Transcript+
Let's be clear, Bitcoin is an international asset. We are spending like drunken sailors. Bitcoin is the only economic entity where the supply is unaffected by the demand. If you want to preserve your wealth, you have to convert that currency into an asset that's scarce, desirable, portable, durable, and maintainable. Thank you for joining us for this week's episode of Scarce Assets, a podcast from On Ramp Media. On today's show, Bitcoiner and longtime hedge fund manager James Lavish joins Andy Edstrom and Jesse Myers to discuss the current state of the Bitcoin market and the impact of inflation on the global economy. They explore the role of Bitcoin in fixing the broken monetary system and the need for financial education. They also delve into the expansion of the money supply, the ongoing debt spiral, and the challenges of addressing a growing national debt. James also explores Bitcoin's path of monetization, the importance of institutional capital flows, and the potential for Bitcoin's volatility to dampen as it matures. And now, time for the show. Hello, I'm Andy Edstrom and I'm happy to welcome you to the 11th episode of Scarce Assets, the show that examines scarcity, the most fundamental driver of economics and markets, and the scarcest asset of all, which. Is Bitcoin. It's great to be here with my friend and Co host Jesse Myers and our guest James Lavish. Now, James is one of my favorite Bitcoin educators because he has the knowledge of Bitcoin and because his background is in traditional finance. He's a partner in the Bitcoin Opportunity Fund, So he's investing in Bitcoin companies and opportunities, which is something we'll talk about. And he writes the Informationist newsletter, which is a great resource that I enjoy reading and that I recommend especially for it's clear explanations of how things work in bond markets and in money markets. So I'm happy to welcome James to the show. James, how are you? It's awesome to be here, Andy. Thank you for having me and it's good to see you and Jesse. Excellent. Well, James, let's wind back the. Clock a little. Bit to November 2022, I moderated a panel with you and David Thayer and Morgan Richard at Pacific Bitcoin, and that panel occurred as FTX was melting down. Bitcoin had dropped below 16 K, having fallen from a peak of about 69 KA year prior, and we talked about whether the institutional narrative for Bitcoin was dead Now since then, the ETFs got approved. Is that the only difference between 16 K Bitcoin and 64 K Bitcoin today? No. I think it was, you know, that time was when we decided to launch our hedge fund. We decided to go ahead and and establish it because we saw so many opportunities out there. You know, Bitcoin is just super volatile. It always has been. And it doesn't surprise me at all that when we have the FTX and Celsius meltdowns that all of the fraud that we had in the space that Bitcoin took not the brunt of it, but took quite a bit of the the pain and, and follow the market down or LED the market down as as it would be because it was. It's the most, it's the most liquid asset in the space and so not surprising at all. And as far as is it the only difference? No, I mean it, it is a big difference that the ETFs have come in and we can talk about that and they've been helpful. They've been a, they've been a very positive, I guess development in, in the Bitcoin space. But in reality, I think that quite a bit of, of the that washout occurred. It went a little bit lower than than we would have expected in the cycle. It probably clipped the top of that cycle. But here we are in the next cycle and, and a lot of it has to do with just the having the, the four year cycles and, and where we are in that. At On Ramp, we believe that Bitcoin will be the most important asset to own in the 21st century. Our multi institution custody solution is the safest and most secure way to ensure that your Bitcoin remains in your and your family's possession for decades to come. Multi institution custody maximizes security and minimizes counterparty risk, leveraging Bitcoin's native properties to eliminate single points of failure that have historically complicated Bitcoin ownership. On Ramp provides Peace of Mind for your Bitcoin journey. For more information, check us out at on rampbitcoin.com. Yep, that sounds about right, right to me. I wonder, with respect to your newsletter, the informationist, has your focus changed over time in that in that intervening period? I mean, you do a great job of talking about the big picture credit markets, the nuts and bolts and the mechanics in plain English so people can understand and then weaving that, you know, bitcoins roll into that. Do you feel like that has evolved in the in that intervening time, or was it kind of always the the same thrust and the same idea? It's hugely evolved and but I wouldn't say it's because of Bitcoin dropping. It's because I started the newsletter realizing that that I had this, this knowledge and information experience that most people just don't have. Being in institutional investing and being in that world for so long, it's pretty opaque. These people are paid to keep you in the dark and there's no real incentive to educate people on that. Knowledge is power and and wealth really in that world. So I wanted to bring some of that to people, but in the in kind of conjunction with Bitcoin knowledge now when when I started doing it. And yeah, I realized pretty quickly that people really wanted to, they want, they want to understand the nuts and bolts of finance. And at the same time, I realized, look, as if I try to, if I try to convince somebody that Bitcoin is the answer right out of the gates, that doesn't really work. What, what what is become extremely obvious, you know, apparent and, and blatantly obvious is that people need to understand that the money's broken. And if we start there, then we can lead you to the path where you make your own determination that, yeah, Bitcoin is a no brainer. So, you know, that's, that's kind of how it, it, it all came about. And I've found that more and more that I talk about traditional finance subjects like bonds, the bond market, the treasury market, the reverse repo market, the repo market, how the Fed works, how the Fed makes their decisions, their meetings, what, how that all comes about. People are are fascinated by that because it gives you that, that grounding, that base of, of knowledge that you can then extrapolate to apply to your own investments and then to why Bitcoin really does matter, why it makes sense. So that's kind of how it evolved. But then and it, it's been fun. I enjoy it, yeah. Yeah, I love it. Yeah, it's, it's, it's interesting to me that, you know, you, you are able to pull back the curtain and, and, you know, that's the best form of education. It's just showing like, oh, here's the, here's the man pulling the lever or the, the rudimentary mechanics that are very human and imperfect behind the curtain. And, and that's really kind of the first step or it was for me in coming to Bitcoin and coming out of the like, you know, sort of general world view and mindset of, of everything is run by professionals who know what they're doing. You know, that's kind of what you're steeped in when you're, when you're coming up in, in school and then early in your career. And that's the assumption that most people have. When in reality, you know, you, you look behind the curtain and, and you see that they, they maybe don't understand the 2nd and 3rd order effects of policy decisions that are being implemented. Exactly. Exactly. And you know, when you try to bring somebody into the space and understand what's going on and why Bitcoin is so important, like we saw yesterday, we saw that Chris Pan was, you know, he, he tried to he, he gave a speech at Ohio State, right? And he came out and I don't know how long into this, I heard the clip. I don't know how long into the speech it was, but he started talking about Bitcoin and they immediately booed him. And part of that is just ignorance. Part of that is because, you know, you've got we've lost the ability to teach these kids how to critically think in college, which is just a shame. Some colleges still do it, but by and far you can see that that's a big problem, a lot of groupthink and so but reality is if Chris had more time and if he had structured his speech differently, I think coming at it about, you know, from the from the angle of hey, look, the money's broken. Here's how it's broken. Oh, and by the way, Bitcoin does fix this. That might have that might have been received better. But if I and I, and I know that because if when I first learned about Bitcoin, I would do the same thing, I would walk into, you know, I would have a dinner party with my wife's friends, these poor people and I'd just start talking about Bitcoin and they're like, what? No, you know, that's a scam. It's a, it's for drug dealers, it's for, for sex traffickers, it's for shady individuals. It's not, it's not real. It doesn't have any airline. It's so it took me a little while to learn that. Oh, I got to, I just have to educate people and, and remind them how, how manipulated our system is and how it's manipulated against them primarily and how it's not working for them. And then they realize, yeah, you're right. You know, inflation isn't normal. I I don't know why I always thought it was. And you have to walk them through it. You've been, you've been taught all your life that 2% inflation is normal because you can stomach it. But the reality is it's not normal. And when you get people around to that understanding, that thinking, they start critically thinking for themselves and they think, yeah, is there another way? Is there another way? You probably know more about this than than I do. My recollection is that that 2% number just came from like a, a paper that somebody put out in New Zealand in the 80s or something like that. Is is that the all it is? That's correct. That's correct. And I, and I, and, and I can't remember and I apologize, I cannot remember if it was in New Zealand or Australia, but it was, it was in that kind of time zone, But that's right. And it just, it came out from a paper and they figured out pretty quickly central banks adopted it, widespread adoption on it and and figured out pretty quickly that, hey, this is what we can get away with. And people won't complain about it. And they'll just accept it. And they'll think, oh, yeah, well, 2%, that's economic growth. No, that that that has nothing to do with economic growth. If you listen to Jeff Booth, you'll realize that the natural state of the advancement of technology is for deflation, that everything gets cheaper. And it's almost impossible to wrap your brain around first hear that. But once you think it through and just sit down and think it through and think about that, you realize, yeah, we should be getting a whole lot more for our work and our money and our developments and our advancements. Like, why are we not? And so I remember how I had this argument with with my brother once about how, and he's he's into technologies, computer science engineer. He was in college, not anymore, but, and we would have this argument about, well, these now that we have a BlackBerry, you can do your work anywhere. It's, it's, it's so much more productive. You're doing, you know, like you, you basically you can spread your work out and you won't have to work as much because it's not as consolidating that eight hour period and you can just get it done as you're going along. And I, and I argued with them because I had been using BlackBerry for almost two years at that point. I was like, it's just making me work longer hours harder. You know, now I'm, I'm able to trade New Zealand and then Australia and then just a few hours later I'm trading in Europe and I don't get a day, I don't get an hour off basically I get like 2 hours off. And that was it. And so, you know, but in reality we should be getting more for it, but, but it, it's not giving us more. And that example was an inflation of, of working hours. But the inflation that we're the experiencing is we all know is it's not natural. It's forced by central banks printing more money and expanding that supply to battle that deflation. And those forces are, they're fighting against each other. And that's what people are feeling. They're like, why is this not working? Why am I having to pay, you know, $9 for a dozen eggs all of a sudden? Like, what is going on here? And maybe it's back, It's back down to five. But yeah. James, I gotta, I gotta tell you my my first BlackBerry story. So my first investment banking job was when the BlackBerry was getting adopted and there was a group there, I was in the M&A group and there's another group which is the restructuring group. And the restructuring group adopted it for all their analysts first. And so they, they, they got the first, first exposure. They used to call it the leash, IE, you know, the, the leash that you're stuck with like an animal because your superiors can contact you at any time for any reason to get you to do work like you just described, right. 24/7. And, and fortunately for me, the M&A group waited a year, I can't remember, waited a year or two. And so I didn't get put on the leash until a year or two later, Thank God. Made a real big difference in my party of life. Yeah. And then it became, they just became crack berries, right. So and that was it. Yeah, but. That's it, That's it. Well, let's talk about let's talk about 2% because you know, some people say inflation in your average country around the world is not uncommon, right? Like how many countries in the world are there where five to 10% annual inflation is totally normal in common. So I guess my question for you is with the backdrop of where debt is, take this any way you want to, you know, is higher than 2% inflation to be expected? What are your thoughts? Well, the answer is it has been higher than 2%. And if you listen to people like Lynn Alden, who is extremely intelligent, then you realize, yeah, the inflation has been closer to the expansion of the money supply, which is, which is over 7% since the 1970s. Once we got off the gold standard, you know, talk, We, we, we let the, we let the central bank off the leash. And so they were no longer leased to gold. Then they could just do whatever they wanted. And now so you're seeing the, the money supply expand and changes in the definition of, of inflation continuously. They constantly change the definition of inflation, whether it's a, you know, it, it's a, it's a basket of goods and it's tied to standard of living that yeah, it's just it, it's, it's insane the way that they change the definitions along the way. And so, but because we are now, Andy, we're we're running $2 trillion plus deficits at a time that we're not even, we're not even in recession and we're running, we're running these deficits that are just ungodly. And So what is happening? Well, our debt is expanding at a rapid rate. So we're, we're adding a trillion dollars of debt every hundred days at this right now. It's on this pace that we're on right now. That's just insanity. And So what do they need to do? Well, talking about that, that's, that's literally the debt spiral because you're, you're, you're operating in a deficit and then you have to issue debt to pay off old debt and to pay the interest on that old debt. Because you don't have, you're not making enough tax revenue to, to make to, to cover that cost, which is your mandatory expenses, which is your, your entitlements, which are Social Security, Medicare, Medicaid, you those are not going away. Those are signed into legislation. You're stuck on those, right? And then your other expenses, military, that's not going away. We're spending somewhere between 8:00 and $900 billion a year on that. So between those two, you're already approaching $5 trillion right there. You're, you're talking, you're getting $4.4 trillion of taxes. OK, so now you only have $600 billion left over, but your interest expense is 1.1 trillion. So there's a half a trillion dollars of debt that you have to pile on just to pay the interest on your old debt. This is called the debt spiral. There's no, there's no way out of it. It's like, it's like, it's like running up credit card and you take out more credit cards to pay off the old credit cards. And eventually you get to the point where you just spiral into such such a, a debt hole you can't get out of and you, you go bankrupt. Well, because we're a, we're a Fiat based debt economy, we can print money. And so we'll never, we'll never just flat out default, right? So we won't go bankrupt. But if you talk through your options there, what are your options to pay down that debt or to right that ship on the deficit? Well, you can cut expenses, but like we just talked about your entitlement, your and your mandatory expenses, including military, including your, your interest on your debt. Military is not, it's not mandatory, but it is important to a point we won't debate whether sending, you know, 10s of billions of dollars overseas every few days is, is, is responsible or not. But their, their, their long term contracts that they're not going to walk away from. So those are all those like those are, they're paying for those. So what are you going to do? You going to cut entitlements? I mean, that's political suicide. So you start cutting Social Security, Medicare, Medicaid, unemployment benefits. That's that's no politician's going to do that. It they, you'll never get re elected. So the, the system is not set up with the incentives to do that. The incentive is to get re elected, not to do right by the public. So that's not going to happen. The second thing you could do is you could raise taxes. If you raise taxes, you wind up. What happens when you raise taxes in, in history is that you wind up disincentivizing productivity. You disincentivize and you and you make it difficult for profitable companies to expand on profitable lines to, to invest in research and development to, to become more profitable. So they wind up tightening their belt because they have higher, they have higher taxes. It's just like we saw out in, in California, you raise the minimum wage and what happens will fast food companies who, who now have a $20 minimum wage requirement, they have to cut workers because the, the, the demand is not there. It's just now the, the, the cost is higher, so they have to cut workers. It's the same sort of idea. But the problem is and you get to the same spot. So you have higher taxes on lower GDP, on lower productivity. And so you wind up getting to the same spot, except it's even worse. Because now your productivity is declining, right? So in the long run, it doesn't work. And raising taxes is not the answer. So what's the other thing you can do? Well, you can just issue more debt, which is what we're doing. But how do you handle that? How do you deal with that debt that you just piling and piling and piling on? Well, you, you allow for high perpetual structural inflation. And that's what you have to do in order to allow this and to keep this charade going. And so the answer to your question, Andy, is we're at the spot where I expect inflation to keep going up. I don't expect us to, unless we some sort of economic catastrophe or a real sharp downturn where we have a a contraction and an economic contraction here that really is, is, is is steep and sharp. I expect us to continue to have high inflation and for that inflation to keep going up because not just because it's necessary to pay down the debt, but because we are we, we are using expansionary and, and fiscally expansionary policies, which are inflationary. And that is going to continue to feed into our, our prices. And that's just reality. That's a long answer to your question, but. That's, that's everything right there. I mean, you nailed how well, first of all, I, I want to highlight what you said earlier about the expansion of the money supply to me. I've, I haven't dug into this as much as you, but when I tried to figure out like, what is the, what is the real inflation metric? Engage it. You know, you can't really trust CPI. You can't trust any of the other alternative metrics out there but M2 and the the rate of expansion of M2 seems to line up pretty cleanly. Yeah, you have to zoom out a few years to see that show up. But that's actually, that's the rate of of inflationary expansion, which just goes right back to the the core idea from Austrian economics of when you print money that causes inflation. And anybody who says otherwise is, is trying to deny reality. And, you know, it's a shame that we live in that world, but. I totally agree. And you know, when you ask, people are asked us all the time. Politicians are asked it our our leaders asked are asked it. Powell was asked on 60 minutes just six or eight weeks ago. Why 2%? Where's that number come from? And his answer was, was a 92nd word. Solid answer, made absolutely no sense. And it basically boils down to what we said before. It's what we can get away with. And we're going to get that's what we're going to tell the people. It is we're going to tell we're going to we're going to do what we can to get it down. The optics of it, they're not getting inflation down to 2%. We may have a moment here where we have some sort of contraction and D and we have deflation for a moment, but they can't have that they So we know long term that the optics may look like it gets down to 2%. Reality is the money supply expands. Eventually the inflation picks up, picks back up and and it it does catch up. Why? Because when you have debt to GDP, it's running over 120 percent, 100 and 26127%. Now you have no choice as a as an as an operating sovereign that based on Fiat dollars then to expand the money supply and allow for high structural inflation in order to expand the GDP nominally, which means without inflation. Because if you expand GDP nominally, which is fake productivity, then that there's more dollars to pay down that past debt in the future when you go to tax those. So put it this way, if you're buying long term U.S. debt at 5%, my belief is you're going to lose on that trade because you're not going to have the same purchasing power with that money when it's paid. When you get paid back in 30 years or 10 years when you get paid back, it's not going to be worth that principally you paid plus the interest that you were paid along the way. It's just not going to be worth. That's a perfect example of like real wealth destruction or confiscation that is being sort of implemented through policy. And now we're starting to see increasing talk about like unrealized gain taxes or, you know, what are your thoughts on on things I. Think it's ridiculous? Tax proposal going from 20% to 44%. Will we see more and more aggressive actions like that implemented as actual policy? I think they'll hide it and they'll give, they'll, they'll raise capital gains taxes through different demographics and then and, and, or financial demographics, not social demographics. But I think they'll different levels, they'll have different, they'll have different measures and, and hurdles for you and kind of hide it, say, well, no, no, no, we didn't raise taxes. Yeah, well, you, you kind of did. And they will do that to some extent, I believe at least this administration, I believe will. I don't know what Trump will do. And my guess would be with lower taxes for capitals, 'cause he doesn't want them, his friends don't want them. That's my guess, but you know, can a, an unrealized capital gains tax go through? Absolutely not. That's that's a non starter. We would lose, we would lose hundreds of billions of dollars of, of, of GDP and productivity in a nanosecond. They would leave the country. And if you're, if you're a, a hedge fund manager, if you're a vent VC capitalist and you are going to be hit suddenly with this crazy unrealized game tax, what are you gonna do? You gonna sit there in Palo Alto? Are you gonna, are you going to, you know, or you gonna move your, your entity from a Delaware Corp to a, a, you know, Grant Cayman's Corp and just you're out, you know, peace. I'm gonna continue being a billionaire. I don't need this. Here's my passport. You know, I mean, like they would just be. It's a nonsensical. I just can't, I can't see that happening. However, it's political. It's all, it's all gamesmanship is what we we, we continue to see from election to election. It's all gamesmanship. Because if you ask somebody, Jesse, in two years, if you ask somebody, Can you believe that, that that capital gains tax, I mean, that was pretty ballsy what what Biden put through. They would say, yeah, it's great because the Brits should be paying more. They wouldn't even know it never went through. All they did is they heard it. Mainstream media repeated it ad nauseam and they think, Oh yeah, they took care of me. That's all they want to do is send that message. We're taking care of you. Well, they got one thing working for them automatically, which is bracket creep, right? Which is if we have ongoing high inflation and therefore the nominal price of everything goes up, well, then you're making more money, at least in terms of income tax. And so you're, you're, you're creeping up in, in the brackets over time. So there's unfortunately though, I, I don't think that gets very far in terms of the, of the holes in the budget that you just described. It's sort of, it's sort of a rounding error. I wonder what you think, James, of the geopolitics and ongoing conflict and, and risk of conflict. You pointed out rightly that the entitlements are very hard to change, but the military, the military budget might have a significant upside. I guess who knows what the Do you have any thoughts in that regard? Have you modelled it or is it really more you're thinking more directionally? No, I'm just thinking more directionally. I think everything goes up. I mean, I'm thinking more along the lines of if we have a, if we have a recession, any typically in a, in a typical recession, your, your entitlements, those expenses rise by 8 to 12% and at the same time that your revenues drop by 8 to 12%. So just think about that 20 percent, 20% jump in your, in your current deficit. So if your deficits run at $2.2 trillion and even $2.5 trillion, now you have a 20% jump on that. Now you're at $3 trillion. What are they going to do? They're going to print money. They have to print money. They, they cannot have this continue like this. So that's my, that's my thesis is that we will see continued expansion of the money supply. There's no way around it and you know it, it's just reality. It's a mathematical reality. So I'm not really worried about the expansion of, of budgets like military. I don't, I don't think that they're going to be able to cut entitlements because it's political suicide. My bigger worry is that they just won't be able to pay for it. And So what they'll do is they'll say, well, we can't pay for Social Security. So by my age, I'm I'm, I'm Gen. X. So I'm the I'm in the crosshairs. You know, I've paid into this thing for 30 years now. And in and in 15 years or so, they're going to say, yeah, sorry, we don't have it for you. And I've got it. I'm still paying in. And So what are people my age going to do? They're going to vote for some sort of expansion on it. You know, they're going to vote for the money supply to be expanded. Take care of us. Well, you took care of the boomers. Why don't you take care of us, You know, and good luck, millennials, you're up next, you know. And so that's, that's just, that's just the reality of where we are. It's mathematical and and I think the system not only allows for it, but incentivizes people for it. Yeah, the political will, it does feel like we're sort of sleepwalking towards the event horizon and, and people think like it's far away and we have plenty of time to turn this ship around. And we have, you know, we have a lot of ability. And if we just pull ourselves together, we'll, we'll be able to get out of this, you know, gravitational pull, no problem. But you know, as you pointed out, like you're not gonna, there's no political will to cut entitlements. There's no political will to drastically cut back the military budget. And so therefore, there's no ability for austerity and any levers that you have to, you know, turn the ship around are suddenly gone. So we're, we're just letting interest expense and and deficit expansion pull us deeper towards the gravity well. And in, in many ways, we've already passed the effective event horizon of like, you know, the event horizon adjusted for our ability or political will to get out of it. You know, we're, we're already. Yeah, and not, and not to get into the, the, the minds of politicians, 'cause God knows that there's a lot of space up in those minds. But but they're looking at and they're saying all they know is 'cause they don't even read these budgets. They just hear it from their, their aides. But all you know, all they see is, well, we can't even make budget on just our mandatory stuff. So it doesn't even matter if we spend more. We we have to print anyways. We have, we're already taking out that credit card and another credit. We might as well what who cares? There is no guys, there is no debt limit right now. There's no ceiling. We just so it's just, there's just like this kind of like there's a cloud up there that we're just keep marching up higher on. And so you know. Until after the elections, quite conveniently. Quite conveniently. And so, you know, we're just going to continue to March forward like this because there's, there's, there's really no incentive otherwise. So yeah. So one of the surprises to some maybe has been the strength of the dollar, notwithstanding the fact that it's deficits and, you know, money printing as far as the eye can see. We had a question actually from a friend, Eddie. He's thinking about the Plaza Accord and, you know, actions that the government could take to weaken the dollar if necessary. Is that something you've thought about, or is it? Is the problem solved just by virtue of the fact they're going to print more? Money, no, I think that's different than when we had the the last Plaza Accord. I think now it's it's quite different. And a few things there, you know, first of all, the reason that the dollar is so strong is because our interest look at our 10 year, which is the bellwether of the world. That's the that's the that is the benchmark treasury government bond of the world. the US 10 year Treasury, well, that's that's up, you know, at over 4 1/2 percent. If you look across the world, even Italy is down at 3.7 or 3.8, right? It's it's way, it's way below, right. And I haven't looked at in a few days. So I'm quoting off the top. But that, you know, if you think about it, that's just a pure like that's, that's a that's called the carry trade and it's interest rate parity. And So what it means is if, if my interest rate, if our interest rate here in the US is, is a lot higher than interest rate out in, you know, in Italy, then what we'll do is you can, you can, you'll sell, you'll short the Italian bond, right? And it's 3.76 right now. The Italian 10 year, you'll short the Italian bond, you'll receive EUR, you'll, you'll buy the US dollar with that. And then you will buy U.S. Treasuries, right? So that function right there is what's pushing up the US dollar. And you're seeing what happen across the world, and especially we've seen it recently quite a bit in Japan, where the yen, because the the Japanese 10 year Treasuries manipulated so low that the, excuse me, the interest rate on that is manipulated so low, meaning the Bank of Japan is buying a ton of their own 10 year Treasury bonds because they want to keep stimulating the economy. They want some inflation. They're buying that, but it's unnatural. And So what winds up happening is the yen becomes the escape valve. And because it becomes the escape valve, you see the yen rise, which is actually a drop. So the number of yen per dollar is rising. That's what you're watching. So when you see the yen go up to 151 sixty, that's not a good thing for Japan. That means the yen, the, the yen is getting weaker. It's a number of yen per dollar. So what's happening? Well, they're the investors in Japan are they're selling the Japanese 10 year Treasury, right? The JG BS, they're shorting them, they're receiving yen, they're selling the yen and buying dollars and they're buying U.S. Treasuries because they're getting a better return here. That's interest rate parity and that's what's happening. So that creates, that creates strength in the dollar. Whether you're a seasoned Bitcoiner or brand new to the asset class, On Ramp provides a best in class private client experience to ensure that your Bitcoin remains accessible, secure, and in your control. You'll have a dedicated advisor to guide you every step of the way. If you want to meet in person, we now have On Ramp branches in New York, New Jersey, Philadelphia, Nashville, Dallas, Austin, Houston, Los Angeles, and Denver with more on the way. Check out on rampbitcoin.com/branches to learn more and get connected with our team. Yeah, I love that clear explanation as always. So appreciate that. James, let's let's talk a little bit about Bitcoin now. Pivot, it's 15 years old. Where do you think Bitcoin is along its path to monetization in the context of the world you've described it's? Just a baby. I mean, if you look at the world and you pull out all and you, you, you, you, you put together all of the investable assets in the world. That real estate I have seen from Statista and different metrics is up around it. It, it is quoted in a lot of different metrics. But if you just assume that total investable assets between real estate, stocks, bonds, the collectibles, rare collectibles, gold, it's a bummer around $900 trillion and gold is about 15 trillion of that. And Bitcoin is, is about a 10th the size of gold. I mean it's just a tiny fraction of this investable universe. I mean just a tiny fraction. So the reality is Andy, it is, it is just now beginning to come into its own as it's separate ass. And that is the most significant development of the ETF. That is why the ETF approval is so significant. It is not had a significant impact on price yet. In my opinion, that's just now beginning. But it but Bitcoin needs it needs to get around this up around, you know, somewhere around the size of gold before it, it can become before it does become an asset. That is a completely separate asset class that will start drawing investments and allocations from things like stocks and bonds. So right now it's still seen as as a as a risk on asset, just like a tech stock. Eventually, as more and more of these put ventures, especially in the institutions that are now buying the ETFs and are going to have that on ramped by them, the RI as the the endowments and you know, pension funds. Once they are looking at this and understand it and start legging into it because they can with the ETFs. And we can talk about why that why that's such a significant shift here in a second. But once they can do that and once they do leg in and get a little bit and start doing the work, they're going to realize that while this really is a different asset class and because there's, there's so much liquidity now yet, but once it gets there and the volatility dampens, it will dampen down as the larger it gets. And so there's a, there's a few functions for that. One of the functions is they get a percentage in the portfolio. Bitcoin rises in price, they wind up selling a little bit because they're, they're just rebalancing. If it falls in price, they wind up buying a little because they're rebalancing. They want to keep it at that one, two, 3% level, whatever it is in that portfolio. And so they just keep rebalancing. You'll see this and that's a lot of money that's rebalancing. And so that will dampen volatility in the future. And that when the volatility is dampened, when it is somewhere closer to the, the, the, the market cap of gold, that's when we will see it, it, it really mature and come into its own as a separate asset class in my opinion. Yeah, that sounds right. Jesse probably won't mention it himself, but I will. In terms of sizing asset class and the opportunity, he has a classic slide on that. Michael Saylor just put it on screen I think for the recent MicroStrategy event. And yeah, agree with you completely. We are, we are so early. Bitcoin is so small. One of my favorite things about Bitcoin adoption is I see these waves of different sources of capital. And with every new group that adopts over time, there's still another bigger group that can't even touch it until it's even bigger, right? And so I wonder if you'll comment maybe on how you think about these different sources of capital. You know, maybe it's now with the ETF has opened up either private wealth or or other channels to a greater degree. But how are you thinking about these, whether it's governments, you know, or pensions, institutional money, individuals, how are you thinking about these ways of adoption where we sit today? Yeah, I mean that's, that's an important piece because if you're, if you're a pension fund and you're, you're something like CalPERS, California pension retirement, you know, like, or you're, you're Texas teachers, you're, you have massive amounts of capital you have to deploy in. And it's not just one portfolio, there are hundreds of them, right? So you've got all these portfolios, but they will have if, if, if bitcoin's going to be separate asset allocation across a number of those portfolios, they've got to be able to invest not just 10s of millions of dollars, but possibly hundreds of millions of dollars in this thing. And you know, and so or billions of dollars, you know it, they're, they've got a ton of capital. They've got to move. Look at Fidelity, look at State Street, UBS, BlackRock, these are, these are entities that have somewhere between 5:00 and $12 trillion each that they're, that they're overseeing. And if, if they're allocating to portfolios, I mean, we're talking about massive amounts of capital, the ETFs are important because they take away a, a, an operational and structural issue, right? Because if you're an institution, if you're, if you're a portfolio manager, you're not, you really didn't have access to this as an asset class until now. You didn't, you didn't have the capability to buy IT. People don't they, they, I hear this all the time. Well, why wouldn't you know, if, if, if they're so big and, and they're so smart, you know, why wouldn't a pension fund just go ahead and buy some? Well, OK, that portfolio manager is you're, you're talking about them buying something that they consider crypto. Number one, they don't understand it yet. Even if they do understand it, then they've got to, they've got to educate people inside that that operation understand it well enough. And they've got to get buy in from a number of people that got to get buy in from their, their, their chief investment officer. They've got to get buy in from their compliance officer, their general counsel. They've got to come up with some sort of operational plan around it. Why? Well, who's going to hold the keys? Who's going to oversee that? Are they going to have multi sig? What's the hierarchy of that multi sig? Who's going to be on that hierarchy? And how does it work? You know, are the keys going to be, are they going to be kept on some sort of hard? Are they going to be kept on cold storage, a hard wallet on exchange with a custodian? Like who's going to custody that for them? And then once they figure all that out, you haven't even gotten to the point. Well, let's start trading it. Well, who's going to trade it? Is an approved exchange. Is it is it someone that's regulated with the with the SEC? Can we trust that? What about settlement? Who's going to sell it? Are we going to hold it? Is our prime broken against settle it? Or do we have to have a different prime broker or can we margin it? And where do we market? Do we market at midnight? Do we market at at midnight in London? Do we market at the New York Stock Exchange close like who marks it? Like these are all things that they had to, but in one, like one fell swoop, you know, second week of January, boom, it's all salt. Because now you have an ETF that has a that's a spot ETF that has the, the underlying asset in the ETF and they know that they can buy it, trade it, settle it, custody it, margin it. There's not getting any margin in it now. But eventually, I believe in the future they will. But it's all the same as a regular stock, as a regular tech stock, boom, done. They can do it. It's not, it's not a problem. So that's where you know it. It is just a baby. But I think it is maturing. And we're just the beginning of that maturity cycle. And this, this influx of of institutional capital is very important for the maturity of Bitcoin becoming the ultimate store of value because it will dampen that volatility eventually when enough capital comes into it. That's my opinion on it anyways. I I love the connecting the dots that are that are out there for anybody to connect. If like I've recently been thinking a lot about a a report that 2 Ocean Trust put out that that analyze the data to show that a portfolio with one to 2% Bitcoin not only performs better but has overall lower volatility as a portfolio. Because of the whole grain it's exactly related asset class now let's be real, OK and I'm not delusional if we have a downturn in the market, bitcoins going to get hit. I would be shocked if it didn't. The only reason it wouldn't is because we had an absolute collapse of of Fiat currencies across the world and and people looking for something to put their money into. That's not Fiat, that's not that's not likely. It's the ultimate Black Swan right and I would I don't hope for that. I think that would be catastrophic for the entire the world economy. So, but otherwise, yeah, it's everything. It, it, it correlates to one, because you're, if you're a portfolio manager and have lived in this spot where you're in a hedge fund and you have $5 billion that you're in charge of and you, and you have a Black Swan event over the weekend, say well, at any moment during that weekend. First of all, the first thing you can do is take some Bitcoin off your exposure because it trades 24/7. So you could do that, you could do it with Bitcoin futures. Or if you're holding Bitcoin itself, you can sell the Bitcoin again. That's number one. The other thing is when you walk into the market Monday morning, you're, you're selling a certain percentage of everything. You just walk in and say, just sell 5 percent, 10% of everything. I, I can't figure out where the liquidity is. I just need liquidity. And I, I, I can't worry about the differences in, in what I'm exposed to. I just, I know that I'm going to need capital because the whole market's going down and I could get margin called and I need some, I need some cash and I want to get ahead of it quickly. That's what happens. So everything correlates to one that's not, that's not a typical. However, during market fluctuations that are normal or Bitcoin showing to be uncorrelated and that's important. And that's, I think Jesse, that is the explanation of that, that that dampened in volatility. It helps. Yep. And, and, and then you connect that with what you were just talking about, about, you know, these big capital allocators having 5 to 12 trillion each. And if you, you, you know, if you put stock in those numbers of 1 to 2% actually is good for portfolio performance and overall volatility, then you know, what's a 1% allocation of five to 12 trillion per per, you know, you're talking 50 to 120 billion allocated to Bitcoin. Like of course, that would have to be proven out over time and it'll take some time for people to in those positions to get comfortable with that and for that to be incorporated. But that you just mentioned like four or five large capital allocators who all could make a decision to head in that direction because it's overall good for a portfolio to have 1% in Bitcoin and that would move the needle massively towards Bitcoin becoming as large as gold. Which is why I think very good point, Jesse. I believe that that I agree and why I think that one of the next big catalyst is going to be the public announcements and the filings of these companies that say they do own the Bitcoin ETFs. And you're going to see some names on there that will surprise you, my guess and that that in and of itself is exciting and and all, but that's not the point. The point is that if I'm, if I'm an investment manager at Invesco and I see that Texas teachers is in Bitcoin, I'm thinking, well, suddenly this is all changed because two years ago, if I was in Bitcoin and somebody found out about it, it's a reputational risk. It's it, you know, the, it, it, it becomes a, my fiduciary duty is maybe I'm maybe I'm pushing the envelope, but now it's flipped. So the risk of not owning it becomes the, you know, the, the, that becomes a question fiduciary duty. How did you Bitcoin, if Bitcoin does go from a, a trillion dollar asset to a $10 trillion asset over the next 5 to 10 years and you don't own it, then you're going to have to answer to that. Why didn't you own any? How did you not see that? It's because people are going to look back and say it was obvious. We all look back and say it was obvious that Amazon was going to rule the world. But I can tell you guys, I'm older than a lot older than you. I can tell you back in 1999 when this when this thing was trading, you know, at, at ridiculous multiples, we were all looking at each other and I had an A portfolio manager who shorted it got his face ripped off. But you know, because they didn't believe that anybody was going to put money like they weren't going to put a credit card in the Internet to buy things. You crazy this never they'll never happen. And they're not going to sell more than books. This electronics thing is just nuts. They're not going to sell it more than now they are the largest marketplace in the world, right? So, but you look back and say, well, it's obvious Amazon was going to be, it was obvious that Apple's going to be the leader. It's obvious that like, no, it wasn't. No, it wasn't. But it becomes a reputational risk at some point. And I think that's where that narrative is going to begin to. That's where it starts to change is when you see large, important, influential, very successful and very smart managers who start owning this thing and then you have to answer to why didn't you own it? Well, it it doesn't. Well, yeah, if I own half a percent, 1%, it's not going to kill me, but at least I can say I was in it. It becomes a protect it, it, it becomes a a defensive thing. It's then it becomes cover your own ass the other way. That's it. The benchmarking, What is the benchmark? What is the index? You know, one of the things, James, that I've struggled with in my financial advisory practice, wealth management practice over the years is, you know, what do we benchmark ourselves against? And there are some global asset benchmarks like Morningstar has one. And I think that gold, I want to say that gold is included in the, in the Morningstar benchmark, although I'm not 100% sure Bloomberg has benchmarks. You know, there's, there's other index providers and I have to wonder out loud, yeah, when does when does Bitcoin get included in that benchmark? How, how much further do we have to go? You know, what's the, are we one cycle away? Is it a certain scale, you know, dollar level? Is it when it hits parity with gold? We know it's coming at some point. It's just a question of when. Yeah, yeah. And I, I think it's going to have to be a lot closer to the, the, the, the market value of gold for that to happen. But there's going to be plenty of alpha to be created in between here and there. And the, the managers who are out ahead of it are going to benefit from that alpha that they create. It doesn't matter that's volatile because it's a, it's an asset that's volatile to the upside, which just gives you opportunity to trade around and add to. That's it. There certainly are opportunities for alpha when the target and the current price are a difference of 1000%, right? You're talking about $15 trillion for gold and and at Bitcoin today. At current prices, I think we're under 1 1/2 trillion. Yeah. And think about that. So if you're a money manager, like I said before, if you're a money manager, I have a 3% position I want to maintain in this this asset Bitcoin double S from here goes to 120 now. Now your positions just gone to a 6% position when you you peel back, Bitcoin comes all the way back to 90,000. Now you add to it, Bitcoin goes back and so you're you're just because of your your rebalancing, your you this thing so volatile, your rebalancing is going to it's going to generate alpha for you likely and it's. Making hay just by riding the volatility and adhering to a rebalancing standard, but that's that's awesome. Well, I want to return to the question of credit cause one of the things you pointed out earlier was in the weekend event, you know, sell anything scenario, of course Bitcoin gets caught 'cause that's leverage at the fund level for some of these crossover investors who are normal traditional finance funds who now maybe have, you know, one foot in Bitcoin or, or a few percentage allocation to Bitcoin. I'm curious if this is something you've looked at at the OR with the Bitcoin Opportunity Fund. But one of the things we've all been waiting for is reasonable leverage facilities, ways to borrow against Bitcoin. In my humble opinion, they don't exist yet, but I would like them to. And I'm wondering if you have any thoughts on how that market could develop, you know, whether you're playing any role in that at all? All I all I can say is we're looking for companies and we're looking at some companies that are looking to do that. We have not, we have not levered our Bitcoin. Would we in the future. It really depends on on the structure of of the facility that's offered. But we are looking at some, some companies that are doing that or looking to do it and are growing that. So will we invest in those companies? Maybe it depends on again the structure of it. I but I can tell you I think it's coming. I think it's going to be a very big market and an important market, especially don't want to outright sell and realize taxable gains on an asset that's super volatile, but do want to have the access to the liquidity. I think it's going to be important, yeah. Yep, makes sense. This market will continue to develop as Bitcoin eats more and more or higher percentage of those major asset classes in the world. It's going to be an interesting area and path to watch for sure. While we're getting up toward the end of time here, I want to give you a chance to talk about anything we haven't covered just yet, whether it's about the informationist or the fund or anything else. Anything else you want to leave people with? James I. Got cut off there. Yeah, I can hear you. Your audio is back, so your your frozen video, but I think we can hear you all right. Sorry. So so yeah, so we're you want to. Repeat that, sorry. Yeah, sorry, just to just to close here. We're running up on time, you know, encourage people. I encourage people to check out your newsletter, The Informationist. Is there anywhere else that you want to point people toward with respect to your work or what you've got going on or anything else you want to close with? No, I think it's this has been great. You know, I'm active on Twitter. James at James Lavish is my Twitter handle. The information this is free. It comes out every week and you can, you can find that at jameslavish.com or go to my Twitter handle the the my bio and you can find information there. If anybody wants information about the Bitcoin Opportunity fund, you can just go to www.bitcoinopportunity.fund and and just attest that you're accredited investor. We can give you more information on that. We are closed for our first fund, but I do expect that Bitcoin will do very well. There will be an expansion in the space and there will be demand for more investments there in the future and we'll have future funds. That's my guess. So we're happy to send people some information around it so they can be prepared for that. Excellent. Well, thank you very much. James, really appreciate it. It's been a great conversation. Thank you so much for coming on Scarce Assets. Well, thank you for having me. I appreciate being here with you both and look forward to the next time. Yes, and and for everyone out there really subscribe to the information. It's, it's he's putting out unbelievable value for free. So I don't know what what you guys are doing. If you haven't, I I sure look forward to reading them. Thank you, guys. Thanks for listening to this week's episode of the show. If you found the information valuable, please share the episode with a friend or leave a rating on your favorite podcast app. All the links we discussed in today's show will be in the show notes inside your podcast app. Before we finish, a quick reminder that on Ramp Media is for informational and entertainment purposes only, and nothing should be construed as investment or legal advice. Regardless of where you are on your Bitcoin journey, we'd love to hear from you. Visit on rampbitcoin.com/contact. Schedule a consultation with one of our private client advisors.
Transcript source: fountain