Transcription
I'm always the friend in the group that has too much of my net worth caught up in Bitcoin or in crypto. I don't know if there is a right percentage to tell someone, but if you had to, what would be the advice to someone who's maybe, you know, coming out of college? Set your percentage, your net worth in this. What does that look like to you? I too fear that I am probably over crypto in ways that I could not provide financial advice for.
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Everybody, welcome to technically, I guess, our first guest show of 2025, as we kick off a new year and look forward to another exciting year in crypto and all things market. Everything Bitcoin-related seemingly gets more and more interwoven with traditional finance, and I'm super excited to have on with us today as we unpack where the huge alpha opportunities are. What's the alpha in 2025? That's what we're trying to figure out.
Happy to have on with us today a man who has alpha in his literal title, Jeff Park, Bitwise's head of alpha strategies. Jeff, thanks so much for coming on, man. Happy New Year!
Happy New Year! Happy to be here. I'm going to have to start getting used to seeing 2025. It'll take a couple of muscle memory redevelopments here.
I know it's always tricky, and I think everyone gets a pass for maybe a couple of weeks. You can get it wrong; it is what it is. It's fine; we'll move past it. But Jeff, I'm super excited to have you on because there are so many different things to talk about. Whether it's, you know, kind of, I think based on what you've said, misconceptions around maybe some of the threats, the bubble fears around MicroStrategy's Bitcoin buys, a lot to unpack there.
And a lot to unpack, I think, as everyone kind of, you know, focuses on mental health, physical health, financial health in the new year. A lot to unpack with what you're working on in terms of changing up the idea around a 60/40 portfolio and maybe how younger investors or any investor really should be thinking about, right, setting their portfolio.
So super excited to dig into that new push and what you're working on there with your community. But why don't we just start with kind of where your head's at around the markets right now? What do you see shaping up as we kick off 2025? A huge start, maybe a little bit of a pullback. How do you see things kind of shaping up this year?
Yeah, I'm so excited for 2025 to begin. As you know, 2024 started with a bang by the advent of the Bitcoin ETF, and it's been a whirlwind journey since. I think 2025 marks now a fresh start of promoting the chance to think about crypto in a whole new way outside of the construct of the simple Bitcoin ETF story, which I'm so excited about.
One of the predictions that I have is that Bitcoin structured products are going to hit the market this year, and it's going to be a huge category. Something that I've talked about over the past few years is this concept of what I call the financialization of Bitcoin being very good for alpha in general. This is one of those final pieces that I think the market will discover.
The financialization of Bitcoin is a fascinating story, an evolution. It first started, I would say, with having futures ETFs like BTO before we even had the Bitcoin ETF that was the spot-based product. Then we had inverse ETFs, we had negative inverse ETFs, and leveraged ETFs. Then you had options launch, which is another dimension of financialization.
Of course, MicroStrategy, in my opinion, represents a specific category of financialization of Bitcoin as well, across capital structure arbitrage opportunities. And then now, lastly, this category of what I call principal protection notes—these structured products, these buffered note categories that can give you yield in ways that bring all of these things together to create a product that is demanding of what institutions really want.
Sometimes institutions actually still do remain hesitant about wanting Bitcoin directional risk. This is something that I have now been having the privilege to talk to investors about for over three years. The truth is there are some folks who will run and embrace Bitcoin's directional volatility, but there are still many on the other side who don't want it and yet would prefer a different interpretation of that opportunity.
This category of Bitcoin structured products is the one that I think will open a whole new channel of investors to imagine that possibility.
Yeah, I think it's interesting. We were just chatting with Cosmo Jang from Panta before the year ended, kind of the idea of where risks are shifting. Before, it had been kind of like, okay, on the margin, the risks might be being a portfolio manager or even someone at a company managing the balance sheet saying, "I don't want to take the risk of touching Bitcoin."
Now it almost seems like the risk is completely flipped. If you look at the data in terms of how it's performed over the years, I think you have enough years now in that sample size to say maybe the risk is on the other side. By not doing anything, you're actually taking a larger risk.
We've even seen BlackRock come out with their portfolio kind of research looking at having a zero allocation as a larger risk than maybe a one, two, or three percent. We're going to get into the portfolio ideas later on, Jeff, but I guess when you look at maybe how 2024—I think you're right to point out how the year kicked off—but the theme seemed to be Wall Street's embrace of Bitcoin.
We can talk about the rest of crypto later too, but around that, how do you see it? I guess what are maybe the checkpoints along the way? Because it's not as obvious as Bitcoin ETFs had been blocked from the SEC for so many years, and then all of a sudden the floodgates opened. That's an obvious catalyst.
But I guess when you look at checkpoints for 2025 for us in terms of the catalysts you might see as the year shapes up for maybe why it's going to be such a big year?
Yeah, as amazing as 2024 was, the reality is that it is still an era in which there were a lot of headwinds for the broader industry. Until the election, there really were still a ton of challenging issues as it relates to the infrastructure and the innovation that could be applied.
It's silly to think about it now, but the reality is that there were still so many custodians, like the State Streets of the world and the Bank of New York Melons of the world, that want to participate in crypto but have struggled and have not been able to.
We have the same phenomena with Wall Street banks that have wanted to offer crypto trading as a service and had to navigate it in very weird, cumbersome ways into facilitating that through all kinds of, you know, frankly unnecessary formats.
Now you're going to see the Goldmans and the JPs of the world come into it a little bit more aggressively and be able to market those services and compete fairly with those that are crypto-native as well.
So I just think that 2025 is a really good reset for that regulatory environment that we're going to have in the adoption towards pushing these towards the mainstream convergence much more strongly than 2024.
Because the Bitcoin ETF, while it was such an amazing thing, was one success of many things that still needs to be unlocked. Stablecoin being one, tokenization infrastructure being another. There's a lot of things that's on the table for 2025 that I think will be really interesting.
You know, where Wall Street—sorry, not to cut you off—you can keep going, finish your point there.
No, I was going to say, and I think, you know, as much as Wall Street has embraced crypto, as you've mentioned, I would say some of these things are happening in formats where there should be broader competition and broader abilities to navigate customer interests.
When I think about, for example, the lever ETFs, especially the one that pertains to MicroStrategy, for those who have been following it, you would have seen the cracking on that infrastructure as to the shortage of inventory possible to support those ETFs because of the nature of the kinds of risks that embody MicroStrategy, of course, being one of the most volatile stocks in the universe.
But you literally have counterparties, swap counterparties, who are not willing to write risk for those ETF issuers to navigate the management of that technical product. To me, that's a huge disservice of actually approving a product by the SEC and then actually, you know, not equipping the players to manage the issue or approved product to the standard that it should be.
That's the kind of thing that I feel like is a little bit half done, where 2025 is going to change that energy completely.
Yeah, no, I think, you know, as we kind of extrapolate it, there are a couple of different things I wanted to ask you about. Because, you know, the lead that Bitcoin now has is there, but we'll see what happens in 2025 with other ETFs following the Ethereum ETFs that got approved and what could happen with Solana and the like.
But one of the themes, as we've polled our own community here, has been around Bitcoin Layer Two. Stacks is now a finalist in our crypto project of the year, one of the leading Bitcoin Layer 2s, along with Solana as the other semi-finalist.
When you look at momentum, Jeff, I guess one of the risks that I see shaping up is that we're talking about an asset that is definitely not built like some of the other assets Wall Street's played around with in the past. It's something that Caitlin Long has come on the show and warned us about.
On the one hand, I'm very happy to see the hyper-financialization of Bitcoin because, great, more money in Bitcoin, I think, lifts all boats in crypto. On the other hand, it also makes me a little nervous because, as we've seen, Wall Street shenanigans might not work out so well.
Perhaps, Jeff, that's a good pivot into talking about MicroStrategy because so many people have come out and said this is bad. What MicroStrategy is doing is bad because it's a catalyst that cannot exist if Bitcoin goes down.
I just want to play a little bit of what we heard from Michael Saylor at MicroStrategy when he was pressed on that from Andrew Ross Sorkin on CNBC, just to table set for maybe some of these questions. Here's what he said just a few weeks ago:
"If, in fact, there was a retracement from 98,000 to, I don't know, 70,000, what happens? I'll make two points. One point: participants in the market are buying Bitcoin 20x faster than the supply is coming from the miners. There's a major demand-supply imbalance, and that's going to continue for the foreseeable future. So I don't really expect that. But let's say it did happen. MicroStrategy's business is so good, we're generating one times the capital we raise. When we raise 10 billion in capital, if Bitcoin traded down $20,000 like you described, we'd still make 1 billion off the arbitrage by selling the volatility. If it trades up like I expect it will, we make 10x that. So we're either making $3 billion on that convertible bond this week in the worst case when it trades down, or we're making $30 billion on that convertible bond if it trades like the Bitcoiners believe it will."
Now, I'm not going to fault anybody, Jeff, for being nervous when it comes to maybe leveraging crypto. We've seen some pretty big washouts before, and, you know, people are always on edge. But to you, I mean, I've seen some bad takes even in just kind of like the way that it works in terms of how a company's run, how it's adding Bitcoin to its balance sheet, and some really bad takes around what it looks like when maybe Bitcoin's price drops.
People talking about, "Oh, they're going to have to sell their Bitcoin." Obviously, that's not necessarily true when they're sitting on a huge amount, billions and billions in profit. So I guess, what do you make of maybe some of the worst misconceptions around what's happening in MicroStrategy, and why are you so bullish on it being a thing that people should be happy about?
Sure, sure. So, in my hedge fund career, there are some cardinal rules that I've learned, and the specific things that make shorting such a dangerous endeavor. I think anyone who is short MicroStrategy needs to take a step back and take a bit of a more neutral stance. Even if you don't believe in the long thesis of MicroStrategy, it has all the makeups of the components that make it very dangerous to short.
So rule number one: you never want to short very volatile things. MicroStrategy's volatility is profoundly higher than almost anything else that exists in the marketplace today. That's just a technical fact.
Two, you don't want to short things where the other side are manic loyalists, like really die-hard fans. This is maybe in reference to something like Tesla, where no matter how fundamentally at one point in time you thought that business might have been challenged from every aspect of bottom-up financial fundamental analysis, you should really not short things where the fan and the manics are on the other side in a very fervent way.
The third thing, and this is the big picture: you don't ever really want to short things against secular trends. So, you know, Netflix, once upon a time, people would have thought was extremely overvalued. But the reality is streaming was a secular trend, and no matter where you thought the demand and supply would meet for the price to be considered value, you do not want to short things in a long-term basis of those types.
What MicroStrategy represents as a secular trend is the institutionalization of Bitcoin. So if you have any belief that Bitcoin is going to become institutionalized, you should definitely not short MicroStrategy.
Within that construct, I have a lot of things that I feel are exciting about MicroStrategy. I think there are also folks who have reasonable doubts and concerns; they should rightfully have in assessing what that opportunity is. But at the same time, I always ask people to be open-minded and take some of these cardinal rules into consideration before taking any directional risk with conviction for something that may be a little bit challenging to know at this point of the cycle.
The reality is, going back to the point on debt, as you've mentioned, MicroStrategy's capital structure is very simple today. I think the total debt is actually nominally a little over $7 billion, which is, you know, less than 10% of the market cap. But actually, if you think about almost all of those converts being ready to be converted because the conversion premiums are all in the money, it's basically unlevered.
So the question is, how do you bring different kinds of new flow of capital to come into this wrapper, this box that is called MicroStrategy, that ultimately, as Michael Saylor alluded to, is a volatility harvesting machine?
In a world where there's such a dirth of yield, that is true, right? True meaning that yield coming from real productivity gains and not these financial manipulations of what's happening across, you know, cross-border flows and central bank policies. True yield, one of the sources of that is volatility.
That is essentially the clever box that I think MicroStrategy has designed itself for. I think there are ways to anticipate that it's going to remain volatile, and everyone has to come with a perspective on the time frame in which they want to invest. There will be moments of richness and cheapness for sure.
But I think those who are thinking about MicroStrategy's richness and cheapness just to the Bitcoin on their balance sheet are all completely wrong and misguided. The same way we don't think the U.S. is going to implode because our debt-to-GDP ratio is manageable, it doesn't mean we're going to default tomorrow.
MicroStrategy has a lot of those dynamics still, where the levers are there, but you've got to be a little bit more careful and thoughtful about what those levers are. I make the case that Bitcoin price is one of them, but the other thing that really matters, in addition to Bitcoin's volatility, is interest rates.
Interest rates are actually a huge component of MicroStrategy's valuation model, precisely because, as you pointed out, if debt becomes a component of its capital raising strategy in a meaningful way, that becomes the lever in which valuation differential can flow across the cap stack of the liabilities from debt to equity.
Preferred equity, as you know, has been announced as something of interest this year as well, which we can, of course, talk about.
Yeah, because there are so many different dynamics. I think the first thing to clear up there is just kind of looking at it. It's obviously very different if a company was not sitting on, I think at this point, I don't know, got to bring up the Saylor tracker for the accurate number direct to today.
As we always know, Michael Saylor always likes looking at that thing and adding green dots on a Sunday. But essentially, right now, $16 billion, if you want to call it that, in paper profits. Very different than a company that might not have any profits at all.
Maybe the ones that are getting involved now in copying the Saylor playbook, and we can put that to the side. But when it comes to maybe that additional preferred shares piece, as you said, I don't know if you have thoughts on that because, you know, the plan has always been pretty well communicated in terms of $21 billion on the debt side, $21 billion on the share issuance side to continue finding new ways to buy Bitcoin.
Is there anything specifically that maybe you make of that now as it changes in the MicroStrategy playbook that people should consider?
Yeah, for sure. As you know, the devil's in the details. One of the things about the converts that I noticed back in March of last year were in those details about the mispricing of that arbitrage opportunity in the volatility premium.
So until we see how the preferred price, it will be hard to know exactly where that's going to land in terms of whether it's negative or positive EV to the equity residual.
But taking a step back, there are some points of clarification that I think are worth having. The preferred equity is not the same thing as the convertible debt. I think there are folks who think about it similarly because it is nonetheless part of the cap stack that is above equity and non-dilutive, etc. But they're fundamentally different.
So these are the things we have to really think about. One, prefs, unlike convertible debt, actually have to pay a competitive non-zero yield. The amazingly beautiful thing about the convertible debt pricing was that he was able to come to market with 0% because he was able to compensate that for the volatility of the conversion on the call option.
So the debt structure is quite beautiful because it's actually converting volatility into yield. The preferred equity is different. If anything, the preferred equity is almost in the reverse direction. The people that buy preferred equity need yield; they actually need competitive yield that will clear the hurdle for how they're assessing it versus the rest of the preferred equity market.
There cannot be a 0% preferred equity, and they want as little volatility as possible to achieve it, which is different than the interests of the convert players who want actually maximum volatility because they have the chance to then profit off of the delta hedging activities on the call options that are long gamma.
Maybe just to boil all of that down for people who come from crypto and maybe don't understand anything about traditional finance, the idea of what's really going on has maybe dawned on me as we dug into the MicroStrategy playbook. It was more about opening up, as you said, opportunities for people who may have never been able to access Bitcoin to access Bitcoin.
These are smart players on the debt side. I mean, we're talking about, you know, Europe's largest insurers on that side. These are people who know markets, and they know not to make dumb volatile bets, but they've never, I don't think, been able to access Bitcoin in this way.
So to me, I look at MicroStrategy as the same thing that happened with Bitcoin ETFs, which was investors who could never touch it suddenly had an ability to touch it. There are still a lot of people who can't touch them through the ETFs.
Maybe if I'm thinking about it correctly, is that kind of to boil it down even further, Jeff, maybe why MicroStrategy has gotten so much attention?
Absolutely. There are brokerages still today here in this country that will not let you buy Bitcoin ETFs. It's entirely true that that is still a fact pattern recognizable in a way that should not be the case. But you can, in fact, buy MicroStrategy.
So MicroStrategy is a substitute good for some of those folks. The other thing I would add is I think inherently there is a desire for a surplus of volatility by investors as well. Anything that is more volatile gives professional day traders more opportunities.
So leverage inherently is a useful thing. Whether that's rightfully or wrongfully the right thing to be doing as an investor is totally a decision that has to be made at the independent level. But volatility itself is a trading tool, which MicroStrategy also offers.
The convertible market is especially important because there's been such a dirth of yield in the credit market that it's been such a lackluster world of performance. To have the chance to have a piece of paper like MicroStrategy that is up and at one point over 200% in the year is a profound outcome that doesn't generally happen in the credit universe.
So that brings life and vitality to having that market be crucial in ways that it hasn't been before. The preferred equity market is a little different. Again, I think those who think about preferred equity and the kinds of buyers, it's really more of like a regulated insurance-oriented play towards wanting yield.
I don't think the interests align particularly the same way as a convert bond trader. You know, the other thing is the reason the convert arb worked was because there's a known explicit market-based conversion ratio that in the end explicitly also impacts the implied volatility surface of MicroStrategy.
There's a direct relationship with the converts; the prefs do not have a market-based conversion ratio. Those conversion ratios tend to be arbitrary, and it actually doesn't give you the chance to have a real kind of options market on the back of it. Mostly because they're very long-dated, and prefs also don't have explicit durations to begin with, right? These are perpetual instruments, so you can't actually term it up as nicely as you could with like a convert.
So that's the important thing; it doesn't really impact implied volatility the same way the convert as an instrument could. I think, you know, whether it's positive or negative EV to the equity depends on a few additional things. First is the yield on the pref fixed or is it floating? That matters pretty greatly because everything else that is being paid out is not good for the equity from a distribution perspective.
Where the conversion premium is, is actually quite important. If there is, there might not even be one, but there probably will be. And then, as you pointed out, how it trades, whether with a premium or a discount to the common, will be a very important thing to watch.
You know, in Korea, actually, funny story, there's a big pref market, and there's a very popular hedge fund trade, which is to trade the pref and hold common stock at a discount arbitrage. So Samsung, for example, has a common stock, and there's also a pref stock.
What generally happens is that the pref kind of trades at a discount to the common. The reason being people want voting power, and that's a valuable thing to have for those who want to be in the business of activism.
So that band widens, and discounts shift over time where you can actually trade that arbitrage.
Yeah, it'll be a curious thing to see where MicroStrategy's pref also trades in the relative premium or discount, and a lot of that will ultimately have to do with, you know, the redeemability features of it as well.
I'm glad you mentioned that because I think it's one piece to 2025 that got us thinking as well when we chatted with Hester Peir at the SEC for maybe some of these changes that could come in 2025.
I think, you know, partial reasons as to why Stacks is a finalist in our crypto project of the year is people have seen so much money flow into these, whether it's MicroStrategy or whether it's BlackRock's Bitcoin ETF or any other Bitcoin ETF, including your guys' Bitwise.
There's a lot of money flowing into these, and now the question becomes, what else can you do to unlock yield? We asked Hester Peir about maybe revisiting some of those rules at the SEC, if you want to call it that, and as she told us, it sounds like all that's on the table.
So I do just want to play a little bit of what she said to kind of get your take on maybe what it unlocks as MicroStrategy also adds those potential tools to the toolbox. Here's what she said about potentially revisiting some of those allowability when it comes to Bitcoin:
"Something that people raise with me pretty frequently, so I imagine that that question is going to be posed to us early on. And as I said, I'm open to reconsidering both in-kind and staking to think about, again, how can you allow people to design the products in the way that's most useful to the investors in those products? Certainly, if you're able to, I mean, if it changes from a majority of commissioners who don't want things to go through to a majority of commissioners who do want things to go through, then yeah, it's easier."
So I don't know; I think a lot of people might be sleeping on some of those things that could potentially change in 2025 rather quickly if you take her at her word. That could be a piece, whether it's through the ETFs or through MicroStrategy.
I mean, how does that maybe potentially also add what investors could be sleeping on in 2025?
Sure, sure. I think you're highlighting that there's multiple dimensions for an asset to earn income ultimately, and Bitcoin is no different. On one hand, as you mentioned, staking is a component within the crypto ecosystem that has captured the majority share of yield.
On the other side of the same coin is really lending and borrowing against these types of collaterals that also generate yield. You know, I would also highlight these Bitcoin Layer Twos are, in some version, rehypothecating Bitcoin towards those types of opportunities by seeding some of the capital into new directives.
So it's all kind of in the same lens of either lending or finding a way to capture some native yield that comes from the productivity of that asset, like in a staking mechanism.
I do think staking is a fascinating question for the ETF wrapper and one we will, I think, find clarity to have in the U.S. because the reality is we have it elsewhere in the world. It's actually not even a point of like whether it's going to happen or not; it already happened in other places.
But it is a multi-dimensional question, though, because it brings in a component of discretion that I don't know if everyone has fully appreciated and understood. Meaning, you know, people are quick to think about staking as a parallel and analogy to dividends, and they'll say it's like earning dividends off of owning a stock.
That's half correct, but it's also half incorrect because if you own Microsoft and I own Microsoft, we both get the same dividends, right? But that's not necessarily true for crypto tokens that are staking. The yield can be different; it really depends on a lot of underlying differences on who you're choosing to interact with as a validator set.
It could deal with some of the things, as you mentioned, in ways that assets can then be rehypothecated if they choose to. The fascinating thing is the technology is moving so much quicker than I think the legislative capacity can.
So what do I mean by that? 2024 was also the incredible year of seeing re-staking emerge as a dominant theme, and you saw Ethereum Layer 2 take the mind share of so many people in earning extra incremental yield on top of the traditional validator set proof of stake yield.
Now then the question is, well, how far can you go down that rabbit hole in giving the yield in all the ways that Ethereum can provide into the ETF? You know, when does that line get drawn?
So can I, for example, can you earn yield off of staking? Yes. Okay, but if I earn yield off of then participating in a Layer 2 through a different staking mechanism, does that count? No. Is it arbitrary? If it is, why is it arbitrary? Those things are actually unanswered, and they're meaningfully important questions in my opinion.
But this, I think, is also why I'm very optimistic that the crypto-native world will continue to be productive and ultimately income and yield-rich in ways that it deserves because it's not slowed down by these types of constraints of what must fit into a box in a neat way.
Well, I think it's been, I mean, obviously, my theory always was, you know, watching the evolution of Web 3 crypto, you know, play out from a media lens when I was at CNBC and then over at Yahoo, is just kind of like this technology is enabling different things.
I think as we've seen it blossom into this modge podge of the attention economy online and money online, it's unlocked a few different ways to kind of monetize for us. I'd be remiss if I didn't mention as well that we have our own validators that everyone can stake with us here at Coinage with our partners at Dyke, and that those funds go back into the Coinage DAO.
So it's a cool kind of, you know, incentive alignment between us and our audience. And again, of course, anyone can convene an NFT, join the Coinage DAO, and co-own the show with us.
But Jeff, I think it's a good segue into kind of radical thoughts around not just a way to do community-owned media, but also, I suppose, how you should be building your portfolio. I think it's something that it was exciting to kind of see you lean into this with your creation of your own community on Twitter.
So I want to give you a shout-out for that as well, the Radical Portfolio Revolution, which I'm a part of now in here as well, this community on Twitter. But maybe we talk about that because for so long, everyone's basically like, "Yeah, 60/40, 60/40 bonds, equities, this is the split."
We're talking about, and then you introduce crypto. Honestly, to be fair, I'm sure you got the same questions around New Year's as like, "Hey, Jeff's a smart guy; let me ask him some crypto questions. What should I be doing in my portfolio?"
My friends made the mistake of thinking I'm a smart guy, so they asked me, and I don't know what to tell them. So I guess when you step back and look at things, what is—and I suppose that's why you created this—but what's the right way that people should be thinking about portfolio blending now? What advice do you give people? What are the takeaways?
Absolutely, thanks for asking. This is something near and dear to me, and one that I think more people need to radically think through their own personal finance and investing to safeguard their wealth for the future.
The reality is that 60/40 is the way that we've been taught is a story that fits a particular paradigm in the way that we understood the world to be. A big component of why I think 60/40 was so successful was because it was created in an era where there was tremendous growth in the way that the global financial infrastructure supported the thesis of growth by all the ways that we've experienced it from the 70s and on.
But what you find there today is that some of that growth, you know, that capital G, if you will, has an asterisk next to it. That asterisk of how we measure growth is changing.
One of the ways that people really thought about growth in GDP, and GDP is a formula. In that formula, one variable that I think everyone should really think about is actually government expenditure. Meaning if the government spends more, the GDP of a nation goes up.
But you can almost imagine that today that actually is a difficult paradox to understand whether that's considered to be true productivity. That is so at the core, the underpinning of what 60/40 is because the 40, the allocations to U.S. bonds or global bonds aggregate, is a reflection of fixed income in the way that we think it should behave relative to growth in equities.
We are now seeing that relationship, frankly, fall apart. It's been falling apart pretty slowly, but it's accelerated really over the last three years. In fact, if you pull up Bloomberg right now and you dot out the correlation between the S&P 500 and the Bloomberg U.S. Bond Index, the three-year correlation is at an all-time high on monthly data points, meaning they're correlated more than ever.
So 60/40 actually doesn't diversify you from anything. 60/40 is actually 100% of something. The thing that I am trying to imagine everyone with this community is a radical version of what true modern portfolio theory should be.
What is actually the true 40 that we need that will actually provide the ballast of diversification against the 60? That 40 is where I spend a lot of time thinking about Bitcoin. I think about other kinds of alternative assets and investing strategies.
But at the core, the realization is that some of the growth and productivity has to come away from the conventional system that we know. It can't come from the same pool of liquidity that is being hyper-financialized in ways where that global refinancing mechanism at the core is the single strongest factor driving the price of those assets.
So we need to find other things, other things like crypto and Bitcoin, but that's not just a crypto story. There are so many things out there in the world that people should think about diversifying their wealth into, and that's at the core of what this community is about.
Yeah, and I think, you know, I need to get an updated chart here, but looking at kind of, you know, Bitcoin as the best-performing asset across most of the last 10 years, I think outside of just a few of those.
I think it's one of the things behind the correlation that you also posted a couple—I don't know exactly when that was—but I think the correlation of all these assets does get very interesting when you think about, you know, the right way to build a portfolio.
I would say the one thing that we've seen is Bitcoin so far has basically performed as, you know, a highly speculative asset. It's normally down by a higher volatile amount when the markets are down.
So I keep waiting; I think a lot of people keep waiting for at what point will that correlation break fully? Will it ever? And maybe that's core to the idea of how people really should be building a portfolio.
I don't know if you want to speak to this personally, Jeff, but I guess the idea—I'm always the friend in the group that has too much of my net worth caught up in Bitcoin or in crypto.
I don't know if there is a right percentage to tell someone, but if you had to, what would be the advice to someone who's maybe, you know, coming out of college? Set your percentage, your net worth in this. What does that look like to you?
Yeah, it's a great question. I too fear that I am probably overweight crypto in ways that could not provide financial advice for. You know, if you take the traditional center point today being discussed around one to three percent, as suggested by Raas and, you know, the BlackRock pitch of the world, I think that's way too low.
You know, should it? I also don't know the right way to tell someone that it's wrong.
Well, here's the thing: if you're young, you have the tolerance for risk in ways that you won't in the future. And actually, the time to enjoy the wealth accumulation more so than somebody who's willing to do that when they're older in their 60s.
So you have to almost think about it this way: the 40% in bonds, who is that servicing, and whose interests is that for? That is part of the system in the way that we're taught to allocate.
If you think about it, and you really ask this question, I think you know the answer: that 40% is representing all the problems that we know in the ways that Social Security is being underfunded, Medicare is being underfunded, and there's so many things that will not come of that bucket in the ways that we are thinking about it.
If you believe that, then Bitcoin is one of the outlets that you have as a young person to reconsider what that hedge should be in the interests of your own generation, your own time period, and your own timeline that you will live compared to somebody who is in their 60s and 70s.
So I think it should definitely be higher than 3%. At the same time, it is very volatile, right? So if you're trying to build wealth, you really also should try to think of other vectors in which you can do it.
So you should still have some portfolio of stocks and other things. But my advice is really, you know, consider the alternative bucket to be a much more meaningful portion than traditionally what people tell you, and diversify that alternative bucket so it's not just Bitcoin.
I think folks who are in the business of trading collectibles also understand how incredibly useful that is as an asset class. If you look at, yeah, yeah, I mean, if you think about, for example, like farmland as a real estate asset class, that's never lost money in the course of the past 25 years as I've tracked, at least.
Yeah, farmland should be in everyone's portfolio. Why can't you own it? Because you're probably not able to access it in the ways that Bill Gates can. Well, how might that change? Maybe tokenization will change that.
So I think about crypto also and the tokenization project at large, like specifically attacking that vector—tokenization bringing new rails that don't exist in traditional finance to give exposure for investors to access unorthodox securities that isn't just like repackaging money market funds and calling it tokenization when you can just, you know, frankly buy whatever money market fund in your brokerage account.
For sure. And I do wonder too, I guess, you know, that's uncorrelated returns, I think, are also part of any smart portfolio building.
And the idea of, you know, not going to try and pitch again what we're doing here at Coinage, but the idea of a media—I saw this at CNBC: when markets are down, viewership's up.
So it's a very interesting kind of like the business actually does better when markets are down. What happens if you can tokenize that? And so we're playing around with the Coinage DAO. Shout out to everyone who's bought a Coinage NFT to co-own this with us.
But Jeff, I think just to wrap up and put all the pieces together, when we're talking about this, you also tweeted this chart, and I do have the date. It was year-end, so it's December 28th.
This chart, which to me was kind of ominous because I'm like, what is Jeff talking about here? And as we put it all together and talk correlation, it is increasingly Bitcoin, I guess, a risk-on asset when you look at it that way.
You tweeted this out in terms of how the market broke in 2024 and what it reveals about what's to come in 2025. Why don't we just end on this, the explanation of kind of interest rates, how it all ties into Bitcoin, and what people should be expecting this year?
Yeah, yeah, love it. What this chart is showing you ultimately is the fundamental breakdown of the relationship between rates and equities.
So, you know, it's fairly anomalous that we would have a rising equities market when we're in a hiking cycle, and that's exactly what you saw. It was quite unnatural in many ways.
Now you're kind of seeing the breakdown happen over the last few months, and at the same time, my guess is this is going to be temporary. This is the question we have to ask: if rates go down this year—which, you know, I think we all think it will or should—the pace is a bit up for debate from two to four cuts, but it will go down.
Will equities go up or down? It is actually somewhat of an unknowable question. Historically, you would have seen rates going down to be the event tied to equities going up.
Some of those relationships, I think, are just not as steady as they would have been. Part of it is because, actually, more so than the last few months, what happened in the last two years was actually the most unnatural part of it.
So my thought is that we're going to see a repeat of those unnatural things more than what should have been a rational endeavor over the last few months.
So if you boil that down even further to good or bad in terms of all of the things we started this off with for crypto investors, you steer more on the side of, yeah, I think that, well, as rates go down this year and bonds go up, I actually think equities are going to go up too.
What I mean by that is it's actually now again related, and it's correlated. They're the same thing. 60/40 just isn't diversifying you from anything.
The consideration for finding alternative assets that give you true diversification will become more important now. That's my own view. Maybe equities will go down, and then that's a valuable thing.
But my instinct and my hunch is that equities will continue to push higher, and a lot of it is because some of the fundamental anchoring of the economy has been completely lost by global liquidity as a mechanism that affects more than anything these cross-border flows of central bank policy at a global scale.
Yeah, which is definitely, I suppose, why the narrative of Bitcoin continues to catch on and rise and rise as more and more people catch on to that fact as well.
But Jeff, can't thank you enough for coming on, man, to kick us off in 2025 with a very diverse take on everything markets. Hopefully, we can have you back on throughout the year to kind of dig through some of these changes as they develop.
But thank you so much for coming on, man. Happy New Year!
Happy New Year to you too! Chat again soon.
Well, yeah, we'll have you back on whenever we can. Jeff Parker there, as we discuss all of these things moving forward, Bitwise Asset Management, head of alpha strategies.
That's going to do it for us this time here on Coinage. As always, you can check out the biggest headlines in Web3 at Coinage.media. For Jeff, for myself, we'll see you again soon. Thanks for tuning in.