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- [00:00]
Lyn Alden
I'm curious if you found anything that could possibly slow this trade.
- [00:03]
Unknown Speaker
When it was done in the 1940s, it was World War II, so nobody was looking, nobody was looking at treasuries. They're all looking at what's happening in the Pacific, what's happening with Europe. You probably get a weaker dollar, you probably get a boom in emerging markets because they have all that dollar diamond debt that gets relieved.
- [00:21]
Lyn Alden
Time based capitulation. My favorite thing to watch when people lose their mind at the same price as it was six months ago. You loved it six months ago, you hate it now. It's literally the same price. If you've listened to my interviews with Lyn Alden in, or any interview with Lyn Alden, you know that nothing stops this train. So I started with a simple question. Does anything slow this train? That started an incredibly interesting conversation about fiscal dominance, the path of United States debt, the approach our government and the Fed are taking to the economic situation in the United States. And of course, where Bitcoin fits into it all. You can never miss an incredible conversation with Lyn Alden.
- [00:59]
Unknown Speaker
That's dope.
- [01:13]
Lyn Alden
So you've gone and remained viral for saying nothing stops this train. I'm curious if you found anything that could possibly slow this trade. This episode is brought to you by Binance, the world's number one crypto exchange, trusted by over 270 million users worldwide. Start your crypto journey with binance@binance.com Binance is not available in prohibited countries, including the U.S. check its terms for more information www.binance.com terms There are certainly things.
- [01:44]
Unknown Speaker
That could slow it. We saw attempted to be slow pretty heavily in 2022, for example, when the Fed started their initial very hawkish activities and it started to re accelerate roughly by the end of the year and especially in early 2023. One of the things I've been highlighting in my research is that right now one of the levers that does somewhat slow it are the tariffs. That basically represents, at least at a current kind of monthly basis, the biggest tax increase in a very long time. And so that actually does somewhat reduce the near term deficit, not by cutting spending, but by increasing taxes. Now, the numbers are still smallish, even though we're talking giant numbers here. So when you look at say, the U.S. economy's $30 trillion GDP, roughly annual spending by the federal government is over like 7 trillion. You know, their income is like over 5 trillion. So you're talking about a $2 trillion deficit delta. And the tariffs are raising hundreds of billions of dollars at an annualized basis. We'll see how long that is sustained if volumes kind of change based on some of those numbers. But you know, I think it's not necessarily that the train accelerates every year. It's more about the unrelenting nature of it. So sometimes it slows down a little bit, sometimes it reaccelerates. For example, the big beautiful bill kept it going pretty strong. If anything, it gave it a minor extra push, but then the tariffs kind of pull it back a little bit. And so the main point is that deficits as a percentage of GDP remain historically elevated. And while they can go up and down maybe, maybe a couple hundred basis points, they're pretty locked in. There's very little that can actually stop it.
- [03:26]
Lyn Alden
And we're paying a tremendous debt service on it, which inevitably makes it continue to increase even if you end up in a small budget surplus or neutral. Right?
- [03:36]
Unknown Speaker
Yeah, the interest expense is one of the key levers that changed. So a lot of people ask what changed? I mean, people have been talking about the debt and the deficit for, for decades. It's kind of infamous at this point. People, you know, in the, in the late 80s, early 90s, it kind of reached a crescendo in American politics that was kind of the peak zeitgeist for it. For example, the famous national debt clock went up in the late 1980s. Ross Perot ran the most successful independent presidential campaign largely on this topic in the early 90s. And that was kind of the peak period, if you look at it up, that was actually the peak level of interest expense as a percentage of gdp because they still at that time had pretty low debt to gdp, but it was combined with very high interest rates. Now what they didn't really foresee, and the reason a lot of these people were like 30 years early in their alarmism is not because the problem didn't happen, but because it happened slower than they thought. And one of the main reasons was they opened up China to the rest of the world starting in the 80s. The Soviet Union fell in the early 90s and that whole block opened up to the world. So you took western capital, eastern labor and resources, combined it together, very disinflationary, that was beneficial for interest rates to continue falling. So we had this 40 year period of falling interest rates which really kind of minimized interest expense. If you double your debt, but you cut your interest expense in half and you keep doing that, it's sustainable. And the problem is we've roughly the whole western world Hit zero in some places it went negative.
- [05:01]
Lyn Alden
Negative, yeah.
- [05:02]
Unknown Speaker
In the US it went borderline zero depending on what part of the curve you're looking at. And so now if we're merely in a choppy sideways pattern going forward, which is less extreme than that negative or zero yielding environment because now the bond market is more demanding of some yield and because the realities of the fiscal situation are understood, that's one of the key levers that changed along with demographics and some other factors that make this kind of the past five years or so different than the past 40 years that came before.
- [05:36]
Lyn Alden
So you mentioned tariffs, obviously slowing the train a bit. I love how you aptly named that attacks, which is sort of the opposite of the rhetoric we've seen about lowering taxes and of course the inflationary effects of the big beautiful bill. And we had doge and talk of austerity and cutting from the beginning. It seems like the current administration is all over the place as to how they view the debt versus everything else or how big of an issue they see it as. I mean we've clearly seen a pivot to we're going to grow our way out of this, not we're going to cut our way out of this.
- [06:12]
Unknown Speaker
Yeah, I think, I mean like any administration generally has different voices in it is the typical thing where there's a king and a bunch of advisors trying to get the king's ear. You know this, this administration had more of the pro tariff side versus more of the, the, the more free trade and cut side, which was kind of the musk side of it. Obviously. You know, Doge, I've been kind of vocal from the beginning that Doge would be ineffective at doing major cuts because they weren't going after the main areas. They didn't really have the authority to go after the main areas which are interest, expense, Social Security, Medicare, defense, veterans benefits. You can kind of add that to defense. That alone represents the by far the biggest piece of the pie chart. The everything else they were going after was like the other 15 to 20%. So even if you were to somehow meaning to reduce that 15 to 20%, you know, let's see, cut a quarter off of that. There's really not a ton. You're kind of picking up nickels in front of the steamroller. So yeah, they have pivoted more toward that running hot, keep interest rates low environment, which is what we saw the last time the US was in fiscal dominance, which was the 1940s. That is the main thing going forward. And I think right now, I guess One of the surprising things to me is the speed of the pivot toward tariffs, which is that they got a pretty significant chunk of people to be really happy about tariffs. So you know, when, when the government says, hey, look at, look at all the hundreds of billions of dollars we're raising from tariffs. This is winning. It's like, well, if you actually look at who's paying this, it's, it's mostly Americans so far. And it's challenging because they were in a very politicized environment. So if you're just trying to analyze, just nonpartisan what, you know, what, what's happening with the numbers. If you're trying to look at the numbers, you'll, you know, people can have it colored by people are against it. We'll look toward one type of source and people for it will look at another type of source. But we can look at things like for example, import prices are measured pre tariff. They're not down in aggregate so far. You can look at, for example, consumer prices around the margins for goods are inching up. Is somewhat complicated by the fact that there was import front running. So businesses rightfully in quarter one, when they saw these tariffs coming, they were like, well this import, double our amount.
- [08:26]
Lyn Alden
This get everything into a bonded warehouse and worry about it later. Mexico or. Yeah, yeah.
- [08:31]
Unknown Speaker
And that gives them a few months of trying to keep prices low, see if they can weather through it, you know, because they're, they have other competitors and nobody wants to raise prices first obviously if they can help it, you know, to keep market share. And so there are a lot of complex variables, but right now, you know, the majority of it is being paid by the combination of American consumers and businesses, you know, offset by some front running and around the margins some lower volumes. The nothing stops the train thesis really had two layers to it. One is that there's so much political gridlock that it's very hard to meaningfully raise taxes or cut spending. And then the next layer below that is that the US is so financialized that even if you somehow did do austerity for a period of time, it would likely slow down the economy and or cause the stock market to have a flatter period, which because our tax receipts are so financialized and thus tied to ever rising stock prices, starts to hurt you on the income side. And what tariffs are interesting is that they kind of found a way to pierce through that first layer, which is that by calling it a national emergency, they were able to kind of bypass that, you know, polarized congressional environment and actually just do A major tax increase, which, you know, if you asked me a year ago, would not have been my base case. So that's why it does somewhat slow the train around the margins. But then it starts running into that second layer. And that's why I think it'll be, if we are having this conversation three years, five years from now, we will still be in a very high deficit environment, even though the numbers can go up and down a little bit.
- [10:05]
Lyn Alden
I've had multiple conversations with people about tariffs who believe that the country, the other country is paying them still. So I don't think you can even have a baseline conversation. I wonder if when Trump started floating them, it was really about raising money or about unfair trade deals or if he just quietly knew this was a way to tax people without that narrative spreading.
- [10:29]
Unknown Speaker
Yeah, I have trouble speculating about that because I don't know, it's hard to read what people think. I can only look at the numbers of what's happening. And if you think about it, I mean, it costs like trillions of dollars to rebuild a manufacturing base somewhere else. So we import trillions from the rest of the world. We spend something like the baseline was 80 billion annualized rate of manufacturing construction spending in the U.S. that was kind of the maintenance cost of a flat industrial base. There was a little bit of subsidies over the past couple of years to build semiconductor facilities. So they increased that by temporarily 160 billion or so that's actually currently rolling over. So we're actually gradually spending a little less on manufacturing construction, even though ostensibly to offset these tariffs you'd have to build stuff locally. We don't see some like giant new bursts of new spending, at least compared to the past two year baseline. And we don't really see a reduction in aggregate import costs. Now generally speaking, you'll see kind of people that are, that are more in the camp that the foreigners are paying it. They'll show anecdotes like, hey look, Japan had a reduction in auto export volumes or something. You'll see these individual cases. But obviously any sort of investing thing is what's happening. Especially talking macro, what's happening in the grand sense now, what's happening with this one company, this one industry, what's happening across the board. And some months into this, the answer is import price is roughly flat tax is being raised, it's not really being paid by foreign exporters and it's somewhat spread between American consumers and businesses. And that front running that happened makes perfect sense.
- [12:11]
Lyn Alden
You and I have talked at length in the past about fiscal dominance, I assume that your base case is still that we are in a fiscally dominant environment and not in a. Obviously looking to the Fed, but everybody's still looking to the Fed. It seems like people don't get it. The main headlines are still Trump's berating Powell and when will Powell leave and who will be the next Fed chairman? Are you still of the opinion that rate cuts will do very little even if Trump gets what he wants?
- [12:41]
Unknown Speaker
So I think that any given FOMC meeting is not that relevant. So a 25 or 50 basis point change is not particularly relevant. Now if we start talking, you know, replacing a Fed chair and other parts of the committee and getting like a 300 basis point cut or something like that, I mean that, that starts to become meaningful. So magnitudes matter. You know, if we're running at 1 to 2% interest rates, that's a, that's a different environment than, than 400 basis points and change. Now if you look at kind of the purpose of interest rates, like what the central bank's trying to do, you know, they're, they're obviously their mandates are unemployment and inflation. But then the question is what are they hoping to do with interest rates? Why, why does that matter? And what they're, what the Fed mainly does is impacts bank lending. That's kind of the whole, you know, purpose of the interest rates is in theory, higher interest rates would slow down bank lending by making borrowing more expensive, whereas cutting rates makes borrowing more attractive, and you kind of restart the credit cycle. Now the problem is that when you're in fiscal dominance, bank lending is not the main source of new money creation. So for example, back in the sevent, when baby boomers were entering their home buying years, which is peak credit formation, we had the highest historical rate of bank lending in the country. And so the money creation was largely led by bank lending with some fiscal on top of it. Obviously you had the Vietnam War, you had Great Society programs, these were adding to it, but there was more money coming from bank lending. So when Volcker jacks up interest rates, he did meaningfully slow down bank lending. And the problem is that this entire cycle, starting before COVID during COVID after Covid, none of this was really caused by excessive bank lending. It was all that really large fiscal stimulus that was monetized. So the Fed is trying to kind of slow down bank lending, which is just not really the key thing here. So their handful of industry changes don't make a huge difference in that sense where it shows up if they do A massive cut, you probably get a weaker dollar, you probably get a boom in emerging markets because they have all that dollar diamond debt that gets relieved. That can cause a kind of more demand for commodities in general, including energy, which could be somewhat inflationary around the margins. They can restart lending to some extent. The challenging thing is that we see them talking as though short term rates and long term rates are the same thing, which they're not. So the Fed primarily controls short term rates. And what we saw is that just because they trim short term rates doesn't necessarily mean that like say mortgage rates go down.
- [15:16]
Lyn Alden
The bond market didn't buy it at all. I mean we saw yields go up, right?
- [15:20]
Unknown Speaker
They didn't buy it. So it. And now maybe if they, let's say they cut 300 basis points, they just completely kill the short end. You know, there's two outcomes that could happen. One is if people are not getting interest rates on short term paper anymore, maybe they will bid for the longer end. They'll buy longer Asian Treasuries and mortgages. Maybe they will drive those down to some extent. Or, or they could say, well this Fed's not serious about inflation. Why would I want to own the long end of the curve? And they could sell it off. So there is actually unclear how that would play out in fiscal dominance. It wouldn't necessarily lower actual borrowing costs. And, and well, it didn't last time. Yeah, the small sample we have so far this cycle is it didn't now whether a bigger one or a second one would. I mean, market conditions could change. If you have tariffs and the economy slows down, then maybe you get a different result. I wouldn't want to fully say it wouldn't do it, but they're just not the same thing is the point. The longer end is more set by the market, especially when the Fed's not actively buying and selling a ton of securities. If anything, right now they're trimming their longer end securities and mortgages. I think the Fed is less relevant. It's not irrelevant, but it's less relevant than probably the market thinks the size of the fiscal deficits is more relevant and the tariffs are more relevant. Basically if you're going to, if we're going to have 400 plus billion in new taxes this year, that's a bigger variable, I would say, than 50 or even 100 basis points from the Fed. You have to get into a lot bigger hikes or cuts to really start having an impact of that scale.
- [16:50]
Lyn Alden
This all seems like it yields that was a four Year slip. This all seems like it heads towards yield curve control when the Fed effectively accepts that we're in a fiscally dominant situation and just falls prey to that. I mean, the train, to use, you know, your words, might not be at the yield curve control station yet, but it seems like it's heading that way rapidly.
- [17:16]
Unknown Speaker
I think. So there's different types of yield curve control. I mean, during the height of the pandemic, the lockdowns, the Fed openly talked about yield curve control in their meeting minutes when they were kind of stabilizing the bond market. You know, they dropped that. They didn't have to go that route. You know, right now we see kind of talk about politicization of interest rates. That's not new. I mean, for example, in the prior administration, you had Elizabeth Warren, she was on the Fed's case about trying to get rates down. Now we have the Trump administration on the Fed's case trying to get the rates down.
- [17:47]
Lyn Alden
So everybody in power, she's still on it too? I think so, yeah. Probably one thing they can agree on somehow.
- [17:52]
Unknown Speaker
Yeah, they both want. Yeah. But I do think that as. So one of the outcomes of fiscal dominance is you tend to get less separation between the government and the central bank because the central bank, whether they like it or not, generally has to step in and put out fires. An example of that is when, when the bank of England had the gilt crisis in 2022. So they announced a budget that had a bigger than expected deficit. They're not the reserve currency, so they, and they have parliamentary systems, so they're a little bit more volatile with some things that happen. And basically their gilt market sold off. They had leverage in the market that kind of resulted in more sell offs. And so the bank of England, they actually, it's kind of comical. They had, so inflation there was like 10% of the time. They, they were going to start balance sheet reduction, quantitative tightening, and they had to cancel a conference about balance sheet reduction to instead go and buy gilts to put out the fire. Now once they put out the fire, then they eventually got to, you know, a period of quantitative tightening as they planned. But the point is they had to like drop everything they were going to do and buy government bonds with new kind of temporarily printed money to put out a fire. And that's, that's generally what happens when you start to get more toward fiscal dominance. And in the US Case, we have a situation where the treasury has been more active in what they're doing. So, you know, people have called this like activist treasury and other things started under Yellen. So far it's continued under the current administration, which is that they can do things like shorten the average duration of their debt. They can issue a higher percentage of their debt as T bills, which is where there's more demand for it. Rather than term out their debt, they can refill their cash balance less quickly than they might otherwise would. They have different levers they can pull that are in some cases roughly equivalent to a handful of industry cuts or a little bit of quantitative easing, for example. But basically you get less independence. The Fed, if you look at the New York Fed's annual report on the state of their kind of securities book, they plan in roughly a year to go back to gradual balance sheet increases. They probably wouldn't call it QE at the time unless there is a recession, but they'll be ending their period of quantitative tightening and go back to gradual increases in that. Whether we get outright yield curve control, that's a very politicized thing to happen and it's hard to do without a major acute crisis. So, for example, when it was done in the 1940s, it was World War II. So nobody was looking, nobody was looking at Treasuries. They're all looking at what's happening in the Pacific, what's happening with Europe. And there was a very kind of raw in it together culture at the time. It was a very centralized culture in a way. We don't really have a reason. It's like, well, decades of kind of bad decisions have caught up to us is the answer. And we just kind of gradually build up this really big debt burden with interest rates that aren't going down anymore. So we need to do yield curve control. That gets really sloppy. So I think they're going to try to push it off. But I do think that there could be various kind of yield suppression techniques that keep it somewhat below what the market might otherwise settle at.
- [21:09]
Lyn Alden
What do you think Powell should be doing right now? In context of everything we've discussed with tariffs, obviously they're supposed to have a dual mandate, unemployment and labor. Right. So in theory, none of this should be their problem. Right. Excuse me. And inflation. None of this should be their problem. And we have a historically high stock market. We have, until last week's revisions, we thought we had a strong labor market. I mean, until that point, wasn't he effectively right to stop cutting? Maybe they shouldn't have even cut at all.
- [21:39]
Unknown Speaker
Yeah. So I think the problem is that, like I said before, when there's fiscal dominance happening. There's really no right answer by the Fed. If they cut interest rates too much, it causes problems. If they keep interest rates high, they're just blowing out the fiscal deficit more than if they had it low. So they don't really. It's not bank lending that's the problem. I think the best thing they could do is be transparent and just say, look, this is primarily a fiscal issue. We're going to try to make bank lending happen at a moderate pace with the tools we have, which is what we're doing now. But we don't really have good answers here. That's why, I mean, I would, I would hate to be in that role. There's no better money you could pay me to want to. Even if I was even qualified to run the Fed, I. Absolutely not. So until recently, with stock market all time high, bitcoin all time high, gold all time high, roughly, and unemployment running within their target band of low 4%, it's not really screaming, we need cuts now. The recent weakness in the job reports certainly increases the odds of a trim. The whole global economy is kind of sluggish. Energy prices are kind of low. You have some degree of deceleration that argues for a cut. I would also generally say tariffs. That's a different type of inflation than inflation from money supply growth. So they generally should look through tariffs per se, just because that's more of a tax increase than a debasement driven price inflation. It's just a very different type of thing. So I do think they should look through that and mostly just think, are we controlling bank lending at the rate we're targeted to now we can have a whole separate discussion. Should the Fed even set interest rates?
- [23:27]
Lyn Alden
Of course not.
- [23:27]
Unknown Speaker
I'm in the camp that they shouldn't.
- [23:29]
Lyn Alden
But it doesn't even exist.
- [23:30]
Unknown Speaker
Yeah, so it's like if, yeah, if they have this algorithm that they're supposed to roughly follow, which is keep unemployment as low as possible, keep longer interest rates moderate, keep inflation in check, they're kind of in a position where there's no right answer right now, but leaning somewhere toward moderately hawkish makes sense given the tools they have.
- [23:53]
Lyn Alden
So then let's say Trump gets what he wants, he puts in a more politically favorable Fed chairman and we get 300 like you said, you know, we really start heading back towards zirp. Does inflation just fly?
- [24:06]
Unknown Speaker
I think we get an uptick in inflation partly depend on what happened with tariffs. I think what happened is you get a weak dollar, therefore you get a little bit of a boom in emerging markets. And the mechanism for that is that they have dollar denominated debts and also they're trying to not to have their currencies devalue relative to the dollar too quickly. So if the Fed's kind of hawkish, it forces a bunch of central banks around the world to be somewhat hawkish. So if the Fed cuts, it allows a bunch of them to cut and therefore kind of multiple economies can get a little bit of a lift, which increases the demand for commodities, including generally energy. So you could get like another round of energy led inflation and just, you know, kind of higher commodity prices. And so I think that that's the mechanism for how it would show up. I wouldn't still necessarily expect like a 2022 level of inflation because that was, I mean we had like a 40% money supply growth in two years. Then we had of course, the shock in energy prices because of the war in Ukraine. So absent some sort of huge energy shock, I wouldn't expect say 9 to 10% headline inflation and whatever truflation was saying at the time, I would expect lower than that, but probably above the current level.
- [25:24]
Lyn Alden
Yeah, that makes sense. So let's pivot obviously to Bitcoin and its current role, how it can be used as a hedge for individuals, governments, or where it really falls in your mind at this point, considering all of that.
- [25:38]
Unknown Speaker
Yeah, I don't call it a hedge per se because a hedge generally is something that pays off at the moment you want it to. So if you wanted to hedge against the stock market going down, you buy certain types of puts, for example. It's more just like as an alternative. It's a parallel system that has many desirable attributes. So as you live in a world with 180 currencies and they're all generally devaluing at a variable pace. I mean, developed market currencies historically grow in supply by 6 to 8% per year. Developing market currencies historically grow at double digit percentages on average, some of them much higher. You have Bitcoin, which is this, this global alternative that people have with no long term dilution, just currently is very low supply inflation as it reaches its total coins issued. And more broadly, I put it in the camp of having solved fast settlement. So one of the things I've argued in Broken Money and elsewhere, is that for about a century and a half, ever since the invention and deployment of the telegraph, we lived in an age where you can make a transaction globally, roughly at the speed of light, but there was no way to send final value in any sort of fast way. And so we became reliant on these big centralized ledgers to arbitrage and maintain the difference. And Bitcoin, for the first time since the deployment of the telegraph, kind of closes that gap where it says now we have this decentralized ledger backed by energy and backed by code and distributed ways of enforcing it that allows nearly instant global settlement. And so rather than being reliant on a big central bank or a big set of commercial banks, there's this alternative. And it doesn't debase at any sort of the same way that fiat currency systems do. So I think basically Bitcoin's going through this period where it started at zero. Now 16 years in, we're at a 2 trillion plus market cap is still 0.2% of global assets. Gold is 2%. Gold, I think, is already reasserting itself to some extent. And I think bitcoin at a tenth of the size is playing catch up. And so I think it's this increasingly recognized global alternative that's been tested. Technically, it's gotten to a scale of liquidity where institutions are obviously interested now. They're the main drivers this cycle. And so I think that it's basically just this side thing you can play in, which makes a lot of sense.
- [28:12]
Lyn Alden
In fiscal dominance with that instant settlement in mind. And your point about obviously this being the first time that's possible since the telegraph, why do you think that so few people are actually using Bitcoin for that purpose? I mean, are you speaking about in a future world where things are denominated in Bitcoin and it becomes a global reserve currency or even an alternative to the other system that you think people will start heavily utilizing it for transactions as a settlement layer? Because right now we know that most people just want to keep their bitcoin, right?
- [28:42]
Unknown Speaker
Rightfully so, Yeah, I think so. It's a good question. I think so. Right now, everybody in the world has a problem of how to store liquid savings in a way that doesn't get debased. So people, for long term store value, they can turn to real estate and other imperfect things. Sometimes they solve needs they have, like where to live. People would invest in equities and gold and fine art, but especially on the liquid side, everybody in the world to some extent has a store of value problem. Whereas fewer people wake up every day and think, I really have too many payment frictions in my life. Some people do. Africa has 40 currencies.
- [29:21]
Lyn Alden
I was going to say not here, not here, but yeah, definitely another place.
- [29:25]
Unknown Speaker
Exactly. So there's some percentage of people that wake up and say, I just, my payment options are so bad. A lot of us don't, especially in the developed world. And so instead now if you're like, Walmart has something like 3% net profit margins or something, right? So if you're doing these crazy volumes, then you might actually think, you know, if I can trim some basis points from payment processing, then maybe this could actually be meaningful. But if the average person, it's more about my wages are getting devalued, my savings are getting devalued, I'm kind of running on a treadmill. If you're, if you're anywhere in the developed world, it's twice the speed or more, you know, and so I think that's the, that's the killer app in say the first quarter century of Bitcoin's lifetime, which is when you go from zero to several trillions. There's capital gains tax frictions against payments, there's the fact that volatility is an issue and you need upward volatility to grow. If you get upward volatility, it's going to come with leverage euphoria and it's going to come with then periods of inevitable downside volatility, which prevents people using it as their three month working capital. It's too volatile at that time to denominate most things in it. So your landlord is not going to denominate your rent in Bitcoin. They might let you pay it in Bitcoin relative to dollars, but they're not going to denominate it in Bitcoin because they have expenses. So basically there's an existing network effect that Bitcoin's growing into where people have their liabilities denominated in dollars or whatever their local currency is. They need some degree of kind of near term stability in their working capital to meet their liabilities. And so I think the current era is that it serves as portable capital with the option of enthusiasts and people that find various payment frictions can turn to it. I've used it as a medium exchange at times. Also there's alternative stablecoins which again, if you're just thinking hold it for three months, pay, receive, and anytime you get a meaningful excess, you then put it into Bitcoin or other longer term stores of value. That's solving a problem for a lot of people, especially if they're not in a totally sanctioned area where even stable coins are more likely to be shut off for them. So if they're not kind of personally running into the fact that stablecoins are centralized. If they don't, it's not, that's not really affecting them, then they're more likely to keep using them. And so I think right now it's just a very crowded market for payment options. And I think Bitcoin is the best long term one because it's like the most unstoppable one. But in this kind of period of growing into the network and being volatile, it's kind of portable capital first, that's like the biggest killer app. And then as it gets bigger, less volatile, I think that payment aspect starts to become more and more interesting over time.
- [32:15]
Lyn Alden
Yeah. My next question was going to be then why does everybody use stablecoins and do it on Tron? Because it's faster, cheaper and they don't care. Right. Because it's still a step up from probably what they're used to or have access to. But as you describe it, it almost starts to sound like in the short term you have a savings in a checking account, Bitcoins, your savings account and stablecoins are your checking account and together they solve most of your problems.
- [32:40]
Unknown Speaker
That's pretty much, yeah. And that's how a lot of the world is treating it, which is that Bitcoin, stablecoins, even some other cryptos can solve a near term payment problem. You can just pay it and receive it and sell it for whatever you want. And really the differentiators, what do you perceive as secure enough to want to hold for five years? And that's what I would say Bitcoin is solving. And if someone people get deplatformed from financial payments, they get debanked. Historically Bitcoin could solve that for them. Some of the early use cases was people wanted to get money in or out of Argentina, for example, where it's not illegal per se, it's just hard because all these capital controls went up and it's like, well, I can use this technology to do it. Stablecoins do provide this kind of near term alternative, which is you're paying a debasement tax as you do it. But if you only are doing it with one month or three months of your capital and you're just kind of moving around and using that for high velocity stuff, people don't overthink it.
- [33:46]
Lyn Alden
And if you're on the peso as your standard of the Bolivar, it's not a debasement tax to you. So I guess it's all relative.
- [33:52]
Unknown Speaker
Yeah, it's holding up relative to your Expenses. I always use the anecdote that I know physicians in Egypt that will buy physical US dollars on basically the black market and hold them in their apartment as a kind of intermediate term store of value. And basically what stablecoins do is they're like a offshore bank account for the middle class. So instead of just the rich, they basically say, okay, here's an offshore bank account. We compress the overhead with technology so anyone with an Internet connection can have access to it. You know, and for, for some people that, that works as a, as a, you know, kind of checking account and just sending value, but it's not something you want to hold long term with any sort of meaningful amount of capital. And that's where something like bitcoin comes into play.
- [34:39]
Lyn Alden
Yeah, years ago I had a guest who told me a very similar story about Argentina and I literally can't remember the conversation, but confirmed it with a friend of mine who lives in Argentina. At that time, before the proliferation of stablecoins, people would literally go on the black market, pay three times what they should for dollars. Or the full story was they would receive dollars maybe even into their bank account or receive money into their bank account, go get dollars on the black market, come back and put the physical dollars into a safety deposit depox in the same bank instead of into a bank account which is, I mean it's exactly the same thing. But they're going back to the same bank to store it, but not in the bank's system.
- [35:16]
Unknown Speaker
Yeah, because it's all centralized. If you go to pull dollars out, they can either say no or they can say, well, here's the fake government exchange rate that we're going to use rather than the actual exchange rate that is being set by the market by people's ability to actually acquire and sell dollars. And stablecoins kind of make that easier because before if you were bringing dollars through a port of entry, there's restrictions on how much you can bring. Often it can just be taken for no good reason. Whereas stablecoins, there's just basically infinite density at ports of entry. And also just, you know, like we could, you know, hold up phones in this call and send bitcoin or stable coins. We can't do that with gold or physical dollars other than just using credit rails, things like stable coins. Like, you know, there's even gold backed stable coins if you wanted to send those around. And yeah, it's this new technology that reduces the, the frictions across borders. And so I think, you know, we're again, we're in a world with like 180 different currencies and a lot of people, there are billions of people that prefer they want more of a choice of what assets they can have. It could be the dollar, it could be liquid gold, it could be bitcoin. And they, you know, this technology gives them that access. And you know, even though bitcoin is now 16 years old and stablecoins are 11 years old, they really only reach kind of serious liquidity more recently. So, I mean, stablecoins didn't crack the 50 billion or 100 billion mark until kind of last cycle. And so as these things are now big and well known, they're starting to actually sort of be used and impactful.
- [36:57]
Lyn Alden
So obviously the path to global reserve currency passes through Wall street and governments and large financial institutions. I got in a lot of trouble for a poorly worded tweet that I had recently where I believe I said, unfortunately co opted. I said bitcoin is amazing. Something to the effect of. But it's been largely co opted by the institutions that it was meant to rage against. And a lot of early whales are basically disillusioned with this and that's who's been selling. So I think co opted was the wrong word because it triggered a lot of people that I was implying that the code had been co opted or the network, which was not my intention. It was more a narrative being co opted. I still regret using that word. But what do you make of the institutional adoption and the fact that obviously some who were libertarian or here early may be a bit disillusioned with seeing what it's become, at least in their mind. How do you frame that?
- [37:55]
Unknown Speaker
So I think it's inevitable that as it gets big and liquid, large pools of capital are going to want to buy some, which can include corporations, can include funds, can include governments. There's never a world, there's never a reasonable path where only retail people own it and no large pools of capital want to own it, even when it gets big and liquid, it's just not how things work. And what I would point out is there's difference between something being co opted, captured and therefore made worse for the small users than something that is. And so if large pools of capital want to own it, but the underlying network keeps functioning very well and is designed to function in that environment, small individual users can still send it around and still use all of its cypherpunk properties, despite the fact that large entities are owning it. And if you go back to the prior discussion of why Are people using it as a medium of exchange? One is because it's so volatile and part of it becoming less volatile is for tons and tons of people to own it either directly or through proxies that some institution owns it, a million of their investment clients for example. And as kind of large pools of capital own it, it becomes a non trivial percentage of global assets that starts smoothing out the volatility. There's like less one whale that can just move the price, for example. It becomes less uncertain in terms of politics, like people just wondering if it's going to be banned or something and large pools of capital wanted to not touch it. As those things diminish, it reduces the volatility and therefore can allow Bitcoin to be used for more short and intermediate term needs in addition to just longer term needs, which actually makes some of the cypherpunk properties better. And I mean so I'm a general partner, Ego Death Capital and we focus on investing in bitcoin startups that, that try to make bitcoin usable. So people, you know, having people buy and put it in self custody, building the payment rails, the liquidity rails for payments, all these different things rather than just holding an ETF wrapper or a bitcoin treasury wrapper. Not there's anything wrong with those approaches, but there is, I think two parallel things happening. They don't really compete with each other per se and if anything they're both paths that have to happen if you're going to become a multitrillion dollar asset and stay there.
- [40:18]
Lyn Alden
I think I should be hired as the eco death marketing department. I just had Nico I think two weeks ago and Jeff five weeks ago. I think it's a testament to just what an incredible team you've put together and how successful it's been. And congratulations on that raise by the way. But yeah, all of that said, would you assign the same narrative to bitcoin as you do to the fiscal situation we talked about? Nothing stops this train. I mean, do you think that bitcoin also inevitably continues to rise and goes to a million or is there anything that you see that's a tremendous risk to that?
- [40:49]
Unknown Speaker
So I think for the most part, and some people, because I'm active in both the macro and bitcoin spaces, when I say nothing stops this train, even though it was originally meant for the fiscal deficits, people will often apply it to bitcoin, which I think has some degree of sense to it because one kind of fuels the other to some extent. The way that I and this is where I would generally agree with Jeff Booth is he'd phrase as as long as Bitcoin remains decentralized and secure, then I think the rest kind of works itself out. I think basically the network effect at this point is reached critical mass. You know, it's a communication protocol along with like Ethernet, usb, simple mail transfer protocol, Internet protocol, kind of a more foundational thing like, or even like the English language like languages, these, these kind of network, self sustaining network effects, ways of communicating is basically the dominant communication protocol for value. It's achieved that kind of liquidity, security and scale. And so unless something can outright disrupt it, I think that that process will continue and there's not much I see on the horizon that could disrupt it. I do pay attention to the whole quantum thing, the whole quantum development and I talk to people that are working on solutions and saying how can we make signature types more quantum resilient? What is the time frame that we potentially have to do that is, is, is this a near term thing? Is it an everything, is it a, you know, one or two decade thing? So I don't really see a near term problem from that for everything I've studied, but it is certainly one of the things that might eventually have to be addressed and there are people working on it with, with solutions to potentially address it. So outside of something actually damaging Bitcoin's ability to function as we know it, as the leader of its category, I think that the category itself is at least a 10x from here in the long arc of time and that it's growing into that almost inevitably.
- [42:42]
Lyn Alden
From a market perspective or price, is there anything that you could see that could derail this cycle or this momentum right now? A lot of people obviously pointing to treasury companies taking on leverage. I've talked about that a lot. Friends have talked me off the edge a bit because my first take was there's going to be treasury company number 97 and 113 and they're just going to be hedge funds taking on more risk to try to beat everyone else. And maybe that turns the next 30% correction into a 50% correction, I don't know. But do you have any particular thoughts? Do they worry you at all? I mean, how do you view all the things that are happening at this level of adoption and how fast they're moving?
- [43:22]
Unknown Speaker
So they don't worry me, but I do pay attention to them as a market participant. So this cycle so far has been characterized by less extremes. And so as I mentioned before, anytime you Bitcoin needs upward volatility to grow. Anytime you get upward volatility you're going to get people saying well if I leverage it I get even more gains. And then emotions kick in and people can get euphoric. And now in the past in bitcoin and broader crypto this would happen to extreme levels and you get like a multi year drawdown and washout. So far this cycle and we could later have a blow off top, but so far this cycle we, we've been having kind of more moderate levels of euphoria. So for example, when the ETFs were approved and the month or two that followed, we had kind of mild euphoria in the market and then we ended up getting a seven month consolidation in bitcoin because of it. And then when, when the election happened and we were perceived as having a much more pro bitcoin, pro crypto administration policies in play, we got a really big bump in November and that, that gave us kind of again another like 7 month ish correction. I think that's pretty healthy. When you kind of have this step up and then big choppy sideways of kind of letting off steam and another big spike up, another big choppy. I generally expect something like that to keep happening. The latest one is you have some froth around altcoin treasury companies, which I don't think is particularly healthy development. And even bitcoin treasury companies, if there's too many of them too quickly and some of them are not managed well, they are potential. Yeah, there are potential sources of liquidation. As soon as you have any sort of severe stress or prolonged mild stress in the market, where the market kind of closes on them and they don't really have the cash flows to support their debt obligations so they end up having to liquidate. I do think we'll get some liquidations. Last time, last cycle was over 75% correction. I don't know if we'll get that again. Depends on how extreme some of this gets. But I don't think it's fundamentally concerning any more than prior cycles so far. I would say less than other cycles. But I do think we're going to keep going through Mild euphoria, washout, mild euphoria, washout. You can either wash out in terms of price or time. You can just go choppy sideways for half a year, full year, get all the interest out, compress all the M.
- [45:47]
Lyn Alden
Navs, time based capitulation. My favorite thing to watch when people lose their mind at the same price as it was six months ago. You loved it. Six Months ago, you hate it now. It's literally the same price exactly. It is really wild to watch. I asked Jack Mers the same question right when 21 was announced when we were in Vegas and he said, good. I hope they wash out the bigger and well capitalized ones that are managed well. We'll just buy it. They're just bigger ones. We'll eat the smaller ones and we'll see who wins in this dog eat dog world. And it does feel like, at least in the current iteration, there's just so much buying and there's so much capital on the sidelines waiting to buy that it should cause more upside for now than downside, at least in the shorter term. I mean, it's just crazy how much buying interest there is and how transparent it is. For the first time we literally know exactly who's buying when and how much.
- [46:41]
Unknown Speaker
Yeah, I continue to be bullish long term and then even in this cycle, I don't think the cycle's over yet. I've liked the fact that we get these kind of mini cycles of slightly euphoric and then seven months of sideways chop and another like spike up. I expect that to continue at least for, we'll see what happens the rest of this year. But I still think we'll see higher prices before we hit some sort of longer correction.
- [47:04]
Lyn Alden
And how about the governments starting to talk about strategic Bitcoin reserves? I think we had an announcement of Brazil's having a meeting on it, Indonesia having a meeting on it. We also know obviously the United States still pending an announcement and sort of an audit of how much the United States already has. How does that play into the game theory, I guess of this cycle?
- [47:29]
Unknown Speaker
So I, on average, I view it more as a next cycle thing, most likely, at least for numbers that really matter. So for example, when we saw like, you know, when MicroStrategy started the Bitcoin treasury strategy, they immediately started marketing the idea to other corporations. They would hold a conference like, you know, Bitcoin for, for Treasuries and really no one followed them anytime soon.
- [47:53]
Lyn Alden
I think that was because of Gap accounting rules or at least that's how I cope.
- [47:57]
Unknown Speaker
Yeah, well there, yeah, there were accounting issues and also just not many people were in the position of Michael Saylor where he had such a strong ownership level of the company, was able to think in terms of years and decades rather than quarters and maybe a couple of years. So instead of being like a career executive, like someone who could get easily fired or just trying to optimize their near term pay package. He was an owner and able to make these long range moves. That's pretty rare. But we started to see this cycle finally after a cycle delay, better accounting rules and a lot of bitcoiners saying, well, if existing companies are not going to do it, we'll basically start new companies and do it. So it took more time than many people thought, but it kind of followed. And I think the same thing happens with sovereigns. I mean obviously El Salvador was an early mover, the Kingdom of Bhutan was an early mover. You see UAE at the sovereign level makes some mining investments and ETF investments and things like that. There's a handful of entities out there. Generally speaking, the smaller ones can execute faster on average. I think we'll continue to see talking about it more so than someone kind of just jumping in and wanting to buy half a million coins from some big country and kind of doing the full microstrategy playbook. But I do think that over time this will continue to leak into sovereigns. They'll own it indirectly. Like you'll see a sovereign wealth fund own microstrategy for example, or own ETF or potentially buy some bitcoin around the margins. And it just kind of keeps trickling in from there as it becomes a bigger, more liquid, more understood network. I think that one of the bigger things this cycle is increasingly understood at the sovereign level at least it's here to stay. With the SEC kind of losing their court case and having to Let the spot ETFs come to market and then this kind of pro bitcoin, pro crypto administration, which is that even I think the market's kind of reached the point of scale and acceptance where even if say there's elections down the line, we have a less favorable administration. It's hard to roll back all of it. Even if you take three steps forward, one step back, it's still two steps forward. And especially when looking at a global scale where one country could pull back, another country can say, well then come to us, bring your businesses and your capital here. I think this cycle is marked more by it's here to stay at the institutional scale and allowed by most, at least semi free countries over time, as more cycles play out and as the asset hopefully stays big and liquidity, you'll get more sovereigns that actually maybe want to buy it and hold it at scale.
- [50:36]
Lyn Alden
I guess the question you brought up, Michael Saylor, obviously he's unquestionably the biggest, the best, he's figured this out. He's going to own a meaningful percentage of the bitcoin supply, but trading actually at a relatively Conservative Multiple to Nav, while some of these others launch in their 8 or 9 or 10X, you know, Nav, I haven't looked of late. I know some of those have sort of compressed. But why should a bitcoin treasury company trade at a multiple? I understand why MicroStrategy should because I truly believe that he's going to become a bitcoin bank and offer a full suite of financial services. And much like you value a JP Morgan at a multiple to their net asset value because of their services, I think you can look at MicroStrategy through that lens. A lot of the rest it seems like conjecture as to what they'll actually do besides buy Bitcoin.
- [51:24]
Unknown Speaker
Yeah, I think it's a good question. I think. So to start with, I think to have the early ones trade at a premium makes sense because they're offering bitcoin to pools of capital that couldn't really buy bitcoin before. So if you're bullish on bitcoin and your main is to only own stocks or only on bonds and you can't own a commodity or in some cases you can't even own an etf, if some company issues equity or bonds that give you bitcoin price exposure that fits in the mandate of your fund, you've now opened this really big pool of capital and there's plenty of capital to say, well, I mean if I, if I had to pay 1.2x for it, it's still bitcoin. So sure, give me that. And then if you, the next layer is, you know, corporations have better leverage than most of us have access to. So you know, we can take out loans, but they could be callable, for example, whereas like MicroStrategy was taking out like 5 year convertible debt, for example, which is a much better way to get through a full cycle. Now they shifted more into preferreds which generally require even more scale and liquidity to be able to access something like that. And so part of what they can do is they build a moat and they basically say this is the better type of leverage bitcoin than most other types of leveraged bitcoin. And therefore people are willing to pay somewhat of a premium for it. And so if you're the leader in your jurisdiction, so in the United States Meta Planet for example, I think those make sense. I think when you get into like Bitcoin treasury company number 17 and people can't name the CEO, what are you Doing differently in some cases or what market are you going after? That's where I think people start to say, well why should this one have an M nav that's above 1.1 or whatever the number might be. But I do think that it's not irrational for the ones that are considered to be well executed and leaders in their space to, to trade at a premium.
- [53:14]
Lyn Alden
Yeah, I 100% agree with that. You sort of mentioned the froth of Altcoin treasury companies. I've been kind of putting myself through mental gymnastics trying to figure out my mind where all these fit. Like I'm a big fan of Bitcoin balance sheet companies as I like to call them. You know, just taking 15% of your cash and buying bitcoin. Right. Really obvious, no leverage. No, I think it's very hard to beat Bitcoin with bitcoin for other treasury companies, as you somewhat articulated. Actually as nonsensical as altcoin treasury companies are, because I don't think they should be called treasury companies because those are not treasury assets. I think it's actually easier to beat ETH or Solana if it is your benchmark than it is to beat Bitcoin because they have native yields with staking or you can go into Defi and earn a larger yield. It's just much easier to beat beat those assets as your benchmark. So I'm trying to like mentally figure out their hedge funds. Right. But where they fit because that actually makes a lot of sense to me. The more I've thought about it if you believe those assets will rise. I just can't see the argument for having a Solana treasury in 30 years as your like, you know, as your cash.
- [54:25]
Unknown Speaker
Yeah, I'd view them more speculations because the problem is that a lot of these, you know, they offer a service, basically the services compete on price. Stablecoins want to go to whatever is cheap and scalable. For example, there's not a lot of huge differentiation there. The winners from one cycle are rarely the same winners of the next cycle. They all tend to have a long term rollover relative to bitcoin after one or two cycles of their initial action. So I think there's some inevitability that people are going to look at the top 10 assets and say well why shouldn't I try to lever this up? Or why shouldn't I try to make this available to capital markets? And there's a pop there, there's a speculation there. Or they can say look, we're going to get the staking yield on top of the asset and you don't have to worry about that and we'll just do it and we'll attach a little bit of leverage to it. And I can see why there's a market for that. The problem is that the way that these bull markets tend to end is that capital just gets fractured everywhere. So it goes into bitcoin. Then they think, well Bitcoin rose, let me buy altcoin number 82. So it gets split 100 different ways. And then last cycle was like NFTs and you have as long as NFTs are things people are going to keep issuing, you have meme coins and now it's kind of like okay, let's have more and more treasury companies come to market in all these other assets and eventually just that you exhaust demand, you fracture the narrative. And then we talk about, we talked about washouts before either in terms of price or time where you have six months or 12 months or I mean depending on how euphoric and then severe it is, you just have a period of time where anything that's not actually of long term value starts to drain back into Bitcoin and even bitcoin can temporarily drain from euphoria back and basically into the dollar until that long tail of weaker assets is largely washed out. And then that can set the stage for the next up cycle. And hopefully it doesn't have to be one of those multi year bear things because hopefully you get less euphoric in the first place and then less craze in the downside. It could still happen but basically I think either way you still go through some degree of cyclicality that washes out anything that's not worth being here for 10 years.
- [56:32]
Lyn Alden
Yeah, I mean every time someone says to me when alt season I say have you looked at stocks? Because we're having alt season. It's just crypto equities in a different market but it's the same, fundamentally the same structure as you mentioned. I know we've only got two more minutes. You said you don't think that the cycle is over. Do you have any thoughts on. I don't even know if you believe in the four year cycle or what the cycle means at this point, but when you would potentially see a top being put in before one of those even long periods of consolidation. Do you have a premise or a thesis on that?
- [57:04]
Unknown Speaker
I think that as mining rewards are now a small percentage of supply, that the four year cycle is much less relevant than it was for maybe the first Three cycles. I think global liquidity is a really big metric to monitor for the overall cycle as well as levels of euphoria. So I'm thinking less in terms of time and more like that. There's a certain set of flags I look for and the things that give me pause for like say a six month or 12 month period is signs of euphoria. And my favorite metric for bitcoin is on chain. It's market capitalization compared to on chain, average cost basis. Basically the value of all coins last time they moved, which is often to and from exchanges. And that metric might become less relevant over time as more volume happens in other environments. So far it's not really the case. So right now that's not a very euphoric marker. If that becomes rather euphoric, I would become concerned because that's more indicative of a big pause. Then I do look at things like what are the premiums on bitcoin treasury companies? How many altcoin companies are coming to market? Just signs of froth. Because the more signs of froth you get, the more it is like yeah, we're probably going to have like six months of, of you know, correcting in time or price to wash some of this out and kind of reset. You know, there are signs that you get three month or six month corrections at times. Nothing's really kind of warning me about a multi year correction at the current time. Which is why I think this cycle still has legs. And where I would become more concerned maybe on a multi year basis would be more extreme signs of euphoria, leverage, dislocation from cost basis and that sort of thing.
- [58:44]
Lyn Alden
Yeah, if we go full like 2021, I mean 2022. Yeah, that'd be bad.
- [58:49]
Unknown Speaker
Yeah.
- [58:49]
Lyn Alden
If we start seeing FTX Voyager, Celsius type block buy situation. So we'll all maybe know better this time. Lyn, thank you so much for your time. I know we went right up there to the last minute. Always really an honor. Pleasure to speak with you. Thank you.
- [59:01]
Unknown Speaker
Thanks for having me. Always happy to be here. That's do.