You may not know this, but if you're holding a traditional
financial portfolio through a traditional financial advisor,
you might be traditionally. Today we're going to breakdown
why your wealth is evaporating behind the scenes.
And if you stick around to the end of the video, you may just
find out how Bitcoin can fix it. Imotions.
This is beyond Bitcoin. Hop in, you curious Kangaroos.
Let's dive in. You are a smart investor, right?
You plan for your future. You watch this channel for your
daily dose of Bitcoin. Or maybe you've never heard or
seen a Bitcoin video, I don't know.
This video does count towards 40 hours of Bitcoin podcast per
week, just if you were curious. Anyway, let's assume you have a
financial advisor or a pension plan or any kind of traditional
financial product. What if I told you this entire
sector of our economy has been running the same exact formula
for 80 years? What if I told you that?
What would you do? That 80 year formula is called
modern portfolio theory. Not modern monetary theory, Not
modern economic theory. Modern portfolio theory, Modern
portfolio theory, or MPT for short, has been the cornerstone
of economic theory for executives, economists,
investors and institutions for 80 years.
That means we've been living with the same investment
strategy for almost a century. The big thought behind MPT is
the idea that there's such a thing as the risk free asset.
At some point in history, government backed bonds became
the idea of this risk free asset, meaning they were assumed
to stay incredibly stable. I mean, we're talking about the
base of the pyramid here, folks. According to MPT, the bonds or
the risk free assets are what hold the economy up.
And because of this, economists and financial engineers would
develo more and more sophisticated models that relied
on the same idea that there's such a thing as a riskfree
asset. I had a conversation with my
friend Fundamentals about it. Fundamentals has been an actuary
for publicly traded companies for over 30 years, and he just
so happens to be the author of a new book titled Bitcoin for
Institutions where he dives into the reasons why BlackRock
changed their tune about Bitcoin or why individuals will always
outbid institutions for Bitcoin. If you want to see a video about
those topics, you can click one of the links above wherever they
land. Here is a clip from that
conversation. Modern portfolio theory is if
there's a law of the land in finance, it's that it's very
well accepted. It came from a long lineage of
University of Chicago economists who won Nobel Prizes.
And it goes back to this. There's this notion of a risk
free asset that everything is benchmarked against.
So if you believe such a thing exists, which a lot of people
do, right, And at the time in like the 50s when this started
getting traction, the US Treasury, you know, the US bond,
US full, full faith and credit of the US was AAA, no question.
So this U.S. Treasury curve was considered
the risk free asset and it was the benchmark for which all of
the assets possible in the universe would be benchmarked
again. So you start with this notion of
the risk free asset and then what you do is then you have
another notion called the market portfolio, which is basically
like what's a port? What is if I could create a
portfolio of every asset that existed in the market, can I
abstract it into one thing and say I'm invested in that right
now this is before like the S&P existed this concept, right?
So the S&P index, you know, the Dow Jones, these indices were
created to try to try to construct something that would
essentially behave like this thing called the market
portfolio. So you have a risk free asset
and you have a market portfolio between these two things.
Yeah, you're looking for a portfolio that maximizes your
return on a risk adjusted basis. This is the most layman way I
can put it. The risk is nothing more than
like price volatility and return is returned.
So you just take those two things and then you try to
optimize within your risk tolerance.
So what you have is on one end of the spectrum, your risk free
asset. And then on the other end of the
spectrum is all of your money is in this market portfolio, right?
And so somewhere between your risk free asset and your all
equity asset is a risk spectrum that you're looking to optimize.
And modern portfolio theory gives a framework to do this
mathematically, to give yourself the impression that you can
actually optimize for this, and you can invest in the portfolio
that truly, truly gives you the optimal balance with between
risk and return. I got a question, yes, where,
where does BlackRock fit in modern portfolio theory and how,
how did it discover Bitcoin as its fix?
Good questions. Let's get to them.
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As I mentioned earlier, BlackRock completely changed
their investment strategy at the end of 2023.
Beginning of 2024. That means that all financial
advisors, executives and institutions that you rely on to
keep your money and grow your money, they all look to
BlackRock for the direction of the market.
BlackRock has been running the MPT playbook for their entire
existence. Larry Fink grew up in the heyday
of MPT. The thought is as long as you
have a risk free asset in place, you can weight your portfolio.
60% stocks and 40% bonds. Government backed bonds.
Remember. The problem here is that when
Blackrock's balance sheet was hemorrhaging during the British
bailout of September of 2022, Think realized that not only
were bonds not risk free, they were risk E ha ha ha hey, they
had to find something to replace bonds for fear of being bailed
out by a government whose currency they were operating in,
just like in the UK. By that logic, that's 40% of
their treasury that they had to dump.
For a financial megalith like BlackRock, that is no easy task.
And what do they even dump it for?
In Travi, Bitcoin is somewhere in there trying to figure out
where to fit in. Whereas I'm saying, well, I'm
saying two things. I'm saying 1 Bitcoins actually
the risk free asset. More importantly, BlackRock
thinks bitcoins the risk free asset and that's a case I make
very strongly in the book. Here's what I think they
decided. OK, I don't know when their
Bitcoin journey started, but like, the boat decided it had to
leave the port after the UK Bank of England pension situation.
You're asking me to read the tea leaves of what BlackRock did.
And what I'd say is there's a couple of things that came out
like, OK, there was this report that suggested that they would
recommend an 85% allocation into Bitcoin.
At some point, this capitulation came together.
We don't normally read asset allocation reports from
companies like BlackRock. I've written many of them.
No one's ever seen them, right? They don't go out into the
public. We were meant to see this one.
We were meant to see that BlackRock had this
recommendation. If you're putting all these
pieces together, you're like, OK, well, first they don't want
to deal at the country level. They don't want to deal with any
country's central bank or government.
So selling their assets is a problem.
Selling Bitcoin is no problem. Liquidity managing bitcoins
price is much easier than bonds because you have the ETF from a
modern portfolio theory perspective, you end up with a
really strong case that Bitcoin crowds out everything.
These are the ingredients for BlackRock going all in on
something they had previously said was only for criminals.
So that told me for sure at the very least their kick that they
they would replace all the bonds with Bitcoin and that still
doesn't even cover it right. So when you think about it
further, if you look at the market portfolio, there's
nothing in there that can compete with Bitcoin in AMPT
framework. If you really do it, Bitcoin
would end up without with if you don't constrain it.
A lot of assets have very attractive like sharp ratios, a
very attractive risk adjusted returns and you have to
constrain them in this model. Otherwise the model will
allocate everything to a hedge fund or private equity or
Bitcoin. But if you really look at
Bitcoin against all of these, it just kicks end up, it ends up
kicking out all of these things. And so I think BlackRock thought
very deeply about Bitcoin in this modeling, looked at it in
an unconstrained way and saw that a yes, you can, you can use
it as a risk free asset, but I think it also takes over the
market portfolio from a risk adjusted return basis.
And it's like that's sort of mind blowing if you think about
it, because there's never, you know, you could work in finance
for 100 years and never see an asset that does anything like
that. So what are we doing?
Like what are we even really doing?
You have to imagine that they went through this process of
denial for a while. Like this can't be.
So like that was the that was the triggering event for
everything that basically has happened since September of
2022. I think when they go back and
rewind the tape on that, there's nothing they could have done to
have averted that other than don't ever be in bonds to begin
with and be in something simpler that's country less.
That is based on one thing that they can invent an ETF to track.
I believe going forward, BlackRock wants to kick out all
their bonds and replace them with Bitcoin.
They want to manage clients using Bitcoin, not bonds, right?
So the question is, how do you do you just kick out?
If bonds are the support beam for modern portfolio theory,
right? Do you just Kick It Out and let
the whole thing topple over? Is Bitcoin the new Mt?
These are the exact questions you should be asking your
financial advisors, your pension planners or your local taxman
that you text occasionally. The more Bitcoin's price
continues to rise, the more this 80 year old model thing doesn't
make sense. If bonds can fluctuate at such
dramatic rates with such diminishing returns, maybe we
need a new risk free asset. One that is scarce and supply
and can't be controlled by any one person.
One that is global and not national and has final
settlement built in. You know what I'm talking about,
Bitcoin, Yes, that's what I'm talking about.
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of this junkie system today. Thank you so much for watching
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Until we meet again, we've. Only just begun.