Eric Balchunas: Bitcoin’s Crossroads, the 3% Allocation and BlackRock's Inside Story

Eric Balchunas (0:00)

I've kind of come around to Bitcoin is a legitimate asset that you have to choose from, and you're kind of dumb to blow it off. The biggest, most impressive number is the cumulative lifetime flows of Bitcoin ETFs. They are now at like 58 billion. That's pretty amazing considering a 50% drawdown. It's not just can you take in money when things are going well and the sun is shining. It's how much can you not lose when the rain comes.

Natalie Brunell (0:19)

So as it matures, I mean, where do you see this asset in about five, 10 years?

Eric Balchunas (0:24)

I think Bitcoin is at a crossroads right now. The message Bitcoin had about helping you with inflation and affordability and store of value, socialist politicians are stealing that message. So the question is who will win that affordability message?

Natalie Brunell (0:36)

You land on 3%, which I'll put it in sailors terms. That means you need 97 better ideas. So why did you land on such a small allocation?

Eric Balchunas (0:46)

Yeah, so.

Natalie Brunell (0:53)

Hey everyone, welcome back to the show. Returning here is Eric Balchunas. He is a senior ETF analyst at Bloomberg Intelligence and releasing a book very soon about Bitcoin. So I'm excited to talk to you about that. Eric, welcome back to the show.

Eric Balchunas (1:07)

Great to be here, your favorite topic.

Natalie Brunell (1:09)

Exactly. Well, before we get into your book and some of the interesting takeaways, I wanted to start with just like a general market update. We're tracking the ETFs, obviously. So give us just some insights into not just how Bitcoin ETFs have been performing, because we have seen a ton of inflows over the last quarter, but also how's gold doing? How's the S&P 500, the stock market has been super strong this whole year. So tell us what you're seeing in the market.

Eric Balchunas (1:34)

For the most part, US stocks are just a juggernaut and the ETFs to track them are a juggernaut. We have a phrase in the team, VU and Chill.

VU is the vanguard S&P 500 ETF that cost three basis points. And a lot of people just buy that and just forget about it. And it's, who can blame them? The market keeps going up. So there's a lot of very happy campers out there. And there's an interesting dichotomy with the headlines. The headlines can be really negative. And there's one negative narrative after another, it seems like, but nothing really has stopped the flows. And sometimes the market will have a little hiccup, like the traders will sell off and then come back. But the flows have been very strong, especially in this sort of vanguard beta world. There is some changes on the outskirts though. Like for example, gold had a huge year last year, not so much this year. In fact, Bitcoin kind of took over where gold left off in a way, those two go back and forth.

And then there's a lot going on in the bonds world. Bonds generally have disappointed people, they don't keep up with inflation. And so the bond ETFs have taken in very little until recently. The yields went up enough that the past couple of weeks there's been people biting. The yields get higher and higher, they get more attractive and more attractive. So at some point the money will come into the bonds. And so we've had a bunch of flows into those ETFs. And there's one thing that I think nobody talks about, but it's huge is money market mutual funds. It's the most boring thing you can say.

People fall asleep, so hopefully just stay awake for the next like 10 seconds. I promise it'll be good.

They've taken in a ton of money. What these do is they have a NAV that's a dollar no matter what. So the big fish like that, they don't want to lose any money, but they get 4% yield, now maybe higher. And so people love to part cash there. So there's been this sort of interesting dichotomy of investing in the US stock market, no matter what the headlines say, but also buying a little cash, getting that 4 or 5% yield with no risk versus taking bets elsewhere. That's generally been the theme. And there's some flavors of the month like memory chip ETFs. Themes always have a flavor of the month. And that's pretty much how the ETF market goes, that 85% of it's pretty boring, and then 15% of it is wild and crazy.

Natalie Brunell (3:48)

What would you attribute the capital rotation back into Bitcoin and why has it been performing so strongly the last quarter?