BlockFi’s Flori Marquez and Fundstrat Global Advisors’ Leeor Shimron talk about new ways to buy and own crypto, the need for FDIC insurance, and how to know if it’s not for you.
MARK DECAMBRE: I’m excited to welcome Florian Marquez, co-founder and senior VP of Operations at BlockFi, and Leeor Shimron, VP of Digital Asset Strategy at Fundstrat Global Advisors. Thank you, Flori and Leeor and welcome. We’re chatting with a pair of the sharpest minds in crypto about how and– and why and whether to invest in crypto. And I’m– I’m going to save time for questions from the audience so please send those in.
Now let’s get started. There are some ways to get exposure to crypto. There are more ways, I should say, to get exposure to crypto than there were, say, two or three years ago.
We’ve got the Coinbase IPO, the biggest trading platform for cryptos in the US. We’ve got Tesla buying Bitcoin. You know, Tom Jessop just said that Fidelity is mining Bitcoin, so there’s clearly demand there.
So what’s the draw? Why is crypto so hot? Flori, you run one of the larger crypto firms. What’s your take?
FLORI MARQUEZ: It’s been an absolute amazing quarter and last few months for crypto and Bitcoin in general. One of the things I’m most excited about is we’ve seen the price of Bitcoin be sustained for the last few months. And one of the best headlines that I’ve seen– like why is there so much noise around this asset class– is the fact that Bitcoin has been the best performing asset in the last decade.
And when you look at the runner-up to Bitcoin, which is the NASDAQ 100, Bitcoin outperformed by a factor of 10x. So it’s a great asset class. And I think as we look back on when I first started my company almost four years ago, the– the rhetoric around crypto has really changed. So it’s grown to be an asset class that is now, as you mentioned, many credible investors are now allocating to crypto alongside gold and other investments.
I think of it as the ultimate hedge because it’s both a tech stock and a hedge against inflation. So there’s a lot of reasons why you’re suddenly seeing markets and investors kind of all focusing in on crypto and starting to get into the space. And I’m very excited for the growth that you’re going to see in companies as a result. You mentioned Coinbase IPO is one of them. And you’re seeing amazing numbers being printed both by Coinbase and other companies in the space as a result of all these tailwinds.
MARK DECAMBRE: It’s– it’s interesting that you mention institutions because that’s kind of another topic I’d like to get into, kind of the notion of, you know, how we have institutions investing in crypto and allocating some portion of their balance sheets to the sector. And, you know, is it worth the risk for– for them? This seems like it has implications for investors to some degree because you may already be getting some exposure to– to Bitcoin if you own Tesla, with Tesla scooping up coins, you know. Leeor, can you touch on that?
LEEOR SHIMRON: Sure. I think what really started this off was we saw MicroStrategy last summer be the first to kind of take the charge and just really go head first and allocate their entire treasury into Bitcoin. And although they took a much more aggressive approach, you know, we’re seeing a lot of other really tech-focused or future forward-looking companies also kind of doing similarly, which is, you know, they’re just buying, you know, small allocations of Bitcoin, adding to their balance sheet. We saw Tesla took a $1.5 billion allocation earlier this year.
We saw Square take an allocation as well. I think that there is also rumors going around that there is additional corporates that are also taking on similar size allocations. And they’re really viewing it as a hedge against many different things, you know, everything from inflation.
We saw how central banks really, in the wake of the coronavirus, they juiced their economies by printing trillions of dollars. You know, the Fed’s balance sheet itself has increased from about $4 trillion to now over $7 trillion in the span of one year. And we haven’t quite seen the knock-on effects of that quite yet.
My suspicion is that that’s going to lead to inflation. It already has led to inflation. We’re probably going to see that even more as the economy opens up, and consumers really return to the marketplace. And I think companies and other investors are starting to catch wind of those effects. And they’re allocating to Bitcoin and other digital scarce assets kind of as a hedge for those effects.
MARK DECAMBRE: And you talk about inflation, and a lot of folks, they– they pit Bitcoin and crypto as the ultimate hedge in– in terms of inflation. And are the correlations there, though, you know? When you look at Bitcoin particularly directionally, it seems to be on the high side, moving almost in lockstep with– with stocks of late. Leeor?
LEEOR SHIMRON: Well, the thing about Bitcoin, it’s actually really interesting. It kind of moves or– or dances to the beat of its own drum. So although it can have high correlation to equities and other asset classes– you know, we’ve seen correlation to gold earlier this year– that correlation really comes and goes.
So, you know, there have been bouts of correlation with those other asset classes. But we’ve also seen that there’s been bouts of non-correlation or even negative correlation to the other major asset classes as well. So that really is interesting to a lot of institutional investors because, you know, when you look at modern portfolio theory and you look at diversification and how to perform within your portfolio and make sure that, you know, that you’re protected from any sort of headwinds amongst the asset classes you’re investing in, that non-correlation is really a huge boon for investors.
MARK DECAMBRE: Now these ultimately are risky assets, right? There’s a danger that a novice investor in the space could lose boatloads of money. How are you explaining the risk of these investments to your clients, your– your friends? Flori, how are you explaining it to your mom?
FLORI MARQUEZ: Well, I think the key here is to distinguish between what– what makes it risky and what makes it different from a typical stock that you might own, and that’s the volatility. And so a lot of the things that we’re talking about are connected. The reason why you’re seeing institutional investors move into this space is because volatility is actually opportunity.
And for the last decade, there’s been a search for yields. And for the first time, different types of crypto assets offer a really attractive yield that we have not seen in a very long time. So when I try to summarize in layman’s terms what is the risk of this asset class, I try to remind people of two things.
One, it’s extremely volatile. So it’s common to see 3% to 10% price swings in a day. So if you’re entering it for the first time, a lot of new investors do tend to get spooked. And so my best recommendation is always to write down what your goal is with this investment and to think of it as a longer term investment, like three to five years, because I truly believe that what we’re going to see over the next few years is the same theme that we’ve seen over the last six months really continuing, which is more institutional investors moving into the space, more retail investors getting comfortable with this asset class. And that, to me, points that we’re just at the beginning.
Guggenheim, for example, said that a Bitcoin should be worth $400,000 each, and we’re at $55,000, $60,000 today. So there’s still a lot of room to run. I think there’s going to be a lot of ups and down in the middle. But really that’s– that’s how I explain it, right? It’s to get used to the volatility and think of it as a long-term investment.
MARK DECAMBRE: Now I– I think you– you told me once when we, you know, chatted– we’ve chatted in the past– that you really need to know these– these assets, know what you’re investing in. And I’m wondering, Flori, if there’s sort of a– a better way to get an understanding of– of Bitcoin and crypto and blockchain. Is there like a crypto compendium for folks to bone up on?
FLORI MARQUEZ: Yeah. So I think that what’s the scariest to new investors is the complexity of this asset class, right? Like, what is the blockchain and what is Bitcoin within the blockchain? And how are those two things connected to one another? And I think the best advice is to start with a crawl, walk, run approach.
And I think the best way to learn about something is to own it. And so what you said earlier is exactly right. I don’t think people should jump in with 100% of their portfolio, day one. But maybe starting with a small allocation, which will allow you to start listening to the news about Bitcoin and slowly learn more about the asset class.
I think the best places to learn is definitely looking at interviews, and the news is starting to cover it a lot better. So definitely I think keeping up with it once you own it is the best way to get your foot in the door and then slowly start to learn and just to remember that we’re at the beginning of a new technological change for our society. A lot of times trying to explain what blockchain is to a new investor is similar to explaining how cell phones were going to change our society to someone back in the ’80s.
And so the concept– the jump that you have to do mentally to understand the technological impact of this is really big. And so the best advice is to start small, start simple, put a few in so that you have an allocation or exposure to the asset class. And you’ll see that you’ll learn more about it over time.
MARK DECAMBRE: That’s– that’s a good point. So– so the model investment portfolio– just kind of riffing off of Flori– used to be 60% stocks and– and 40% bonds. Is there going to be a time when your financial advisor proposes a 60-30-10 split of stocks, bonds, and Bitcoin? Leeor, can you hit up on that one?
LEEOR SHIMRON: Sure. Yeah, I mean, we’re living in a really funky world right now, where yields are approaching 0 if not negative. I think Flori mentioned this a little bit earlier. But, you know, we saw $18 trillion of negative yielding sovereign debt, which is just an insane amount to comprehend. And so when you have interest rates paying so low, that forces people really to climb up the risk curve and invest in higher risk tech stocks, crypto assets, really anything else that can– that is showing significant growth.
So I think it is prudent for all investors– obviously they have to come up with their own strategy and way of approaching this market– but I think it’s just imprudent to have zero exposure to the space. And a lot of people and a lot of investors are– they’re– they’re becoming aware of that fact, and they’re starting to– to move in in size into the space. And, you know, at Fundstrat, we deal with a lot of retail investors.
We deal with a lot of institutional investors as well. And what we advise them to do is really take a slow-moving approach, invest in using a dollar cost average approach, which is basically, you know, determine what your allocation is going to be, whether it’s 1%, 5%, 10%, whatever it is. Purchase equal amounts over a predetermined amount of time.
Maybe it’s three months. Maybe it’s six months. Maybe it’s 12 months. And regardless of the price, make sure that you’re allocating into the space and don’t be scared by the day-to-day volatility, which is just– it’s going to happen regardless.
MARK DECAMBRE: And one of our questions from– from our audience is, what do you think– it’s– this person’s name is– could be Jaime but I think it also could be Jamie– what do you think is the safest strategy to buy crypto for beginners. Leeor, you might have touched on a– that a little bit. The other part of the question is do you think Bitcoin or Ether is– is the future, which is kind of go to– to another question. As you think about buying cryptos, you know, clearly it seems like Bitcoin would be number one if you’re diversifying your– your crypto portfolio. But what is the– what are the other prominent cryptos out there that investors should be thinking about at least, Flori?
FLORI MARQUEZ: Yeah. So I think one of the interesting things that we’ve seen this past week, going to which– which asset classes are winning as a result of all of this focus from institutional investors moving into this space, and what we’ve seen at BlockFi over the last two weeks is our retail clients are actually net buyers of Ethereum and Lync. So those two asset classes seem like the other alternative assets within the crypto space that seem to be gaining a lot of momentum. And the two things to keep in mind as– as you’re looking farther down the spectrum is– the first thing is where do you buy these, right?
And there’s a lot of reputable exchanges where you can buy it for the first time. But right now, it isn’t the simplest process to get into crypto for the first time, right? You can open a BlockFi account and put cash in and then buy crypto, but you need to have a separate account from where you keep the rest of your stock, so it’s a little bit tricky.
And the second thing that’s so important for investors to know is the security aspect of this. So there’s a lot of– so there’s no FDIC insurance for any of these products. And what happens very often in crypto is accounts get hacked. And so the thing that new investors need to be mindful of is definitely making sure to use all of the security available with your accounts, and that’s usually two-factor authentication. And also allow listing to make sure that if there are withdrawals from your account, they can only go to one place.
MARK DECAMBRE: That’s– that’s a great point you bring up about the FDI insurance. Because from a risk perspective, I don’t know that investors appreciate that as much. And the whole notion of security and storage– and maybe, Leeor, you can kind of expand on what Flori said– you know, is– is there a best practice around storing your Bitcoin and– or storing your crypto and– and safeguarding your passwords so you’re not in a “New York Times” story for having lost hundreds of millions of dollars in crypto as an early adopter.
LEEOR SHIMRON: Sure. Security is a very tricky thing. And I think there’s always trade-offs, you know. Typically there’s a big trade-off between security and convenience. So if you’re buying Bitcoin on an exchange like Coinbase or Kraken, obviously it’s very convenient to purchase it directly on the exchange.
Keep it there, never have to worry about your private keys. That’s very convenient. However, it’s not very secure. I mean, there’s a ton of historical precedents to show that centralized exchanges are a central point of failure. And there’s been billions of dollars worth of crypto that’s been hacked and stolen from those central points of failure.
So in terms of making sure that you’re following best practices, it’s always helpful– if you’re using a qualified custodian, whether it’s Gemini, Anchorage, or one of the many other companies that exist that provide that service– that could be an option for– for investors. There’s also on the retail side, we’ve seen hardware devices really pop up, so Ledger Nano X, Trezor, multi-sig products like Casa. These retail-focused products really allow or empower retail investors to secure their crypto using the best practices available.
MARK DECAMBRE: What is– what is Casa?
LEEOR SHIMRON: Casa, it is basically a multi-signature wallet so basically they hold one portion of the key, and then you will hold a portion of the key on your phone as well as a third portion of the key maybe on a hardware device. And so if there’s three keys, it would require two out of the three in order to send any amount of crypto to another wallet. So when you have that type of multi-signature schema at play, it really enhances the security of your– of your holdings.
MARK DECAMBRE: Great, that’s– that’s good advice. What about– and I just– we have a little bit more time and I just want to get through this quickly– what– what about NFTs or non fungible tokens? We’ve certainly– they’re popular enough to get there on SNL skit. But is it a perfect example of a– a bubblicious aspects of this market? Flori, are you buying NFTs?
FLORI MARQUEZ: I haven’t bought any NFTs just yet. But I do think that there’s two amazing use cases for the blockchain. One is for really getting a hold of copywriting and licensing for anything that exists in the digital world. And that could be music, art, really controlling and making sure that the individual who created that property has the end rights to how that’s distributed.
And right now there’s definitely a craze around NFTs because I think a lot of it comes down to people wanting to get in on the next big thing at the early stages. So there is some concern from people that there is a bit of overhype at the moment. And we’ll see how that plays out over the next few years.
But the other big use case for the blockchain, which I think we’re still very far away from, but I’ve always thought one part is art and the other part is voting. So I think we’re still a decade away from seeing governments use the blockchain for voting. But I think whenever we do get there, it’s really going to make a difference to how we’re able to see the results of elections.
MARK DECAMBRE: Let’s move on to actually some questions. And one of those– one of those questions, this one comes from a– a– an audience member called Julia sent. It fits into what you were just talking about, Flori. Will BlockFi begin accepting or providing services for– for buyers and owners of NFTs?
FLORI MARQUEZ: So the way that we choose which assets get to go on the platform is to– there’s a whole process that it goes by. But I would summarize it by one part is the regulatory aspect of it, so making sure we understand how that asset was created and how regulators think about it. And the second part is the market capitalization and liquidity of that asset.
So we always start at the beginning, and that’s why Bitcoin and Ethereum were the first few. And then we work our way down. So I don’t think that NFTs are in the near-term horizon for us, but I think there’s always a wealth of opportunities of things that we could offer.
We talked about how the fact that there’s no FDIC insurance for these types of assets. One thing that I know many of our clients would like is being able to create a product that does maybe provide some sort of insurance for things that are held on the platform. And like always with any start-up, it’s a question of how do you listen to your clients and prioritize the things that they need most and get those out the fastest.
MARK DECAMBRE: We have another question from Michael. What visibility is there into the float of Bitcoin? If it’s mined and new Bitcoin is created when the 21 million supply is reached– I think this person is referring to the– the cap supply for– for Bitcoin– Leeor, can you– can you take that one?
LEEOR SHIMRON: Sure. So that’s really one of the major features that makes Bitcoin so unique is that anyone running a node– so anyone with an internet connection essentially– can verify the total supply of Bitcoin. And that is extremely powerful. I mean, I think there’s no other asset that you can say the exact same thing.
You know, look at gold. We have estimates– estimating how much gold is currently in existence. And based on those estimates, it seems like the total market cap of gold is around $10 trillion or so, give or take. And we don’t know exactly what that total supply is, and we also don’t know what the terminal or final supply will be.
The inflation rate of gold has been historically around 2%. And if the price of gold increases, then that means a lot of miners can spin up, and you’re going to have new mining expeditions to try and produce more gold, which would obviously increase supply and then could affect the price. So it is reflexive in the sense that for gold if the price increases, and that will lead to higher supply.
Versus Bitcoin, it doesn’t matter what the demand is or what the price is. The supply is always going to follow that predefined, predetermined schedule, reaching 21 million by the year 2140. So that’s what really makes Bitcoin unique as a scarce digital commodity.
MARK DECAMBRE: This question’s from David, and it’s tailor-made for– for Flori because it’s about BlockFi. For– for BlockFi’s yield product that pays interest on crypto holdings, would you please explain in more detail how it works? Who pays the interest, how often, et cetera? Basically this person wants to know more about the BlockFi apparatus.
FLORI MARQUEZ: Yeah. So at a high level, we are a marketplace and a liquidity provider. So what we do is on the retail side, we have people who are existing crypto investors and sometimes people who are buying crypto for the first time, who link their assets to BlockFi. And then what we do is we take those assets and we lend those out to institutional investors, generally in the same asset that is sent to us.
So if we get Bitcoin, we’re lending our Bitcoin to institutional investors. And then we get a yield for lending out those assets. Then what we do is we take the average yield that we’ve been able to receive, and we flow that through to the retail depositors, and we make a spread in the middle.
So when we update our rates, it’s a reflection of the amount of interest that we’re able to generate on the institutional side. And so basically it’s just a marketplace, right? If rates go up, we raise our rates. If rates come down, we raise– we lower the rates.
And we’re always trying to provide our clients the highest interest rate possible on their crypto assets or stable coins. I love that on the stable coin product, we’ve been able to offer 8.6% since we launched. I think in– in the world of today– we just talked about the search for yield and how things are at near 0– that’s an incredible product to have exposure to. And like everything else, think about your risk tolerance in your portfolio and assets in total and then allocate accordingly.
MARK DECAMBRE: Cool. I really appreciate you guys taking time out, lots to unpack. Both of you gave us a lot of food for thought. Thank you, Flori. Thank you, Leeor.