Clay Finck (02:02):

Before we dive into the research you guys have done, how about you introduce yourselves so the audience can connect a voice to a name and tell us a little bit about your background and how you guys ended up joining the Fidelity Digital Assets team.

Chris Kuiper (02:16):

Yeah, I can take us off here. So Chris Kuiper, Director of Research at Fidelity Digital Assets and my background, I guess, professionally, and then also all go into my Bitcoin origin story perhaps, and how they both meet and where I ended up today. But my professional background is mostly in equity research, traditional finance, asset management. That’s where I spent most of my time. I started at a fairly large firm in the Chicago area, had about 25 billion under management. I was an equity analyst there on their tech side. So I was having a lot of fun. Absolutely enjoyed it. But I always had a passion and love for economics as well, all throughout college. I continued to read economics and a few years into my role there, I had the opportunity to get a master’s in economics at George Mason University, which was one of my favorite or top or only choice. I said, if I’m going to do a master’s in economics, it’s probably going to be there because it was all my favorite professors and people I had been reading anyway.

Chris Kuiper (03:10):

So it was one of those opportunities I couldn’t turn down. It was a fellowship for masters. I also got to work at their research center and think tank where they published a lot of studies on public policy and things like that. I bring all this up because this is what primed me for my Bitcoin origin story, which is I had a keen interest in monetary economics, monetary theory, what is money. Went on my way to study with a lot of professors there who specialized in this. So I graduated with that program and I went back to finance. I still love finance. And so back to the buy side, and then more recently, just before joining Fidelity, I was at an independent research firm, also doing equity analysis.

Chris Kuiper (03:47):

So where the two things started to meet was, I first heard about Bitcoin in 2012, and I think it was actually more from the tech side, surprisingly, not the econ side. I’m a bit of a computer nerd. Like to build my own computers, stuff like that. Unfortunately, I don’t know a lot of programming, but it’s always been a hobby of mine and so I heard about this more on the tech side, and then of course it got me interested on the finance side. I made my first Bitcoin purchase in, I believe it was early 2013, whenever it was around 40, $44 is when I made my first purchase. Unfortunately, it wasn’t a lot at all. And I traded it. You know, I was making the silly mistakes that most people make, which is to play around with it and trade it and move it and probably lost them along the way. I don’t know.

Chris Kuiper (04:28):

But it wasn’t until after the 2017 bull run and then 85% crash when I started really do the deep dive, the homework into the economics, the incentives. And that’s where all my econ training came back to me. Back to my professional work, I was starting to cover in my research companies like PayPal, Square, Visa, MasterCard, all the payment companies. I was also covering the exchanges, NASDAQ, CME, ICE. I even initiated most recently before I left that firm on Coinbase. I was personally interested in Bitcoin and then I started professionally covering it and getting it out to clients. And then that’s when I came across Fidelity Digital Assets and the opportunity roads to move over to them. Again, I just couldn’t say no to make this my full-time job to be thinking and talking and writing about Bitcoin and of course, now I to be working with Jack, who I like to say, is the real brains behind the operations. So Jack, I’ll turn over to you.

Jack Neureuter (05:21):

Yeah. Thank you Chris, and we can’t all be quite as early as Chris in the 2012, 2013 time period. So I was still in high school at that time. Yeah, myself. My name is Jack Neureuter. I’m a research analyst. I work with Chris day-to-day. I graduated school in 2020 actually. So within college 2016 through 2020. Studied finance, econ, so traditional business, but focused on alternative investments. Finance is my interest and my hobby as well, not just work. And so spent a lot of time thinking about active management and got really interested in this idea of like, alpha is always zero sum. And so it’s got to come from somewhere and on aggregate, everybody is just the global market portfolio. And so like, where do you find edge cases where you understand something or have information assymetry that others don’t because if you don’t, somebody else does and off the line you’re the sucker at the table.

Jack Neureuter (06:12):

And I think that’s what really led me looking at macro and thinking about like, okay, what is the plumbing of this system highlights? Potential questions that come up and you start looking at that and look at digital assets and Bitcoin as a potential solution to some of those questions. And I think that’s where I got really interested in Bitcoin and digital assets and just finding those edge cases or asymmetric opportunities is always interesting. And with Bitcoin and digital assets, I think it’s just a world of misunderstood assets that are growing in tandem with this traditional system. I joined Fidelity upon graduating in the prime brokerage area, but after nine months, they kicked me on, sent me over to the digital asset place, sort of the digital asset torch holder there and got moved over here.

Clay Finck (06:56):

I love that. That’s exact why I wanted to bring you guys on is to help bridge the gap in the misunderstanding of the asset class. How did Fidelity Digital Assets come to be what it is today? It just seems that you guys are so far ahead on the digital assets space. I’m really interested to hear how Fidelity Digital Assets came to be what it is today.

Chris Kuiper (07:18):

Yeah, it’s an interesting story. And one I’ve enjoyed learning as I’ve joined Fidelity, I mean, you could really start by looking at Fidelity as a whole. You know, it’s over 75 years old, it’s kind of this stalwart among the major firms and money managers out there. But if you look at their history, they were one of the first to embrace things like placing orders and trades over the phone as quaint is that seems today. And then of course, moving on to the digital revolution and being able to do it online and have an online brokerage account. To start with Fidelity Digital Assets, you actually have to go back further than Bitcoin to something called Fidelity Center for Applied Technology. And this was started in 1999, so well, over 20 years ago. And you can think of this as an R&D center arm of Fidelity.

Chris Kuiper (08:02):

And so their job is just to explore and look at these new technologies that are coming on the horizon and looking for opportunities as well as potential disruptions. You know, I think one good way of putting it would be like, let’s set this up to make sure we don’t become the next Kodak. Right? Or if you think of the old Bell Labs is what I thought of when I first heard of this. They had a major R&D center where they just did pure R&D not necessarily with an objective or commercial product always in mind, but just to understand the technology. So of course, FCAT, Fidelity Center for Applied Technology saw Bitcoin, and they started playing around with it, experimenting with it. Of course, it was well before my time, but I think they even ran a pilot program where they had some of the employees were able to use Bitcoin wallets and pay for their lunch at the cafeteria with Bitcoin.

Chris Kuiper (08:46):

So I think there’s still some people bemoaning that they spent how many Bitcoin on their ham sandwich or whatever. It shows, how… Don’t just research and write about these things. They actually play with them and they use them. And so the next thing they started doing was they began mining Bitcoin. If we’re going to understand this, they said, we’re going to have to mine some Bitcoin. And the center still has a very large mining operation today, but one of the first problems or issues they encountered was they were mining Bitcoin, they wanted to hold it and they realized there wasn’t a good enterprise grade institutional level platform to custody those Bitcoin.

Chris Kuiper (09:20):

So that was the very first major product that they set out or issue that they set out to solve. And so out of that came Fidelity Digital Assets in 2018, that’s still one of our major and core products today. We custody Bitcoin. We hold and handle the private keys for all of our clients, major institutions. And then of course, other things added on to that are brokerage and trading services and financing options as well. So that’s a bit of the origin story of Fidelity Digital Assets and where we are today.

Clay Finck (09:48):

We all know there are thousands of cryptocurrencies out there today, and it can be pretty daunting for someone that’s new and just getting into the space. So I’m curious, what coins does Fidelity even support and why is that?

Chris Kuiper (10:03):

So today, right now, Fidelity Digital Assets only supports Bitcoin. I’m sure as we’ll talk about with our recent publication, Bitcoin first, there’s a number of reasons for that. We think it is important to start with Bitcoin, understanding Bitcoin, and then you also just have to realize too, our clients are institutional in nature. These are very large clients who take a long time to make a decision. They set aside a core allocation for something. And so of course we think, and we saw in the market that Bitcoin makes sense here, and that’s where we’ve started and where we currently are today.

Clay Finck (10:34):

Could you talk to the audience about what the typical institutional client looks like, maybe the type of company and dig into that?

Jack Neureuter (10:43):

Yeah, I can jump in here. I think when we say institutional client, it’s a catchall term for different types of asset managers. So this ranges from large institutions like endowments, foundations, pension funds, corporate treasuries, which they talked about a lot. Hedge funds, which we start thinking more finance, directly asset managers. And then also, smaller shops, family offices, and RIAs both large and small. As well as crypto and traditional financial institutions where we can act in a fashion to offer our products and services to other financial intermediaries as well. I think thinking about the types of firms that come inbound to us is pretty well-highlighted through this institutional survey that we run every year. So we’ve run it. A survey for the past three years, which is up on our blog. So if people want to check that out, definitely worth checking out.So we try to keep it more numbers and less wordy. It’s easy to read through and capture some of the highlights.

Jack Neureuter (11:42):

But what we find is these common trends across regions, as well as investor types. And we’ve seen these clear trends in adoption and interest across various types of institutions. What we tend to find is smaller institutions or smaller firms like financial advisors and family offices, where maybe of less people in the room, or we use a phrase like less red tape involved have shown more interests inbound, and have had higher allocation or been thinking more on the trends of what is this Bitcoin or digital asset class, and how might we be able to allocate to it? Whereas larger institutions like pensions, endowments, foundations, often have more mixed feelings in the survey, have lower adoption trends.

Jack Neureuter (12:28):

Not that those trends aren’t up into the right, but there may be slower growth curves in relation to things like family offices and financial advisor shop. You know, one stat that I pulled out that definitely highlights that is when we asked pension funds about whether or not they think digital assets has a place in portfolios, 45% of respondents said that they don’t think it has a place in a portfolio. And you got to think about a lot of these large institutions, it’s not one for person making the decision. It’s a boardroom of 10 people that then have to come to a two-thirds majority decision of some sorts. And this 45% of those people on average are saying, this isn’t even an asset class worth considering for portfolio, it’s hard to see those allocation changes and the ability to get off zero in regard to digital assets, it’s very much like small ships. You know, if you have a small boat, it’s easy to turn the boat versus this huge freight or cargo ship. Right?

Jack Neureuter (13:22):

Those organizations are asking questions and certainly wanting to get educated. But I think that it’s a lot earlier than some people make it seem in the digital asset space. Bitcoin’s been around for 12, 13 years, but this asset class wasn’t really considered institutionalized until maybe 2020 when we had corporations and hedge funds starting to come out. And so it is still really early and I think that education is a huge part of that.

Clay Finck (13:47):

Yeah. I think you make really good points there, where these private companies can be a lot more nimble than these public companies with these large bores that have all these hoops to jump through just to even consider making such a decision. So I’m curious, what is the main reason for these private companies or even other institutions to come to you? Is it the main reason just to diversify their treasuries?

Chris Kuiper (14:09):

Yeah, that’s certainly one of the reasons, but as you know, Bitcoin is different things to different people. It has a lot of different investment thesis behind it, which makes it so interesting. So of course, people come to us for different reasons. There is the treasury component of it. If they’re sitting on a large amount of cash and they want to diversify, then there’s also just the asymmetric risk reward. So people who are looking for more of an actual investment with a lot of potential upside, but a known or limited downside, then there’s people that come to us from a portfolio allocation standpoint. So they’re looking at, Hey, a Bitcoin isn’t correlated to all these things. This could actually improve our portfolio from an efficient portfolio standpoint. So yeah, it all just depends on the client or on the person and to follow up on what Jack said too.

Chris Kuiper (14:54):

It’s interesting to see how people get to us. Sometimes there’s a push and sometimes there’s a pull. So like Jack said with the smaller organizations, it’s usually one or two people who have been orange pilled and are tearing the torch with the larger ones. Maybe they’re still that same person, but they’re having to convince a whole board. So that’s sometimes a little harder. I mean, there’s a lot more hurdles there. And then we’re also seeing, especially on the RIA side, a lot of them come to us, not because they’ve been orange pilled or they’re interested. But from a business standpoint, their clients already have it. They already own it or they want to buy it and so the RIA has to start to understand this. Well, how do we think about this? How do I hold it for them? They’re coming to me and saying, they’ve got these private keys. You know, all these questions that they have and so really it’s their clients who are pushing them along and now they’re having to adapt and learn this new technology.

Jack Neureuter (15:45):

Again, Chris, to your point, it’s amazing how many people will research that we put out and reach out and say, Hey, I’m really interested in this or me and a couple of people within our firm are really interested in it, but maybe upper level that is calling the shot hasn’t totally come around on it. You are behind the Fidelity brand. Can you maybe come and talk and just be a touch point? And there’s so many people where it really is always those like, you need to hear about it a few times before you start to say, “All right, I’ve heard from enough people that I respect, that I should be paying attention to what’s going on in Bitcoin and digital assets. Maybe I should go down the rabbit hole and spend a couple of hours asking unbiased questions.”

Jack Neureuter (16:26):

I don’t know if you guys had that same thing where at first you shrug it off and you’re like, “You know, this is beanie babies.” But eventually after you hear about it enough and you do your own research, it’s hard to come to that beanie baby conclusion. And I think we find that with a lot of institutions, is it just takes a while and we’re happy to be that touchpoint of let’s just talk about it. There’s no expectations on any side. Let’s just ask us the questions and we’ll talk about it with you.

Chris Kuiper (16:50):

Yeah. I don’t think we’ve ever had prospective client call, Jack, where their first conversation and they were immediately sold. Right?

Jack Neureuter (16:57):

Definitely.

Clay Finck (16:59):

Yeah. It seems like we all go through this process. I’ve heard a number of times of the three touch points. The first time you hear about it, you think it’s a Ponzi scheme or it has no value. The second being, it’s something like a pure speculation play. And the third being, Hey, I think this actually has a place in a portfolio. I’ve chatted with a few financial advisors and none of them have access to buy Bitcoin for their clients. They could buy Bitcoin proxies like the Bitcoin miners, the Grayscale Fund or MicroStrategy, but those come with their own issues as well. So they aren’t really comfortable allocating to their clients. What are some of the other reasons that institutions have approached you and decided not to allocate to Bitcoin?

Jack Neureuter (17:43):

I think some of it is Inertia. And the fact that if we just look at a 60-40 portfolio over the last 10, 20 years, the last 10 years that 60-40 has compounded at a 10% CAGR and clients are generally happy with that type of performance. And if people are extrapolating some of that performance forward, they would expect, no need to change and so why should I be taking this career risk on an asset that maybe has some stigma associated with it which I think that what has happened. We think back to 2017, 2018, when the price of Bitcoin boomed. You know, we went to 20,000 and it took three, four years to get back to that point. And if you’re an asset manager that puts somebody in Bitcoin at that time period, you’d rather just, for some, not have to deal with that.

Jack Neureuter (18:27):

We hear those common rebuttal is if people haven’t taken the time to really ask the hard questions, they’ll usually wind up with the easy answer, which is to revert back to some of the media headlines of, Bitcoins too volatile. It has no fundamentals. It can be copied. Right? It’s all the things that you tend to hear is just… It’s easy to assume that and so why do the work and ask the questions? What we find is, when we do get that inbound interest in asking those questions, I think it takes a while to get there, but people start to say, “Huh. You know, I haven’t thought about it in that way.”

Jack Neureuter (18:59):

Maybe this asset, which Chris often uses the Platypus analogy, it’s like, it doesn’t fit in prior norms and so people will write it off. So is this a payment system? Is it a digital gold? Is it a foreign remittance tool? It’s kind of all of those things. And so you don’t have to just be a gold bug to see Bitcoin. You can be a tech investor and see the network effect happening here. And there’s different things that align with different folks, but it’s trying to find that proper framing for each investor to then be able to say, okay, well there’s a lot here. There’s some sort of a thesis that I align with. Then there’s all of this other optionality that get along with owning that asset. I think once investors start to see that, they tend to come around, but again, with institutions, it takes time and there’s a lot of decision makers involved.

Clay Finck (19:45):

I loved your guys’ comments. Chris mentioned earlier that Bitcoin is different things for different of people. And I think that is just one of the parts of Bitcoin. That’s just so fascinating. You know, one person might be just purely investing in it. Another person might be buying it because it’s an uncorrelated asset. Another person might be hedging against devaluation of their currency, so on and so forth. Now, let’s transition. You two wrote this brilliant paper titled Bitcoin first white paper. Why investors need to consider Bitcoin separately from other digital assets? I can’t tell you the number of people that have asked me, what’s going to be the next Bitcoin or tell me this is going to be the next Bitcoin. Why does Fidelity consider Bitcoin to be in a league of its own relative to all the other cryptos?

Chris Kuiper (20:34):

Going back to how everyone goes along that journey, you’ve pointed out a very common one we hear, which is okay, I’m beginning to understand this technology. I want some exposure, but which one do I invest in? Obviously, I know Bitcoin. And they bring along that technological lens that prior and I did this too, when I first started. Remember I was a tech investor or tech analyst, and you bring along the tech lens, which usually in the technology world, the pioneer blazes the trail, but it’s the other people that come along and make some incremental improvements or take over. Right? So it’s the classic Facebook replacing MySpace or Google replacing all these search engines no one’s heard of anymore. Alta Vista, Ask Jeeves, whatever. So I get that. I made the same assumption. So that was one of the things we wanted to tackle in this paper that if you’re going to look at these other things, you need to realize there’s inherent trade offs.

Chris Kuiper (21:24):

We actually start the paper first by saying, what do we view Bitcoin as? And we view it as a monetary good. It fulfills the role of money because it has all these characteristics of good money and we go through them. You know, it’s divisible, it’s portable, it’s scarce and finite. You can make sure it’s genuine. All of these things make for really good money over history. There’s a lot of research to back that up. If you think of a Bitcoin as a monetary good, then the next question is., “Okay, could something out competed?” Right? So if you have a free market for monetary goods, you want… The one that has fulfills all these things the best will win. Right? It’s a good question to ask. You know, it’s theoretically possible, but when you start to dig into it, you realize this is likely not going to happen at all, because Bitcoin is the most decentralized and the most secure of all of the other things out there.

Chris Kuiper (22:16):

So at the very best, someone can come along and completely copy Bitcoin’s code. It’s open source. Right? So they’ve made another Bitcoin that’s just as decentralized or secure or in theory, it could be. Right? But in practice, it’s not because of network effects. And so it’s the example that we give, I could copy Wikipedia’s code, but my Wikipedia wouldn’t be nearly as successful because why would people have an incentive to jump to mine when it’s exactly the same? We use the example of reinventing the wheel in the paper. And we actually say, this is such a cliche, but here it’s actually true. Like you would just be re-inventing the wheel. Once you see Bitcoin, you can’t unsee it. You can’t make a better one, right? If people are already with Bitcoin, it was the first mover. It’s the most decentralized. It’s the most secure.

Chris Kuiper (23:00):

We think this one is going to have the dominant network effects. And if you think network effects are strong for things like Facebook, which has half the globe on its networks, why do you see the network effects for a money? Because the incentive is so much higher to choose the right monetary network. You are literally going to lose money if you don’t choose the right one. And so we don’t see anything usurping that because again, if you want money, are you going to choose one that’s the most decentralized or secure, or are you going to choose something else?

Chris Kuiper (23:28):

Now, like you said, that’s why we see in a league of its own. We think you have to start with Bitcoin and its own bucket in that way. Now other things of course have come along, they’ve copied the code and they changed it. And that’s fine. We’re not disparaging those things in the paper. We’re simply pointing out that once you do that, whether you want to realize it or not, you’re making a trade off. So if you’re going to say, oh, this is better than Bitcoin, because it’s more scalable. It’s faster. It’s got more programmability. That may be true, but then you’ve sacrificed something else, usually in the realm of decentralization or security. Again, those are the things you want for a money. So we think Bitcoin fulfills the role money. These other things can fulfill other use cases.

Clay Finck (24:08):

You’re really hitting hard on the network effect piece and I think that’s really important. The idea is that each new incremental user adds value to the network and makes it more valuable for all of the existing users. Chris, you mentioned Facebook’s network effect and how monetary network effects are much stronger. It’s interesting to think about how some people are able to add a lot more value to the network than others. For example, when Tesla bought 1.5 billion worth of Bitcoin that added a heck of a lot more incremental value to the network, then say some smaller businesses or even most individuals. Whereas Facebook Ads users, one-by-one and each new user, isn’t all that different than any other user and that helps illustrate the difference between a monetary network and most other network effects.

Clay Finck (25:00):

You also mentioned that Bitcoin is decentralized and you hear that word tossed around all the time in this space. And I think your common person might be like, so what is decentralized? So I want to ask you why the decentralization piece is so important for digital assets and why is Bitcoin considered to be more decentralized than all the other cryptocurrencies?

Jack Neureuter (25:23):

Yeah, I think decentralization is at the heart of Bitcoin’s value proposition. It’s a whole idea here is that instead of me sending payments to Chris or Clay with a centralized intermediary in the middle, I want to be able to do it without a centralized intermediary in the middle that can change the rules, that can censor those payments and stop them from happening for whatever reason. And so trust and decentralization are inherently linked at the hip. We almost think of, and Chris, too, reference some of the trade offs that we see where centralization becomes a trade off versus scalability and speed of your base layer. And a lot of this has to do with the size of blocks and the amount of history that is contained within Bitcoin or any software protocol history. And so with Bitcoin, the idea is let’s keep the base layer very simple.

Jack Neureuter (26:13):

Let’s just make this network have 21 million coins. You know, uncentrable peer-to-peer payments. And that’s it. Let’s keep the block sizes at one megabyte, which is what it originated at. Whereas, we see and we reference this in the paper is the block size wars really highlights the Bitcoin community or the free market emphasizing that decentralization matters because the block size wars was all about this idea of, okay, Bitcoin’s too slow because if we have one megabyte blocks, we can only get four to five transactions across per second, if you sort of back out the math. Let’s make those blocks bigger because then we can fit more transactions in. The transaction fees will be lower and therefore everybody wins because now we can compete with Visa and we’re a faster network, but what that miss is and what the entire block size wars was all about, was you saw two communities, one rallied around speed and scalability of this payment network and the other one rallied around decentralization and these core value propositions associated with Bitcoin today, which is stems out of decentralization and ultimately the free market decides which would win.

Jack Neureuter (27:20):

And if we look at market caps today from the time of Bitcoin and Bitcoin Cash, hard forking, which was the ultimate outcome is that Bitcoin and decentralization matters on the base layer. And then what that ultimately leads to is that Bitcoin kicked its scalability problem up to this idea of we could solve it in layers. And so we’re seeing solutions that are emerging, like the Lightning Network, that we’re where we can have micropayments that are economically feasible and still rely on the security of base layer settlements, if, and when we need it. But ultimately, scalability is the trade off that you make to make Bitcoin more decentralized because then if blocks are smaller, therefore it’s amount of history is smaller. Therefore, every individual can run the software if they want to and the network becomes more decentralized. As well as secure because when you start making trade offs for larger block sizes, then you reduce transaction fees, which reduces the mining incentive and lower overall security.

Jack Neureuter (28:19):

So security and decentralization really sit on one side and speed and scalability, sit on the other. In Bitcoin, out of all digital assets really makes the biggest trade off towards that decentralization and security. And then all of these other emergent digital assets are starting to make different trade offs towards scalability, complexity, and speed on their base layer. But it does come at a direct cost of some level of decentralization or security.

Clay Finck (28:44):

When you guys mentioned that there aren’t really any legitimate competitors, or it’s going to be very difficult for another monetary good to overtake Bitcoin to the network effects. You know, they might look at the list of coins and look at something like Ethereum, where the market cap is actually somewhat comparable to Bitcoin. Is Ethereum or any of the other larger market cap coins actually legitimate competitors to Bitcoin? Or how do you think about that?

Chris Kuiper (29:11):

Yeah, it’s a tricky question because as Jack said, the free market or anyone who’s participating in this marketplace is voting with their dollars on what they think is the right mix or balance of these things, right? So with Jack’s example of the block size wars and the forks that came off of it, we have in the paper, a chart showing Bitcoin towers by magnitudes of a hundred or more over these forks. So clearly, people voted with their dollars in terms of market cap and said, I want Bitcoin not Bitcoin Cash to store my value. Right? And so that makes sense. Now to your point, it’s a good question, because you know, there are a lot of people, especially in the DeFi space who say, well, I transact in ether all the time, the native token of the Ethereum network, and I have to use ether for all these things. And I’m always converting back to ether.

Chris Kuiper (29:59):

To me, ether is the base money. Ether’s money to me. If we’re saying out of one side of our mouth, for the free market and people are going to choose whatever works for them. But on the other hand, we’re saying, we think Bitcoin’s going to win this game. What’s it going to be? And so, we have to be intellectually honest. We don’t know exactly how that’s going to play out, but from what we’ve seen so far with Bitcoin being the first most decentralized, most secure, and then everything coming after it, Ethereum founders are known. They have a very influential group of developers and names and people behind it. That’s fine, but they’re certainly more centralized than Bitcoin. Right? And so when it comes down to it, again, what are people going to choose?

Chris Kuiper (30:45):

And so while we can’t predict or know exactly, I would put my money on that when it comes to that base layer, the true monetary good, you want the simpler, quote, dumber network to handle these transactions and for it to be ultimately secure, unconfiscatable, permissionless, censorship resistant, this is clearly nobody else’s liability, this is a bear asset that you can hold. I mean, it’s the ultimate pristine collateral, as some people like to say. Right? And we’re seeing that play out today.

Chris Kuiper (31:13):

So that’s kind of the reasons why we think Bitcoin’s network effect will grow as a monetary good. These other things can grow for other use cases. But again, it’s a good point. You know, we don’t entirely know. Jack, I don’t know if you had other thoughts on poking holes into theory with saying, “Well, I use ether. To me, ether is money.” You know?

Jack Neureuter (31:31):

Yeah. I think when we look at these other digital assets, like the investment risk return profile is completely different, because if we’re making the assertion, that Bitcoin is really trying to fulfill this role as a monetary good that allows for- it’s a function of the store value asset and a medium of exchange. Well, what do all of these other digital asset networks enable because you could theoretically do both, but I think we would argue in many ways, particularly the store value aspect is inferior to these other networks because Bitcoin had that zero to one moment and created it.

Jack Neureuter (32:05):

So I almost start to build these use cases for other digital assets appear to be competing with Bitcoin’s ability to scale itself. And so Bitcoin scaling technology, as well as like companies and infrastructure that are being built around Bitcoin, are the competition for these other digital assets that are trying to fill other use cases like other borrowing and lending platforms and different things that could be created using this technology is being created within this DeFi ecosystem and on these other layer one platforms, whether or not, these have long-term terminal value.

Jack Neureuter (32:43):

I think a lot of that has to do with, can Bitcoin scale itself and can all of that infrastructure be built around Bitcoin or do these other networks maybe use Bitcoin as a collateral in some sense, or this monetary good, right? Where Bitcoin is the ultimate monetary good in these other things are moving around or tethered to it in some form or fashion, I think that’s how we’re looking at the rest of the digital asset space.

Clay Finck (33:07):

Now one pushback I get all the time is that Bitcoin has no value and it’s not backed by anything. What would your response be to something like this?

Chris Kuiper (33:19):

Yeah, my first response, when somebody gives me that question is, what do you mean backed by? I haven’t seen a good thorough study on this, but I’ve seen enough YouTube videos. And so maybe take this with a grain of salt of, I don’t know how many people do this to get the result they wanted, but it’s a video of someone asking people what the US dollar is backed by. And it’s surprising them of people say gold. They still think the US dollar is backed by gold. It’s not that crazy because for much its history buzz, you could convert your paper dollars, your US dollars to an amount of gold. You know, there was a fixed peg $20.67 cents per ounce of gold. And then of course they’ve revalued that and we’ve incrementally gotten away from that. People also know we have all this gold in Fort Knox, we have gold on the Central Bank balance sheet.

Chris Kuiper (34:05):

So there’s still this intuitive sense that it’s backed by in terms of you could convert it. But of course, we know that’s not true. So first of all, what’s the US dollar backed by? It’s backed by nothing. I mean, some people say it’s backed by the government, our military, the ability to get taxes from people. But I think that puts the cart before the horse because you can just look at other countries. Let’s look at Turkey in the last few months here, whose currency has dropped by 50% or more or they’re experiencing inflation of 50%. Officially, maybe a hundred percent by unofficial measures. They’re an industrialized country. They’re G20 country. They have a military. They have the ability to collect taxes. They have a government, but their currency clearly is not backed very well by these things. And so people say, Bitcoin, isn’t backed by anything.

Chris Kuiper (34:55):

It’s true in the physical sense that you can’t trade it at a fixed exchange rate for something else. There’s not a reserve from the Bitcoin corporation sitting somewhere that you could swap it for something. Right? But what is backing it? Is the network. The massive amount of computing power. That’s powering this network. That’s verifying and processing the transactions. That’s securing the network. All of the nodes, the verifying node are backing this network. And so what you’re putting your faith and trust in is this code and the code is open source. It’s verifiable. And we can see the incentives that give us the assurance that the Bitcoin is genuine. It’s not fraudulent. It’s not created fraudulently at a thin air. It can’t be double spent. And that there’s that really hard cap of 21 million. That’s the key. Right? That’s what you’re putting your trust in because that’s what makes it scarce. That’s what gives it value. That’s what gives it the ability to potentially be a store of value.

Chris Kuiper (35:52):

So the question is, would you rather have a money backed by something that doesn’t have one single ruler or one single board, like a Federal Reserve Board of Governors? You know, a dozen people that are sitting behind it, making decisions. Would you rather put your trust in that? Or would you rather put your trust in a currency where you can see the rules? You can see the pre-program monetary schedule and you can see all the incentives that give you the confidence that this is what’s going to continue in the future, that these rules are not going to be changed. So I guess that would be my response to that.

Clay Finck (36:24):

Yeah. It reminds me of what Jack mentioned before, where people just have this Inertia where people have always used the US dollar. So why would we need something else? Why would we need to trust something else? All these questions come up. I’d like to ask. What are some of the things happening in the Bitcoin space that you guys are studying or keeping your eye on that makes you optimistic or gets you pretty excited about what’s happening?

Jack Neureuter (36:52):

I think there’s a ton of things to be optimistic about when you’re looking at Bitcoin. Yeah. I look out across, from an investment perspective, the investment landscape, and I see tons of things that were tailwinds for certain asset classes that have now become headwinds. But when I look at Bitcoin and the digital asset ecosystem, I see tons of tailwinds. From that sort of an investment lens it’s like, there’s a ton of opportunity here and I think the innovators and the things that are being built around these ecosystems is what’s most interesting to me anyway. So writing is an obvious one, which we mentioned, but what are the things that Lightning then enables is limitless in many ways where if you have a payment network that’s completely open source, it costs effectively nothing. And you know, has no counterparty risk because both parties can settle back to the base layer chain. You get effectively the full settlements assurances associated with Bitcoin using the Lightning Network.

Jack Neureuter (37:49):

There’s so many possibilities where we always say this phrase of like, digital gold. And that’s cute. Like to make the analogy between the traditional investor, trying to understand the space, and it’s important to have something to tether to. I think everybody thinks of the gold part. You think of there’s only 21 million, but you understand digital to the point of, okay, it’s not a gold brick, it’s computer software, but what you lose is this thing of like Netflix, isn’t just digital movies or digital blockbuster. Netflix is the ability to stream movie and shows 24/7, 365. You know, instantly almost anywhere across the globe. You know, as long as you have an internet connection and oh, by the way, over time, they built algorithms that say, you watch these three shows. You would like this show and that movie and they know who I am.

Jack Neureuter (38:39):

And when you take something physical and make it digital, I think it gets lost that the network effects, usability, user experience all are magnitudes better. And so Bitcoin’s total addressable market and what it’ll be able to do as a result of all this technology that is just starting to get built on top of it is unthinkable. And so they just take gold as a total addressable market, I think is completely incorrect if you can back out, was doing some interesting analysis of looking at like Netflix, Uber, Airbnb, these types of businesses that were physical, and now they’re digital. And if you back out the physical assets associated with those businesses and look at, “Okay, what is the value there at full maturity versus blockbuster at its height versus Netflix today?”

Jack Neureuter (39:27):

And the multiple of how much bigger that business is relative to the total economy is double-digit multiple. And so to just say that Bitcoin is only going to enable the store value asset that can allow me to send you value, I think, is naive. But I think that we’re only whatever, five, six years into a lot of the technology being built on top of Bitcoin, where I think the next two or three years, we’re going to get a lot more answers and a lot more tools that we can actually point to and say, that is what is going to be made possible. And you’re going to be able to do with Bitcoin. We just don’t have those answers yet. So it’s hard for a lot of people to see, those types of things. You know, discreet log contracts and a lot of the things that now your tap root, making multi-sig effectively the same as a single signature in terms of block space and enables a lot of cool things to be built is going to take a couple of years for those entrepreneurs to build those tools.

Chris Kuiper (40:20):

Yeah, Jack, I like that analogy with the blockbuster Netflix, or even I just remind people and you mentioned Uber. You know, it’s like Uber invents new hardware, right? It just took all these existing things and put them together into a completely new business model. And so that’s one of the things I find really exciting too. You know, Clay, for example, podcasting. Right? We’re seeing just the edges of the ability to stream money in real time, like streaming [SAX 00:40:46] to someone you’re listening to. Right? What does that do to the existing business model of podcasting or other things that rely on traditional advertising? I mean, there’s unknown unknowns. Right? We don’t know what these new things will enable, but just getting a little glimpse of some of these things makes me very assured that there will be some brand new technologies and business models out there that we can’t even see yet.

Jack Neureuter (41:10):

Yeah. It’s like the more out on the fringe you go. The more like interesting and exciting it is, but the less answers you have, we see discreet log contracts, which is like… You know, this idea that we could have a derivative that uses Bitcoin as its settlement layer in some sense. What if you could hold stable value that was backed by Bitcoin using a discreet log contract, and now all of a sudden you have a savings account in Bitcoin, but you have this ability to have a checking account or stable US dollar, stable value or whatever you want to peg to using Bitcoin as the underlying collateral for both of those. Those things that enables so much value accrual to the base layer of Bitcoin, as well as reduction in trust. Because you know, a lot of the stable coins that exist today are centralized. And what if we could use the most decentralized digital asset as the underpinning for that, that stuff is starting to be made possible. And I think, stuff that we’re excited about, and all of that value accrues to base layer holders over time.

Clay Finck (42:09):

Yeah. I agree that we are potentially just scratching the surface on what Bitcoin is potentially becoming. I think a lot of people might have trouble wrapping their head around how big the total addressable market is for this just one asset. Could you talk about why Bitcoin is an attractive option to diversify a portfolio in the current market, specifically? Five or so years ago, a lot of people might say things were a lot more stable in terms of the economic environment. So maybe you could discuss some of the things we’re seeing today, specifically.

Jack Neureuter (42:42):

I mean, I think we’ve lived and like Clay, you mentioned both of us in were in high school and whatever early 2010 and a lot of people look at that and say, well, that’s a disadvantage. You don’t have that much experience. You know, I think in some sense, if you know Morgan Housel is reading his book, the Psychology Of Money, which he’s an incredible writer and really thought provoking about finance is only 10, 20% math and 80, 90% behavior. And he has this interesting quote of like, “Your life experience is only 0.0001% of the observable history of the universe, but it makes up 80% of how you view the world.” And it feels like in some sense, the past 40 years of investing have had a couple of embedded assumptions within them where like a 60-40 portfolio and owning a house has been the way to go and let’s extrapolate that into the future.

Jack Neureuter (43:38):

But when you look at the trends that have caused that to be really successful, they’re almost like trends that can’t persist forever. A few of the big ones to me that stand out is just look at interest rates, right? Interest rates, price themselves into every single asset, because they served your baseline opportunity costs. I could own fixed income, this risk-free asset or I could own this risky asset discounted at a rate that base that in interest rates from 1981 were over 15% and today they’re sub 2% on the 10 year and that was nearly a linear line straight down. And that’s a tailwind for all assets. You know, thinking of traditional assets, stocks, bonds, and real estate, that’s a tailwind for all three of those. Then we think of being US-centric and the US dollar sitting at the heart of the financial system, but reserve currencies change and monetary systems change.

Jack Neureuter (44:27):

And if this time isn’t different, well, the structure of the financial system and the monetary system likely will change at some point. That doesn’t mean the world has to end. It just means that there will be winners and losers when things start to shake themselves up. And then I think the last related and important one is over the past 40 years, the system has never really deleveraged. We’ve had big moments of deleveraging, but every single time policy makers have stepped in both monetary, central banks globally, as well as increasingly fiscal policy makers, politicians spending money into the system, deficit spending. And both of those working hand-in-hand where in 1987, you see a little bit of monetary intervention. Post 2000, a little bit of monetary intervention. 2008, you see quantitative easing on the monetary side, but you also see a little bit of fiscal spending with its hard deal.

Jack Neureuter (45:19):

And then 2020, what do you get? You get both monetary and fiscal working hand-in-hand it’s because the system never really deleveraged. The leverage just moved around the system and now it’s sitting on global sovereign balance sheets and you have to start the question of, what does that lead to? Can you just do the same thing you did for the last 40 years? And I think that if you look at probabilities, which is investing, is the probability skew towards the answer is no, you can’t do what you did the last 40 years. And yes, the world is probably going to change to some degree. So what are those probabilities look like? And I think what we see is large sovereign debt loads. Historically, we’ve seen the solution there. Traditionally, for large sovereigns is to run negative real interest rates.

Jack Neureuter (45:59):

Let inflation run a little bit hot and have your interest rates down below that inflation rate. And so you naturally peel down the leverage in the system by debasing your currency. And so what assets look interesting? What assets maybe don’t look as interesting? Well, I think fixed income cash maybe looks a little bit less interesting in that type of an environment. And I think, traditionally, real estate is interesting or the precious metals. And then we start to think about digital scarcity and an emerging digital scarcity or an emerging monetary good in the digital space. You know, maybe Bitcoin make some sense in a portfolio in that type of an environment. I think that’s the case that we’re making.

Chris Kuiper (46:38):

Yeah. Also, just going back to what we touched on earlier about decentralization, why it’s important? People are finding out a lot of their assets are also someone else’s liabilities. Right? And so what are the true assets that are left standing that are not someone else’s liabilities? A lot of people think just cash, a great asset, because it’s there. Especially, think of like a cash in your billfold. It’s like, I have this dollar, I own it. I’m holding it in my hand, but that’s actually a liability on the Federal Reserves balance sheet, right? Cash and circulation is classified as a liability for them.

Chris Kuiper (47:13):

So as Jack was saying, what do we expect the playbook to be? We’ve seen it time and time again, you have negative interest rates, you debase the currency. And of course, the ideal is always to do this in, quote, the responsible way or trying to juggle this. Like, the fed likes to use lots of analogies of a balloon, not too much to pop it, not too little to deflate it, but in reality markets are much more chaotic than that and driven by human emotions. Also, I would just disagree with that underpinning of the analogy anyway. But just to get back to my original point, I think we’re going to have a rude awakening when people realize what are actually liability free assets and what are not?

Clay Finck (47:55):

Fantastic points. I think from my perspective, the real rate of return being so widely negative on cash and fixed income gives such a strong incentive for people to at least consider Bitcoin. You know, you look at some of these public companies. Even Apple has $200 billion in cash, Berkshire Hathaway, and many of these other companies. And you’re seeing it already from the private company perspective that don’t have as many hoops to jump through.

Clay Finck (48:20):

So Chris and Jack, thank you so much for coming onto the show. I really, really appreciate you guys taking the time to share what you guys are working on and your research. Before we close out the episode, where can the audience go to connect with you and learn more about Fidelity Digital Assets?

Chris Kuiper (48:38):

Yeah. Thank you, Clay. It’s been our pleasure. You can go to fidelitydigitalassets.com and you can also check out our Twitter at digital assets.

Clay Finck (48:48):

Awesome. Thank you so much guys.

Jack Neureuter (48:50):

Thanks, Clay.

Clay Finck (48:52):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it. If you left us a rating or review on the podcast app you’re on, this will really help us in the search algorithm so others can discover the show as well and if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources as well as our TIP finance tool that Robert and I used to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (49:29):

Thank you for listening to TIP. Makes sure to subscribe to We Study Billionaires by the Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.