SLP267 Joe Burnett How Big Is The Market For Bitcoin?

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Joe Burnett of Mimesis Capital joins me to talk about just how big the market for Bitcoin could really be. Hint: It might be bigger than just the market for gold. We talk through valuation in a post hyperbitcoinization world, and we also explore the Bitcoin Contango trade.

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Podcast Transcript:

Stephan Livera:

Joe, welcome to the show.

Joe Burnett:

Appreciate it.

Stephan Livera:

Joe, I’ve been following some of your work. I see. You’re one of those young Bitcoin Zoomer gun guys whose been writing a lot of interesting pieces and wanted to get you on the show and chat a little bit.

Joe Burnett:

Yeah, no, it’s great to be on the show. I’m a long time listener, I guess.

Stephan Livera:

That’s great. Oh, that’s cool. So yeah, let’s get a little bit about you. How’d you get into the Bitcoin aspect of it? What was the appeal for you?

Joe Burnett:

Yeah, for sure. So I first got into Bitcoin, I guess I would say pretty late, like around 2017, summer 2017. And I remember following it on Reddit and thinking, I have no idea what this is. So it took me months before I even decided to put any of my own personal funds into it. And eventually I was like you know what? I Might as well just throw a little bit of money. And two, at the time I had no idea what I was doing. So I put some money into some altcoins or whatever, but I had been investing in stocks since I was a really young kid. And and you know, of course at the end of the bull run, everything just went crazy and I made like 10x and obviously didn’t sell at the top, but on some random coin and I was kind of hooked ever since. Of course now I’m definitely Bitcoin only, but yeah, after I saw that like, you know what, the potential, like what this stuff is and kind of just got hooked. I fell down the rabbit hole after that.

Stephan Livera:

So Joe, I’ve seen, you’ve been writing a little bit about how big the market for Bitcoin really could be because there’s different numbers that go around. What’s your way of thinking about this question?

Joe Burnett:

Yeah. So I guess first before I start to address what I think the potential market size of Bitcoin could be. I think it’s important to like understand like what possible markets we’re comparing it to and like why Bitcoin could possibly replace certain parts of the financial system. So Bitcoin is like the world’s best monetary good. And it’s good because it’s perfectly scarce, portable, durable, divisible, et cetera. And because of these unique properties. Individuals or corporations are incentivized to save Bitcoin. And in a way like Bitcoin is like a game theoreticSchelling point that individuals have been converging on. And so those that converge on Bitcoin first are economically rewarded. And even at full adoption, Bitcoin is still the ultimate savings technology because everyone needs money.

Joe Burnett:

And so one way that many people have thought about comparing Bitcoin to like the traditional world or the analog world is comparing it to gold. You know, you hear Bitcoin is digital gold. And so gold’s market cap is roughly around $10 trillion. And if Bitcoin just became the equivalent of physical gold in the digital world. It would be half a million dollars per Bitcoin. And so that’s just in my opinion, one of the, like the bearish possible scenarios for Bitcoin, because I think comparing Bitcoin to gold would be a lot like comparing Alexander Graham, Bell’s telephone to the iPhone. It’s just, yes, it has the basic functionality of the telephone, but there’s just so much more and the properties of the iPhone and the properties of Bitcoin are so much superior to the analog world that that’s just the tip of the iceberg of what Bitcoin could possibly be worth.

Stephan Livera:

Right. Yeah. And so I think that’s also a common even on prior shows, I’ve discussed with Vijay around different potential cycle valuation models and gold being one of the common ones. And then I guess the idea is Bitcoin actually sucks up not just gold, but also some of the market for monies today and potentially some of the other stores of value that the world is using because the money today, fiat money is broken and flawed and that’s why people cannot use it to save.

Joe Burnett:

Absolutely. So, as I said, like the gold case for Bitcoin is my opinion, one of the most bearish low level cases we could go a step further and say, Bitcoin will eat or replace gold plus M2 money supply, which M2 money supply is basically money in your checking and your savings account. So Fiat money that we would think of today and if you replace the total value of M2 and gold, then it would, we would already be sitting at roughly $5 million per bitcoin. And we could even go potentially even further. If we decided to add all global debt into what Bitcoin could possibly eat considering interest rates are basically all time lows and people that hold these hundreds of trillions of dollars worth of credit for debt financial markets they’re looking for a safe store of value and Bitcoin could potentially replace debt. And so if you add in global debt to the potential valuation of Bitcoin in addition to gold and M2, you could be sitting at $17 million.

Stephan Livera:

Right. And so I think we have to distinguish like one point that’s important to make here is that all the money in the world, I mean, yes, fiat money is inflating and they’re making more of it, but the money exists in someone’s accounts. So really what we’re talking about here is the relative valuations of those things changing, right? So if there’s certain amount of money in a certain amount of fiat dollars circulating around out there, it’s really sitting in people’s accounts and it’s just moving from some people’s accounts to other people’s accounts. But really what’s going on here is people are changing their mental valuation of that US dollar or their faith in that us dollar or in obviously in other fiat monies also. So it’s kind of just a change in the relative valuation of Bitcoin versus other fee out monies or versus fiat monies, or versus some of these potential stores of value, things like historically gold. And even as you’re saying, the bond market and the debt markets that are out there. And I guess this also plays into that whole theme, which often I’ve mentioned on the show and other people talk about is this idea that we’re shifting from a very debt-based economic system into a more equity-based one where the incentive is not to, the fiat standard rewards, people who take on a lot of debt and who can play that debt game. Well, the Bitcoin standard will be different.

Joe Burnett:

Yeah, absolutely. So like you said, the Bitcoin standard, it likely won’t be based on debt. And in fact we are, I expect that the debt market in a Bitcoin world will be a very small almost nothing or at least very short-term debt, nothing like 30 year bonds, like, like we would see our 10 year treasuries or whatever. We just likely won’t see people willing to loan out their Bitcoin for that long because Bitcoin will likely be still appreciating in value you know, year after year due to, you know just like the price of tomorrow, just growth deflation. And so going after like throwing out the those, those like price, potential price targets, it’s very difficult to like estimate what a single Bitcoin could be worth, because we really don’t know the propensity to hold Bitcoin that individuals and corporations and like local governments may have, we also don’t know how much people will value Bitcoin’s risk-free nature and no dilution risk. So it’s possible that like people that have significant amounts of wealth won’t necessarily have all their wealth in stocks or how all their wealth in real estate, it’s more likely that they would have a large portion of their portfolio in Bitcoin going forward.

Stephan Livera:

Yeah. That’s a really tough question because it will be like people have to figure out okay. So assuming full adoption people would then have to think about what kind of return quote, unquote return really what we’re talking about is the growth deflation rate or the kind of the gentle beneficial deflation that we would all be experiencing if we all lived under a Bitcoin hard money standard. And then also if people want to get a return or at least an increase in their purchasing power above and beyond what that normal amount is, that’s where they’re going to have to take some risk and put that into some kind of equities or into some kind of project to try and actually generate return. So how are you thinking about that and how are you sort of, I guess, theorizing about how that might come about?

Joe Burnett:

Yeah. So it will be interesting to see how, like the equity and stock markets develop over time, because we’ve already kind of seen like some sort of Bitcoin lending market, like developing, like with things like BlockFi, where people are going out and earning either 6%, or I guess if you have a large amount of Bitcoin, it’s roughly about two percent now, and obviously that’s more debt based not equity based, but we would we could expect Bitcoin holders to basically determine at what equity risk premium. They are willing to part ways with their Bitcoin and in today’s world when people are pricing equities many use like the US treasury yield as like their risk-free rate. and that’s kind of true because the government can always print more money if needed or tax the population.

Joe Burnett:

But obviously the issue with that is that the dollars that you get back in 10, 30 years or five years may not be worth much. But they are likely to never default. And so when valuing like equities or stocks and today’s world you know, you attempt to like do a discount cashflow model. So you predict your future cash flows that a company would generate, and then you discount those cash flows back to the present value value using a discount rate. And in today’s world this discount rate could be the 10 year treasury plus an equity risk premium. And the equity risk premium is simply the reward that you would expect to be compensated for the extra risk you’re taking by investing in a company rather than like lending money to the government itself. Now in a Bitcoin world, like we’re talking about an equity risk premium would be the excess return that investing in stocks is expected to provide over a risk-free real return of simply holding Bitcoin, or this could also be based off, you know like Lightning Pools the potential risk-free or at least non-custodial or non counterparty risk-free that you can earn lending out liquidity on Lightning network, but the equity risk premium in the Bitcoin world is definitely very difficult to predict because it will ultimately just come down to what Bitcoin holders are willing to part ways with their Bitcoin for. Because they will be the ones that basically determine the risk premiums that they’re willing to accept for giving up their Bitcoin.

Joe Burnett:

And so anyone can give their best guess on, on what this will be based off like the 6% that many are earning off something like BlockFi, we would expect the equity risk premium to be slightly higher than the debt risk premium, because equity is just simply more riskier than debt. And so it can be something like anywhere from zero to 30%, maybe 10% would be a good.

Stephan Livera:

Gotcha. Yeah. So I guess walking that back, just for listeners who aren’t as savvy with finance and economics and finance classes and stuff that some of us would have had at Uni, the point with the current modeling for a lot of equities is they do what’s called discount cashflow. So for example, they take into account the time value of money, and they put that and typically they’ll use the risk-free rate or some kind of rate there, and plus some rate as you’re saying that premium, and if you, as an example, say the total of that is 5% or it’s 10%, you might say, okay, I’m expecting a cashflow of a thousand dollars in one year. And I’m going to discount that by let’s say you were using the rate of 5%. You would put that $1,000 over 1.05 and then let’s say you’re getting $1,100 in two years time, and then you divide that by 1.05 squared.

Stephan Livera:

And so the idea is you’re doing this to try and account for the time value of money, because you could have been using that money to do something else. In this case, you could have been holding the 10 year treasury, or you could, maybe you could have deployed that capital somewhere else. And this is something that entrepreneurs will use to try to, and investors will try to use to figure out are they actually making good use of the capital? But then now that’s the current world, right? And then translating that into the Bitcoin world is a little bit different because there is no quote unquote government bond risk-free rate. We are now talking in Bitcoin terms and Bitcoin has no inflation beyond the 21 million. And so it’s, I guess it’s an open question. And we have to think about what do we think the, if you will, the growth deflation rate of the economy, right.

Stephan Livera:

To someone like some of the Austrian economists, like you know Salerno or Hulsmann who I’ve interviewed on the show or Phillip Bagus who I’ve interviewed and talking about deflation and what would that sort of look like in this kind of deflationary environment. And so I guess if you had to kind of guess at least what do you think these kinds of numbers might be in terms of the growth deflation rate, or maybe Jeff Booth might use the term technology deflation what kind of numbers are you thinking about?

Joe Burnett:

Yeah, it was a great question because it, inflation is always like a tricky topic when you talk about it on Twitter or wherever, because everyone has different definitions. You know, some people will say it’s the growth in the money supply itself. And then others will say, no, it’s like a CPI measure, I guess, just for answering this question, we’re obviously talking about technology deflation, so more of like CPI type price inflation that you’ll see when you’re buying food clothing or whatever. And so based off the research that we’ve done, we think it’s realistic to maybe expect an average like Bitcoin consumer price inflation to fall somewhere between 0% and then even negative 10%. Like the current system that we have attempts to produce supposedly 2% CPI inflation. And since the the Bitcoin monetary standard operates under a fixed supply, Bitcoin savers will be the ones rewarded with future productivity in addition to the entrepreneurs that are able to generate that future advanced productivity and the savers, the Bitcoin savers will be rewarded through lower and lower prices. It’s hard to know what that how quickly prices would decline in a Bitcoin world. But it is reasonable to expect prices to decline.

Stephan Livera:

Yeah, this is such an interesting topic, and it’s hard to estimate what that’s going to be, but we can sort of have an intuition there that over time prices are going to be falling, and we will all be better for it as consumers, because the price of the goods we buy will be coming down over time. Now, the typical question that might come at this point, we’ve had this question on the show before also, but just to have it out there, what happens for entrepreneurs when prices are falling, how do they make it work when they are operating in a deflationary, or a growth deflation or technology deflation environment? Is it that their revenue is falling, but also their costs are falling too?

Joe Burnett:

Yeah, absolutely. And this is something that a lot of the like traditional Keynesians will definitely get stuck on because in addition to investment, they’ll say, Oh, well, no, one’s going to spend their Bitcoin when you can HODL it and spend it and buy something bigger or better next year. And we’ve kind of like debunked this myth just with computers or iPhones itself. Computers are getting faster and faster every year you have like Moore’s law where, where the processes are getting faster and faster, and they’re saying the iPhones are getting better and better every year, but that doesn’t necessarily stop people from buying iPhones. Now, from the investment perspective, it’s kind of what you were saying just because you, as a business might have to lower your price to remain competitive in the market. Your costs are also going down. So the companies and the suppliers that you’re buying your supplies from are declining as well. And so, yes, your revenue, your top line growth may be declining, but as long as you are remaining competitive in the market, the Bitcoin that you’re earning year after year will be more and more valuable.

Stephan Livera:

Yeah. And the funny thing is for, and when we translate this now to an employer, or sorry, an employee’s perspective, they may see, well, there’s a few different scenarios. And I spoke about this also in my, one of my earlier episodes with Phillip Bagus. So people can check that out, but at a high level, your salary, as an employee, let’s say, might stay the same and your purchasing power might rise, or even more kind of crazy to think about is that your salary might be falling, but your purchasing power might be increasing even still.

Joe Burnett:

Yeah, absolutely. It’s something strange to think about and many people will have a difficult time wrapping their heads around that idea. But yeah, I mean, I thinkwhat would probably be reasonable to expect is throughout your career, your salary, might actually just remain the same because you yourself become more productive. You graduate from job to job B and you slowly move up the ranks. But yeah, it is something very unique to think about. And I don’t really think it will create like any major issues. I think, as long as your personal prices continue to continue to climb. It’s not a big deal that your income either remains the same or slightly declines

Stephan Livera:

Yeah, and there’s also this question as well. One of your articles, you’re talking about this idea of what store of value percentage is in equities, because as we were saying fiat money is broken. People can’t save into it. And so they are reliant on trying to put some of their savings into the stock market. How are you thinking about trying to estimate that as a percentage and what kind of numbers are we talking about here?

Joe Burnett:

Absolutely. So what we did for our research was we basically created a very simple DCF model which again is about discounted cash flows. And we created a, basically a fictional company called Wyoming Red Rib-eyes basically they are a small cap consumer staples beef supplier that raised cattle and then sells the premium beef to the us. And so we created a very simple DCF model based off what this company would be like in today’s world, where prices are increasing. And as far as prices, that’s their costs and the price that they’re charging for their goods. And so, and we, and we also assume that that the amount of rib eyes that they were selling was growing and, but in a Bitcoin world it was kind of different.

Joe Burnett:

So the price and their costs were actually decreasing. And so, as you can imagine, that changes how revenue is going to be growing over time or not growing over time. And it also changes how their costs are going to be growing over time. And in the article, I go like much more in depth on exactly how we created the model, but in short it basically reveals that with assuming a negative 5% price deflation and Bitcoiners looking for a 10% equity risk premium when valuing this specific company, we estimated that the share price of Wyoming red rib eyes would actually be worth roughly 77% less than it would be valued in today’s world. So looking at that, we kept, we kind of came to the conclusion that 77% of maybe the entire equity market or the S and P 500 generally speaking is not necessarily looking for an investment or, or like trying to grow. They’re really just looking for like a generic store of value. And so it’s possible that a large portion of stock market or equity market could reallocate to Bitcoin.

Stephan Livera:

Yeah. So then that puts up a new price in terms of what the potential, like, if you were to like, hypothetically, if we were to just kind of add those numbers up what kind of numbers does it give you in terms of Bitcoin price?

Joe Burnett:

So going back to what we originally talked about, where we had gold and into global debt, and now if we add 50% of stocks, and then we could also add about 50% of real estate, because same with equities, people are using real estate to store wealth through time. If we, and this is pretty much, you know in today’s world Bitcoin’s sucking up pretty much as much value as it possibly can. It would be about $26 million per Bitcoin, which is definitely many people would laugh or say that’s out there, but it kind of makes sense if people are you know, invested in these equities that have massive PE ratios or even PE ratios that don’t exist because these companies don’t even make money. People will move, that capital into something safe or that has no dilution risk and has no counterparty risk. That’s Bitcoin.

Stephan Livera:

So important to note that that is 26 million in today’s terms because in 10 years time, 15 years time, 20 years time the actual nominal number might be different. But what we’re talking about is kind of just loosely speaking, $26 million in today’s purchasing power is roughly what we’re talking about, right?

Joe Burnett:

Yeah, absolutely. I think looking at specific price targets for Bitcoin in nominal terms, it likely won’t make too much sense in the future, just because, I mean, you can, you can go look at the price of Bitcoin in the Turkish Lira. I’m sure if you, if you looked back five years ago today, you would laugh. People there might laugh at you for saying what the price would be. But it makes sense because nominally and this fiat currency, that’s kind of just being debased non-stop due to the extremely aggressive fiscal policy combined with endless quantitative easing in the monetary policy. The nominal prices simply, just won’t make too much sense.

Stephan Livera:

Yeah, exactly. And another point to consider is that the world we live in today has all of these various institutional arrangements that push people down a certain pathway. A quick example is the set up. So in Australia, it’s called superannuation. I know in the US it’s called 401k. And people have like their IRAs and so on. And basically the setup is basically that people are pushed into storing all this money into the stock market. Because again, coming back to that base problem, we were saying, you can’t save with Fiat money. So people are pushed into chasing for yield or chasing into and that pushes a lot more money into the stock market or into the bond market, or potentially even the property market that might not have otherwise gone there. Because if we were living under a gold standard, hypothetically, or today, a Bitcoin standard, those people might not have taken it on themselves to invest so strongly into the equity market like they do today. Because as a system, many countries around the world have kind of pushed their employees and people into this track. And so we’ve, it’s like a path dependence thing we’ve been pushed into this path. And the Bitcoin future may not necessarily be like that.

Joe Burnett:

Yeah, exactly. Well, like Bitcoin, like I said, it’s the world’s best monetary goods and the best monetary good is going to preserve your purchasing power through time. It’s going to, and that’s what it does. It’s a monetary good as it is. It allows you to send value or wealth through space and through time and today’s world, our money is just fundamentally broken and people have started to replace their savings with their 401k which obviously just includes stocks, bonds, REITS so real estate and all sorts of different risky assets that actually have risk. And instead of your money, which, which is supposed to be safe or ideally should be safe.

Stephan Livera:

Yeah. That’s a great irony is the great irony here is that if you go out and sell financial products, it’s like, no, you need to be a registered financial advisor. You need to be licensed, blah, blah, blah. They do all this stuff, but the irony is they haven’t done well at actually helping people save themselves from the problems. It’s just the system has layered on and tacked on all these different interventions to deal with the problems brought about by the first few interventions. And now we’re just living in this trash kind of as my friend Pierre Rochard would say is the high velocity trash economy. Right?

Joe Burnett:

Yeah, exactly. And to me, it will be interesting, interesting to see how like the financial advising space progressive, because obviously like you’re saying nowadays, they basically say we’ll diversify into pretty much everything. You buy stocks, you buy real estate, and you buy bonds and then your stocks need to be US equities. And I need to be like foreign equities. So they need all this different stuff. And then at the end of the day, you’re just kind of like putting up all of your eggs in 500 different baskets, and you don’t even really know what your money is doing or where it’s going or what you’re funding. So it’s going to be really interesting to see in the future, if people even need a financial advisor, I kind of suspect that you, the average person that is not extremely wealthy, I guess will just save Bitcoin, because that makes it a lot easier. There’s a lot less risk taking and you still still earn the safe, real return that you’ll be rewarded, by just the deflationary technology advancement that entrepreneurs will be basically giving you.

Stephan Livera:

Yeah. It’s a really interesting way to think about it because in a very, obviously I’m speaking in a very loose sense, it’s kind of like holding Bitcoin is like holding an index fund that tracks all of humanity’s productivity growth. And so as you know, the entrepreneurs all around, they’re all out there are working hard to try to accumulate capital and then put that into a business that can produce products and services even cheaper than some other entrepreneur or even better than some other entrepreneur. We as consumers all benefit from that. And here’s the other benefit, as employees, guess what the capital that those entrepreneurs are accumulating and investing into that business, it makes us more productive as employees, if we are an employee in that business. So it’s just a massive benefit all around. And I think this is one of those things where people look at rich people and say, Oh, see the rich people they’re holding us down.

Stephan Livera:

And, but the reality is how many yachts and things that Jeff Bezos has doesn’t impact the ability of people like you or me to enjoy our lives. But the reality is the capital invested by these rich people and billionaires and so on is making our lives better in the sense that we can buy products cheaper. And it also increases the productivity of our labor because as employees we’re able to use advanced machinery or computers and the internet and printers and whatever other technology that we need to actually do our jobs that’s for employees.

Joe Burnett:

Yeah, absolutely. I think it kind of goes to the idea of the Cantillon effect where the people that are being rewarded in today’s society are already very wealthy because quantitative easing purchases bonds and lowers yields, and that bumps up the asset prices of everything too, and a debt based monetary system like we have today that kind of keeps the economic machine going. And I think like you said in a Bitcoin world, the technology and the growth that we see actually get allocated to, the people and to what actually helps everybody. And I think part of this, this like interesting dynamic is why we’re seeing the rise of socialism and MMT, because people, you know are, have kind of recognized that it’s kind of rigged. That everyone is kind of just a debt slave and the people that get rewarded when stocks go up are the people that have a small amount of money in their 401k or don’t have any money, or they’re just in debt up to their eyes.

Joe Burnett:

The people that get rewarded are the people that are simply own tons of real estate, or tons of stocks. And it’s kind of a big switch that that could happen. That is very interesting.

Stephan Livera:

So the change to an equity based economy, it might end up being that a typical family might still stack sats basically, and each person is earning money and there’ll be stacking that away into hardware wallet, multisig, whatever. And there’ll be a gamut of options, right? Some of those people will be using like a hybrid sort of Unchained Capital style multisig sort of thing, or others might just be doing it fully Self-Sovereign their own open source wallets and things like that. And then they’ll just be saving up to buy the things that they need, whether that’s a house or the family car or whatever it is that they need. And as opposed to now where the model is more like, no, just go into debt for everything. And any money spare gets put into this kind of allocated away by these this massively bloated financial services industry who are all clipping the ticket on you. The registered advisors and blah, blah, blah, because you’ve gotta be a super genius to be able to invest your money. Like, I think that those, I guess, high level, I’m thinking that’s the long-term vision of how I see it going. But how are you thinking about that kind of thing?

Joe Burnett:

So I think a very similar to that, like I was talking about, I don’t think people necessarily have financial advisors anymore. I think that people simply save Bitcoin likely hopefully using their own private keys, whether it’s with a multisig solution, like Unchained Capital or Specter wallet or just a single sig wallet. And I don’t think that the people, the average person will be taking the risk of investing in different stocks. Like the average person, whether you’re an engineer, a doctor, a lawyer, or just someone that works in a factory, you’ll focus more on specializing your labor and that specific job that specific task, you won’t also have to be an expert stock picker. And even in today’s world, like there aren’t really, that many expert stock pickers. So people are kind of just throwing money out at game stop or any random meme stock that is popular for the week. And that’s definitely not that great for society. And I think the world would be a much better place if people could just use effective money that actually allows them to save for the future. And then they can focus on more important things in life instead of random finance stuff that doesn’t really matter.

Stephan Livera:

And so I guess in that model, in that vision, maybe high net worth individuals might still use some kind of family office for their own advanced level tax planning, and estates and all that kind of thing. And maybe some mix of investing, but the average person out there, and most people are just going to be stacking sats and that would just be a return to just what we used to call saving. Right. so I guess that’s one way that we might hypothesize this plays out. Also another thing I know you’ve been writing on is this whole Contango thing. So let’s get into this. So Joe, what is Contango?

Joe Burnett:

So Contango is a really interesting thing in Bitcoin. Contango is when the futures price of Bitcoin trades higher than the spot price. So for example, I’m just going to make up numbers right now, but the July futures contract could be trading at $65,000 and spot Bitcoin could be trading at $60,000. And so sometimes when this happens in more like traditional commodity markets, it’s because there’s like a cost of storage, so it could do with oil. It could train up higher. the futures contract could trade higher than the spot price because no one wants to store the oil or however, or, or work a trade. The future strikes could also trade less than spot price, but in the Bitcoin futures market it trades in Contango, which means futures price is higher than the spot price. So a lot of people have questioned.

Joe Burnett:

What is driving the premium? Why is it in my opinion, it’s because of people demanding to go leverage long, because obviously over the last few months, if you’ve been leveraged along it’s been a pretty profitable trade. And if you’ve been short Bitcoin, that’s been a very unprofitable trait, but there’s two basic ways to get leveraged long Bitcoin in futures market. So the first way would be using like the perpetual swap, which this is probably if you’ve been on like BitMex or Deribit or whatever, this is probably like the most common way that the average person would see. And you basically can just buy a what’s called a perpetuals futures contract, which actually charges a funding rate every eight hours. So this funding rate is typically paid by the longs to the shorts because a lot of people want to leverage long Bitcoin.

Joe Burnett:

And I think last, I looked at it this funding rate, if you annualized it over, like the past month it would, it would’ve been like about 35% annualised. So you, so if you’re going leverage long Bitcoin using the perpetual swap, you’d be charged, you’d be paying the shorts like 35% annually, roughly. So another way to go leverage long Bitcoin, if you don’t want to pay at 35%, that could change every eight hours. So Bitcoin’s going up a lot that annualized rate could be extremely high. You could also do for futures contracts. So for example, you could leverage long the June futures contract. And right now that trades, I think roughly, depending on the exchange, maybe about a 25% premium. So if you were taking more inclined to take like a leveraged long position that you had no intention of selling anytime soon, maybe like, or at least wait until June or July, then that’s probably a better way to go about it because you’re charged basically less for going long.

Joe Burnett:

The shorts are making less if they are shorting them or there’s just, there’s just less of a premium. And so I guess a lot of people have, questioned, like why does this exist because many, many funds are already doing this where you buy Bitcoin, and then you short the July futures contract, and you can actually capture that that 25% of spread. And it’s not risk-free, but the only risk is mainly exchange risk. Like does the exchange custody Bitcoins correctly? And are they not going to get hacked? And as long as you’re willing to take that risk you can earn 25% annualized no matter what the price of Bitcoin does. And so a lot of people have been discussing that this basically simple arbitrage trade is sucking up a lot of coins off of the market because to perform this trade on Kraken, Deribit, Binance, or wherever, you need to buy Bitcoin to do it. And so it’s a very interesting dynamic where there’s this very large premium that people can arbitrage out and it still hasn’t disappeared yet, which is kind of fascinating.

Stephan Livera:

Yeah. Right. That’s the person doing that trade in some sense, they are capping their upside because let’s say you’re a Bitcoiner trying to do this, do that trade. You are basically saying I’m giving up the future upside above and beyond what that future contract is. So this kind of makes a little bit more sense for people who are USD denominated, if you will. So if you’re a us dollar person if you’re a fund who is trying to make US dollars, then this is a way to capture to make that return. But yeah, certainly it’s a very interesting phenomenon that we’re seeing. And I think it just fundamentally comes down to more and more people are realizing what Bitcoin is. They’re trying to buy it. They’re trying to go along. Maybe we’ve got a lot of degen gamblers out there who knows.

Stephan Livera:

And so fundamentally, it’s just all these people running in to try and buy Bitcoin. And then it’s creating this opportunity for the arbitragers to do that trade and try to get quote unquote risk-free return. Obviously you are taking some custodial risk and you’re kind of you’re putting some trust into the platforms that are helping you do this, but I guess the typical person operating on those platforms is sort of saying, okay, I’m comfortable taking that level of risk, or maybe whatever in their mind they think, okay, it’s a regulated platform. The government will help me if something goes wrong, blah, blah, blah.

Joe Burnett:

And one of the things that’s really interesting about it being a 25% plus annual return annualized return turn right now is looking at the current bond market that exists. So the rates that you can, you can earn on like a 30 day treasury are pretty much zero. And so these these high yields that you can be earning that are, not entirely risk-free, but very low risk in my opinion, are, very interesting. So it’ll be interesting to see how this develops over time and if the premium starts to compress. I thinka big part of why to this, like you said, is because the people that feel comfortable dealing on platforms like Binance and BitMex, and Deribit are people that are already into Bitcoin, and they don’t care about a 25% annual return. They’re looking for. You know, the home run that week, that Bitcoin has delivered in the past. And many people think it will continue to deliver in the future. And so that’s, so they’re not willing to take the 25% return, but if you are like USD denominated, a more traditional fund, or you simply have access to really cheap capital from a credit line at a bank or whatever it’s a great way to capture that spread

Stephan Livera:

That brings a question of why has this not been arbitraged out by now when there’ve been some big maybe not Bitcoin people, but, or someone doing maybe a Bitcoin person, but doing it using their US dollar money or some kind of USD fund coming in to try and arbitrage this away, or is it just fundamentally that the structural nature of Bitcoin is that there’s all these people running into buy it, and that’s why this opportunity exists?

Joe Burnett:

Yeah, it is really interesting how it hasn’t been arbitraged out, but also, it’s not like a time architecting, like I think right now the total open interest on Bitcoin futures is over $22 billion. So there is definitely billions of dollars performing the short side of this trade because I highly doubt there’s billions of dollars flowing to just short Bitcoin. Because that just wouldn’t be a smart trade and you probably would have been wrecked by now. But again, I think it comes down to the people that are already in this space recognize like that Bitcoin is actually extremely valuable to begin with. And so they don’t feel comfortable trying to get the 25% return because they think they can, outperform that just by holding Bitcoin. And I think the funds are people that are willing to perform like such a unique trades that you’re not doing necessarily with the NASDAQ or the New York stock exchange you’re dealing with Binance or BitMex that they, they would rather probably just allocate a small portion of their capital to maybe Bitcoin, instead of trying to do a very like unique trade that they’re definitely, they probably necessarily don’t understand, like they don’t understand the platforms. They don’t really understand bitcoin. And they just aren’t willing to take that risk or, or jump into something like this.

Stephan Livera:

So a lot of people have that discussion around, Oh, is Bitcoin priced in, right. It’s the halving priced in. And I think the answer in one sense is that a lot of the world has not woken up to that yet. And that, yeah, there’s a few hardcore Bitcoin people, but those Bitcoin people are probably already all in or as allocated as they can get as they can reasonably be. And so it’s just a matter of time until the rest of the world starts to wake up to that. And so maybe that’s also the answer that all this money stored in stocks and bonds and real estate. And again, coming back to what we were saying, it’s relative valuation, right? Those stocks still exist. It’s just that people in their mind have to change their relative evaluation of stocks and bonds and real estate put it into Bitcoin. And that’s just this process over time of the world, waking up to this. What’s your view on that idea?

Joe Burnett:

Yeah. I love like talking about the efficient market hypothesis, and thinking about it because you would think that if markets were extremely efficient or perfectly efficient, then Bitcoin would either be worthless or there would be hydrophobic colonization. So it’s kind of funny how we’re or somewhere in the middle, I think the EMH or efficient market hypothesis is typically like barely accurate because I think free markets are the best known way to price goods, services, and investments. And that’s why capitalism works significantly better than communism. But I think for markets to be perfectly efficient, I think that’s, that’s somewhat kind of wrong. I think it’s kind of wrong for, I guess, two reasons. I think one is just because information is very doesn’t mean a majority of capital in the world has actually looked at the information.

Joe Burnett:

And then number two is even if the individuals that have capital to allocate have looked at all the information, it doesn’t necessarily mean you understand the implications and like the interactions between this information and the actual world. So again, it just comes down to individuals making the best possible decisions that they can based off information that they’ve digested and what they understand from that information. I think what we’ve seen is over time over the last decade, more and more individuals and corporations are learning what Bitcoin is. They’re learning that it’s a number go up technology, it’s a world’s best savings technology. I think what we’re seeing is markets trending towards efficiency. I think that’s part of the main reason that that Bitcoin has been the best performing asset even risk adjusted if you’re looking at the sharpe ratio. So like looking at its returns over its volatility, Bitcoin still dominates traditional markets, whether it’s equities bonds or whatever. I think what we’ve seen is as Bitcoin continues to trend towards the most efficient price. And that’s why we have these crazy parabolic repeated bull runs

Stephan Livera:

An interesting idea. So for a long time, people were saying, Oh, look, this GBTC, there’s a massive premium. And now recently that’s been arbitraged closer down. And I wonder, could a similar thing happen here in the in this whole futures, Contango in Bitcoin, maybe it’s a matter of time. And what would it look like if somebody were to, or if people collectively or enough people collectively were to go and eliminate that by doing this trade.

Joe Burnett:

Yeah, absolutely. So back in, so throughout Bitcoin’s history, like the futures market hasn’t been super developed until recently, but in 2017, Bitcoin did trade in Contango, but then back in 2018, I think for most of the year it traded in backwardation. So that meant the futures price was actually less than the spot price. And that’s because more people wanted to be short Bitcoin while it was going down the more people that want it to be long. So it definitely can switch out of Contango certainly possible. But I think as long as the market is generally bullish on Bitcoin you know, for the foreseeable next few months or the next few quarters we can expect it to still be around. And again, like, it will be interesting to see if enough capital or individuals decide to, allocate their capital to this trade, this USD denominated trade.

Joe Burnett:

It will be interesting to see what happens because to, to, to make this trade, you need to buy Bitcoin and to use Bitcoin as collateral to, short the futures contracts. So, like I said earlier, it’s kind of sucking up the supply of Bitcoin anyways. So I think if you really take a deep dive into this trade and what it is right now, you kind of realize, Oh, well, why should I make this trade? When this trade is going to drive up price of Bitcoin, just the fact that this trade exists, this arbitrage opportunity exists. It’s actually gonna drive up the price of Bitcoin because it’s sucking up more supply might as well buy Bitcoin. And then you kind of get down the Bitcoin rabbit hole and you you recognize it’s the world’s best monetary good. So you say, some people may discover this and may start the trade, and then they may just decide to hold Bitcoin instead. But yeah, again, if there is a significant downturn in price, that’s somewhat sustainable. Maybe we get up to crazy high levels and markets gets overheated and people the price just starts to decline and it can stick the trade can certainly go away. And the Contango can go.

Stephan Livera:

Yeah, it could also be that maybe now rightly or wrongly, right? I’m not, I’m not saying a stock to flow is correct or stock to flow is wrong or whatever, cause I’m sure there’ll be debates about that too, but rightly or wrongly, there might be a bunch of people who try to trade that model and they might try to say, Oh, look, we’ve gone above the model we’re overshooting, now it’s time to sell some. And that fact may also contribute and become a bit like a self fulfilling prophecy. But now obviously some of these people might end up getting wrecked if they try to sell, because you know, the price might just completely blast away and go even higher so they could get in trouble there. But maybe that’s another possibility.

Joe Burnett:

Yeah, it will be really interesting to see what actually happens with regarding the stock to flow model, because I definitely do think that people will try to use it as like some sort of top indicator, especially this cycle. But the problem with this cycle, I would say is we’re like at a point where there’s basically unprecedented fiscal policy and unprecedented monetary policy. And so I think the traditional top indicators may not be that helpful especially this cycle. And so I think it will be interesting to see how many you know, supposedly smart money smart Bitcoin does try to maybe exit or take some chips off the table if stock to flow model or other indicators begin to say we’re overheating. And again, I don’t, I wouldn’t feel very comfortable selling a significant amount of my position of my Bitcoin at all. But I’m sure that there probably will be a few people that that may think that they’re making a great decision problem is if they come out with some crazy UBI stimulus bill after that, it gets funded basically directly from the fed buying treasuries or euros or however, however they want to do it, the price could just keep shooting up. So it will be super interesting to see how that develops over time.

Stephan Livera:

Great. What else are you looking at? Are you able to maybe hint for any listeners, any other pieces of work that you’re working on or research or things that you’re looking at?

Joe Burnett:

Yeah, so I’m publishing a lot of research on publishing something probably in the next couple of weeks, just about the bond market and how basically bonds and Bitcoin are two asymmetric trades, except Bitcoin is an asymmetric asymmetric trade to the upside and bonds aren’t asymmetric to the downside. But other than that I’m just doing research at Mimesis Capital which is a very Bitcoin focused family office based out of Taiwan. And like Michael Saylor we believe that Bitcoin is a massive wealth transfer. It’s a great opportunity. And so we’ve adopted Bitcoin as our treasury reserve asset and just our investment benchmark. So in addition to, the research that we’ve been doing I helped do due diligence and just general research on Bitcoin startups in the ecosystem. So that’s pretty much what I’ve been doing. and if anyone has more research that they want me to do and take the time to write and share with the community, definitely DM me on Twitter and reach out to me. I’d love to hear any additional ideas.

Stephan Livera:

Excellent. Where can people find you and find Mimesis Capital?

Joe Burnett:

Yeah, so I am on Twitter. I’m @IIICapital and three as an III. So you can definitely find me on Twitter, follow me, DME. My DMS are open. And then as far as my Mimesis Capital you can find us online mimesiscapital.com and you can also follow us on Twitter. It’s also @mimesiscapital and that’s also in my Twitter bio as well.

Stephan Livera:

Excellent. Thanks for joining me today.

Joe Burnett:

I enjoyed it as well. Glad to be on the other side of the headphones, I guess this time.

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