First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 51 | Jeff Chang | Addressing Bitcoin and Volatility | ROI Podcast
In this episode Jeff Chang breaks down the virtues and risks of Bitcoin, highlighting Bitcoin-linked tools and strategies that aim to generate income and mitigate downside risk.
----------------------------------------------------------------------------------------------
Subscribe Here to the ROI Podcast & other First Trust Market News
Website: First Trust Portfolios
Connect with us on LinkedIn: First Trust LinkedIn
Follow us on X: First Trust on X
Subscribe to the First Trust YouTube Channel
Subscribe to the ROI Podcast YouTube Channel
Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. Today, I'm joined by Jeff Chang, president and co-founder of Vest Financial. Jeff and I are going to discuss the risks and opportunities associated with Bitcoin and new tools that investors have to help manage some of that risk. Thanks for joining us on this episode, and I are going to discuss the risks and opportunities associated with Bitcoin and new tools that investors have to help manage some of that risk. Thanks for joining us on this episode of the First Trust ROI podcast.
Ryan:I'll be honest, I did not expect that we would be here in 2025 and Bitcoin would be trading over $100,000. And by the time this episode airs, who knows? I mean, maybe it'll be. You know, the base case that I have includes the possibility that it's a $50,000 or a $200,000. I mean, it could go up 100%, down 50% in my example. I have no idea, and I think it's a good opportunity for us to discuss a little bit about what we're even talking about, because I think there are a lot of people that trade Bitcoin that have no idea what Bitcoin even is, and so I'm glad to have this conversation with you and dig in a little bit more into what we're even talking about. So, to lay the groundwork, when we're talking about Bitcoin, what is it?
Jeff:Yeah, it's a decentralized currency on the blockchain.
Ryan:Those are already two words that people are like what do you mean? Decentralized currency on the blockchain?
Jeff:Yeah, so it is. There's, essentially, bitcoin, there's a digital ledger that people can mine, or you can actually like mine it, and there's only a limited number of these of Bitcoin. I believe, in totality, about 21 million is the maximum amount I think we're close to about close to about 20 million, about 19 and change. So essentially, 95% of the Bitcoin has already been, has already been mined, so that's already in circulation. What's interesting, though, that, when all of the Bitcoin actually will be completely mined by, I believe, 2140.
Ryan:Okay, that's a long time from now.
Jeff:Yeah, it's a massive diminishing part of it. I think what makes it special as a kind of a if you want to call it a digital currency or a digital store of gold, is it's just not.
Ryan:there's no government in control of it, and that's the decentralized part.
Jeff:Exactly, that's the decentralized part of it, and then it does allow for transactions to kind of digitally happen, but obviously, like from a cryptocurrency perspective, it may not be as good as some of the new technology, but it does have that first mover advantage and that's why it's been so popular.
Ryan:Yeah, and because it's already out in the wild, is it possible to change the protocols at all, or are they kind of set as they are?
Jeff:So that's why, Bitcoin being kind of the first mover, it's not as flexible as other digital currencies, but because it's been so much battle tested, it has become kind of, I would say, like a store of value as opposed to a currency right now, and because it's in existence through all of the different, like you know, crises that we've seen, people have some level more confidence in Bitcoin than perhaps you know kind of younger cryptocurrencies that are out there, yeah.
Ryan:So okay, let's talk about it as an asset class. And whether you consider it a store of value or a currency, or however you want to term it or name it, it's kind of unique in a lot of ways. However you want to term it or name it, it's kind of unique in a lot of ways. So what's the case for people investing in something like Bitcoin as an asset class?
Jeff:I'll first touch upon why it kind of got there as far as not really a currency. Bitcoin is extremely slow. You can only do seven transactions per second. Now compare that to Visa or MasterCard you can do thousands of transactions per second. If you're talking about modern exchanges, you're talking millions of transactions per second. And this is why they call it digital gold, because it's very slow. Comparatively to other technology and the ability to build on top of it, it's a little bit more kind of an older tech. So this is why it creates more of kind of this digital gold effect, kind of an older tech. So this is why it creates more of kind of this digital gold effect.
Jeff:Now, when you're talking about investing it from a portfolio perspective, really it serves several different purposes. One, some folks may look at it as a speculative way of making returns. Also perhaps to express a bullish view from forward technology such as crypto. Also perhaps to express a bullish view from forward technology such as crypto. So that's a lot of people that will invest in that way. There is portfolio diversification benefits to it because it doesn't behave like a traditional asset class that you would say, and so that's where you see that it put into portfolios because of that unique characteristic. And the last is also, like I said, the store of value, Given that I think there was a survey that for investors under the age of 40, 77% of them prefer Bitcoin over gold Is that right, yeah.
Jeff:So that's why kind of the older generations, while they tilt toward gold, the new Gen Zers, millennials, actually prefer Bitcoin as a store of value as opposed to gold.
Ryan:Interesting, and so you touched on this a bit already, but maybe you could make another comment on Bitcoin in comparison to some of the other cryptocurrencies. Is it just because it's got that first mover advantage and, as you pointed out, it's a little slower technology that it's really taken on a life of its own? There's other cryptocurrencies that people pay attention to, but Bitcoin seems to have the lead.
Jeff:Yeah, mostly because, like I said, it's been battle tested. But that's not to say that from a currency perspective, other types of cryptos can perhaps overtake it, basically from actually a currency point. But I think it's really taken its life of its own as an investment, like I said, store of value. I think what's critical, what's really interesting, if you look at the way Bitcoin has behaved, it does really well as the market kind of moves along. So, as people are bullish, it actually outperforms blue chip equities. So, as people are bullish, it actually outperforms blue chip equities. But what's also interesting is that during times of crisis, like when people lose confidence in central banks, asset class as a tech stock during peacetime and a libertarian lifeboat during the storm, which is a very unique behavioral behavior of a particular investment asset class.
Ryan:Yeah, absolutely, but it's not without risk. I mean, it's clearly volatility works two ways, right Volatility and it's not going to always outperform, so talk about some of the risks when you're talking about Bitcoin.
Jeff:Yeah, I mean there's several different ways to invest in Bitcoin. You know, obviously you can own it yourself and that comes with its own risks, such as security risks, like you know, your digital wallet getting hacked or you forget your password or something along those lines risk like your digital wallet getting hacked or you forget your password or something along those lines. But if I were to just look at the asset itself, I mean the volatility is extreme as far as your max drawdown can be upwards of 80% right. So that's part of being able to stomach that volatility over the long term, then you potentially could obtain the benefits of, like I said, the tech stock during peacetime and libertarian lifeboat during the storm. But you have to be able to stomach that volatility.
Jeff:This is why I think we have built strategies that actually hedge our exposure to Bitcoin, because that's the part that you have to stomach. Is that volatility right? Perhaps, like you know, as an example strategy, putting a floor like, let's say, a 15% floor on the strategy would be extremely helpful, where you can still retain a lot of the upside let's say, 30 to 40 helpful in the portfolio. But you got to, I would say, given the volatility, especially in the financial advisor, wealth management space. Doing it with guardrails can be extremely important.
Ryan:Okay, I want to dig into that a little bit more in just a moment, but before we do, you mentioned the wealth management space and you know there's been a lot of developments that have enabled that wealth managers to be able to allocate to Bitcoin. Can you talk a bit about the different ways, beyond just the traditional owning a flash drive, owning Bitcoin?
Jeff:What are?
Ryan:some of the other ways that people can own Bitcoin today.
Jeff:So actually let me go in order. The first was derivatives. You know you could buy futures on Bitcoin and that really kind of brought it to, I'd say, kind of the Wall Street kind of types where you could actually trade it through derivative form. Then we saw the emergence of derivative based ETFs that you could access through futures, and then eventually we saw ETFs that you could access through futures. And then, and then eventually we saw ETFs that could actually own the physical, physical Bitcoin.
Jeff:Now that obviously there's trade-offs, risks and so on and so forth. Obviously in an ETF you don't have that, that risk of losing your password or your digital wallet getting getting stolen per se, but you do get still also the intraday liquidity to ability to trade Bitcoin. And then after that, and then we started seeing options on Bitcoin, which then opens up a whole new way of building strategies where people can access the asset class not only from a hey. I want to, let's say, on one hand, control the volatility or basically target a particular like hey, this is my risk return objective, but also, what's even more exciting, the ability to actually monetize the volatility, get paid for, like, as an example, writing cover calls on Bitcoin. And what's fascinating about it is that if you initially looked at the options on Bitcoin, like typically in most, like normal stocks, they have what's called negative skew, meaning more people are buying puts than they're buying calls. Right, but the interesting thing was in Bitcoin it was positively skewed.
Ryan:That means more people there's a lot of risk appetite yeah exactly.
Jeff:Why not sell calls to somebody that thinks up? Because the volatility is there. There's a lot of opportunity to basically get paid to monetize that volatility. That's what's really exciting. We build strategies being able to do that as well, which is really exciting.
Ryan:So, vest Financial, just to take a step back. I mean, what you are experts at is developing strategies that use derivatives to achieve income objectives, outcome objectives. You guys are, in my view, you're better than anyone at that, and so you're telling me that you can do that not just on equities and equity indices and fixed income, but also now on Bitcoin.
Jeff:Yeah, that's right. So that's what's exciting about what we do is that we can reshape those returns, generate income almost on any asset class in which we can source the option on, and so that really opens up a massive world of what we can do. A massive world of what we can do.
Ryan:So, Jeff, we just passed the 10th anniversary, I think, of when somebody bought two pizzas at a Papa John's I think it was 10,000 bitcoins or something like that and now those are the most expensive pizzas ever bought or ever sold. Do you remember hearing about that?
Jeff:Absolutely. I mean, that's fascinating to me. Think about how much if you look at the chart of Bitcoin and how much has actually look at the chart of bitcoin and how much it's actually gone up. But I think what's critical for people to understand is is that, while it's gone up so much, let me like I would. The question becomes is you know you probably heard that you know the past uh, couple, couple years where people are like, hey, the s&p is overvalued, it's got the short p.
Jeff:You know it's like 27. The question is what is the pe of overvalued? It's got the short PE. It's at 27. The question is what is the PE of Bitcoin?
Ryan:That's a very good question.
Jeff:It's null. You can't put zero in the.
Ryan:E.
Jeff:There is no earnings. The value of it is basically how much the next person is willing to pay. You probably heard the word irrational exuberance in the equity market. What does that mean in the Bitcoin market? If there is no P-E ratio, it does not spit off income, right? For that matter, it doesn't even spit off two pizzas. There's nothing there. So that spike is a lot of. Is it irrational exuberance? I'm not sure. So now you're kind of in this dichotomy of okay, the next generation views this as a store of value. There's an extreme amount of volatility the value is determined by. Is this an irrational exuberance? I mean great example Farcoin went to 2 billion market cap, bigger than 1,000 of the Russell companies.
Jeff:Russell 2000 companies. Yeah, russell 2000. Over half Farcoin. You know what Farcoin does Makes a fart sound when you trade it On some of the platforms. What Farcoin does makes a fart sound when you trade it right, like on some of the platforms we trade, it makes a fart sound. And that was bigger than 1,000 of the Russell 2000 companies. It makes me want to make Chaincoin right like. If I had Chaincoin, you know what sound it would make.
Ryan:I'm not sure.
Jeff:Cha-cha. I love it, but my point in all seriousness is this is that we don't know whether it is. There is definitely something here from a store of value perspective, but how do you stomach the volatility, especially as a fiduciary? This is why we think if you're trying to invest in the gold of the future, investing with guardrails probably makes sense. The second component is that there is this extreme amount of volatility. There's an immense amount of opportunity to be able to monetize the volatility and get paid for it.
Ryan:Yeah, I think that's a really good point because, to your point, there's a lot of uncertainty when it comes to Bitcoin and there's a lot of. I mean, most people, I would say, don't understand it, but they do recognize that, for whatever reason. Maybe there is an opportunity, but they need to find ways to manage risk. If you're getting involved in Bitcoin, and the good news is there are ways to use derivatives to manage some of your downside, as you mentioned earlier, to put a floor in limit the amount of loss that you can have, and I would imagine you're long a put contract. Is that how you establish a floor in that sort of strategy?
Jeff:Yeah, in our strategies. Yeah, we would buy a put to provide the protection. The great way of that kind of risk managing is it's perfectly negatively correlated, right? It's not like I'm trying to manage the risk of Bitcoin by buying Ethereum, right? Not diversifying, but really just hedging the position itself, yeah.
Ryan:So strategies like that allow people to get that diversification benefit from Bitcoin, allows them to have some of the upside potential, but also, to your point, have guardrails, have some sort of risk management, and that's really, it seems, the newer generation of how to invest in something like Bitcoin.
Jeff:Exactly Like I think the overall message is there are there are definitely benefits to it. Like I said, it's a unique asset class in which does well when markets are going well and then when people lose faith in government and monetary policy and so on and so forth, it also does well. That's a very unique aspect. And then, looking at the data, as far as where the next generation views the store of value, as far as where the next generation views the store of value, it's definitely something that investors should think long and hard about, as it is something that is going to be around. But, like I said, the conclusion is, while there's all these benefits, there's an extreme amount of volatility and there's definitely some risks here, like not just the vol itself.
Jeff:Like if the largest holders of Bitcoin right, there's a mystery person, satoshi Nagamoto, if he sells his position, it could crash the price. Like, imagine if, like I, put your entire net worth in something and one person makes a determination or even some way you know, a micro strategy, determines to unload. What is the impact of that? So you have all these benefits. You have all these risks. This is why I I say, like you know, you got to get creative on how you access this asset class and how you, what are the strategies that you're actually getting into, uh, to be able to access it, and that's why I think even, um, you know, from a fiduciary perspective, it's very important.
Ryan:Yeah, you know, one of the interesting aspects of Bitcoin to me that I've recently looked at was the energy cost of Bitcoin, and I'm not sure if you've ever looked at this, but I think last year, in 2024, bitcoin mining used enough energy. It was something like 140 terawatt hours of power which was landed it between Sweden and Poland in terms of their annual use of electricity, and it's growing at like a 23% rate over the last five years. It's just. It's a pretty remarkable amount of energy that's being used to mine Bitcoin.
Jeff:Yeah, and that's that's one of the drawbacks that if you read it and study Bitcoin is the amount of power that it actually consumes, even just from the ledger itself.
Ryan:Yeah, yeah, and so it's one of these areas that I think a lot of companies are trying to find ways to set up solar farms in the desert so they can monetize that you know, the mining of Bitcoin with with solar panels, but it's, it's. It's really interesting, especially in an era where everyone's talking about other reasons for expanding the amount of electrical power, whether it's AI, data centers or reshoring a manufacturing or these other, these other sources.
Jeff:Yeah and I think that'll be more and more especially, you have this power need not only from crypto, but also, like you said, powering from AI. That energy need is just going to increase.
Ryan:Yeah, so when Satoshi Nakamoto first introduced the Bitcoin, I think it was 2009. Do I have that right? 2008. A big part of that was to be completely separate from the financial system because of concerns about debasing currency and the US dollar, and you wanted to have an alternative to that. And now we've come to a point where the US government seems like it has become more friendly towards Bitcoin. And now we've come to a point where the US government seems like it has become more friendly towards Bitcoin and you know the Trump administration has talked about having our own. You know US oh, it's like a strategic reserve, kind of like the oil strategic reserve that we have.
Jeff:Yeah, you know what's actually interesting is the US government actually is one of the top 10 holders of Bitcoin. Yeah, you know. You know why Seizures? Because they seize it, right, yeah, and then they don't know, like it's just sitting there. Yeah, I believe, if I got it right or wrong, about 200,000 Bitcoin owned by the US government, if not more. Yeah, today, mostly through seizures.
Jeff:But you did touch upon a point that's extremely important. There's another major risk that people write about. It's regulatory risk. Depending on which country you're in the regulation and your ability, like tomorrow, you know any government could say like, hey, it's illegal to have Bitcoin, or you know that's the most extreme. But regulatory risk is a major risk of Bitcoin. There could be changes in just fund construction, right, like some of the largest holders of Bitcoin are funds from you know the ETFs to you know, private funds. You see it on the blockchain. So that is definitely a risk because just by changing a law in a fund, it could cause any one of these funds to have to liquidate their entire position. So that's definitely, like you touched upon, it is a major risk. Also, lending itself on why hedging is also probably a good way to access this asset class, yeah, and and.
Ryan:Because when you're owning a derivative on an ETF or something like that, that's kind of separate from you don't actually own the Bitcoin. You have a contractual agreement with someone else who sold you that or bought that contract from you, right, yeah?
Jeff:So yeah, that's what's great about auction we're just pointing at the movement of something else, and that determines the value.
Ryan:Yeah.
Jeff:And then the great thing is, if you know, as exchange traded options they clear on the exchange and so you don't have the, let's say, the counterparty risk of trading with one person per se on a particular derivative contract.
Ryan:How liquid have those contracts become? They've been trading for a while now. Is it something that's very liquid? It's fascinating.
Jeff:So when the I believe the iBit option came out I think it was like late last year Within its like first month and a half of trading, it became the fifth most traded ETF option. Is that right In the market? And so how wild is that when you have like SPY, gld, you know, like all the Russell, the NASDAQ, all these things, it became the fifth most traded option ETF option out there. And that was just in the first month and a half. So that's how, like the liquidity of that space and like I said, it could be a lot of people speculating and so on and so forth, but you know it's a tremendous amount of volume there.
Ryan:And that's good. If you want to access exposure to any of those contracts, it doesn't matter to you. In other words, if someone is just scratching their speculative itch and they're betting in their mom's basement eating their mayonnaise sandwiches, as long as they're transacting, it brings volume and liquidity. Yeah, interesting. I love the image that you painted of who the typical trader is.
Jeff:I've seen that person before.
Ryan:All right, jeff. Any final. What haven't we talked about when it comes to Bitcoin and investing in it?
Jeff:I would say like definitely something that will be there in the future and people should really look long and hard at it, really understand it. And hard at it, really understand it, meaning look at the vol, understand that component and then pick the right strategy for them to access the asset class. Because, like I said, if you're looking at and there's several surveys about this that the next generation, the younger generation, views this as their version of gold, I believe that it definitely has some place in the portfolio. If that's the case, just access it the right way.
Ryan:Okay, Well, we haven't talked about a lot of your other what you're doing over at Vest Financial. Congratulations on a tremendous amount of success in the product line. It seems like every other day you're finding new and innovative ways to get exposure to assets, to generate income, to manage risk on the downside, and you know you've been a true pioneer in that space, and so you know, congratulations for all the success. It's been a great partnership with Vest Financial, sub-advising a number of First Trust ETFs, and so that's been great as well.
Jeff:That's been fantastic. I think the partnership has been phenomenal.
Ryan:Yeah, and, of course, thank you for making another appearance on the podcast. It's always great to have you join me for a little chat.
Jeff:Always great to be here. Can I get your autograph?
Ryan:Yes, when we're off camera, we'll exchange jerseys that are autographed. How about that? Perfect? Again, thanks for joining us, and thanks to all of you for joining us on this episode of the First Trust ROI Podcast. We'll see you next time.
