The Last Trade E071: Bitcoin’s Hidden Portfolio Power with Mark Connors

Jackson Mikalic (00:03.546) All right. Welcome back to The Last Trade. This week we have Mark Connors, Managing Director, Head of Global Macro Strategy here at OnRamp and also joined by my co-hosts Jesse Myers and Michael Tanguma. Mark, really excited to have you on because you've just dropped a bombshell of a report going into Bitcoin's unique attributes as an asset class, why this is a timely place to be looking at Bitcoin for institutional investors and traditional finance. and really a lot of insights in Alpha that are not widely covered in the space. So Mark, how are you doing? Thanks for joining us. Mark Connors (00:39.658) You bet, Jackson. Thanks. And Jesse, thanks for joining in, Michael as well, because this is a thick document. You call it a bombshell. As we are building it up, we called it a beast because it had to be tamed. We had to rip a lot out and we had to make it cohesive and understandable to people about why we spent all this time and effort to produce something that could be deemed wonky. So that's what we want to do here is try to chip away at it so we can make bite sized pieces. to folks so they read it, they understand why we think it'll drive pricing adoption. And that's the main goal, think, unless you folks have other ideas as well. Jesse Myers (Croesus) (01:19.256) Yeah. Yeah. What I think is really cool about what you did here, Mark, is it's totally data driven. And, you know, I think most Bitcoin investors only think about what kind of returns has Bitcoin delivered. And that's about, you know, the only metric that people seem to care about. But for institutional investors, for portfolio allocators, they care about a few other metrics too. And, and Mark, you kind of helped school me on, on some of the things that matter to institutional investors beyond just performance. And then you dug into the details, the data that Bitcoin shows with regard to those particular metrics. And it tells a hell of a lot deeper story about how attractive Bitcoin is as an institutional asset class at this point in time. So. I guess it'd be great to hear you tee up what are those other metrics that institutional investors care about besides just performance. Mark Connors (02:27.592) No, thanks for that, Jesse. It's not just how much, but it's also how you got there. Because if you look at a narrow person like a college endowment, colleges want to say that they're able to fund 80 % of first-generation college students. They want to do a lot of good with their money. but they also have to have the money be there. So they don't like something called drawdown. They don't want to all of sudden make 50 % one year and then lose 30 % the next year. They can't afford that, that downside. So what Bitcoin has, and this is a money shot, can kind of, if we had to clip it, we clip it here. Bitcoin has more good volatility than bad volatility. It has more upside risk. or uncertainty than downside risk or uncertainty. It's a weird concept because that 900 trillion in assets that you framed in your report, Jesse, of bonds, equities, art, et cetera, that makes up the monetary premium or investible universe, that whole universe of assets surprises to the downside. So that little nugget of Bitcoin on the right is a high pressure value savings mechanism that is slowly drawing value from the others because those other segments, as we'll show here later, have more downside risk. All of a sudden you're like, yep, I'm clipping 80 basis points, clipping 80 basis points up, I lost 5%. So in trader speak, we talk about taking the escalator ride up in opportunity, but we wake up to that elevator shaft ride down on a fraud, on a default, on an earnings miss, where they're all of sudden down eight times more than they've been up over the past three or four quarters. Mark Connors (04:37.364) So that's why this is a weird concept because those other assets are mature. There's no new adoption. Bitcoin is gaining adoption and that adoption is creating a unique profile that, as we'll share, BlackRock wrote about. Fidelity has mentioned aspects of Bitcoin's favorable risk-adjusted returns and not putting words in anyone's mouth. That's just what people have stated. But it's not something the average Joe or Jane really cares about. But that $900 trillion in assets, the people who manage those assets, they care and they're coming. Jackson Mikalic (05:19.267) Yeah, Mark, on that, a lot of alpha already, and I do want to get into the volatility story because... Mark Connors (05:25.822) But hold on, Jackson, how wonky was I? We have to have a wonk check on it. If I get too far in the... Jackson Mikalic (05:32.066) No, that was perfect. And we're going to get more into the weeds because there is this misconception about volatility and that being only bad. I think before we do that, Mark, let's zoom out for just a second. I know you've been working on a lot of these ideas and research, not only during your time at OnRamp, but this is kind of like coalesced through, I think, years of data that you've analyzed probably the past two or three years. And this is ultimately, I think, what's been compelling to you and why you wanted to get involved in the space. I'm curious because the report is Bitcoin, the emergent asset class has arrived and the subheader for that is Bitcoin boosts returns and dampens volatility in traditional portfolios. So why, could you give like the audience a little bit more context as to the main goal of this report and really why were you motivated to put this all together? Because it was a beast. It did take a lot of your time and resources. So why are you, why do you think that this is so important and an idea that people would need to start paying attention to now? Mark Connors (06:32.842) That's a good start. Thanks for redirecting me here, Jackson. The reason I spent so much time and you guys gave me the leash to do it is because I think it has a persistence. When doing research, it's not worthwhile doing something like building sand castles on the beach where the next day your insight's gone and washed away. This is persistent. It has precedence. And the reason we spent time on it is because I think we'll be able to use this report to then speak to what's happening next quarter and next year in equity markets with behavior of RIAs. So I think we'll be able to drive opportunity for our firm and for clients. That's one thing. It's persistent. And the other thing, the reason I spent time on it, you know, I've been in the markets for a while. been in a risk practitioner for 15 straight years at different hedge funds across multi-assets. When I came across this aspect three years ago of the up-vol versus down-vol or good versus bad, it was so weird. I called up my old boss from Credit Suisse, Indigit Bardin, and Indy's now doing independent work for companies, but he's the man. He was at Merrill. He's written operational and market risk white papers. He's more letters after his name than the alphabet. And I called him up. said, I need you now because I want you to go check my work. And he was the first person I used others. They all said I that it was unique. They hadn't seen it. So the reason I spent time on it is because I've channel checked. People either aren't incentivized or don't understand it, but the ones that do understand it said, yeah, you're right. This is accurate. And as we share in the report, some other institutions are are coming to the same. realization of this attribute that can really enhance and improve the otherwise more abundant, sloppy, less performing, more volatile to the downside assets that Jesse highlights in that report of 900 trillion. Jackson Mikalic (08:49.997) Yeah, appreciate that market. It's great context. so thinking about where we are right now, we're in October 2024, last quarter of the year. Earlier this year, there were the ETFs that were approved and since launched, they've been wildly successful. think they was iBIT and FBTC in particular were the fastest ever ETFs to accumulate $10 billion in assets under management by a very wide margin. So So when you think about Bitcoin as an emerging asset class, it really, was the ETFs a big part of that or are there other considerations as to why like 2024 or even last year 2023 were part of this or what needed to happen for Bitcoin to become seen as a reliable and legitimate asset class within traditional finance? Mark Connors (09:45.972) Yeah. So Jackson, the ETFs were critical. as some of our friends who are Bitcoin focused are saying, it's not great because it's paper Bitcoin. And yeah, and there are qualities of it that aren't desirable that you're giving up as opposed to owning the token outright through something like multi-institutional custody. True. But the more people being aware, driving adoption, and we all know it, some of us may not have gone to Bitcoin right away. bought Ethereum first, who knows, I'm not saying it was me. But you know, we all have our journey. So buying the ETF and understand adoption, that's expanding the awareness of it. So ETFs were good. But if I was going to look at an analog to what's happening with Bitcoin now, I'll go back to the 70s. Because people are drawn to Bitcoin, you know, they come for the returns and they stay for the integrity. The returns will continue, we believe, because of what's happening with the growing debt load and debasement. I'm to put that topic to the side for a second. It's deeper. part three of our report coming out later this quarter. But the ETFs are second to what I said is an analog for the 70s. In the 70s, gold, another commodity, analog commodity, not digital commodity. saw its volatility increase from I think five or six annualized to over 70. It had upside volatility as its price went from $35 right before Nixon broke the peg to gold in 71 to over 550 by the end of the decade not even accounting for the $800 blow off in 1980. So Mark Connors (11:43.006) people are going to Bitcoin because they're seeing the problem in TradFi. They're like... know, Canadian stocks, I worked for a firm. The TSX is up single digits. It's not even near debasement. You're losing money by holding there. Europe, the SXXP, the stock 600 is not keeping pace with debasement. Bonds are down this month. They're down the past couple of years. So the traditional assets aren't the best way for an endowment to say, I need to fund the higher insurance costs, the higher costs of building the new facilities for the next generation. Where am I going to go? They're waking up and they're saying, I can't go to what got us here because I can't keep up with the increasing debt loads. That's why we can't look at the last 20 years to say what are the good returns. We have to go back 50 years to say when was another stepwise function in markets. It was when Nixon broke the peg to gold and people realized there was a new asset to capture that debasement. And that's the analog I think that I would use. Jesse Myers (Croesus) (12:43.958) Love that. Yeah, I love that comparison, Mark. And what strikes me about that, I think you're dead right that the seventies and gold is the closest analog. And I think a big part of that story for me is that the reason that gold rallied so hard in the seventies is because suddenly we went off this, this, this sort of arbitrary gold peg that the U S government was saying, here's the value of gold and sort of suppressing. free market price discovery for the value of gold. And you go off of that and then suddenly you allow price discovery to take gold to a place where it should have been, right? Like it naturally was able to rally up to an equilibrium where it should have been the whole time. And so there's this stark moment of gold being unleashed. And with Bitcoin, it's a different sort of set of circumstances, but the same kind of phenomenon of Bitcoin didn't exist and now it exists. And you have to go from zero to where is the right valuation for this type of asset in the global asset landscape. And so it's not going from like prohibition to free market price discovery. It's going from not existing to free market price discovery. And what's playing out is that process of Bitcoin continuing to drift towards where it should be in the global asset landscape. In my opinion, a much larger asset than it currently is as you know, since it's currently only one one thousandth of the world's value. Michael (14:28.512) Yeah, that's such a great point because it doesn't exist. The 60-40 or the notion of volatility is one piece. This notion of the volatility is opportunity. I think the other two pieces that are missing and why there's so much asymmetry is the opportunity is understanding Bitcoin versus digital assets because people are effectively, they lump generally them all together. And so they're still don't even know how to look at a singular asset and its volatility profile and come to this conclusion. So it's a big part of the education of like, let's look at it as a singular asset, its own asset class, as Larry Fink is now coming out to say. But then the last part is the opportunity is this notion of custody, because if you get those other two right, you're still worried about, what do I do and how can I size this appropriately? Cause I may lose all the assets if I pick the wrong counterparty. So all of these things are almost like, is a perfect confluence of this next kind of like up trend in figuring out custody with regulated custodians, actors that are there, understanding how to price or size it proportionately to the volatility profile. And then also just why you're looking at a singular asset versus a basket of cryptocurrencies, which we would all agree probably look more like a venture style bet. And that's not what we're talking about here. Jackson Mikalic (15:44.813) Yeah, that's a great point, Michael. Mark, correct me if I'm wrong, but you had some information about that in the report as it relates to just Bitcoin dominance. how do you think about that Bitcoin versus the broader digital asset space and just what we see in terms of the concentration of value in Bitcoin versus the rest of the ecosystem? It's like kind of unlike what we've ever seen before in traditional assets. Mark Connors (16:09.652) Yeah, and so the Bitcoin versus crypto, what Michael just talked about about the venture side, which is a side and people are looking at it. Bitcoin has four year cycles and it has a halving its price behavior follows it. So let's use that as as as epochs or as segments to look at in each of those four year segments. Bitcoin has dominated since it came out as the first one. are no others. Price discovery, Jesse started one like in 2010. I don't think it was 09. Jesse Myers (Croesus) (16:44.514) Yeah, I mean the first markets were 2011. Yeah. Mark Connors (16:50.122) Yeah, so Bitcoin was in existence in 2009 and then pricing in 2011. And then other coins came out in 2016, 2017. But in each cycle, some of them did well and then they receded. If you look at the top 10, they rotate a lot faster than what you'll see in the S &P 500, where there's a more of a persistence. So if you want to look at investing in something, sure, you can try other things, but Bitcoin has remained the most dominant. And its persistence or its dominance as a part as, you know, what is it today? Fifty seven percent of the entire two point three trillion dollar digital asset market. Is Bitcoin and it's been as high as, you know, 80 and. What I think, and this is a fundamental part that is fundamentally based, but it's based on data and a model. I think that in this space, the criteria, when people look at blockchain, they say, okay, how secure is it? Thumbs up, it's the most secure network. But the biggest part is how decentralized is it? Can someone come in, three people wake up on a Sunday night, you know, say August of 1971 and say, we're going to change things. Or on Ethereum, you know, we're going to go from proof of work to proof of stake because feedback is we should change it. That mechanism is very different with Bitcoin because of the decentralization, because of the setup. So that. That aspect of it, I think, is why it's dominated, because it's playing the long game and the scale and utility is only growing over time. that went into the fundamental side. But Bitcoin is different. And I think it's a difference. Just like how I said, I did the report because this feature of volatility has been persistent. It's been persistent because it's in its DNA. Mark Connors (18:52.08) No other coin has this type of codified supply cap or the escape velocity of being decentralized. You can't do it going forward. Everyone's watching. So that's why there won't be another Bitcoin. And that's why it's Bitcoin not crypto. And that's why we got excited about writing this, because it's go time on figuring it out. Jackson Mikalic (19:18.084) Yeah, I love that, Mark. And it's also not even just Bitcoin versus digital assets, right? Because if you look at Bitcoin's dominance from a return perspective against traditional assets, it's very clear that Bitcoin dominates across equities, real assets, venture, private markets. And there's some really good data in the report around that as well. And I believe if you look at the worst four year period of Bitcoin, right? Because we could talk about all the upside and how meteoric Bitcoin can be in bull cycles, but even in bear cycles, Bitcoin's lowest four year period was, I believe, 22%. Right. So we're still looking at a pretty attractive rate of return there as it relates to or compared to traditional assets, which is very impressive. You would think that it would be much lower given some of the downside volatility that we do see in the market. Mark Connors (20:13.034) Yeah, and I'm going to jump in quickly on that one. I think I can really make a good tight point here. That's why people like Michael Saylor was just on with with you, Jesse, I believe a couple a week ago. He's figured it out and he'll say, don't lever it. Hold on to it. It's still hard for people to weather the up and down. But to have that number out there to say if you hold it, you will not you will. You have only realized a twenty two point nine percent annualized average return over any four year period. So the data is there. is there it still might be hard to do but we invite individuals to explore to do their own hodling. This report goes somewhere else. This report says most people might not want to do that or it's too volatile so use a little bit of Bitcoin put it in your portfolio and something very unique happens. Your returns go up Along the lines of what you said, Jackson, about its unique return profile of the long run is positive. Your returns go up and your volatility goes down. There's. Effectively, no. Price to pay. In fact, drawdown. Between 1 to 3 % is virtually the same and a 5 % allocation by our study. There's some positives and negatives. It's almost a push as well, so. On an outright basis, it has a positive case on a mix with the multi-asset portfolio. Like I think people are on notice to why they didn't have this in there. And that's why we're having part two of it. Rich Kerr, who runs a wake up call is writing a report part two about how this is perfect for RIAs who are Mark Connors (22:13.93) What do we call them? Disruptors to gather value. So thanks for that intro. That's the distinction about yes, it is good for the individual. Hodler because of, as you said, pull it back. You only had positive four year returns, 22%. But even the day to day volatility is absorbed and you know, Bitcoin jigs when the rest of the market jags. That's why the wavelengths. offset each other, you that diversification benefit that Ralph wrote about last week in our report. That's why they're coming. They're not coming here because it's, you they're on the mission and they think it's a good idea. They're here because it helps their existing portfolio beat others. Michael (23:01.499) Mark, curious on that. It's kind of a unrelated related in the sense that you mentioned Rich and the RA community is just very fascinating in that independent advisors looking to gain market share in fear of losing market share, being ultimately altruistic. I remember somebody came in and was like, RA is a very form of like decentralized finance in itself because they're all over the place and they're working with independents. their clients and wanting to protect their wealth. But that made me think of like pensions and the unfunded liabilities and individuals. it's just a, we all know this was a very beautiful system that impacts everyone. And that is very, we have Larry Fink now, very aligned. I know you've never seen something like this. And I would imagine you've never seen anything like this in your career in traditional finance and everybody having this like alignment with a one exposure to it. But do you have anything to comment on there of what would be the closest quarrel area? you mentioned gold in the 70s, but how everybody needs a piece of this and will ultimately have a piece. Any thoughts on that? Mark Connors (24:12.404) just brought, there's nothing like this on that emergent asset class and how we all have to wait for it to be blessed, unfortunately, by Larry Fink and, you know, God bless him for advancing it. We're not trying to say. Mark Connors (24:31.082) So the only, back to the RIAs, the only thing, and the closest analog is what RIAs did in last 20 years by adopting alternatives, a much broader asset class, where they said, hey, we're gonna create new products that dampen vol, whether it be in liquid alts or liquid alts. That's the advantage because you guys don't understand it's too complex. It's almost like the fund of funds of the 90s to invest. said, listen, I've done the work. I know the best 10 managers. And then it went the RIA said, I'm going to bring that same model to you, the individual investor. I've been the market for 25, 30 years, RIA number one, two or three. And I'm going look at alternatives. So it went from hedge funds to maybe some illiquid private equity, certainly private debt now. that is something, goodness gracious, it may work out, but the price discovery in that animal, you I prefer the 24 seven price discovery of Bitcoin to that. So, so Michael, think alternatives in every RAA would, think 60 % of them would agree that. just the adoption of alters broadly, but they're still trapped by the same debasement risk or reality that the rest of market is. Jackson Mikalic (25:55.439) Yeah, Mark, you made a comment earlier as well about Bitcoin being a diversifier. And I think there's a misconception out there as it relates to Bitcoin being highly correlated with equities, specifically the NASDAQ. And I would love for you to just shed a little bit of light there, because I see it all the time that people will refer to Bitcoin as just a high beta NASDAQ exposure, right, tech exposure. But in reality, there are different return profiles and Bitcoin isn't moving with the NASDAQ and it happens occasionally but it's not like a it's not a high correlation is my understanding. Mark Connors (26:34.886) It can be at times and so can bonds and everything else in a time. But we have data that shows, not we have data, it's wrong, Jackson. Let me just not bounce around it. It's not highly correlated based on a one year, three year, five year, 10 year period. It averages less than 40%. I believe on all of those, maybe one of them is 41%. It's in our report. So over the last year, I think it's below 30. So 30 is not high. And then if you want to do rolling, whatever measure, I'm not cherry picking here. So that's part of our report. The reason it's data intensive, as Jesse said, is because I don't want anyone to dismiss it as saying, you only chose this. And we're also following up with another addendum that goes over 12 years of rolling daily data. All right, yeah, this one. Okay. So how can you call NASDAQ and Bitcoin... highly correlated or call Bitcoin a three times levered ETF or play on NASDAQ. If, and I'll show you what you're looking at here. Some people like to grab, some people say it's not intuitive. We're looking at. We say, what's a 63 day or three month return for Bitcoin? We chose three months because it smooths out the return. It's also how people allocate data or portfolio rebalancing, often quarterly. So what's the quarterly return, let's say for the most recent period in our report, which is July, maybe Bitcoin returned 22%. And I believe that number is about flat. That means NASDAQ returned about 22%. So call it even, There's no difference that dot is at zero. But if you look at the day before, it was actually less. Nasdaq outperformed it. And in say June, maybe it was lower. But if you look at the next day and the next day, the entire what, seven year period here, on balance, Bitcoin's 63 day return was two times more that of Nasdaq. Mark Connors (28:46.022) Our data shows that, I think. One point, yeah. Jesse Myers (Croesus) (28:48.77) Yeah. Wow. So, so in other words, you know, on this chart, the weighted average of this whole time period is significantly above zero when you're comparing Bitcoin versus NASDAQ. Mark Connors (29:02.218) Yeah It's 40 if you clip all the numbers above that zero line when bitcoin made more than nasdaq, I think it's something like 44 percent and if you look at all the numbers below And some of them get below as much as 50 for a 63 day period not often but does That averages 18 loss for those periods below the line and and we also show that Jesse Myers (Croesus) (29:29.422) Yeah. Mark Connors (29:32.518) not only those numbers there, but NASDAQ underperformed Bitcoin more of the time than Bitcoin outperformed. So you have this favorable asymmetry, which is effectively what good vol versus bad vol is. That's what you're seeing. You're seeing the good volatility manifest in that graphic. Jesse Myers (Croesus) (29:55.352) Yeah, so for more of the time than not, Bitcoin is outperforming the NASDAQ. And when it is outperforming, it's outperforming significantly. Whereas when it's underperforming, it's underperforming by a small amount. Mark Connors (30:09.449) Yep. Jackson Mikalic (30:12.205) and Mark. Mark Connors (30:12.446) mean, that looks like option, that was, looks like an option portfolio that you have to pay premium for. Jesse Myers (Croesus) (30:19.436) Right. And funny enough, in this case, the premium you have to pay is just understanding Bitcoin. Mark Connors (30:26.972) And said, we're helping you guys, right? We're trying to reduce the cost of entry here. That's why Team Tanguma and Myers started this place. Jesse Myers (Croesus) (30:32.608) Yeah. Jackson Mikalic (30:37.657) So, can we talk about the idea of volatility then? Because we're talking about good volatility, we're talking about bad volatility. Mark, could you define or explain how you think about volatility as it relates to portfolio allocation and then... From there, we could talk about the positive skew and the unique attributes of Bitcoin that it has more good volatility. But I think it's really important to explain how you think about it because in the traditional finance space, standard deviations, volatility is almost always categorized as a negative, but there's a lot more to unpack there. So I think you're the best person to do that. Mark Connors (31:20.106) All right, good. And let's look at that, if everyone could put that last graph in their head as we're doing this. As you said, Jackson, volatility is measure that people use as standard deviation and it's great standard. just simply says, all right, how have returns for a single asset been over the past year, month, whatever? And they say, okay, just like, they, in fact, can you switch back Jackson to the distribution of returns? Now we have, I think, I don't know if we've showed those yet. That might be a better one. Jackson Mikalic (31:59.629) I can do that. me just give me a second here and I'll get it pulled up while you're talking. Okay. Mark Connors (32:03.944) Yeah, look, bring up the equity one. So standard deviation takes in both the Mark Connors (32:13.226) Returns whether they're good or bad up or down over a period of time and it says okay against an average return over the period so here we have Bloomberg's US large cap equity, is effectively a proxy for the S &P we chose that because it's It's the index that they use to make up their 60-40 portfolio. So they can be apples to apples in our report and the return there on average is 3.7 percent So all those returns over that period average 3.7%. But what was the journey like? Because that's what people care about. Because RIAs are gonna get calls saying, hey, why is my portfolio down on this day? They don't call to say, why is it up? Thank you. say, people write bad Yelp comments, not good ones. So what this shows me is that it looks kind of evenly distributed, but it's not. There's more... punches to the left or to the downside, then to the right. So this has a negative skew. So it's standard deviation. Its volatility measure would be something like, you know, the VIX is, call it 14 to 18. And that means that on any given day, the volatility will be plus minus 14%. But it doesn't distinguish between good or bad. It just says that's what it is. because I'm standard deviation and I don't care about whether it came more from the downside or the upside. I average it and give you a single number. Not great if you have two different qualities that are driving this, but it's good enough for government work. In fact, we have a link to what William Sharpe said in 1997 in a paper saying all these measures, volatility, even my Sharpe ratio that everyone bows to and uses. Man, it's got holes in it. God forbid you're bringing in a negatively or positively skewed asset, you're have to do more work. So people know it, but they don't care because they look at it as negative because bonds, equities, private debt, all of these assets have this type of character. They are more negatively skewed. They punch more to the right. So standard deviation is now interpreted as being bad. Mark Connors (34:36.104) because it usually is. So that's a, that's a, it's wrong, but they've been right in using high vol with loss. That's landing on this statement. High vol usually equates loss because of what you see here, a lot bigger numbers to the left loss of the mean. So I'm going to stop there. want you guys to kind of bring me back center to see if it. what I've made sense to the audience here. Jesse Myers (Croesus) (35:06.742) yeah, I think that's, again, you're in the details here. You're a bit wonky and that's good. So to translate, think what you're saying is that historically higher volatility more often than not means a bad day. And that's what this reflects, know, the skew to the left side of the distribution here. So people... Mark Connors (35:10.943) I Jesse Myers (Croesus) (35:33.828) traditional investors, traditional asset investors have a fear of volatility because it's associated with bad days. so volatility is typically something that people are trying to avoid. And that might be part of why there's a reflex reaction to Bitcoin and seeing the high volatility that comes with it and saying, like, I don't want to be a part of that because volatility is bad. But that's simply because they're bringing over their assumptions about what volatility means from stocks and bonds. then I guess maybe that tees up the next chart of showing this distribution in contrast with bitcoins, which tells a different story. Mark Connors (36:20.042) Yeah. Yeah. You know, even on that equity bucket, if you saw the the instances of minus 16 to minus 19 percent, it was like 27 instances where you could have lost 16 to 19 percent. And only 17 or so instances where you made 16 to 19 percent. And let me see if I had that. had that right? Yeah, 16 to 14 percent, 27 instances. And then, you know, in the 16 to 19 percent area, was like 16. So if you aggregate all those numbers, I know I just cherry picked there. But what we don't show here is that in statistics, this has a negative skew of 0.6, I believe, or minus 0.7. So when people see that, statistically they say, any given day, I'm going to have some bad news more than good news. It's like a bank. Imagine you get a bank statement and every time there was an error, was because there was a loss. Jesse Myers (Croesus) (37:18.68) It Mark Connors (37:32.82) Somehow they took out more money. But when do you ever have a surprise positive bank statement day? And that's what Bitcoin gives you. Bitcoin is a bank error in your favor on given days. Jesse Myers (Croesus) (37:44.578) And so that negative 0.6 is specifically the negative 0.6 standard deviation shift from the center of the bell curve to where the average is on that bell curve, right? Like on this, in this example that 3.7 average performance over the time period is. to the left of the center of the bell curve, meaning it's 0.6 standard deviations to the left of what the center is. Mark Connors (38:17.972) Conceptually, yes, and and I believe the math is a little more it's more like calculus where it's more of a differential We have a link to a man report that goes into it and they call it the third moment of data So, you know, we're not dancing with third moments on this call, but it is akin to that Jesse it's not as clear as a point six change in deviation but the reason I like the pictures is because we can stay away from the math and just be like Jesse Myers (Croesus) (38:24.365) Okay. Mark Connors (38:48.286) Fat-tail so I think even are know RIAs and everybody can understand what they seem to lab wrote about with a black swan and about unusual events Things that aren't in the data, you know the black swan on the lake. It's there just because you don't see it doesn't mean it doesn't exist What we're trying to show you here is that these things exist in Bitcoin to the upside This is a fat tail There's an average But there's a lot of geography to the right of that that explores things like 100, 200 percent gains versus only a down 60 or 55 worst quarter on the downside. So this shows you what you want to have in your portfolio. And at a minimum, Jackson, what you were saying about diversification, at a minimum, this thing is very different than what we just saw. So that's the part we want people to get curious about. Forget the math and askew. This thing's different. This is just looking at the actual returns, numbers that you can gauge each day, put in a histogram in Excel. You can do this. And that's one thing that I like about data. I I'm not a quant by any stretch. To learn about risk management and statistics, I had to go through the data and create and go through it. And it really helps me understand it when I go through and create the statistics and generate them and then... talk about it. We suggest you do the same. Jackson Mikalic (40:18.489) Yeah, and. And so for the listeners, the context is we had a chart previously that showed equity performance distribution and it shows, as Mark said, a very fat tail to the left, meaning that there are more, there's more of a distribution toward negative returns, which as Jesse explained, is kind of informing the bias that traditional investors have as it relates to volatility being bad. And now what we have on the screen is Bitcoin's performance distribution, which is showing a very heavy skew. long fat tail to the right, which means that there are more, there's more of a skew toward large outsized positive returns rather than negative. So this is really critical in understanding why volatility is not only bad as a lot of the folks in the traditional space typically associate, and not that there's any... There's nothing wrong with that, right? Like that's just effectively how people have been trained in this environment because there's not a lot of asset classes that look like Bitcoin and have this higher skew or this positive skew to the right, which shows good volatility and outsized returns. Jackson Mikalic (41:34.863) Awesome. Now, so Mark, maybe what we could talk about now. go ahead, Jesse. Jesse Myers (Croesus) (41:38.956) And and and Mark, just sorry to Jackson, if you could pull up that chart again, it strikes me as sometimes you hear about if you held Bitcoin every day except the top 10 performing days of the year, you'd you'd forget if it's be flat or lose money, which is to say that, you know, most days Bitcoin doesn't do much, but there's a few days a year that. Jackson Mikalic (41:44.665) Sure thing. Jesse Myers (Croesus) (42:06.082) or a few time periods a year where Bitcoin sees serious upside volatility. And that's represented here on this long tail to the right. And so, you the process of holding Bitcoin is holding through all of this, like knowing that you're, your mode day, your typical day is gonna be flat, but you're gonna get a few days, a few time periods a year where there's a pretty sharp volatility to the upside. And that's the whole game of holding Bitcoin. Mark Connors (42:39.272) And you just defined a positively skewed profile. So to the, what we're looking at dead on the average is 18.3, but look at the mode, Jesse, it's to the left. So things frequently hit around the mode is zero to minus 15. It's pumping there, pumping there, pumping there. And then boom, green candle, boom, green candle and Jesse Myers (Croesus) (42:59.852) Right, right. Mark Connors (43:08.926) Green candle is not in the lexicon before I came into Bitcoin for 20, 32 years. You we didn't have them because it was red candles. Mark Connors (43:21.736) Downside, excellent explanation. That's it. Mode to the left of the mean is a definition of a positive skewed profile. Jackson Mikalic (43:29.603) Yeah, now we could take a look at another chart that I think nicely positions Bitcoin enhanced 60-40, right, with a 3 % allocation to Bitcoin in a 60-40. And then you have your traditional 60-40 portfolio, US large cap equities, and then US bond aggregate index. So Mark, maybe we could talk through this bar chart here and just give, if you can, just a little bit more of a visualization and explainer here, especially for those that are just listening. listening, what we're looking at. This really I think encapsulates the idea that we've just been talking about over the past 10 minutes. Mark Connors (44:07.772) Certainly, and thanks for the prod about the describing the visual. So what we're looking at here. R is a chart with four different assets and I'll start with the equity asset. It's a large cap equity index by Bloomberg, which is effectively the S &P. They just create their own for their own purposes. And then we're looking at the US bond aggregate. And this to fixed income folks is the old Lehman AG that was around since 87. Barclays took it over when they assumed Lehman at bankruptcy. And then Bloomberg either co-opted or is doing a JV. It's the Bloomberg-Barkley bond aggregate. It's got corporates in it, mortgages. It's the bond proxy that everyone knows. We choose these two because they make up the Bloomberg 6040. So it's neat to see the two constituents and how they impact the broader portfolio of the traditional 60-40, which is a mainstay for advisors, endowments, cetera. They may have exactly a 60-40 or a variant. That's why we choose it, because the animal is used still with tens of trillions of dollars in basically indexed assets. The fourth asset is a variant of the 60-40. In our study, we allocate 3 % of Bitcoin by pulling away one and a half from bonds, one and a half from equities. And we rebalance the portfolio every quarter. Mark Connors (45:44.084) for five years, total of 20 quarters in this instance. We do another one, which you can read about. We won't talk about this, but we do another longer study as well. So those are the four assets. Let's look at the constituents. Well, let me stop there. Was that clear as far as what we're looking at? And does anyone have any questions here on Jesse or Michael or Jackson about description before I go into what differences these four assets show on good vol versus bad vol? Jackson Mikalic (46:10.317) Yep, exactly. That was clear. then so each each one of these assets, each one of these four assets has two bars, the gold one being good volatility and then the green one being bad volatility. Mark Connors (46:22.942) Perfect, all right. So let's look at the US large cap equity, which we saw it had a not quite a normal distribution, but a negatively skewed profile. So its returns punch a little bit further to the left than to the right. So not surprisingly, when we look at two different types of volatility, bad volatility being, let's look at the Not standard deviation, but the down deviation. Let's do a metric where we look at how variable the negative returns are against the mean of the returns. So on any given day, you could make or lose money. But the variation of losses here is about 14.8%. And when we look at the good vol, excuse me, yeah, and when we look at the good vol, it's only 10.9. So the upside or the variability of positive returns is lower than the variability of bad returns. That goes back to the elevator shaft down. In fact, it's pretty neat because it looks like an elevator shaft because it's the tallest bar on the chart. So that's what we do. Wonky stuff. But look at this. We take all the returns. We say, OK, How about the bad days? They are much more volatile. The good days, not so much. Now let's look at bonds. Bonds are supposed to be a safe haven and a mainstay. And you know, they have been for a long while, but less so now. And they also exhibit more downside vol, 4.4 % versus upside vol in the gold, 2.5. So the reason why this is critical, and I love talking about it, because I don't even make this. in my this conclusion or observation in my report that I'm going to do now. These are the two things that are supposed to provide diversification with each other. Both of them have more bad vol than good vol. So you mix them together. And not surprisingly, that 60-40 portfolio has more down vol than up vol. More elevator shaft than escalator, you know, and then only an escalator on the way up. Mark Connors (48:41.322) think it's 8.2 versus 7.0. 8.2 of downside volatility and only seven of upside. So you put those two together, you know, the apple doesn't fall far from the tree, they say when you're a parent, well, here you go. Same thing in portfolio management. But we introduce a new animal, a new variant in that last, in the final chart that we show here. on the Bitcoin enhanced 60-40. Again, take out 1.5 % of the equity allocation, take out 1.5 % of bond allocation, put in 3 % Bitcoin, rebalance every quarter. And the upside volatility is 8.6 and the downside volatility is only 7.9. You have more upside volatility, Jackson, than the 60-40 where you started. and you have less downside deviation. So I'm going to stop there because that's home run. That's a money shot. Jesse Myers (Croesus) (49:45.506) Yeah. This is, this changes absolutely everything for portfolio construction. cause Mark, what you've just shown here is that you can go from a world where volatility is bad. volatility is not your friend. and there's no way to hide from it because bonds and equities share that characteristic. to a world where volatility becomes your friend just by taking 3 % of your portfolio and putting it into Bitcoin. So you're not changing all that much, but suddenly you now reap this massive benefit of volatility is now good. On net, it's now your friend just by taking 3 % and putting it into this different asset class. And, you know, I'm... Your focus here is on volatility, we also know that that performance enhances performance significantly as well. And that's going to be, I think Mark, what you've hit on here is this is the entire story of how TradFi makes its way into Bitcoin over the next decade by, you know, shops on Wall Street waking up to the data that you've just surfaced. Mark Connors (51:04.138) That's it. Clip that one. Jesse, thanks for... That's why I come on here to figure out what I'm trying to say. Jackson Mikalic (51:11.428) And Mark and Jesse, know, thinking through this live as we're chatting through all the data, what this really speaks to me is that, Jesse, it might have been a point that you made about how... infrequently, but how material these moves can be in Bitcoin to the positive right skew. Right. So what that means to me as an investor is that you want to be allocated in the market and you want to have a secure way of owning Bitcoin. Right. Because if you're out of the market on the wrong days, if you're trying to time the market, you're more likely than not going to miss the most important days of the year where Bitcoin is generating most of its upside. Likewise, if you don't have a secure way of owning it and we could talk about what exists out there. We don't have to. But if you don't have a secure way to own it and something does happen to your allocation, you think of like hedge funds, investment managers that were impacted in FTX. Well, they were out of the market for a long period of time and they're just starting now to get their capital back. They missed the entire first couple innings of the bull market here. And that is really something if you're an investor, you need to be paying attention to, right? Because if you're out of the market those wrong days and you've effectively a lot of the return that you should be getting from owning Bitcoin. Mark Connors (52:33.034) Dead on. I mean, you can't be out of the market and... as hard as it is for people to understand the volatility because they've been ingrained with vol being bad as opposed to vol being only about uncertainty and now you have an asset that gives you more upside surprises and downside. What you just brought up is it's also a bearer asset. So by choosing FTX because Tom Brady was on board or they had good commercials, was a bad decision because you lost your coins on November 11th, 2022 when Bitcoin was at $16,400. And the courts just said, no problem. We're giving you back 100 % of your lost assets in dollars. So you got $16,400, maybe a little bit more than that. But Bitcoin's at $68,500 and rising. because you lost that upside. it is true and we do this for a living here at OnRamp, but it's why I came here because I got the macro thesis down. But what I don't understand or didn't understand until I came here and talked to you folks is how important it is to hold it. So as thick as this topic is, it's important to know. Custody is more important to know because if you don't do that right, then this entry point almost doesn't matter because you're not going to have it to realize those updates. Jackson Mikalic (54:04.545) Absolutely. And so, Mark, want to be mindful of your time here. We're almost an hour into this. Are there any other topics that we should discuss before wrapping up here? Obviously, we do want to encourage people to check out the report that's on the website, free to access. And we also did record a podcast with Fidelity Digital Assets, Chris Kuyper, the director of research there, on the wake up call with Mark, Jesse, and Rich. Maybe as a place to leave it, any thoughts that we didn't cover or any thoughts about just how do firms kind of now utilize this data that we've shared in their research, on the podcasts, how do they utilize that and implement it as part of their investment strategy or for their clients? Mark Connors (54:56.906) Sure. If you want, you want to call us, I think we, I'll check our compliance, but we may be to share some of the data in soft form in case you want to repurpose and attribute it to us. I would suggest just emailing us. We try to make nuggets and we're coming out with some on social media to act as, know, easily accessible, digestible nuggets that will lead you to more insights, but as an RIA, all you have to think about is, I think, adding a little bit doesn't disrupt what your client sees on bad days. That's the biggest takeaway. Our data suggests that adding a small amount of Bitcoin to a traditional asset portfolio or to a multi-asset portfolio will not prompt bad calls from your client because it has more upside than downside. And we think it'll help you differentiate from all the other competition or or your, you know, the other advisors who are still playing by yesterday's game with more downside than upside. That's the biggest takeaway. So call us up. It's there. I've spent time on it. I've channel checked and I don't think this is widely known is why we're spending a lot of time on it. Michael (56:16.844) Yeah, that's a great point, Mark, to push out to the market. Rich and the team have a lot of conversations with institutional investors, RAs, and that's something that comes up often is effectively the air cover, right? If you understand Bitcoin deeply, but you're at a large organization, it's somewhat daunting, if not possible, to bring this up without the appropriate documents team behind it. So we're happy to lend those resources, whether it's the documents or our team at OnRamp that has backgrounds in supporting things like this. So yeah, please reach out and we're going to be opening up more of these research papers and just things to help make the ultimate case for where an individual all the way to an institution needs exposure to Bitcoin. Jackson Mikalic (56:59.243) Absolutely. Well, Mark, excellent work on the, on the research. know that's been a slog for you and it's just extremely well done. So I would encourage anyone who wants to dig deeper into the data. have about 50 pages of research of charts for you to leverage in your conversations to help, you know, make a case within your firm as relates to allocating to Bitcoin. And as Mark said, you know, we're just a call or email away. If you do want to get in touch to discuss the report itself and the findings, or if you want to discuss implementation and how to think about allocating to Bitcoin and the various products out there, we have you covered. So Mark, thanks again, just fantastic work and really excited to see what conversations we have that are brought about from the work that you've been doing on this piece. Mark Connors (57:47.444) Great, thanks Jackson. It was really helpful to rip through this with you guys, Jesse and Michael, because you're seeing things that I don't because I'm so close to it. So thanks for that. Jesse Myers (Croesus) (57:57.954) Yeah, awesome conversation, Mark. I think everyone should go check out the report. It's really cool that the graphics, the charts that Mark put together tell the story very cleanly. So, you know, add that to your quiver of arrows for making the case for Bitcoin. Jackson Mikalic (58:15.065) Thanks Mark, appreciate the time. Mark Connors (58:16.116) Well said, take care folks.