Intelligent Investing #65 with Ben Jacobsen of IDX Digital Assets - FTX bankruptcy details, present uses of these techonologies, future of cryptocurrency

In this episode Glenn Leest interviews Ben Jacobsen of IDX digital assets. We talk about cryptocurrencies and the current state they are in. We also discuss:

•What is Bitcoin?
•What is the Block Chain?
•More information and thoughts surrounding the FTX bankruptcy
•Applications thatthese technologies have today and  what could they look like in the future
•Overall thoughts about the digital assets space


Glenn Leest
Senior Investment Advisor
WT Wealth Management
(928) 225-2474 Office
INTELLIGENTINVESTING@WTWEALTHMANAGEMENT.COM

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Transcript

You are listening to Intelligent Investing with Glenn Leest. In today's episode, I've got one of our friends with us from IDX Digital Assets here to talk to us about cryptocurrency, what's going on, and give you more education in that area. So stay tuned. Going to be a great episode.

All right. Here in the studio with me, I've got Ben Jacobson. Ben, how are you this morning? Everything's good, man. Life is good. I'm blessed. Nice. Nice. Ben is, uh, remind me again your, your role at IDX Digital Assets. Last I wanted to say managing partner. Is that correct? Yeah, I, I, you know, you could say that.  as an equity owner in the business as well.

Um, but I think my official title on the business cards and email signature line and all that is, uh, managing director here. Gotcha. So, um, we actually did a show earlier today that we recorded, um, on a, a radio show and, uh, wanted to kind of follow up, give some more, uh, behind the scenes content because there's just so much to cover when it comes to digital assets, cryptocurrency, the blockchain.

So let's maybe take a step back for, for those. Maybe you want to get some further clarification. What is the blockchain and um, you know, what uses does it have so far? Yeah, absolutely. Absolutely. So I think when you, if you want to think about the official definition of the blockchain, it's a decentralized ledger, but okay, for normal people, what does that actually mean?

Well, . Essentially what it means is that if I'm going to be sending money, you know, and I think dollars or currencies is one example of a use case for the blockchain. It was the initial rationale for it. If I'm going to be sending, you know, money from one person to another, there needs to be that trusted intermediary in the middle.

Gotcha. Which is the bank. Um, but after 2008, when a lot of the banks. , it became evident that maybe there could be a better way of mm-hmm.  of facilitating a, a trustless transfer of information. Gotcha. In this case, we're talking dollars, and that's what the blockchain ultimately does is rather than having one person or one entity decide whether or not that that should be approved to go through mm-hmm.

what the blockchain does is it actually creates a mechanism to where there are millions of computers all around the world, all validating that, hey, this is an actual live transaction, so. Gotcha. Okay. Taking it from one entity to the masses, now it becomes something. , you can pass this information back and forth, but do so in a way that is not reliant on one single entity, where that one entity could create fraud or make mistakes or anything like that.

That could happen. So let's paint a picture here. Say I go to Starbucks and I buy a cup of coffee. Mm-hmm. . And I'm going to use my Visa. Visa or MasterCard. So I swipe my card. Um, then the bank becomes involved in that transaction because, , uh, Starbucks is checking to make sure, one, I've got the money to be able to, you know, process the transaction and then when it goes through, um, Starbucks sends the information to say, Hey, send, you know, update or your ledgers to give us $10 and take $10, you know, or out of his account, or put it on the, you know, balance that's due.

Mm-hmm. . And so what you're saying is the, the blockchain seeks. Take that role that the bank was playing in that, that, uh, instance and spread it out across the entire network. So it's not just, um, it's not, you're not relying just on that one bank. So you're, you're basically eliminating the bank from that transaction and you're putting it on the blockchain.

Is that a, is that a good understanding of it? Yeah, I'd say that's, that's absolutely fair. Think about it like this, right? , if you run a business, and it doesn't even matter what kind of business that is, what you want to do is build in redundancies. Mm-hmm.  to make sure that one thing can't break your business.

Yeah. And if you think about, that's a lot of what's going on here with the blockchain right now. It's JP Morgan Chase or Wells Fargo, whoever is that one bank. Mm-hmm. . Um, and rather you're diversifying it across a bunch of different, in this case, validators that would be able to push that along there. So it's just a, uh,

It's just ultimately a, a de-risking of having one entity control things and there's pros and cons with that. Mm-hmm. , you know, one of the pros of having one entity control things is things can move very, very quickly. Yeah. Um, that's one of the things that the blockchain has been trying or, you know, different various blockchains.

Cause there's more than one, right? Mm-hmm. , Bitcoin has one, Ethereum has one, et cetera. They're looking to get faster and faster, um, because you.  in that sense. That's a trade off here. Yeah. Right. You can have more people validating, but that can take a little bit of a longer time. Mm-hmm. . So, um, there are trade offs to it, no doubt.

Um, but I'd say that, you know, your, your characterization of it is, is correct there. Okay. Um, where, where do you see the application of this going in the future? And, you know, what is your, your thought of, is this going to become something. Used by everyone in the future. And is this going to be something that's part of our daily lives?

And, and where, where do you see it going and where is it, uh, being used right now? Yeah. So short answer is yes, absolutely. Everybody will use this as part of their daily lives. And I'd argue that there are millions, if not hundreds of millions Americans right now utilizing it. They don't even know it. Hmm.

And what I mean by that is, you know, currency as we talked about is one. You know, utilizing this blockchain. Yeah. But supply chain is another example of another way. Um, you know, there are major, uh, department stores, you know, Starbucks coffee for example, that are already utilizing the blockchain for supply chain logistics there.

Um, but on top of that, You know, you'll see NFTs come out and you know that you'll have an N F T that is your movie ticket. That is your concert ticket. Yeah. That is your, your essentially, your, your ticket entry into places, or maybe you have an NFT that gives you more access on a website to more content depending on what type of user you're so, , all this stuff can live on the blockchain.

Remember, this is just information being passed and enforced without one centralized entity controlling it. It will take the form and already is taking the form of multiple, multiple different use cases here. I mean, title, land title is another great example there, right? You've got to go, if you live in some small pot town, well, you got to go into the county records where you know everything is still probably on paper and you know, If all of that data lives on the blockchain, health data, living on the blockchain, it's immutable.

You can't erase it, you can't take it off. Um, so it's very much something that, I think it's a common misconception that this is only for currencies. Blockchain can blow up and be, you know, one of the biggest inventions that we use as humans for.  all businesses going forward. And that goes a lot beyond just, uh, just currencies.

Yeah, and that's something I I, I picked up on over the last year and a half is the where could this go and how can it be utilized in our daily life, like kind of forward looking. Um, because I, I remember years and years ago I was, uh, I used to work out a lot and I still do. , but I, I had corded headphones to listen to my music and I thought to myself, wouldn't it be the coolest thing ever if they was no corded somehow, like you can just put in your ear and it played the music.

And at that time it was just like a, this far off thought, like, you know, that would be cool. I, I had no. Not even, couldn't even fathom how they do that now. Everyone's got wireless headphones. So, no, I had a similar, I had a similar thought, uh, before Netflix was doing, remember when Netflix was just, they mail you DVDs, uhhuh.

Um, I remember having a thought back then like, man, it would be cool. Like I can stream a baseball game. Like, why couldn't they just stream all these movies and stuff? Mm-hmm.  instead of getting them mailed back and forth. And um, sure enough that comes out too . So I think it's just, uh, look, I think that we're, we're living in an era.

Technology is rapidly developing, right? Yeah. War's law, right. It's going to develop faster and faster and faster. Mm-hmm.  as we progress, and you know, I'm sure there are listeners right now that, you know, remember the black and white television mm-hmm. , you know, remember the corded phone. Um, I mean, shoot, how many interns do you have now that don't even know where the cord is?

You know what I mean? So like, All this stuff is developing. Are there growing pains with any new technology adopted? Absolutely. Yeah. You don't have to go back that far. Go back 20 years to the internet being adopted. Yeah. Um, you go back 25 years, you'll see, uh, we may have even mentioned this on a previous, a previous, uh, podcast that.

You know, you got, anybody can go up and look up, uh, on David Letterman's show, I think in 1996. Mm-hmm. , bill Gates was on there trying to explain the internet and Letterman and the crowd just roasted him. Yeah. Um, the irony is that here we are, you know, 20, 30 years later. Laughing at how silly that clip was on the internet.

On YouTube. Yeah. Right. . So this stuff develops, there's going to be growing pains. Um, and I think that, that, you know, the blockchain digital assets, this is no different than, than any other technology there. So one of the things that, um, we kind of dissected, uh, when we were on the last show is the FTX scandal.

And I was even learning a lot about that too. So, um, be, because I think people have. This, this can, this idea that like, oh my gosh, this happened to FTX. You know, is it going to happen to all the different blockchains or the, all the different cryptocurrency exchanges? And so I think getting some more information on what really happened and the setup of it, I think kind of illuminates, you know, Or can give us a better educated decision on, on, on what really happened.

So maybe tell us a little bit about the FTX, um, scandal and, uh, what they, what they were doing and, and how it went wrong. Absolutely, absolutely. And look, I could talk for three hours on this one particular topic, so Yeah. Uh, please direct me if I'm going into too much detail here. Um, so for anybody who doesn't know, FTX was a very.

Exchange where you could go in and trade your dollars for different cryptocurrencies, right? Mm-hmm. , um, or tokens, if you will. They don't necessarily have to be currencies. Yeah. Um, or you could trade your other crypto for other certain cryptos, for other crypto, right? Um, and, you know, that's ultimately what, what they did, what was interesting about this particular group was kind of the origins behind it, right?

Mm-hmm. . And you look at, uh, Sam Bankman Fried or SBF as he's well known on, on Twitter here. . Um, and you go back and you look at his, you know, kind of his upbringing, right? Yeah. This was somebody who was, grew up very fluent, Harvard lawyers for parents, um, top Prep School. Um, ultimately ended up going to MIT and then getting a job at Jane Street, which is a, uh, a Wall Street, uh, brokerage house there.

Um, after that he ultimately created a hedge fund called Alameda, and that was something that they had a lot of success with early on. Uh, one of the things that they did was called the kimchi trade, which is Essent.  in, uh, South Korea, the price of Bitcoin was inflated. It was higher than it was based on some regulation and some things they were doing there.

So what would they would do? They would buy Bitcoin in the States or anywhere else, go sell it in North Korea or South Korea, excuse me, boom. Crap for that, that spread, right? Yeah. Um, so they were doing very smart trades like this in the beginning. Um, Translated into them becoming a market maker. So essentially providing liquidity to different exchanges where essentially they have the same amount of risk, long or short.

So they're just capturing once again, another spread there. Gotcha. Um, from there, they went out in 2019 and started FTX. And FTX is Okay. So now instead of providing liquidity, these exchanges, let's create our own exchange. Yeah.  and you know, with his background and with his connections, you know, they were able to raise a lot of VC or venture capital, venture capital dollars.

Um, and I think one of the big things about this entire situation that makes it so shell shocking is that if you go back earlier this summer to when three euros capital went down to when Luna went down to when Celsius went. , there was a lot of contagion back then as well for different, you know, crypto related businesses.

And he was coming in with this war chest and saving people. Um, he was the savior. He was the one that was running his business. Right. Hmm. Um,  ultimately you, you know, you fast forward a couple months ago, um, you know, think, you know, October, November type area and words starts to come out. You know, leaks start to happen that, hey, Ft X's balance sheet isn't what they say.

It's actually not all that healthy. Hmm. Um, one of the things that they had done is, and this is not uncommon for in exchange like an FTX to issue their own. , right? Yeah. Um, think of, you know, these are governance tokens. These kind of act a little bit like, uh, like shares in, in a company like Stock Shares, right?

Mm-hmm. , you get a little bit of the revenues that the exchange is creating. You also get a little bit of voting power with the, the FTT tokens, which is what that was the, the, the ticker for their, their particular token. Why is this important? Why is this even matter?  a lot of their balance sheet, a lot of the assets on their balance sheet were their own token.

So a big comp, which is, that's a big no-no, he definitely don't want to do that. Right? If your token drops, your assets drop. Right. So one of their big competitors is a group called Binance. Um, Binance, the, the owner of that, I don't want to butcher his name, but Cz is what he, he goes by, um, and cz. , you know, owned a lot of these FTT tokens and this is one of their biggest competitors.

Um, Binance is the largest global exchange that there is for this kind of stuff. Um, he wasn't the reason that FTX collapsed, but when he decided, I'm going to dump my FTT tokens, that was the straw.  that broke the camels back there because once he dumped all of his tokens and he had a large amount prices for that FTT dropped even further.

And then all of a sudden, um, you have FTX now in this liquidity crunch. They don't have the assets, um, that they're supposed to have to cover their liabilities. Hmm. Now that is nothing about, that is really illegal. Where does the fraud and all that stuff start to come in? Yeah. Um, well look, there's, there's a few cases to this.

and it really all stems from the Alameda Hedge funds still having, you know, common ties to FTX. Gotcha. Okay. Um, so, you know, one example of some of the things that they were doing insider trading. So when a, you know, newer token, um, or a less known token gets what they call listed on an exchange, meaning, okay, now this thing is available for purchase on FTX.

There's a spike that happens with that tokens price because guess what? You have all these users of Ft. FTX that can now easily buy this. A bunch of people buy it up, the price goes up. So what the hedge fund side was doing was they would know, alright, token X, Y, and Z are going to be put onto this platform in two weeks.

Let's buy as much of that as we can, such that when it goes onto the platform, it spikes, we sell. Capture that, capture those returns. Hmm. Uh, that is insider trading. That is very, very, very much legal. Yeah. Um, but on top of that, they were doing other things to where, you know, it's very, very difficult for an exchange to get banking.

Hmm. Um, and you know, that's intentional for, for regulatory purposes, right? Yeah. So early on, one of the things they were doing was they were saying, Hey, why are your assets to our hedge fund? And what we'll do is we'll credit.  on the FTX side with the money that you should have with us. Mm-hmm. , uh, that's a big no no.

Right? Because ultimately what ends up happening there is you're co-mingling assets between two different entities and you're, that's definitely a, that's a hard no. Um, then what would happen there even worse is, okay, you're supposed to have your, you know, your account with assets on FTX that's supposed to be backed by the assets that you sent to Alameda.

Well, if they go take that pool of. That were supposed to be your assets, Glen's assets on FTX, but they start doing all sorts of trades with that. That's re hypothecating assets. That is also very legal, especially when your terms of service very, very clearly say that you will not do these types of things.

So these are just a couple of examples of the very. Very illegal fraud that's happening here. And the, the sad part about all of this is that, you know, there are, you know, they filed, all three of those are, you know, I think have filed for, for bankruptcy here. You know, it's going to be the high end creditors that end up getting the payouts and not, you know, the normal people with 50 60 K or 10 K on this platform.

By the time it gets down to them, they're not, they're very likely not going to see a dime here. So, yeah, I think I'd summarize that all up. With this point, because the next question a to that a natural person would ask is, is this the end of of crypto? I mean, this was a very big name, a very well-known name.

You saw Tom Brady and Steph Curry and all these people on the Yeah, on the commercials. Um, and the way that I would kind of think about it is like this, you know, if there's a plane crash, what happens? Boeing stock takes a hit. Southwest Airline stock takes a hit. American Airline stock takes a hit. They keep, people keep flying.

Mm-hmm. . And that's, I think my big point here is, look, this is obviously a bad actor. This is obviously something that, you know, knowingly or unknowingly, and I think that's up for debate and I'd argue knowingly, um, knew a lot of these things were happening. , um, and this kind of stuff, this kind of stuff happens.

Yeah. Lehman collapsed, right? Um, you know, bear Stearns collapsed. Well, we didn't stop banking, so I do think that this will be something that, look, it's going to have contagion effects. Uh, there are going to be other businesses that are tied in with FTX in one way or another that will be affected. Fortunately, you know, uh, IDX digital assets and everything that we do is not tied into any of that.

We, we didn't know this was coming, but we knew that stuff like this could happen. So we were very, very careful about. , the counterparties and groups that we decide to work with here. Um, so there may be a little bit of a, of a shakeout, but this is by no means the, the end of crypto or, or digital assets here.

And so when you said, um, Hypothecating of assets. Um, here's maybe another way I'm, I'm, in my mind I'm thinking about it. So say you have a, an investment account with Charles Schwab and you bought a bunch of Apple stock in there, or you have cash, whatever the case may be. So that would be what FTX did, would be like if Charles Schwab then took your investments, your assets, and then started trading on them, or you used them for margin, you know, all these other things.

It would be like this, it would be like this, right? Like you, you, you have your account at Charles. . Mm-hmm. . Okay. And there's a dollar amount aside to this based on the assets that you own. Let's say Charles Schwab, you know, has this hedge fund on the side. Um, and they say essentially, all right, I've got a great idea to make money in this hedge fund.

Let me, uh, take Glen's money without him knowing. Invest it in something, you know, try to make money on that. And then I'll put Glen's money right back where it was. He'll never even know the difference. That's the kind of thing that's happening, and that's a problem. You know, one, uh, you're taking somebody else's, you know, capital and doing something that you didn't disclose.

But I'd say two. What if you lose? Right? What if, what if that Schwab hedge fund goes out and lose those assets? Then what? Right? Yeah. What happened to, to Glen's dollars in this scenario? So, yeah, you can't use somebody's assets that are for them for other purposes. Um, and that's. That's a main, that's a main problem in this, in this FTX case here.

Yeah. It seems like, uh, in my mind is theft or stealing. I mean, I mean that's, that's, you could very much make that argument. Um, you know, it's, it's, it's a type of theft. Let me go borrow your money without you knowing it and, uh, try to go make some money on it. And borrowing. What's the difference between borrowing, stealing if you didn't have permission?

Right. I just realized what I said. Borrow your money without you knowing. It is the definition of stealing , right? Yeah. So, . I think that's helpful to kind of peel back the layers and understand. The other thing that I heard you say about FTX, mm-hmm.  is a red flag is they weren't domiciled or based in the United States.

And one of the main reasons would be like, okay, why? If you're United States, you know, operations and your US citizen and all that, why would you be domiciled in The Bahamas or some other place that that raised the red flag because. To me that sounds like they're trying to circumvent some sort of law or regulation or, you know, um, restrictions that the United States may place on them.

So they're just going to go outside of the United States, but still everything that they're offering is pretty much, you know, to a US citizens. And so that'd be like if you invest in some investment firm or. You know, whatever that was based in the, you know, Barbados or something like that, or Zimbabwe, you'd be like, why, why are they based there?

You know, what are they up to know? Like maybe let me learn a little bit more. Because uh, they may not be held with the same standard. So that was something that they were doing that, um, you know, should raise a red flag for anyone that was looking to get involved with them. If you're, you know, a supposedly a US exchange and the wire transfer go to The Bahamas, you should be asking yourself a question there.

And I think that. Now you bring up a good point. Look, this is one of the reasons that, you know, for some of the investment products and strategies that we offer, you know, one of the reasons that we did not go with FTX a year and a half, two years ago, um, was this, this exact point here. Um, look, if you're going to be offshore the way I see, it's for one of two reasons.

You're trying to ev evade some sort of tax consequences mm-hmm.  here in the States, um, which isn't necessarily illegal if you set yourself up the right way. , like what you're inferring here is there's some funny business going on. Sure. There's some regulatory stuff that you're trying to avoid. And look, the example that I gave earlier about it was hard for them to get banking, so send it to the hedge fund.

Like that is literally you circumventing mm-hmm.  rules and regulations. So, um, this is not going to, uh, to end well for that group there. Yeah. Yeah. I was almost even thinking in my mind, you know, what's a definition of money laundering? Because, you know, that seems like it's pretty close to what they're doing.

Yeah. It's like, yeah, I can't, you know, You know, I've got this illegal money that I have and I can't just put in the bank, so I'm going to, you know, buy a piece of real estate with it cash, and then, you know, then I can use that asset or, or whatever the case may be. It's, it's like you're, you're filtering the money through because there's restrictions in place from you just going directly to it, because there for a reason.

There's restrictions for a reason anyway. Now to hear that too, you know, a Coinbase, for example, right? Coinbase is a US regulated bank, um, chartered bank, like they're. They have all sorts of rules and regulations assigned to them, well above and beyond, you know, um, you know, anything like what FTX had. So, yeah.

Um, yeah, I mean, look, I think you're, I think you're spot on with that. Um, there's a reason that they were domiciled internationally there, so, Moving forward, how should we view cryptocurrency in our overall, say, financial lives or investing lives? Sure. Um, and I've got my own opinions on that. I, I, whenever I speak with clients, I say, Hey, do you have an interest or an appetite frame of this stuff?

And if the answer is no, great, let's move on. But if the answer is, yeah, but you know, not quite sure, or I want to learn more, all that. Knowing what you know and kind of, you know, projecting out in the future, um, of potentially how this could be huge, what would you, what are your thoughts in that area? Like, is this something that, you know, if you got the appetite for, is something you should consider?

Or is this still so new and it's infancy that it's just the wild West? I mean, maybe get some thoughts on that because there are solutions that can be offered to get people exposure into, you know, these areas that you know.  are available, you know, through, through, through what we do as a firm. So maybe just gimme your thoughts there.

Yeah. Um, well first I'll take you back to, you know, 20 years ago with the internet example, right? Um, if you go back then, and you're looking at a world where this internet's a fraud, pets.com, Amazon's down 98%. Yeah. Uh, I think Apple was down in the eighties. Microsoft in the sixties. I might have those two.

Somebody fact check me there. I might have those two, those last two flip flop. But I think the point is, . There was a point in time where people were giving up on this idea of the internet. Yeah. And if you had done that, you lost. You lost. Because the last 20 years, look at, you know, all you got to do is look underneath the hood of the s and p 500.

Look at what drove returns. Yeah. It was growth, it was tech companies, it was, you know, these internet type stocks. Right. Um, and I think we're, we're, we're sitting in that spot now with digital assets. Now that doesn't. , I want to be very clear about this. Like that doesn't mean that everybody should be invested in this with everything that they have.

Yeah. Um, you got to view this kind of the way that people were viewing internet stocks back then, right? These are equities. These are more speculative or more risky equities. Yep. And say a value stock. Right. Um, and with more risk can come, more return, generally speaking. Yeah. That's how it goes. So I would say, , you know, any investors should be looking at this space.

Like, look, I'm not the one that's going to sit here and tell you, yo, this is going to act like gold in your portfolio. Mm-hmm. . Um, I think there's some interesting arguments there, but the difference here is that this is going to be volatile. This is going to bounce around a lot. Yeah. And if you're going to have something like that in the portfolio, our, our thoughts at IDX is that it should be managed.

You should be doing some things to manage that volatility. Mm-hmm.  and protect that downside. And that's a lot of what we do here. Um, but even if. I do think that it deserves the place in the portfolio for the right investors. More in more of their aggressive section. Right? Yeah. Um, so, you know, I'm not the one clamoring for everybody should have 20% of this and call it a day.

Um, I'm the one saying that you should be thoughtful in how you're doing this. You shouldn't let the risk scare you because once again, if you let the risk scare you 20 years ago with the internet, you would've missed out on the crazy returns that Apple, Amazon, Google, Netflix have had. Yeah. Um, but I do think that it should be thoughtful in how you do it and you know, if you have the right risk to.

and if you have, you know, the capital to be able to put towards something like this mm-hmm. , um, I do think it's foolish to have zero exposure here. Yeah. Um, with, with, you know, a, the potential for this space and b, where we're sitting at right now, Bitcoin, you know, around 17,000, it was a year ago. Was that 68,000?

Yeah. Um, so I think we're, we're closer to the bottom than the top. I'm not saying that this is the bottom here. We could go down to 12 or 10. I don't know. I don't crystal ball. But um, you know, I think that it's very analogous to, to internet stocks of 20 years ago. So use the right way. There's a lot of upside here.

There's a lot of upside. You just want to be careful about. What type of exposure you have and how big is that exposure? Mm-hmm. . And that's all going to be dependent on your current financial situation. And that's kind of how I've been approaching it as well too, is um, for those that have the risk appetite and can look at this over the long haul and.

Want to get exposure to this, you know, then, you know, let's talk about how we can do that. And it's not be the farm on, you know, cryptocurrencies because that's, again, we, we, you, we wouldn't do that with the stock either. You wouldn't put all your money in one stock. Um, because that's, you know, you, you have no diversification and what happens if it's an Enron stock and it just goes under.

Because that does happen from time to time. Well this is why you diversify your portfolio, right? Yeah, exactly. This is exactly why, and I would say that this, uh, you know, in short, this should be an element of that diversification. Mm-hmm. . One that's more growth oriented. Sure. One that's more return seeking. One that could potentially be diversifying as well, uh, from stocks and bonds.

But I'd say that yeah, this, you know, you're, you're thinking about it the right way. What's, um, one, just kind of wrap up. What's, uh, one or two misconceptions that you've heard about blockchain or cryptocurrencies that you would like to maybe clear up or address or shed some more light on that you hear a lot?

Yeah, I'd say that's a good question. Um, you know, one of them is that. You know, it's for fraud. It's o you know, it's opaque, it's not transparent. Um, like for illegal activities. Maybe. For illegal activities, okay. For criminals. Um, and you know, to that I'd just say that, um, that's actually not the case. It's incredibly transparent.

There was a lot that we were able to see about FTX very, very quickly because of that transparency. Gotcha. Okay. And then I, you know, another quick example of this, and we might have talked about this on the previous show, is there was a, uh, there was a pipeline hack on the eastern seaboard, um, for, for a big oil, uh, pipeline there.

And the hackers demanded, I think it was like 50 million in Bitcoin. Well, they got their, , but they also got the feds that theirs doorstep a couple minutes later, , because you know, with IP addresses and everything, like it was very easy to figure out who, who those people were. Yeah. I've had situations where clients have called me and said, Hey, uh, I know somebody who got hacked with their Bitcoin.

Is there anything you can do? It was very easy for our team, not me specifically, but our team to identify this is the walled address. That, that hacked that, because every, every transaction, every. , every part of that, you know, who's, who's had it and where is stored on the big, on the, it's on that all on the blockchain.

And that's what makes the blockchain so transparent is that you can't remove things from it. So if this went from wallet A to wallet B, I can see that that's never going to change. Gotcha. Okay. So, um, I'd say that it's incredibly transparent. Now there are some blockchains out there. Manara is one of them that are designed to be opaque, that are designed not to be transparent.

Um, that's not anything that IDX. Or invest in. Um, but there's options there if you're, you know, a criminal listening to this type of thing. Right. . Um, but, but by and large, um, it's very transparent in terms of where assets are moving around. Yeah. So I'd say that's misconception number one. Um, misconception number two.

Uh, I'd say, you know, if I go back to, um, I'd say if I go back to, you know, kind of that, that 20 year example is that, you know, this is at, this is. , right? I told you the people that say I've, I've seen this. Like I, I, I, it was at 68,000 or whatever it was a year ago. It's now falling to zero. This is going to zero.

This is, see, I told you, so this stuff's going to zero. It's, people forget that 2018, just a couple of years ago had a Bitcoin year or cryptocurrency year, just like this, right? Bitcoin was down about 80% for the year, I think. Uh, or that was peak to trough, um, maximum drawdown, but you know, maybe it ended down 75% on the.

well guess what? Uh, it was up triple digits in 2019 in 2020 and up six. Bitcoin specifically was up 60% in, in 2021. Gotcha. So, gotcha. We've seen these types of drawdowns before in the space and it's one of the reason that, you know, at IDX we've been preaching the tactical, more risk managed approach as long as we have been.

Um, but I'd say that, you know, this isn't, uh, this is not the end of this space. You know, kind of going back to the airplane crash example here. . Yeah. Um, last question that I have and we'll wrap up is, um, you talked about there's a lot of volatility, um, in this space. What drives that? What, what causes that, you know, 80% drop?

Is it unique circumstances each time it happens, or is there kind of a common thread? Because frankly, I, I don't know why it drops, um, that much or, you know, I can't figure out the rhyme and reason to those kind of events. Yeah. I think, um, You know, each of these events is going to have a particular catalyst that kicks it off.

Right? Um, in one case it's FTX. Everybody gets spooked and sells. Um, in some cases it's, you know, Margin limits being hit and all of a sudden this creates a cascading effect where everybody, a cascading effect where everybody needs to liquidate. This is what happened. Uh, the summer of 2021, he had a big 50% drawdown only for it to rally all the way back.

So I'd say each of these can have a specific catalyst, you know, even the Fed coming out and, you know, raising rates. Bad thing for risk on assets like cryptocurrencies that can push things down. Gotcha. But you asked a bigger question, which is where does that volatility come from? Why is it. It's so volatile.

And you know, I think what, you know, the main answer for this is, is that it, it all comes from supply and demand. Um, and digital assets are unique in the sense that when you're going to, when you can hold them, you can hold them in either, you know, on an exchange or off the internet, off an exchange. Okay.

Holding them off. The exchange is called cold storage. Well, if you have a lot of your assets being held in cold storage off the exchange, then when somebody goes out and makes a. The percentage of shares outstanding or total assets that are out there, it's much higher because a lot of those are taken away and put offline, right?

So this would be like, all right, if you're going to trade a million dollars on something that's a billion dollars total, it's not going to move the price all that much, but. . If you're going to trade a million dollars on something that's 10 million total, well now you're 10%. Yeah. You can really push prices around.

So I'm giving extreme examples here with that, with that last bit. But that's the point that remains here, is that a lot of these assets can be held off the exchange. I think it's a smart thing to do because it keeps you from getting hacked. So what I do with my personal assets, but that can create a lower denominator of total shares outstanding or total tokens outstanding.

Gotcha. Makes sense. So when people come in and move in and out, it can be, uh, a lot more, uh, uh, positive to the upside or devastating to the down. Yeah. And so actually that makes a lot of sense where a lot of people opt to have it in cold storage and they still have it, but it's not in circulation. So what is in circulation is a, is a less amount.

And so when someone does make a big move, it has a more pronounced effect. And that's exactly right. This is not dissimilar to small cap stocks. Mm-hmm. , for example, which aren't as big, don't have as many shares trading very often the owners still own whatever, 40, 50% of those shares. So they're not out there in the world being traded.

So, yep. You you got it. Spot on. Great. Well, um, want to thank you for coming on this show. Um, it's been great. Um, I'm. Continually always learning more and more about this space. And, uh, if you want to give us a call, the number here is, uh, 9 2 8 2 2 5 2 4 7 4, or you can email us at Intelligent investing@wtwealthmanagement.com.

Uh, we'd love to sit down and talk with you if you have an interest in this space. We do have a solution where we can get you exposure to this and we can talk more about what that looks like. Um, this is part of the reason why we've started working with IDX, is to provide a solution to our clients that make sense.

For their specific situation. So with that, really appreciate, uh, you coming on the show today, Ben. Uh, you're welcome back anytime and, uh, yeah, let's have a great rest of the day and, uh, I think we're getting lunch here in just a minute. So anyways, with that, Glenn Leest with Intelligent Investing signing off.