B (2:51)

Yeah, I think you hit the nail on the head. The most popular products are really the bitcoin products. We as a firm allowed solicitation in Bitcoin ETPs more than a year ago in brokerage accounts. We just expanded them to allow them in advisory in October. So we're still early days here. There really hasn't been that much interest in the other crypto products. Now when people think about this, there's three buckets here. There are some people that think of it like digital gold and they're worried about inflation, they're worried about government deficits, and that's kind of the angle that they're poaching crypto from a second group. Think of it like a venture capital, like a disruptive innovation in tech that's going after this big addressable market and, you know, hopefully the penetration will rise in the future. And then the third bucket is really thinking about it as a diversifier. So they're saying, hey, this thing is volatile. It doesn't match stocks, bonds, other assets. And so I kind of want to use it for diversification. Now, Mike, when you have these discussions with institutional clients, how do they view the risk and potential of these different cryptocurrencies?

A (3:51)

What's interesting with the crypto space is adoption started on the retail side with institutions now slowly beginning to explore and allocations. And that's the opposite of what we've seen historically with institutions leaning in ahead of retail in areas whether it's commodities or private markets. But it's still early days on the institutional side. We're starting to see some pensions, endowments, foundations begin to make some small allocations to Bitcoin as a long term inflation hedge. But keep in mind, institutions tend to make investments in the context of strategic asset allocations, often with a broader macro framework. Denny, you've written quite a bit about the four year crypto cycle. Could you explain what that is and where you think we are in the current crypto cycle.

B (4:31)

Yeah, if you look at the data, you see a pretty clear trend of four year cycle. So there's three up years and one down year. And it's been like clockwork since bitcoin was invented. Now when you see something like that, you always try to explain like, why is this happening? So there's two kind of dominant explanations that we've seen. So one's macro, one's micro. Now the macro version for crypto is really the M2 cycle. So we see that global M2 money supply has kind of accelerated and decelerated in four year cycles. And Bitcoin tends to really match that cycle. It tends to accelerate when M2 is accelerating, and it tends to decline when it's decelerating or declining. But there's also this bottoms up way of looking at it. And commodities are really the place we go to for that analysis. So a lot of commodities could be coffee, could be oil. If something disrupts supply, you tend to get the shortage, you get the price moving up, then you get commodity speculators piling in, adding leverage, and it'll just kind of go parabolic. At some point, something pops the bubble, usually more supply. And then you get like a Great Depression, you get like an 80% drawdown, all the leverage comes out and the whole thing crash. So crypto has also followed that. Now we break the four year cycle into four seasons, spring, summer, fall and winter. And each season has a different characteristic about which parts of the market work which don't work, what things look like. We're in the fall season right now, and that tends to last about a year. We wrote a note last year on this fall is the time for harvest. So it's the time you want to take your gains. But the debate is, you know, how long will this fall last, when will the next winter start? So. Or maybe this pattern won't even hold in the future. And so this is the big debate in the crypto circles these days, Mike, given the volatility, given the Great Depressions we talked about in bitcoin with these 70, 80% drawdowns, how do you see it fitting into institutional portfolios compared to other cryptocurrencies?

A (6:19)

Compared to other cryptocurrencies, Bitcoin is still viewed as the flagship asset within the crypto space, just given higher adoption, greater liquidity this year, market value, its longer history, and better regulatory clarity as compared to other tokens. But given the volatility, as you mentioned, and the early days nature of cryptocurrencies adoption is still quite nascent amongst institutional investors. Some institutional investors view Bitcoin as digital gold or macro hedge against inflation and monetary debasement. It's also sometimes viewed as a low correlation diversifier within multi asset portfolios. But even that's also been a debate in the marketplace too. As we look forward from here, crypto adoption within institutional portfolios could potentially expand as regulatory clarity establishes a clear framework for digital assets. Assets. Right. We had the Genius act recently that focus on stablecoins. Next up is market structure. There's a bill working its way through Congress. We've also had developments on the ETF side that lower barriers for institutions to gain exposure there. Not only is it more accessible within traditional portfolios, but the ETF fits nicely into day to day workflows. So bottom line is institutional views on Bitcoin and crypto are evolving. And how firms view Bitcoin we think will depend upon the institution's objectives, their risk tolerance and portfolio context. And keep in mind that institutional allocations don't turn on a dime. They tend to be slower moving. Danny, do retail clients take a similar approach or are they more likely to take bigger bets?

B (7:47)

Our clients struggle with this question. And so we get a lot of questions like, okay, I don't want to miss this. I'm a little nervous about it. What allocation should I use here? And so we go back to our three kind of typical investors. When we try to answer this question, we really try and help people figure out where is equal weight. So we wrote a note in February called are you underweight bitcoin? And we have three different answers depending on how you're thinking of it. And you know, there's a big debate, there's no clear answer. And that's not really where we want our clients. We want them to be smaller, where they can have some exposure if they want it. Not everyone wants it, but if you do want it, you can have it and it won't really dominate the volatility of the portfolio. Now on another note, Mike, are you seeing legacy platforms start to offer crypto as well?

A (8:30)

So crypto ETFs are generally available in self directed brokerage accounts across the industry today. Schwab, for example, commented that their customers hold $25 billion in crypto ETFs, which is about, call it 20% share of the ETF space. But access to these crypto ETFs is a bit more restricted within the Advisor LED channel. But we're starting to see that broaden out for ETFs and eventually might see model portfolios with allocations toward crypto ETFs. But when you look at spot crypto trading, though that generally remains out of reach of most legacy platform. The key hurdle for that has been regulatory clarity and with a more crypto friendly administration, that is changing here. So Schwab, for example, acknowledged that they have the regulatory clarity needed and they're working towards launching their spot crypto trading platform in the first half of next year. On that topic, Denny, how do you view the merits of holding crypto directly versus through an exchange traded product like ETFs?

B (9:25)

Yeah, I mean our clients are mostly not day trading this product and kind of moving it back and forth. So the ETPs have been a pretty good answer for us. The one issue is liquidity and so we're not used to thinking of this in US Equity markets at the most liquid markets. But in crypto, the crypto markets, the spot markets are actually more liquid than the equity market. So you get a lot of liquidity even after hours, even 24,7, as other markets around the world kind of take the lead. But most of our investors aren't treating it that way. They're not day trading it and they're really keeping it more like that digital gold allocation. And so they just need to adjust the position size, you know, once a month, once a year, maybe just kind of buy and hold. But I wonder, you know, as more people get more comfortable, it could become more important in the future. So it's an open question, but for now the ETPs have been a pretty good answer here.

A (10:13)

Fascinating space. Denny, thanks so much for taking the time to talk.

B (10:16)

It was great speaking with you, Mike.

A (10:17)

And thanks for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

C (10:26)

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