Blocktime
Your go-to Bitcoin podcast hosted by Pierre Rochard, VP of Research at Riot. Tune in weekly for thought-provoking discussions, exclusive interviews, and a deep dive into the disruptive power of Bitcoin.
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Blocktime
Episode 36: Dylan LeClair's Analysis of Bitcoin's Market Resilience
Join us for Episode 36 with special guest, Dylan LeClair. Our journey begins with Dylan's own departure from conventional economics, leading to his deep dive into the pandemic's silver lining: Bitcoin. As we unpack his analysis of Bitcoin miners and related equities from his vantage point at Bitcoin Magazine, you'll uncover the untold narrative of Bitcoin as an unstoppable force in the financial realm, empowering economies and challenging the status quo of the banking system. The conversation heats up when we tackle the myths surrounding Bitcoin's market behavior, unwrapping how ETFs and short selling sculpt its volatility. Join us for a candid discussion on the evolution of the derivatives market and the resilience of Bitcoin in the face of manipulation—a stark contrast to traditional assets like gold.
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Welcome to the Block Time podcast produced by Riot Platforms, where we explore topics related to Bitcoin, bitcoin mining and energy. Today we've got a very special guest, dylan LeClaire. Dylan, welcome.
Speaker 2:Thanks, pierre, I'm excited to chat. Dylan. Welcome. Thanks, pierre. I'm excited to chat.
Speaker 1:Yeah, absolutely. I mean, I love your tweets. You've always got fascinating insights on the macro side of Bitcoin, which I think is it's not the most important, and I don't think we should categorize things as relative importance. But when we think about Bitcoin as a monetary system, it is very important to think about how it's interfacing with the existing fiat system and what's going on in the existing fiat system. So, yeah, I wanted to have you on. I know that there's probably things top of mind, so I'm curious to hear you know where you see us in the monetary cycle and maybe also talk about your background and how you got interested in Bitcoin.
Speaker 2:Before we do that, yeah, sure, well, I've stumbled upon Bitcoin in 2019. I was in high school in 2019. I was in high school I mean I've given the spiel before but did a year of Keynesian economic indoctrination at university, had my fun, but, you know, I was learning more just reading on the internet because I was curious if I didn't know what something meant on a podcast or you know, one of the world, you know foremost economic, macroeconomic experts, put out a tweet and I didn't understand what it meant. I would look up the definition and that was. That was kind of my learning style versus, like you know, textbook style assignment.
Speaker 2:You know, like whatever, the, the kind of the college curriculum is very, very much like a rigid, rigid system. And then we, you know, covid comes that freshman year a rigid system. And then we, you know, covid comes in that freshman year, and so I, you know it was fully remote, wasn't, was ignoring everything, was already, you know, kind of peering down the bitcoin rabbit hole, but went full, full tilt uh down it and, um, you know, felt like fast forward uh to 2021, was lucky enough to kind of uh get a part-time uh role with bitcoin magazine and in the past few years I've spent uh, have spent across various roles, have been full-time Bitcoin looking at the market, doing a lot of market research with Bitcoin Magazine Pro for a while, doing some kind of data analysis with Bitcoin and Bitcoin-related equities and assets, with UTXO management and their liquid side. So something like how do you value a miner? How does a publicly traded miner trade relative to Bitcoin? That sort of thing.
Speaker 2:And then, broadly, I would say, nevermind the titles, I'm very much passionate about Bitcoin because I believe, not only for my generation but for everyone, this is the tool, the asset for economic empowerment, is the tool, the asset for economic empowerment, and without Bitcoin, we would be in a pretty, pretty dark place. So a lot of what some might call evangelism is more just a passion because of how important I think this thing is Much more important than myself or any one company or person. If the thesis is right, it's the biggest idea of our time, it's the apex predator and the largest total addressable market on the planet. So how could there be a bigger story? That's kind of how I view things. So, yeah, it's been a wild ride, man, four or five years riding the waves and it looks like more and more people are kind of coming or conforming to the Bitcoin worldview. It's exciting.
Speaker 1:Yeah, it is very exciting. I mean, you mentioned evangelism there as maybe something that gets portrayed negatively by, let's call it, the really fiat minded traders who they don't care about the story, they don't care about what values Bitcoin represents, they're just looking to make money. Interestingly, though, bitcoin does attract them, so in some way they end up getting orange pilled anyway.
Speaker 2:Yeah, no, I agree. There I think there is laser-eyed maximalist, or from the outside view it looks very much like cult-like, and I think that maybe turns people off. For those that aren't intellectually curious about, okay, why is there a group of internet anons and never mind anons, just, you know, geographically distributed across the planet, across every profession, that are, you know, like zealots about, about this thing, that have all of their money in said thing and don't part with it? You know, it goes up by a factor, by an order of magnitude, two orders of magnitude, three orders of magnitude, and they're actually not selling, they're buying more. That's like a very, very foreign construct, in kind, of the current financial economic system. And so, yeah, I mean, I understand why there's, you know, maybe some people have like a jaded view of Bitcoin because of Bitcoiners, but I think that completely misses the point, which is that this is obviously a much bigger story than what people say in an internet chat box or whatnot. This is a massive story and you actually can insulate yourself from the implications of it, which is, I think, the biggest point right, Like if you look at the last few thousand years of history, and particularly, like you know, with regards to engineering and you know, if you want to go to like warfare, you can, but right, like couldn't insulate yourself from the gunpowder revolution. Right, Like you couldn't insulate yourself from the implications of the industrial revolution, you couldn't like insulate yourself from these sort of technological advances. They happened, right. And if you stood to lose against the adoption of X, Y or Z technology, complaining about it and trashing it and ignoring it isn't actually changing reality whatsoever. You're just putting yourself in a worse place. So I think that's what we're living through with Bitcoin.
Speaker 2:Is that a lot of people whether it's an egotistical thing? Right, you got a PhD in economics and you trade bonds at a hedge fund? Right, and you've scraped by a 9% return for seven years in a row? Right, and you are used to being like the most important person in the room and then a bunch of people laugh in your face, tell you to have fun staying poor and say you don't get it. That messes with you. And I think that was kind of just one example and I was a bit of an exaggerated one, but I think that's why there's a lot of people still to this day. 2024, spring of 2024, Bitcoin ETFs have rolled out. There's a BlackRock stamp of approval. Love them or hate them, we can't stop them. It's an open, permissionless network and there's still people that are saying well, this is irrational and this is tulips and it's like you know.
Speaker 2:all right, that's where we are, I guess.
Speaker 1:Yeah, I mean even Vanguard, which it seems like the outlier on Wall Street of not wanting to make money off of this phenomenon.
Speaker 2:Yeah, you know, and it'll be interesting to see how Vanguard pivots. I don't expect it short term, but I mean, they're a giant right. They have trillions of assets missing out on. Currently 10, $15 billion of flows.
Speaker 2:Isn't the end of the world, but I think the game theory of you know, there's Bitcoin game theory at a sovereign level. There's Bitcoin game theory at a kind of an industry level, depending, you know, depending on what industry you're in, right, whether you're talking about, like a financial services company, and so the fact that BlackRock is embracing this and has 50 days straight of inflows and has broken every ETF record on the planet reflects well on BlackRock and it reflects well on, you know, like their client base, who they told, hey, buy this thing and it's, you know, 20% or 15, 20% above its, you know, volume weighted price currently right. So every client that bought Bitcoin maybe they're not a zealot, maybe they're not a laser eyed maximalist, they're just someone that looked at the basic math and said, hey, I mean this thing. Yeah, it's volatile, Of course it is, but in risk-adjusted terms across any meaningful timeframe, it's the best risk-adjusted return asset class, right. So you'd be dumb to not put a small amount in your portfolio.
Speaker 1:So that's what I think it is right.
Speaker 2:It's like Larry Fink isn't some Bitcoin maximalist. He just obviously has clients that were knocking down his door saying, hey, we want this thing. And so he said, hey, well, we'll issue a product and make some fees on it and that's just the incentives of it, right? So I mean we see that, we see that across across the spectrum. We see we're seeing that at a corporate level, very, very small adoption. Still.
Speaker 2:We're seeing that at a nation state level, right, where, like the Bukele's of the world are saying, hey, we're going to buy Bitcoin, we're going to buy one Bitcoin a day right, which is for a nation state, tiny. But they're also saying, hey, we're going to remove taxes on currency swaps, we're going to attract capital to come here and build businesses right. And so this is like we're still very, very early stage in this. Still, I would say experiment, right. But I think the game theory at play, which a lot of people don't even recognize they're playing a game, is already set in motion, and so it's going to be a fascinating decade ahead to see how this all plays out to see how this all plays out.
Speaker 1:Yeah, it's been interesting to see Larry Fink put out some laser-eyed talking points of hey, this is digital gold for your portfolio, which is not what I was expecting from him. I thought maybe he'd be more aligned with Gensler. Of hey, we have this product, but we don't recommend it. It's only for people who are speculators. Yeah, and you also, I like to think about, but we don't recommend it.
Speaker 2:It's only for people who are speculators. Yeah, I mean, and you also like, I like to think about, I think it's an interesting dynamic with the finance industry and you see, this, I mean this is kind of how you often see like bubbles arise, like in the late 1990s, right, the tech investors smoked everyone on the planet. So if you didn't have a tech exposure and your competitor, your industry, your buddy, was getting rich, you were underperforming. You were underperforming the market if you didn't have tech exposure and there was kind of this feeling of FOMO and everyone that's ever bought Bitcoin and has watched the price rip as they have cash or just is already all in Bitcoin and just wants more you feel that FOMO. But now there's FOMO.
Speaker 2:That maybe isn't pressing just yet, but there is the potential for this kind of massive chase where most everyone that's allocating to these ETFs from what we hear from some of the ETFs issuers, like Bitwise say, like the big wire houses, like some of the larger, you know pretty massive pools of capital, still haven't like given this a green light, right, so they're still like figuring out and making you know kind of cutting the red tape on some of these products, despite them rolling out and, you know, being issued on the NASDAQ, like I bit is.
Speaker 2:So I think it's just like a few hedge fund speculators, a few family office types and some of the kind of the retirement accounts that are getting this Bitcoin exposure right. And still there's like a vast, vast, massive pool of capital right, like $50, $100 trillion of capital that's sitting on zero exposure or a minuscule exposure. So getting off zero and getting to 1% is just a massive amount of flows and anyone that has a larger percent allocation like if you have a 5% allocation and it doubles well, the competitor that you're competing with if they have zero they need to catch up.
Speaker 2:Because how could you? Okay, 15 years, you dismiss Bitcoin, that's fine, that's excusable. You couldn't access it. Gbtc was a tough product. You didn't want to download a sketchy app on Coinbase. You couldn't. If you were an institutional investor, okay, fine. The ETFs launched. The biggest asset issuer in the biggest asset issuer in the world, blackrock, stamps the approval and says, hey, we're launching this and starts shilling it. And you still didn't buy it because of ego or because of you know, you thought it was tulips, right. So I think that's where this, you know, has potential to get very, very interesting in the coming quarters too. We also see, like the FASB, accounting rule change, which is going to be massive, right, because not everybody has the super majority of voting shares, like Saylor did, to kind of take a company on a Bitcoin standard, not that I expect all the.
Speaker 2:S&P 500 companies to be fully hyper-Bitcoinized shortly all the S&P 500 companies to be fully hyper-Bitcoinized shortly. But it's like everybody's sitting on massive amounts of cash or at least the profitable companies are and the meta of the past decade has been lever up, buy back your stock, decapitalize your treasury, reduce outstanding shares and try to pump the shares to get your stock options. And Saylor flipped it on its head and said no, we're not going to lever up and buy back shares and purposefully cripple our balance sheet. We're going to issue long-dated fiat liabilities at basically zero interest rate and we're going to buy Bitcoin. We're going to sell shares right, which is dilutive, and buy Bitcoin right, and MicroStrategy shares have 10x'd since August of 2020.
Speaker 2:So I think it's an impossible story to ignore and you know the copycats on every level smaller sovereign nations. You know the kind of the insurance portfolios, the massive endowments and also the corporates right, whether you're a public company or a private company. If you aren't studying what's being done with microstrategy, then I mean even if you don't implement it at full scale. But if you don't understand the strategy at play, if you don't understand why the 2020 convertible notes that were issued at 0% are up 400%, if you don't understand why the 2020 convertible notes that were issued at 0% are up 400%. If you don't know why that is, then it's going to be a long decade. So I think it's a really, really interesting time and there's so many positive catalysts ahead.
Speaker 1:Yeah, and this issuance of ETFs, I think, also has helped debunk another talking point, which is that in the past Bitcoin's price has gone up because you can't short it, and so they say, oh, it's a one-sided market, it only reflects the buyers. I don't think that's necessarily been true, but now that there's CME futures and spot ETF and equities that you can go short, there's no limit to. Well, I hope there are limits to how much people can short this. Do you think that's going to cause problems of people getting liquidated because they don't quite understand what they are shorting?
Speaker 2:Yeah, I mean, I think it'll go both ways. You know I encourage, I don't encourage people that I care about to short Bitcoin, but you know, lay it on short MicroStrategy. You know, short Iovit, short the futures ETF, short futures, right. I mean, especially if you think about it, dollar collateralized Bitcoin shorts I mean. So if you are 1X, you know, if you have $67,000 and you short Bitcoin, one Bitcoin you can get liquidated on that right, at least if you have Bitcoin collateral for your short. You can't get liquidated With dollar collateral right. It's the inverse of BTC collateralized longs, for instance. So if I borrow dollars and buy Bitcoin, right, I'm levered long Bitcoin. Or you know, and you can do this in the futures market, right, and you borrow money, you buy Bitcoin, you have a levered Bitcoin long and there's convexity. Well, it's the opposite, it's the inverse. It's the same dynamic for dollar collateralized shorts, right.
Speaker 2:So this I think that's a big structural change in the derivative market, especially where we're trading today. 66,000, 67,000, the peak or top of last cycle, the entire market was crypto collateralized leverage. It was Bitcoin ETH. Even FTX Casino had any crypto token was used as collateral for their futures marketplace. And now there's still a little bit of that. About 20-25% of the market compared to 75% of the market is crypto collateralized and now 80% of it is dollar collateralized. So there's an asymmetry between going short and long Bitcoin with dollars, and the asymmetry is not actually favoring the shorts. So I think that's really interesting, right, and we're going to get some squeezes, and I think that's why I mean, for anybody that's not intimately familiar with the market and some of the kind of interplay between spot and derivatives, and I don't think everybody should, right, I encourage most people in my life that I care about hey, buy Bitcoin every day or every week a little bit, don't look at the price, call me back in a few years. That's what I tell people.
Speaker 2:But if you're looking at the Bitcoin chart and you're like this is irrational, what's the catalyst for a 10% up day or 9% down day? A lot of this is like kind of the intermediate derivatives sort of stuff, right, when you know sellers or buyers get exhausted and you know the thousands of Bitcoin of leverage on either side has to forcibly close their position. So I think you know, from a side of the shorts, yeah, use your treasury bonds as collateral to short Bitcoin on CME futures, like I, you know, I encourage you to do that if you hate money. But it's not something that I'm actually too worried about, because I think the ability to settle and spot instantaneously or almost instantaneously is the reason that you know Bitcoin is more prone or resistant, more resistant to the gold attack vector of paper gold right.
Speaker 2:The fact that there's proof. Right, jp Morgan has paid massive fines for gold market suppression and manipulation. Right, because you can't deliver gold instantaneously. Right. So we settle with a signature, we settle with a digital ledger of CME futures With Bitcoin. If I get margin called, I have to settle with Bitcoin or I have to settle with my dollar collateral and it's instantaneous. So I think that's the difference here. But yeah, I mean I'm not worried about the shorts whatsoever. I actually hope more people pile in on the short side. We could have some fun.
Speaker 1:Yeah, absolutely, and hopefully fewer people going leverage long so that we're not overextending on the upside. But putting that aside, where do you think that we are in the Bitcoin cycle? Do you think that the are in the Bitcoin cycle? Do you think that the havings still matter?
Speaker 2:So I missed the. You broke up for a split second there. I heard the Bitcoin cycle and the havings still matter. Anything else I missed in the question there?
Speaker 1:That was basically the question.
Speaker 2:So I mean to be honest, I think and this is a bit of a paradox, and I say this full of transparency, I say this as someone I vividly remember right near around my 18th birthday, the stock-to-flow model comes out. I'm on Twitter anonymously just scrolling and learning, and I'm a math statistics guy and I'm not paying attention to whatever class I'm in in high school and I'm I look at this stock to flow model thing and I don't really understand much about Bitcoin. At this point and you know, having to understand this, I'm like wow, this is a log scale. It's linear regression up into the right. Okay, what's the having, what's the difficulty, adjustment and I learned all the mechanics from that and kind of being like, oh, wow, you know, this is like kind of a quantitative tightening, this is programmatic scarcity. So the stock to flow model kind of helped me internalize what the Bitcoin system was, but I, you know, I never thought it was gospel and I think more so at this point. And again, this is sort of a paradox. I think it's more of a demand drivendriven event than a supply-driven event.
Speaker 2:At this point, I think we have this global advertisement of hey, this thing is not a Fed chair, it's not a dot plot. It's not 12 old white dudes in a room in a boardroom deciding monetary policy for the world. This is programmatic, this is quantitative, this was hard-coded in 2008, and you can't do anything to stop it, and I think that's a massive signal to the global market and every subsequent halving last halving, may 11th, 2020. I just remember it was kind of like just the Bitcoin nerds and the Bitcoin evangelists that were celebrating, and it was at the same time that the Fed was coming out with unlimited quantitative easing and there was such a clear dichotomy between the two systems. And I think this time around we have a similar dynamic Stock market all-time highs. Yesterday, the Fed chair, essentially, and Fed speak came out and said, ok, well, the inflation fight is done, it doesn't matter if it's kind of re-accelerating, we're just, we're going to cut later in the year. Basically, again, fed speak for like, okay, we're just going to let this puppy rip. In terms of the like, financial conditions are not tight, even despite five percent rates. Right, uh, we're. We're seeing just kind of a return of speculative fervor and the economy running pretty hot because of just the massive fiscal spending. So the the dichotomy between kind of the fed tea leaves and global. I think we're at the start of kind of a global rate cut cycle. We saw the Swiss National Bank just today cut rates, and so the dichotomy between that and the Bitcoin halving is going to be extremely clear.
Speaker 2:And this time it's even bigger in kind of the mainstream news cycle, right. So it's BlackRock research decks right, going out to clients with hundreds of billions, trillions of dollars sloshing around saying, look, this is the Bitcoin halving. This is the last three times it's happened. This is what followed Correlation, causation, who knows? But just be aware this is what happened.
Speaker 2:So I think the reduction from 900 BTC a day like 50, $60 million of issuance to $30 million and change of Bitcoin issuance I don't think that matters much when there's billions of dollars sloshing around in the ETFs and just UTXO If you just look at the on-chain data itself, there's billions and billions of dollars of UTXOs changing hands every day. So I don't think that the minor issuance really matters. I think more so it's this global advertisement of look, no one can change this, no one can stop this, this is hard-coded in, and every subsequent having kind of reinforces the reality of absolute scarcity. So I think the having matters, but I don't think it's because it's a supply-driven squeeze that's going to send Bitcoin to the moon. I think it's more so like an advert of like hey, you know, we can't change this thing, and that's why it's important.
Speaker 1:Yeah, and on that, why do you think that central banks are cutting rates already? I mean, if anything, they should be going up still.
Speaker 2:Yeah Well, so here's where I and I own this 100% was a bit wrong in the past year on kind of the pendulum of Fed easing, fed tightening. Right, we see a historic inflation burst in 2021. And before this, right, we're up to our eyeballs in debt, the most debt. This is a global phenomenon. I talk about the US, but this is a global phenomenon. The dollar and the US economy is just kind of a proxy and the rest of them are just derivatives of the dollar and the US economy. But global, massive, massive debt problem, you know more, like the highest levels since World War II. Right, it's clear they need to get us out of this. And you see the Fed governors roll out in 2020 and say, hey, you know, we need, we don't want 2% inflation, we want to average 2% over the long term. And so you know, the past decade it was like one, one and a half percent. We can overshoot a little bit, right? So they're like they're literally going out on CNBC and saying, yeah, inflation is too low. They're saying this you can go look at the internet archive or go look it up. And so we see the biggest inflation burst in 50 years, since the 70s, and, in my opinion, I think the academics and I tweeted this this morning, I think you retweeted it there was the IMF was publishing papers in 2011 saying look, we have a massive sovereign debt bubble. This is how we get out of it. There's no gold at the base layer, so we can't explicitly default. It's not politically feasible or palatable. It's not going to happen. There's no appetite for fiscal austerity. So what we have to do is we have to have a sustained period of inflation over interest rates.
Speaker 2:And so I think, in kind of academic circles post post COVID, you know, there's kind of like a catalyst for money printing. Right, like the economy was slowing down in 2019. Yield curve inverted, the repo market blew up. Blackrock put out a paper in August of 2019 said hey, the next crisis. We're already at zero rates, we don't have much to work with. We're going to have to go direct to consumer with stimulus. They said this in 2019, before anyone had ever heard of COVID. Right, seven months later, they print, you know, an order of magnitude, more than the great financial crisis. You know $10 trillion, or whatever the numbers were. Globally. Fiscal and monetary stimulus bazookas, right, and they get an absolute rip of inflation, right. Stimulus checks, ppp programs. You know, free money, right, funny money and obviously kick off a speculative frenzy in assets.
Speaker 2:But I think the intentions from like academia and the political, like managerial class was okay, we're going to let inflation rip, we're going to keep rates at zero, we're going to erode real debt burdens, like that was. That was what was attempted to be accomplished, and what they didn't foresee or what they didn't, um, I guess account for was the political pushback right of the inflation. Right. Inflation has kind of been, it's been like a, a steady force, but it's been small enough for most people who maybe aren't as like tuned into economics or monetary policy.
Speaker 2:1%, 2% a year it's not like that crazy of an inflation rate. But 5%, 6%, 7%, whatever even the official numbers were. Rent being 10%, 20% higher than it was a few years ago, people's pocketbooks hurt. Rent being 10, 20% higher than it was a few years ago, people's pocketbooks hurt, right. So there was this massive political pressure from the left and the right on the Fed and global central banks to stop inflation. Right, like the Elizabeth Warrens of the world were calling out the Fed directly saying, hey, you need to raise rates and stop this.
Speaker 2:So they did right, and there was a historic tightening cycle that happened in historic fashion of how fast it occurred, and I kind of suspected that they would let it go a little too far and they would tighten the belt so much that we would actually see a crack. We'd see some form of credit contraction, we'd see some sort of crisis and I guess we sort of got one with the. The uh bank collapses, right, uh, silicon valley bank signature bank, silver gate um, sorry, here I'm gonna mute, uh, I'm gonna mute some of this stuff here. Um, but what, uh, so right they, they set out before all this. They said, hey, we need a bunch of inflation, we're gonna let this rip're going to keep interest rates low. They did that. There was massive political pushback. Then, you know, for the first we've had positive short-term rates, right, whether you want to look at the trailing inflation rate or the kind of the forward expected inflation rate the last year or so, with interest rates at five and inflation quote unquote at three and change we had positive real yields.
Speaker 2:And again, that's if you take government stats at face value. And with that I sort of suspected that, hey, maybe we would see some form of cracking here. And I was wrong, for one key reason it was that we ran the Biden administration, and I'm not a red team, blue team guy, I'm not like my team's good, your team's bad, but the Biden administration is running fiscal deficits at a rate that the US has never seen outside of wartime. So the Fed's tightening, right, tightening. There's all this excess money in the reverse repo market, they're rolling off the balance sheet, but in the meantime, the the biden administration is is issuing trillions and trillions and trillions of dollars of debt. Right, you know, compounding this, this debt at you know, like six, seven percent a year, um, with interest expenses. Right, because of the short-term debt at historic levels. Right, interest is, for the first time in US history, above our defense spending. So this is a real problem and I think you know there's still, despite the historic inflation spike. The most interesting thing of all this right is they set out this goal we're going to let inflation rip, we're going to erode the debt Despite the historic inflation burst, despite prices being 30% higher than they were in 2019, 2020, that the GDP hasn't lowered at all.
Speaker 2:So now we're there in this position where they already did the rate cuts or the rate hikes. Maybe they could get another 25 bps so they can push out the rate cuts, but there's really no room for any more fiscal austerity. The interest expense is already unbearable and we know left and right there is actually no appetite for fiscal austerity. If there was, this would be a different story, because once every so often, dollars or fiat currency can actually store your value a little bit well, and that's when there's a contraction of credit. That's when the units in the system are actually decreasing, not increasing, and from what we've seen, that's not allowed.
Speaker 2:And so Powell comes out yesterday. Inflation's ticking up. Oil, gasoline, some of the commodities are re-accelerating. Inflation hasn't come down. You see a lot of the regime tweet out hey, inflation's down, inflation's down. No, the rate of change has decelerated. There has been no fall in prices. The rate of change has simply decelerated. And so we see a reacceleration in the rate of change.
Speaker 2:And despite all that, the Fed says hey, well, we're still going to cut at the end of the year. And from the monetarists, the Fed tea leave. Readers have basically concluded that that means that this means up only, and anybody that doesn't have assets gets hurt. So yeah, I mean, why wouldn't they hike rates? Well, if they actually cared about preserving the system, they would. But they have to print, they have to let this rip, they have to let inflation rip because they need to devalue out of these debt burdens. At 120%, this is default territory for every sovereign that's ever existed. Just a matter of what the default looks like, and I think a lot of people don't actually understand what a fiat currency default looks like.
Speaker 1:Yeah, and the part of this that really makes me scratch my head is the cost of living adjustments that are part of the spending, Like, for example, Social Security. Your benefits will go up. To try to track inflation, you know the official inflation which adds to the deficit and adds to the inflation deficit and adds to the inflation, and so it seems like they'd never really get ahead of the problem of getting the debt down. On top of that, a trillion dollars in interest expense, I think, annually, which is going to continue to increase as they roll the debt onto higher interest rate instruments. But so their plan is to inflate out of this. But it seems like if everything's inflating at the same time, then you know, as you mentioned, the national debt is increasing faster than inflation, so they never really inflated away.
Speaker 2:The interesting thing is, you know, if you look at what the Congressional Budget Office puts out for projections and you would suspect right, like the government projections for productivity or inflation or whatever statistic, generally I guess it depends how much faith you have in, you know government bureaucracy, but generally you'd expect that it would be somewhat of an optimistic or real I would say optimistic projection, right, and when you look at what the Congressional Budget Office puts out, this was before.
Speaker 2:This was early 20, I think it was late 22, early 23. So this is before long-end yields and this tightening cycle took off. So this is before interest rates rose as dramatically as they did you know, the worst bond bear market in modern financial history. They projected debt to GDP to go up and to the right to like 200% by 2050. So they're saying debt relative to our productivity before the interest expense shock is going up only, right, which means, by definition, that the interest expense is also going up only and the deficits that we're going to run is also going to continue to widen. Right, right. So this is, I mean, this is what this is like If this was an individual, this was a corporation like. This is what a bankruptcy looks like. This is what an insolvency looks like, but they have a money printer.
Speaker 2:So you know, this is, I think, unfortunately, there's like there's a lot of second and third order effects that aren't positive from this Right A growing wealth gap, wealth disparity, you know socioeconomicife, like red team versus blue team, dominates the discussion, but it's actually much deeper. So I think obviously with Bitcoin, it's like, well, we actually have a fair ruler and there's yeah, there's volatility, but this is the only thing that you can own in the world. That is yours. You can't be stolen from and not just stolen from it, meaning like someone takes it from you, but also, if you hold dollars under your mattress, you're getting stolen from with every single spending bill, and I think a lot of people don't understand that, and that's why this system kind of creates a growing, an ever-growing wealth gap and wealth divide.
Speaker 1:You mentioned that the rising interest rates did cause a blowup at SVB and some of the other smaller banks. Do you think that's going to continue to grow and metastasize? I keep hearing about commercial real estate.
Speaker 2:Yeah, I mean I'm no commercial real estate analyst, but I think it's quite obvious that with COVID there was this shift. This digitization of the economy was already happening. I mean, there was already remote workers before COVID. But the sheer size of the workforce and the people like me that were a student at the time and all of my Boomer teachers that had never had a Zoom call in their life, that immediately just boom, fully remote, I think that was while. We've seen a little, we've seen a bit of the return to the office and whatnot.
Speaker 2:I think that was like a zero to one moment for the world where like oh, wow, a lot of this. You know for a commercial real estate market that obviously was up only for a while, you know riding on the tails of 40 years of lower interest rates and you know climbing valuations and more leverage, that's. I don't think it's a, it's a. I would not own commercial real estate with a 10 foot pole. And I think they're seeing a lot of seeing a lot of what a lot of people thought the valuations were for some of this stuff, right, kind of the secret sauce of these real estate funds or PE firms is like, well, we just market to market. Right, we market to market when it makes new highs, but when you actually try to get liquidity out of these things, they're seeing massive losses.
Speaker 2:And so a Fed? Would it bail out, implicitly or explicitly, of the commercial real estate market in some form? Catch me by surprise? Absolutely not. I mean, we've seen this. Every single debt cycle, there's a new form of credit monetization. We had TARP and the great financial crisis, and then you know, the Fed's buying corporate bonds in 2020, right, like and when the Silicon Valley Bank and Signature, in particular, collapsed. Right, they have a. They had a commercial real estate portfolio. That was just, you know, all the toxic sludge was bought up by the government. I believe, the FDIC, right, where JP Morgan just took all the good assets. So I wouldn't be surprised whatsoever to see some form of implicit bailout for the commercial real estate sector. And when I say implicit, what I mean is it's not. I think they have done an increasingly good job of obf obfuscated, obfuscating what's happening.
Speaker 2:You know, with the bailouts right, for instance, the, the during the banking crisis last March, they came out with the bank term funding program, right, which was, you know, any bank could come, because all of these banks were underwater on their long, their long duration treasury portfolio. Right, you buy a 30 year bond at 1% and it goes to 5%. Well, you have a 30, 40% mark to market loss. But the great thing about banks is, if you just put it in the hold to maturity category, you don't have to market to market, except when there's a bank run. So the Fed said hey well, we have this shiny new facility. You can bring any one of your bonds to the Fed and we'll give you. Well, you can use this collateral to get basically par value in liquidity.
Speaker 2:So I have a $100 bond that's trading at $60, that I bond 2020 and it's 2023, and I go to the Fed and my $60 bond is valued at $100 of collateral. And I go to the Fed and my $60 bond is valued at $100 of collateral. And so, again, like the people that aren't and I don't fault the average Joe American for not understanding what this is or not frankly not caring about the BTFP Fed facility, right, but that was an implicit bailout, right, for just the banks, right. So you know, it doesn't matter if you actually bought the generational top in US treasuries with your entire balance sheet, it doesn't matter, because we'll paper it over, and so I you know whether commercial real estate is, there's a contagion aspect to it. I you know I'm not the one to say, but I do suspect any sort of mass form of deleveraging or credit contagion will be met with what it's always met with, which is liquidity stimulus and some form of implicit bailout.
Speaker 1:It does seem like they have been trying to use the banking system as a buyer of treasuries by marking these treasuries. Oh, these are risk-free, right? The government will never default on them, so you should stuff your balance sheet with them. Meanwhile, there's duration risk, there's interest rate risk, so there's currency risk, obviously, but if they're funding their balance sheet with dollars, that doesn't matter. And then the interest rates go up and the bank's insolvent and everyone's blaming the bankers for being greedy, right.
Speaker 2:Yeah, I mean it's a perverse system and I mean just like again, just the paper I tweeted out today, the liquidation of government debt. It basically outlined we're going to have to dump all these treasuries, all of this government debt, on someone, and the someone is the banks and the pensions. Essentially, someone's got to be the creditors here. And so who loses in a financial repression scenario? Who loses in a slow motion, implicit default scenario for a sovereign? The losers are the savers and the creditors. And if you hold a short-term or God forbid a long-term government bond, you are the creditor, you're the one that's funding the US government.
Speaker 2:And laughably, six months after money printer go brr, when they literally said there's unlimited money at the Federal Reserve, US Treasury bonds were trading at the 30-year. Us Treasury bonds were trading at like 1.3%. It was like the biggest, most laughable mispricing I had ever seen in my entire life. Um, and you know, if I could have borrowed money for 30 years at that point, I would have Um, and so I, I mean I still think right, like we've seen. This is the interesting thing is I think we've seen for the most part, the duration, repricing of of long-term debt. Right, we've seen the interest rate shock, 1% to 5%, and treasury bonds are trading at whatever they are today, bouncing around.
Speaker 2:What people aren't prepared for is, again, we still have debt to GDP that hasn't budged. So in order to get out of this the only modern analog would be post-World War II you need a sustained period of inflation higher than interest rates. So you know whether the Fed's the buyer or the banks are made to be the buyer, or you know pension funds, or you know whoever's the bag holder here other sovereign nations. You know that the US holds at gunpoint. You know someone has to hold this bag and you're going to. You're going to get paid back in nominal terms, like you're going to get your dollars back. They're just not going to buy you anything useful, right? So you know. And then that may or may not show up in the government recorded inflation statistics.
Speaker 1:So you mentioned the banks and pension funds having to hold treasuries and hold the bank. It seems like they're also interested in holding Bitcoin, though, and we see like SOB 121 with the SEC, and we also saw a bill in Arizona about a public pension fund putting on some Bitcoin ETF exposure, so maybe this bounces out.
Speaker 2:Yeah, I mean there was an interesting barrage of headlines two days ago. It was the Bank of Japan raises rates for the first time since 2007. And then the second one was Bank of Japan abandons yield curve control. They did yield curve control at 25 basis points and 50 basis points and then they moved it to 1% 1% on the 10-year, where they said, hey, we'll buy an unlimited amount of bonds at this price. If it falls below this price, we're pinning the yield here. If you want to sell it to us, we'll buy it and we have an unlimited wall of money. So they did that for a while and they abandoned those two things.
Speaker 2:And the same day there was a headline, and the Forbes headline was a little, I wouldn't say hyperbolic, but it was optimistic. It was biggest pension fund in Japan explores Bitcoin investment and they posted the PDF on their site, of which they quickly deleted after it went viral. But the Internet Archive didn't forget deleted after it went viral. But, uh, the internet archive didn't forget, um, and it basically said like we're going to explore, due to, uh, funding gaps and and, uh, you know, just due to the state of, you know, global, global risk and bond yields, we're going to explore illiquid assets. And they named you know, they named some private equity, they named bitcoin, they named gold and they named a couple other things. And you know, among like Bitcoin was this little kind of it was just they mentioned it once right, but Bitcoin's this little $1 trillion pond right in a global ocean of hundreds of trillions of assets.
Speaker 2:And Japan, right, which is like the largest kind of creditor nation out there. You know, the Japan investors have been buying loads and loads of US US treasuries for a long period of time because their yields were so low. There's a weird kind of phenomenon in global finance where sovereign debt and currencies are fungible. It's kind of a weird way to think about it. It's like wait, how does the Bank of Japan printing money impact the US? But there is an actual.
Speaker 2:There is a kind of a function here, which is when the Bank of Japan is conducting yield curve control at 1%. Right, that means that those on a yen dollar hedged basis right, because there's FX hedges US Treasury bonds become more and more attractive. So there was this big carry trade out there for so long where everyone borrowed in yen and they'd invest in other dollar assets. I think that's still at play. But from an FX hedged basis, sovereign debt is fungible. You can hedge out the currency risk. I guess you can hedge out the default risk too. The sovereigns aren't going to default on the currency they can print. But there's two headlines right, they stopped yield curve control. You know we see kind of an inflation burst. They raised rates up a pitiful amount for the first time in 15, 16 years and also their biggest government pension fund says, hey, you know, maybe we should explore Bitcoin, gold and some of the liquid assets here and again. Like you don't have to be a zealot, you don't have to be a laser eyed Bitcoiner to simply like, look at a plot of sharp ratios across a period of time and say, hey, you know, maybe we shouldn't have zero Bitcoin and it'll be interesting because the market caps a trillion and change like 1.3, 1.4 trillion. But the actual liquidity of the assets and this is a good thing the illiquidity cuts both ways. But try putting $10 billion of work into the Bitcoin market right now. It's going to be tough. You're going to have to really send this price and so I think that was the bull cases for the ETFs. It's like, look, they're plugged into the money spigot on Wall Street and we have a historic supply constraint here. We saw this all in 2023. We can see it with the on-chain data. That's the beauty of the Bitcoin UTXO set.
Speaker 2:There's not enough coins to go around. There's a Bitcoin shortage, which is kind of a joke but serious in the same time. So all of these funds, all these pension funds, they've underperformed, they're under-allocated, there's a performance gap. They need to catch up. And some of these pensions, like CalPERS, are saying, hey, we'll just chuck on some leverage and fund private equity and, I think, an increasing amount of like these savvy pensions. You know, and there's obviously a bunch of checks and balances and boards and you know approvals and whatnot, but increasingly it's going to be a no-brainer to not have zero bitcoin uh exposure and most of them still have zero bitcoin.
Speaker 2:So, yeah, treasury bonds are garbage and I think increasingly people will realize well, shoot, you know, I need to, actually nevermind if I like Bitcoin or not. I need to hedge Bitcoin success. Right, because what if this thing like assign a probability distribution Bitcoin zero? Bitcoin is global money. Right, probability distribution Bitcoin is zero.
Speaker 2:Bitcoin is global money, and you can think whatever you want about the likelihood of either of those scenarios, if it's binary or somewhere in the middle of that spectrum, but I would say it's not a zero percent chance that Bitcoin is global money, and also anywhere in between that, from it being zero to it being global money, has a probability as well. So if you're a money manager over a long time frame with long-dated fiat liabilities, like a pension, they owe dollars. Or if you're in Japan, they owe yen. Over the next 15, 20, 30 years. Bitcoin is this thing. That's like screaming at you and even though it's pretty small and illiquid, now you know this is, I think, the biggest story of the decade and it's a big story for the last one too, so it's impossible to ignore.
Speaker 1:And with the ETFs, do you think that they're finally going to be able to do in-kind rather than just cash settled, and would that result in a lot more interesting on-chain activity?
Speaker 2:Yeah, that's interesting. I mean the mechanics of it. I think the cash settled just add kind of one more step in the loop. I think I'm still following kind of on-chain flows regardless and there's coins moving in and out of these coin-based institutional addresses and I think the proof of reserves have a lot of work too. I mean it's great that, like Bitwise, for instance, said, hey, here's our address. I think there's much more we can do with, kind of verifying the transparency of the network. Whatever asset liability reserve attestation looks like, we can see the asset. What are the claims? Wall Street's still grappling with how to actually handle this thing. The radical transparency of it is a new thing. Thing like the radical transparency of it is a new thing. So I mean the in-kind versus the cash settled. I think in-kind would be preferable, but I think on a net basis it doesn't really matter that much, but it would be good to see for sure.
Speaker 1:Yeah, and another question I've heard a lot is around valuation. They'll say hey look, I can do a valuation of a business based on its future cash flows. Bitcoin doesn't have any cash flows. What am I supposed to base my valuation on? Is $60,000 expensive? It was $17,000 not so long ago. How do you react to that?
Speaker 2:How do you react to that? Yeah, there's. I mean, the cash flows trope is always a funny one. I love the, and sometimes this is not, you know, not meant for like a side discussion, but more so for like, hey, like here's a deck or like here's like a dashboard for you to look at and really internalize. But I think you know one of the most most pure forms of a Bitcoin valuation you can have, never mind the look. There's 500 trillion of assets, or 300 trillion of bonds, or gold's 10, 15 trillion. We can do that and assign Bitcoin a slice of those things and I think that's fine, but that's kind of hypothetical.
Speaker 2:I think one of the most interesting things is having a fair valuation of Bitcoin inherent to its own system. So it's like, well, okay, think it's tulips or speculative nothingness, all you want. But we have a transparent ledger. We have 14 years of or you know, 14 years of pricing data. A lot of coins are lost. A lot of coins are mined in 2009, when they had no value, haven't moved. You know what would? What's the Bitcoin network worth collectively? Right, and you know, in finance, circulating supply or you know, the market cap of a company is free float, shares, times price. We can do that with Bitcoin too. That's like $1.5, $1.4 trillion $67,000, $19.5 million Bitcoin, whatever that math comes out to be. But more interestingly is the realized price, or the realized market cap, where we take each UTXO, we take each Bitcoin and we value it at the price it last moved, and I post about it a lot, and probably redundantly so, to people that are intimately familiar with some of this stuff.
Speaker 2:But the fair value metric of like this is what the network as a whole on average or for the realized cap it'd be an aggregate has paid and right now that's at $530 billion, or like $25,000, $26,000 per Bitcoin. And every bull cycle we see Bitcoin's exchange rate trade multiples, several multiples, above that fair value metric. And every bear market we see and who knows in the future if this continues to occur but every bear market washout, every capitulation phase in 2022, in 2018-19, in 2014-2015, we saw Bitcoin trade below that fair value price. It was like, on average, every dollar that's been put into the network, every coin that's moved at a certain price on average, is underwater, and so I think that's a very much interesting kind of an inherent or Bitcoin native valuation metric is like how much is the average user paid for this thing? And if you look at like, the most interesting thing about this is never mind if Bitcoin is overvalued or not, but if you strip away the market cap, if you strip away the exchange rate and you just look at the value of all Bitcoin at the price they've last moved on a log scale, it's up only with no volatility, in just a lockstep fashion, and it's like there's minimal volatility in the downside and it just keeps chugging upwards an order of magnitude or so every few years, with barely a drawdown.
Speaker 2:So, regardless of if you think you know what your thesis is on Bitcoin or how bullish or bearish you are on it, if you looked at that and said like, look, this is a new form of value, you know monetize it from scratch and you weren't fascinated by it, right, like I think you should reconsider, right? So that's. I think the on-chain data and the fact that Bitcoin is so radically transparent is still relatively obscure. It's not known. I haven't seen you know any of the Wall Street people or you know firms or research shops post about Bitcoin's realized cap and I could be wrong there, but it's still kind of an obscure metric. But I think there's so many cool things we can do with Bitcoin's UTXO set.
Speaker 1:It's because it's this transparent ledger, immutably yeah, during the financial crisis, they would always talk about how oh, we don't know what the assets are worth or where they are, so we can't buy Lehman or whatever, and so that lack of transparency is highly problematic in the fiat system. It's not inherent to it. They could actually have as good of a ledger as Bitcoin does if they somehow trusted each other. I guess that's the hang up, but the other part of it, too, is that they accuse Bitcoin of lacking transparency. Part of it, too, is that they accuse Bitcoin of lacking transparency. So there's an interesting dichotomy there where I guess we'll have to disagree with folks like Jamie Dimon who say, oh, new Bitcoin could just come out of nowhere at any moment. When Satoshi comes back, you'll see his face pop up on the software, and that's where it's like OK, is this where the education education is?
Speaker 2:in 2000 I think that was in 23 when he said that yep, uh, and the best part about being in um in the bitcoin space is you see a lot of these same it's really the same arguments regurgitated over and over again. Um, I was. I was pretty shocked um to to find out, or discover that many of the talking points against Bitcoin and for Bitcoin, all of the arguments or maybe potential flaws or holes in the thesis, were vetted out on a Bitcoin talk forum in 2010. You know, like most every you know normally talking point or you know FUD critique that you could throw at Bitcoin was discussed over a decade ago. So, yeah, I mean, if Jamie Dimon thinks Satoshi is going to come back and print more Bitcoin, that's fine.
Speaker 1:Yeah, I think one of the first responses to Satoshi Nakamoto's initial email to the mailing list was that this is going to consume too much energy and the price at the time was zero dollars. It was consuming zero energy.
Speaker 2:And yet that argument is still with us to this day. Yeah, I mean, I love the energy. Like the energy rabbit hole is almost maybe equally or more fascinating than the macro economics rabbit hole. That we have an indiscriminate buyer of energy globally at the lowest cost that can shut off instantaneously when there's demand or when there's someone willing to pay a higher price is something that's still not understood and this is a deeper thread to pull on that we probably don't have time for today. But there's definitely kind of a modern indoctrination that energy is bad, energy equals bad, climate change or whatever the reason may be. And to me I'm always like never mind Bitcoin, ignore Bitcoin.
Speaker 2:Human flourishing is a direct result. It's a derivative of our ability to harness and channel energy. The Industrial Revolution does that use too much energy. It's a completely nonsensical argument that we're going to take Bitcoin's hash rate because it's completely transparent, and then we're going to assign some inputs, we're going to assume some variables like energy cost and efficiency of ASICs or whatever, and then we're going to say Bitcoin uses as much energy as insert third world country or whatever. Bitcoin uses as much energy as insert third world country or whatever. And in someone's head that reads that they go oh my gosh, bitcoin uses as much energy as Sweden or whatever the country is, and it's like, yeah, but it's not like it, where the poor people of Sweden got thrown out of their houses and they can't turn the lights on because of Bitcoin miners. No, bitcoin miners are buying energy that no one else wants, and when people want the energy, they stop mining.
Speaker 2:So this is the grid story. The stabilizing load is extremely misunderstood and it's a massive deal, and also just nevermind developed grids. The fact that we have something that can, you know, monetize excess flared methane is also a pretty massive story. The fact that we can, like, build civilization around remote energy sources like a running river, is massive, and no one you know, no one besides like still a niche group of, you know, of internet nerds seems excited about it. So that's where I still think OK, yeah, I've been bullish on Bitcoin. I've had these convictions.
Speaker 2:I thought I was maybe a little late four or five years ago. And 2024, surely it couldn't be early. It couldn't be early in, couldn't be. It couldn't be early in this adoption curve, right, bitcoin's, over a trillion dollars how could it possibly be still early in this, in this adoption cycle, um, and when I see you know some of the richest or you know smartest people, um, most respected people on the planet, that have, you know, absolutely terrible talking points about this thing, or just severe misconceptions about it, um, while you know being being, uh, like, completely sure of their opinion, I I remind myself like, okay, wait, it's actually, it is still early. Um, it is still early in all of this and it's going to be a. You know, it's actually, it is still early. It is still early in all of this and it's going to be.
Speaker 1:You know the education process is obviously ongoing yeah, absolutely Well, thanks for being a part of that process, dylan. Really appreciate all your contributions throughout the years, many years to come. You know we're getting old together and really appreciate you taking the time today to hop on the Block Time podcast, catch us up on what's going on in the wider world and hope to have you back on. I'd like to dig into Realize Market Cap more and hopefully next time we'll talk more Bitcoin mining too.
Speaker 2:Love it, pierre. Thanks, man. It's been an honor to come on. I'm a fan of Riot and like what you guys are doing and love some of the content you put out in the past, like measuring the carbon dioxide output of some of the ASICs. So, yeah, it's been an honor and I'm sure we'll do it sometime again in the future.
Speaker 1:Yeah, I'm looking forward to taking more CO2 emissions with each generation of mining rig, just to make sure that we're still at net zero. We're still fully electrified zero carbon.
Speaker 2:Looking forward to that. Thanks, Dylan Bye. Thank you.
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