ETH can be confusing for Financial Advisors. On this episode Tyrone Ross goes deep on ETH and its implications with Erik Smith from 401 Financial.
Transcript
00:02
Welcome to a live recording of Crypto Office Hours with Tyrone Ross. My name is Jay Coulter. This show is exclusively on Financial Advisor Television and we produce it live so that if you happen to catch this recording live, you're able to ask questions to Tyrone or his guests. Today, we're gonna do a deep dive on ETH and Tyrone's partner, Eric Smith, is gonna join us in a little bit. Tyrone, I wanna start with a question that's been on my mind.
00:31
I'm a long term gold and silver investor, small portion of a diversified portfolio, they have physical coins, and then you have the paper based products, whether they're an ETF or a futures contract. It is well known that the manipulation in the gold and silver markets is extreme. People are even going to jail now for it. What's not to say as it relates to Bitcoin or maybe even ETH, now that the futures contracts have become more prevalent and the potential for an ETF.
00:59
We might not have that same level of manipulation of the Bitcoin price. And what can investors do about it? Well, first of all, I have to ask you, how dare you hold assets that don't have any earnings anyway? A couple, a couple of things here, uh, because we have other things to get to. So first, I think the main thing for everyone to understand the Bitcoin
01:28
the Ethereum blockchain, crypto overall, highly auditable. It's easy to see who is doing what, who could be moving markets, whale wallets, as they call them, right? Who owns a lot of the asset. There's a lot of tools now in analytics out there that would be easily, right, used to show if someone was trying to manipulate markets. That's the first thing. Second thing is, yes, very nascent market.
01:54
It has been manipulated at certain points this far, just like any market where there's very little information and people take advantage of those dislocations in the market. Here's what I will say. I think with derivatives, futures, you get an ETF now, I know Matt Hogan has made this point, that makes the market more mature. It makes it more accessible to more people, price discovery, deep liquidity, all these things are needed.
02:25
On the flip side of that though, I will say that the manipulation part then becomes the major players being able to manipulate price, fees, and these things away from retail who have gotten there first. So we would have to define what that manipulation entails, right? And I believe that if we get an ETF that is already a form of manipulation, but I digress.
02:54
I've been saying this for years. But anyway, to your broader point, I do think that having futures, having derivatives, more mature markets, and the larger players coming in, there is an opportunity for what you've seen in past markets to happen here. And that was the whole point of crypto coming to the fore, was to remove a lot of that. But as it becomes more financialized, you're going to have a higher probability of those things happening, which stinks.
03:24
Here we are. Bags go up, right? That's what everyone want. That's right. And I love your comment about owning something that doesn't pay a dividend. All right, so I want to get your take on something I heard over the weekend. So a famous investor, I'm not going to say his name, came out and he was talking about gold. And he said, I don't buy gold at $1,900, hoping that it goes to $2,200 over the next year.
03:51
I buy gold in case it goes to $4,000 over the next half a decade. Is that the way investors in Bitcoin or crypto in general could potentially approach investing in this asset class philosophically? Yes. And I think that's how many have I've gone on record saying that I still don't think Bitcoin is digital gold. I get why that said because it's, again, tastes like mayonnaise, I kind of know what this is why folks would say that.
04:18
And yes, I do think though that is good framing, right? Where unfortunately there's a shorter timeframe with folks who crypto-winnage should be longer, but I do think that type of framing for institutional folks and folks walk into it for the first time, I think that's a good framing for them as they start to look at it and kind of position it along with the conversations that are had around gold or silver or any alternative like that.
04:48
Let's bring in your partner, Eric Smith. And I'd love for you guys to educate the audience on Ethereum, maybe even start at a one on one level if you can, and then get a deep dive into what you guys are looking at today in the space. And what really financial advisors need to be thinking about. Eric, welcome to the show. Hey, Jay. Hey, Tyrone. Glad to be here. First things first, Jay, I have to call out that Falcons helmet in the back. I am a Minnesota Vikings fan.
05:18
from Iowa. So it was a good game over the weekend. It really was. To be honest with you, I'm surprised we got it done with Dobbs. So well, Eric, I was torn yesterday as a Tennessee fan. I'm a big Josh Dobbs supporter. I felt like he's a man who's never gotten a real shot in the NFL. And one thing he did yesterday is prove that he has the intellectual capacity to learn a playbook in five days and the physical abilities to execute.
05:46
and he deserves a QB1 role next year, hopefully. So I'll be pulling for the Vikings the rest of the year, as long as Jobs is at the helm. Love it. I grew up a Giants fan, so let's move on. So a couple things, I think for those that are watching, things are a couple, it's in his bio, they're a bit important for folks to know that Eric is a certified financial planner.
06:12
I think there are a lot of CFPs now that are starting to understand the crypto ecosystem in depth. You would be hard pressed to find someone outside of Eric that is probably going deeper than he has. The second thing is, I think what we've tried to do together and what we've tried to do as a firm is try to speak advisor through the lens of crypto.
06:41
is make it so that advisors understand in some capacity what this means for their actual practice, what it means for practice management, for client engagement, and just the future of the business. Last thing I think what we hope to accomplish, right, is for advisors to understand this is a world that we live in 24 seven 365.
07:07
Like we never leave it. If you look at our text threads, if you look at everything is crypto all the time. This is all we do and all we obsess over. It's a passion. And it's our goal to be the gateway between the future and the present. So speaking of that, just saying that we are a resource, the goal is to be that trusted center of influence for advisors where let us handle that. Right.
07:35
You could go do whatever it is that you want to do, give it to the crypto hippies and move on with your life. So I think with that, first thing I will say is this, it's very important that there's a book called crypto assets. And I think it's very important that financial advisors get that book and read it because it'll give you a good background and history on how crypto came to be. Everything that has come after Bitcoin,
08:04
has somehow been a result of Bitcoin, Ethereum included, right? Before handing it off to Eric, I think this is a key point. A lot of people think that Ethereum is the second oldest crypto it is now. That is Litecoin, it is not Ethereum. Ethereum came later, but those two mainly are the ones with the biggest brands, the most folks working on them, and the two that we've gotten some clarity on from financial, from...
08:33
or financial advisors from the SEC. So with that, I just think it kind of sets the ground floor where everything that we talk about and everything that advisors probably should be focused on should be focused around these two. But getting into Ethereum, E, I'll let you take it from there and I could kind of fill in some blanks as needed. Yeah, definitely. No, appreciate the intro. And that's exactly right. We...
08:59
We want to operate in this space over on the crypto side of things. So not everyone has to become a crypto expert. Like, you know, come to us. We're more than happy to chat with anyone about whether it be at the asset level, which we'll kind of get into the difference between Ethereum, what we would actually call ether as the asset versus Ethereum, the blockchain. So similar to Bitcoin.
09:26
You have both Bitcoin, the blockchain and Bitcoin, the asset. And it's important to distinguish those two. Same thing goes for Ethereum. You have Ethereum, the blockchain, and you have ether, which is the asset, the native asset of that blockchain. So that's some of the very high level, just thinking about how do we separate the technology versus investing in the asset itself. Now,
09:56
In my view, Tyrone, I don't think that every advisor is going to need to know how a blockchain works. I think we're going to get to the point where these systems, which we would call like a decentralized network, for example, just a network similar to the internet that's, you know, you can use, you can build on top of all around the world. And as these networks make
10:26
technology layer of how things are built, we don't need to know how Amazon Web Services works. We just need to know that it works. We don't need to know what technology makes up the iPhone. We just need to know that the iPhone is in our pocket and it works. So I think we're going to get to the point where it's a similar feeling in the crypto space, which we can even talk about that if we want to call it crypto. I know that's the, that's what we got the show.
10:54
you know, the crypto office hours. Um, but I think what I'm getting at is this is just going to be an underlying piece of our everyday lives eventually. And we won't need to know how blocks are stacked, what's proof of work versus proof of stake, et cetera. Right. And I think that has been part of the problem here is if an advisor is, um, recommending a client purchase Amazon.
11:23
or Google or whatever the case may be, Metta, they're not also explaining TCP IP and how the internet works and everything else. So I think for the purposes of this conversation, right, you mentioned proof of work versus proof of stake. That is a main difference right now between Bitcoin and Ethereum. Let's just be completely honest. To me, if I'm walking to a room and I'm talking to a room full of financial advisors, do I think that matters to bring up? No. But
11:53
Here's why it should matter to advisors just for the purposes of comparison. There's some folks that are very concerned about the energy consumption on Bitcoin. You don't have those issues with proof of stake for Ethereum and staking, meaning just anything that you put at stake. The more you put at stake in Ethereum, meaning your Ether coins, more say you have in terms of what happens.
12:22
on that actual chain. This is oversimplification. But I say all that to say, if you have clients, or if you run a practice that is focused on ESG or other personal things that folks may have as a part of their investment philosophy, that might be something that you want to know. Beyond that, advisors really don't care. The other thing is we have no idea who Satoshi is. I think I have an idea.
12:51
Um, but no one really knows. I kid, right? No one knows. I think it's a group of people to be honest, but in Ethereum, you can point directly at the co-founders of Ethereum. Right. And I think Jay has a question later around some of that. So that is also a big difference. Those folks have a lot of sway. Those folks have a lot of power. They try to remove some of that power by giving the space away. It's on and so forth. You can kind of get out how Ethereum is set up, but
13:20
I think those are two really big distinctions right now that it that advisor should be concerned about. One may have more influence than the other, but I think those are two core differences right off the bat that I think advisors should care about and know. Yeah, definitely. And I think, you know, to talk about so to keep it on this Bitcoin versus Ethereum, I think there's one key piece that advisors really do need to understand. And that's what makes up that what compares them, what makes them similar.
13:49
And that would be the ability to self-custody assets on the blockchain. So this gets us into the debate of, does it make more sense to self-custody? Should I be holding it at a qualified exchange? Should I be holding it through an ETF? If I'm going to invest in crypto, any crypto, which of those three options am I going to take? And I think what we've seen historically is.
14:19
Most retail investors stop at step two. Most advisors haven't gone into any of this yet. But with that said, they're gonna have those three options. They're either gonna be able to say, we think that you should hold this through an ETF, we think it's the safest route, we think that it makes sense alongside your tradition in your brokerage account. I don't agree, and I'll give you the reasons, but.
14:48
then you could say, go do it on your own, which I think is the path that a lot of advisors have taken where a retail, you know, a customer, a client opens up an account at Coinbase, buys and sells crypto assets there. What is most important to understand here is that third step of going from Coinbase into a self-custodial wallet is becoming much, much easier.
15:17
the user interface with opening a self-custodial wallet, not even needing to know that you're necessarily using a self-custodial wallet, not needing to write down your 12 words for a seed phrase, and being able to custody those assets while, most importantly, since we're talking about Ethereum, being able to earn yield on those assets by staking them
15:47
which is currently about three to 4%. Those are things that are not going to be possible, at least probably not at the beginning, with an ETH spot ETF, or just telling them, hey, go buy ETH on Coinbase's exchange. So I think those are some key points that every advisor should know about the differences and the similarities between Bitcoin and ETH, and then how you get exposure to ETH.
16:17
Yep. And again, I think there's a there is a digital divide here, right? And I think that is the difference between why advisors are going to clamor for Bitcoin ETF. They just want to hold it. But if you start talking about ETH, I think again, everyone, I think an ETF is an absolute farce and it's a money grab, but I think there's only one thing worse than holding Bitcoin in the ETF is holding a theory of an ETF because of all the things that you can do on the Ethereum blockchain.
16:45
So for the advisors out there, why am I saying that? Well, Eric is not this old, but I'm old enough to remember when you used to have the phones on the wall where you had to hit the nine and it came all the way back, right, rotary phone, and you had to dial and it was, think about that as Bitcoin.
17:02
Right. It's just never used one of those by the way. It's just clunky. It's slow, but I can make a call. It gets it. I'd call anybody in the world right now. It's just there. It's always going to work on the wall of grandma's house. It got fish grease on it and everything else, but I pick up the phone and I could die, right? Think of Ethereum as a smartphone, right? It's an iPhone. I can do all these really cool things. It's programmable. I could take photos or whatever, but at the end of the day,
17:32
It's a phone, right? Now, the interesting about that is based on generations, there are people who still actually use the phone. And those that are probably 20 to 35 never use this phone for phone calls. They use it for all of the programmable things that you can do on the phone. So Ethereum is simply a programmable, it's an iPhone blockchain. We can do all these really cool things on it. And Bitcoin is just there.
18:03
Boring on purpose to be boring right now some cool innovations happening on Bitcoin So I think for the purposes of investing and if this is a proper investment for clients There's a lot there to think about The utility which is something that folks always talk about the utility of a theory and you can do a lot of things with it You can stake like you said you can't get you right you can build on top of a theory imagine We are to get you know
18:32
on chain asset management and in all these really cool things, right? The centralized ID, all these really cool things that you can do. Where can you put a P E ratio on that or try and figure out some type of earnings around it? The normal brain says, no, yes, you can. But we realize this, we don't have enough time here. But there's some key metrics that you can look at in Ethereum that gives you that.
19:02
So there is a lot of data, which leads me to the last thing that I'll say. There is a lot of data that I think financial advisors in terms that financial advisors should be familiar with total value locked, right? Which is just the value of all the Ethereum that is locked within the blockchain. You mentioned yield, you get a yield, certain things happen there. They kind of get this on chain bond market type of feel. And if we're being honest, that might.
19:29
gives you more visibility into a potential price more than Bitcoin, right? Yeah. Some would argue. So I'm done there. I probably reached a capacity of my overall intelligence. I think that's a, I'm good at dumbing things down, but I think that's a really important way for advisors to think about this rotary phone versus a smartphone. And then how, what are the next level to try and attach some value to those things, if it makes sense for clients. Definitely. And yeah.
19:57
That's spot on. And just to expand on that a little more, and this will be the last thing I say, I think of Ethereum similar to that phone or like an app store where people are building on top of it. So like when I go on to, you know, token terminal, for example, one of our partners over at 401, when I go on there, I can see there's 900 some applications that are built on top of Ethereum.
20:24
Okay, so you have Ethereum at the base layer that's settling these transactions. You have people building on top of it. And all these applications serve different purposes, just like when you go into the iPhone and App Store, all the applications are different. They serve different purposes for the, who's using them. Same things happening on Ethereum. Ether, the asset, accrues value from that when that blockchain is used more and more.
20:52
And that can kind of take us, we don't have enough time today, but it takes us into how Ethereum's supply and demand, mainly supply gets burned over time based on usage of that network. So if you think the easiest way to think about it would be if you have the internet and you could own the internet and every time the internet gets used, you accrue some value.
21:22
to that ownership token, so to speak, that's similar to what Ether is as a decentralized asset that's powering the Ethereum blockchain itself. Yeah, I think that's a good way to end it there. The goal is to line the street with gold coins, and hopefully everyone picks them up as far as learnings are concerned. I will say, to end here, just to plug in the announcement without
21:51
for those that are watching in January, we partnered with the American College. There's three modules of CE credit and crypto education that will be coming out. Please go and watch it and enjoy it when it comes out. That was a lot of work for me. I lost my voice. It was a long day of filming modules, so please go look. But our goal is to obviously be incredibly...
22:18
involved in the space, but also work very hard to kind of distill things and make it available. So we're excited about our partnership with the American College. And I believe the modules will be available in January. So definitely watch those when you can. And we'll love any feedback and anything more that you guys want to see as we create more content. Good job, guys. Ethereum 101 plus a little bit more advanced for advisors that are already operating in the space. Eric, before you go, I wanted to ask you a question. So as a
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crypto novice and very active Twitter user. I came across this article yesterday and reading it for podcast listeners is from Bitcoinist. It says, Ethereum insider drops bombshell. ETH founders fraud bigger than FTX fraud. Eric, what's your take on this article? Yeah, so I did see this. It's...
23:14
Look, I don't I'm not going to speculate on what the this what they actually have information on. If you read the article, you'll see that that none of that's actually come out. What I'll say is this, though, and I think this is really, really important to understand for those that are trying to learn about the crypto space in general. FTX was a centralized company. And when I say centralized, just like any other company, they had.
23:42
You know, they had founders, they had a CEO, they had employees, they were building this exchange in a fraudulent way. That's FTX. Ethereum started off as more, it started off as somewhat centralized, where it was a smaller group of people building out the initial phase of this blockchain. And over time, has grown to become very decentralized. Ethereum is not a company.
24:12
It's a network. So, you know, with that said, there's many different people that are not only developing on top of Ethereum, but also validating the blockchain all around the globe, hundreds of thousands of validators actually. And with that said, it's, I can't comment necessarily on what happened at the beginning of Ethereum, if this, if that's what this is persons referring to.
24:41
obviously, but what I do know is this today, the network itself is, it doesn't look anything like a company. It's, it's, it's independent people that are building on it and using it all around the world. More importantly, building on it and validating that network. So I guess we'll see what comes out of this. I appreciate you, you know, bringing it to
25:09
my attention. But I think that's a key thing to differentiate between FTX versus a blockchain. So Hey, for the novice, that was a great explanation. It's a network, not a company. Clearly, FTX was a company, they couldn't have pulled off that fraud if it wasn't. Right. Definitely. Well, Eric, thanks for joining us your second time on the show. Glad you're going to be a regular here. I learned a lot. Just listen to you speak with Tyrone. Thanks, Jay.
25:37
And thanks Tyrone, appreciate you guys having me on.
25:42
Tyrone, it's time for the final word. So you've had three weeks to think about it. I'm excited to hear what you have to say. The stage is all yours, my friend. The word of the day of the week, the month, and the final word is custody. Or let's just go with custodian. I posted something on my LinkedIn about...
26:11
what Fidelity is doing as far as their cash management and everything else that's there. I won't go on that here. But one of the things that I wanna say is, custody in the traditional world is becoming an absolute mess. You can't go on to X without seeing advisors complaining about the experience at Schwab, competing with the advisors for their clients, subpar technology, the ability to move money, awful.
26:39
um, cash management options for clients. Awful at some point, financial advisors here need to really start thinking about the client. And if it's truly about helping the client, then you have to look at the custodians and go, what exactly are you here for? And we are in a space that lacks any type of meaningful innovation. With that, I'll end on this fidelity and Schwab.
27:08
have both participated in building a non-custodial exchange. I have gone on record saying, and will continue to go on record to say, that the future is non-custodial. People are going to hold their assets right here. Now, folks argued a Heminhall, they say whatever else, fight it, please, disagree, please, it's coming. For no more reason.
27:34
then looking at the custodians continue to increase revenues at the advisor's expense and ultimately at the client's expense. So if financial advisors are fiduciaries and the best interest of the client is to do right by them and put their interest first, then yeah, you have conversations around cash and debt management and estate planning and investment management portfolio construction and estate planning, all of that.
28:02
But I think we should start looking at the custodians as well. Because one thing I know for sure, and it was a very risky thing for us, we removed the custodian from our client experience. And we put the power and the money back into the hands of the client. And now technology is making it so it's no longer an excuse that those folks get to act that way and take advantage of $120 trillion plus industry.
28:31
and the people that they are supposed to protect and manage money on behalf of. So for me, the final word is enough. Enough of the existing legacy custodian experience. Shout to my man, Jason Wankin Altruist that is kicking a door in that and he saw it first. Enough. And we can't say one thing with clients and the SEC says one thing about.
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what custodians are supposed to do and everything else, and then have them behave in that manner.
29:05
I got to get this out. One last thing. It's funny to me, and I had this conversation with the SEC, the bar is so high for crypto custodians, rightfully so, if they are true qualified custodians. Man, that bar doesn't even exist in the traditional world. An advisor chooses fidelity, a Schwab. No one thinks anything of it. I just got to pick one of those and it just is what it is. But shouldn't there start to be some type of really deep due diligence on the existing custodians of how they treat their advisors, how they treat the end client, what they make available for those clients?
29:36
I think it's time to do that. And I venture to say that 10 to 15 years from now, the wealth management space doesn't look the way that it looks at 834 on November 6th, 2023. See you guys on the next one.
29:51
Tyrone, an excellent close to another great show. Appreciate you coming on and sharing and really being the flagship guide for people, for financial advisors, interesting and understanding digital assets. Looking forward to your course coming out in January. We have two more shows this year. Hopefully, we can go a little bit deeper on that right before the launch. Absolutely. Thank you again for having me, my man. Always great seeing you. All right. Bye now.