JUSTIN ARZADON | Betashares

The BetaShares Crypto Innovators ETF opened this week on the ASX breaking all previous launch records. I was joined by Justin Arzadon to talk about cryptocurrencies, blockchain and the companies that comprise the CRYP index.

This ETF doesn't invest directly in cryptocurrencies. It invests in companies that deal in cryptocurrencies and blockchain like Coinbase, Microstrategy, Paypal & Square. These are publicly listed companies that have transparent financials with direct exposure to this sector.

What makes digital assets so different is the ability to come up with a decentralized consensus, meaning there is no one single authority figure to make a decision. If you have multiple users, hundreds of people or thousands of people in, in many cities, in many countries around the world who have downloaded the software, and ensure that when a transaction comes through it is verified.

Justin is the Head of Digital Assets at BetaShares, leading sales efforts on cryptoassets, educating and informing clients as they consider investments into this emerging and exciting asset class. He also contributes to the formation of digital asset strategy and product development for the business.

As the longest serving member of the Distribution team, Justin has supported the Institutional, Intermediary Broker and Adviser channels since 2010.

Justin has over 15 years’ experience in the ETF market, initially in North America and more recently in Australia. Before joining BetaShares, Justin was a V.P. Business Development at Horizons Exchange Traded Funds, one of the largest ETF issuers in Canada. Prior to Horizons, he held various roles within the North American Wealth Management industry.

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TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil (38s):

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. There's been a lot of excitement lately about crypto in general, with some of the gains and especially the eye watering prices of some cryptocurrencies. But most people find this sector intimidating and confusing. What people may not know is that there's a whole ecosystem that sits behind these cryptos, mostly powered by blockchain technology. Many of these companies are publicly listed on stock exchanges. Meaning investors can get exposure to the players powering the crypto economy. Joining me today is Justin Arzadon to help clear the air and explain the opportunities of crypto equities. Hi Justin.

Justin (1m 16s):

Hi, good morning, Phil.

Phil (1m 17s):

And thank you for coming in. This is the first interview face-to-face not over some sort of online tool so it's great to have you here in the studio, live.

Justin (1m 26s):

Thank you very much for having me. Very excited to be here today.

Phil (1m 30s):

Justin's the head of digital assets at BetaShares, where he educates and informs clients about this emerging asset class and contributes to development. So tell us about your time working in ETFs. It's been 15 years?

Justin (1m 41s):

Yes, that's correct. Phil. So 15 going on 16 years. Kind of lose track of the years after you get above 10 years there. But yeah, so I started my career in Toronto, Canada, so I was actually born and raised in Toronto. And, you know, after school, you know, started working at a bank branch, so retail bank branch. You know, it was good to sort of be exposed, but eventually knew that I wanted to make my way into the funds management industry. And so eventually made my way to an ETF fund manager in Toronto there. The firm was called Horizons Exchange Traded Funds and it was very early days. They actually didn't have any ETFs listed.

Justin (2m 23s):

They were running a

Phil (2m 25s):

They were an ETF provider without any ETF.

Justin (2m 27s):

Well, so they weren't an ETF provider, they were more of an index of providers. It wasn't listed on the exchange yet, but they were index funds. They were actually leveraged both on the long side and the short side. So it started when they were about a hundred million dollars of funds under management that continued to grow to about 600, 700 million. And eventually they decided to start listing onto the exchange and officially become an exchange traded fund provider. And so I started with them in terms of really learning, how to, you know, position exchange traded funds with financial advisors, as well as with the retail investor.

Justin (3m 8s):

And helped grow that business to roughly about, I think it was about 3 billion or $4 billion of funds under management before, unfortunately I had to go to them and say, you know, "Unfortunately I need to resign because I'm going to be moving to Sydney." And the reason I came over to Sydney is that, you know, my wife, she's originally born and raised in Sydney and she wanted to be closer to our family. So I decided to make the jump and was offered a role with BetaShares.

Phil (3m 37s):

Because of your experience.

Justin (3m 38s):

Probably not many people know this, but not only because of the experience, but also Horizons Exchange Traded Funds was an initial minority shareholder in beta shares. And so I actually met the co-founders when they came to visit Toronto. And, you know, because I had, you know, sort of the approval from the Horizons owners, you know, Alex and David were kind enough to bring me on board.

Phil (4m 3s):

Yeah. Come and look us up if you're ever in Australia.

Justin (4m 6s):

Exactly. And so what was quite interesting, however, is that when I left Toronto, the assets under management in all of exchange traded funds in Canada were roughly just under 40 billion. And coming to Australia in 2010, assets under management, again, for all exchange traded funds were just under 4 billion. And so, you know, you fast forward almost 11 years and you know, we're at a hundred billion plus. And I'm proud to say that BetaShares alone is now sitting over 22 billion funds under management. So, you know, I've been able to experience the growth of exchange traded funds, not only in Canada, but also, you know, now here in Australia.

Phil (4m 54s):

So it's interesting, isn't it, how ETFs have grown over the last few years? It's been such an explosive growth because they do offer a lot of pluses like diversification don't they?

Justin (5m 5s):

Correct. So not only do they offer diversification, but I believe it's the transparency. So you know exactly what an exchange traded fund holds.

Phil (5m 14s):

Yeah.

Justin (5m 14s):

You know, you can see the holdings on a daily basis and actually even, you know, for the domestic ETFs, you know what the actual price is at pretty much that second. So you get the diversity, you get the transparency, you get the ease of access. So I mean, you're purchasing it essentially like any share. So, you know, a lot of investors that haven't experienced using or trading and exchange traded funds most likely would have purchased, you know, for example, CBA or Westpac shares and essentially the exact same way that you would purchase any of those shares, you purchase an ETF. And so, you know, you have all the investor protections as well.

Phil (5m 55s):

You contribute to the development of ETFs. What's that involve?

Justin (6m 2s):

I contribute the ideas for the development. So I've been a member of the distribution team since starting with BetaShares and being on the frontline, you know, you're speaking to advisors on a daily basis and, you know, they are feeding ideas in terms of what their clients are looking for. So, you know, really over the last, you know, call it year, year and a half, you know, they've been actually letting us know that, you know, what do you have in the cryptocurrency space? You know, do you have a Bitcoin ETF? You know, how can I get access? And you know, if it's not just myself, that's hearing that, but it's my colleagues hearing that as well, then

Phil (6m 40s):

The light bulb goes off, doesn't it?

Justin (6m 41s):

Exactly, exactly. So, you know, we have, you know, monthly or quarterly product development meetings and, you know, we actually have to discuss, you know, what type of exposures to come out with. And the thing is, you know, we get approached all the time from other fund managers to either partner up or from our clients wanting to get exposure. But you know, you can't come out with an exchange traded fund for everything. You know, you have limited resources, limited time. And you know, when you come out with an ETF, you want it to be successful, right? So, you know, you don't want to come out with something and, you know, it raises 30 or 40 mil. You want to hopefully make sure that it appeals to the masses and that you're raising, you know, a hundred mil plus for example.

Phil (7m 22s):

Yeah. So cryptocurrency, including Bitcoin and all the other coins have been in the news a lot lately. Tell us a bit more about the crypto space as a whole. How does it work?

Justin (7m 30s):

Yeah, so the crypto space as a whole. So when we talk about crypto, there's a lot of confusion because, you know, people call it crypto, they call it digital assets. You know, they might just refer to, you know, I'm not into crypto, but I I'm really into the technology such as blockchain. But however, I like to refer to it as digital assets, because, you know, there are cryptocurrencies that people are familiar with such as, you know, Bitcoin and Ethereum with those two being the largest cryptocurrencies. But for anyone that's really been paying attention to the space, they have probably started to hear words or acronyms such as NFTs or non-fungible tokens.

Justin (8m 12s):

And so this is almost like the next level in the digital asset space. So I like to refer to everything as digital assets, but essentially what is happening in the digital asset space currently is, I like to view it as there's almost a parallel financial system being built. And that's not to say that the current financial system is not going to have any involvement in that or that we're actually leaving, but you have to think about what the internet has done to various industries. So you take a look at, you know, newspapers or media, right? I mean, you know, how many people actually get newspapers delivered?

Justin (8m 55s):

You know, everything's delivered online. The internet has disrupted multiple industries. And for the most part, it hasn't disrupted the financial industry yet. And now because of cryptocurrencies, because of the decentralized consensus mechanism that a lot of cryptocurrencies feature, we're essentially now able to get rid of, you know, the middleman. And the middleman or the centralized figure being, you know, the banks. Now, does that mean the banks are going to actually disappear? You know, a hundred percent they're not. I mean, they're just too big. So what is essentially going to happen I think, in my opinion is that they're going to evolve, they're going to develop.

Justin (9m 37s):

And they're going to build on top of these protocols. Because that's all cryptocurrencies are, they're essentially software open digital protocols that is actually open to all. So banks, corporations and other, you know, developers, you know, if you have an idea you could eventually build on these open protocols.

Phil (9m 55s):

Not sure how far down we want to go into the weeds here. But just before we started recording, I mentioned that analogy about the soccer game in understanding how blockchain works. Where I described, how in a professional soccer game, you've got a referee, you've got line judges, you've got the videos and the decisions on any aspect of the game is decided in a very centralized manner. Whereas if you think about a kid's soccer game, no one scores a goal until every kid on the block agrees that the goal has been scored. And then you developed that idea a little bit further in our discussion beforehand.

Justin (10m 31s):

That's correct. So, you know, just from what you've said there, you know, what that makes me think of is what they call as distributed ledger technology. Because the thing is, a blockchain can actually be private or public. So think about, you know, the internet, there's the intranet, which, you know, many may have had access to in their firm. If you're working for a corporate, you have the intranet. It's centralized, they were making the decision in regards to which websites you could use. However, if you want, you know, something that's decentralized, you have, you know, the internet, which is open to all. So you have, you know, multiple websites and you can essentially search anything that you want.

Justin (11m 12s):

And that's the same with blockchain technology. They could actually be private or public. Now blockchain is a great technology and cryptocurrencies use blockchain, but blockchain is not what makes cryptocurrencies or digital assets interesting . I think what makes digital assets interesting and what makes them so different is the ability to come up with this decentralized consensus, meaning there is no one single authority figure to make a decision. And the reason it's able to have this consensus mechanism where everyone can agree is because you have what are called nodes or, you know, call it users. So if you have multiple users, you know, hundreds of people or thousands of people, let's say in, in many cities, in many countries around the world and, you know, we've downloaded the software program, we can all take a look at and ensure that when a transaction comes through it is

Phil (12m 8s):

It's verified

Justin (12m 9s):

It's verified, correct. Yeah. So it's verified and then once it is verified, then, you know, we can all agree and then we can move on to the next transaction.

Phil (12m 22s):

So can you explain the crypto economy and how it all connects?

Justin (12m 25s):

Yeah, certainly. So in terms of the crypto economy, it's all activity relating to the creation, transaction and ownership of digital assets. And so, as I mentioned, you have digital assets themselves, whether it's Bitcoin, Ethereum, you know, NFTs or non-fungible tokens, rather.

Phil (12m 43s):

We might have to explain non fungible tokens at some stage listeners are just listening because it's one of those terms that we hear a lot about. And a lot of jokes about it, as, you know, people are selling eight-bit gifts, you know, and they're worth millions of dollars anyway, sorry, back to your point.

Justin (13m 1s):

I'll definitely expand on that. But you have the digital assets themselves on one side, you have the participants in the digital assets. So whether you're an investor, whether you're an institution such as a, you know, a super fund or a, you know, a managed fund, you know, looking to invest or your business, right. If you're a business that wants to accept cryptocurrencies for payments. So, you know, all of those are considered the participants. Now in the middle that helps facilitate both the digital assets themselves, as well as the participants, you have the businesses. The businesses that are in industries that help facilitate both sides.

Justin (13m 42s):

And without them, the crypto economy would be very, very difficult. So the fund that we just launched, it is the BetaShares Crypto Innovators ETF, which takes a picks and shovels approach, which is leveraged to the growth of the crypto economy.

Phil (13m 57s):

So these are the companies that the fund is investing in as opposed to the coins or the cryptos themselves.

Justin (14m 5s):

Correct. So the fund itself does not actually purchase any Bitcoin or Ethereum or any of the cryptocurrencies themselves. It actually invests in the companies. I guess, where I was going with that is that it currently holds 32 names, and these are the large cap companies in the space. So there's a lot more other companies. However, a lot of them are still in its infancy. And so we don't hold any of that because they're, you know, they're not really at, sort of, that level that they're, you know, really driving sort of the crypto economy. But the names that we are holding, you know, some of them have been around since 2012, 2013 and, you know, they are really helping drive the crypto economy because, you know, not only are they helping the digital currencies themselves, but they're helping the participants.

Justin (14m 50s):

And whilst you may have cryptocurrencies go through a lot of volatile periods, you know, they'll continue to go up and down in price. And that's the thing a lot of investors may not have the stomach to hold direct cryptocurrencies. You know, we actually saw a Bitcoin, correct earlier in the year, you know, it hit a high of about 63,000, I believe it is. And it actually came off to about 29,000. That's over 50% drop, right? And that's a lot for a, for an individual's portfolio. Now through that period, you had, you know, companies in sectors that we hold such as, you know, Bitcoin miners or exchanges and custodians, or the asset managers, for example, that continued to have phenomenal numbers.

Justin (15m 33s):

And when I say phenomenal numbers, I'm talking about financials. So, you know, they continued to increase their user base. They continued to increase their revenue and that's because digital assets themselves will continue to grow even though cryptocurrencies may be going through a period where prices are falling. When you think about the report that came out a couple of weeks ago by bank of America, they said that as of June of this year, there are over 220 million users of cryptocurrencies or blockchain based applications. That's up from 60 million just a year ago. So you could see the growth there.

Justin (16m 14s):

The growth of the technology is actually superseding the growth of the internet. If you take a look at when the internet had roughly about the same amount of users, I think it took about 10 years to get to a billion users. The expectation is that the cryptocurrency space actually ends up getting to a billion users within four and a half years. So the growth is going to happen regardless. We don't know which cryptocurrencies are going to necessarily benefit from all that growth. But what we are pretty sure about is that these companies that are helping both the cryptocurrencies themselves and the participants are most likely going to grow regardless.

Phil (16m 58s):

So Justin, tell us about a couple of the larger companies that comprise this index that the ETFs based on.

Justin (17m 4s):

Yeah, certainly. Look, there's a few companies that, you know, come to top of mind right away. You know, first off is Coinbase. Coinbase has been known to be the Google of cryptocurrencies. And, you know, we know what a powerhouse Google is. And what's quite interesting about Coinbase is that, you know, their exchange. So they facilitate the buying and selling of cryptocurrencies. However, they don't just do that for retail. They also do that for corporates, such as Tesla and, you know, large fund managers. So they're not just doing it on a retail level, but they're doing it, you know, in terms of billions of dollars. Now, the thing is they have other lines of businesses as well.

Justin (17m 45s):

So prime brokerage as well as, you know, they are being a custodian for cryptocurrencies. But this is why I like this exposure. And this is just an example here, in the second quarter of this year, we actually saw Bitcoin fall from 60,000 to $30,000. However, during that time Coinbase, when you actually take a look at their financial statements, not only did they increase their transacting users, so that they grew their client base, but they also increased the volume of cryptocurrencies that was traded. So this goes back to what I was mentioning before in that even though cryptocurrencies are volatile and they're going to go through a lot of sort of, you know, bull and bear type markets, you know, a lot of peaks and troughs, as long as the cryptocurrency space continues to grow, the beneficiary will be a company like Coinbase.

Justin (18m 40s):

Another company that comes to mind is MicroStrategy. So MicroStrategy being run by Michael Saylor, longest running tech CEO of a public company. You know, he likes to say that he runs a 500 million software business that grows 10% a year. And they run a $5 billion Bitcoin business that's growing upwards of 100% a year. So Michael Saylor started adding Bitcoin to their treasury holdings a few years ago. They've purchased roughly about 3 billion and now it's worth over 5 billion. And it wouldn't be surprising to see, you know, possibly the market cap of that company eclipsing, you know, a trillion dollars of Bitcoin continues to grow the way it has.

Justin (19m 22s):

Now, I won't focus on any one of the specific Bitcoin miners, but if you take a look at the index itself, we have a number of Bitcoin miners. And when you take a look at the performance of the Bitcoin miners versus Bitcoin over the last 12 months, a lot of the Bitcoin miners have actually outperformed the price of Bitcoin. And, you know, when you try to delve into it and look at why is this, well, not only are they mining the Bitcoin, but they also don't necessarily have to sell the Bitcoin right then and there when they actually mined. And so they actually ended up just holding the Bitcoin themselves. And as the price shoots up on Bitcoin, that's when they will eventually sell.

Justin (20m 5s):

And that all goes towards their bottom line. So whilst we have taken a look at the correlation of the index versus Bitcoin, the correlation being pretty close, you know, it's not 100% correlated. I believe it's between, you know, 0.7 and 0.75. But what we hope to see is that, you know, even during sort of those periods where cryptocurrencies kind of level off and may pull back, these companies continue to grow. The reason why PayPal and Square are in the exposure itself is because we, as I mentioned before, 85% is invested in pure play companies. So pure play companies being companies that have at least 75% of their revenue, you know, from their crypto based business or companies that have at least 75% of their balance sheet or their treasury assets invested in cryptocurrencies.

Justin (20m 58s):

Now that leaves 15% of the funds. And 15% of the fund is put aside for these large cap companies that are doing meaningful work, or have a meaningful business line in the crypto space. And so an example of that would be, you know, PayPal and Square. You know, obviously they have their primary business, which, you know, because of the size of it is just, that's where most of their revenues come from. But, you know, PayPal and Square, they're actually really starting to do some interesting work in the crypto space. And you know, that business will grow. And so they get a small percentage in the index itself.

Phil (21m 35s):

Yep. And PayPal have been around for how long now? That's like, I think it's nearly 20 years hasn't it been?

Justin (21m 42s):

Correct. Yeah. But you know, it really shows, I think the sort of staying power, because, you know, they see the opportunity essentially. They see the opportunity and what's happening in cryptocurrencies and how that's going to, you know, develop into essentially what I think are going to be faster payment systems than what they use in terms of the way that PayPal works, for example.

Phil (22m 9s):

So why is the ETF not investing directly in cryptocurrencies themselves?

Justin (22m 13s):

So we feel that getting exposure to digital assets ecosystem through the companies is actually a great diversifier or alternative. Being in tune with the advisors and speaking to them about the space, there's actually a lot of advisors that don't necessarily want exposure to the cryptocurrencies. You know, they're volatile, you know, their clients could be a lot older and their portfolio can't go through that volatility. As I mentioned, there's actually over 7,000 cryptocurrencies. It's actually hard to determine which ones are going to survive. When you take a look at the companies themselves, they're publicly listed. They come out with financial statements, you know, on a quarterly basis and, you know, financial

Phil (22m 55s):

They're all publicly listed?

Justin (22m 57s):

They're all public listed, correct.

Phil (22m 58s):

So very transparent.

Justin (22m 58s):

Very transparent and advisors actually know how to value these companies. Whereas when you take a look at, you know, something that doesn't have any cash flows like these cryptocurrencies, how do you actually value that? You know, you have to start taking a look at network effects and that sort of thing. But there are a lot of investors, and when I say investors, I put, you know, financial advisors that are more comfortable in just investing in the companies because they feel that regardless of which cryptocurrencies, when these companies will be the winners in the long run, because they help facilitate both the growth and just the development of the space itself.

Phil (23m 34s):

Is the fund actively or passively managed?

Justin (23m 36s):

Yes. So this fund is passively managed. The fund is passively managed because we are trying to track

Phil (23m 43s):

Track the index.

Justin (23m 44s):

Track the index, correct. And in regards to the way that it is weighted because you can have ETFs that track indices, but weighted in different ways. The 85% of the fund is going to be market cap weighted. And so the benefit there is that the companies that continue to be strong in the space continue to grow, and you remain market cap weighted with a cap of 10%, but you remain weighted towards those big names. Now that other 15% that I refer back to in terms of the companies, you know, that have multiple lines of businesses, but only, you know, at least one business line, those will be equally weighted. And so there'll be a 10 names that are equally weighted for that section there.

Phil (24m 26s):

Okay. So let's talk specifically about the ETF. What's the code for this ETF?

Justin (24m 32s):

For the ETF is going to be C R Y P, or we like to just call it CRYP

Phil (24m 38s):

In the vault with CRYP. So what kind of investors is CRYP suited for and where can CRYP sit in a portfolio?

Justin (24m 50s):

Yeah, certainly. So I think for investors looking to invest in CRYP, I would classify the fund as a thematic. So BetaShares, for those of you that are unfamiliar, you know, we're an ETF fund manager, 22 billion of funds under management and have over 65 exchange traded funds currently listed on the ASX. And we have a number of thematics. You know, some of those thematics may be, you know, global cyber security or cloud computing ETF. And so when you think of thematics, they don't make up a big chunk of the portfolio, but we feel that, you know, some of these thematics that I just mentioned are long-term megatrends, right? And you know, this sector, the cryptocurrency sector, is a sector still really in its infancy and is going to continue to grow.

Justin (25m 38s):

And so, you know, it would be considered a growth exposure. It's an equity exposure. And really, you know, it's up to, you know, your, either your financial advisor or yourself to determine how much exposure you want, because you know, everybody's risk tolerance is different.

Phil (25m 55s):

And of course, listeners should talk to a licensed financial professional before making any decisions that are based on this. So where can listeners find out more about this ETF?

Justin (26m 6s):

Yeah. For listeners that are interested in this ETF, the best source would be to go to the website. So betashares.com.au. If you are interested in the crypto space in general or the digital assets ecosystem, we're also going to be posting a weekly crypto insights and highlights sort of, you know, call it a letter, but it's posted on the website. And I'm actually going to be writing that on a weekly basis. And BetaShares also has their social media avenues so yeah, I mean, there's plenty of references.

Phil (26m 38s):

And we'll put all those links in the episode notes and the blog post as well.

Justin (26m 42s):

Yeah, excellent, that's great.

Phil (26m 43s):

Justin, thank you very much for joining me.

Justin (26m 46s):

Thank you very much, Phil, for having me. I was glad to be here and always

Phil (26m 51s):

Live

Justin (26m 51s):

Happy to come back at any time.

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