Welcome to Season 2, Episode 30 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Ben McMillan to discuss everything you need to know about digital asset classes, cryptocurrency, blockchain technology and where it’s going in the world economy. Is it worth it for the average consumer to invest in a decentralized future? Tune in to learn more.
Meet Our Guest
Founder | CIO | IDX Digital Assets
Ben McMillian is the Founder and CIO of IDX Digital Assets. IDX has developed the worlds first suite of Risk Managed Digital Currency Indices priced by S&P Dow Jones. His vision is to focus on a quantitive, data driven approach to digital currency investing. He has extensive experience as a portfolio manager and with quantitative analysis. Ben holds a Master’s degree in Econometrics from The London School of Economics.
Elliot Kallen: Good morning and good afternoon, everyone. I’m Elliot Kallen, and I’m CEO of Prosperity Financial Group. I would like to welcome you to another episode of Meet the Expert. Very exciting. This is something we don’t do a lot of but we have a real expert on Bitcoin and blockchain.
What it is, and that’s gone from $60,000 to $20,000 – and should we buy it? Is it going bankrupt? Is that the future? Is it the past? Lots of great questions. If you need to reach me, I’m at 925-314-8503. That’s my direct line. So let me welcome Ben McMillan. Welcome, Ben.
Ben McMillan: Great to be here.
Elliot Kallen: And great to have you. Just a quick introduction, then I’ll make it fast because people want to hear what you have to say rather than who you are, which is that he’s got great credentials. He’s the founder of IDX. That’s obviously the company that specializes in Bitcoin.
A lot of credentials after his name, master’s and so forth. He’s been on Bloomberg. he’s been on Fox Business, and he’s been on CNBC. I don’t even know what other shows you’ve been on. Maybe Oprah. I don’t know what other shows are going on, but you truly are an expert in what some perceive as the future of exchangeable currency out there.
How does Bitcoin and blockchain technology work?
Elliot Kallen: So, why don’t we start some basic things. How does Bitcoin work? How does it work? How does the average person get hold of it? And then the volatility, let’s talk about that too. Let me turn it over to you for a moment and I might interrupt you with more questions.
Ben McMillan: By all means absolutely. So, kind of the simplest way to think about Bitcoin or blockchain technology, in general, is just a decentralized network of computers. So the question is, alright, what’s so great about that? You know, there are a lot of nice properties with that. If you think about Google Cloud or Amazon, AWS, the ability to have computing capability that’s decentralized, it’s 10s of 1000s of computers all over the globe. That can send transactions back and forth which is nice because it’s very robust. It’s very durable.
One of the reasons you know a lot of people in recent years have gotten excited about blockchain technology is when there have been other events where centralized services have gone down, Blockchain-based technology has stayed up. I’s started among early adopters in technology that first saw the promise of this technology. Now it has started to now go mainstream. A large part of that is because of the financial component to Bitcoin.
Of course it was early on and being seen by many as competition for money or currency. That brought in a wave of speculative buying, but it is important to detach the underlying fundamentals from the speculative price behavior, much in the same way as commodities. There’s intrinsic value into wheat or copper, oil, but the price at any one time can be excessively volatile. So you got two competing camps here.
I’ll wrap that thought by setting a good way to think about is really kind of the 90s era. For those of us that remember the idea of the internet was still in its nascency and kind of the early 90s, mid-90s, and then we have the.com bubble. Any business with the.com at the end of it went to the moon but people realized that just putting a.com at the end of a bad business doesn’t make it a better business. Pets.com was still a bad business model. The baby got thrown out with the bathwater, so to speak.
That’s kind of what crypto, in general, has been going through very recently with this kind of boom and bust. The speculative, excess working its way to a fever pitch. Now the baby’s coming out the bathwater, and people are going back to the roots and looking at the technology and starting to build from there.
That’s the high level. That’s why people are getting excited about Bitcoin. That’s why a lot of technology focus groups and bigger players are starting to look at this as a better way to send payments internationally. A better way to run decentralized services. Even things as complicated as exchanges or banking functions can be done in a decentralized way, which has a lot of nice properties to it. So, it’s an area of excitement. But again, as I said, it’s one where it’s seeing kind of speculative excesses.
How do we make sense of all the “fat” in the crypto market?
Elliot Kallen: So just on that note, because before we get into good use of it, there are some companies that aren’t going to survive. By the way, we’re talking with Ben McMillan and you’ve got to interesting degree in econometrics from the London School of Economics, as my son was there too. So, I’ve great respect for these things. The geeks they’re now in London all studying how to change the world. It gives you a lot of gravitas on the subject, and that’s why I brought that up.
But looks like Coinbase may go out of business, other changes with Ethereum, are they going to survive? There’s Doge which was created as a joke. We’ve seen Elon Musk kind of use it as a joke and things like that. So, there’s a lot of fat in the market. How do you understand that?
Ben McMillan: That’s a good way to put it. Then again, this goes back to why its like the.com analogy so much because you look back to that era and you had good companies like Amazon.com right alongside Pets.com, and that’s what we’ve got now. Now the top, this tide is going out. The Fed obviously is pulling back on liquidity that makes capital much more discerning, not just within the crypto spectrum but everywhere, even high-value growth stocks.
I mean, the ARK ETF is down big year to date because all of a sudden capital is starting to be more discerning in terms of where it’s going to place, it’s bad growth is getting repriced. Within the crypto market, that’s absolutely right. There’s a lot of companies that are not going to make it.
I think that things like Coinbase and some of the bigger ones aren’t. They’re big enough and they have a big enough footprint that I’d be hard-pressed to believe they go out of business in the same way that Lehman Brothers did. There’s probably some big strategic out there that would probably prevent that from happening, But groups like Celsius, I mean, that’s been in the news recently. Luna, back up about a month when we started seeing kind of the real stresses in the crypto market unfold.
There was a protocol called Luna which was its own blockchain and it was very poorly constructed from the beginning. It was one that had a lot of criticisms early on it and some of the behaviors by the founders were kind of scammy or seemed scammy. A lot of people were worried that it was kind of a glorified pump and dump.
Still, that was a project that raised a ton of money and did well as long as the music was playing, so to speak. But soon as the Fed started pulling liquidity out of the market, it was a house of cards that just collapsed in on itself. And so, you know, that was one that if it wasn’t an hour a Ponzi scheme, it was structurally very similar and needed required money to keep coming in to stay afloat. Fast forward, now we had Celsius recently was a very big centralized company, basically paying out 20% APR on crypto loans. So, that’s when if you could buy bitcoin through them, or Etherium and you could lend it out, they would pay 20%. Well, the way they were able to do that was they were borrowing VC money and just literally subsidizing that rate.
Well, that’s obviously not a sustainable business model. That’s when liquidity is cheap and easy and you can get away with it. That was part of their planning to kind of buy our users. Once liquidity becomes more expensive, that’s a business model that goes to zero. That’s what we’ve been seeing. They’ve been a stressed seller in the marketplace recently. They’ve needed to get a bailout or they’re looking for a bailout. So you’re gonna have companies like that, that do go to zero.
On the other end of the spectrum, look at the protocols themselves. Coinbase, Celsius, these are centralized companies but they’re not decentralized protocols. They’re in the crypto market but they’re regulated. They have a peel box and all that. But you look at something like Etherium or Bitcoin, those are actually just blockchains.
So there’s no centralized company that quote-unquote owns that. It’s purely decentralized. That’s a lot more durable. That’s a lot more robust. That doesn’t mean that the price can’t get too high. That’s what we’ve seen the market is repricing Bitcoin, but it does mean that it can’t be regulated out of business or out of existence.
So there’s a durability component there. That’s appealing, and that’s one of the reasons people have rallied around the idea of decentralized blockchain technologies is because you don’t have to worry about that counter party risk that you might with a Coinbase or Celsius or even an IDX, no matter who it is. That’s a key. That’s a key distinction.
Can Bitcoin solve the world-wide supply chain problem?
Elliot Kallen: It’s high-level stuff that we’re talking to clients and potential clients on. So, I want to get back to regulation. I want to talk about afterward the dollar. But let’s talk for a moment about supply chain versus blockchain. We have a major supply chain issue around the world. I don’t know if that goes away unless we have a worldwide recession. Maybe we’re going to have that. Who knows. But there are a lot of people who think that the answer to the worldwide supply chain problem is locked up a little bit in Bitcoin, and they can solve this. So tell me about that.
Ben McMillan: I think blockchain technology can absolutely help. Whether it can solve it in one fell swoop, it’s unlikely. Supply chain issues are highly complicated, not the least of which is competing for kind of political considerations that are completely exogenous. A unilaterally declared war, for example, in the middle of Europe, Bitcoin isn’t going to solve for that. But we’re canceling where you’ve seen some of the early, early work on blockchain technologies by some big-name companies, by the way, is in logistics and supply chain.
If you think about being able to just at the simplest level, being able to cut out the middleman. If you look right now with supply chains, one of the things it’s like the old (actually, this is this was on one of my game theory exams at the London School economics is you know, how to traffic jams happen and you know, it’s the game theory where if one person slows down the road to see what’s happening in the other lane, that has a ripple effects that gets amplified. That’s how you get 10 mile traffic jams when just one person is stopping for a split second at a time.
Supply chain logistics is very much the same way. You’ve got a lot of different interconnected links. If just one of them jams up and thatchance of the next one, it’s an exponential effect. Well, if you can automate a lot of that and remove the human component, or embed that in self-executing smart contracts, which is what blockchain technology does, you can remove a lot of the middleman layer. It really kind of streamlines different supply chains.
Now, there’s a lot to be built out there, but the key is that it is being built.
One of the big things, we always get the question, “How do you know Bitcoin and Etherium aren’t zeros, are worthless, they don’t do anything. Everything is theoretical, and the answer is 10 years ago, this was all theoretical. I remember buying Bitcoin 10 years ago, I remember mining Bitcoin 10 years ago, and it was everything I’m talking about now. Back then was very much a theoretical use case, it was a could happen or might happen.
Now fast forward, and it’s really been the last kind of 24 to 36 months, two to three years, where we’re seeing applications start to solve this. There’s a long way to go and it’s not going to solve supply chain issues this year but it is being developed. That’s a key consideration as it relates to blockchain, Bitcoin and Etherium is that the use cases now are no longer purely academic.
They’re being built. They’re being built and deployed in the real world. You’re seeing companies actually start to deploy them.
Disney, for example, is using a blockchain called Stellar for some early logistics exercises. IBM has a deal with Stellar for something similar. So, you’re starting to see big companies turn to this and it’s not for marketing purposes. It’s because they’ve got problems they want to solve.
So yeah, but I think to answer your question, blockchain technology will absolutely help the supply chain issue. It’s going to take time, and it’s got to be built. It’s not going to be a one-and-done answer, much in the same way that back in the early 90s it wasn’t yet clear how the Internet was going to affect all of our lives. Now, of course, fast forward 20 or 30 years and it’s ubiquitous. We can’t imagine life without it. We could very well see a similar progression with Blockchain technology.
How do you see the future of a digital world of computer servers?
Elliot Kallen: So there are some people on that same blockchain technology concept, who are the prognosticators of the world that say, well, we’ll get rid of the middleman. You’re eliminating the need for Google and all the servers out in the marketplace because computers will talk directly to computers. And it’s hard to imagine a world without a Google or Microsoft or all these millions of servers talking to each other. How do you see it?
Ben McMillan: Well, I think it’s probably gonna be a hybrid. This is the big, if you’ve heard the term web three, that’s what they’re referring to is basically a decentralized you internet, one in which Google would be disintermediated by a global network of peer to peer computers. I don’t think it’s one or the other. I think we’re gonna have hybrid approaches, as there are a lot of benefits to decentralized blockchains.
There are some drawbacks but there’s a place for both. They’re some of the benefits of centralized servers, centralized computers – speed and scalability. You sacrifice on the security.
He’s sacrificing the kind of other pieces of the puzzle, but I absolutely think it’s inevitable that blockchain technology starts to take away some market share. From the Googles of the world over time, you’ve seen the idea too. You’ll see more of this as I said, the web 3.0 concept. One of the kind of strong pillars of that thought is people owning their own data. One of the big issues with privacy rights recently has been these big companies Google and Facebook. They actually own our data and they monetize our data. The consumer has no say in that.
So, one of the big promises of the decentralized Internet, what they’re calling web 3.0, is that users can own their data. So it wouldn’t be in the hands of any centralized entity. It would be in the hands of the users and we could choose, who sees our data and how we want to monetize it. And so, you know, I think it’s going to be a hybrid world.
There’s going to be a place for both. I don’t see any state of the world in which web three or blockchain doesn’t take some market share from the Googles and the Facebook’s of the world, which is why you’re starting to see these guys make a land grab in the blockchain space, Facebook renamed their name to meta, for example, to make a Metaverse play. I mean these guys are smart, they see where the puck is going. They’re trying to skate there before everybody else.
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Is there any real competition with the US Dollar?
Elliot Kallen: I like the hockey metaphor. We’re talking with Ben McMillan of IDX. He’s the founder of IDX. We’ll get to that in a moment. We talked about the dollar and competition from the dollar. So I look at this. I have been wondering, as somebody who’s been in the financial advisory business for 29 years, almost 30 years now, giving people advice on money, investments, and retirement, I wonder why the US Treasury has allowed Bitcoin to even exist and get to the point that it’s come to.
Why they haven’t come up with their own version of the crypto dollar because you and I both know that China has aspirations for taking out the world and being the only world player. In crypto, they want to have the only world currency. They have trillions of dollars in their currency but trillions of dollars that can make a difference. They’ve got a navy and other places that can make a difference on there.
So let’s talk about whether competition for the US dollar is real competition or are we’re gonna have a cryptocurrency? How does that work with Bitcoin? Is that clearing the space even more to get rid of other currencies too?
Ben McMillan: Yeah, I think you hit the nail on the head. I think that’s exactly right. That the Fed originally looked at this with the regulators in general, originally looked at this and they didn’t like it. They didn’t want the competition. Because it’s decentralized though, they can’t take it down. And so they quickly realized they saw what China was doing. They quickly realized that we gotta come up with our own central bank digital currency to stay relevant.
Looking at Chairman Powell’s comments this past Friday, I think we’re very telling and it just didn’t get a lot of play in the media. He said at a cognitive banking conference that the US needs to have a central bank digital currency for the dollar to maintain its preeminence so he’s already looking at kind of a post dollar world.
You know, I don’t think it’s any surprise that the Middle Eastern countries like Saudi Arabia are now starting to negotiate, potentially moving away from $1 denominated oil. The US regulators are looking at this and saying the digital currencies are here to stay. We can’t get rid of them as much as we would like. China’s already beat us to the punch. Saudi Arabia is about to move away from dollar-denominated oil we need to get in this game. It’s not like Facebook. They had a great moat. For a while. Blockchain currencies are going to take that away and so if you can’t beat them, join them.
I think we’ll see. I think we will certainly see a central bank digital currency. The question is when, and I think it’s probably sooner than later. The Fed has had a pilot project with MIT for several years. Now, in terms of developing blockchain technologies, totally public, it has not been well advertised. But that may or may not be by design, but you can go to Google and see the papers. I mean, they’ve done a lot of work in terms of developing a pilot for what a fed coin or a cbdc would look like. I think that’s only accelerated now.
I think Powell was commenting on Friday and hinted that’ll be good for two schools of thought here. I think regulation around stable coins, in general, is going to be good. I think a central bank digital currency will help that, it’ll ultimately help increase adoption. It’ll help be an on-ramp and a safe-on-ramp. You know, for people that are nervous about crypto, they don’t want the market risk, so maybe they don’t want Bitcoin or Ethereum. Skeptical of private currencies, which are all stablecoins right now, or technically private currencies.
And so you’ve got to really trust that the peg maintains if there could be a fed coin that’s backed by the full faith and credit of the US government, that could go a long way towards kind of increasing the audience for crypto. Ultimately, getting them onboard and then what does that do to Bitcoin and Ethereum? The existing Crypto I think it sits alongside them, and I think there’s going to be an exchange rate just like there’s an exchange right now for a US dollar, Bitcoin, Russian ruble or whatever it there’s going to be a digital version of the US dollar that’s this Fed coin.
It just comes with it, all the program and programmatic aspects that people like. You imagine getting your tax refund directly. Your tax refund in a pure blockchain world where all your spending was captured. Your tax refund can be as easy as hitting your wallet. You look at stimulus payments and you wouldn’t have to put checks in the mail that could just hit your wallet. So there is a lot of appeal to having a kind of digital currency. Again, I think maintaining dollar hegemony as long as they can is was one of the big ones.
Is there still room for Bitcoin with the US Dollar and a Chinese cryptocurrency?
Elliot Kallen: You think there’s room? If you have dollar and Chinese currency there, do you think there’s room for Bitcoin? Will people actually say, “I’m going to deal with a third party when I have a sovereign crypto?”
Ben McMillan: Well, yeah, because Bitcoin is still going to have value independent of the Fed. The Fed isn’t gonna have a cryptocurrency that competes against Bitcoin or Etherium because they’re just gonna have a stablecoin. There are concerns with that too. One of them is privacy rights. People have said with a Fed point, they can see exactly what you’re doing, how you’re spending.
In fact, a lot of people don’t know but recently in China during their zero COVID policy, they would lock down wallets that they thought were violating COVID policy based on where they were they were spending, so if you are spending their digital coin at a place or time you shouldn’t be they can just shut your wallet down. Whereas with physical cash you can’t do that. So there are privacy concerns around Central Bank digital currencies.
There’s also inflation concerns you know, the central bank digital currency is going to inflate at the same rate the dollar is so for people that are concerned about purchasing power and hyperinflation and things like that, you know, the central bank digital currency doesn’t solve that. That’s one of the appeals of, you know, these decentralized currencies is that nobody can flip a switch and decide to make more Bitcoin.
There’s a predetermined amount. There’s only ever going to be 21 million existence. That is what it is and as long as that blockchain has utility, owning a piece of that blockchain is going to have utility as well. And so I think you’re gonna start to see specialization, you’re gonna see certain blockchains optimized for certain things. Bitcoin is going to be one them and you’re going to have various central bank digital currencies. Those of which are going to be digital arms of those existing currencies.
I absolutely think there’s a place for both. I think the race really is between the Fed coin and the other Central Bank digital currencies. Their race isn’t necessarily against Bitcoin or Ethereum. It’s against the China one.
Did people who got paid in Bitcoin just lose ⅔ of their paycheck?
Elliot Kallen: So, there are some professional ballplayers that suddenly want to get paid in Bitcoin. It wasn’t too long ago that Bitcoin was over $60,000 a coin. And today it’s $20,000. Give or take, right. So, that’s negotiated your contract at $60,000 market rate, which was at that time $60,000. I pay you a $5 million contract based on $60,000 a coin, and today it’s worth $20,000. Did I just get a two-thirds haircut?
Ben McMillan: Yes, you did. That is why I reached out to every single one of those ballplayers. I reached out to the mayor of New York, I reached out to the mayor of Tampa who also said she wanted to take her payment in Bitcoin and I said,” Think twice about that, and if you do take it, take it in our risk-managed Bitcoin fund. Because it’s going to preserve value and during drawdowns.”
It’s easy to get excited about blockchain technology, but also understanding price is something different and the price is going to be all over the place. It’s a speculative asset class where 50% drawdowns are a way of life and you know, I don’t have to tell you that when you get into the math of drawdowns, 50% or above you got to double your money just to get back to breakeven.
In fact, that’s where we are right now. You know, the bitcoin is down from the from all-time highs. Bitcoin is down well over 50%. So if you wrote that down you need it to go back up at least 100%. Just to get back to breakeven where if you. Our risk management approach is this year is down by 24%. So, you know, that’s in line with 20-year bonds. So, you don’t have to spend as much time putting yourself back out.
We are firm believers in taking a risk management approach either you know, a group like our dollar-cost averaging, sizing it appropriately whatever it might be. Be cognizant of the risks because of the price risks. It can be a good technology, but it can also be very speculative.
Look at the Ark Innovation ETF. I mean, there’s a lot of companies in there that are you know, are probably way overpriced but they’ve got good businesses, they’re going to be around, but the price just got way ahead. That’s why you got it down. 70%. So, I think I think that was part of the learning curve for a lot of people’s realizing that Bitcoin was this kind of great, shiny object that was going to disrupt the world. I want to only be paid in it. But, they weren’t around for the last crypto winter where prices were down, you know, 70% or 80%. To answer your question, those people that top ticks, you know, that just basically got themselves, you know, 70% pay cut.
How does the average person know Bitcoin isn’t a lost cause?
Elliot Kallen: Let’s kind of end with that and if we could, one more question. In your world, we have now added the IDX products to moderate growth and growth portfolios between last week and this week. But, people are scared because it’s gone from $60,000 something a Bitcoin to $20,000. That’s down by two-thirds. Basically. We’re not writing that because you’re taking a limited risk. Explain that to the average person. So they know that we’re not just stocking up on something that might go down still another 50.
Ben McMillan: Yeah, exactly. Our approach is to be very respectful of the risk in this asset class. Everything we do is all model-driven. What we’re looking for is conviction, buying momentum. If you go back to October of last year is when we started to see some waning conviction. So we started raising cash, more cash, more cash. We’ve been entirely in cash for the last month now kind of sitting on the sidelines.
The idea is we’re not going to avoid all the drawdown, but in this case, since all-time highs, bitcoins is down %60 or 70% while we’re down about 1/3 of that. So the idea is if you can capture more than 50% of the upside and participate in less than 50% of the downside, you’ve got an asymmetric payoff. You’re getting more than half of the upside when it goes up. You’re getting less than half of the downside when it goes down and over time. You get participation in the asset class, but it’s going to be, or it should be a smoother ride. Your capital is expected to compound more efficiently. The idea is that you’re not going to have to endure these %50 plus percent drawdowns.
The volatility profile of our fund is expected to be something more in line with like commodities. Again, I don’t want to give the impression that there’s no volatility or that there’s going to be no drawdowns, but you know, it shouldn’t be you know, 50% ,60%, 70% drawdowns. It should be more like 10%, 20%, or 30% drawdowns.
“Be cognizant of the risks because of the price risks. It can be a good technology, but it can also be very speculative.”
What is “crypto winter?”
Elliot Kallen: O your word, you use the phrase “crypto winter.” I’ve heard that on TV. What does that mean?
Ben McMillan: Crypto winter was just this kind of dormancy period for the 2017 crypto boom. In 2018 crypto and Bitcoin is down 80%, and it stayed there for a while. Back then crypto was still relatively new. You didn’t hear about it on CNBC. All these use cases I’ve talked about we’re still academic. Nothing really had been developed. Or if it did, it wasn’t getting scale yet. It didn’t have nearly the adoption we have now.
Now we’ve got dozens, several – Bitcoin, ETFs, mutual funds. The institutional adoption is there. So I don’t think we’re in for a prolonged crypto winter like we were last time but it’s come to be known as kind of a moniker for the industry that when crypto prices get down this much, everybody starts screaming “crypto winter” again.
Can you tell us about shorting Bitcoin as a strategy?
Elliot Kallen: Just yesterday or the day before I noticed that one of your competitors create an ETF that’s that shorts Bitcoin.
Ben McMillan: Yeah, that’s a tricky one. We’ve had a lot of people that have been in our models from day one when we started opening it to outside capital in 2019. They’ve seen them perform well and they say, “Can’t you just short? We want the short version.”
Shorting is very difficult in an asset class like this, where there’s huge upside volatility. One of the things that’s interesting about digital assets is that there’s a lot of upside volatility so that means it can rise 20% out of nowhere. When you are shorting, it’s easy to look at an environment like this and say, “We could have made so much money if we’d been short instead of flat.”
It’s tricky at the turning points because that’s where short-only funds can erode a lot of capital. There’s a place for short Bitcoin ETFs to be sure, but it’s tricky. I wouldn’t just, you know, too bearish on the asset class. It’s like the VIX ETF, where the mechanics are a little bit detached from how the actual ETF performs. So, yeah, it’s a wild ride to be sure.
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