Why ESG Investing Isn't Worth the Hype

Plus, the crypto investment thesis with BlackRock, CoinMetrics, and L1 - and your Social Security questions 

Ric Edelman: Ric Edelman: It's Friday, July 26th. On today's show, investing in ESG. Plus, a conversation with three crypto experts. We're going to share with you the investment thesis for crypto. Yeah, with all eyes on spot bitcoin ETFs, it's easy to forget there's a whole lot more to crypto. Back in March, I hosted the Wealth Management Convergence, a big conference with about 150 financial advisors in attendance joining us in Palm Beach. And one of the sessions we hosted there featured three experts, Robbie Mitchnick, the Head of Digital Assets at BlackRock, Tim Rice, the CEO of CoinMetrics, and Miguel Kudry, the CEO and Co-Founder of L1. I'm going to play for you the recording we did of their session at Wealth Management Convergence so you can learn the investment thesis for crypto.  

But first, let's talk about ESG: environment social governance. Those three words are a lightning rod in the world of investment management these days. It's been around for decades. In fact, it used to be called SRI, socially responsible investing, but they changed its name to ESG, partly because people were arguing over, how do you define socially responsible? So they changed it to the target terms. Are you interested in the environment? Are you interested in social issues, the SRI part? Or are you interested in governance? Meaning, are corporations behaving fairly, properly, with full disclosure and transparency? So depending on how you feel about social, environmental, or governance issues would determine your investment strategy. ESG, like SRI before it, have been around for decades and have attracted a huge amount of investor capital. 

It all comes down to a very simple premise. Do you want your investments to reflect your values? It's a pretty simple question and a pretty easy one for most people to answer. And I think most people would be quick to say, well, of course, I would certainly want my investments to reflect my personal morals and my code of ethics and how I feel about life. I mean, I don't think you would want your money to be used to invest in things you morally oppose. That's the concept behind ESG. And it has, as a result, generated massive amounts of investor capital. Because people are saying, yes, I want my money to match my morals.  

But I have been always opposed to the idea. Now, that might seem a little cold and heartless, but let me explain why I don't like the idea of ESG. First of all, your morals might be different from my morals. I mean, think about this. If you are buying individual stocks, it can be relatively easy for you to exclude ownership of stocks that are in businesses or industries you flat out don't like. 

For example, if you're opposed to tobacco, you don't want to invest in tobacco companies, even if those tobacco companies are profitable. Perfectly understandable, relatively easy to do. Not always. I mean, it's easy to avoid investing in a tobacco company, but what if, for example, you don't like the idea of, oh, say nuclear power. Well, there aren't very many nuclear power companies. They are generally companies that are much bigger and broader where nuclear energy is a part of their overall business. A perfect example, General Electric. I think most people would be okay with GE light bulbs and refrigerators. But GE also has a big nuclear division. So if you don't want to invest in nuclear, then you have to avoid a terrific company like GE merely because one of its business operations is engaged in that one area. So, even if you're buying individual stocks, it can be a little bit difficult to invest in all the companies you want to invest in, when in fact, some of those companies are doing something that you might find objectionable. 

Another problem is that, do you know what else GE does? This is such a big international conglomerate, they may be involved in business activities that you don't know about because you haven't studied the company close enough, and you could inadvertently be saying yes to an investment in a company without realizing that they're involved in some part or area of an activity that you would object to had you known about it. So it can be a little more complicated than you at first might realize.  

And that's assuming that you're investing in individual stocks, but what if instead you're investing in mutual funds or ETFs? In this case, you're not investing in a single security, you're investing in a basket that will own hundreds, even thousands of securities. All of them picked for you by a fund manager. Well, what's the likelihood that that fund or fund manager has the exact same moral code you have? You might be perfectly fine with gay rights, but the fund manager may have a strong objection to that. You might be perfectly fine with the right to life issue. Fund manager may be the exact opposite of your viewpoint. So the likelihood that you're actually going to find a fund that mirrors identically your point of view, extraordinarily unlikely.  

And here's my biggest problem of all with ESG. Anytime you apply a non-economic filter to an economic decision, you're going to hurt yourself. And in fact, that is what we now see as proof. When you look at the track record of the ESG funds, they stink. They simply have not performed as well as funds that don't apply such a social screen. And investors have finally woken up to this. And they are basically saying the heck with this bad idea. So far this year, $40 billion of assets have flowed out of ESG funds. $14 billion just in April, a record. And this is not just in the US. This is happening all around the world. Some are even comparing the ESG debacle to the dot com era that burst in, you know, that bubble burst in 2000. Everybody was all hot and excited about dot coms in 1999. That bubble burst in 2000 as a fad that didn't pan out. A lot of people are beginning to say the same thing about ESG.  

In fact, it's such an egregious situation, that some firms have actually been hit with fines over something the industry now calls greenwashing. In other words, a firm manages money in a given way, but they suddenly realize that this ESG thing is a fad, and it's attracting a lot of investor dollars. So they relabel their fund, and they now call themselves ESG. When in fact they haven't made any changes at all to their underlying investment methodology or the investments that they hold. That's greenwashing. And one firm recently paid a fine of $19 million dollars to the SEC for what the SEC said were making materially misleading statements about their ESG approach. 

It's also gotten political. Larry Fink, the CEO of BlackRock, the world's largest money manager, said that he had to have the term ESG dropped from the firm because it's been weaponized by Congress. Some people on the left love the idea of social screening. Others on the right say that it is nothing but a woke strategy that undermines and harms the economy. So Larry Fink said, I'm not going to play this party anymore. I'm out of here. And he's no longer even using the term ESG in his conversations.  

Just let me illustrate for you the economic implication of this. Over the past 12 months, ESG investments rose 11% on average. Well, that's not a bad average annual return. In fact, that's certainly better than the hundred-year history of the S&P 500, which is about 10% a year. So over the last 12 months, ESG funds rose 11%. What's wrong with that?  

You're listening to The Truth About Your Future. We'll be right back. 

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Ric Edelman: Welcome back. The Truth About Your Future continues. I'm Ric Edelman. So over the last 12 months, ESG funds rose 11%. What's wrong with that? Well, I'll tell you what's wrong with that. Over the last 11 months, all other stock funds have gained an average of not 11%, but 21%, nearly twice as good as ESG funds. And now, you know, why investors are voting with their feet. And selling their ESG investments.  

When you're picking investment strategies, you need to be looking for the long-term future. Don't go for the latest fad. Don't fall victim to the hot craze or the slick ad campaign that is foisted on you by a mutual fund company and ETF provider, or even your local friendly financial planner or investment advisor who's trying to get you to invest.  

I'll give you one silly story. A friend of mine was searching for a new financial advisor, came upon one, got a set of investment recommendations, shared those recommendations with me, and I was happy to take a look, and I was rather surprised by what I saw. Not only were there about 40 different funds recommended for this person, which is a little bit excessive, I mean, that's more redundant than diversified. Among the 40 choices were half a dozen ESG funds. I'm thinking to myself, wait a minute. How can you own 40 different funds and six of them be ESG? ESG is a philosophy. You either believe that your investments ought to reflect your social values, or you don't. And if you do believe it, all of your funds ought to be ESG. And if you don't believe it, then none of them should be. But having six out of 40 ESG? That means that the advisor doesn't really understand the whole point of ESG themselves, which raises some serious questions about the quality and talent and skill of that advisor.  

Make sure you're picking an advisor who's looking out for your best interests long-term and not focusing on a fad. And if you are a financial advisor, think carefully about whether you ought to be including ESG in your client portfolios, and if so, how you're going to properly disclose this position to your clients. So on a full disclosure basis, they understand what you're doing and why. 

Coming up next, learn about the investment thesis for crypto, custodying, benchmarking, portfolio construction, and a whole lot more. 

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Ric Edelman: The Truth About Your Future continues. I'm Ric Edelman. The following interview is with Robbie Mitchnick, the Head of Digital Assets for BlackRock, Tim Rice, the CEO of CoinMetrics, and Miguel Kudry, the CEO and Co-Founder of L1, from my Wealth Management Convergence back in March. 

Ric Edelman: I'm very happy to welcome onto the stage, Robbie Mitchnick, who's the Head of Digital Assets for BlackRock, Tim Rice, the CEO of CoinMetrics, and Miguel Kudry, who's the CEO and Co-Founder of L1. Gentlemen, thanks for joining us here at the conference. This is, a conversation about crypto and particularly the spot bitcoin ETFs, but an awful lot more than that. It's not a crypto conference, but how can you talk about the investment strategies of today without talking about these spot bitcoin ETFs? And so Robbie, naturally we want to begin with you as the head of digital assets at BlackRock. Congratulations on the incredible asset flows that your ETF has enjoyed. But we got to talk about the elephant in the room and that is Larry, who in 2017 was a significant crypto skeptic. And today he might be the biggest proponent, publicly anyway, how he has said that he believes that this is going to transform global finance, and he is, an unabashed proponent and bull on the entire crypto space and bitcoin in particular. So talk about how he moved, cause you've been in this space forever. Talk about how Larry himself moved from crypto skeptic to crypto proponent and what that translated into with the support and decision to launch the ETF.  

Robbie Mitchnick: Well, I think that that evolution comes alongside the evolution that was happening in the external environment too, right? If we're talking about 2017, which you referenced, seven years is a long, long time in this space, right? In 2017, this industry was incredibly immature. It truly was the Wild West. You had no institutional grade service providers, really. You had total uncertainty from a regulatory standpoint. The question wasn't how do we regulate it was, are we going to ban this or not? You had almost no institutional participation. It really was a retail market. And so over time, all those factors have evolved to the point where a firm like BlackRock could get conviction that this was a space that had the infrastructure, that had the providers, that had the degree of regulatory clarity that we could build a BlackRock and iShares quality offering for our clients who seek that. And then the other piece of it was that client interest just continued to grow over the years. And even through the bull and bear cycles, which are a part of the way things are in crypto, that client interest was resilient and steadily grew. So those factors come together. You have to credit him and the firm for having done the work and studied the space and spent a lot of time and resources developing expertise and capabilities. And that's how we got to where we are today  

Ric Edelman: And recognize that was then this is now and how we need to evolve our thinking that, frankly, you could make the case that this is the best time to invest in crypto. We've all made the comment. We've all heard the comment of people saying, I wish I bought bitcoin when I first heard about it. Because most did not, most dismissed it out of hand. I think you can make an effective argument that now's the best time to invest, despite the fact that it's at $70,000, not $700, because it has been largely de-risked. As you pointed out, we're no longer asking the question, might the government ban it? Might it fall to zero? Those questions aren't really being raised anymore. And the fact that it has been de risked in such a way that it is becoming a mainstream asset class appropriate for use in a diversified long term portfolio makes it easy for guys like Larry Fink to say we need to offer a product to give our clients access to this, which is really where it's at. But he's going beyond that. His attitude is not this is the end, this is really the beginning, and Larry's been very vocal about tokenization. So talk about BlackRock's thinking on that subject. We heard Jenny Johnson earlier this morning from Franklin Templeton's perspective on tokenizing. Talk about BlackRock's views.  

Robbie Mitchnick: Sure. So, we think about the digital asset space broadly at BlackRock. We think about it in three pillars. One is crypto itself. One is stable coins. And the third is tokenization. And it really means different things to us and to our clients. And crypto, think about that as a new emerging alternative asset class. We think about stable coins, we think about that as, transformative payments infrastructure, a technology that can potentially reinvent the way money moves around the world. Then we think about tokenization, which is actually the longest dated in terms of how early it is in its transformation, how long it might take. But the issuance of all manner of securities and funds and assets potentially in a tokenized format on a blockchain where they are digitally native, global, interoperable, programmable, sent anywhere in the world in near real time and near zero cost, that's a really compelling transformation, but we do think it's going to take a long time. So we're doing, experimentation work around it today. Which is much less far along than, say, what we've done in bitcoin.  

Ric Edelman: BlackRock's innovative behavior is something I don't think everybody really pays a lot of attention to. They just assume BlackRock being the biggest asset manager offers a lot of product and is really good at distribution and generation of assets. But, we go way back. I'm sure if you realize, Robbie and I worked together on the development of the exponential technologies ETF back in 2015, which at the time was the very first such ETF in the market. So BlackRock doing this is not out of sync at all. I mean, this is the bread and butter for BlackRock activity, creating product that in categories that maybe those categories didn't exist before. 

Robbie Mitchnick: Yeah, we consider ourselves a technology firm, at the heart, even though traditionally you think of BlackRock is an asset manager. And we're constantly focused on some of these new, innovative, transformative technologies. And when it comes to deploying those for our clients, I think the bitcoin ETF is a classic example of that, where we had this pent up frustration from so many of our clients, whether it was end investors, institutional, or in particular, for the wealth advisory channel, but there was no efficient way of accessing this. And so what happened was clients were investing away. They would hold, high cost suboptimal structures that be, futures or, trusts that existed or publicly traded crypto companies, or maybe they said that this is too hard to do at all. So that maybe it was the worst option of all. They ended up missing what was the best performing asset of the last 10 years entirely. And so there was this wave of frustration. And a desire for us to be able to provide a turnkey efficient, low cost exposure vehicle. And so we were, at that point, well positioned to do it based on all the work that we'd done in this space over the last five years. 

Ric Edelman: So, Miguel, what's your response to what Robbie has described with BlackRock's views of tokenization? What does all that mean for advisors from your perspective?  

Miguel Kudry: Tokenization, is just the avenue for assets to come on chain. And, what does on chain mean? It's the equivalent of being online, but for money and assets and anything of value. It is effectively the ability for anybody with a wallet to interact with an asset, to trade it, to borrow against it, to transfer it, to spend it, and do all sorts of different things 24/7. And the interoperability component is, very compelling here because, you can interact with an asset that really has no barriers. And there's no walled garden, which actually exists in the traditional world. So an issuer like BlackRock could put out an asset that basically anybody can access. Of course, you can program some rules to it, but that's what's so disruptive about it. In the future, everybody's going to have a crypto wallet on their phone and like you can do now, but it's going to get much, much easier and it really changes the game for people in this room, for asset managers, for anybody that deals with assets and money. And so that's the work that we're focused on at L1.  

Ric Edelman: So you're like the exact opposite of BlackRock. BlackRock's claim to fame and all the ETF providers is that you've radically simplified, the ownership of bitcoin. Nobody has to deal with wallets. Nobody has to deal with private keys. Nobody has to just fuss with the whole crypto thing. It's just another asset. It's easy to buy it as a worldwide gold through GLD, for example. But what you're doing, Miguel at L1 is the exact opposite. You're facilitating the ease for advisors to facilitate the asset management of crypto assets for clients that are doing a whole lot more than just buying bitcoin directly. Explain to folks who may not be familiar with L1 what it is and how you do it.  

Miguel Kudry: Yeah, absolutely. L1 is an on chain wealth and asset management platform. And so the big problem that we're solving, for you guys in the room today is that many of your clients are investing in crypto on their own. They've been investing since way before the bitcoin ETFs were a daily topic of conversation. And the reality is over 40% of Americans, have, some sort of crypto holdings, whether it's on Coinbase, whether it's on a self-custody wallet. And we allow you to incorporate those assets virtually instantly into your practice without your clients ever having to give up custody because if you've ever bought crypto, I think everybody relates to the idea of just wanting to hold the asset and not actually like transferring it out. I think ETFs are, they've closed the loop on the spectrum of, demographics, of investors in the asset class. Eventually we're just going to see ETFs come on chain and that'll take it one step further. But, at L1 we, we are the gateway, for financial professionals into this new on chain world of assets and financial services.  

Ric Edelman: It's fascinating that on the one hand, there's a lot of interest, in buying a lot of consumers who own bitcoin, aren't able to explain what it is. They aren't able to explain how it works. They don't have any idea of the metrics behind it. And Tim, that's where CoinMetrics comes into play. You're providing the data. You might not know the household name of CoinMetrics, but if you're watching CNBC, you're looking at bitcoin's price on the ticker, that data is being provided by Tim and his company. So, talk about how you're working with the institutional markets to help them track, measure, report on crypto activities.  

Tim Rice: We commercialized CoinMetrics in 2018. I've been in the space since 16 and built data companies for 40 years. And I think what you're hearing here is that there is a lot of work that's done to predate getting to a bitcoin ETF. So, Matt Hougan and Bitwise worked with us years ago, spent a fortune on legal fees to justify the trading activities of various assets. So that we could get to the point where we are today. And so our place in that ecosystem is we aggregate the legitimize crypto trading volume from exchanges we believe traditional financial institutions would do business with. And so we never, when we were building the company, realized that was going to be the used by the justification of Bitwise and Fidelity with the SEC to get over some of these early hurdles. We built connectivity to all the exchanges. We consolidate all of the trades and the order books and all that information together in one place. But it turned out it was a foundation for the early pioneers of the industry to get conversations going in the right direction so that we could all understand it differently today. And then as Miguel said, with the on chain side of this asset class and what he's doing is ultimately another kind of pioneering exercise of how we our children, our grandchildren, are gonna interact with this set. It's a data rich environment. It's very conducive to large language models and other training capabilities. But I think, from the data side, what we're working on with others and trying to pioneer is at some point you're gonna go to the point of purchase for a Starbucks or whatever your favorite coffee is, and automatically within your wallet you're going to have a set of assets that are doing work constantly. They're creating yield, they're investing in your philanthropies, they're doing whatever. And at that point of purchase you're going to execute and there's going to be a programmatic wallet that's going to pay at the best tax advantage asset you have in your portfolio while earning interest and pay that five bucks and you won't even know that it happened. So, this is all kind of pioneering work that's really going on and so the ETFs right now are just a watershed moment, and I think as Ric said earlier, this is very, very early days. It's hard to understand what the exponential nature of this market is going to be from where we started. When I started in this space, Ethereum was trading at $8, bitcoin was at $1,500. I would have, you've got to have some, really high held convictions about what's going on. But when you study the data side of this asset class, it's so solid. Bitcoin is such a highly performant technology solution at this point, and others are building behind it. So, we've aggregated all this content together to help get us over the hurdles with regulators for the conversation and to build other primitives that I think are going to make this a real thriving ecosystem.  

Ric Edelman: So is the data that you produce and the tracking of the markets that you do, that info is available to advisors? 

Tim Rice: Yes. You can get it either directly from us at CoinMetrics. We have partnerships with FactSet. We do work with Goldman Sachs and their marquee data lake. It's fairly widely available across a number of different platforms.  

Ric Edelman: So it's kind of like the Bloomberg of crypto. 

Tim Rice: Yeah, it is. I only say that because, I think it's much, much more than that. When you look at it, on the on chain side, as you all know, these are digital ledgers. We work with KPMG. We've worked with them for four years now to create an audit solution that allows them to go in and take a client's crypto asset portfolio and basically perform a historical financial audit of that. So the only reason I hesitate on the Bloomberg for crypto is it's just a much more robust infrastructure than we've seen in legacy financials once it's all connected together. So starting off as the Bloomberg for crypto feels pretty good, but I think there's, again, this is early days on what this asset class looks like. 

Ric Edelman: Given your depth of activity in pouring through the data, not just collecting it, but looking at it and analyzing it. What's your reaction to the asset flows of these ETFs to date? Are they higher, lower? Are you surprised what's happening? 

Tim Rice: I don't think we're surprised. We thought that we would see this trend come on pretty quickly once we got broader adoption. I think the challenge with crypto is we look at what the realized value of bitcoin is, for example. And so you can think of that as the cost basis of an asset. So when was the last time that this bitcoin moved and at what price? And you can see that over time, you can see the age of wallets and cohort the wallets together as far as how long people have held these. So there's a tremendous amount of this asset that was held in the very, very early days when the cost of bitcoin was marginal, almost zero. Today, you've got new transaction activity coming in when we already have 18 billion bitcoin out into the marketplace. And so the flows are moving the market because they're scarce availability of the asset today, which is how you start to explain the fact that we were at 30 something at the beginning of the year. And now we're at $72,000 this morning. So it's just interesting to see that this supply that's being bought right now is a small portion of the supply that's actually available in the marketplace, which restricted supply leads to rare assets and increases in price.  

Ric Edelman: So you're expecting the price to continue to rise? 

Tim Rice: It'll be bumpy still. We're not a financial advisor, obviously, we're a data company, and so we'll let the facts speak for themselves. But yes, I think there's plenty of room to go.  

Ric Edelman: Robbie, you want to comment on that? What's BlackRock's reaction to the flows you've enjoyed? Has that been a surprise, the speed of those assets? 

Robbie Mitchnick: Well, we knew that this was going to be a product that had a lot of resonance for our client base because we had years and years of data points of our clients expressing the frustration over the lack of an easy way to get bitcoin exposure. But I think that these numbers have, surpassed really anyone's expectations, right? If you think of, in the last decade, of the ETFs launched in the last decade, 35 of them have gotten to $10 billion in assets, and the fastest of those did it in two and a half years. And IBIT did it in seven weeks. So it really is uncharted territory.  

Ric Edelman: When you look at the list of the 25 ETFs that were fastest to a billion, seven, I think, of these bitcoin ETFs are on that list of the top 25. And I just have to mention that ranked at number 25 is XT. So it's still in the top 25. That's why I had to brag. It's still in the, it's gonna get kicked off that list pretty quick as... 

Robbie Mitchnick: It's held on for a long time.  

Ric Edelman: Yeah, it's so I had to mention that. But do you think this pace is going to continue? Or are we just at the beginning? And, it's gonna even accelerate, or is it going to taper off?  

Robbie Mitchnick: Well, I think, it's hard to predict for sure. But, what we're seeing is, if you think of the investor basis, three main channels being, end investor direct. Wealth advisory and institutional an investor direct channel for sure has, from day one has been there and it's been a huge source of the inflows. Institutional there's a lot more education and diligence and the process just naturally we think biggest pension funds and sovereigns and endowments, et cetera. They don't move on a dime, right?  

Ric Edelman: You've got to wait for the next quarterly board meeting.  

Robbie Mitchnick: That, that's part of it, literally. And so that's going to take a little bit longer. It hasn't started, there's some of it that we've seen, pension fund type flows, but certainly not the majority. And then for wealth advisory, RIAs have had a big advantage because most RIAs have had access, off the top. And if you think about the big wires in private banks, none of them have completed their diligence processes yet, and they're at various stages of so doing. So that channel really hasn't been turned on much at all. And, we'll see what impact it has when it does happen. 

Ric Edelman: Given all that, Tim, with the huge focus in the ETF world, for the bitcoin, marketplace. Is CoinMetrics doing anything in the ETF space, particularly regarding, crypto?  

Tim Rice: So we work with a lot of our clients to help develop research and support investment in the crypto category. Bitcoin, we cover public miners, the data behind mining. Specifically we have an index business, we do that work for Fidelity behind their ETF fund. We do work with Greyscale on others. We do work with Matt's firm at Bitwise, so we're actively involved in providing data content research as well as indexes to help support the valuation. 

Ric Edelman: Do you think that will become a bigger part of your business?  

Tim Rice: Absolutely. I think one of the things that I've seen over my journey in this space is that there's an ever-increasing maturity of infrastructure required. As you come up the scale, I joke that, I love being part of the junior varsity over the past four years prior to this, but now the varsity is here and you have to operate at a higher level of scale, capability and resiliency margins have compressed in the bitcoin spot market to a higher degree. I grew up in the world where an FX trading room was the size of bigger than this room with this many people working on it. And then one day EBS came along and there were three people and a dog and the dog was, don't touch that. I think crypto and bitcoin are quickly getting to that model where you're getting, consolidation, the varsity's here, they're managing this thing in a much more effective manner than we were in the early days of crypto and that's going to allow us on the crypto side to evolve. 

Ric Edelman: Have you been hearing from other asset managers who are not among the 10 originals that they are working on launching their own bitcoin ETFs?  

Tim Rice: So, I think we've got a little bit of a first mover advantage for folks who are here. Some have rolled up their tent, pulled back on their filings, and stepped away from the business. They, in their initial view, is that this is a non-differentiated product that are across the major providers that are already in the marketplace. And so we're there leaning right now is what's next, like, how do I figure out some multi asset play where we can bring in some other things? I think the SMA community is going to be advantaged from this going forward, where you're going to see this big spike in return from owning this one particular thing. It's like, okay, if this was here, what's next? And how do we, stay looking at that?  

Ric Edelman: And the SMA thing's interesting, Miguel, because the entire SMA context, I've said many times that I believe that these bitcoin ETFs, as incredible as they are in terms of what they do and how easily they do it and how it's drawing people into bitcoin for the first time, people are going to pretty quickly figure out that all they did was buy bitcoin and they didn't diversify and advisors love that word and yet we gave them a single asset investment. And they're going to want more. And we're hopeful of Ethereum ETFs coming eventually, but I don't think anybody's expecting, even if we do get the Ethereum ETFs, that we're going to then see any other ETFs anytime soon, certainly under Gensler. So the SMAs are going to be a big thing, because it allows advisors to buy dozens of coins in a privately managed account that you create, where you can customize it for your clients, tax manage it, et cetera. And there are several crypto SMA platforms that do this. Eaglebrook, I think, is the largest and oldest. That plays into the services that you provide, right? Are the SMA providers that Tim has mentioned, are they a competitor to you or do they facilitate, do you make them better via the services that you provide? 

Miguel Kudry: I'd say, they are an alternative to just being fully on chain. Today, there is a little bit of complexity still to being self custodied. Investors that actually buy the asset and start educating themselves ultimately prefer it. But for somebody that's getting into it for the first time, I think a custodial SMA is a fine solution. The moment you want to start getting into sort of like the real meat of the asset class, you really have to go on chain and, the only way to go on chain is through self custody. So I'll give an example, Ethereum and ETH. I think that's the next big ETF. When we see that ETF hopefully get approved, I would be willing to bet that we're not going to see any yield, baked into the ETF. How do you get yield on your ETH? You stake it. How do you stake it? You have to go on chain. And, today, ETH is considered to be like the risk free rate of the crypto world. And I think the moment investors start doing their diligence, they're gonna quickly realize that they have to be on chain to get access to all of the good stuff, as we call it. And that's going to be the case for any asset, an asset class that gets tokenized. When asset classes get tokenized, the instant settlement aspect is just one big differentiator, but then everything else that you can do with those, on chain assets, the fact that you can get instant liquidity and borrow against those assets and do all sorts of tax efficient strategies. It's hard to do that, if you're not actually talking to the protocol directly.  

Ric Edelman: And the big issue for advisors is custody. We don't want it.  

Miguel Kudry: Exactly.  

Ric Edelman: And you avoid the advisor of having to have it. And yet they can manage the client portfolio. They can have eyes into the portfolio. They can assist the client with rebalancing the portfolio, but they don't have custody, and they can get paid on the asset. Let's not forget that important point.  

Miguel Kudry: Yeah, custody, introduces a lot of compliance overhead requirements. Especially with the crypto custody rule, that the SEC introduced recently. Just the ability to remove that, abstract that away for the advisor is actually a value add. I think advisors should at the very least be tracking those assets in real time. And then when they're comfortable, they can actually start advising on them. 

Ric Edelman: You mentioned Ethereum, which is a big topic of conversation. Robbie are you expecting that the SEC will say yes? Has BlackRock filed an application for an Ethereum ETF?  

Robbie Mitchnick: We did. We filed in November for Ethereum. I think, though, it's important to qualify that step or the idea, because there's been chatter of, okay, what next from BlackRock after that, with, in this space, there's a clear one that's in a category of its own, right? Bitcoin today, there's 10,000 plus crypto assets. Bitcoin has 52% of the market cap, right? And by far the deepest liquidity, maturity, clarity of investment thesis, this unique kind of digital gold element to it that, that is understood by lots of different investors and has unique portfolio implications. 

Ric Edelman: And the only one that the SEC has definitively said is not a security.  

Robbie Mitchnick: That's right. Then Ethereum is a clear two, right? 17% or 18% of the market cap. Very different story than bitcoin. It's often, not well understood. This is a technology innovation play in a totally different set of use cases and investment thesis is going to look more like a venture tech kind of bet, right? The long tail after that has a long way to go before we would ever think about that as something we would bring forth the solution for clients around. Not to say that it won't get there. But today, overwhelmingly, our clients are interested in bitcoin, a little bit Ethereum and very little the 10,000 plus others. 

Ric Edelman: So I asked Jenny earlier today to tell us what makes the Franklin Templeton bitcoin ETF different from the others. Let me ask you to do the same thing. Why should these advisors who are contemplating picking one, for client portfolio, why should they choose IBIT?  

Robbie Mitchnick: It's somewhat of a unique thing what we were able to bring here, right? Which is, the platform and track record and innovation history of BlackRock and iShares, as the world's largest ETF issuer with nearly $4 trillion in ETF assets and having done a lot of the really, transformative innovations in the ETF space over multiple decades, pairing that with, fairly significant actually digital assets capability that we built over multiple years on a little bit of a lower profile. That wasn't just some of the things we've done in tokenization and with circle and stablecoins, but most importantly, our partnership with Coinbase Prime, which dates back to 2021, that enabled us to integrate their functionality as a, trading prime brokerage and custody operation into Aladdin, the investment management solution on which the other 1,300 BlackRock iShares ETFs globally run. And so that level of scale and automation efficiency was a pretty unique thing that we were able to do with Coinbase because of our size. And that has given us an advantage out of the gate that just becomes reinforcing when you think about the liquidity that befalls the largest ETF provider in a category, which today is IBIT. 

Ric Edelman: One of the elements of these ETFs is a benchmark provider. Tim, what should the ETF issuers, BlackRock and the others be looking for when they've all had to pick a benchmark provider and they're all choosing different ones? What should they be looking for? And what should advisors be paying attention to about those providers? 

Tim Rice: I think it's a maturing asset class in the crypto space. And I think what we all got comfortable with as we were running to the point in January to get this launched is we had the SEC comfortable with some names and some folks doing things across the space. Coinbase, BlackRock, Fidelity and others. Goldman and JP Morgan. The index side of the asset class is a little less known and indexes, the index providers in general who stand behind it and do the data work, are an afterthought with what we're doing. To answer the question directly, having done data business for a long time, it's about creating mature infrastructure, supporting the issuers with the distribution of the data they need to the people in their ecosystem. Whether it be APs or market makers or whatever, and being able, in a 24 by 7, 365 environment, which is very different from businesses I ran at Reuter's, being able to support that kind of marketplace. I think there's a lot of great qualities that got us to this market. I think, as we're talking, we're going to have some period of time while this marinates and cures, and then folks will, again, look to be able to extend behind just Coinbase Prime as a custodian if Bank of New York and others can get into this for some changing regulations, you're again going to see another step of maturity and I think same thing on the index side is how people built their infrastructure, how are they supporting things, how are they following international principles and doing that kind of work. So it's an evolution.  

Ric Edelman: I think that there's still a bias in the industry that crypto is of interest predominantly among younger investors. And yet this audience serves predominantly an older clientele. Give us your views on that, Miguel. Is this a whole conversation that's really aimed at younger investors. How should advisors be thinking about crypto relative to their client base? The kids of their clients and so on. What's your viewpoint on all that?  

Miguel Kudry: I think there's two kinds of conversations at play. First is, crypto as an asset class. And then there's a whole picture of asset classes. We were building L1 with the vision that asset classes come on chain. It's the Internet of assets. Today, when you look at the asset class specifically, my generation has been heavily invested for many, many years. And it's the one of the only assets that are predominantly self-serve. We, crypto investors just, basically invest on their own and they go down the rabbit hole, usually on their own. And those that work with financial advisors tend to have those assets outside of the advisory relationship. And, the technology has been there for over a decade now. And I think technology alone is not what's going to drive these assets and other asset classes on chain. It's the behavior and the expectations that my generation, I mean, you are looking at your future clients, my generation has over their investments. I expect, just like I have my USDC and my ETH, my other crypto tokens available whenever I want them and I can see my yield and borrow against them on a Sunday night if I need liquidity. I expect that from my stocks and bonds, and that's what's actually going to drive every other asset class on chain. So I think, to bring the conversation back to the title, the investment thesis for crypto, there is an investment thesis for the asset class. There's also an investment from you in understanding how to work with my generation and with these new rails that are going to power your operation in the near future. 

Ric Edelman: Question. 

Attendee: Thank you everybody for being here. So for the skeptic who might say that this is a bit of a bubble, it feels like similar to the late 90s, every financial institution came out with what they described as a blue chip growth fund, but everything that was in it was some type of dot net dot com, many of which don't exist today. I think in addition to that, the idea of this being the Internet or the World Wide Web or electricity, how do you apply basic fundamentals of price to book, price to cash flow when none of that applies seemingly with bitcoin? 

Ric Edelman: Robbie, you want to start? 

Robbie Mitchnick: Sure, well I think, for one it's important to distinguish between, bitcoin and the long tail of crypto because there's no question that in the long tail of crypto there's a lot of frothy bubble like behavior that is detached from any fundamentals or economic use case. I think with bitcoin the question becomes, do you believe in it as a digital gold? And do you believe in it eventually as a global payment technology? Today, far more people and far more resonance exists around the digital gold store value narrative, right? Which is, this is the first internet native money that, has gained global adoption in history. It's the first, form of, or monetary instrument that, since gold and silver, many thousands of years ago to become a global, decentralized, non-sovereign, recognized, monetary asset, right? And what is that worth, ultimately, you can't apply PE, price to book, cash flows, those concepts, they don't apply here just like they don't apply to gold. So one of the benchmarks that people often look at is, okay, well, gold is a roughly $12 trillion market cap. Bitcoin's about a tenth of that today. To what extent do you believe it starts to, eat into that and take share away in that sort of, global non-sovereign scarce store of value, investment thesis? That I think is the most common way we see investors and our clients thinking about valuation here. 

Ric Edelman: Miguel, you want to add to that?  

Miguel Kudry: Just very quick, setting bitcoin aside, there are definitely on chain fundamentals. There's nothing more transparent than looking at a protocol's token and seeing how much volume is going through, how much fees are being generated, how much cash flow. There is, in fact, cash flow in these protocols. And you can look at it at every minute of the day. You don't have to wait for quarterly financials, so I would push back and say there are fundamentals, on chain, for sure.  

Ric Edelman: Tim?  

Tim Rice: So I think we learned a lot, or at least I did, from the dot com bubble. That's why you have a bitcoin ETF, that's the principal thing. One asset from multi asset, asset class. The thing I worry about most is to go back to the 18 months we had prior to this in crypto. And so we spend a lot of time thinking about how to do correct disclosures for these assets with some very powerful financial companies to not have that happen again. But I would say you've got the coin. You should leverage it into your practices to be able to bring and educate people because it will be changing. And yes, worry about the dot com bubble and what comes up next and just make sure the industry and others are doing their due diligence. And you're comfortable with what we're doing and people are doing. And we've done that with bitcoin for 14 years now. So I think here's one work with it. We've got some work to do on the back end about the infrastructure, even the TradFi, get it into the wire houses and the family offices and others. So if you've been delivered one, your pragmatism around your concern is something you should pay attention to because your job is getting people comfortable with what you're talking to them about, and you should get comfortable with this one. We'll bring the other ones in the right way.  

Ric Edelman: That's Tim Rice, Robbie Mitchnick and Miguel Kudry - give them a round of applause.  

Ric Edelman: Coming up next on the show, a question that I got from one of our listeners. 

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Ric Edelman: Welcome back. The Truth About Your Future continues. I got a question from Juanita, here's what she wrote: 

“We're sending money to other countries, but they can't fix Social Security?” 

Yeah, I sense the frustration in your question, Juanita, and it's certainly well placed, but get this. If your position is essentially that we shouldn't be sending money to other countries because we need to fix Social Security – in other words, let's take the money that we are sending overseas and instead reallocate it to Social Security to solve the Social Security crisis, it won't work for the simple reason that the total amount of money that the US government sends overseas to other countries to help them out is 1.3% of the federal budget. It's not a lot of money. Well, I mean, it is a lot of money, but as a percentage of the total budget and as a total dollar amount relative to the total dollars needed to save Social Security, it's not going to solve the problem. In other words, it's not an answer to the dilemma.  

So I think we do need to recognize that we have a lot of needs, a lot of issues, and we can't stop eating merely because we have rent to pay. And we can't stop buying insurance merely because we have to put gas in the car. I mean, this is the complexity of our lives these days is how do we afford all of the necessary, essential things we have in order to preserve democracy, our way of life while protecting and enhancing the lives of Americans? This is the challenge. I'm not suggesting I have answers. I'm just saying that your solution, taking the money that we send overseas and diverting it to Social Security won't solve the Social Security crisis. 

You can send me your question as well, just send it to AskRic@TheTruthAYF.com. The link is in the show notes.   

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Ric Edelman: The Ethereum ETFs are here after a stupidly long wait, thanks to the incompetence of Gary Gensler's SEC, the Ethereum ETFs are here, trading is underway. I've already bought some, how about you? And this conversation is not just about Ethereum and the new Ethereum ETFs, this is really about the entire broad landscape of crypto. NFTs, tokenization, the metaverse, DeFi, DePin, Decomp, regulation, taxation. It's all why you need to enroll in my CBDA course, become Certified in Blockchain and Digital Assets. You can study at your own pace with our online courses. Thousands of financial professionals have done this. You can too. And it's listed in FINRA's database of professional designations. You can display your CBDA. And to celebrate the Ethereum ETFs when you enroll in the course right now, you save 25%. The links in the show notes use discount code ETH25, but hurry, this offer expires in less than two weeks, so click that link right now. 

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Ric Edelman: On Monday’s show, why you really need to be paying attention to the birth dearth.  

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Ric Edelman: If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube – and remember leave a review on Apple podcasts. I read them all! Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app. 

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Links from today’s show: 

Become Certified in Blockchain and Digital Assets: https://dacfp.com/certification/ 

Wealth Management Convergence (March 2024): https://www.thetayf.com/pages/convergence 

BlackRock: https://www.blackrock.com/us/individual  

CoinMetrics: https://coinmetrics.io/  

L1: https://l1.co/  

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