January 2024
They discuss Bitcoin’s similarities to gold, particularly its role as a potential store of value as opposed to fiat currencies, while also noting Bitcoin’s relatively short history and high volatility compared to gold’s long-standing stability. Meghan and Chris also consider the technological complexities associated with direct Bitcoin ownership, including private keys and the irreversible nature of losing them.
Therefore, the emergence of Bitcoin ETFs is a significant development as they offer easier access to Bitcoin’s price movements through regulated, mainstream financial instruments. Although Morton is not currently investing in these ETFs, we are still watching these trends closely and speaking with managers to see which ETFs are most structurally sound.
Watch previous episodes:
Ep. 67 Generating Income by Lending on Real Estate
Ep. 66 A Year in Review & Looking Ahead
Hello, everybody, And thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Chief Investment Officer Meghan Pinchuk. Meghan, thank you for joining us.
Thanks for having me.
Exciting stuff. 2024 started out with some big headlines. I don't know if you caught it, but last week there were changes by the SEC for the adoption of ETFs that could track the price of Bitcoin. And, so that kind of stole a lot of the major headlines and news channels at the end of last week and potentially an emerging asset class that you can get exposure to easier now through the form of an ETF as opposed to all the hurdles that you have had to go through in the past.
And I think that the big story is the fact that you can now access the price of Bitcoin a lot more easily than you could before as an emerging asset class. The reason it's interesting to us at least, is that it has a lot of the same properties or values as gold. Theoretically as a store of value instead of fiat currencies.
Right? So instead of owning the dollar, do you own something else that can't be printed the way our government likes to do and that can hold its value over theoretically long term? It is a newer asset class, as you said, emerging. So the question is, does it really have those properties the way gold does? Gold's been around for hundreds of years and it's something we're really passionate about in the portfolios.
But with Bitcoin, you know, it doesn't have nearly that track record and it also has a tremendous amount of volatility. So you've got a lot of big swings up and down. In the short term, does it really meet the criteria needed for a currency? It's interesting and something that we do watch very closely.
You know, the store of value is challenging when the price can fluctuate by 80%, it's like, yes, there are times where the store of value lines up and there are times where it potentially does not.
And again, that's not abnormal at the beginning of something like this. It's a question of sort of win win as it become investable.
You know, the U.S. is in $34 trillion worth of debt. And it's not just the U.S. I mean, there's been money printing around the globe for quite some time post 2008 financial crisis. So the premise of Bitcoin saying, hey, you know, this is separate from the system. It's deregulated.
You know, somebody can't manipulate the price of it. The premise, again, to your point on why we like gold as a store of value over time.
And the blockchain technology, that's the real innovation with Bitcoin. It is this technology that allows it to be and stay decentralized in theory. So that's really been what's changed now though, again with ETFs is really how you own it. So Bitcoin itself hasn't changed. It's more how are you holding it? And so previously the most pure way, if you will, to own Bitcoin was to own it directly for the blockchain.
So you own it, there's no intermediary and you have your passwords and that is what is your, your keys. And that's essentially what's giving you direct access to Bitcoin. But there have been challenges with that over time.
Yeah, this poor guy, I don't want to mention his name, but like back in 2011, he apparently did a short animated film talking about Bitcoin was paid 7002 Bitcoin back in 2011. Most recent article that I saw a couple of years ago is that he has two more attempts on, you know, picture a hard drive like a USB hard drive.
He has two more attempts at the password so that way he can get access to his 7000 bitcoin.
Yeah. So it's not like you have some magic central number called customer service. If you forget it, if you are the one that has your ownership directly and there are a lot of rules around it. And if you basically cannot remember your passwords, your keys, you you can potentially lose it forever. So, you know, not a great situation.
So that was that was again, though, in a lot of ways big advantage because that's the purest way to own. And if you can keep your keys and such, then potentially the best which we can get into a little more. The other option that people had prior to the ETFs coming out was to own it through a custodian.
So Coinbase being one of the big names, Fidelity, some of these groups that that would basically hold it for you and you would go and open almost like another brokerage account to hold access to to your Bitcoin.
Not too different than owning like a stock or a mutual fund. If I've got an account at Schwab or Fidelity, I own that stock with XYZ company inside that account.
Exactly. Yeah. Pretty practical, right? Not too challenging an extra account and such. But not the worst thing in terms of ownership. The challenge more there was was what is the quality of a custodian. Right. So so structurally do are you with a custodian you can trust or they actually own the bitcoin that's backing it.
And so being sort of the famous example from recently where that blew up and they were not holding the Bitcoin the way they were supposed to be. And so that's that was the challenge previously of is your custodian trustworthy? And again, with a new asset class, I think that's not abnormal that you have potential fraud or concerns around, around things like that.
It's hard enough just to make a decision on is bitcoin and investable asset class. It is relatively new. And then to think that you have to do the due diligence on where you're going to story structure matters. Yeah, structure matters.
I love structure. And so now again, this, this idea that it's exciting because if you want exposure to the price of Bitcoin, you now have big companies coming into this BlackRock, Fidelity, so big name companies that are getting involved and that are launching these exchange traded funds that are going to be now regulated by the government.
And so now it is theoretically a very easy way that people can get access to the price of Bitcoin in their in their current custody. You know, custodian accounts not have to go open new accounts.
Yeah. And what that does is just opens up access, which, you know, potentially in the short term can cause for a little bit more speculation and potentially more volatility. Who knows in something that's already extremely volatile. But really it's a way for people to dip their toes in and to get exposed to something that is relatively new without the pain points of having to go directly and worry about this.
You know, wallet and separate keys.
If you want the good news with this is if you want exposure to the price of Bitcoin, it is much easier. It's a click of a button in your existing account. So that's the good thing. We still think that for people who are passionate about Bitcoin, that's probably not the way they're going to own it.
So some of the features of owning it directly that are important to people, you know, are related to you. Again, you're the one with access. There's no intermediary sort of keeping you from your Bitcoin. And so that again, for more purists I think is going to continue to be important. You don't have that potential issue of fraud or something in between you that that would worry purists out there, also just being able to spend it.
So again, if this is more of a speculating on the price or thinking the price is going to go up, the ETF should serve that purpose. But if you are looking to actually be able to transact in Bitcoin, which I think people who are in the space would think is going to increase over time, then you need to own it directly or through a direct custodian versus the ETF.
Yeah, so there's there are still advantages, I think, to owning it directly. And then again, for our purposes, it's something that we are we are watching because it's interesting, it's an interesting alternate alternative to gold, alternative currency.
And look, clients are going to ask that question now that I can access it a little bit easier, should I? And if I do, where should I get that exposure? How should I? I mean, there are so many questions I have around this new asset class, how it was created and then now even getting exposure through these ETFs.
I mean, if you're really a diehard Bitcoin person, you're saying, I like this because it's not subject to regulation. It is something that people cannot manipulate and they can own directly and they can't just print more of it and devalue of it. And in the future, I'm going to be able to, you know, transact and buy things with it.
If you own it through this ETF, you're sort of forgoing those two major premises. It's not the end of the world, right? We get exposure to gold through ETFs as well. It's just interesting to.
Me, and I do think that that idea of decentralization, you know, there is this counter to that because you're putting it into something now that's being regulated by the government, something that was supposed to be outside the system. Again, easy way to potentially access the price. So that's good. In a lot of ways we're just as it helped Bitcoin become a little more mainstream over time.
But for those purists, I think they are going to want to own it direct where they can have all those those benefits as well. So something we are spending time on is which of the ETFs out there are best because a bunch of them, as you can imagine, came out at the same time. So we're talking to a couple of the big managers and just seeing which structurally were most comfortable with looking at fees and how the Bitcoin is being held, things like that, we're just making sure that we have when clients come to us, if they do want to own it, that we have a recommendation for which structure is best.
We're not currently buying it in portfolios. But again, it is something that we we spend time on that we are watching closely.
Because structure matters. I mean, if you're going to invest in one of these ETFs, you want to be invested in one of the ones that's actually doing well and gaining adoption to the market.
It's the same with gold, actually. When we look at gold ETFs, we spend time on that as well, making sure that you're getting access, that there it is backed by the actual Bitcoin or gold, because there are some that are backed by derivatives, for example. The idea being that you don't actually own it, it's just like you're making a play on the price.
And so for this purpose of store of value, I think you have to actually have the asset behind it. And so that's something that's important structurally that we make sure we're comfortable with whichever ETF we pick.
Well, you know, thank you the investment team for all that work. I know that there's a number of different options and it's going to be hard to be swayed away from some of the really interesting names of some of these ETFs. I think there's one of them that stands for like hold on for dear life, which I'm not sure is an investment thesis that that I want to take on.
I mean, it's funny, it gets points for funding, I guess, but yeah, I'm not going to be swayed by the names, but it is entertaining.
More to come on this issue as we continue to do research and, you know, truly try to understand the store of value that bitcoin can have in someone's investment choices or asset allocation. But definitely the introduction of new ETFs creates the potential for a lot of money to access this easier than it has before.
So I'm sure this won't be the only headline we see this year on it.
Disclosure: Information and references to specific investments presented herein are for educational purposes only, are not intended as an offer or solicitation with respect to the purchase of any security or asset class, and should not be relied on for investment recommendations. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. The investments discussed may fluctuate in price or value. All investments involve risk, including the loss of principal. Past results are no guarantee of future results. You should consult with your financial advisor to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.
