Bitcoin as Emerging Store of Value

Hi, you're listening to Stephan Livera podcast. Today for episode two hundred and thirty-two, Lyn Alden of Lyn Alden Investment Strategy joins me to talk about misconceptions on Bitcoin, the concentration of Bitcoin, and how Bitcoin is emerging as a store of value. This show brought to you by swanbitcoin dot com, the best place to auto-stack your Bitcoin. BTC in the US with incredibly easy setup and low fees. They have recently announced availability in New York, so they are now available in all fifty US states. They have a range of new features too, just like xPub support by Gigi, so you might want to use that feature with a hardware wallet of yours and automatically withdraw to a new address each time. Swon service is built around regular stacking, but if you want to wire money in for a special smash buy, support for this is coming very soon also. That's at Swon Bitcoin dot com slash buy now if you wanna sign up for that beta. They're Bitcoin only, they're focused on teaching people to self-custody, so you should send all your new coin to friends there. This is a company focused on helping customers stack sat safely and easily, so go to swanbitcoin dot com and sign up. Unchained Capital is building Bitcoin native financial services on a foundation of multi-signature. Their multi-sig vaults are designed for ultra-secure long-term storage, so if you're thinking about your security and you're concerned about the rise in Bitcoin price and your security situation, well, look into Unchained. They can give you the white glove treatment if you need it, and they can ship you some hardware wallets, answer your questions, and deposit a thousand dollars of Bitcoin in your vault using their concierge service. And if you use the code Livera, you'll get a discount when you do that. You can also buy Bitcoin through their OTC desk for purchases fifty thousand dollars or higher straight into your new vault. This is a great option for self directed Bitcoin retirement accounts and for companies moving Bitcoin to treasury. They offer advanced business accounts and they can help move your corporate treasury to Bitcoin, where your team controls the private keys. Go to Unchained Dash Capital dot com for more. We often talk about security and backups on this show also, and that's why you should consider Cyphersafe at Cyphersafe dot io producing the Cypherwheel product. This is a metal backup product for your Bitcoin hardware wallet seed. So if you've got the bip thirty nine seed, don't just keep it on that piece of paper, make sure you're using something that's fireproof. proof, waterproof, rustproof, petproof, and tamper evident. So the cipher wheel comes in a wheel shape and you slide in the tiles, four tiles for each word, and make sure that you or your loved ones have access to your bitcoins if an accident occurs. Go and order yours at ciphersafe dot io and use the code livera for a discount.

Lyn, welcome to the show.

Hey, thanks for having me.

So, Lyn, I've been following your work, I've seen you've been, writing about Bitcoin and saying some 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.

sure, yeah. So I, I, I come at this from a, a broader, investment perspective. So, I, 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 cover digital assets, notably Bitcoin, a handful of times. so, you know, I, I, I originally encountered it back in 2010 or 2011, and I thought it was neat, look into it too deeply. and then it was, it was during that twenty seventeen bull run where I started to get more and more emails from people as it, as it kind of, reached the mainstream. And so I, you know, I, I dedicated a long form, research article, into Bitcoin and to some extent into, into the, the broader, digital asset space, just because that was also the season of altcoins. and so my approach back then, you know, that, that came out, you know, about

About seven thousand dollar 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, at-- I didn't, 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 scarce, so Bitcoin's scarce, but what if all the money that pours into the sector just goes into all these different protocols, and, you know, there's not one protocol that's able to have a strong enough network effect to maintain like a, a dominant market share? And so I, I had some concerns about that, and, also just, you know, that was, after many, many months of, of strong bullish act, accent. So, I was worried about the overall euphoria and sentiment I took no position. I, I, you know, I said if people wanna 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, a, a blow off top and then a, a, a crash and a multi-year consolidation. And I kept, I kept monitoring the space to some extent, and, you know, 'cause I, I'm interested in it, but I never really took the time to go another layer deeper

You know, corrections or, or things like that. And then, once we had that sharp correction, in March of this year, I got, I got quite bullish, and that's also when I, I, 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, in my twenty seventeen research piece. And so, I went long in April, and, you know, then I continued also looking more into it, increased my Public one in July and then a follow up here in November. And so, you know, overall, it's been, it's been a, you know, as I learned more about it, I became more bullish on it. And I, I'd say the one reason I, I became so bullish is that a lot of my concerns about twenty seventeen 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 a network advantage, and so I, I 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 six, nine hundred. So I was like, okay, it's the same price, but it's, it's de-risked, so, you know, I'm more bullish now.

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 four thousand 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, see, it's all dead, it's all over," and ev- 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 ten thousand to maybe four thousand or so in March twenty twenty. So what was your thinking

there? Yeah, The events of, 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, and, often accompanied by fiscal, spending and other sort of, you know, policy response, that's when you usually In, in many of those, you know, assets like gold. And so you can see the same thing happen, you know, in the early two thousand recession, you can see, see the same thing happen in gold in the, in, in, you know, in 2008. And so I, I view basically Bitcoin as behaving similar to the metals were. And, and particularly, I mean, silver got crushed around March as well, and I was, I was very bullish on silver. I mean, that fell all the way to like twelve dollars an ounce. And 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, it went down to something like four thousand, and then it was, it was sharply coming back up, and that's when I said, okay, you know, we're, we're definitely in the, the rebound phase here, and I was pretty bullish at that point.

And that's one of the really ha-- the hardest things to do as an investor is to be actually buying when, when there's blood That takes some real skill, wouldn't you say?

Yeah, I think so. And, and, you know, at the same time, there's, if you're-- It's almost like a trap because a lot of people are afraid to buy when there's blood on 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, you know, do that, they often have a tendency to sell too early, right? So now, now we've had a giant gain, and so I

Search for other clients, and they all have different risk profiles, and I'll explain like, okay, you know, we've, we've, we've doubled our initial investment, depending on how much people put in, I can see they might wanna rebalance, but me personally, I don't plan on, on selling at this point, just because I don't think, 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 wanna have taxable events or anything like that. So, you

That's a great point. And historically, there were many people who maybe they bought some Bitcoin at one dollar and then they sold at ten dollars, and they're thinking, "Oh, wow, I got a ten x," 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?

so I, you know, I've seen a lot of and so I, 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 ten trillion, and even the part that's for private investment purposes, so if you factor out the central bank and the, 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, you And then if I think beyond that, I, I do, you know, there are arguments for it could be much larger than, than gold because, you know, it, it ca- it fixes some of the issues, that gold has. For example, it's verifiable, it's more portable. 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'm, I wanna see how it performs, primarily emphasizing its store of value. And that's also another shift I had from twenty seventeen to twenty twenty, because in my twenty seventeen article, I was examining it both as a medium of exchange and as a store of value, because there were, there were kind of competing narratives at the time. And so my conclusions back then were that as a medium of exchange, it's probably overvalued, and I, I showed different quantitative reasons why. But I was like, okay, but, you know, if it were to have a rapid adoption, it, it could justify its price, but, you know 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 ten percent of gold's market share, if it takes fifty percent, then you can get some pretty bullish numbers here on Bitcoin. So even in my twenty seventeen article, I, you know, I, I, I looked at the, the long term potential, but I was kind of torn between narratives and, like I said, concerned about the, the network dilution. And so in twenty twenty, with those risks addressed and emphasizing the store of Kind of quite bullish on it.

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 permeable. And so how do you think about that kind of, you know, when you're approaching the world and you're, the way you're analyzing things is, you know, not necessarily a Bitcoin specialist?

so I, it, it, I think it can add a degree of objectivity, and, so I, you know, I, 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 permanent bulls on gold, for example, you know, whereas I, sold my physical gold in twenty eleven, and whereas a lot of, bulls at the time kept holding and holding and holding. And so, basically, you know, for me Barbarish 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 was I, I, you know, I, I, I basically tried to take what some people were saying within the community and explain it to people that maybe weren't in the community. And coming from someone that, that kind of approaches multiple asset classes, it turned some people onto it that might not have otherwise seen it. And I think that's, that's kind The space is basically say, you know, without blinders on, what asset class am I, am I bullish on, what asset class am I bearish on, and, you know, looking out at the long term, I'm, I'm quite bullish on Bitcoin. And, you know, occasionally, like for example, back on, November twenty-second, I, I, I, part of a research note, I warned my, investment clients that probably Bitcoin is near-term overbought, and I, you know, I'd be actually welcome to see a correction

here, but I mostly did that for, you know, 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 so I, you know, I think having that, that multi-asset kind of approach can, can help people kind of navigate these markets a little bit.

For sure, and I think it's also historically true to say that during these bigger bull cycles, there are often these little thirty percent pullbacks along the way. So I suppose that's something you've also been-- you must have also been looking at, right?

Exactly. I showed them the, you know, the twenty sixteen, twenty seventeen charts. there were multiple thirty, thirty-five percent pullbacks, and, you know, I don't know if this particular run would be quite that volatile, but it's certainly possible it will be. And so basically what I emphasized was, you know, I 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 sure, the, you know, more and more indicators are showing kind of near term, you know, multi-week probably overbought, but this is still nowhere near the type of, euphoria we saw in, say, late 2017 or the previous kind of major having cycle peaks.

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's interesting, but look at the massive energy use it takes"?

Yeah, so I, I, I learned a lot from people in the industry, you know, because there are of course people that are specialized 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, as a, as a non-expert a-and but from my like, deep research into it, and take that and, and apply that to some of the common, criticisms. And so with energy, I, I point out a couple things. One is If we're talking about a decentralized store of value, so gold, for example, requires a massive amount of energy to get every single, you know, 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 it into its final form. 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 its hash rate, goes into its security, and is what separates Bitcoin from, from most other stores of value and especially from other, you know, alternative digital assets. and so basically was saying, okay, it consumes a lot of energy, but you can make the argument that, that this asset makes that energy worthwhile because it gives people options they didn't have before, and so there's kind of that, you know, the market currently is saying that it's, it's worth To put that energy into it, and that there's a demand for that energy. the second one was, you know, going along, points that people make that Bitcoin really kind of optimizes to, to find, 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. 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, Aluminum, because it's a very electricity intensive, process. And so they basically said, okay, we have this resource, and so we're gonna put it to use in this way, and, and we're basically gonna export our ener-- our electricity cheapness in the form of our aluminum, refining. And so Bitcoin's kinda similar in that, you know, if there's, you know, overbuilt hydroelectric dams or if there's stranded oil and gas like some people in the industry specialize in, those resources can be put into Bitcoin. so I, the amount of energy usage, as part of my bullish thesis.

I see, yeah, and, I think it, it could also arguably said that, 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?

Yeah, I think so.

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, it can go through these crazy swings in, in the space of a few months, it can, you know, it can ten x or whatever, and, and then it can drop heaps." what, what do you normally-- how do you think about that when, thinking as an investor there?

Yeah, so I, 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 isn't that it's currently a, 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 a down payment. So it's not a savings account in that sense. but, you know, an analogy

Fifty years, it's, you know, it's still, it's still valid, it's, you know, pays good dividends, you know, that's a stock that's a, a decent store of value. It's, 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, of companies like that. Whereas if you have a small growth stock, it's gonna be more volatile, but then you have more potential from it because you're, you're, you're pricing in the p 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, 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 Because it's, it's a growth of value, it's a, it's a, you know, multiplier of purchasing power rather than merely a maintainer of purchasing power like gold generally is.

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 analogy.

Exactly.

Yeah. Yeah. and, also in your writing, I've seen, this kind of- Explanation of perhaps the phenomenon of Bitcoin, right? So you, you talk about this idea of the constant low-key influx of new capital, right? Because all 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 out there with that dynamic?

Yeah, so I, 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, I didn't have an opinion about the accuracy of the, the forward projections of the price. I kind of, I kind of disregarded that part of the model, but what's valuable to me were, were the quality of the charts, that linked the price, of Bitcoin over time strongly to the halving 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 a halving cycle tend to be more about consolidation and kind of finding a balance until the next halving period happens. and so I, I kind of stepped back and just logically, you know, did some thought experiments and said, okay, if you have a set number of coins, if new capital wants to come in regularly, but then you have a reduction in, in new During that time. And so even with pretty benign assumptions about how much demand has to come into the space, if you, if you have a, a situation where, you know, a lot of the initial holders aren't 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 Of, of momentum and FOMO traders coming in. and so it's basically just an extr- extraordinarily powerful incentive mechanism because it's fully transparent, so we all know it's going to happen, but un-until there's actually that kind of liquidity squeeze and, you know, more people want coins that are, you know, e- you know, easily accessible from like, you know, call it week hands or traders, whatever the case may be, it's not until that happens that you get that kind of really strong, bullish action.

Right, and, to the point that you were mentioning 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 anal-analyses to see, okay, number of coins held more than 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 that those have, been a part of your analysis.

I have, yeah, like when I was, you know, researching the halving You can see, you know, the, the percentage of coins that are held for over a year or over two years, tends to follow a, a certain pattern along with that halving cycle. So, you know, it, it tends to build up during that, that consolidation phase where you get a lot of those hodlers just kind of holding onto their coins, just accumulating, and you have that kind of rise in the percentage of coins that aren't really moving, and then during those massive bull runs, that's when you see some percentage of those hodlers start to take profits,

Start to, to sell into some of that bullish strength. You know, it could be for a variety of reasons. Maybe, maybe Bitcoin's becoming a very large share of their net worth, and so they wanna, you know, take some gains. Maybe they wanna buy a, a, you know, a, a mansion with their gain, whatever the case may be, Lamborghini. so for whatever reason, they sell into that bullish strength, and that's what, what creates some of the liquidity until you eventually have a blow off top. So I, I've, I've fundamental investor. And so I know people that use technical charts for, for what Bitcoin's gonna do, whereas I prefer viewing the fundamentals. So, you know, who's buying, who's selling, what are the mechanics, of, of, you know, what makes them wanna buy and sell, and what are the use cases. so I, I like the fact that it's, it's very transparent.

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, or it's, it's so highly concentrated." How do you, think about that issue?

Yeah, so I had, 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 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 a custodian from multiple smaller holders. but as a, as a general, you know, est-estimate, we know that it's, it's fairly concentrated. but it's, you know, comparing how, how vastly, concentrated the US stock

So much bigger, bigger, we'd expect it to be more, you know, kind of spread out, but it's not. So for example, the top ten percent of holders of the US stock market hold eighty-eight percent of it, and then the other, twelve percent is held by the other ninety percent of people. And so it's extraordinarily concentrated. And if you think of Bitcoin even further as, you know, a fairly young tech stock, right? So, you know, it might have still have a lot of insider ownership from some of the initial founders, from some of you know, so i-it's not like one of the stock that's been around for fifty years, it is like widely held, it's still, fairly concentrated. So I, 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, you have kind of that same, concentration effect in most other asset classes as well. And, you know, that does create some degree of, when you get some of those brutal sell-offs, even within a bull market, fits, but as long as people can put up with that volatility and don't lose sleep over, you know, week-to-week changes and, and, and talk about, you know, price manipulation and things like that, if you can kind of have a multi-year outlook, the, the concentration is, is probably not that big of a deal, in my view.

Right, and, I guess it just, like many other things in life, there's gonna be an unequal distribution and it's gonna be power laws and Pareto eighty twenty, 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, they perhaps feel like they don't have as many options in terms of where they can put their money. So why, why is that?

so there's a couple of reasons. I mean, one, the challenging thing is, 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 focus on the broad money supply, and so the broad money supply is increasing rapidly, especially on a per capita basis, then that's inflation, it's already inflation, regardless of what prices are doing. And so, you know, we can refer to that as monetary inflation. So, you know, the Then there's other type of inflation, like asset price inflation, which is when, you know, 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, you know, fine wine, 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 ten percent or so, and then they're storing it in, in those assets. and Inflation can happen when the, 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 have gone up, gone 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, all sorts of different factors like that, due to demographics even, due to debt, so you can have You know, Bitcoin as, 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 you're-- If you were to run deficits, there's basically a couple different models of government financing. So you can tax from one part of the economy and spend into Economy, and it's just kind of a rearranging of, 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 gonna issue treasury bonds, extract capital, you know, from volunteers that wanna buy those, and we're gonna also put that some of the economy. And again, you're just kinda rearranging things. However, when you're running large deficits, that the central bank is printing new dollars to buy those treasuries, that actually directly increases the broad money supply,

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, 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, that's a, a key part of, of kind of, you know, most structural,

I see. And so, in your view, then, is it mostly an American story or a US story about, people wanting to buy Bitcoin, or are you seeing a case there for people in other countries around the world also?

it's pretty widespread. So, you know, I, I, I cover, something, called the long-term debt cycle frequently. that was a topic that was popularized by Ray Dalio, and it's, it's something I've done a lot of additional work on. And that's the idea that, you know Where you have, you know, a- when you have a business cycle, right? So you have a recession, and then you start to get, you know, a deleveraging event, that's when the government comes in, you know, the central bank cuts rates, the government does stimulus spending, and you stop that deleveraging about halfway through, and then you start building up leverage again. And so if you string multiple of those short-term business cycles together, you're never really deleveraging all the way back down to where you're starting. And so after five, six business cycles At the same time, interest rates 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, that lower interest allows all those entities to hold more and more debt relative to income, relative to GDP, and then that, that party kinda stops once you hit the zero bound, because you can't, you can't realistically cut

You need basically to eliminate cash, you've got to go deeply negative, 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 deleveraging the system. So instead of deleveraging nominally by, you know, defaulting or paying back the debt, a lot of it gets partially inflated away, so the money supply goes And so that's something that is happening in the United 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 a ton of debt in Japan, China's, you know, private sector is incredibly, leveraged, and so it, it's mostly worldwide phenomenon, more so in developed countries, 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

Government can't print that away, they can't, so that, that's why emerging markets tend to have more inflationary crises more often, and that's why they tend to, like, 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 even just, you know, not even like a full failure, just like a constant loss of purchasing power. And so I view it mostly as a global story.

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Yeah, pretty much. I mean, that's, that's what we saw to the buildup of the, of the two thousand and seven, bubble. So after the, after the stocks crashed, you know, after two thousand, 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, That kind of policy that incentivizes bad behavior combined with their willingness to, to behave badly, can cause those bubbles. and, you know, more broadly, the way that the global monetary system's designed ever since the early seventies, ever since we, 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 wanna have positive trade surpluses and, and, you know, so a lot of these, countries- To have mercantilist policies where, you know, they'll, they'll print money to buy, you know, more and more foreign exchange reserves, in a, in a, specific, attempt to weaken their currency. Now, of course, they don't want their currency so weak that it looks like an emerging market currency where, you know, the 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 the, So right now, for example, you know, China's running surpluses with United States, Europe's running surpluses with United States, and so they have this incentive to kind of keep their currencies, you know, weaker than they should be based on a trade balance basis, because they wanna keep that business flowing. And the United States, we've been on the, 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 '70s, we've, you know, global monetary system mostly based around energy pricing, and just this, this big, you know, weird incentive structure we've had for decades.

Yeah. and there are also some, You know, interesting or unfortunate consequences when governments go into too much debt, aren't there? it's, it's, I, I know you were also commenting about what typically happens once they get above a certain debt level, that 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?

Yeah, event horizon. So, you know, the study I was referencing showed that, you know, over the past two hundred years, there were, you know, fifty-two countries that went over a hundred and 13 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 that allowed them to, to hold on to that longer than anyone else. So for example, they, 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, of trade surpl Japan owns more foreign assets than, foreigners own of Japanese assets, and so they have this, they have this constant stream of income flowing in from their assets around the world. And so they, you know, plus their highly organized culture, low, low unemployment rate, they've basically been able to, to push that longer than anyone else. But generally, once you get above a hundred and thirty percent debt to GDP, you generally start to see a degree of currency devaluations or default. And in the United States case, and of, of course, that can take different-- That 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. So the Federal Reserve said, "We're going to hold treasur- Treasuries across the entire duration spectrum at two point five percent or below. So, so T-bills were held at like point three eight percent and the long end was held at two point five percent, and the Fed was able to maintain that peg by saying, "We're gonna print money and buy Treasuries as needed to maintain that peg." And so, even though inflation had these double digit spikes in the nineteen forties, there, there were 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

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.

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, what are the typical, valves or areas that they get pushed into?

Well, we've seen, you know, more and more pensions get pushed into equities and pushed, you know, further into the volatility spectrum, and private equity even, even including, you know, pensions that have been bag holders some, some really bad kind of private equity, you know, things like financing shale oil or whatever the case may be, just a bunch of uneconomic pro-uh, projects. And it's challenging for them because pensions have often had like a seven percent return target, seven or eight percent, you know, which, which could make sense if Expect a little bit more than that, so you can say, okay, with a, with a balanced portfolio of equities and bonds, we can get, you know, we can comfortably get seven or eight percent. But we're in an environment where, where year-yields are near zero, and then stock valuations are consequently pushed very high, right? Because people are willing to pay up for stocks because they're, you know, compared to alternative of bonds, so you, you jack up the stock valuations and, and lower the forward expected returns, then you're in an environment where all these You know, you can kinda have projections and say, okay, you know, we can, we can keep the can down the road and say, you know, if we're, 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, if they reduce their target returns, then they basically admit they're insolvent. And so they have to kinda maintain the illusion of solvency, by still maintaining these pretty high return targets, that they often don't meet History, bonds aren't unlikely to do well on, 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, are, you know, through financial oppression, yield curve control, either formal yield curve control or informal yield curve control, you're, you're just gradually chipping away your purchasing power, and that's on a best case scenario. If, if in a worst case scenario, you could have a, a spike in inflation while those yields are still held quite low.

Yeah, it's a very, difficult situation, and as you point out, that when the world is in, even from a stock market perspective, if, if the valuations are already very high, then from a cape cyclically, cyclically adjusted price-earnings ratio, you can't be expecting really great returns to come from the 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's Probably isn't big enough yet for them at, you know, as we speak today, Bitcoin is around three hundred and fifty billion as a total, you know, kind of asset, and, I guess what's, what's, your thinking around that, around the si-- the relative size of Bitcoin as a market compared to, say, gold or stocks or other, other investable, assets?

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.

Gold among, you know, institutions around the world, gold would have to be much, much more expensive, the market would have to be much bigger to be able 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 a somewhat more defensive asset in your portfolio, in, in that environment of low real yields. And so, you know, Bitcoin as a, as a small fraction of gold's market cap has that, has that problem multiple times over, which is, is tiny compared to

It, it go up the ladder. So, you know, Bitcoin used to be a, a retail phenomenon. You know, individuals kind of, you know, either developed it or found it and it kind of went from the ground up. then you have kind of adventurous institutions hop on board. So you 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 and hundreds of billions, and so they're able to be nimble enough, or, you know, Employ their capital instead of, you know, a complicated kind of model. And so, you know, you kind of go up there, so you start 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.

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 wanna, they wanna dip their toe in the water, right? Take a small amount, and then as this thing grows, they're probably gonna be more happy to hold a higher percentage, wouldn't you say?

Yeah, kind of like, you know, gold, for example. I mean, e-- today, if you have an investor interested in both gold and Bitcoin, they'll usually have more money in gold because, Probably won't make up tomorrow and, and gold's down thirty percent, whereas Bitcoin has a higher probability of, of something like that happening. And, you know, so as people manage around risk adjusted, you know, returns, they generally de-emphasize those more volatile assets. And so that leaves, that, 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, that have a long time horizon, they can overweight Bitcoin more so than some of those And so, you know, I think over time, if Bitcoin grows larger and it becomes less volatile, then I think you can see, people put more of an allocation into it. It's also a narrative thing. So for example, you know, back when it was associated, people would associate with drugs or criminal activity. Some of those narratives are still around, you know, but, 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

Flood in, because they're not the, you know, not, they're not the first anymore. They're not, they're not 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, we're, we're allowed to view it as an asset class now, and so you can, you can, you know, start to have that floodgate open. And I think it was, you know, Neil Ferguson's article. We 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 one percent into Bitcoin, you know, 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 wanna hold it, and some millionaires might wanna have more than one percent. So, it's just, basically, the market cap is still tiny compared to the potential, if, if it continues to catch on and grow, and more and more people wanna

Right. and, as we've seen historically in Bitcoin, it has tended to move in these, well, historically four-year cycles. do you have any thoughts around- You know, 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, do you think it will be in terms of percentage of the population, as we say, over this next few years?

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, you're getting more mainstream interest and you're getting a variety of, funds, like 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 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 twenty seventeen spike was massive, '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, already figured out from the last search, and so they don't need to search again. But at the same time, I mean 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 a, an increase in search activity around certain types of terms, and not just like a, a milder increase, you should see a, a, a spike similar to twenty seventeen. Now, I've heard, you know, I, I know some podcasters are, are reporting that their, that their listens are going up, so that might be, it might also be the case that we've increasingly heard, you Big metric, but I think, you know, I'm viewing it more as kind of like what level of, of, 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.

Yeah, I think very appreciating comments there. 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, it's a little bit frothy. Are there any kind of ideas in your mind there in terms of what that might look like?

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 was 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 bull move and then correction. You know, part of the reason I, I got a little bit cautious, you know, wanted to make sure my, you know, readers were, were ready for a potential correction was I started to see kind of a euphoric sentiment, you know, at least within the community, right? So w- once you're at the point where you're comparing Bitcoin's market cap to JP Morgan and you're, and you're also, you're also, you know, you're touching new, new all-time highs, that's kind of a classic

Kind of an easy call to make, but then of course the hard part is wondering how, 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, when we probably see one here. And so I'm looking at mostly in terms of how long we go, you know, into this halving cycle, what does the price action do, what do some of the technical indicators look like compared to previous cycles, what do some of those fundamental indicators like market value versus realized value

Some, bitcoiners that say never, ever, ever sell, you know, if it, if it balloons to a, 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, you know, interpret that however they want for their own situation. It could be, it could, you know, implying that you're in for another multi-year consolidation, which some people wouldn't mind holding through

Consolidate, and so they might wanna shift profits and, and just kind of rebalance their risk profile.

Gotcha. Yeah, for sure. And, I think there's also a change in the narrative as well. So as you were pointing out, in twenty seventeen, it was a bit of a-- it was a mix of, you know, people who were confused about B-Cash 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

Average stacking sets. do you, 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?

That's good. I mean, that, 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 we made you'll see less volatility as it's 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,

Take capital from one type of investment to another type of investment. I still think the general idea of, of dollar cost averaging into your net worth, is a good idea. And so that's why, for example, I, I've associated 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, the space.

absolutely. And 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, be, become traders, because the reality is for most people, that's just not realistic. Yeah. 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 you let the listeners know where they can find you online.

Sure. I think, you know, this is, it, it's gonna be an exciting cycle, right? Because, you know, e-every time Bitcoin has one of these, you know, halving events and, and you, you've kinda held on through a consolidation phase and you start to retest new highs,

Just kind of, you know, keep an open mind to other people as you, as you encourage them to, if you, if you wanna sell the asset class as an idea to other people, is to basically approach it from where they are. So I, 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, a, a way of approaching people that, you know, can kinda speak to them in terms

Having that asset class, you know, in their portfolio, you know, why they might wanna have a non-zero Bitcoin position, as I often say. And so, you know, I think it's just gonna be a really interesting cycle to see if, if it plays out like some of us expect, you know, it's, it's gonna open a lot of questions in people. And so, it, you know, it's, it's, it's, it's best to approach them kinda humbly and, and just kinda, you know, being willing to answer any questions

Certainly had a lot of interesting insights to share. thank you for joining me today.

Yeah, thanks for having me. Happy to be here.

I hope you enjoyed the show and I just wanted to let you guys know I've got some really big guests coming on the show this month, so make sure you are subscribed in a podcatcher application so that you don't miss out. Get the show notes at stephanelivera dot com and as always, any reviews will be very much appreciated. Thanks, and I'll see you in the citadels.