Happy holidays everyone!
If you celebrated Thanksgiving, I hope it was a great one, and if you worked the night shift as I did, I hope you got to enjoy it on another day. Also, go Bills!
There’s a lot to be thankful for this year, and in relation to bitcoin, I’m thankful it’s not worth zero dollars!
I feel like bitcoin is near its fair value/oversold a bit, and is right on track in this bear market with security (hashrate) and new users at all-time highs. Traditional finance is just dipping its toes into this new asset class as well. Coming soon to a 401k plan near you. Bullish…
2023 could bring a nasty recession (not guaranteed), so going lower is definitely on the table. You can be sure I’ll be buying on the way down. I’m personally looking for bitcoin to have a 20-30% compound annual growth rate (CAGR), which would be an incredible return in the investment world. That means your investment would double every ~3 years. Recall the “Rule of 72.” Since 2011, BTC is the clear winner across all asset classes despite the significant “down” years.
This annualized return will likely decrease moving forward as the asset class matures, but who knows, maybe not? Regardless, it’s still well above my 20-30% target. Embracing volatility and having a long-duration mindset is key. If Warren Buffet could understand bitcoin he would be drooling over its potential and the need to hold it for decades, if not forever, which is his mantra. Look where it’s at now and what it’s trying to disrupt…
I’m going to do my best to keep this one short(er) as almost everything in the macro world is status quo (and still utterly confusing with all the cross currents). I figured I’d just put out a few of my thoughts related to the FTX saga as that is dominating the headlines right now and impacting everything. I touched on it briefly in the last newsletter and my stance hasn’t changed. Unfortunately, due to life/work I couldn’t get this out before Thanksgiving. I imagine every no-coiner (holds no bitcoin) sat down over the holidays at the dinner table and asked you, “how’s your magical internet money doing? Crypto is really dead this time, huh? FTX sure showed what a scam it all really is.”
First of all, and most importantly:
This is why in every newsletter we try to always separate the two. Both are still speculative for sure, but so is owning Tesla stock in your portfolio (down 52% this year, Bitcoin down 65%). Bitcoin should never be conflated with crypto, and anyone who does shows their lack of understanding in this space and you should be highly skeptical of their opinion. DYOR (do your own research) and challenge them. They couldn’t be more different, and the FTX debacle is a prime example.
To put it simply, the FTX meltdown was centralized fraud at the highest levels where millions of customers lost billions of dollars. In a crypto Ponzi scheme that was taken out of the fiat banking playbook, Sam Bankman-Fried (SBF) and Caroline Ellison committed some serious white-collar crimes. These were the people millionaires and billionaires were deceived by…
Hindsight is always 20/20.
The TLDR is this: he created a bunch of money out of thin air by creating $FTT crypto tokens (not via POW like bitcoin) and selling them to retail traders. He pumped the price of the coin since he controlled basically all of them and then took profits as retail traders piled in at the top. From there, he convinced millions of retail traders, institutions (a Canadian pension fund!!), and brilliant investors to invest in him and his company FTX. Tom Brady was in. Unfortunately, all the money that was being put into FTX for buying tokens became SBFs personal play account using his hedge fund Alameda Research that Caroline ran. He took user deposits (without consent) and sent them to Alameda for trading, even using bespoke software to manipulate accounts through a backdoor that wouldn’t alert any red flags when funds were transferred.
Directly from FTX:
“None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading.”
Lying to everyone, he and his buddies bought mansions in the Bahamas, spent millions of dollars on advertising and naming rights to stadiums to draw in even more money, and even was the #2 donor to the Democratic party to advance his agenda! All fraud and illegal as he used depositor funds deceivingly in trading, made it worse by trading with leverage, and then subsequently lost everything in the bear market on some bad trades.
When a report hit Twitter that the FTX balance sheet looked precarious, the fall from grace was breathtakingly fast.
FTX assets and liabilities didn’t match, and most of the assets were a useless and manipulated $FTT token that had questionable value to begin with. Binance (a large crypto exchange) saw this, said, “I’m out” and started selling their $FTT tokens. This triggered a bank run (similar to $Luna before) as it went viral and basically everyone who had money on the FTX exchange started trying to pull their money out before the doors shut and they were bankrupt.
The doors closed quickly. In the end, FTX had a nearly 10 billion dollar hole on their balance sheet of funds owed to customers/investors. Bankrupt. Game over. Thanks for playing crypto. SBF hero to villain in 72 hours. Remind you of someone else?
This is not bitcoin. This is not a bitcoin problem. In fact, bitcoin’s properties are what exposed the fraud he is! The only thing this has to do with bitcoin is that people “thought” they were buying BTC on the FTX exchange when in reality they were buying an IOU for bitcoin, but that promise was broken…
Frustrating, right? Hence the mantra, not your keys, not your coins.
SBF was running a Ponzi scheme company and deserves to be in jail. We’ll see if that happens, I certainly hope so, but it wouldn’t surprise me if he gets a free pass.
Meanwhile, the real innovation of bitcoin where a decentralized network of miners and nodes that are doing POW with real-world costs to run an open monetary protocol is being conflated with this crypto nonsense. You can buy BTC from legit companies (I use Swan primarily) and immediately take self-custody.
At that point you can sit back and relax, you are immune to any drama. You hold your portion of 21 million bitcoins, that percentage can never go down unless you sell. Not true with cash, gold/commodities, equities, bonds, real estate, etc. Powerful stuff.
The properties bitcoin has are why FTX, Celcius, Voyager, Blockfi, and others went bankrupt. It is the beauty of bitcoin and why I continue to pound the table at the monumental innovation that it is.
It is a digital bearer asset. Meaning you can custody it yourself with no counterparty risk (FTX, Voyager, Blockfi, GBTC, etc.) if you want to (and you should). You can easily prove you own the real thing and take ownership of it at a moment’s notice, and people are starting to wake up to this. Below is a chart of people withdrawing BTC to cold storage. I see a lot of red…
There is no other asset on the planet that can claim this, especially its closest competitor gold. On top of that, it’s infinitely divisible and easily portable. You can take it anywhere, save it forever, or send it to whomever you want and no one can stop you, all instantaneously and for nearly free. These properties as money have never before existed and mankind, who is stuck in the world of fiat money brain disease, cannot fathom money so powerful and sound.
Crypto exchanges/banks can play fiat games and fractional reserve bitcoin like banks do currently with dollars, but at some point, they will get wrecked and go bankrupt as quickly as FTX for several reasons:
1. The government can’t print more bitcoin to bail them and their customers out when they lose it. This is called capitalism, and how it should be. Banks are lucky because they always have the Federal Reserve money printer to bail them out. People, myself included, need to learn hard lessons. Some will be costly and painful, but that prevents the mistake from happening twice or being “papered” over with socialized losses that hurt those that didn’t partake. The 2008 GFC is a great example.
2. As mentioned, since bitcoin is a digital bearer instrument, you can custody your bitcoin and prove ownership at a moment’s notice 24/7/365 (you can’t do that with gold, or anything for that matter). That’s incredibly powerful and puts the owners of bitcoin in control, not the centralized entities we use today.
a. Because of this, there can always be a “run on the bank” like with FTX, Voyager, etc. Customers are withdrawing funds instantly and the institution must have the assets on hand to prove solvency. They cannot fractional reserve bitcoin like banks do with dollars without taking on EXTREME risk of bankruptcy. This is what is happening in 2022 for everyone to see. Lessons are being learned.
b. In current fiat world, there can’t be a run on the bank even though your bank holds probably 5% or less of the cash you have in your account.
Banks will only allow you to withdraw so much at a time and per day. This is on purpose. Most of the digits on your bank account screen are just as much an IOU as with FTX. Banks are making loans with money they don’t have on hand, and they’re allowed to. The difference is trust and confidence in the government to make you whole if the bank goes insolvent, and also banks make the rules, not the people. Thus, the bank will always win. Banks don’t get to make the rules with bitcoin though.
The games and leverage and financial engineering in the fiat system are what have gotten us into the mess we’re in today with profound wealth inequality, inflation, and unfathomable debt. It’s a credit/IOU based system, and a house of cards.
To keep the system running, more and more debt/credit must be issued or it all collapses. Most of the system is operating on garbage IOU promises and bad debts just as FTX was. FTX simply brought the fiat games to the crypto and bitcoin world and thought everything would be the same.
Remember, Bitcoin was created literally as the antithesis to this financial engineering/fractional reserve/QE infinity/debt-based fiat system we use today. It was designed to be a new peer-to-peer electronic payments network that disintermediates banks and punishes those who try to fractional reserve it given its superior monetary properties discussed prior. It’s doing exactly what it was designed to do.
Unfortunately, it just takes time for people and institutions to wake up to this new game with different rules. Rules that are transparent to all, can’t be manipulated by people in power, and don’t ever change. What could be fairer than that?
I’m not sure if I’ll get another post out before Christmas. If not, happy holidays! Don’t let anyone talk smack about bitcoin around the table! Finally, here’s a sneak peek at my Christmas gift giving plans…
Until next time…
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