← The Wolf Of All Streets
The Wolf Of All Streets
“The 4-Year Bitcoin Cycle Is DEAD! Here’s What Replaces It" | James Lavish
01:02:51
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- [00:00]
A
Are we done? Is that it? Is the bull market over for Bitcoin? My answer is they're going to do whatever they can to make sure that the market doesn't draw down significantly just due to liquidity issues. This measure doesn't really make any sense anymore. Housing, insurance, childcare have all ballooned to levels that put the poverty line closer to 130, $140,000.
- [00:23]
B
If the stock market is going to dip, it would be better to do it now or in the coming six months before it's truly midterm season.
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A
I don't think this administration wants it to happen at all. But if they're going to need to have a drawdown in the markets to force the Fed's hand, well, of course they'd want it to happen now rather than by the time you hit the election. But we've done as much as we could. We can't cut anymore. We cut anymore, we're going to cut into flesh and bone, which means Social Security. What are your choices? You're going to cut Social Security, Medicare, Medicaid, they're not going to cut defense budgets and interest on the debt. That's it. You're. You're already in deficit.
- [01:15]
B
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. you and I were in Vegas a couple weeks ago and had a conversation about this being the strangest bull market of all time because seemingly everybody has lost money. I want to start with, are we actually in a bull market at all, in your mind? And then sort of dive into what we spoke about privately for everybody else.
- [01:56]
A
Yeah, I mean, I don't think we ever got out of a structural bull market for bitcoin because we have so many things that are going forward and so many tailwinds that we didn't have prior to this. We have so many tailwinds that have developed over the last two years between the ETFs, options on ETFs, a favorable administration now for crypto and bitcoin. You've got stablecoin legislation, you've got other legislation coming online. You've got the. You've got the choke point 2.0, which we thought was kind of dead. We'll talk about that. But, you know, that repeal of SAB121 now became SAB122 and banks are able to custody Bitcoin and create collateralized products around it. That's, that's a big deal. These are all like big structural issues. You had the ETFs. The IBETF was the fastest asset gathering ETF in the history of ETFs. And so it gathered I think $50 billion in just over a year, which is just incredible. So since then we had this new administration. You saw bitcoin get repriced from 60 some odd thousand up to over 100,000 and, and then it has been grinding sideways ever since. And since that time this summer, we've had a sharp sell off here in the fall. And I'll attribute most of that sell off to liquidity drying up or contracting global liquidity contracting. And so the question is, are we still in a four year cycle for Bitcoin or is that dead? And my answer, which you and I have talked about before is I think that the four year cycle is dead, that we're, that we're now in a liquidity cycle. So are we still in an expanding liquidity liquidity cycle, global liquidity overall, where you're going to have a little bit of movement in between, but the long term global liquidity cycle is more like, I'd say somewhere around six years, seven years, which puts us into next year until that starts to really contract again meaningfully. But right now it's just like this interim contraction and Bitcoin has been, has been pricing that in and showing everybody that that's happen happening across the world, whether it's ECB or it's the UK or it's Japan or it's the Fed itself, or it's the treasury and the Fed which we can talk about further, or it's just the, the bank of China that's not expanding as, as much as people had hoped or, or expected. So all of those things have, have kind of played into Bitcoin here and, and being the tip of the risk asset kind of spear, which unfortunately is just the way it's being treated still. Bitcoin's being sold off and it's telling you that the liquidity has been drying up, but that doesn't mean that's going to continue into next year or through next year. I think that we do get an expansion of liquidity. I think we're going to get it soon.
- [05:13]
B
Is that going to be coming from the Fed? Is that coming from the treasury general account that obviously is now full? Is that more a function of China and Japan and things changing there. How do you view this flood of liquidity that's coming?
- [05:28]
A
Well, okay, so let's talk about that. So first of all, you have seen issues and some kind of red flags in lending markets and overnight lending markets. So what do I mean by that? Well, you're seeing more financial firms using the overnight repo facilities. So the Fed has a standing repo facility they put in place after 2019, because 2019 we had a repo shock. What do I mean by that? Well, it means that we had financial firms that were looking for dollars that needed $Scott, and they couldn't get them. And so back in 2019, in September, we've talked about this a little bit, but for your listeners who haven't heard this before, back in 2019, you had an issue where you started seeing the lending markets tighten up. And the reason for that was kind of threefold. You had, first of all, you had tax payments, corporate tax payments being due in the middle of September. So that drew some liquidity out of the markets as basically firms had to draw on liquidity and send it to the government. Right. So for tax payments, that's number one. So I got out of focus there for a second. Number two, you, you had the, you had overseas, you needed dollars in, right? So the overseas, there was a demand for dollars and there was low liquidity. And that all has to do with Euro dollar and dollar market overseas, but, and exchange rates. But then the other big thing was that the treasury kind of misstepped and they expanded their qra, their quarter announcement, and they expanded the number of Treasuries that they would be floating to the market. And so you started seeing, you started seeing firms and big banks hold on to their dollars and be reluctant to lend them or just not have them to lend. And so the overnight lending markets, the rates spiked and they went into about 9% intraday, which was three or almost. It was over three times what the normal rate was. And, and so liquidity kind of just locked up and it made the Fed almost go into a panic. And so the Fed and the treasury teamed up pretty quickly and in 48 hours or so, they stopped QT and started QE. And so if you look back at the Fed balance sheet and this is where you get all tied up with qe, not qe. Was it liquid? Is it, is it, was it really QE or not? And the Fed came out and said, it's absolutely not qe. It's, this is not qe. And so we call it qe not QE now, because it obviously was, if you go look at the Fed balance sheet, it expanded at the end of 2019 and it never contracted again. Now part of that is because we came out with, with that, you know, the, the liquidity bazooka in 2020 and dumped $5 trillion into, into the markets. But, and then they started contracting after that, but that money's still there. They never took that money out. And so that's been on the Fed balance sheet ever since. Okay, so that brings us to today. So what happened recently? Well, what happened recently is that, well, first, we're still running multi trillion dollar deficits now. And so the treasury just continuously needs money. They continuously need to float T bills and anything they can that doesn't draw down bank reserves. Well, here's the issue. The treasury also had to build up its, its, its general account, its checking account. So their target right now is $850 billion. However, as they were building that up and going into that, that build up, the government decided to close because they couldn't, they couldn't agree on a budget. And so here the, the government closes, the TGA is still being filled out. The, the, you know, the treasury doesn't stop issuing debt. It needs to keep issuing debt on its schedule. It has to, it has to keep issuing debt. So what happens to that capital that they get in? They put it in the treasury general account, yet they're not spending it. So that's been a draw of liquidity and it's been a draw to the tune of over a hundred million dollars, $100 billion. So now you've got the TGA that's bumping up against a trillion dollars while the government remains closed. Last month, and at the end of the month in October 31st, you saw a spike in need for dollars again. So you saw the overnight repo facility, the, sorry, the standing repo facility, which means that if you're, if you're one of the few banks that are allowed to use it, you can take your Treasuries, you can send them to the government, they'll turn around and send you dollars for those. And you pay a, you know, you know, a nominal interest rate which is just a little bit above the fed funds rate, however, or a little bit below actually, because it's a collateralized product. However, you saw that the overnight rates that the banks charge each other to borrow spike and it spiked up to 36 basis points above the, the Fed funds rate. Okay, so the SOFR is, you know, so the SOFR rate is what is now it's, that's what has replaced the Libor rate that spiked up, which told you that there was a need for dollars and there was a lockup of liquidity. Was it a catastrophic, catastrophic event? No. Was it leading to one?
- [11:09]
B
Was it.
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A
Well, there was a question of whether or not it was. And so was it something like in 2019 where we saw the markets just lock up? No, not yet. But what is significant, Scott, is that that lending has picked up, that need for dollars has picked up. It's picked up right up to month end and a little bit through month end. We haven't seen it spike up again recently. But we're watching. But what has stayed high is the rate at which the banks are willing to lend to each other. And so that's the, you know, that SOFA rate has been, it's been ticking up. So that's the, that's the issue that people are watching. They say is, is this, is this SOFA rate over Fed funds? Is that spread getting wide enough that it shows that there's a liquidity problem? So then you dick back dig back into, well, what would indicate that we have tight liquidity? Well, that's one of the indications. The other indication is, and this is the structural part that that is meaningful, is that bank reserves are low. They're down below the, the point at which the, the Fed feels very comfortable with the 10 or 12% of GDP or of the total bank assets. Now the, the bank reserves have fallen below $3 trillion which, which brings them below that level. They're still considered ample, but they're declining to the point where it gets the Fed nervous. Back in 2019, that level was somewhere around seven and a half percent. So we're at nine, some odd percent right now. If it continues to contract with which they expect it to naturally, then that's going to be an issue. Which gets us to what the Fed said last month at their, at their meeting and at the press conference. Powell said they recognize that bank reserves are getting to a level that they're going to, they have to stop qt and they're going to, they're going to have to, they're going to have to add to liquidity eventually. Not right away, but they're expecting to sooner than rather than later. Now that gets everybody on Twitter and you know, in our investing universe fighting about is that QE or is it not qe? Well, in my mind, if they're adding liquidity to the system, it's qe. That's, that's, that's Literally just the definition of adding liquidity to the system. They can say that it's short term, that it's not meaningful, but if you're adding 20, 30, $50 billion of liquidity to the system every single month, that's still adding liquidity. It's not taking away. It's the opposite of qt. And so now the only question that we're asking for, for bitcoin and, and in this cycle and what, and your question is, are we, are we done? Is that it? Are we, are. Is the bull market over for bitcoin in this cycle? And my answer is I don't think we're any longer in a four year cycle. We're no longer in the four year cycle and we are in a liquidity cycle and watching liquidity. I expect liquidity to expand again going into this next year for all the reasons I just laid out in the banking system, but also because we're going to go into midterms and we have a political atmosphere that's changing rapidly at the Fed and that's going to change this spring going into midterms. And they're gonna do whatever they can to make sure that the market doesn't draw down significantly just due to liquidity issues. Like we can't manage black swan events, but you can manage liquidity issues.
- [14:48]
B
How long does it generally take after that flood of liquidity comes in? I mean, 20, 30, 40 billion is not that much in the relative.
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A
It's more like a, that's like a, that's like a steady stream, right?
- [14:59]
B
Slow drip iv. Yeah. So if we get a real flood of liquidity, how long does that usually take to show up in markets or in assets? Right?
- [15:08]
A
It depends on the asset. Right. So in bitcoin it can show up a little bit faster in stocks, a little bit, a little bit faster, you know, but it really, it really depends on, on the form of it, where it's coming from and that Cantillon effect that we always talk about. Just how close are you to the liquidity spigot? And so I expect that bitcoin moves pretty rapidly off of it. And I'm talking weeks, not not many months. You know, we're talking maybe six, eight, ten weeks, not, not three, four, five months. So that's, that's, that's my expectation now when that happens and how much it comes is really what, what drives that. Um, but I, I do expect it to start to occur depending on what happens here with the markets. I do start to expect it to them to start adding Some liquidity by the year end here. And I mean we're just five weeks away from the year end so it's, it's getting to the point where they're going to have to start adding soon again. I'm not talking about full on, you know, definition of QE where they start printing money and buying long term Treasuries. We're still in the short term T bill market for liquidity but they're going to continue. They, they don't really have much choice. At some point it's going to have to happen and they understand that they already, they've already admitted.
- [16:37]
B
Is there an argument to be made that if the stock market is going to dip it would be better to do it now or in the coming six months before it's truly midterm season. We talked about this before the past election so not didn't necessarily happen but you know, if you know that the floor is going to fall out at some point, people have very short memories. So yeah, as long as by, you know, May or June we're ramping back up that maybe this will be the time to let it happen.
- [17:05]
A
Well, yeah, I mean if, if I don't think this, this administration wants it to happen at all, but if they're going to have to, if they're going to have need to have a drawdown in the markets to force the Fed's hand, well of course they'd want it to do to happen now and early spring rather than by the time you, you hit the elections. Because remember what you, what we just said is it's going to take some time for that liquidity to, you know, that goat to make it its way through the boa. Right. And so if they start, if they start adding liquidity early this next year or in the first quarter, that's, that's time enough for it to really get through the snake through the markets for the summer for it to be a good setup for midterms. But if you wait until summer or fall to start, it's too late and you could have a drawdown that it would be, you know, it could be catastrophic for midterm elections. And so they're going to do whatever they can. So what are we talking about here with, with the Fed and more favorable Fed? Well, Powell, his term is over this spring and so by, by May we're going to have a new chair of the Fed and which will likely be pretty favorable to this administration. And so it's up to Trump to, to pick that to, to nominate that person. And, and he's got, he said he's got a handful now, four or five that he's choosing between. And you can see them jockeying for that position in their statements. And whether or not there are, you know, pro expansion here, meaning more liquidity and easing of Fed policy versus contracting, you know, and so you've got, that kind of, you've got a split Fed right now, but you can see who's jockeying for it. And Wallers is, you know, making some pretty good, he's making some pretty good statements to say that I will be very favorable to this administration and to expand the economy. Then you've got others who, who you know will, will fight against that. So, but this is, this is kind of unique here, Scott. We don't usually have a Fed that's split like this, that's got statements coming out from all over the map constantly, week after week after week. And now, so you see it in Fed funds futures. You could see the Fed funds futures go from an 80 or 90% probability of a cut in December down to 30% off of certain statements and then back up to 70% because the new York Fed, Williams came out, the New York Fed President Williams came out on Friday and said, oh, I can, I'm generally favorable of a rate cut in, in, in December. So now you've, and he's, he's a pretty powerful figure being the New York Fed and usually aligned with, with Powell. That gives you an insight that, that those two are thinking cut. So it's more likely than not. And now you've got Fed funds futures at 70% probability of rate cut. So it's kind of all over the map here, which is not normal. You don't normally have two or three, you know, participants, officials, dissent off of, off of the, the rate cut or hike or Fed policy decision. It's just not normal. And, and so this is the first time in many years that this has been occurring and it's going to continue right into next year and through next year, I expect, because again, the Fed has become a little bit more political than we would say would be normal in history.
- [20:41]
B
When I hear you talk about this, how complex it is, how many buttons and levers they're pulling, it just becomes increasingly more nonsensical. Like the politics of it, the will this happen? How much of it. It's such nonsense that this is what it takes to buoy a free market.
- [21:01]
A
Yeah. So it gets you back to first principles. You have to go back to first principles, which is what are Their options. It really comes down to the Treasury. What is the Treasury's option? Well, treasury is going to be, it's not the Treasury's fault that we spend so much. It's Congress. Congress refuses to cut, they absolutely refuse to cut nonsense programs, you know, and, and whatever they're doing for their own constituents, they try to trick each other into cutting. But there's, there's no such thing as austerity anymore. Not in the, not in the United States.
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B
We ended this week like Doge is gone, remember?
- [21:36]
A
Yeah, they said that. Well, there's, we've done as much as we could. You know, there's really no, much more than we can, we can't cut anymore. We cut anymore, we're going to cut into flesh and bone, which means Social Security. And that's, it's just not going to happen. And so what are your choices? You're going to cut Social Security, Medicare, Medicaid, because between those programs, the defense budget, which they're not going to cut defense budgets and interest on the debt. That's it. You're already in deficit. That's it. We are already in deficit. The only other choice is to raise taxes. And when you raise taxes, you wind up putting a top on productivity and there's less reinvestment from companies, especially small companies that are investing in small productive lines or in hiring people. Well, that kind of gets cut out and then you have declining productivity. So that's no good either. And so they're not going to do that. Nobody wants to raise taxes. It's, it's, it's not, I guess, unless you live in New York. It's just, it's not a popular tactic politically. And so New York's going to, they're in the CAFO phase of, of, you know, they're in the FA phase of FO.
- [22:58]
B
So they're going to find out.
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A
They're going to find out. And so, but you know, you're going to continue to have these deficits and we're going to continue to fund them. So the first principles are, that's not going to stop now. How are they going to fund those? Well, you need liquidity to fund those. You need bank liquidity to fund these deficits. You need to continue to expand GDP nominally to have the tax base, the so called tax base to operate from. And so they're going to continue to debase the US dollar just like they're doing to other major currencies, fiat based currency, you know, the fiat based debt and currencies. They're going to continue to do this. And that's just the first principle. Which deficits are going to continue. They're not going to get smaller and we're going to continue to fund them and we're going to continue to print money in order to debase the dollar, to not pay down the debt, but just to continue this charade. And it's going to go, it's going to continue ad nauseam. So the only question is not whether or not they're going to print, but when. What drives them to do it? Is it a black swan event or is it just a run of the mill, you know, vanilla worry of recession that they, they start pumping liquidity into the system, which is what you heard Powell say last, last month. That's, that's where they are now. It's just the run of the mill. We're going to start adding liquidity to the system. Can they do that? Can they do enough of that to keep it going? Or are they going to have to really pump it? So forget about all the, the nuance and the politics and qe, not qe, the programs, the btf, whatever it is, it doesn't matter. Is there liquidity going? Is there going to be liquidity added to the system or not? And my answer would be absolutely, they're going to add liquidity. So just be ready for the debasement of the dollar. It's going to continue.
- [24:57]
B
Okay, so I want to go back to the original question, which is the conversation that we had in Vegas about this. If it is a bull market, whatever we're going to call it, how difficult it's been for most actors, because arguably it's because of all the creative things that we've tried to beat bitcoin. Right. Because if you're sitting in bitcoin, even if it's in the 80s, wherever it'll be by the time this comes out, you've done very well if you've been in it for a long time, like these people. Yeah. So altcoins have gotten destroyed, obviously. So there hasn't been really a lot of fun to be had in that market for those who have exposure there. And then the other trend, obviously has been treasury companies, MicroStrategy ETFs have done well. They've tracked bitcoin. But my feeling is that even the people who preach not taking risk with their bitcoin have found creative ways to lose money thus far. So very few people have made money in 2025 if they've done anything but hold bitcoin and Even those people are somewhat disillusioned by the price kind of going, you know, into November here.
- [25:57]
A
Yeah, I mean, you know, there's been, we've seen liquidity flushes. And so the part of the issue is that you can look at Bitcoin and say, okay, it's the safest crypto asset. Clearly I believe that and you believe that. I believe so. However, if you're. Look, this goes back to exactly what we just talked about, Scott, is that if you're younger and you're not sitting on a pile of money and you're just treading water, you're trying to keep up with all this inflation, you can HEAR the, the Ph.D. economists wax poetic ad nauseam about, oh, inflation's coming down, they should be happy. Nonsense. Prices are not coming down. Inflation, the inflation rate is slowing, but you're still experiencing inflation. And if you're a family of four with two working individual, two working adults and trying to make ends meet with higher rent, higher health care, higher auto insurance, higher auto payments, whatever it is, and if you're trying to borrow, your, your interest on your debt is higher, like your childcare is through the roof, you know, your grocery bills, you're just trying to make ends meet. And you listen to them talk about how that, you know, you should be happy. Inflation's coming down, the prices are still 50% higher than they were before. COVID then it's not okay. And so, but that gets us to going back to the first principle of the people who the K shaped economy. Okay, so you've got the asset owners who have done very well. The 10, the top one to top 10% has done, they've done very well in the past, you know, five years. The bottom 50% has not done so well. And so, or the younger people, they've just gotten out of college, they've got debt, they've got, you know, their student loans that they've got to pay off. Rent is higher, food is higher, all the, all of the insurance costs that we just talked about are higher. So they're getting into these markets. Then they see the crypto market as a place that you can make money. Well, we've seen people get absolutely demolished in some of the, you know, the nonsense cryptocurrencies that don't really have any, any value or any, any protocol that, that has any tangible value to it. You know, so if they go into something like Bitcoin, they think, okay, this is a safe asset, but man, it's not going to give me that 10x or 100x I'm looking for. How do I get that? Well, I can do it on the perpetual preferred mark or perpetual futures market where you're, you're buying Bitcoin on a 10x25x50x margin. And, you know, you're, you're literally levered up to the point where if Bitcoin just moves a percent or two, you get wiped out. That's not a wise, you know, choice. But you're seeing this happen over and over and over again and people getting completely wiped out because they're pushing more chips on the table. Why do you think lotteries do so well? I mean, you're, the likelihood of you winning a lottery is so low, it, it makes zero sense for you to do that. But you see people doing that because they're like, well, if I just, it's a few dollars and maybe I win and I get out of this hole. God help me. Just help me get out of this hole. So we've come into a situation where people feel like they've got to take risk and they've got to take more risk than is warranted for the investment profile of the security. And so. Or they're putting that, those dollars at risk in a way that doesn't warrant that, that risk. And so. But why, why are they doing that? Well, because they're just trying to do anything they can to, to catch up, forget about, get ahead. Some of these people aren't thinking, well, I just want to get rich. I want to go have a, have my mansion. No, they're thinking, I just want to be able to have enough money put in the bank that I can feel secure for my family for the next three years. Because I am terrified. Yeah, I'm terrified. And so what's, what's the harm for me to, if I got $1,000, it's not going to get me there, so I might as well risk that. And that's the problem, is that the Fed and the treasury and all of these central banks, central banks at large have put people in a position where they must take risk with the money they've earned in order to not get ahead, but just keep up. And that's the issue. So that's the first principle that everybody's dealing with right there.
- [30:48]
B
I read in passing, so I can't really quote it tremendously well, but Michael Green wrote a substack or an article that just was going around this morning, and it was about the way they calculate the poverty line. Did you see that by chance?
- [31:00]
A
I did And I think it's a 19, it's a 1950s or I think it was a 1963, I think, calculation. Where their calculation is, it's basically three times the, the cost of food. Yeah, right. But the problem is, and he points this out very well, so anybody who has not read it, it's, you know, it's on his. Professor Plum. Is his handle correct?
- [31:27]
B
I think it's Prof. Plum. And it's the guy from Princess Bride as the Avatar.
- [31:33]
A
Avatar, yeah. But he's, he's, he's very smart and he's got his Medium or substack. It's on medium. It's a free article. You can catch it and you'll put it in the show notes, I'm sure. But the, the crux of the article is that this measure doesn't really make any sense anymore because you've got, you've got, you're measuring three times the cost of food as a poverty level, which would get you to like you know, 30 something thousand dollars. Now, which is just imagine living near an urban center on $30,000. Like, it's just, that just makes absolutely no sense. Of course you're not going to be able to survive on that. So what's the real measure? Well, the issue that housing, insurance, childcare, have all ballooned to levels that put the poverty line closer to 130, $140,000. Now it may sound insane, but when you do, when you go through the numbers, you add it up and you take out everything. You take out vacations, Netflix, any, any out like dinners out, sporting events, like take all of that out. And you just add up the, the insurance costs, the health care cost, you know, the cost of autos. You need two autos because you need two working adults in the family. Now that's what they've taken away. That's what they've created. They meaning central banks and the manipulation of the money supply have created a situation where you need two working adults in a family. And the problem is that second income is largely going to healthcare for somebody else to watch your kids while you're working. Just to. Yeah, I'm sorry, child care. Just, just to add one or two thousand dollars a month to your bottom line just so you can pay, make your car payments and your health care payments because otherwise you're not making ends meet. It's not the food that's the problem and that's the issue is that the poverty line is nonsensical now. And the poverty line is really well over $100,000 because you're not getting jobs that are going to give you meaningful salaries way outside of city centers anymore. I mean, we've had a great, we've had a migration to cities and there's a reason for that. The urban centers. And as everybody is coming back to the office and you know, by and large are going back to the office, even the companies that figured out that they could save so much money on rent, they're also figuring out that they're not getting quite the same productivity from workers that they're sitting at home. And so they're calling them back to the office, by and large. And so you need to be in urban centers. And if you're in an urban center, that, that is going to be costly and you're going to be living below the poverty line unless you're getting toward that. $200,000 a year between two family or two incomes.
- [34:21]
B
Begs the question then if we're miscalculating these things and we know that liquidity is coming and we know that the Fed is trapped and governments are trapped, what's the answer for those people? It's only going to get worse. That's not, there's, there's no solution here, right? So we can talk about recalculating it and understanding the situation that they're in, but there's nobody who's saying, how do we fix that for them.
- [34:44]
A
That's the issue. That's why, that's why we talk about this every day is the issue is that you must own assets in order to get, get past this. In order to climb up into that upper echelon, you must own assets. And that means not just owning your house, but owning tangible assets that you can move around liquidity in times of need, whether that's stocks, whether it's gold, whether it's Bitcoin, you need to own assets. And so that's been the argument. The best assets to own are ones that can't just be inflated away, that, you know, can't be debased. So dollars are not a great asset to sit on because they're being debased every single day. You don't want to be sitting on a pile of dollars in, in your checking account. This blows boomers minds, typically that they're like, they're just sitting on a pile of cash in their checking account. They're like, why not? Well, I don't think, you know, they, they, they have enough assets outside of those, that they're not realizing that you can't just sit on cash as A safety anymore, which goes back to the point of what we were talking about before, which is you are forced to take, forced to somehow, you're some, somehow compile some assets, find a way to put money away every single month, however you can, and then take risks with those assets in order to keep up with the inflation rate around you so that you're not left behind when you want to go buy a house, when you want to go buy a car or you want to go do something that's not just living, not just paying your grocery and healthcare bills, that you actually want to take a vacation with your kids. And so, but you're forced to take risk in order to get to that point. And that's the, and that's why we keep saying that, you know, you gotta do a few things, which is do whatever you can to start putting away money to an asset and have a long term view on it because you've got to be able to ride these liquidity cycles and these people can't do that.
- [36:48]
B
That's the thing is that's such a trap. Because it's a trap if you're living check to check and your expenses are going up and you're not you enough money to track that, you can't even put 100 bucks away, much less the 10,000 or 100,000. You would need to be patient and watch it grow. It's an impossible.
- [37:04]
A
Yeah. And the young, the young, younger generation sees that. They already, they already experience it. They're like, well, I don't see a way I can ever own a house. I mean you're the median age, the average age of a first time home buyer now is, is in the 40s, you know, so that like, that's just crazy. So they're like, it's going to take me a long time to get there. And so is it any surprise that you're seeing the rise of people electing officials who are socialist? You know, is it, is it any surprise? It's no surprise at all. The money system is this is, this is what we've created and we've created that through the separation of wealth. And so they can feel it. And so that, that's not any surprise whatsoever because they're thinking, well, at least I'll get something. At least I'll get some sort of either rent control or grocery price control or eventually hopefully I'll get a ubi, you know, Universal Basic income so I can get by without, like, and I'll be able to raise my family. And so, and that's the, that's the, you know, that's the failure of the system right there. If you want, if you want to have a measure of failure of a so called capitalist system, if you have a rise of socialism that's, that's occurring in that, in the midst of that capitalist so called system, then that capitalist system has failed. And that's the argument that we're not really in a true capitalist system. We're more and more, we're in a cantal system of, of the Cantillon effect.
- [38:44]
B
You know, I mean, we always joke that bitcoin fixes this for everything. It's become a meme. But does bitcoin actually fix that? Or are you back to the problem where if you can't buy it and you can't hold it long enough, then doesn't fix anything. Right. Because you're just going to end up selling it on some volatile day when it goes down 20% and pay your bills?
- [39:06]
A
Yeah, well, it fixes it if you actually, if you actually start pinning the value of debt to it. So, you know, we got off the gold standard in 1933 and then we got off it completely in 1971. And so you've seen how inflation has raged in periods since then and how much the dollar has devalued since then. Well, if you actually, if you have debt tied to something that cannot be debased, something like Bitcoin, well, you could stop that from happening. You could, you could stop that pain. Are they willing to do that? It remains to be seen. You know, there's a lot of chatter about it. You've got Cynthia, Cynthia Lummis talking about it, the senator from Wyoming, and she's been pushing for the Bitcoin act, where the US Government actually buys bitcoin, puts it on its balance sheet and then we can shore up the, the debt around that. Is that going to happen? We'll see. It remains to be seen. I can tell you that it's kind of like a self fulfilling prophecy if right now people say the, the government would be out of their minds to do that because look at the volatility of bitcoin, that's just crazy. However, if they did do that, what do you think bitcoin would do? I mean, that's game theory right there where every nation, every, you know, nation that's, that's fiat based, that has that issues, debt in their own currency would have to do something to kind of keep up with that, whether they're going to back their currencies with gold or they're going to back it with bitcoin. Well if, if they, if comes out the U. S Government is buying bitcoin and it's going to start shoring up their debt with bitcoin, you better believe that they're going to be doing the same thing. So it becomes self fulfilling where bitcoin becomes the preeminent asset of the world and it gets completely revalued. It doesn't go from a hundred thousand to five hundred thousand, it goes into the millions and it's, and again this is not, this is not a number go up kind of argument. This is the, this is the graduation of bitcoin becoming from going from a speculative asset to becoming one of the best stores, if not the best store of value in the world. That's the difference. And so it's the argument of this is not a number, this is not a get rich quick scheme, this is a not get poor slowly scheme. And that's really the hope of bitcoin, that's why we talk about it so much.
- [41:44]
B
Let's dig into the treasury side. So obviously microstrategy has taken a beating. There's a lot of fud and nonsense that we've actually discussed about where that's coming from. Whether it's some sort of conglomerate is getting together to destroy microstrategy and get them delisted. And we don't need to dig into all of that. But I think we obviously saw a major hype bubble or excitement around bitcoin treasury companies coming into the summer and a very, very quick washout. I think most of them have honestly taken the approach you just said, which is that they are not trying to get rich quick, they're trying to get poor slowly. But the investors tend to try to get rich quick. They haven't done that particularly well when they've bought these at 10x multiples before these companies could even buy bitcoin or register a share. Right. So I think there was just something structurally wrong with the way they were launched. But you know, obviously you can't talk specifically about the ones you're involved with but just sort of setting the table for the environment. Now what rises from the ashes? What do we see from the treasury company space moving forward now that that bubble has somewhat popped?
- [42:50]
A
Yeah. So I think it's rather than, I mean it's come back to earth. Right. And it was a really short lived, very short feeding frenzy on these things. So there's a good reason for that. I think that there's a, there is.
- [43:05]
B
A.
- [43:07]
A
Tremendous use case for these companies and that's long term, Scott. So just to back up a little bit for, for maybe listeners who, when you said treasury, they're wondering what you're talking about. You're talking about the bitcoin treasury companies, you know, and so things like Microstrategy, that is the, is the one that started all of it. Michael Saylor and then you had Meta Planet and you know, you've got CEP 21 with Jack Mahlers and Strive Asset Management. I'm on that board. So. But there are a handful here, Scott, that I think that are going to continue to, to grow and they will thrive in this. The, here's the thing though. When these started coming out last spring and into the summer, there was so much enthusiasm around that because it was basically an arbitrage of the capital markets. They were, you know, you're using dollars to, you're using a debasing currency to go borrow and buy bitcoin with in the capital markets. Some, some of the companies use convertible debt to do it. Some of them just issued equity. And, and then you started getting into MicroStrategy, forged a path of, of using preferred equity, which is, you know, it's perpetual debt that doesn't have to be paid back. And, and that's a, it's a, it's a, the strongest way to use your balance sheet to buy Bitcoin. And then strive, we, we did the same thing. We floated a perpetual preferred as well. Not everybody can do that. So let's move back a little bit. Let's move back one step. You had a feeding frenzy. A ton of these companies come out and it was, it was euphoric. Bitcoin was at all time highs in the 115 to 120 range. And people were buying these things left and right and they didn't really understand what they were buying at the price they were buying it. And there's been a lot of anger on social media about this. And the truth is they were just buying at levels that just made no sense. So what do I mean by that? Well, when you look at these companies, you, you've got the, the basic, the most basic measure of all these companies is their M Nav and that's the, the market capitalization of the entire company over the amount of bitcoin that they own. The market cap of the bitcoin they own, okay, so, and that's called the M Nav. And if they're trading above that and you, you have the, the most basic basic measure is just using their, the, the fully diluted common shares to get to the market capitalization of the company over the, the amount of bitcoin they own, the dollars worth of bitcoin they own. You have to take it a step further and you really should be using enterprise values. You should be using their debt as well. If the debt can be converted to equity, you should convert it to equity first. But those are the kinds of measures that's the basic measure. So if you're trading at one, that means that your stock is trading at the value of the bitcoin. If trading above that, that means that your stock is trading above the volume of the bitcoin. Meaning that the investors expect that you'll be able to get more bitcoin on your balance sheet in the future. So they're, they're buying that the bet that you're going to be able to get more bitcoin per share on the balance sheet in the future. And so that's, that's what that M nav is. So the issue is these M knobs got, got out of control. If you look at some of these, got up to, you know, 5, 6, 8, 12, 15, 18 times M nav 8. And it was insane.
- [47:03]
B
And so some of them didn't even own bitcoin yet.
- [47:08]
A
And we were watching this and so being, and here's, here's where people got really frustrated being a hedge fund. And so my, my hedge fund, the Bitcoin Opportunity Fund, we were, we had access to some of these opportunities, being big buyers of them. We had access to them prior to the float of the public equity in it. So it's called a pipe, you know, where we would buy these shares privately off exchange and then we would be locked up and wait until they came to market. Meanwhile, these things were trading in the market and we had no access to it. We just watched them. And so, but we were buying them at close to 1m nav a lit, maybe a little bit above or a little bit below depending on the situation. And so that made people pretty angry. But now flash forward to the future where, you know, we're just getting our shares in the last number of weeks and these things completely collapsed from.
- [48:09]
B
And the price of bitcoin's down, so.
- [48:10]
A
The, and the price of bitcoin is down.
- [48:12]
B
The net asset value went down 20, 30% as well.
- [48:16]
A
So, so we took risk buying them knowing that we would be locked up during that period and they would very well come back down toward that 1m navigation and we took that risk you know, we calculated that risk and we've done fine on it because we calculated that risk. We chose not every company, we chose a few of them. Okay. And so, but they had, they did come crashing down. Now you've got them trading somewhere around just below 1-1-2 m nav for some of the best ones. Okay, so why would they be trading around there? Well, to us, you've got to have some sort of metric that you can anchor to. And so for us, we look at these things like more along the lines of the, the book values of, of say, banks, where you've got banks trading anywhere between just under 1m.nav all the way up to 2, depending on the cycle, depending on the liquidity cycle. But let's call it about one and a half. Makes kind of sense for these things to settle out at where they're going to be trading between one and a half and two book value, which is essentially what we're talking about, the book value of the bank, you know, assets or with the market, the market capitalization over their assets. It's just like that with the treasury companies. But here's the issue for people who are buying these things, even if you're looking at them and saying, okay, okay, I want to own it 1 1/2 m nav or anywhere near 1 m nav, just make sure you're doing the calculation properly. And I keep saying this because you see, like we, we check these, the, the monitors, the, the general monitors that have all of them listed and they're wrong all the time. They're just not up to date. They're not checking the 10q or 10k properly. They don't have the number of shares. They're not diluting it the same way we would. I would say just do it yourself and use it. Go on to Edgar and pull those filings and look, actually look at the number of shares, look at the debt outstanding. Make the calculations yourself to understand just exactly where these things are trading. And then, you know, make your, you, you make your assessment on which ones you think are going to do well. I think that there's a, a handful that, that will do very well and they will, they've got a long Runway. But there will be some that continue to get washed out here, Scott. And they're going to trade under 1M NAV and their, their choice is either get, go buy back their shares because you're buying Bitcoin at a discount at that point, or get, sell to another company, which is literally what happened with Similar scientific and Strive and we're in the middle of that deal and I can't really comment on it, but that's, that's a situation that you're going to find some other treasury companies in and they'll either be buying about their shares, they'll get bought out.
- [51:12]
B
So should you tell people to go on Edgar and figure out what the accurate M Nav is obviously and take a deeper look. But what are the sort of exogenous or what are the main factors beyond just where they're trading at for M Nav that would make one successful over another? What's the end game beyond just being a company that holds Bitcoin? Because I think that a lot of people jump the gun and didn't have a really long plan. I think Saylor is showing exactly what you can do by owning a lot of bitcoin. Right. Regardless of what people think about it, he's proving that there are a lot of financial instruments that can be created. When you have a humongous stack, do you think that the winners will be the ones who have similar plans or who have plans to create different kinds of bonds or instruments that he hasn't yet? Or is it just going to literally be like whoever can financial engineer their balance sheet to buy more bitcoin?
- [52:04]
A
No, I think you laid out exactly the way I would say it is that the strongest companies will have the strongest management. Which means not just. It's not the bitcoin influencers that doesn't matter, it's managers who understand capital markets, who have a strong line to capital markets. I'm sorry, operators. Strong operators, exactly. That can actually lead the company. Okay. And that's, that's, that comes in, in way of not just management but also board members as well who understand capital markets and understand how they work and have a long, long term either both view on how to do this and experience on, you know, different ways to do this. And just like you said, those operators. So the best companies with the strongest balance sheet, with the strongest management and the strongest ties to capital markets are the ones they're ult they going to survive. MicroStrategy is, you know, exemplary of this. Between their management and their board and their ties to capital markets and their long understanding of how to do this, they, they know what they're doing. You know, Shareish, their, their treasurer is instrumental in all this and he's on the board of Strive as well. And you know, we talk about these things because it's really important to understand all these dynamics. Not every Single company can just go dip into the capital markets and issue a preferred. And you're gonna, you're, you're, some of these companies are finding that out the hard way. I mean, you have to have strong balance sheet, strong management where the, the capital markets will respond to you. Well, what do I mean by that? Well, when, if you're going to have your JP Morgans, your, your, you know, your Merrill Lynches, your Goldman Sachs of the world, you know, the Canter Fitzgeralds go and tap their capital markets, meaning their customers, their long term clients. We're talking about endowments, institutions, you know, the pension funds, large hedge funds that are going to have an appetite for these types of instruments. They have to have strong relationships with them and be willing to share those relationships with you as a company. And so that's tapping into the capital markets. And so not every single company can do that. So what's the end game? Like you just said, it's to create financial instruments around the bitcoin base that you have that will appeal to them. And whether that's a perpetual preferred that will stay somewhere constant in price because of the dynamics of your issuance and you know, buybacks of those, of those securities or the changing of the interest rate on them, the, and what the yield will be for the ultimate buyer of them. Well, that's, that could be very interesting to an institution that has been stuck around 3, 4 or 5% on their, on their money market funds, you know, buying treasury bills and, and they might want a better yield. But different than something going that, than going after just high yield debt or distressed debt, this would be something that would be more attractive to them because it puts in a completely different bucket. And that's what we're talking about is finding instruments and finding securities and creating those around your ultimate, you know, your ultimate balance sheet of bitcoin. And that's what we're looking for, is those companies that have the long run way to do that and the experience and knowledge to do it.
- [55:52]
B
I know some people think that the market can sustain thousands of these down the road, that every company will become a bitcoin company. But as you describe it, I think there's going to be very few of these are successful because it's such a chicken and an egg problem. You have to have the operator who can do all that and create instruments that have real value but also have demand. But you have to have a huge bitcoin stack first. And it's seemingly impossible for most of these companies to get the bitcoin but then actually have a strong enough balance sheet and operator to utilize that because most of them just bought the bitcoin at the top and now have no options.
- [56:29]
A
Well, their option is like you said.
- [56:32]
B
Stock down, I guess.
- [56:34]
A
Yeah, average down. Or they could buy back stock.
- [56:37]
B
I mean buy back stock.
- [56:38]
A
I meant to say buy back stock, that's one thing. Or they could sell know and so meaning not sell the bitcoin but sell a company. And so I expect that there will be consolidation in, in this universe and then there will be an expansion. As we head into a very strong bitcoin price cycle, there will be an expansion of these again. You might see another, you know, feeding frenzy. I don't think it'll be like this where, you know, it felt a little, I'm going to be honest, it felt a little bit haphazard where you just had these, these companies being slapped together and going out there raising money and selling equity and buying bitcoin with it without a real plan. And so we avoided, by and large we avoided those companies. But luckily and you know, but strategically, you know, but I do believe that there's going to be another very strong cycle here with these and Companies like, like MicroStrategy are poised to do extremely well when we have an expansion in price in bitcoin. Extremely well. And we're very confident of that.
- [57:46]
B
Yeah, I mean you and I talked about this. It's Monday and this will come out Sunday. So we talked about it on Macro Monday. But MicroStrategy feels like a screaming buy to me right now. Yeah, I mean it just feels like all possible FUD is being thrown at it. Every going to zero narrative, it's all over delistings. Every nonsensical thing you could possibly hear just is like if you're a counter trader of sentiment, it's about as bad as it gets right now from those people.
- [58:13]
A
Yeah, I mean it's a good entry point for sure. Could you have another drawdown in bitcoin? Absolutely. It feels like it hit a local bottom here. It does depend on that. And it will trade with bitcoin and will trade probably at a little bit of a beta to it even here it's trading right now in my calculation. I, I didn't, I, I haven't updated for what, what he did over the weekend, which I don't know if he did anything, but it's at about a 1.1, 1.12m nav right now, which is really close to 1. It's a 10. You know, Delta is that to me, that's a pretty good entry point, but that's that I have a very long term view on this. This is not something I'm, I'm, it's probably good to trade around, especially if you're bullish on bitcoin price here. Could it trade down again? Absolutely. Because if bitcoin trades down, it's going to trade down with it. But if it gets down below a 1M nav, I mean I would be a screaming buyer of this.
- [59:10]
B
Oh my God. Yeah. Remind you of GBTC which went to a 50% discount? Obviously totally different. But I mean buying bitcoin coin at a discount seems like a screaming buy. So listen, I know we're kind of coming to time here but, but looking forward to 20, 26, I don't think either of us think that we're plowing down into a bear market right now for three years. Right. I think it's fair to say that we mentioned at the beginning. So assuming that they can pull the levers and push the buttons and we don't have a major black swan event, how do you foresee the path of bitcoin?
- [59:44]
A
Well, if we don't have a splash of liquidity soon, I see bitcoin drifting a little bit lower maybe and then grinding sideways between 80 and 100,000 for a little bit until we do see some clear liquidity added to the, to the system, which I do expect to come next year. And when that does happen, I expect us to reach new highs again. You know, I would not be surprised whatsoever to see Bitcoin at 150 or $180,000 next year. Do I expect it? It's hard to expect anything in bitcoin, but what I do expect is more liquidity, which means I expect bitcoin to catch back up. And rather than having a steep drawdown in the markets of 30, 40, 50%, I would see a, you know, if there's a hiccup in the markets, they're going to come, you know, they're going to come with fire trucks if there's anything more than a hiccup. So I would expect for us to be, you know, for, for bitcoin, for the bitcoin price to start gravitating back up to that all time high. You know, you've got the, we, we talked about OGs before selling and starting a little bit of a cascade with, with just monetizing some of their long, long, long term holdings and going to, you know, to go live their lives. Well done. That's, that's expected. I think we've by and large cleared that at the $100,000 level. We'll see. And what it. I expect there will be some more of that as well as some of the hedge funds that bought along the way here in some of the smaller institutions. So they'll cycle out of it. But once we get through that a hundred thousand mental level, I think we're going to get right back up toward that all time high and then kind of just work our way. Work our way higher. And, and that's going to have. That's going to be due to liquidity. It's not going to be due to any crazy euphoria. I don't think it's going to be.
- [61:48]
B
Because J.P. morgan explodes because of their microstrategy short and then the moon man comes. Yeah. The narratives right now are really. They're insounding. So thank you for keeping us grounded. I'm glad we got a chance to have a conversation without Mike and Dave fighting.
- [62:07]
A
The same. The same thing over and over again. But, you know, it's important to hear different points of view. It really is.
- [62:14]
B
I love it. That's why it's so engaging.
- [62:17]
A
We have to always try to get back to first principles and where we are in the markets and just what to expect from that. And that's where I try to ground myself, and that's my jumping off point every single day.
- [62:29]
B
I appreciate it. Now that you've spent the last few hours talking to me, I'm going to let you go live your life, man. Thank you so much. I appreciate your time.
- [62:36]
A
Absolutely. Love the studio, man.
- [62:38]
B
Yeah, we got to get you in here next time.
- [62:41]
A
I'm there.
- [62:42]
B
Let's go. All right, buddy. All right, man. Thank you. Yeah.