Irene:

Hi everyone. Thank you for joining part one of the WisdomTree Digital Assets Office Hours Series titled "Intro to Bitcoin, Basics of Conversations" where you will hear from Jeremy Schwartz, our Global Head of Research, Jason Guthrie, Head of Capital Markets and Digital Assets, and Matt Kress, Director of Advisor Innovation.

Matt Kress:

Thank you, Irene. We're excited to be here. This is going to be a fun series on digital assets that we go over for Office Hours. I'm here with Jason and Jeremy, and we're going to really dive into some different history of bitcoin, differences between the different cryptocurrencies, what a blockchain is, and the different ideas around just everything going on in the space today and you can really start thinking about communicating and thinking about cryptocurrencies and digital assets going forward.

An interesting stat that we found recently and we've seen show up recently was Bitwise put together research and they found that 72% of advisors think clients may be investing in crypto on their own outside of the advisory relationship. So when you think about what is going on with your clients and just in general with all the other questions you might have, it's really important that you kind of get a handle on this and start to understand it a little bit better.

So I want to start off with a fun poll. We're going to have some polls, some engagements here, so hopefully not everyone's just listening in and not paying attention. So I'm going to share my screen really quickly. Pull out your smartphone, pull out your camera, and I'm going to want you to point your camera at this QR code. It is going to bring up our first poll question. So if you point your camera to this QR code on the screen, hit the prompt, it's going to bring up this first poll question of what's your general thought, so in one word, what's your general thought about digital assets looking forward? And we're going to have a couple other polls throughout this, so go ahead and keep your phone out, keep the browser out on your phone and it'll update it for you.

So what's one word? So we see positive, growth, confused. This is fun. Speculative. Volatile. Stay. All right, so we're starting to get a lot of responses coming in with what you're thinking about and what your general thoughts are, and this is great. Opportunity. Positive. Important. Future. You can just see there's a ton of different feelings and thoughts out there. So Jeremy and Jason, what are your... Jeremy, what's your first reaction to these words that you're seeing?

Jeremy Schwartz:

First of all, this is the coolest poll feature I've seen on an Office Hours. So I think this is fantastic. I think you see this volatile. You see people confusing as a word, disruptive. All these I think are symbolic of what's going on. So this is a great feature.

Jason Guthrie:

It's a really good spread. The one that jumped out at me was inevitable, as to what I would probably most relate to with this. And it's really interesting to see that people out there are starting to think that way.

Matt Kress:

Yeah. Absolutely. So we'll say this. I'll stop the share. I'll take the poll off. Like I mentioned, we'll have a few others come up. But absolutely, I agree, Jason. So when you think of inevitable and you think of just how we're thinking, everything you saw, can you quickly explain a little bit more about the quick beginnings of bitcoin and just transition to I guess up to the more current place we are right now?

Jason Guthrie:

Sure. So I mean, bitcoin was born in 2008, 2009 with this technical innovation by a pseudonomic developer, Satoshi Nakamoto. And it brought into world a few things. It brought into world Bitcoin, but also brought into the world this concept of blockchain and the underlying technology or the technology principles that were bolted together to form it. And it really did kind of kick off this decentralized revolution of how we transfer value.

And without going into a huge amount of kind of technical detail, what kind of started with this one concept of being able to kind of transfer value peer-to-peer without central authorities by the internet has kind of grown into this rich and diverse ecosystem of sort of exceptionally clever ideas of this big amalgamation of smart people working with clever projects that's attracting a lot of kind of capital and investment.

And if I take a big step back and kind of look at the space and go back to that concept of inevitability, if I think about the amount of I guess innovation, the amount of brain power, the pace at which they're developing in this space it feels almost overwhelming. And the analogy that I like to use a lot is comparing it to the early days of the internet. Where we are right now feels like it's '94 and we're talking about the internet. It's impossible to kind of guess that it's going to be Amazon and Google and they're going to have the impact on business that they've had, but it was really I think clear or you were able to stand there in '94 and go this is an innovation that's going to change the way we share information and that's going to have a big impact on how everything works.

Jason Guthrie:

Blockchain, Bitcoin, the developments around it, this is going to do for the sharing value what the internet did for the sharing of information. And the potential and the way it's going to change everything I think it's going to be seismic. And the changes we're going to see in the next sort of 10, 15 years are going to incredibly interesting.

Matt Kress:

Yeah, that's really fascinating when you think about just... It's really, I hear it lot, but it's really, it stands out when you say this feels like when the internet became to be. I can't even remember what I would. It's just so normal for me if I want to look up information to Google it. To find something online. There's more information than ever at fingertips, so when you think about how that's going to happen to this peer-to-peer transfer space, this distributive ledger, blockchain space, it's really fascinating to think about. Jeremy, what are your thoughts on the growth and what Jason was saying about how it's just going to eventually change and that inevitableness of everything?

Jeremy Schwartz:

Well, I think the series that we're going is an important one because each crypto asset, cryptocurrency technology there's a different use case and the story for Bitcoin is different than the story for Ether. And we're going to probably drill in. This one was focused Bitcoin. I know in the pre-submitted questions there there was some on Ether also. I do think of Ether as this future of computing. Ethereum, that blockchain is where there's going to be a lot of creativity and a lot of new applications build on top of it.

Bitcoin today there's a whole question of what is the investing narrative, why is Bitcoin a useful asset to import folios. And I think the dominating narrative today, what is the people most using Bitcoin is, I think the dominating narrative has been this digital gold. That is it in a world of money printing and deficit spending and increase from all over the world, the M2 money growth in the US up 30% since the pandemic began, a lot of printing. And there's going to be a fixed amount of Bitcoin in circulation, going to 21 million Bitcoins in the end. And there's less and less new Bitcoins being mined every year.

And it's a classic, in my view the investment case is a classic supply-demand story. There is only a fixed amount of supply. The question is what is the demand and how many people are coming to the ecosystem? This is a tough question to judge. But where are we on the demand cycle? How many more people have yet to adopt? And your point from the advisors thinking how many people are doing it away from them. The question is are people building into portfolios holistically? Is it coming more, Jason in Europe is talking, with more institutions? In the US we don't really have regulated products, ETF products yet. There's some harder to access or what we think are structures that have some deficiencies in them. But where are you on the adoption curve to create demand for this asset class I think is really the big question.

Matt Kress:

Yeah. I love what you're talking about. Even you mentioned there's 21 million, a supply cap of Bitcoin. I believe right now the latest statistic, actually just yesterday, was just over 18,700,000 have been mined and created. So that's a whole discussion on how many more are there to get to the 21 million, but also that we'll be there when enough people jump in.

So that leads us really nicely to the next poll question and really quickly. I won't go through too many of these, but just thinking of the comfort level. So you mentioned as more people are coming into cryptocurrencies and wanting to use, for example, Bitcoin, how comfortable are you as an advisor when it comes to just communicating about digital assets with your clients? So if you kept your phone up and had the browser pop up, it'll be the new question now. If you did it, the QR code is here again. You can point your phone at it. We'd love your responses. It's a simple one to five. One, I'm not comfortable, five I'm very comfortable. So how comfortable are you in communicating about digital assets to your clients? Let's see what some of the responses are. Okay.

So a lot more uncomfortable, very uncomfortable than neutral and comfortable. So that's something to think about is, Jeremy, or Jason as well, as more and more investors are looking for information, do you find that in order to increase some of that and help get more investors using cryptocurrencies that advisors need to change this uncomfortable and very uncomfortable to a little more comfortable?

Jeremy Schwartz:

Well, I think even the demand for our office hours today and our people coming on is symbolic that there was a lot of interest in today's discussion, even more so than a standard are you looking at value or size? I mean, this is a topic that's very top of mind for people, and I think because it's been so hard, there's really been no way to incorporate it into portfolios. So I think advisors have, in a way, been able to say it's just not easy. It's not easy to go open a Coinbase account or open a Gemini account and do the trading for their clients. So oftentimes clients will come in more knowledgeable about what's going on.

I personally got interested. We were thinking about it from a business perspective, could we launch products. Europe was actually able to launch products, but we haven't been able to do it. We've been thinking a lot about the digital assets story. And I pushed myself to learn by buying a few different things just to get up the learning curve and there's nothing like having your own account to know and track what's happening day to day. And I think that's often how these will start, you start doing it yourself. But then quickly, how do you make it available if you think it ends up being a valuable thing to do?

Matt Kress:

Yeah. That makes a lot of sense. So speaking of communicating, speaking of getting there, doing it yourself, one of the questions that came in ahead of time, so please everyone here for the next office hours, ask questions ahead of time. We'll allow you to ask them afterwards. We'll follow up as well. But Jason, one of the questions that came in was what is the difference between cryptocurrencies and blockchain technology? Can you tackle that and help us be a little more informed about how to communicate that?

Jason Guthrie:

Yeah, sure. So blockchain technology is essentially the underlying technology stack that facilitates the creation and maintenance of a given cryptocurrency. Whereas a cryptocurrency, you can think of as a discrete representation of value in the internet or over these sort of blockchain networks, as it were. Without going into too much detail, essentially a blockchain really bolts together, a few kind of innovative technologies that were already in existence. It actually really didn't come up with anything brand new, but bolts together some cybersecurity, some encryption, some wider cryptography techniques into what becomes a very user efficient way of transferring value in a trustless, decentralized way.

And just to kind of take a step back and understand the problem that this was kind of solving for, it's typically referred to as the double spend problem, right? The best example I can give is, Matt, if I send you something over the internet, historically, picture, PowerPoint, Excel file, whatever, I'm actually not sending that to you, but I'm sending a copy of that. The ones and zeros that make up that file, I'd give you a copy of those ones and zeros, which is perfectly fine for a photograph or a PowerPoint, not very good if I'm trying to send you $1000, because then copy of that $1000 can be spent again. And that's obviously a big issue, which is why we've had to rely on big institutions like banks, et cetera, to really do the accounting for us and make sure that they sort of maintain the state of the world, who owns what, where and when.

And if you think about how you buy a cup of coffee, when you tap your card or insert your card at a Starbucks, really, you're not giving Starbucks money, but you're sending a message to your bank to take money out of your account and put it in the account at Starbucks' bank. And then they'll give you the coffee in return once the confirmation for those messages go.

What the underlying technology solved for was the ability for me to digitally send value to you to solve for that double spending problem and to maintain a constant account of where that value sits without actually needing to trust anyone else in that network. And that's hugely powerful for sort of streamlining how the flow of value can occur in a digital network, not relying on these big institutions to essentially gatekeep that flow.

So that's what blockchain technology sort of is, a trustless network for maintaining a record. Cryptocurrencies then themselves are the units that are able to be transferred on top of that. And these then can take a series of forms. Again, but the first and probably simplest of those is Bitcoin, a simple unit of a fixed number of Bitcoins. And then it has sort of evolved from there into sort of various, you may have heard about smart contracts or decentralized finance that's growing up on top of this, but it then becomes a very interesting space. But at its root, the blockchain technology is the underlying way in which they've solved this double spend problem for digital transfers and the token of the unit of count.

Matt Kress:

Yeah, it's really interesting. So at the most simple level, when I think about it and just breaking that down and consolidating a little bit more as if we think of a blockchain, that is, like you said, the underlying technology, right? That is the technology behind it. When we think of a cryptocurrency, that's the medium of exchange of the asset, whatever that is. So Bitcoin, it's Bitcoin. Ethereum blockchain, so the Ethereum blockchain itself, the medium, the main asset we think about there is ether. And then you could think about on the Ethereum blockchain, there's different cryptocurrencies and different things that are building on top of that. Is that right?

Jason Guthrie:

Yeah, exactly. I like to think about that there's three levels of sort of how this operates. So there's the protocol level, which is let's say the software that everybody deploys. There's the network, which are all the parties involved in it. And then there's the tokens themselves, which is the final layer, the observable transferable unit of value. And each kind of blockchain network kind of comes with these three elements or each cryptocurrencies at work comes with these three elements.

Matt Kress:

Yeah, that's great. So when we think about that, the asset, and the question just came in, can you explain what they're actually doing when mining for Bitcoin?

Jason Guthrie:

I can. So part of this process of maintaining the network and running the protocol, so total as I've just described, is this process of mining. And that mining process is what secures the network and processes the next set of transactions that are to be added to the blockchain. Now what these guys are essentially doing is they're getting their transactions, bulking, getting all the pending transactions, bulking them together, and then applying a series of cryptographic techniques to link them or cryptographically link them to all the previous transactions that have occurred. Part of that process is doing a computationally difficult process which whereby they put computing power to essentially generate a series of random numbers to find an outcome.

One of the sort of features of this or one of the clever innovations is that it uses sort of one way cryptographic techniques. That means it's really difficult to come up with what the answer is, but once you've got the answer, it's very easy to verify that it's correct. Now in using this kind of one way technique where you can check that it's right very easily, but it's very hard to come up with, once someone comes up with a right answer and the network agrees with that answer is right, that block becomes locked in. Now if anybody ever wanted to go back and just change history as it were for this block, they would have to expend all of the energy and effort that was put in to mine every block in history in order to actually come up and actually to go and falsify what's in there. So that effort and energy that goes into mining each block secures it by making it exceptionally difficult to change, effectively making it immutable.

Again, I can talk in more detail, but really simply that's what the mining process does is it deploys effort and energy and value to secure the network in a cryptographically difficult way that is easily verified by everyone else so we can all be comfortable with the state of the world, with the transfers of value that we've made, knowing that that network is secured by that effort and energy and making it essentially immutable.

Jeremy Schwartz:

Right. And you'll hear some terms like proof of work and proof of stake. And so Bitcoin mining and Bitcoin today is this proof of work concept you're going to hear a lot. Today Ether is a proof of work like Bitcoin, but it's going to this concept called proof of stake which is a different dynamic. It gets into the energy consumption going into how do you verify these transactions on the Blockchains? And it could be a different dynamic in Ether. We've done some podcasts on that topic of a bed transition. So there's some questions here on the resources to learn more. I'm sure we have some pages that Matt we can show where on WisdomTree they can find this kind of information. But you'll hear more about that proof of work and proof of state concepts on both of those.

Matt Kress:

Yeah, absolutely. And we'll share some of the resources as well in a second. Segueing, Jason, you mentioned something and Jeremy, this is a question for you. So Jason, you mentioned about cryptographic and when we think of we can all feel comfortable and there's this equal state. Jeremy, we were talking this morning and the latest news that we're seeing a lot in this space right now is what happened with the pipeline and Bitcoins and what happened with that. Can you explain a little bit more? I'm sure that's on everyone's mind when they see the news. And Bitcoin had not the best couple of days recently because of some of the news.

Jeremy Schwartz:

Very relevant. I mean you go back to the word cloud, you had volatile today, you see Bitcoin down 70% last I looked at it this morning. And part of what's going on and also in the headlines you had the FBI was able to seize Bitcoin from the hackers who attacked the Colonial Pipeline. We actually just did a podcast, did a blog on it yesterday at WisdomTree.com. You go to our blog. And we had a podcast with Team8, venture capitalists on cyberspace, our CIO, chief information officer, and industrial software group. Essentially there's this question on is Bitcoin enabling ransomware because people view this as this anonymous thing. I mean one of the things we said on the podcast is it is not so anonymous. It may be hard to track overnight, but over time there is a record of your transactions. And the FBI is showing with, they basically said we followed the money and we were able to get this private key and we were able to get the Bitcoins back and essentially return it to Colonial. And so it is not so so anonymous, there's a record of those transactions and there's still this security question. So it's just an interesting point on it has become the way that criminals are asking to get paid, but there is a record and the FBI's showing that they are able to track some of it.

Matt Kress:

Oh go ahead Jason.

Jason Guthrie:

I was just going to say, it's a narrative that's been around with Bitcoin for awhile, but it's playing out to sort of not be true that it facilitates a given elicit activity more than anything else. I mean most illicit activity is still done in $100 bills, not Bitcoin. But I also think that the usability of a given technology cuts for everyone. There was a lot of criticism leveled on the internet when it first started as well until it started to add a lot of value to everybody and all of that sort of starts to fall away. And I think what we're seeing is some of these initial sort of knee-jerk negative reactions or knee-jerk negative narratives that were pervasive for Bitcoin are proving to not be true. Is it making it harder or easier for criminals to get away with funds? No, it's not. In fact, the analytics you can do for on chain data is a very powerful tool for law enforcement.

Matt Kress:

Yeah. And that's something I think that we, a lot of times we forget about and a lot of people don't really realize is that there are a lot of savvy people that can really figure out and see where, I mean it's all public record, right? You can see where things are moving. Now there's a lot of random, it's like a hash random numbers and letters and symbols and things that tie to each other, but you could see where all of this is going. [23:59]

So when we think about even just resources, so simple resources, I'll bring up the WisdomTree site. Let me share my screen again, bring them the site here. Another question, while I'm doing this if you don't mind answering, so two questions that came in is one, why is Bitcoin limited? So at a very quickly, can you answer that? And then also, are you worried about getting money out of exchanges? I know we don't want to talk specifically to the exchanges because we're not one, but we hear stories about that. And so can you talk on those Jason and Jeremy?

Jason Guthrie:

Yeah, sure. I mean look, so Bitcoin being limited, it's essentially coded into the protocol. One of the great things about cryptocurrencies open networks is that it's essentially open source software. Anybody can audit it, anybody can see what's in there, how it works. There are tens of thousands if not hundreds of thousands of people who have looked at and gone through the Bitcoin code. And it's also got 10 years of track record as to it functioning as intended. So how do we know it's limited? We can say it's public record. If you want to be really sure about these things you can run your own version of it and see it syncing with the rest of the network. It's auditable, it's transparent. So it's essentially a matter of fact that this is limited, that the protocol as it stands can't have more than 21 million.

Matt Kress:

Yeah. That's great. And then I guess we'll dig into this probably the other later office hours when we think about even just the one of the 30th, dig a little bit deeper about concerns of getting money out. I mean. Jeremy, do you see any concerns with that or Jason, do you see any concerns with that at all?

Jason Guthrie:

You want to go Jer?

Jeremy Schwartz:

Well the key is, I go back to why I started trying myself. Partly it's got to start doing it and explore and get comfortable. The first time I purchased it I used an SMA provider who was managing all that using a Gemini custodian and helping manage that. I'd done also stuff on Coinbase. I mean the issue on something like Coinbase is that you're sort of grouped in with all of the other people on Coinbase. And then the thing is you've got to then get it into your own wallets. So I don't know Jason if you have any other personal experience you would talk to. But I think there is something about trying it yourself to get comfortable as you look at other options of how to do this.

Jason Guthrie:

Yeah. There's definitely a comfort level. I'd also say that, look, as with anyone that you deal within in financial services, you need to be cognizant of counterparty risk exposure and concentration. You need to be comfortable with the people that you're operating with. And I think given that cryptocurrencies is relatively new, there are a lot of people that are still kind of on the fringe of it. I think luckily where we are now is there's more and more guys that are really pushing to be highly transparent and deal with regulators to have as much of their business regulated as possible. And I think you should always know who you are engaging with, if it's someone random on the internet, and there's not a lot of details on the company structure or founders or how it works, that might not been the best place to park money or client money, but there are plenty of high profile listed, regulated entities out there offering services for crypto. And so, I think it's important to make sure you're vetting that appropriately.

Matt Kress:

Yeah, absolutely. And so, thinking about, and I've never had problems for as long as I've been interested in the space as well. It's just really about learning and getting comfortable with it yourself. So going back to a couple of resources here, there's one more question that kind of be fun to answer. It could be a quick one. You can go to WisdomTree.com. So if you want more resources, there's a lot of different places we can take you. You can go to WisdomTree.com, highlight over the strategies, the word strategies in the navigation, and then go down to evolution of crypto. It's the second link here. When you click on that, this page is going to be full of information. We're going to be keeping our updated resources, keeping information here. There's a lot of information that you can find there.

And you can also go to, if you click over to our blog, there's posts that we're posting. So if you go to the blog, then you can go down on the right side, click on categories, and then click on digital assets. So this is going to show you all the blog posts that are relevant to digital assets. One in particular that you should definitely check out is Will [Peck] wrote an article, the Bitcoin for Investors in Three Ways. There's a couple other articles. Here, you can see more things by Jeremy, by Jason as well. And we'll send you an email. We'll send you a follow-up email with some of these links and just makes sure you're comfortable as well. You can also reply to that follow up email for any sort of questions you might have. We can follow up with that. And Jeremy, just a question came in, is this site client approved? Do you have any idea on that?

Jeremy Schwartz:

Yeah. This is not a financial professional page. There is some information on here that is for financial professionals at the very bottom. But most of the blog is for sure anybody, everybody has access to. And then, there are some resources for FPs on how to implement in portfolios and other things.

Matt Kress:

Yeah, absolutely. And so, another question that came in, what happens when the internet goes down? Man, sure, might not be able to have the peer to peer thing going on. There's definitely going to be a bigger issue in the world if the internet goes down, so I'm sure there's a lot of... Go, Jason.

Jason Guthrie:

So I can add some color to that. The internet's actually pretty decentralized as it is. It's not like one central node running it. So in order for the internet to go down, it means every one needs to go down at the same time, which is actually pretty low probability. And if your section goes down and some validators or miners are down, they will reconnect and sync with whatever protocol it is as and when they come back online. Interestingly though, even for the infrastructure that we've got here, there's something called Starling, which is a satellite network specifically to run the Bitcoin protocol. So even if the internet on Earth goes down, there's already a redundancy up in space for that.

Matt Kress:

Yeah. That's great. I didn't even know that, so good to know. But if you keep paying attention to the WisdomTree site, we will post more articles and more resources and more blog posts.

So this is great. We really appreciate you all showing up here. We thank you for coming. Like I mentioned, reply to the email that you receive as if you have any more specific follow-up questions, we'll take notes from all of these topics as well and make sure that we're providing the best information and helping you out the best we can. So Jason, Jeremy, thank you. Thank you for everyone being here and we appreciate it.