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- [00:00]
PGIM Representative
At pjum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long term goals. Pjum our investments shape tomorrow today.
- [00:36]
Katie Martin
Pushkin, Heaven knows we've tried to avoid it, but eventually. You know what this here podcast has to talk about Crypto. There is a ton of interesting stuff going on at the moment, from stablecoin regulation in the US to an obscure Japanese hotel developer that's decided to turn itself into a machine for buying bitcoin. The price of bitcoin itself, by the way, is up a lot this year to almost $110,000 a pop. Today on the show, we are grasping the nettle, bracing for the inevitable influx of aggressive emails and telling you what you need to know about all this crypto jazz. This is Unhedged, the Markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, the markets columnist here at FT Towers in London, and I a stupid cold, which is annoying. Joining me through the magic of the Internet all the way from New York City is the big man, First Sealord, Robert Armstrong, senior executive vice President of the Unhedged newsletter. Rob, how are you doing? Have you got a cold or.
- [01:45]
Robert Armstrong
No, no, I feel all right, man. Sorry you're. I'm sorry you are poorly, as you English people say.
- [01:52]
Katie Martin
Now listeners, if you are a crypto maximalist and you hate everything that we say and stand for, please be advised. Rob's email address is robert.armstrongt.com I have had enough haters in my inbox lately, so please feel free to send me.
- [02:09]
Robert Armstrong
You made a movie. That's because you made a movie about bitcoin or.
- [02:13]
Katie Martin
That was one of my mistakes.
- [02:14]
Robert Armstrong
Yeah, we'll get to that movie shortly, I'm sure. But you know that brings in the emails when you go and make a movie. Katie. Can't say you weren't here.
- [02:23]
Katie Martin
No. So given that, why are we doing this to ourselves? Why are we talking about crypto today?
- [02:30]
Robert Armstrong
Well, this. Because of this hotel. Because of the bitcoin hotel. Katie.
- [02:34]
Katie Martin
There's so much weird stuff here. So it's a Japanese hotel development group called I believe metaplanet, Meta Planet.
- [02:42]
Robert Armstrong
It was a hotel development group. Now it is a bitcoin buying entity. There should be a name for these things. These companies all modeled on MicroStrategy that used to do something else and then decide it's a better gig just to be a machine that buys and accumulates bitcoin.
- [03:08]
Katie Martin
Yeah. So microstrategy, which is now called strategy, is like the OG of this stuff. Like you say it used to be a software company and then it decided, nah, wouldn't it be more fun if we just bought bitcoin for a living? And this is kind of starting to catch on. So Meta Planet, this Japanese hotel group or former hotel group, said it was going to borrow four and a half billion dollars to buy bitcoin.
- [03:34]
Robert Armstrong
Well, let me just tell you, before you even start making fun of Meta Planet and its minions, that stock over the last year is up something like 2,500%. So don't laugh at those returns. Whatever they're doing, it's working right now.
- [03:54]
Katie Martin
Katie, that's the thing. Like a lot of these companies that do this, Chiefly Strategy, formerly MicroStrategy, but now also MetaPlanet, they've made their shareholders a lot of money loads. Props to them.
- [04:10]
Robert Armstrong
And the most important and interesting fact, I think, is that these basically buckets full of bitcoin have performed better than bitcoin itself, which I don't get that looked at in the abstract. Looks like black magic.
- [04:26]
Katie Martin
Yeah, it's like alchemy.
- [04:28]
Robert Armstrong
Yes.
- [04:28]
Katie Martin
You just, you turn. You turn money into more money by putting it in bitcoin. Like, it makes very little.
- [04:37]
Robert Armstrong
Very little. Okay, well, but there is. You can give at least a mathematical description of what is going on. So MicroStrategy trades, and I'm gonna slip into finance jargon here, and I apologize. It trades at a premium to its net asset value. So think of this company as a balance sheet. It has some liabilities, like debt. It has some equity, which is what the shareholders put in, and on the other side, it has assets. And the point is that if you take all its assets and you subtract its liabilities, it trades at a multiple of like one and a half times the net asset value. So what that means is if they issue a share, right. They say we're selling stock, which they do a lot. They sell stocks, they sell convertibles, all kinds of equity and semi equity financing. And then they use that stock to buy a bitcoin and then they put the bitcoin on that balance sheet, the increase in the value of the company is like 1 1/2 times the value of the bitcoin.
- [05:47]
Katie Martin
Yep. So you've got a bucket of bitcoin and you say to somebody, would you like to purchase this bucket of bitcoin say, I've got a hundred dollars worth of bitcoin in this bucket. Would you like to buy it? And people say, sure, I'll buy that for $150, please. And you think, what?
- [06:04]
Robert Armstrong
And it means you can be like a machine that issues equity, buys bitcoin and becomes more valuable.
- [06:12]
Katie Martin
That's the other bit of this, which is like, so magic is you borrow money and you use that borrowed money to buy bitcoin. And in the process of buying that bitcoin, you push the price of bitcoin up. So strategy accounted for something like a quarter of all bitcoin purchases last year. This is big. So in the process, you push the value of bitcoin up, and that pushes your share price higher, and it just makes you a generally wealthier company, which means that you can borrow money even more cheaply next time. You try and do it, like, basically for 0% in the case of strategy, and then you buy more bitcoin. And by the way, the founder, Michael Saylor, loves bitcoin. Like, he's a huge believer in bitcoin. So you have this, like, infinite money glitch is what people call it in relation to strategy. And now you've got other companies trying to get in on this.
- [07:06]
Robert Armstrong
That looks like a good idea, they say, and who can blame them, given the success that MicroStrategy has had? But there is a fundamental question to be answered, Katie, which is why are people paying $150 for the bucket of $100 worth of Bitcoin? Right. Why is that happening? And will they ever stop doing it?
- [07:33]
Katie Martin
Well, they haven't so far.
- [07:34]
Robert Armstrong
Cause as soon as they stop doing that, the music stops, right?
- [07:37]
Katie Martin
Yep.
- [07:38]
Robert Armstrong
Somebody has to be willing to pay more for the company full of bitcoin than the bitcoin in the company is worth. I have one theory of this now, by the way. Michael Saylor. Am I saying his last name right? Saylor, you are. Okay, good. Saylor, he says. One theory he offers, which is still more black magic, is that he says our stock is so volatile that people want to buy it so that they can sell calls against it and generate a lot of yield without getting too much into the technicality of this particular form of black magic. Basically, call options, meaning options to buy a stock in the future become more expensive as a stock is more volatile, which kind of makes sense, Right? Stock goes way up and down. The poker chip that lets you buy it at a fixed price is worth a little more. Right? That's the call option. So he says, people buy our stock so they can sell call options, these expensive call options against it. That's called selling a covered call and make a lot of money. And what is weird about this is that those of us who suffered through finance school were told that volatility, all in all, all things considered, makes companies less valuable. But Michael Saylor has discovered a way in which volatility makes them more valuable.
- [09:12]
Katie Martin
Absolutely. Hats off to the guy, genuinely. I just think it's like, so he himself. So I was involved in a film that the FT made about this act of black magic. That strategy has managed to pull off listeners. If you're interested, you can find it online. But what's not clear to me is, so he has achieved this act of genius magic, whatever you want to call it, and you can kind of think about how sustainable that is, but can't argue with how it's done so far. But is it replicable? So this Japanese hotel chain is trying to get on a similar act? I believe so. GameStop, the kind of video games retailer in the States that was the subject of a huge stock buying frenzy a couple of years back, it's tried to do something similar and not had the same results.
- [10:06]
Robert Armstrong
It hasn't been terrible. It hasn't been terrible. So they announced, like in late March that they would start buying bitcoin. And the stock has done okay since then, although when they finally announced that they had in fact bought a big old pile of bitcoin, the stock sort of rose and then immediately fell back down again, which I'm sure is not the result that they were hoping for. So maybe GameStop is the one who's gonna prove that not everybody can do this card trick.
- [10:37]
Katie Martin
Yeah, it does feel like, you know that game, like with the magicians, where they have a little ball that's under the cups and they kind of move it around and then, you know, where's the ball?
- [10:46]
Robert Armstrong
Here's a theory, though. Katie, you can tell me what you think of this. I'm not certain of it, but I have argued this, and we'll see how you like it. So bitcoin, despite all the efforts of the crypto community, is still kind of a pain in the butt to buy directly.
- [11:06]
Katie Martin
Like, maybe especially in the uk.
- [11:08]
Robert Armstrong
Especially in the uk. Although the UK rules are getting a little easier to buy kind of bitcoin traded funds or some kind of thing. But the point is, if you buy the stuff directly, you have to have a wallet and then you have to take care of it, and you can't Lose your key and whatever. And you know what's easy is buying shares in Meta Planet or in microstrategy that you just go into your brokerage account and you buy it. And so it's like you don't have to figure out what a crypto wallet is. You don't have to learn a key, you don't have to, you know, etc. Etc. So it's. It's like what these guys are selling maybe. And the reason the shares traded a premium is what they're really selling is ease and liquidity.
- [11:55]
Katie Martin
I think that's right. Actually, much as I hate to agree with you on anything, I think that is a large part of why the shares in these things sometimes do so well. I mean, you can argue about what happens when the music stops. Right. So this all works as long as the price of Bitcoin is going up. And it has gone up a lot this year. Something like 17%. Like I say, $110,000 a pop.
- [12:16]
Robert Armstrong
And the premium remains.
- [12:17]
Katie Martin
And the premium remains.
- [12:18]
Robert Armstrong
Two forms of risk. Yeah.
- [12:20]
Katie Martin
But you know what happens when either of those things snaps? But I just, I do think it's interesting that we're getting these copycats now, but it comes at a time when there is like a lot of excitement about crypto in the States at the moment. So there's. There are meme coins associated with the president. And if you buy enough of the meme coins, then you get to go to dinner with the President. The pictures of the food looked really awful, but that's. Let's set that aside for now. Controversially, they seem to be.
- [12:48]
Robert Armstrong
The rubber chicken coin is, I think, where you sold to get the food.
- [12:52]
Katie Martin
Yeah, like a chunk of beef and a chunk of fish. I don't know, man.
- [12:55]
Robert Armstrong
God. Surf and turf coin.
- [12:59]
Katie Martin
And basically the authorities in the states under the new administration are like gutting crypto enforcement. So crypto crime is like effectively not really crime anymore. It's a very much caveat emptor. Right. It's like, you buy this stuff, you know the risks, it's on you. If you make a lot of money, great. If you don't, don't come crying to us. That's sort of fine in and of itself. Alongside all this, there's also a lot of chat about stablecoins.
- [13:25]
Robert Armstrong
Yes.
- [13:25]
Katie Martin
And there is a thing going through the US political system at the moment which is about regulating stablecoins. So if you don't know what a stable coin is, congratulations. But let me tell you what it is effectively. So if you Buy a coin like Bitcoin, you buy it because you think it's going to go up in value. But there are these things called stablecoins where you don't imagine that it will go up in value. You imagine that you put a dollar in and it remains a dollar that just lives in the crypto ecosystem forever. So you put a dollar in, you can get a dollar out. Why would anyone want to own these things? Right. That's because if you're jumping in and out of different crypto coins, it's much easier to do that using a stablecoin as your base, rather than using the actual dollar or the actual euro or normal pounds to do that. So it's like a dollar that lives on the Internet now.
- [14:19]
Robert Armstrong
Wait, Katie.
- [14:20]
Katie Martin
Yeah, yeah.
- [14:20]
Robert Armstrong
There's a crucial irony here, and this goes back to what we were saying about strategy and the other crypto owning companies. And it's an irony that applies to the stablecoins as well. If what the crypto utopians say is true, in other words, that cryptocurrency replaces fiat currency, or at least in part replaces it.
- [14:46]
Katie Martin
And fiat currency is like normal currencies, right? Dollars.
- [14:51]
Robert Armstrong
Yeah, yeah, exactly. And if cryptocurrency sort of flowers into a new, improved and better fiat currency that is useful for everything, and you can buy things with it, and you can send it really easily to everything and everything is wonderful in that world, what do you need a stablecoin for? Well, as you just described it, a stablecoin is a way to play in crypto markets. It's like a liquidity bridge. And this is the same point about the companies strategy and meta planet. If what they're selling is liquidity, if the beautiful, perfect crypto future arrives, crypto will have become perfectly liquid and easy to access and universally accepted and wonderful. And in that world, what do you need a stablecoin or microstrategy for? I don't know.
- [15:47]
Katie Martin
And also in that world, why do you want it to be appreciating in value really quickly? Doesn't that mean that that would make no sense? So this is one of the big kind of contradictions at the heart of crypto, and there are many, is that there are people who think that it's a currency and there are people who think it's an asset. So if you think it's a currency, then you think it's a way to pay for things and you can go and buy your coffee with it. And the price that you pay for that coffee is pretty stable. If you think it's an asset, then you buy it because you think it's going to go up, up, up, up, up, up. Both of these things can't be true. And you know, when I was speaking to Michael Saylor for the film that I made recently, he was very much framing it as this thing is an asset. And it's an asset that is scarce and it's an asset that is going to appreciate in value because lots of people want to buy this scarce thing digital cool. And that's fine. But that's not what other crypto enthusiasts say. Other crypto enthusiasts will say, no, no, no, this thing is a currency, so whatever. Not an argument that I honestly intend to get into in too much detail, but tell me about the genius act.
- [16:52]
Robert Armstrong
So the genius act is about stablecoins. Actually, I'm gonna back up. Let's think about what a stablecoin issuer does. Katie gives stablecoin issuer a dollar and in return receives a rubber chicken coin or whatever, which is a stablecoin that the issuer promises. When you give me the stablecoin back, I'll give you your dollar. It is redeemable at par. To use the financial lingo there. Now the issuer has a dollar and the interesting question, as ever, is what the issuer of rubber chicken coin does with their new dollar. Yeah, so you might, I don't know, you might buy a house, you might do whatever. But you know, usually what you do is you invest, you know, and what the genius act, which is working its way through US Congress says is you're only allowed to invest in very stable short term assets like treasury bills or cash or bank deposits or stuff like that, so that you don't have a mismatch between the par. Redeemability of the coin and the assets the issuer has invested in.
- [18:18]
Katie Martin
So stablecoin issuers, that includes the biggest of them all is tether. There's loads of others. There's one that's operated by Circle. There are versions that have come from Binance. There are all sorts of these different things and what they promise is that all of the money that goes into them is backed one for one by these reserves.
- [18:38]
Robert Armstrong
Really safe reserves, really safe reserves.
- [18:41]
Katie Martin
Now so interestingly, the holders of the, what you, Robert Armstrong has called a rubber chicken coin, remember robert.armstrongft.com is that you don't get any kind of adjustment for inflation and you don't get any kind of interest payments on these things. The operators of the coins do, which. Two thumbs up. Very clever bit of financial engineering. Very Simple. I admire it. So there is this question about if stablecoins become really popular and they should become really popular in line with the general growth of crypto. Because like we say this is the kind of base camp for, for trading crypto, then at what point does this become a financial stability risk? So.
- [19:26]
Robert Armstrong
Well, I wrote, I wrote a second. I can.
- [19:29]
Katie Martin
Oh my God. Interrupt you go on then.
- [19:32]
Robert Armstrong
King of interrupting. Let me just say, before you go on to your excellent column, let me just say this. Financially astute listeners will have noticed that when we were talking about things redeemable at par purchased from a company that then goes on to invest the money, what we are talking about is a bank liabilities redeemable at par on the liability side of the balance sheet and investments on the asset side of the balance sheet. Now I said this in a column and everyone disagreed with me. That said, everybody always disagrees with me. Doesn't mean I'm not right. Stablecoin issuers are banks and the Genius act is a light touch bank regulatory piece of legislation.
- [20:27]
Katie Martin
Yep, yep. Now that is interesting cause there are people who think that stablecoin operators are banks. There are people that think that they're basically like money market funds operators. I'm not sure for the consumers of these things that makes much of a difference. But it is interesting in terms of like you know, theory of high finance stuff.
- [20:45]
Robert Armstrong
It's going to matter when they fail. Katie.
- [20:47]
Katie Martin
Wow.
- [20:49]
Robert Armstrong
When, when the rubber, when the bank of rubber chicken win, the bank of rubber chicken goes bust. It'll matter to consumers.
- [20:56]
Katie Martin
Here's the other thing. So as I was saying, when money comes into stablecoins, they take that money and they use it to buy reserves to back these things. One for one. This is the kind of promise that is made. Now there's a paper that's out recently for the bank of International Settlements and that's kind of like the central bank for central banks. And it's a working paper from those guys and they were saying that when money comes into stablecoins, if it comes in in large enough volumes, then you can demonstrate that this does raise the price of short term US government debt securities, which is interesting. Right. So over, if you get a big inflow, then within the sort of 10 days after that, then you get as much as 22 and a half basis points, which is 0.025 percentage points. Doesn't sound like a lot, but it is quite a lot. In short term debt securities, that's how much the yield will come down. So look gobbledygook finance stuff basically means it pushes up the price of short term debt securities. But the interesting thing is that when the money comes out of stablecoins at speed, the impact on the price of, of short term debt securities is two to three times larger.
- [22:05]
Robert Armstrong
Why is that?
- [22:06]
Katie Martin
And that kind of makes sense. Well, it, it makes sense because when the money's coming in, then the, the stablecoin operator has a certain amount of discretion around what they buy and when, right? They can wait and they can, they can buy, they can buy a dip or whatever. If the money's coming out of a stable coin and they have to redeem that money quickly and someone comes along clicking their fingers so saying, yes, I'd like my money back now, please. For whatever reason, you've got to deliver it like now, now. And it doesn't matter what the price.
- [22:35]
Robert Armstrong
Is, sell what you can sell.
- [22:37]
Katie Martin
It doesn't matter what the price is like, doesn't matter what market conditions are like. So you get a bigger impact on price when you get redemptions. Now this is all kind of fine and bubbling up under the surface, but if stablecoins become really big and if, and it's not a kind of outlandish mental exercise, it's something were to go wrong in cryptoland and there were lots of redemptions from stablecoins, you could easily get to the point where suddenly this has a really meaningful impact on short term US Government debt prices. And then we all sort of look at each other and say, well, who let that happen? How did this all happen? This has all come as a huge surprise. So it's like this kind of massive risk that's building up in plain sight and everyone's just like filing their nails and saying, I'm sure this will be fine. It's crypto. What could possibly go wrong?
- [23:30]
Robert Armstrong
Well, I'll tell you. Katie, Katie, do you know that the US Government has already bailed out a stablecoin issuer? I'm gonna tell you this story. It has happened. I'll tell listeners the story. So there's this stablecoin, by the way, its issuer just went public like this week. Circle. Isn't that what the coin was called? Circle. And circle was very conservatively run. Of course it, you know, probably would have complied with the Genius Act. It had a lot of its reserves, in fact, almost a majority of its reserves in bank deposits. I mean, it wasn't even buying treasury bills. Yeah, and that was all fine until it turned out that the main bank, it was depositing its dollars in Washington Drumroll please.
- [24:17]
Katie Martin
Drumroll.
- [24:18]
Robert Armstrong
Silicon Valley Bank. So there was a run on Silicon Valley bank and because Circle's reserves were deposited Silicon Valley bank, that became a run on Circle. And when the government bailed out Silicon Valley bank by getting it sold to another bigger bank, it was de facto bailing out Circle itself. And that just goes to show you, even if you want to reject my theory that stablecoin issues are banks, if they are not very careful, they get welded into the banking system and they become an issue in the banking system that has to be dealt with eventually by the person who always deals with trouble in the banking system, that is the taxpayer.
- [25:08]
Katie Martin
Correct. The point is once these things become big enough, then they are a big enough part of the short term debt securities market and they're a big enough part of the banking system that it's something that everybody needs to keep an eye on, even if you're not a.
- [25:21]
Robert Armstrong
Crypto invested in them.
- [25:23]
Katie Martin
So you've got listed companies that are piling into Bitcoin, you've got stablecoins that are growing really quickly. Rob Armstrong, yes or no? Will this end in tears?
- [25:33]
Robert Armstrong
I don't think the companies that buy Bitcoin can trade at a net asset value premium forever. That just doesn't make any sense to me. If the system grows up and becomes liquid and a well functioning corner of the financial world, the strategies of the world will become dinosaurs. That may never happen, but if it does happen, that's over. And I also think stablecoins have to find a more permanent use than trading in the crypto. I would call it a casino, others would call it a market. So you know, this is a whole nother show we can do. But I don't think other than crime, I don't think we have a really great demonstrated killer app for stablecoins that's going to get the email coming in.
- [26:31]
Katie Martin
Woo. Let's see how many emails we get before we decide whether or not to do another show on this. And just a reminder listeners, send your emails to Rob. Okay, so we are going to have to leave it there because we've been rattling on for ages about crypto and we don't even like talking about crypto. So we're going to be back in a sec with long short.
- [26:59]
PGIM Representative
Bonds are back and so is all the credit. PGym Fixed Income's monthly podcast series. From the latest trends to long term perspectives, you'll get timely fixed income insights from leading economists, research analysts and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to all the credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.
- [27:28]
Katie Martin
Okey doke. It's time for long short. That part of the show where we go long a thing we love long or short a thing we hate. What you got, Rob?
- [27:35]
Robert Armstrong
Katie, I'm short tariffs on solar panels. Oh, there's all this crying that China is dumping its solar panels on the US and that solar panels are a strategically important industry. I think these things are basically commodities at this point and they're a good commodity and if the Chinese want to sell them to us really cheap, we should just buy, buy them and have a lot of solar panels everywhere and, and I just think that would be a better world. I'm really pro solar power and I'm really pro cheap solar panels.
- [28:11]
Katie Martin
You are so woke. On a completely different note, I am short poo pills. So the BBC writes to inform us that UK doctors are attempting to clear dangerous superbong infections using quote, poo pills containing freeze dried feces. The BBC informs me this is all a very good idea and that it's going to make people better. And I'm all in favour of science and making people better. I'm just saying this needs quite a heavy rebrand I'm not in a hurry to take.
- [28:44]
Robert Armstrong
I mean, you know, they call this, they call this procedure a fecal transplant.
- [28:48]
Katie Martin
It's a no from me. Really needs a rethink.
- [28:54]
Robert Armstrong
A little bathroom humor to end the show. Thank you.
- [28:56]
Katie Martin
Yes, we're very grown up. Okay, that's it. Today I'm going to go and take some cold remedy, some paracetamol, probably no poo pills. We will be back in your feed on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alastair Mackey, Greta Cohn and Natalie Seidler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedged offer I'm Katie Martin. Thanks for listening.
- [29:47]
Robert Armstrong
Sa.