Since you're a subscriber to this Bloomberg podcast, we thought you'd be interested in a new four episode sponsored podcast called Evolving Money, produced by Coinbase and Bloomberg Media Studios. It explores some of the monetary system's biggest changes over the centuries and today's companies that are making big bets that cryptocurrency could be money's next evolution. You can subscribe wherever you listen to your favorite podcasts. Here's a recent episode.
It was twenty ten, about a year had passed since the first bitcoin was created. In Jacksonville, Florida, a twenty eight year old computer programmer named Laslohnyez decided it was time for someone to use this new kind of money, like real money, to actually buy something. Laslow went online and posted a question on a bitcoin forum under the subject line pizza for Bitcoin. A nineteen year old in California named Jeremy Sturdivant responded and took him up on
the offer. Laslow paid Jeremy ten thousand bitcoin, and then a few days later, two Papa John's pizzas were delivered to Laslow's front door. The first known commercial transaction involving bitcoin was completed Back then ten thousand bitcoins were worth about forty one dollars, so it wasn't a horrible deal at the time. But today those ten thousand bitcoins are worth hundreds of millions, enough for Laslow to buy an
entire chain of pizzerias. That's a pretty dramatic increase in value for a currency over such a short period of time, maybe the greatest ever. And for that very reason, bitcoin is much better known today as a store of value for investors rather than a medium of exchange a currency. From Coinbase and Bloomberg Media Studios, this is Evolving money, and I'm your host on this podcast. We're taking a
different look at cryptocurrency. It's been cast as a radical departure for the monetary system, but what if it wasn't radical at all, just the next logical evolution of how we pay for things and store long term value. Along the way, we'll explore how money has changed over the centuries, looking for lessons that predict its next evolution. Why did bitcoin move from a currency to an investable asset in
just fifteen years. It was because of mainstream adoption by retail investors who believed there was money to be made, But behind that mania for all things Crypto was a much more serious undertaking, the birth of a new asset class. Investors came to understand that there was a market for crypto and that it behaved differently from other assets in their portfolios. It's not the first time the monetary system
has absorbed a new asset class. In fact, as we'll see, the rise of crypto has striking parallels to the creation of stocks in the sixteen hundreds. Will also be joined by Kathy Wood, CEO of ARC invest who was one of the earliest believers in crypto, will explore what her research shows could be a smart use of crypto in a diversified portfolio of assets. Back in the sixteen hundreds, Europeans got rich sailing the world, taking spices from far
away lands and trading those spices back home. The most coveted spice was pepper, and the trade of pepper yielded enormous profits.
The Portuguese had started the pepper trade.
That's Maria lane Uthart, professor of history at Vraya University in Amsterdam.
Very soon it was known that the Portuguese merchants who were trading the pepper that they made amazing profits with it.
So the Ditch wanted to get the pepper trade.
But for the Dutch to catch up to the Portuguese required massive investment. The Dutch were face with that classic money conundrum. In order to make it, you've got to spend it. To fund the voyages, the Dutch created the feinigd Orsendische Company of VOC, also known as the Dutch East India Company. The government gave the East India Company a charter for twenty years, and according to the charter, anyone could invest in it. Even the maid of one
of the directors of the company participated. She put in ten month salary. All investors were given the option to cash out after ten years, but that was kind of a long time to wait, so the directors of the VOC added a line to the charter that would change the history of money forever. That line read quote, conveyance or transfer may be done through the bookkeeper of this chamber.
In other words, if you wanted your money back before those ten years were up, you could sell your share of the company to anyone who was interested in buying it.
This resulted in the fact that a lot of smaller investors sold their shares to the big investors who didn't mind the wait.
People would sell their share on this market.
At first, shares were sold on a city bridge. Then when that bridge got too crowded, the trading moved to a new building that became the world's first stock market. The VOC shares were just one of a panoply of other investment opportunities open to merchants at the time.
A very safe kind of investment was also the public debt of the state. It had a very safe return. A lot of the merchants owned, about half of their investments, were in government stock.
Which today we'd call government bonds. Very much like today. Merchants were diversifying their portfolios by balancing stocks and bonds, and they were reaping the benefits. What were the kind of rewards that might have been available to someone who invested if they invested well with the VOC.
The total capital that was invested in sixteen oh two, that is six point four million guilders, and in sixteen thirty seven this was worth seventy eight million guilders.
A nifty return of more than one one hundred percent returns a lot like that. Bitcoin pizza money centuries later for crypto to become an asset class, it needs to go through the same process as stocks did. First, a market needs to be created, a place where owners of the asset can talk to and trade with each other. Second, investors need to understand how the asset behaves differently than existing classes. In other words, what role it can play
in an investor's portfolio. Both developments are well underway with cryptocurrencies today, although in very different ways than in the Netherlands of the seventeenth century. As we're about to see.
One of our analysts at my last firm on my team, the strategic research team, came in to one of our brainstorms and started talking about bitcoin and we thought it was in interesting, amusing, maybe interesting.
This is Kathy would CEO of asset manager arc Invest.
And then he kept coming into the brainstorms and throwing it out there. And this was twenty eleven, twelve thirteen. The more research we did into it, the more captivated we became.
Years before bitcoin would take off, Kathy was like a trader in Amsterdam and the sixteen hundreds, on the leading edge of a new asset class. In twenty fifteen, Kathy's research team wrote a paper which outlined the versatility of bitcoin Kathy and her team were surrounded by skeptics. One of bitcoin's most notable critics, JP Morgan Chase CEO Jamie Diamond, said as late as twenty twenty one that bitcoin was quote worthless and described it as a quote hyped up fraud.
But for Kathy, turmoil overseas had prompted a light bulb moment.
When we first took our position in bitcoin. So twenty fifteen, Greece was threatening to pull out of the European Union, and I noticed that when the Greek sovereign debt crisis was flaring up, Bitcoin would rally, and I remember mentioning it at the time and I said, Wow, wouldn't that be amazing if this were a risk off asset too.
Then March of twenty twenty three, regional banks started imploding and the KRI which is the original bank index, was plummeting, and Bitcoin was down too, and it got down to about nineteen thousand. Bitcoin started out that way, and then all of a sudden turned up as that bank index kept going down. And again I was commenting to everyone in the office our morning meetings, said, look at bitcoin is going up.
Bitcoin's performance in a crisis was more evidence that the cryptocurrency wasn't just a cool technology.
It's a technology, it's a new asset class, and it's a new monetary system.
To Kathy, it was becoming clear that bitcoin could be like those stocks in the sixteen hundreds in the Netherlands, a new asset class that performs differently from other assets, earning it a place in the modern investor's portfolio. As an evangelist for active portfolio management, she maintains that if investors add exposure to cryptocurrency, their portfolios could produce higher returns without overindexing on risk.
We were out there clearly saying this is a new asset class. If you don't own it, you better have a good reason why, because you know, a new asset class for an asset allocator is very important in terms of low correlations of returns, increasing returns per unit of risk. If you look at the correlation of bitcoin to other asset class returns, you'll see that it's very low relative to stocks and bonds, so it just behaves differently.
Crypto has historically shown very low correlations with traditional asset classes, according to data compiled by coinbase, but in twenty twenty two, bitcoin took a hit, a big hit, at the same time that both stocks and bonds were both headed south.
It collapsed like everything else. But if you look over a five and ten year period, you'll see very low correlation of returns, and.
In four of the last five years, she says, bitcoin's performance has significantly exceeded most other major asset classes. If you popped a relatively small amount of your portfolio into that investment, say between one and five percent, what could that do for you?
Potentially, we did that study in the last five years. If you had slotted in five percent proportionately and took it out of both equities and bonds, your rate of return over the five years would have gone up from sixty percent over a five year period to ninety three percent. That's a fifty five percent increase in returns. Now, the interesting thing about that, what did you have to give
up for that? You had to pay in the form of more volatility, So the volatility went up fifteen percent for that fifty five percent return, you're looking at a sharp ratio, which is the return per unit of risk going up thirty percent from point six eight to point eight seven.
That's the sharp ratio that even maybe Jamie Diamond could like yes, Yes, Indeed it coin turned out to be so much more than Kathy imagined when she initially bought it at two hundred and fifty dollars.
I was doing it mostly because I thought it was a big idea. Now I think it is as much an insurance policy against what can go wrong out there, inflation. It's a hedge against inflation.
There are currently almost twenty million bitcoin in circulation, but the rules are coded in there will never, at any point in the future be more than twenty one million in circulation, and this means that bitcoin has a disinflationary supply schedule. It will not be subject to inflation because it cannot be printed into perpetuity like many fiat currencies. But bitcoin has also shown a resilience against monetary policies like interest rates, an area where stocks and bonds tend to correlate.
The FED, with its twenty fourfold increase in interest rates over little more than a year's time, has unleashed I think think what's turning out to be real disaster in other markets. It is because of that move that some of these devaluations are taking place, and that is really hurting people in countries, hurting people who work very hard every day to earn their currency. So I think my thinking has changed more from this risk off point of view. I knew it was risk one before. Now I truly
believe it is a risk off asset as well. And how many assets do you know out there that are risk on and risk off? There are not many.
As Bitcoin's role in a portfolio has become clearer, adoption amongst institutions has grown exponentially, and that's fueled the second key component of developing an asset class, making a market. Bitcoin got a big boost in that respect in January twenty twenty four when the SEC approved the creation of ten you exchange traded funds invested directly in bitcoin. Those ETFs allow investors to invest in the cryptocurrency much more easily than they could before. Now they don't need to
worry about where to store their bitcoin. They can simply buy shares in the ETF, which holds the crypto itself and lets investors trade it as easily as a share of stock. The result, by the start of May, those ETFs had garnered net inflows of twelve billion dollars, according to data compiled by Bloomberg and that made them the most successful debut of all ETFs in history. Kathy is steadfast in the belief that bitcoin is going to transform
the world. As she says, it's a new technology, a new monetary system, and a new asset class.
It's still a big idea. We think it's just begun.
More and more investors today are trading in cryptocurrency, fully aware that its volatility is as unpredictable as the ocean waters in a grueling, year long journey in the Dutch spice trade. With the passage of time and the creation of market it's like the Bitcoin ETFs. The role of crypto in a portfolio is being defined, just like that new asset class called stocks popularized by the Dutch so many years ago. Thank you to Mariolen Outheart and Kathy Wood.
Tune into our next episode when we dig into another component to the digital revolution that's upending the financial industry, the blockchain. How could blockchain technology transform our financial system and make it better? This is Evolving Money, a podcast from Coinbase and Bloomberg Media Studios. If you like what you hear, please subscribe and leave us a review. I'm Patty Hirsh thanks for listening,