:59
for sale. They take profits. And I'm just kind of painting a worst case scenario that, you know,
15:07
a lot of these companies end up trading at a discount to their Bitcoin. And then the only
15:12
way to kind of restore some shareholder value is to sell their BTC and buy back stock, right?
15:17
That's kind of what everyone is worried about. That's a scenario that Saylor has kind of taken
15:23
off the table, deny that he's going to do it, but, you know, it might only take one to do it before
15:30
everyone else feels the pressure. So I still think my gut is that that's ahead of us and that a lot
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of these treasury companies kind of won't sustain the MNAV premiums that they're trading at.
15:46
But I also think that an 80 percent drawdown is probably too big. And, you know, each cycle gets
15:50
smaller, both the rallies, but also the drawdowns. That's kind of a wishy-washy answer,
15:57
but directionally, that's where I am. No, because I was discussing this yesterday
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with some people as well, and that's what I'm not going to claim that this time is different. I mean,
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there's definitely different dynamics at play, but will I say that this is a super cycle or
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that we're not going to have massive material drawdowns in the future? No,
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I would never do that. Bitcoin has humbled me many times over the last 12 years.
16:23
But it's just one thing I'm really curious about.
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Is there enough, like the corporate treasury play that we're describing right now?
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Obviously, it's massive.
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I saw your tweeting the other day, MSTR plus CEP plus ASST plus Semler plus NACA plus DJT is $76 billion in capital raising ability to buy Bitcoin right now.
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56% of the AU amount of the ETFs and 169% of the net inflows of the ETF complex has achieved over
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the last 16 months. That's an immense amount of capital that can come into that six companies
16:58
relatively quickly, buy Bitcoin, keep it on their balance sheet, and they get over their skis.
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One thing I've been discussing with John Arnold at 1031 quite a bit too is like,
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sailor i believe was during last year's shareholder meeting described what they're doing now
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as chapter one of strategies for long-term goals which is accumulate as much bitcoin
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as possible and then he alluded to strategy becoming like a quasi bitcoin bank and if you
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just look at the the book value of fiat banks that exist today they really trade around that book
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There's not like a big premium on there.
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So like in the long term, it makes sense to me that if this is the strategy of the strategy
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as a company name is a terrible name, but the strategy of the publicly traded Bitcoin
17:52
treasury complex in the long run, at some point, everything will have to compress to
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basically one in terms of NAV, MNAV.
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And it's just like, what is the process between now and then look like?
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Like how high do the multiples blow out and what does the compression back to one look like?
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Is it aggressive? Is it steady?
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Is it wholly dependent on Bitcoin's market cap reaching a certain threshold
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and certain Bitcoin-related financial services come into market?
18:26
Yeah, I think that's a fair analogy.
18:29
Right now, there's a very wide dispersion of what these companies trade at.
18:34
You know, MetaPlanet is like seven times the value of its stack, MicroStrategy closer to two times.
18:42
And then you've got kind of some of the smaller names like Assembler, which is basically trading at 1x.
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So the banks that reliably trade at a premium to book are diversified.
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They're earning spread income and fee income.
18:59
They've got consumer franchises and institutional franchises.
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And, you know, how many really of those are there going to be on the Bitcoin side?
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Strategy is the most evolved because they have products that are diversified.
19:17
Fixed income investors can access the preferreds.
19:21
Arbitrageurs can use the converts.
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There is significant volatility in the stock that has sustained.
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and I think that he's done a great job of establishing relationships with some of the
19:34
convertible bond traders so that the biggest hedge funds in the world all have dedicated people that
19:40
are involved in that capital stack. That's not the same for some of the smaller names and
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it may be hard to develop that same ecosystem. And then there's just going to be the digestion
19:55
of all of this paper that's coming to market, right?
19:58
These are a lot of private investments in public equities
20:02
where the shares are locked up for some period of time.
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And then over the next few months,
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those unlocks are gonna hit kind of like the altcoin market.
20:13
And a lot of folks will be selling out.
20:15
I saw that there was a filing
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from one of the Solana treasury companies last night.
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And they disclosed that as a result of some of these convertibles being exercised, the share count is going to grow by 50%.
20:32
And they listed like 30 different VCs who all they assume are going to sell to zero, right?
20:39
Not holding even one share once the lockup occurs.
20:44
That's going to be a lot of paper to digest for the market.
20:47
I think a lot of the stocks will be lower in three months.
20:53
Yeah, that's fascinating.
20:55
And I think that's a big question, going back to what I was saying earlier.
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This corporate treasury play is just one theme of many that are beginning to materialize.
21:04
Obviously, you mentioned the ETFs.
21:06
You've written a research paper on BIT bonds.
21:10
Obviously, they're not to market yet, but they're being discussed not only at the federal level.
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Mayor Adams would like to do one, whether or not his comptroller will play ball with him is another question.
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You have to imagine that somewhere in the world, a product like this will materialize at some point in the next five years.
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And then one thing we're really interested in at 1031 is this intersection of credit,
21:40
particularly traditional financeable credit and Bitcoin as collateral, so commercial real estate.
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residential real estate eventually being able to refinance commercial real estate loans
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residential real estate loans and introduce bitcoin as collateral and put them stuff them
21:58
in these longer duration products that could be very interesting in terms of if those strategies
22:05
reach scale in size being able to have like a forward-looking duration curve of look here's
22:11
all the Bitcoin locked up in these 10-year duration products, these 30-year duration products.
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The corporate treasuries can say, we're going to hold forever, but they're beholden to the whims of
22:22
their stock price at any given point in time. And that decision could be forced to change,
22:29
whereas these credit products seem a bit stickier. Obviously,
22:31
they come with bankruptcy risk, but I'm sure that's limited compared to what could happen
22:38
with the corporate treasury strategies and then obviously the nation state race that seems to be
22:44
incited in terms of these nations trying to accumulate bitcoin strategic reserves too
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and i don't have an answer but it's just like trying to think like okay is the corporate
22:55
treasury strategy isolated enough in the forest of all these different themes that are materializing
23:03
that a company or multiple companies getting over their skis and being four sellers of Bitcoin
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is sort of that that supply is easily soaked up by those other demand factors.
23:17
Yeah, it may be that one of these treasury companies, if they can manage to sustain the
23:23
premium, will acquire some of these kind of, you know, lenders that we've seen emerge who want to
23:31
use Bitcoin as collateral. Like one of the funky things about Bitcoin doesn't have a yield. So
23:38
it's kind of tough to grok like how it fits in a fixed income portfolio. The way that folks are
23:45
using it right now is like the lender, a lender with particular conviction in Bitcoin says, hey,
23:51
I'd feel a lot better if part of my collateral for this loan were in Bitcoin, not only in the
23:58
commercial real estate that I'm lending against. The tricky part about that is like
24:03
the sophisticated lender can just structure that product himself. He doesn't need to necessarily
24:11
combine the Bitcoin with the real estate. Sometimes it's cheaper just to strip it out.
24:17
So the same thing is true of BitBonds. The way that it's been floated is that instead of the
24:26
government selling the 10-year bond at 4%, they'd be able to sell it cheaper because part of the
24:33
proceeds are going into Bitcoin, which has higher upside. But then the end buyer of the bond has to
24:40
split the upside above a certain cap. So if you're the lender to the government, why wouldn't you
24:47
just lend in a straight treasury bond and then just buy Bitcoin yourself and keep 100% of the
24:55
upside. So there's a certain cuteness to it that might be too cute by half. I think what would
25:02
really legitimize it, this is an obvious statement, is if the strategic Bitcoin reserve were actually
25:10
a law. Because if the government is, or the central bank, actually holds Bitcoin in reserve,
25:17
then they can kind of combine them into one combo asset.
25:24
So, yeah, that's kind of my thought on it.
25:27
I am captivated by what's going on around the world
25:31
and the number of countries that are mining Bitcoin
25:35
with some of their spare energy
25:36
or kind of negotiating against the IMF
25:39
by either threatening or enacting like Bitcoin reserves.
25:44
and that may be a more, a bigger driver for the price than these kind of BitBond products,
25:52
which, you know, they may be like a next cycle story, I think.
25:56
Yeah, that would be fascinating.
25:58
Are you hopeful that a strategic reserve will get signed into law or is that a pipe dream,
26:02
in your opinion?
26:03
I think the pretty low, quite low probability.
26:08
And I also think that a lot of people have hatched onto this revenue neutral
26:12
condition for acquiring Bitcoin in the strategic reserve. But just because something is revenue
26:21
neutral doesn't mean that you can do it without legislation, right? Like I could say, hey,
26:26
let's raise taxes to 100% on, you know, everyone making a million dollars a year, but then cut it
26:32
for everyone else. It might end up revenue neutral, but it's still a material change to people's lives
26:36
that needs legislation.
26:38
And the same thing is true for Bitcoin.
26:41
So I think there could be some type of experimental purchase,
26:46
very small, just a small number of zeros
26:49
that they can kind of sneak through in existing structures
26:54
like the exchange stabilization fund of the treasury
26:56
where there is some leeway to get creative.
26:59
But I think the numbers will be very small.
27:01
So whether like a poly market counts a $10 million purchase as a Bitcoin reserve, I'm not sure.
27:10
It'll be fascinating to see how that all plays out.
27:13
What are your thoughts on the headline that came out of JP Morgan last week about them basically saying, all right, we will allow our customers to use the Bitcoin ETFs as collateral to take out loans against?
27:28
Not only that, we will recognize crypto holdings as assets that play into how we underwrite credit for mortgages, whatever that may be, any other type of loan.
27:41
You want to take out, I mean, considering how Jamie Dimon has postured toward Bitcoin over the last 10 plus years, I thought that was fascinating.
27:51
that and correct me if I'm wrong, but it was a signal to me that despite Jamie Dimon's personal
27:57
beliefs or view on Bitcoin, at the end of the day, JP Morgan has a fiduciary responsibility
28:04
to their shareholders as the largest bank in the world and publicly traded company.
28:09
And Bitcoin forced their hand and they sort of forced to bend the knee to Bitcoin will because if they didn you could make an argument they were making a lapse in fiduciary duties Yeah JP Morgan has been making markets in the ETFs since they launched
28:30
So they've been an authorized participant for some of these ETFs.
28:35
Now, the ETFs are right now, they're all created in cash.
28:40
You can't deliver Bitcoin and receive shares of the ETF without first going through cash.
28:47
So that means that a lot of U.S. broker dealers didn't actually have to touch the Bitcoin directly.
28:53
They were having their kind of offshore affiliates touch the Bitcoin.
28:57
That goes to some of the lack of clarity around custody for institutions.
29:03
That's all being solved.
29:05
And many of these products will now be able to be created and redeemed in kind.
29:12
That means that the broker dealers will be touching Bitcoin.
29:15
That means it's integrated into their balance sheet.
29:17
So it was kind of, I think that JP Morgan probably had a special policy to exclude the ETF, the Bitcoin ETFs from customer balances.
29:27
Because think about a prime broker, like they have a look through to your holdings of securities.
29:33
and those securities can include all types of things that would get different leverage levels
29:39
from treasuries to corporate bonds to equities to super risky equities and the amount you can get in
29:45
margin depends on the volatility of product etc so those etfs presumably they've been looking
29:52
through and seeing that you know for the last two years and they had they made an active decision to
29:57
not count it uh and now with these products going in kind and every broker dealer touching them
30:03
directly, like they would just lose market share if they didn't offer some type of leverage on them.
30:08
So not surprised, but it's great to see it. I think it's a positive headline.
30:15
Yeah. And a lot of people are focused on the sort of collateralization of the ETF shares.
30:22
But I think just as importantly is the recognition of crypto as assets that can be accounted in somebody's net worth.
30:33
Because for the longest time, if you've had Bitcoin, you've gone to get a mortgage, you go to the mortgage broker and you say, well, we recognize this Bitcoin as assets.
30:42
Some will do it, but most don't.
30:44
They typically want you to sell a portion of the Bitcoin, put the cash in a bank account and have it sit there for a period of time before it's recognized as assets that count towards your net worth.
30:56
And I think being able to recognize Bitcoin without having to sell it as an asset on your personal balance sheet is massive, too.
31:07
Yeah, the next step will be hopefully changing some of these Basel rules that assigned a huge risk weighting to any type of crypto held on bank balance sheets.
31:18
So it's still very difficult for banks to hold it directly, but that could be something to look forward to.
31:27
And does SAB122 sort of set the stage for that?
31:30
It's like, okay, you can…
31:31
Maybe, maybe.
31:33
It's a little different because SAB-122 is even about holding client Bitcoin.
31:39
So under that law, a rule rather from the SEC, even if someone like a State Street, which is a custody bank, held client Bitcoin, they would have to count it as an asset and corresponding liability on their balance sheet, which is very rare.
31:59
They don't have to do that when they're holding customer securities.
32:03
I'm referring to if a bank wanted to hold it for their own account on their balance sheet under current kind of global banking framework, crypto's assigned a hugely punitive risk weighting that makes it impossible to hold.
32:22
yes it would have to be because gold i believe next month is it is officially recognized as tier
32:29
one asset on balance sheets so right so to be something like that is needed for for bitcoin as
32:35
well yeah and who is it the czech republic the uh governor of the central bank is assigned his staff
32:42
to do a study on possibly holding bitcoin as a reserve on the czech central bank balance sheet
32:48
I think those are the types of moves that if we see them say yes, then the BIS standards could maybe get discussed.
33:03
There's so much going on.
33:05
It's incredibly bullish all around.
33:08
And I mean, going back to what we were discussing earlier about a lot of these wealth managers being able to market these funds, corporate treasury strategy.
33:17
I think we're still in the early innings of that.
33:20
So I think they're going to go tap the capital markets and shovel tens of billions of dollars
33:25
in the Bitcoin.
33:27
How do you see this cycle playing moving forward?
33:29
Because that's one thing I think a lot of longtime Bitcoiners sort of haven't intuited
33:35
yet is as we're sitting at a 2.1, 2.2 trillion dollar market, they'll look at these billion
33:42
dollar buys, $10 billion buys, and they'll look at the price and say, why isn't it going
33:46
up?
33:47
I think it's important to also recognize as the market cap of Bitcoin grows, it gets harder and harder to push that up.
33:55
The amount of inflows necessary to do another 10x from here are pretty significant.
34:00
Could you explain the dynamics of that and whether or not you see those type of flows coming to the market over the next year or few years?
34:13
Sure.
34:14
My base case is that the four-year cycle holds enough so that second half of this year could be very positive as long as the inflation continues to come in light as it did this week when we just got PPI this morning.
34:36
deceleration, lower than expectations. Once and if the Fed commits to that rate cutting cycle,
34:47
my expectations would be Bitcoin would react very favorably to that.
34:52
The previous smallest cycle ever for Bitcoin was 20x from the trough to the peak. So a 10x
35:01
would put us around 180K.
35:07
And that seems feasible to me, right?
35:11
The volatility has fallen.
35:13
It hasn't fallen by 50%.
35:14
So it doesn't seem crazy to haircut the rally by 50%
35:18
and say 10X to 180.
35:21
That's the blow off top
35:23
and then reevaluate for next year
35:25
whether maybe inflation is reaccelerated by then,
35:30
and maybe something in the macro has changed.
35:33
But that's kind of my base case.
35:36
I mentioned that we use the funding rates as a kind of a tactical gauge for when things are overheated or really washed out.
35:46
We also use the unrealized profit ratio.
35:50
So although nearly everyone in Bitcoin is profitable, they're not profitable enough to spark kind of widespread selling.
36:01
So there's that net unrealized profit ratio above, you know, 0.7.
36:07
You really start to the forward returns really deteriorate.
36:10
We got close to that in December. Indeed, like Jan, February tough, but we're not back in a range that says, oh, there's a whole bunch of like unrealized profits that are likely to be unloaded.
36:22
It feels like what you said, there's more new buyers, especially the corporates.
36:27
So I'm on the lookout for that to change, but that's my that's my base case.
36:32
and since you alluded to like what are your thoughts on just the broader macro geopolitical
36:41
landscape as it stands today obviously it's been somewhat chaotic start first half of the year
36:48
trump to um taking taking the reins again and obviously with liberation day and all the saber
36:56
rattling that's going on around the world a lot of pressure on jerome powell to lower rates the
37:02
10-year and the 30-year staying relatively elevated. What's the macro backdrop looking like
37:09
in your perspective? Yeah. I think that the policy changes, not just in crypto,
37:17
but just the generally kind of pro-growth policy with regards to energy, energy infrastructure,
37:24
AI, those are big tailwinds for Bitcoin as well. To the extent we have cheap, abundant energy
37:36
whose infrastructure doesn't require a ton of red tape to set up, that should be positive for
37:43
the investment cycle for Bitcoin. When you hear President Trump talk about Bitcoin,
37:49
He usually mentions AI and energy in the same breath.
37:55
And I'm tracking these Bitcoin miners pretty carefully because we have a new ETF that owns the equities in the space.
38:03
And they've all, not all, many of them have stopped buying ASICs, have paused their Bitcoin mining expansion plans, pivoting over to AI, you know, in the process bringing down their cost of capital.
38:18
but also maybe putting a little bit of a lid on on hash rate growth and reallocating some of that market share to smaller, more nimble companies.
38:29
The U.S. share of hash rate, which grew so dramatically in the last two years, has has leveled off and started falling a little bit.
38:40
I'm not directly answering your question except to say that, like, the pro growth policy is having a lot of impacts beyond just Bitcoin.
38:47
We've got some exposure to nuclear stocks.
38:49
We've got exposure to these data center companies.
38:52
They're feeling the tailwinds as well.
38:54
And I think that's part of what has catalyzed this equity rally.
38:59
When you look at some of the miners like the Core Scientific or Applied Digital, which is a Bitcoin mining hosting company that hosts a lot of marathons infrastructure.
39:10
And they've been looking for an AI deal, looking for an AI deal, running out of cash.
39:14
And then, boom, they just got one with CoreWeave and the stock like basically doubled.
39:19
That's positive for the ecosystem.
39:21
So I'm pretty, yeah, feel, you know, decent about the next half of this year.
39:27
The weaker dollar would would help.
39:30
Sentiment on that feels, you know, quite one sided.
39:35
So that that would be a risk.
39:40
But, yeah, let's let's see how it plays out.
39:43
What do you think?
39:44
I, uh, I'm pretty bullish. Well, like I think, uh, I've been playing around with AI a lot just
39:55
here at TFTC and doing research for 1031. And it is abundantly clear to me that it is increasing
40:04
productivity, at least for my business, like the things that I've been able to do with AI to, um,
40:10
increase the productivity at tftc is incredible we just launched a browser extension opportunity
40:17
cost um yes or two days ago now at this point that two years ago probably would not have been
40:24
built because i wouldn't have been able to build the prototype i built it with ai tools and then
40:29
was like able to validate myself so like oh this is something worth building and should get traction
40:34
and it's been a very successful um launch the first two days like over a thousand users and
40:39
which is, to me, a great success.
40:42
And that has increased the exposure of our company and increased the top of funnel.
40:48
We've seen a bunch of newsletter signups, and this is just a small media company leveraging this.
40:54
When you think about these tools applied to many larger companies and everything that's going on across the FANG companies,
41:02
particularly Meta, Tesla, Apple.
41:07
Apple may be a little bit of a laggard here,
41:10
but it seems clear to me that AI is being implemented
41:14
by the people who are on the cutting edge.
41:17
It is creating these productivity gains.
41:19
And I am bought in to the AI story
41:25
in the sense that it's going to increase productivity
41:27
and hopefully increase profit margins for companies,
41:31
which should allow them to stomach higher rates for longer. What that does for the job
41:36
market is another question, but I think there's incredible product to be there. Obviously,
41:41
like you mentioned, it's also pushing us to expand our energy infrastructure quickly and
41:49
at a scale that we haven't seen in decades, which is bullish, I think. And then obviously,
41:56
Bitcoin benefits from all this because I think it's going to be an integral part of energy
42:04
expansion.
42:05
But not only that, I think the government's going to continue to go into more debt.
42:10
And obviously, Trump is berating Jerome Powell to lower rates.
42:15
And so if inflation begins to pick up again, but Bitcoin is going to benefit.
42:21
But I'm overall optimistic.
42:23
I think the conditions to for anybody any individual or company to sort of bring value and productivity to the economy has never been stronger than they are today And then you pair those productivity gains with the
42:37
hardest money the world has ever seen. Those that take advantage of that combination, I think are
42:42
going to be very well off. Yeah. It's like for those that there are AI bears out there and to
42:48
those bears, I would just say, imagine what's going to happen once chat GBT introduces an ad
42:55
supported like delayed response free version uh they're going to take so much market share from
43:03
google and they're going to make a lot of these remote data centers uh a lot more economic right
43:11
if you if you're on a budget and you're willing to wait half an hour or eight hours for your response
43:16
or watch a two-minute had reel it's going to dramatically change the return on capital equation
43:22
for some of these heavy investors.
43:25
And so that's one of the catalysts that I'm looking forward to.
43:29
Yeah.
43:30
I don't know if I buy into AGI being around the corner,
43:33
but I think as it stands today,
43:37
the tools are good enough to increase productivity.
43:42
And then, I mean, you just look at what's happening around the world.
43:48
Things seem pretty tense geopolitically,
43:51
But again, idealist, eternal optimist, I hope all these productivity gains.
43:57
And I like to think that Trump certainly has his flaws.
44:01
But I think even bringing Trump out of the equation, like in America that is reinvigorated to grow, expand and become extremely productive and lead in terms of innovation and leaning into the continued transition of the digital age is hopefully inspiring.
44:21
for others and around the world and just leads to competition at the market level and not
44:28
at the kinetic warfare level.
44:29
I agree with that take.
44:32
Maybe too optimistic there.
44:35
What are some things we haven't touched on that are on your mind that you think the audience
44:40
should be aware of as it pertains to Bitcoin, capital markets, these trends in corporate
44:46
Treasury strategies, ETF flows, structure credit in Bitcoin.
44:52
Anything else that you think is being underreported or underappreciated right now in the world of Bitcoin?
45:00
I mean, the questions that I'm getting in recent weeks, I guess, are about quantum.
45:10
You know, it's just it's hard to avoid.
45:12
I guess when BlackRock updated the risk disclosures to include quantum threat and those equities have done really well.
45:24
So in some of our equity strategies, we're digging into that as a possible hedge on Bitcoin volatility.
45:32
you know if you just kind of put one or two percent of your bitcoin stack into maybe some
45:39
of these quantum leaders and you know you could they're kind of they're correlated for the moment
45:44
in terms of like oh these are leading edge tech type of assets but it's the capital markets have
45:53
accelerated so much now you get these etfs right away you get these 2x single stock etfs and
46:00
it can entrench the early leaders because it runs up their stock price to such a level that now they
46:07
have this really expensive currency to do deals. And they can maybe, you know, cement an early
46:13
market share lead that for a company like MySpace, for example, like they didn't have that. So they
46:19
lost even though they were the early leader. So it'll just be really interesting to watch that
46:26
market develop and to what extent the Bitcoin community can come together and suggest and
46:35
implement, you know, signature schemes for the wallets that could be quantum resistant.
46:42
So that's something that we're noodling around.
46:46
I don't think there's like a near term impact except on the equities themselves.
46:53
Let's see.
46:56
Yeah, just focused, I guess, luckily, we got focused on equities here a bit early when we saw the token run ups in December and some of our tactical indicators flashing.
47:10
We took some risk off and some of the kind of altcoin and leverage part of the markets and looked for opportunities and stocks.
47:19
And we've launched this new ETF that buys equities across the ecosystem.
47:28
So not just the leveraged players, but also complementing that exposure with some of the lower volatility kind of data center, energy, energy infrastructure, nuclear names.
47:39
And it's an interesting like barbell approach, I think, that can appeal to the advisors who are still freaked by like Bitcoin's volatility.
47:51
And by if you look at some of the crypto equity indices, they're really leveraged.
47:58
You know, it's like just a lot of beta, a lot of exposure to leverage names.
48:03
And the performance since inception of these indices has not been good.
48:08
So institutions are kind of spooked by the pure play equities, I think, and maybe we can find some interest in this more diversified approach.
48:19
So that strategy includes like some utilities, some midstream energy and MLPs, REITs, data centers. There's all types of new of companies that are now mentioning Bitcoin and blockchain in their SEC filings, in their investor relations materials, where the stock right now exhibits very low sensitivity to the Bitcoin price.
48:42
But over time, if we're right and Bitcoin can grow, you know, continue to grow, that beta involved to Bitcoin might increase and we could end up with some excess returns from stocks that don't seem to be crypto stocks.
48:59
So that's, I guess, the new bets, some of the new bets that we're making.
49:03
We're also, we've brought a tokenized money market fund to market to try to find some liquidity there, you know, yield bearing money market fund in tokenized form across a bunch of blockchains.
49:18
And you'll see some early customer announcements for that product over the next couple quarters.
49:24
So still wonder about the end market there. It's very, very fragmented.
49:32
It may be that Bitcoin has to do another 10x before that. Really, there's a consolidation of the liquidity that drives activity on chain instead of just doing the same thing in TradFi.
49:46
But we have really after the election, Jan Vanak, who owns the firm, kind of clapped his hands and said, hey, product development team, like get back to work. The pipeline's open. You know, the regulatory path is clearing. Let's be more aggressive in bringing products to market.
50:02
And we're doing that. You may have seen we're we're going slower on the single token ETF side.
50:08
We've only filed for two kind of new single token products this year because we're just seeing better performance out of our active strategies, our hedge funds.
50:19
Hopefully this new active ETF that just launched. So we're kind of doubling down our venture fund.
50:24
We have a new early stage venture fund, which just had its first close.
50:29
So active is we're mostly a passive shop in the traditional ETF market.
50:35
But for crypto, we found the active performance has been a lot better.
50:39
No one's really cracked the passive nut except for the simple Bitcoin ETF.
50:45
Yeah. Many comments there.
50:47
First, for all of you institutional investors who came to the show, because Matthew is our guest, the quantum stuff.
50:55
Definitely something to be on your radar.
50:56
But I will say that having been to a couple of Bitcoin developer meetups over the last couple of months across the country, the devs have it top of mind.
51:06
They're working on it.
51:07
I actually like Ethan Heilman.
51:10
He had a really interesting post on the Bitcoin dev mailing list a couple of months ago.
51:15
I will say there's a lot of creative solutions being talked about.
51:19
Obviously, none have been picked, but something to be aware of.
51:23
And I'm confident in the sort of vigilance and competence of the developers focused on this problem to make sure it isn't an existential threat to Bitcoin in the long run.
51:39
Likewise, or not likewise, but building on that, just commenting on what you were, some of the things you were just saying, like the energy play.
51:47
Like that was somebody who started a Bitcoin mining company in 2018 doing flare gas mitigation.
51:55
It became very clear to me in 2019, 2020, like once these oil and gas producers, where it's
52:01
midstream, upstream producers become privy to it, like they are best positioned to mine
52:08
Bitcoin because they own the infrastructure and they own minerals, most importantly.
52:12
So vertically integrating their operations to take advantage of their wasted resources
52:18
makes a lot of sense.
52:19
And it seems like they're opening up to it.
52:21
And I think Stone Ridge's annual letter from Ross last year really signaled, obviously,
52:28
Stone Ridge and Nye Digg are ahead of the curve in terms of institutions playing in
52:33
these intersections of Bitcoin debt markets and energy markets.
52:37
But I think what they're doing with the stranded gas play and signaling at the end of last year that they would like to monetize these stranded gas assets with Bitcoin is something that will be picked up by mid-majors, majors, and will become a growing trend in the United States.
52:54
And getting proxy exposure to Bitcoin via energy companies is extremely exciting to me as well.
53:00
Yeah, like right now, at least in the strategy that I'm involved in, there's kind of only one upstream energy company, YPF in Argentina, the state-owned energy company.
53:14
And after Malay won, they hired the CEO from the largest private oil and gas company in Argentina, Tech Patrol, which had been mining Bitcoin.
53:25
And now YPF is reportedly mining some Bitcoin as well.
53:30
In the U.S., more of the exposure is like midstream and downstream.
53:36
There were reportedly some pilots with like Exxon and Chevron.
53:39
Those haven't materialized into anything larger, but I'm definitely on the lookout for that.
53:44
Right now, it's more at the utility level and at the pipeline level.
53:48
And I think that makes them interesting stocks to hold in an equity strategy because the volatility profile of those downstream utilities and pipelines is much, much lower than the upstream.
54:00
explorers. And so when you combine that with Bitcoin miners, it's kind of a barbell approach
54:07
that leaves you very well prepared to buy Bitcoin washouts because these utilities really outperform
54:14
in the down markets. Yeah. That was the other thing, like upstream flare gas mitigation or
54:20
mining on the well pad. It's like logistically hard and there's a lot of sort of operational
54:26
execution risks that come with that. And it always made sense to us at Great American Mining,
54:32
like ultimately at scale, or when the market really figures this out, it makes sense just
54:38
to put a large mining operation at the midstream and you essentially suck the flare in from midstream.
54:43
So you take advantage of the economy as a scale of the supply of the gas at the midstream and
54:48
you allow the producer to keep drilling for more oil and just creating pipeline capacity by mining
54:55
at midstream as like a pressure release valve for pipeline capacity um then the other place
55:02
the stranded well play in america particularly is a massive opportunity which as i mentioned
55:07
earlier seems like stone ridge and i dig are going after um yeah it's so it's like reading
55:13
these conference calls you're you're having pipeline companies talk about data center deals
55:18
like that is a brand new dynamic uh new end market for those companies so some execution risk but it's
55:25
a growth driver for what has historically been a very sleepy sector.
55:30
Yeah, it's a beautiful thing.
55:31
I'm optimistic.
55:33
There's a lot of doomerism out there right now, Matthew.
55:35
We've got incredible opportunities.
55:37
It's never been easier to get on the internet, build a brand, leverage tools that can enable
55:44
you to build a product, do something productive, get some profits, shovel them into the hardest
55:50
money that's ever existed, and keep going about your way.
55:53
So I'm very optimistic. This was an absolute pleasure, Matthew. Where can anybody who's listening find out more about the research that you're doing, what you guys are doing at VanEck more broadly?
56:05
um where should we go uh so on our website vanak.com there's a digital assets section where
56:14
we publish uh monthly on bitcoin and then a separate piece on the rest of the digital assets
56:20
ecosystem so you can uh subscribe there for email updates or just follow me on twitter
56:25
matthew underscore siegel and we put out all our work there as well awesome well thank you for your
56:32
time hopefully this is the first of uh many conversations we should do this uh every once
56:36
in a while yeah look forward to it marty all right peace and love freaks