Lyn Alden of Lyn Alden Investment Strategy joins me to talk about how Bitcoin is emerging as a new store of value. We discuss misconceptions on bitcoin, the impact of the constant low key influx of new capital, gold vs bitcoin, concentration of bitcoin, and the broader macro environment we find ourselves in.
Lyn Alden links:
- Lynalden.com
- Twitter: @Lynaldencontact
Sponsors:
- Swan Bitcoin
- Knox Custody
- Unchained Capital (code LIVERA)
- CypherSafe (code LIVERA)
- Hodl Hodl
Stephan Livera links:
- Show notes and website
- Follow me on twitter @stephanlivera
- Subscribe to the podcast
- Patreon @stephanlivera
Podcast Transcript:
Stephan Livera:
Lyn welcome to the show.
Lyn Alden:
Hey, thanks for having me.
Stephan Livera:
So, Lyn, I’ve been following your work. I’ve seen, you’ve been writing about Bitcoin and inaudible very intelligent things. And I know you sort of shifted your opinions a little bit more recently in this year. So let’s hear a little bit about you and your story with Bitcoin.
Lyn Alden:
So I come at this from a broader investment perspective. So I have a research firm and we cover a variety of asset classes, including equities alternatives like commodities, precious metals occasionally fixed income. And I covered digital assets, notably Bitcoin, a handful of times. So, you know, I originally encountered it back in 2010 or 2011 and I thought it was neat. I, you know, I didn’t really think about how to price it or anything. I didn’t look into it too deeply. And then it was, it was during that 2017 bull run where I started to get more and more emails from people as it kind of reached the mainstream. And so I dedicated a long form research article into Bitcoin and to some extent into the broader digital asset space just because that was also the season of altcoins.
Lyn Alden:
And so my approach back then, you know that came out about November of 2017. And so, you know, Bitcoin was in the, about $7,000 range. At that point, when I wrote the article, of course, it went up like a thousand dollars in the course of writing the article. But and so my conclusion at the time was that, you know, the technology is very interesting and I can see why a lot of people like it. However, I didn’t allocate capital to it because I was concerned about some sort of dilution. So that was, you know, we had the Bitcoin and Bitcoin cash fork, and I said, okay, so all of these are scare, so Bitcoin scares, but what if all the money that pours into the sector just goes into all these different protocols?
Lyn Alden:
And, you know, there’s not one protocol is able to have a strong enough network effect to maintain like a dominant market share. And so I had some concerns about that. And also just, you know, that was after many, many months of strong bullish action. So I was worried about the overall euphoria and sentiment. And so I took no position. I said, if people want to have a small position, I think it could make sense, but you know, at the current time I’m not. And so, you know, fast forward, of course we had a blow off top and then a crash and a multi-year consolidation. And I kept monitoring space to some extent and, you know, I’m interested in it. But I never really took the time to go another layer deeper and to keep examining it.
Lyn Alden:
And, you know, roughly in late 2019 I started digging a little bit deeper. And I was kind of, you know, thinking about building position if there were to be, you know, corrections or, or things like that. And then once we had that sharp correction in March of this year I got quite bullish and that’s also when I went into the rabbit hole a little bit to find out more details about the protocol, including some things I didn’t fully grasp in my 2017 research piece. And so I went long in April and you know, then I continue to also looking more into it increased my allocation and wrote a number of articles about it a big public one in July and then a follow up in November. And so, you know, overall it’s been you know, as I learned more about it, I became more bullish on it.
Lyn Alden:
And I would say the one reason I became so bullish is that a lot of my concerns about 2017 were addressed. So, you know, Bitcoin proved that it had a dominant network effect compared to all those other digital assets out there. And you know, it has a security advantage. It has network advantage. And so I, you know, I felt that it was a significantly de-risked enough and ironically, it was about the same price when I went long in April as it was back in November. So I, you know, I got my first coin for, it was like 6,900. So I was like, okay, it’s the same price, but it’s de-risked so, you know, I’m more bullish now.
Stephan Livera:
Yeah. That’s a really great way to put it because many people who in the recent, you know, we’re talking about the March crash down to kind of 4,000 range or so at that time it was, it was a really interesting marker if you will, because a lot of the people who weren’t, so in the know were like, “Oh, I see it’s all dead. It’s all over.” And like almost everyone who was in the know was like, “I am trying to accumulate. This is I’m so incredibly bullish right now.” So what was your perspective there at that time when, you know, Bitcoin was crashing from, I can’t remember the exact number, but it was something like from around 10,000 to maybe 4,000 or so in March, 2020. So what was your thinking there?
Lyn Alden:
Yeah, so, because I have experience with the gold market I see gold behave similarly during those liquidity events, of course, less volatility. And so it’s common during the early stages of a recession when you have a big liquidity crunch, right? So everyone, you know, margin calls are coming in, people have to sell whatever they have, it’s normal for even assets that theoretically should perform well in that environment to get sold off in the beginning. And then as soon as you get that liquidity response from the central bank, and often accompanied by fiscal spending, another sort of you know policy response, that’s when you usually get the sharp rebound in many of those you know, assets like gold. And so you can see the same thing happen you know, in the early two thousands recession the same thing happen to gold in 2008.
Lyn Alden:
And so I view basically Bitcoin as behaving similar to the metals where in particular, I mean, silver got crushed around March as well. And I was very bullish on silver. I mean, that fell all the way to like $12 an ounce. And so I was quite bullish on gold and then even more on silver and that, you know, I viewed Bitcoin the same way. So I was comfortable investing into a liquidity issue because I knew that there’d be a policy response. And also, I mean, I called the rebound. So, you know it went down to something like 4,000 and then it was, it was sharply coming back up. And that’s when I said, okay, you know we’re definitely in the rebound phase here. And I was pretty bullish at that point.
Stephan Livera:
And that’s one of the really hard, the hardest things to do as an investor is to be actually buying when there’s blood in the streets. Right. Everyone can talk about it, but in practice, achieving it and doing that is actually the part that takes some real skill. Wouldn’t you say?
Lyn Alden:
Yeah, I think so. And you know, at the same time, if you’re, it’s almost like a trap because a lot of people are afraid to buy when there’s blood in the streets, but the types of personalities that you know, for one reason or another are more value oriented, and they’re more likely to be able to do that. They often have a tendency to sell too early. Right. So now we’ve had a giant gain. And so I had to resist the temptation, like, okay, I got a double, like, should I just unload my coins now? And so I haven’t sold a single coin, but I, you know, I also publish research for other clients and they’ll have different risk profiles and I’ll explain that. Okay. You know, we’ve doubled our initial investment depending on how much people put in. I can see they might want to rebalance, but me personally, I don’t plan on selling at this point just because I don’t think this bullish run is over. I’m still very bullish long-term on the asset class. And so, and of course, I don’t want to have taxable events or anything like that. So you know, I think it’s always kind of tricky to keep holding. Even when you have that kind of contrarian mindset.
Stephan Livera:
That’s a great point. And historically, there were many people who maybe they bought some Bitcoin at $1, and then they sold at $10 and they’re thinking, Oh, wow, I’ve got a 10X, but then they missed out on this huge, huge gain that came afterwards. Because again, they hadn’t really peered into Bitcoin to understand what it is and what kind of market it’s actually competing for. So then when you are thinking about what kind of market Bitcoin is competing for, how are you thinking about that?
Lyn Alden:
So I’ve seen a lot of you know, different people in the community all explained their own views of it. And so I start from the perspective of digital gold because that’s already a very large addressable market, right? So gold has a market cap depending on the price at any given day of, you know, in the ballpark of 10 trillion and even the part that’s for private investment purposes. So if you factor out the central bank and the jewelry component, there’s still trillions of dollars of gold investment. And you know, so even if Bitcoin is only digital gold, it can still go up multiple times over. And then if I think beyond that, I do, you know, there are arguments for, it could be much larger than, than gold because, you know it fixes some of the issues that gold has, for example, it’s verifiable, it’s more portable.
Lyn Alden:
So, you know, if it were to expand beyond that, I think there’s a case to be made for that. But, you know, I focus on, you know, maybe one or two halving cycles here. And so I want to see how it performs you know, in this particular bull run. And I want to monitor it over time. So I’m starting from that perspective of, you know, primarily emphasizing its store of value. And that’s also another shift I had from 2017 to 2020, because my 2017 article, I was examining it both as a medium of exchange and as store value, because there were kind of competing narratives at the time. And so my conclusions back then were that as a medium of exchange its probably overvalued and I showed different quantitative reasons why, but I was like, okay, but, you know, if it were to have a rapid adoption, it could justify its price, but, you know, it’s basically like a growth stock, it’s priced as though it’s gonna be more adopted, but then as a store of value, even back then I compared it as a market cap to gold. And I said, okay, if it takes 10% of Gold’s market share, if it takes 50%, then you can get some pretty bullish numbers here on Bitcoin. So even in my 2017 article you know I looked at the long-term potential, but I was kind of torn between narratives. And like I said, concerned about the network dilution. And so in 2020 with those risks addressed and emphasized in the store of value aspect you know, above all, that’s made me kind of quite Bullish on it.
Stephan Livera:
Yeah. And also I noticed as well, because you’re interested in many different assets, right. You’re not a Bitcoin specialist. And so there’s a difference there in terms of knowledge, but then also in fairness, the Bitcoin specialists tend to be more permabull. And so how do you think about that kind of you know, when you’re approaching the world and the way you’re analyzing things is, you know, not necessarily a Bitcoin specialist.
Lyn Alden:
I think it can add a degree of objectivity. And so I’ve kind of used that before when analyzing the precious metals markets, cause those can also be quite emotional markets. There are some people that are permeables on gold, for example you know, whereas I sold my physical gold in 2011 and whereas a lot of bulls at the time kept holding, holding, and holding. And so basically you know, for me with different asset classes I’m a very long-term holder, but I still don’t mind saying, okay, I’m bearish on an asset class over multi-year period for reasons X, Y, and Z. And so by being able to kind of find value in different asset classes you know, I think one of my approaches with Bitcoin I basically tried to take what some people were saying within the community and explain it to people that maybe were not in the community and coming from someone that kind of approaches multiple asset classes.
Lyn Alden:
It turns some people onto it that might not have otherwise seen it. And I think that’s kinda my voice in this, in this space is basically say, you know, without blinders on what asset class might am I bullish on what asset class, my version and, you know, looking out at the long-term, I’m quite bullish on Bitcoin and, you know, occasionally, like, for example, back on November 22nd, part of a research note, I warned to my investment clients that probably Bitcoin is near term overbought. And I actually welcome to see a correction here. And so we got that Thanksgiving a little sell off there. But I mostly do that for, you know, I explained to them that I’m not selling any Bitcoin, I’m not trading around that view. And I just wanted to set expectations, so people know how to handle that turbulence. And I think having that multi-asset kind of approach can help people kind of navigate these markets a little bit.
Stephan Livera:
For sure. And I think it’s also historically true to say that during these bigger bull cycles, there are often these little 30% pullbacks along the way. So I suppose that’s something you’ve also been, you must have also been looking at right?
Lyn Alden:
Exactly. I showed them that the 2016, 2017 charts there are multiple 30, 35% pull backs. And, you know, I don’t know if this particular run would be quite that volatile, but it’s certainly possible that it will be. And so basically what I emphasized was I showed a bunch of metrics, you know, there’s all sorts of different kind of valuation metrics, like, you know, market cap over realized cap and all sorts of different things. And I showed basically in that, in that November 22nd piece, that more and more indicators are showing kind of near term, you know, multi-week probably overbought but there’s still nowhere near the type of euphoria we saw in say late 2017 or the previous kind of major Halving cycle peaks.
Stephan Livera:
And also in your, some of your recent articles, you’ve commented on some of the different misconceptions about Bitcoin, one of which was energy usage. So how do you answer that question when someone says to you, Lyn you know, maybe Bitcoin is interesting, but look at the massive energy use it takes?
Lyn Alden:
Yeah. So I learned a lot from people in the industry you know, because there are of course people that are specialize in that and they know way more than I will. And so what I wanted to do was kind of summarize some of the misconceptions about Bitcoin you know as a non-expert and, but from my like deep research into it and take that and apply that to some of the common criticisms. And so with energy I point out a couple of things. One is that, you know, anything of value generally requires a lot of energy, especially if we’re talking about a decentralized store of value. So gold, for example, requires a massive amount of energy to get every single ounce of gold coin you have to remove literally like tons and tons and tons of rock to get a gold coin plus all the logistics, plus all the transportation, all the verification plus the, you know, putting into its final form.
Lyn Alden:
And so that’s a very energy intensive industry. Of course the energy is more front-loaded but it’s still a very energy intensive industry. And so my point was that sure Bitcoin uses a lot of energy but that energy is goes into hash rate, goes into it security, and is what separates Bitcoin from most other stores of value and especially from other, you know, alternative digital assets. And so basically it was saying, okay, it consumes a lot of energy, but you can make the argument that this asset makes that energy worthwhile because it gives people options they didn’t have before. And so this kind of that, you know, the market is currently saying that it’s worth that amount of energy and that it’s willing to put that energy into it, and that there is demand for that energy. The second one was you know, going along points that people make that Bitcoin really kind of optimizes to find a cheap energy or stranded energy, or, you know, anytime there’s an overproduction of energy in an area Bitcoin can kind of arbitrage on that.
Lyn Alden:
And an example I was familiar with basically is that, you know, I believe it’s Iceland that has really low energy costs. And so they arbitrage that by you know, refining a lot of aluminum because it’s a very electricity intensive process. And so they basically said, okay, we have this resource. And so we’re going to put it to use in this way. And we’re basically going export our electricity cheapness in the form of our aluminum refining. And so Bitcoin is kind of similar in that, you know, if there’s overbuilt, hydroelectric dams, or if there’s stranded oil and gas, like some people in the industry specialize in those resources can be put in a Bitcoin. So I didn’t really have a problem with the amount of energy usage as part of my Bullish Thesis.
Stephan Livera:
I see. Yeah. And I think it could also arguably be said that as many governments around the world are subsidizing renewables, then in some ways, people who are able to use renewable to mine Bitcoin are kind of sucking up that subsidy. So there’s a bit of an arbitrage there, wouldn’t you say?
Lyn Alden:
Yeah, I think so.
Stephan Livera:
Yeah. I think the other big question that many people coming in is around volatility, right? So they’ll say, Oh, look, it’s, you know, it can go through these crazy swings and in the space of a few months, it can, you know, it can 10X or whatever, and then it can draw heaps. What do you normally, how do you think about that when thinking as an investor there?
Lyn Alden:
Yeah, so I define it as an emerging store of value. So instead of being an established store of value, like say gold or treasuries or whatever the case may be Bitcoin is an emerging store of value. So the idea is not that it’s currently a store of value in the sense that, you know, an investor can put in money into Bitcoin and expect that it’ll be worth the same amount six months from now when they need that for down payment. So it’s not a savings account in that sense. But you know, an analogy I’ve made is that if you look at equities, right? So if you have a blue chip stock, it’s been around for 50 years, it’s, you know it’s still valid. It’s, you know, pays good dividends. You know, that’s a stock, that’s a decent store of value.
Lyn Alden:
It’s something you can put a lot of money into. You don’t have to worry about it too much, especially if you have a diverse basket of companies like that. Whereas if you have a small growth stock and it’s getting more volatile, but then you have more potential from it because you’re pricing in the potential future, which might not happen. But if you think there’s a high probability it happens, you basically pulling, pulling forward. Some of that value now, Bitcoin is tricky because unlike an equity, like a growth tech stock, Bitcoin you know, advertises itself as a store of value. And so there’s that little bit of a competing narrative about the volatility, but if you just kind of take a step back and say, okay, it might not be a store of value yet in that sense, it’s an emerging store of value. So if people are correct about, you know, all the different bullish potential of Bitcoin, then it will grow into being a store of value. And in the meantime, that volatility, if you’re right about the general direction of it, is more than a store of value, because it’s a growth of value. It’s a you know, multiplier of purchasing power rather than merely a maintainer purchasing power, like gold generally is.
Stephan Livera:
Right. And probably similar, I guess, gold is kind of like seen maybe more like a blue chip, whereas Bitcoin is more like a growth stock in that kind of technology.
Lyn Alden:
Yeah. Exactly.
Stephan Livera:
Yeah. and also in your writing, I’ve seen this kind of explanation of perhaps the phenomenon of Bitcoin, right? So you talked about this idea of the constant low key influx of new capital, right. Because all of these people are, you know, as we say, Stacking Sats and at the same time, there’s a reduction in the supply. So what are you getting at there with that dynamic?
Lyn Alden:
Yeah, so I, I brought in some of the charts in my article, I referenced some of the charts from plan B, you know, the well-known stock to flow model. And so my approach with that model was, you know, I didn’t have an opinion about the accuracy of the forward projections of the price. I kind of disregarded that part of the model but was valuable to me, what were the quality of the charts that linked the price of Bitcoin over time, strongly to the Halving cycle. And in addition to just looking at the mathematical correlation of how that works out you know, basically the whole idea is, you know, roughly the first two years of a Halving cycle are pretty bullish. Whereas, you know, the next two years of Halving a cycle tend to be more about consolidation and kind of finding a balance until the next Halving period happens.
Lyn Alden:
And so I kind of stepped back and just logically, you know, did some thought experiments and show.Okay, if you have a set number of coins, if new capital wants to come in regularly but then you have a reduction in new coins, you can easily see why the price goes you know, pretty parabolic during that time. And so even with pretty benign assumptions about how much demand has to come into the space if you have a situation where, you know, a lot of the initial holders are not selling and there’s a decent amount of constant demand coming in you can get a pretty strong price rise just from that supply reduction. And then of course that also triggers, you know, more demand to come in, because then they’re excited about the price performance. And that’s why you tend to overshoot you know, the model each time is cause you, you get that kind of blow off top of momentum and FOMO traders coming in. And so it’s basically just extraordinarily powerful incentive mechanism because it’s fully transparent. So we all know what’s going to happen. But until there’s actually that kind of liquidity squeeze and, you know, more people want coins that are you know, easily accessible from like, you know, call it weak hands or traders, whatever the case may be. It’s not until that happens, that you get that kind of really strong bullish action,
Stephan Livera:
Right and to the point that you mentioned there about those people who are accumulating and not selling, I think Bitcoin is also fascinating as well because people are able to do these kinds of on chain analytics to see, okay, number of coins held more one year or two years. And those actual metrics can give some level of insight as well. I’m not sure whether you’ve looked into any of those or those have been a part of your analysis.
Lyn Alden:
I have. Yeah, like when I was you know, researching the Halving cycle, you can see, you know, the percentage of coins that are held for over a year or two years tends to follow a certain pattern along with that Halving cycles. So it tends to build up during that consolidation phase, where you get a lot of those HODLers just kind of holding onto their coin, just still accumulating. And you have that kind of rise in the percentage of coins that are not really moving. And then during those massive bull runs, that’s when you see some percentage of those HODLers start to take profits. So you have people, you know, they, might’ve been holding for a year, two years, three years, and they start to sell into some of that bullish strength. You know, it could be for a variety of reasons maybe Bitcoin’s becoming a very large share of their net worth.
Lyn Alden:
And so they wanna, you know take some gains, maybe they want to buy a you know, a mansion with their gains, whatever the case may be Lamborghini. So for whatever reason, they sell into that bullish strength. And that’s what creates some of the liquidity until you eventually have a blow off top. So I found a lot of the on chain metrics to be extraordinarily useful because I, I approach things primarily as a fundamental investor. And so I know people that use technical charts for what Bitcoin is gonna do, whereas I prefer viewing the fundamentals. So, you know, who’s buying, who’s selling what are the mechanics of what makes them want to buy and sell? And what are the use cases? So I like the fact that it’s very transparent.
Stephan Livera:
Yeah. And speaking of transparency, I think another interesting theme is this whole idea of concentration of Bitcoin, right? So people come out and say, Oh, look, the Gini Coefficient of Bitcoin is, you know it’s so highly concentrated. How do you think about that issue?
Lyn Alden:
I had a tweet that went kind of semi viral around that subject, which was, you know, people were pointing, there was kind of an influx of tweets. I saw about how, how concentrated it was. So I just pushed back a little bit and showed how concentrated the US stock market is. And so it is true that, you know, as far as we can tell Bitcoin is pretty concentrated. Now that’s still an estimate because, you know, you’re looking at the number of addresses and you know, all that. So of course one big holder can have multiple addresses. And one big address can be custodian for multiple smaller holders. But as a general, you know, estimate, we know that it’s, fairly concentrated. But it’s, you know, comparing how, how vastly concentrated the U S stock market is. It’s really not that much different, especially considering that the US stock market is so much bigger, we’d expect it to be more you know, kind of spread out, but it’s not.
Lyn Alden:
So for example, the top 10% of holders of the us stock market hold 88% of it. And then the other 12% is held by the other 90% of people. And so it is extraordinarily concentrated. And if you think of Bitcoin even further as, you know, a fairly young tech stock, right? So, you know, it have still have a lot of insider ownership from some of the initial founders from some of the early investors. You know, so it’s not like one of the stocks that’s been around for 50 years. It is widely held. It’s still a fairly concentrated. So I think over time, Bitcoin can spread out more than it is now, but in the meantime, I’m not really worried about its concentration because it’s, you have kind of that same concentration effect in most other asset classes as well.
Lyn Alden:
And, you know, that does create some degree of when you get some of those brutal sell offs, even within a bull market. You know, part of that is from the concentration, you have kind of whales coming in and taking some profits. But as long as people can put up with that volatility and don’t lose sleep over, you know, week to week changes and talk about, you know, price manipulation and things like that, if you can kind of have a multi-year outlook the concentration is probably not that big of a deal in my view.
Stephan Livera:
Right. And I guess it just like many other things in life, there’s going to be an unequal distribution, and it’s going to be power laws and Pareto 80 20 like many other things in life. So I’m also interested to just talk a little bit more about kind of the like broader macro environment that we’re in. So, you know, people are faced with an environment of higher inflation and they perhaps feel like they don’t have as many options in terms of where they can put their money. So why is that?
Lyn Alden:
So there’s a couple of reasons. I mean, one, the challenging thing is so I’ve written a couple of notes recently about inflation and the challenging thing is cause there’s different definitions of inflation, right? So there’s, you know, some schools of economics folks on the broad mine supply. And so the broad money supply is increasing rapidly, especially on a per capita basis. Then that’s inflation, it’s already inflation regards to what prices are doing. And so, you know, we can refer to that as monetary inflation. So, you know, the broad money supply in the US went up well over 20% this year. And so then there’s other types of inflation, like asset price inflation, which is when normally when you have that kind of broad increase in money supply that can pour into scarce assets, whether it’s real estate, equities, gold, Bitcoin, fine art, wine, fine wine.
Lyn Alden:
Those things tend to go up very quickly, especially when you have a lot of wealth concentration in society. And so, you know, most of that money gains are going to the top 10% or so, and then they’re storing it in those assets. And then of course you have consumer price inflation can happen when the broad level of prices goes up. And we’ve seen over the past several years, a lot of imbalance in there. So we’ve seen, you know, things like healthcare, tuition, childcare services all those things going up very rapidly in price, whereas things like electronics and other things have been more deflationary due to technology, due to offshoring you know, due to all sorts of different factors like that due to demographics, even due to debt. So you can have that kind of deflationary offset.
Lyn Alden:
And so, you know, Bitcoin as a store of value responds a lot to that monetary inflation and that asset price inflation which, you know, those are the numbers that are really big this year. And the reason they’re so big is, you know, the US is running very, very large fiscal deficits. And then importantly, rather than extracting that capital from say, issuing bonds that, that people buy, right. So if you were to run deficits, there’s basically a couple of different models of government financing. So you can tax from one part of the economy and spend into another part of the economy, and it’s just kind of a rearranging of, what’s happening. Then you can add, you know, debt to that. So you say, okay, in addition to taxes and spending, we’re also going to issue treasury bonds, extract capital, you know, from volunteers that want to buy those.
Lyn Alden:
And we’re going to also put that somewhere in the economy, and again, you’re just kind of rearranging things. However, when you were running large deficits that the central bank is pretty new dollars to buy those treasuries that actually directly increases the broad mine supply far quicker. And so by law, you know, the Fed can’t buy directly from the treasury, you know, on an ongoing basis but they can buy through the primary dealer banks. So basically the treasury can issue tons of treasuries banks buy them, and then they sell them to the Fed and the Fed just creates new bank reserves out of thin air and uses those to buy those treasuries. And so you basically have indirect deficit monetization and that’s, you know, that’s a key part of, of kind of, you know, most structural inflation trends.
Stephan Livera:
I see. And so in your view then, is it mostly an American story or US story about people wanting to buy Bitcoin? Or are you seeing a case there for people in other countries around the world also?
Lyn Alden:
It’s pretty widespread. So, you know I cover something called the long-term debt cycle frequently. That was a topic that was popularized by Ray Dalio. And it’s something I’ve done a lot of additional work on. And that’s the idea that, you know, as it’s kind of basically within this, Keynesian framework we have where you have you know, when you have a business, like, right, so you have a recession and then you start to get, you know, a de-leveraging event. That’s when the government comes in, you know, the central bank cuts rates, the government does stimulus spending and he stopped that. De-Leveraging about halfway through and he started building up leverage again. And so if you string multiple of those short-term business cycles together, you’re never really, de-leveraging all the way back down to where you’re starting.
Lyn Alden:
And so after five, six business cycles you get higher and higher debt as a percentage of GDP, both in the government and the private sector at the same time, industries are hitting lower and lower levels each time. So they’re able to raise them a little bit during the expansion, but then they cut them during a recession and they never get back up to where they were in the previous cycle. So you get higher and higher debts, you get lower and lower interest. And that lower interest allows all those entities to hold more and more debt relative to income relative to GDP. And then that party kind of stops once you hit the zero bound because you can’t realistically cut industry as much deeper. You know, some countries have gone mildly negative. You basically need to eliminate cash, but to go deeply negative.
Lyn Alden:
And so they turn to asset purchases and deficit monetization instead. And historically you know, once you hit the zero bound, that’s when you get, you know, in the years in the decades that follow, you eventually get some sort of currency devaluation, and that’s basically how you end up de-leveraging the system. So instead of de-leveraging nominally by defaulting or paying back the debt, a lot of it gets partially inflated away. So the money supply goes up a lot quicker than the debt, and eventually they start the whole cycle anew. And so that’s something that is happening in States, but it’s also happening much else in the developed world. So, you know, we have a ton of debt in Europe. We have ton of debt in Japan. China’s private sector is incredibly leveraged. And so it’s mostly worldwide phenomenon, more so in developed countries.
Lyn Alden:
But then of course, emerging markets have their own problem because even though they have less debt as a percentage of GDP, the issue they have is that a lot of their debt is denominated in dollars. So their own government can’t print that away. They can’t. So that’s why emerging markets tend to have more inflationary crises more often. And that’s why they tend to default more because their obligations are often outside of the jurisdiction of their own central bank. And so, you know, Bitcoin is very popular in certain countries that have you know currency failures and things like that. Or you can just, you know, not even like a full failure, just like a constant loss of purchasing power. And so I view it as mostly a global story.
Stephan Livera:
Yeah. That’s a really interesting way to put it. And as you rightly point out, there are a lot of countries in the world who are not a monetary sovereign, they are able to have their own currency and also borrow denominated in their own currency. And because of that, for example, somewhere like Argentina, who has to borrow in US dollars, that’s, what’s creating a bit of this dynamic where they face higher inflationary pressure over time, just because they can’t manage it so well themselves. Whereas if you are USA, if you are Japan, you are in a different story or it’s a different category. So bringing it to what people face, I guess we would say people face an incentive to go into debt, right? People facing incentive to go get a mortgage, because over time, the value that you repay will be inflated away over time, such that the real amount you’re paying back in real terms is coming down over time. So it helps people who are in debt. So then what does that sort of look like over time? Would we say that that’s also part of the reason why we’re seeing these huge housing bubbles, because everyone is incentivized to go into borrow and buy a house, right?
Lyn Alden:
Yeah, pretty much. I mean that’s what we saw to the buildup of the 2007 bubble. So after the, after the stocks crashed you know, after 2000 they cut interest rates super low, and that helped encourage a housing bubble, you know, combined with, you know, banks, not acting rationally and people acting irresponsibly. So that, that kind of policy that incentivize bad behavior combined with their willingness to behave badly can cause those bubbles and you know, more broadly the way that the global monetary system designed ever since the early seventies ever since we went off the Bretton Woods system, basically, you know, every country’s incentivized to have weak currency, right. Because they want their exports to be fairly competitive and they, you know, they want to have positive trade surpluses. And so a lot of these countries have mercantilist policies where, you know, they’ll print money to buy, you know, more and more foreign exchange reserves in a specific attempt to weaken their currency.
Lyn Alden:
Now, of course they don’t want their currency so weak that it looks like an emerging market currency where, you know, people can’t import what they want, but they basically want to have this, this, this constant weakening pressure on their currency. And you see this kind of over time, it’s like a game of musical chairs where these countries are all have this incentive to you know, do competitive devaluations with each other. And so right now, for example, you know, China’s running surpluses with United States, Europe running surplus with United States. And so they have this incentive to kind of keep their currencies weaker than they should be based on a trade balance basis because they want to keep that business flowing. And United States we’ve been on the big trade deficit side of that. So ever since we went off the Bretton woods system and onto the petrodollar system in the early seventies, we’ve had this gaping multi-decade trade surplus just because of how we structured the whole you know, global monetary system, mostly based on energy pricing and just this big weird incentive structure we’ve had for decades.
Stephan Livera:
Yup. And there are also some interesting or unfortunate consequences when governments go into too much debt aren’t there. It’s I know you were also commenting about what typically happens once they get above a certain debt level, but it’s difficult for them to come back down from that. There’s like a what’s the word? It’s like a tipping point, right?
Lyn Alden:
Yeah event horizon. So, you know, the study I was referencing showed that, you know, over the past 200 years, there were, you know, 52 countries that went over 130% debt to GDP. And over the next 15 year period, after that 51 out of 52 of those, either inflated away, defaulted, restructured it, or otherwise didn’t, didn’t pay all, you know, didn’t maintain the value of their sovereign bonds in purchasing power. The one exception was Japan but they had some unique characteristics allowed them to hold on that longer than anyone else. So for example they had the largest net international investment position in the world. So even though they have high sovereign debt, they’ve run, they’ve ran decades of trade surpluses. And so they have a situation where Japan owns more foreign assets than foreigners own of Japanese assets. And so they have they have this constant stream of income flowing in from their assets around the world.
Lyn Alden:
And so that, plus they’re highly organized culture, low, low unemployment rate. They’ve basically been able to push that longer than anyone else, but generally once you get above 130% debt to GDP, you generally start to see a degree of currency devaluations or default, and in the United States case. And of course that can take different there’s a spectrum of outcomes there. So you can have, on one hand, you can have hyperinflation, which is more often happens when you have external obligations, either war reparations, or dollar denominated debts, if you’re Argentina, things like that. If you’re a monetary sovereign, then you are historically get kind of a partial currency devaluation. So the only other time in us history where we had Federal debt to GDP as high as it is now was the 1940s during World War II. And what they did was they employed yield curve control.
Lyn Alden:
So the federal reserve said, we’re going to hold treasuries across the entire duration spectrum at 2.5% or below. So T-bills were held at like 0.3%. And the long end was held at 2.5%. And the fed was able to maintain that peg by saying, we’re going to print money and buy treasuries as needed to maintain that peg. And so even though inflation had these double digit spikes in the 1940s there are two spikes that got up into the double digits and another one that got into the high single digits. But they still held treasuries at, you know, 2.5% or less. And so anyone who held treasuries throughout the course of that decade, you made all your money back nominally but you lost roughly a third of your purchasing power. After that decade was over just from a big chunk of that being inflated away because even though they can control interest rates, the release valve ends up being the currency itself,
Stephan Livera:
Right. And so what’s the implication there for, let’s say pension funds, investment funds, even insurance funds, when they are stuck in this environment where they can’t get much get much of a return out of bonds what are the typical valves or areas that they get pushed into?
Lyn Alden:
Well, we’ve seen, you know, more and more pensions get pushed into equities and pushed up further into the volatility spectrum and private equity, even including, you know, pensions that have been debt holders, some really bad kind of private equity you know, things like financing, shell oil or whatever the case may be just a bunch of uneconomic projects. And it’s challenging for them because pensions have often had like a 7% return target seven or 8% you know which could make sense if treasury is yielding 5% and equities, you know, you can expect a little bit more than that. So you can say, okay with a balanced portfolio of equities and bonds, we can get, you know, we can comfortably get seven or 8%, but when you’re in an environment where year yields are near zero and then stock valuations are consequently pushed very high, right?
Lyn Alden:
Because people are willing to pay up for stocks cause they’re, you know, compared to alternative of bonds. So you jack up the stock valuations and lower the forward expected returns they, didn’t an environment where all these institutions have a lot of trouble getting that, you know return that they need. And, you know, you can kind of have projections and say, okay, you know we kick the can down the road and say, you know if we’re optimistic about our projections it looks good. And that’s one reason they don’t, they don’t reduce their target returns. Cause if they reduce their target returns, then they basically admit they’re insolvent. And so they have to kind of maintain the illusion of solvency by still maintaining these pretty high return targets that they often do not meet.
Lyn Alden:
And so it’s historically very challenging. I mean, you know, if this goes anything like history bonds are unlikely to do well especially on an inflation adjusted basis. And so anyone kind of relying on them is likely to lose some degree of purchasing power. I mean, even in the best case, if you don’t have kind of outright high inflation, if you just have, you know, positive inflation while their yields are, you know, through financial pressure AND the yield curve control, either formal yield curve control or informal yield control, you’re, you’re just gradually chipping away at your purchasing power. And that’s in a best case scenario, worst case scenario is you could have a spike in inflation while those yields are still held quite well LOW.
Stephan Livera:
Yeah, it’s a very difficult situation. And as you point out, that’s when the world is in a even from a stock market perspective if the valuations are already very high, then from a CAPE cyclically adjusted price equity ratio, you can’t be expecting really great returns to come from stocks. So you’re kind of stuck in this weird situation, but at the same time you might be okay, you might be thinking, okay, yeah, we should buy some Bitcoin, but perhaps for some of these large entities, Bitcoin simply isn’t big enough yet for them at you know, as we speak today, Bitcoin is around $350 billion as a total asset. And I guess what’s your thinking around that, around the the relative size of Bitcoin as a market compared to say gold or stocks or other other investible assets?
Lyn Alden:
I think that’s absolutely right. And the funny thing is, I mean, even in that sense, gold isn’t necessarily big enough, at least at current prices. And so if you were to have a 5% allocation in gold among you know, institutions around the world gold would have to be much more expensive. The market would have to much bigger to absorb that. So they’re actually still even underweight precious metals, which are historically one of the alternatives that can hold up if you want to a somewhat more defensive asset in your portfolio in that environment of low real yields. And so, you know, Bitcoin as a small fraction of Gold’s market cap has that problem multiple times over, which just it’s tiny compared to that. And so, you know, we’re starting, you kind of see it go up the ladder.
Lyn Alden:
So, you know, Bitcoin used to be a retail phenomenon, you know, individuals kind of developed it or found it. And it kind of went from the ground up. Then you have kind of adventurous institutions hop on boards. We had fidelity hop on pretty early and start exploring it. And you have some family offices or some hedge funds you know, they’re not managing say hundreds of hundreds of billions. And so they’re able to be nimble enough or, you know, they might, they might have kind of a quicker process in order to deploy their capital instead of, you know, a complicated kind of model. And so, you know, you kind of go up there. So you started to see some of those more nimble organizations hop on board, and as the market cap grows, then you can accompany, you know, bigger and bigger pools of capital that can potentially, you know, decide to have a non-zero Bitcoin position.
Stephan Livera:
Right. And I think the other important part is just over time, as people become more comfortable with Bitcoin, they are more comfortable to up their allocation percentage. So at the start, people just want to, they want to dip their toe in the water, take a small amount. And then as this thing grows, they’re probably going to be more happy to hold a higher percentage. Wouldn’t you say?
Lyn Alden:
Yeah. Kind of like, you know, gold, for example, I mean, today, if you have an investor interested in both gold and Bitcoin, they’ll usually have more money in gold because, you know they probably won’t wake up tomorrow and Gold’s down 30%, whereas Bitcoin has a higher probability of something like that happening. And, you know, so as people manage on risky adjusted returns they generally deemphasize more volatile assets. And so that leaves that can be good for people that don’t mind that volatility, that don’t have that mandate to reduce volatility as much as possible. And so, you know, people that have high conviction that have a long time horizon, they can overweight Bitcoin more so than some of those institutions can. And so I think over time, if Bitcoin grows larger and it becomes less volatile I think you can see people put more of an allocation into it.
Lyn Alden:
It’s also a narrative thing. So for example, you know, back when it was associated, people would associate with drugs or crumb activity. Some of those narratives are still around, you know but, you know, I think as that kind of fades and, you know, as you get the, you know, Stanley Druckenmiller, you know, approval stamp of approval on it, and you get the Paul Tudor Jones stamp of approval on it, then you can see more and more institutions kind of flood in because they’re not the, you know they’re not the first anymore, they’re not to kind of risk being viewed as something that would invest in something illicit or something kind of dangerous. Right. They’re saying, okay. I mean we’re allowed to view it as an asset class now. And so you can start to have that flood gate open.
Lyn Alden:
And I think it was Niall Ferguson’s article. He talked about Bitcoin and he showed some of the back of the envelope, math showing that if every millionaire in the world wanted to put 1% into Bitcoin even that Bitcoin has to grow dramatically in order to accompany even that amount of allocation. And that doesn’t even include the fact that, you know, non millionaires want to hold it and some millionaires might want to have more than 1%. So it’s just basically the market cap is still tiny compared to the potential if it continues to catch on and grow and more and more people want to have a non-zero allocation.
Stephan Livera:
Right and as we’ve seen historically in Bitcoin, it has tended to move in these well historically 4 year cycles. Do you have any thoughts around how, how big this cycle could go in terms of adoption? So not necessarily talking about like what price or whatever, but more just like how I guess well taken up. Do you think it will be in terms of percentage of the population, as we say over this next few years?
Lyn Alden:
I’m not sure about percentage of population, but I think you know, I don’t think, for example to reach like the broad pension level in this cycle, I think, you know, you’re already, I think kind of the adoption you’re seeing now where you’re getting more mainstream interest and you’re getting a variety of funds, especially hedge funds and things like that that are on the more nimble side of institutions. So I think, I think that’s where this cycle ends up is, you know, kind of the faster money gets in and is able to get in. And I’m curious to watch Google trends because, you know, we saw during every time there’s been a previous kind of cycle peak for Bitcoin, there’s been a spike in, in Google trends, searches for it. And of course the, the 2017 spike was massive.
Lyn Alden:
Cause that’s the one where it really kind of hit adoption. And we’re still not seeing one of those. We’re still not seeing one of those search spikes yet. And that could be because enough people, you know already figured out from the last search and so they don’t need to search again, but at the same time, I’m still get questions from clients. Like how do you buy Bitcoin or what is the best exchange to buy Bitcoin? Or some people still have to search for things like that if they want, if they go from having heard of it, but actually wanting to own it. So there’s, you still should see an increase in search activity around certain types of terms and not just like a mild increase. You should see a spike somewhere to 2017. Now I’ve heard, you know, I know some podcasters are reporting that their listens are going up.
Lyn Alden:
So that might be, it might also be the case that we’ve increasingly heard, instead of searching for it you know, on Google people might be hearing it more and more from podcasts. So it’s not a perfect metric. But I think, you know, I’m viewing it more as kind of like what level of asset manager will it get to. And so I think basically we’re at the level it’s going to get, just more and more of it. So we have, you know, some hedge funds flowing in. But I think by the end of the cycle, you could have a lot more of that, that fast money in as well as continued retail adoption.
Stephan Livera:
Yeah. I think very prescient comments there. Also, I’m curious if you’ve got any views on, let’s say what kind of news articles or events happening over this cycle that might indicate to you that, okay, we’re looking a bit toppy now, a little bit frothy. Are there any kind of ideas in your mind there in terms of what that might look like?
Lyn Alden:
So some of the on chain indicators are good, like realized value compared to market value, I think is a good one. You know, just basically once, once the technical signals are like extremely, extremely overbought you know, again, like plan B has really good models showing, you know, what is the relative strength index on a monthly basis for previous bull runs as an example. So I would continue to monitor some of those euphoria indices you know, even in this, in this recent you know, kind of a bull move and, correction, you know, part of the reason I, I got a little bit cautious, you know, wanting to make sure my you know, readers were ready for a potential correction was I started to see kind of a euphoric sentiment you know, at least within the community.
Lyn Alden:
So once you’re at the point where you’re comparing Bitcoin’s market cap to JP Morgan, and you’re also, you’re also, you know, you’re touching you at new all-time highs, that’s kind of a classic resistance level. It was basically a perfect storm of reasons to expect that we’re going to run into some turbulence here. And so that was kind of an easy call to make, but then of course the hard part is wondering how long would the correction go? How deep would it go? And that’s why I didn’t try to trade around it. I just said, you know, just don’t be surprised when we probably see one here. And so I’m looking at mostly in terms of how long we go into this Halving cycle. What does the price action do? What is some of the technical indicators look like compared to previous cycles?
Lyn Alden:
What do some of those fundamental indicators like market value versus realized value and just kind of look for comparisons there? I don’t really plan on trying to time a top but, you know, unlike some Bitcoiners that say never, ever, ever sell you know if it balloons to a significant chunk of my portfolio, I wouldn’t mind, you know, explaining to people that, you know, they all have their own risk tolerances. And so that I do think it is getting frothy here and that, you know, people can interpret that however they want for their own situation. It could be, you know, implying that you’re in for another multi-year consolidation, which some people wouldn’t mind holding through, whereas other people might not want to see their gains, you know, go down 50% and consolidate. And so they might want to shift profits and just kind of rebalance their risk profile.
Stephan Livera:
Gotcha. Yeah, for sure. And I think there’s also a change in the narrative as well. So as you were pointing out in 2017, it was a bit of a, it was a mix of, you know, people who were confused about Bcash and medium of exchange versus store of value. But I also think in this coming run or this run that we’re kind of going into now, I think there’s also more of a narrative around regular accumulation, right? Dollar cost average, stacking Sats.What kind of an impact do you think that will have if more and more people are just every week or every month or every day, even just buying a bit?
Lyn Alden:
That’s good. I mean that can smooth out the volatility and that’s, you know, in addition to the larger market cap, I think that’s one of the reasons why you could potentially see, you know, even though you still see a lot of volatility, I think there’s a case you’ll see less volatility as this grows because as more and more people, you know, they look the more kind of price history you have, the more people are confident to accumulate into it. And so, you know, even in my own, outside of Bitcoin, I often promote the idea of dollar cost averaging into other investments. And that’s even, even though we sometimes rotate capital from one type of investment to another type of investment, I still think the general idea of dollar cost averaging into your net worth is a good idea. And so that’s why, for example I associate myself with Swan Bitcoin just because they emphasize that dollar cost averaging, rather than that, like, you know, trading casino altcoin mix that a lot of people kind of fall into when they enter this space.
Stephan Livera:
Absolutely. I I really like what Swan are doing. They are a sponsor of my show also. So certainly I think that is an important message to carry with us as we’re kind of going through this such that people aren’t thinking of trying to like become traders, because the reality is for most people that’s just not realistic. So look, I think we’re just coming up to the end of time. So if you had any closing thoughts for the listeners, perhaps you could give us those and also make sure that you let the listeners know where they can find you online.
Lyn Alden:
Sure. I think, you know, this is it’s going to be an exciting cycle, right? Because, you know, every time Bitcoin has one of these, you know, halving events and, and you, you’ve kind of held on through a consolidation phase and you started to retest new highs. It can be really exciting time you know, and there’s going to be volatility. And I think, you know, one of the most important thing is to just kind, you know, keep an open mind to other people as you, as you encourage them to if you, if you want to sell the asset class as an idea to other people is to basically approach it from where they are. So I think, you know, some people have kind of a harsh attitude, which I love to see in some ways, cause I love the enthusiasm. But I think, you know, also if you have kind of a way of approaching people that, you know, can kind of speak to them in terms they understand I think it can go a long way to you know, showing them kind of the value of having that asset class, you know, in their portfolio, you know, why they might want to have a non-zero Bitcoin position as I often say.
Lyn Alden:
And so I think it’s just going to be a really interesting cycle to see if it plays out, like some of us expect you know, it’s gonna open a lot of questions and people, and so, you know it’s best to approach them kind of humbly and just kind of, you know, being willing to answer any questions they might have. And you know, for me, I can be found at Lynalden.com and I’m at Twitter @lynaldencontact.
Stephan Livera:
Fantastic. Well, Lyn, I’ve really enjoyed chatting with you. You’ve certainly had a lot of interesting insights to share. Thank you for joining me today.
Lyn Alden:
Yeah. Thanks for having me happy to be here.