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- [00:00]
A
On this episode of Full Signal, I sat down with Sam Callahan. He is the director of research and strategy at Orange btc. We talked about the macro backdrop that's supporting bitcoin right now, its divergence from gold, why the long term bull case is still intact and much more. Sam is one of the smartest people in the investment space today. I think you're going to love this conversation. Sam, I'm so glad you're here today. I want to get right into bitcoin. Bitcoin's divergence from other assets during this geopolitical turmoil we've seen to start the year. How are you thinking about this?
- [00:34]
B
Well, I think it's been pretty impressive. Bitcoin's held up since the outbreak of war in the Middle East. And I think part of it is bitcoin has acted like a leading indicator for a number of years now. So we did have a correction leading up to that escalation. And now bitcoin seems to be finding a bottom around 45% off its all time high. And other asset classes like gold and silver had their moment of the sun in the fourth quarter. People talked about bitcoin failed as the debasement trade and now we're seeing gold down almost 27%, silver's almost down 15% on the year. And so you're seeing a correction there after they had their run and bitcoin's now outpacing them. So it's a bit of a timing thing as well. But I think when you look at war and rising geopolitical uncertainty and it actually bolsters the long term value proposition for bitcoin as a decentralized, permissionless, store of value neutral, censorship resistant, seizure resistant. All these things, all these properties that bitcoin have talked about, they kind of shine, unfortunately, during times of chaos. Just imagine yourself being a citizen in one of these countries and wanting to flee. I mean, it's a really real question that people have to ask, what would you do in that scenario if you wanted to take any part of your wealth with you? It gets difficult when you consider holding physical assets like gold art on the wall if you had to leave in 10 minutes, having an asset that's digital, that is resistant to all those things I mentioned before that you can hold with 12 words in your head. You know, people haven't really woken up to how powerful that is and how unique it is as a technology. And you know, bitcoin. Bitcoiners have talked about bitcoin's properties, its decentralization, the censorship Resistant, all that stuff. I don't think it's very appreciated, especially in the West. But as the sovereign debt crisis around the world continues to unfold, as geopolitical uncertainty continues to rise, I think those attributes are going to be much more appreciated over time. And so I think the outperformance that we've seen recently, is it people waking up to this fact or is it bitcoin just finding support after it's had a correction? I like to think it's the former. And I think bitcoin, when you really think about what makes it special, it's all those things. And so that's how I think about it right now. One of my favorite tables was BlackRock recently where they showed major geopolitical events and different asset class. I think Gold S&P 500 and Bitcoin, they compare the returns 10 day and 60 day. And Bitcoin initially typically sells off because it trades 24, 7, 365. Only thing you could sell on a Sunday morning if you want to de risk when you, when these events occur. And so bitcoin kind of gets sucked into these moments of panic. Correlations go to one, it sells off, but over long periods of time, bitcoin is actually outperformed. And so I think it's actually people waking up after the initial fear. They start to think about, oh actually maybe diversification and diversifying into an asset that has those attributes would actually be helpful for reducing risk in our overall portfolio. So I like to think that's what's happening over the 60 day and that's why bitcoin's outperforming. So that's how I think about it.
- [04:06]
A
I think that all makes sense. And one of the surprises of last few weeks, let's say I think gold's on like a 10 or 11 day losing streak, which is very unusual compared to the last year and a half or so for gold. And I think that's shocked a lot of people to see bitcoin go up and gold go down, which is pretty much the opposite of what's been happening. Is there anything with the specific gold bitcoin dynamic that you're seeing right now that you're shocked by or, or that you weren't expecting to see?
- [04:37]
B
Not necessarily. I think gold had a tremendous run last year. I think it perhaps got a little bit overheated. There's a lot of retail interest in it. There was that central bank bid I, I like to think about and I would have to look at some of the data. I don't think the data is out there yet, but lot of central banks were buying gold as a diversification of their FX reserves. And specifically in the Middle east and other central banks around that region were some of the biggest buyers. And if you think about why the central bank holds FX reserves, it's typically in situations like this where there's large external shocks and they need to sell X reserves and raise cash. And so perhaps we're seeing some of that show up in the price action of gold where you're seeing the reversal of that because of the increased geopolitical uncertainty and the shocks to their economies that they're starting to raise cash. And I think that's another reason why I think we're starting to see long end yields rise in the US Specifically because you have these countries that hold a lot of Treasuries and they're selling what they have right now to buy things like oil to protect their economies and to protect their, their currencies, to bolster their currencies. And so it's like they sell what they have and if they have gold, if they have Treasuries. And that's why there's like implications of, of the Middle east conflict that kind of trickles out way beyond just, even just the oil market or just that region. It's all interconnected.
- [06:12]
A
So how does the Fed fit into all of this? Like what are you looking at as far as the rates market and you just mentioned just now, but that as far as relation to Bitcoin and the outlook for that asset?
- [06:25]
B
Well, I mean the Fed could be in a little bit of a tricky situation right now, right? I mean if they're facing a more stagflationary environment where you have this supply side commodity spike across the board that leads to inflationary pressures. And you see this in the inflation expectations starting to rise as well as I just mentioned the oil price obviously. And so they could hike to kind of protect their currencies or defend their currencies and to combat inflation. But when you have debt levels at these levels, it gets tricky, right? With the interest expense, it kind of blows out the deficit even more if they raise interest rates. And even maybe more importantly, when you raise interest rates to combat an oil spike, it typically puts pressures on equities. And so when you look at the correlations between federal tax receipts and equity performance, they've been pretty tightly correlated because the US Economy is so financialized. And so if you get this situation where you hike rates to combat the inflation, you could cause equity prices to fall. And then you have falling tax receipts and then that can lead to actually a wider deficit which could bring interest rates even higher, which could interest expense higher, which could blow out the deficits more. And so it's a really tricky situation. And so the Feds in this, they could perform quantitative easing in the face. They could find themselves needing to inject liquidity in the face of oil spiking and commodities spiking and inflationary pressures rising. And that's when you start to think like the emperor's having no clothes. I mean already you saw the Fed justifying cutting rates when the unemployment rate was still very historically low and the CPI was still well above their 2% target, they still justified cutting rates. Now if you have inflation actually rising and you still have to return to more accommodative monetary policy, people are starting to question like what is the, what's the end game here? What's the sustainability of this? Why would I own long dated bonds for a country that continues to blow up their deficits and then they don't know, they don't respond to inflationary pressures, they just continue to do accommodated monetary policy. So the Fed is in a tricky situation. And in that environment, if they do need to resort to something like quantitative easing in that environment and inject liquidity, typically Bitcoin does really well in that environment. But there might be a lot of pain before the Fed actually pulls the trigger to do something like that. But ultimately I think that's what's going to have to happen.
- [09:15]
A
Well, all of that I believe just bolsters the case for bitcoin. Right. Because as a long term asset, it's the debasement trade, the ultimate debasement asset. And all this points to, I think,
- [09:30]
B
higher prices for bitcoin, I mean in that environment too. But I think there's going to be a lot of volatility before we get there. I think the signals are there. If you look for them like Kevin War saying things like a Fed treasury accord, the last time we were in this situation was World War II essentially when they had to do resort to yield curve control. And so that could be something down the road because they can't really afford to lose the long end of the bond market. And right now we're seeing yields rise. And for a Treasury that needs to refinance as much as they need to, which is a lot over the next year because they've been issuing so much on the short end, you have that refinancing risk. The treasury, when they see yields rise, you can tell it concerns them by their comments. And I would be concerned as well. If the Fed and Treasury start to work together, if they become the treasury, it's typically you have either indirect monetization of the debt, which is a fancy word of saying, or direct monetization would be a fancy way of saying money printing. And that's typically good for Bitcoin. It'll be good for gold too. If Bitcoin didn't exist, I'd be a very large gold bug. So I think this is a correction in gold. I think it might play out, it might not have the most stellar year, but the long term valuation of gold and Bitcoin in this environment, I think it's very constructive. It's why it exists. Having a political neutral stores of value that can't be printed in an environment where everything seems to be able to be printed.
- [11:25]
A
Yeah, I agree. One of the things that I know you wrote recently is that Bitcoin as an asset almost behaves like two different assets depending on the time horizon you're using to look at it. Can you explain what you mean by that?
- [11:42]
B
Yeah, it's kind of similar to what I said before where it's due to Bitcoin's liquidity profile, it being the only asset that's available to trade247,365. It typically trades like a risk on asset over short periods of time. And I think the market broadly use it as a risk on asset, but over long periods of time it's more tied to things like fiscal sustainability and currency debasement. I think that goes back to that table I talked about the 10 day, 60 day. But even longer term, if you stretch it out to six months or years or three to five years, I think Bitcoin's price action is more related to the traditional monetary system, financial system and the sustainability of the fiscal outlook. The risks of currency debasement, rising geopolitical uncertainty. I think Bitcoin's price action is more driven by those factors. And so it's kind of a tale to time horizons where you have Bitcoin trading with speculators and traders in the short term and that kind of dominates the short term price action. But the long term price action I think is driven by those more structural factors.
- [13:07]
A
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- [14:52]
B
Yeah, I think bitcoin treasury companies should be considered as what Michael Saylor says is amplified bitcoin exposure. So if Bitcoin's down 45, 50%, I think you should expect the equities of bitcoin treasury companies to trade below that. And then same thing on the upside, Bitcoin treasury company equity should probably outperform bitcoin Bitcoin if the management team is executing with discipline. And so right now we've seen a correction with bitcoin, which is typical. These are bitcoin businesses with a lot of bitcoin on the balance sheet. And so you should expect them to come under pressure. But the way I look at bitcoin performance with these treasury companies is looking at the KPIs like Bitcoin per share BTC yield. And a lot of these treasury companies have actually continued to buy throughout this correction. And I think that's a signal to the resiliency of the business model. I mean, if you look at strategy during this price correction, they've not only continued to buy bitcoin, but the pace of their bitcoin accumulation has Increased. And a lot of people were saying that hey, they're going to have to sell Bitcoin. And strategies are risks if Bitcoin corrects. And really they just didn't run the numbers. And I think even the more interesting thing is that strategy and others continue to trade at a premium to their Bitcoin holdings despite the Bitcoin price correction. So I think when you look at the performance of a Bitcoin treasury company, you should really think about it in Bitcoin terms. So like Orange BTC for instance, we're pretty proud of the fact that we've increased our Bitcoin holdings in an accretive way by I think 2.39% at this point, despite the Bitcoin price correction, which is great. We're stacking Bitcoin even at these lower depressed prices. We have long term conviction and we're going to continue to do that. And so I think it's actually a pretty good signal that a lot of these treasury companies have held up through this bare market and it'll give people more confidence to potentially invest in them to benefit from the bull market. Because like I said, if Bitcoin starts to rally, you should expect a leveraged Bitcoin equity to actually outperform Bitcoin as long as the management team is, is, is executing.
- [17:07]
A
Yeah. The crypto trade in public markets I think has really fallen out of favor and it almost was more bearish sentiment around it than the software sell off we saw from the AI fears. What do you make of, let's say, the long term outlook on these treasury companies? If we don't see a recovery in Bitcoin for a while, is it possible that that performance separates? Can they still come back without Bitcoin coming back? Or is that, I don't understand the dynamic as well as you do.
- [17:42]
B
Well, look, I mean each treasury company is different. So that's the first thing. You know, they have different management teams, they have different capital structures, they have different balance sheets, different leverage ratios. And so some are built to withstand a very prolonged bear market because they have very low leverage. They have a cash Runway, they have an operational business to bring in some revenues, others maybe not so much. And so maybe they've come under pressure, but still, I mean there's, there's ways to get around that. Even if they come under pressure, there could be an acquisition, there could be other ways they could generate revenue. That's the optionality of being an operating company. You know, they have ways that they could change the potential of the company. Despite the bitcoin price drawdown. And so I think over time you're going to just see more of these companies kind of differentiate themselves. Like at origin btc, we're in Brazil, which is differentiation in itself. And then we're working on building operational lines of business to generate revenue. We're working on 20% of our bitcoin holdings. These are companies we have very low leverage ratio right now and we have a decent amount of bitcoin and that's digital capital. I mean we can do things with that capital. 20% of our bitcoin holdings are earmarked for bitcoin income generation strategies. And that could be derivative structures, that could be different arbitrage trades, that could be lightning channels. Like we're considering all these different options to just make some of that bitcoin productive to generate more income and make our balance sheet more productive and efficient. And hopefully that leads to more bitcoin accumulation because that's the goal. Right. To increase bitcoin per share. And so all that stuff can be done in a bear market or a bull market. And so we're just head down building. I mean really it's just about building a robust capital structure that's able to withstand bitcoin's volatility and so that we're able to survive to benefit from bitcoin's long term price appreciation. Our balance sheet will just get stronger. And we believe, you know, this isn't our first rodeo with bitcoin volatility and it's just having conviction that it will recover. And then once we have that tailwind behind our back, I mean that just makes it our lives even easier. But right now it's like we're not really sweating much just because of decisions we made a year ago where we were prepared for bitcoin's volatility and we built a company expecting drawdowns like this.
- [20:30]
A
Well, the disconnect in public markets, I think for people that aren't so in the weeds with bitcoin and treasury companies, it's hard to conceive of revenue generating operations besides owning the asset or. Right. Like when people. Right. People think of a Treasury company, they just think you buy and hold and that's all you do. Rather than you're an operating company that has multiple revenue streams or you have even products and services.
- [20:56]
B
Yeah.
- [20:57]
A
That can bolster the business. Yeah, I think you do great work. And where can people find you online?
- [21:05]
B
Yeah, I'm on X, just like a lot of people. And so I share my insights there and analysis at Samcala S A M C A llah. You can also track what we're doing at orange@orangebtc. And then orangebtc.com is a website where we have analytics, dashboard, research reports, educational materials, as well as more information about the company if you're interested in learning about it.
- [21:30]
A
Amazing. Everyone should definitely go do that. Sam, I really appreciate you taking the time and we'll do it again soon.
- [21:35]
B
Thanks, Phil. Appreciate it. It's fun.