Greetings!
To start with, I wrote 99% of this before the recent crypto “crash”…and I haven’t deleted anything. Nothing changes!! Bitcoin has died once again, for the umpteenth time…hecklers rejoice!
What’s going on? Basically, the FTX exchange that Tom Brady promotes (red flag as a Bills fan) was levered up to their eyeballs in a ponzi scheme and went insolvent - just like Voyager and others in the past. This causes forced selling of all crypto and bitcoin mostly from “weak” hands who use leverage or invest more than they should to cover margin calls. Plus, we’re in a HISTORIC bear market, so that doesn’t help. Bitcoin is fine.
This is a centralized, traditional finance (involved in crypto) greed problem using proof of stake imaginary altcoins like $FTT to run a leveraged ponzi scheme. The only thing that is real is Bitcoin, the rest is pure speculation. It often takes a hard lesson to learn this, unfortunately. Everyone will in time.
Same old stuff though: Not Your Keys Not Your Coins, don’t use leverage, only invest what you’re willing to lose, dollar cost average, focus on bitcoin over alt coins for less risk. I’m still hodling and buying bitcoin, but that’s just me. With that said…
What a year it’s been! Our first publication was on 10/31/21 and I honestly didn’t think we’d make it a year churning out newsletters. The price of bitcoin basically topped out around then and it’s been all downhill from there!
Despite a brutal selloff (not unexpected and I’m fairly confident we’re near the bottom, but who knows) and essentially no interest by the general public in Bitcoin or crypto anymore, we’re still here writing, trying to keep you informed. My hope is that readers will recognize the signal there. The belief and the thesis haven’t changed, and the best time to invest is in a bear market if you’re convicted. Don’t follow the crowd.
We knew it was going to be messy and a wild ride, and to be honest, you have to be a little crazy to make the leap, dive in, get educated on something new, believe, and invest. But…
I love writing Crypto Pulse because the world is so complicated and unpredictable, and bitcoin/crypto is so new that I need to write things down to make sense of it all and see where I’m right and wrong. People will question my views and reasoning and that will push me to learn more and refine what I believe. I’m all for that. It’s a growth mindset and I don’t claim to have all the answers.
What I love about Bitcoin is that it really humbles you and teaches you that along the way. What I do know is that most of the world has no understanding of how the financial system works and 99.9% have zero understanding of Bitcoin. I’m just here to do my part, and I’m drawn to that role as a doctor. Doctor in Latin means “teacher”, and as much as I love medicine, writing Crypto Pulse to teach others gives me equal if not greater satisfaction, as crazy as that may seem. Who am I kidding? It’s probably just the memes I like.
This newsletter has a music and movie theme to it. We’ll talk about the current macroeconomic conditions (because that is what influences bitcoin primarily), and finish up with some bitcoin/crypto news and notes. Let’s go!
Hotel California & The Danger Zone
When I was growing up in the 80s, these were two really popular songs. If you have never listened to them (unlikely) I advise doing so before you keep reading. Whenever I think about today’s current macro conditions, both of them come to mind. Hotel California, by the Eagles, is a song about greed, decadence, addiction, and excess.
“Welcome to the Hotel California
Such a lovely place (such a lovely place)
Such a lovely face
Plenty of room at the Hotel California
Any time of year (any time of year)
You can find it here
…They livin' it up at the Hotel California…”
For much of the 2000s, and certainly after the crash of 2008, the federal funds interest rate was pegged at basically zero, and the Wall Street party was in full swing. Money was essentially free (borrow at ~0%), and this encouraged speculation and capital misallocation given how “cheap” money was. If interest rates are high, you might think twice about borrowing to invest in that start-up company or take on debt to start a business without a good product market fit. If it fails, that’s a costly mistake. When rates are zero, the risks decrease dramatically and people say…
On top of that, the Federal government money printer (Quantitative Easing) was on overdrive since 2008 to dig the economy out of the hole the banks put it in with the subprime mortgage fiasco leading to the Great Financial Crisis. Everything on the surface was hunky dory (after the 08’ crash) up until 2021 with plentiful energy (due to the shale revolution in the US), cheap labor (due to globalization and the rise of China), low-interest rates to encourage borrowing and spending, and an extremely accommodative federal reserve injecting record liquidity via QE into the stock market.
“stonks” only go up, right? Buy every dip, right?
Unfortunately, not only did the private sector get hooked on the drug of low-interest rates and QE, but so did the government. With interest rates near zero, money was free for the government too. Selling bonds with interest rates between 0 and 3% was the norm, so taking on massive amounts of debt with minimal interest expense was a no-brainer. Keep raising the debt ceiling!! Our government officials are human just like you and me. When money is free, get it and spend it. It’s not rocket science, and it’s fun, right?
The world was about to enter a recession in late 2019 (which most people aren’t aware of), but then Covid hit. The world stopped for months and arguably years? Unfathomable amounts of money were unleashed into the economy to support it. Like 5 trillion dollars. Stimulus checks, PPP loans, etc. If you had a pulse you got a check. Interest rates were zero, money was growing on trees, and demand for goods as people were stuck at home went into the stratosphere that summer.
“Her mind is Tiffany-twisted
She got the Mercedes Benz
She got a lot of pretty, pretty boys
That she calls friends
How they dance in the courtyard
Sweet summer sweat
Some dance to remember
Some dance to forget”
Although the world was in disarray from the virus, financially most everyone was fine with all the support. But Covid brought with it a complete destruction of the world’s just-in-time supply chains and a labor shortage of multifactorial etiologies. With the world awash in dollars, inflation kicked in given the supply/demand imbalances discussed. The federal reserve let the party go on too long with QE and zero interest rates (their words not mine)…
and then came banging on the door like the police to shut it down (by raising interest rates and starting Quantitative Tightening where they remove liquidity as opposed to QE).
Simultaneously, Russia attacked Ukraine in March 2022 and a global energy/cyber/currency war kicked off. Suddenly, a world conditioned like a heroin addict to zero interest rates, cheap and plentiful labor, energy abundance, plentiful trade with efficient supply chains, ample commodities, and QE got a big dose of Narcan as all these things were swiftly taken away. Puke.
The Danger Zone
“Highway to the Danger Zone
Gonna take it right into the Danger Zone
Highway to the Danger Zone
Ride into, the Danger Zone”
As of the first week of November, the Federal Reserve raised the federal funds interest rate to ~4% - the Danger Zone in my opinion (I’ll discuss why shortly). They told everyone the party was over back in late 2021 and they had to get aggressive to stamp out inflation. Inflation is like cancer, if you don’t kill it there’s a chance it can metastasize and be deadly. See Germany post-WWII and many other developing countries today (Zimbabwe). The Fed cannot change the supply of goods and services and impact supply chains. The only thing they can do is suppress demand by rate hikes which will eventually filter through the economy (less borrowing/lending, higher unemployment) which leads to lower inflation.
There’s a reason people say, “don’t fight the fed.” If interest rates are rising that means stocks need to be repriced lower. If you can make a 1-4% risk-free return on US government bonds (due to rising interest rates), investing in stocks that are risky and return 5-10% on average if all goes perfectly is a much harder decision. When interest rates are zero, the risk of investing in equities is much less because bonds aren’t really providing any significant returns, so taking a chance on a company that could provide higher returns makes sense. In addition, higher interest rates make it more challenging for growing companies to borrow money (it’s Hotel California when rates are 0%), and they can become bankrupt quickly with bad debt. On top of that, high inflation (leading to higher interest rates) generally makes things more expensive for the consumer so the fear is that people will spend less on discretionary items like iPhones and more on food/energy/rent. Thus, company earnings go down and so does the stock price.
“Growth” stocks really suffer in this environment compared to “value” stocks that are cash flow positive and have less debt, despite lower projected growth. Bitcoin and crypto are currently lumped into the “growth stock” category and have taken a sizeable beating. We’ll talk about why I think that’s a monumental error regarding Bitcoin towards the end and how I view it as simply an opportunity to stack cheap sats (satoshis) while the market misprices it.
How has the economy incredulously handled interest rates moving from 0-4% in less than a year? Look at this rate of change! Historic.
“You'll never say hello to you
Until you get it on the red line overload
You'll never know what you can do
Until you get it up as high as you can go”
I was wrong in my thinking that “something would break” as we moved up to 4%. I didn’t appreciate just how much liquidity (dollars/QE, etc.) was pumped into the system during the pandemic and how much of a cushion that gave the American consumer. The Fed literally hit the red line overload and got it up as high as they can go. The chart below shows the amount of excess savings that are sitting in consumers’ checking accounts compared to 2019/2020.
A simply staggering amount, across all income distributions. In addition, the banking sector is very well capitalized and has been since 2008 after the GFC and hard lessons learned.
Those PPPs, stimulus checks, other government relief programs like eviction prevention, higher wages as a result of a labor shortage, loan forgiveness/forbearance, a booming stock market, and credit opportunities like Buy Now Pay Later made 2020-2021 one for the history books. On top of that, most people with loans obtained them over the past few years and even refinanced them at historically low interest rates – further extending the good times narrative. The data says that Americans are sitting on a fat pile of cash, despite inflation of goods and services, and can handle the rate hikes…for now, but it’s falling fast.
It took me a while to understand this but now I get it. I also think it fits with what my eyes are seeing. Despite the stock market sell-off, when you are out and about business is booming. Restaurants and sporting events are packed. Airports are full. Everyone is traveling and spending like there’s no tomorrow after the pandemic. The real world certainly doesn’t look or feel like a recession to me as it currently stands. The stock market is not the economy per se.
But just like the song says, highway to the danger zone, gonna take it right into the danger zone…strap in because we’re here.
I didn’t think the Fed could hike past 4% without something substantial breaking and I’m sticking to that thesis. That’s why I call this the danger zone between 4-5%. Will the Fed still hike up to ~5%? Likely yes, given the economic data the Fed looks at. The Fed wants to live on the edge to bring down inflation.
“Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity”
So what’s going to break? What’s the problem with higher interest rates or “higher for longer” as the Fed states? I see five things.
1. Despite many calling for an end to globalization, I sincerely doubt it. The world economy is hyper-connected and that isn’t going to change overnight. To that end, given the reliance on foreign countries for the trade of goods and services and investments, a downturn in one major economy is bad news for the US economy and US companies at the end of the day. Two of the biggest concerns in this regard are China and Europe. Europe unequivocally has entered/will enter a recession in 2023 and it’s likely to be severe and prolonged. Due to the Ukraine-Russia war and the energy stranglehold Russia has placed on Europe, inflation is sky-high (> 10% and rising) and businesses/consumers are about to be in a world of hurt. In addition, as the Federal Reserve raises interest rates at home, this basically requires other central banks around the world to hike rates to “keep up” with the US, or else capital will flee and seek out the higher interest rate the US offers. Thus, Europe is raising interest rates INTO A RECESSION. This is a toxic combination.
Furthermore, unlike the US where since 2008 basically everyone is on a fixed 30-year mortgage, that isn’t the case in Europe. Most homeowners are on variable interest rate loans. Higher rates on big mortgages, high energy costs, and high inflation = a bad day at the office.
Again, Europe is not the US, and the US consumer is in a much better position. But the world economy is interconnected and there will be ripple effects as a direct result of the war and the Fed raising rates.
China is a whole separate discussion that to me is a massive black box. Nobody knows what’s going on there or can get any quality/reliable info. Thus, I choose not to focus on it, but their zero Covid policy continues to be a massive headache for the rest of the world as supply chains remained snarled and a huge driver of global growth remains locked down.
2. The second problem relates to point one regarding the energy crisis Europe faces primarily, and to a lesser extent (but not zero) the rest of the world. Recall that the abundance/availability and increased consumption of energy is one of the main reasons why global civilization has flourished, particularly over the past 100 or so years. Energy use drives everything. Unfortunately, as discussed in a prior article (you can’t print energy) there has been a massive underinvestment in fossil fuel energy over the past decade. The American shale revolution and global open trade of oil/gas/coal over the past few decades made energy cheap for everyone. When energy is cheap, everything you use in your life is cheaper since it all requires energy to make. Some unintended consequences happened as a result of all that cheap energy though.
First, as energy supply was abundant, energy producers like Exon and Mobil's profits tanked. Great for consumers at the pump, but bad for the company and shareholders. This caused them to decrease investment into drilling for new oil/gas supply as they had less capital to do so. Second, the ESG movement really ramped up causing fossil fuel producers to take it on the chin as the main reason for global warming. This further led to a decrease in fossil fuel production and a focus on wind and solar. Now there is World War 3, and open trade with Russia as a main energy exporter is severely curtailed. Finally, interest rates are up to 4%. Higher interest rates make it more challenging for companies to take on debt to drill more wells, scale their operations, and produce more energy. That’s a problem. The cherry on top is that after decades of poor stock returns, energy companies are now making record profits for their shareholders with limited fossil fuel supply, and they intend to keep it that way. Can you blame them? It’s America and it’s capitalism, I don’t.
3. HOPE. I love this chart.
I think it quite nicely describes how the economy shifts into a recession and where to look to see what stage we’re at. The good news? We’re past “H”. The bad news? We haven’t hit “E” yet. When the Fed raises interest rates from 0 to 4%, interest rates on all loans go up. The loan on your house or car is based on the federal funds rate. If the FFR is 4%, your house will likely be ~7% as you are a more risky borrower than the US government (they can just print the money if needed) and thus deserve a higher rate. Guess what happens to the housing market when the FFR goes from 0 to 4% in under a year?
Monthly mortgage payments go vertical for buyers, and as home prices skyrocketed from QE/zero-interest rate policies and a shortage of housing – a higher down payment and a higher monthly mortgage is a huge turnoff for prospective buyers.
Mortgage applications % change.
For now Buzz, for now.
Many people argue that the housing market drives or at least is a major driver of the economy. Once it slows, everything slows with a lag. There’s good trend data to back this up. Worse homebuilder sentiment = higher unemployment. It’s coming…
A massive amount of jobs and purchases are tied to the housing sector. When people aren’t spending money on housing, the rest of the HOPE cycle starts to play out. New orders (“O”) fall because people don’t need stuff to put in their new house. Company profits (“P”) begin to take a hit as consumer spending slows down and stocks take a hit. This finally leads to layoffs/unemployment (“E”) and a recession. If FFR stayed at 1-3%, I think the housing market would be okay. At 4-5% and mortgage rates near 8-9% with today’s inflated home values? No chance.
Make no mistake, this is what the Fed wants. They are driving rates higher to reduce demand and cause unemployment. They want layoffs. They want more people out of work and stocks to go down. They want home prices to fall.
I get it, but it also sucks. Remember, the Fed is largely responsible for our current state…
The biggest concern with raising interest rates is HOW the Fed chooses to do it. They look at data from the past, NOT forward-looking indicators. Essentially, they are driving the car by looking in the rearview mirror. Dangerous, right?
The Fed continues to focus on higher core inflation and persistent LOW unemployment. They are NOT happy that people aren’t getting fired and have plenty of job opportunities. As discussed with the HOPE cycle though, “E” is the last shoe to drop. When it drops, things get ugly. All the FORWARD-looking indicators (inverted yield curves, new orders, housing market, shipping rates) are screaming “watch out”, but the lagging indicators and the prolific excess savings Americans have say, “keep hiking”. Quotes like this below from the Fed don’t inspire confidence.
They also said they’d not even think of raising rates until 2024. Their credibility is gone, trust them at your own peril.
Moreover, an energy crisis due to multifactorial reasons discussed above and a labor shortage secular trend given the demographics nightmare are two things the Fed can’t fix.
High energy prices keep inflation higher for longer and a labor shortage gives workers the upper hand demanding higher wages with plentiful job openings. I think this also passes the “eye test” when you’re out and about. There are job openings EVERYWHERE and yet the Fed wants there to be even more (higher unemployment). I’m not convinced hiking rates will solve these problems entirely. This is not the economy of the 70s when there was a massive population GROWTH 10-20 years earlier causing inflation. We’re in the danger zone, and a policy error could be cataclysmic if they’re wrong.
4. Related to number 3, elections are coming up in 2024. To be brief, there is ZERO and I mean ZERO political will for high unemployment on either side caused by high interest rates. If high unemployment is achieved, can you imagine the political warfare during election season around that? Unemployment is just starting to tick up. Danger zone kind of things.
5. Last but not least. My favorite topic. The impending sovereign debt crisis. I’ll admit – my timeline regarding this needs to be extended further. I thought 10-20 years and it’s probably significantly longer than that, but regardless, math is math, and the US/Europe/Canada, etc. are F’d. This is a long-term secular trend thesis that will play out in a volatile manner. The cliff notes version is that the US has 31 Trillion dollars of debt (chart a touch old).
They will never go insolvent because when cornered they will just print the money given their reserve currency status. Putting that aside, debt still matters. As governments continue to rack up 1-2 trillion dollar budget deficits annually to keep the economy humming with an aging and declining population/workforce, that debt just gets added to the pile. What did we talk about in the beginning? Hotel California is great, it’s such a lovely place where money is cheap (zero interest rates). The problem is
“You can check out any time you like
But you can never leave”
That’s the position the US government now finds itself in. They checked in and have 31 Trillion dollars of debt amassed at historically low rates, and they can never leave. Think about your credit card, student loan, or housing payment interest expense and how much that adds up to annually.
Now imagine you owe 31 trillion dollars and you need to refinance some of those loans on a 4% interest rate. Gulp. All of the new debt issued, and debt in the next year or two that needs to be refinanced will be done at these now higher rates. See the chart below on debt expiration dates and amounts.
Most of the US government budget will be spent on debt, defense, and entitlements. There’s really no money left over to spend on things that grow the economy and make our lives better. Most of the budget is going to interest expenses. It’s an albatross and will require annual deficits to just go higher and higher to pay the interest which in turn will increase the total debt. It’s a vicious cycle as interest payments alone approach 1 trillion dollars.
Mind you, sometime in the 2030s entitlements like social security and Medicare/Medicaid are bankrupt. They are going to need to come up with the money to pay all of us who have been contributing to these programs our entire working lives so that when we retire we’re taken care of as promised. Estimates are that they’re about 200 trillion dollars in the hole on that promise (unfunded liabilities are NOT included in the debt, that’s why it’s only 31 trillion reported). These numbers are literally unfathomable. They will not default on their promise. Taxes will likely be higher and they definitely will print the difference to fulfill their end of the bargain. How much will your savings be worth at that point? Everyone may become a millionaire, but how much will that buy you?
The point is, interest rates cannot remain at these levels for an extended period of time. Sure they can go up for a bit, but the debt amassed by ALL countries around the world who checked into the Hotel California requires the long-term rates to be very low, if not zero/negative. The demographic tsunami of baby boomers and low population growth worldwide ensures this. It is math. Less people working = less growth and taxes = more debt needed to pay the bills. It is inescapable. Fiat is the sinking Titanic ship.
The US dollar is the back of the boat. Bitcoin is my chosen lifeboat. My goal is to teach others about bitcoin and point it out as an option.
ETHEREUM
I wish I had the conviction about ETH as I do with bitcoin, but I just don’t. Will the price go up in the next bull run with a decreased supply thanks to the merge? My eight ball says yes, but who knows. A few things to note related to ETH:
1. Office of Foreign Assets Control (OFAC) compliance. Basically, the ETH POS chain is a centralized and fully captured blockchain at this point. All the ETH validators are mining blocks that are OFAC compliant, soon to be 100%.
This means that transactions can and will be censored. The US government basically has full control of ETH at this point and ETH is at their mercy. Is this an issue? To be fair, I don’t know. ETH has always been a digital equity in my mind. It should be a centralized company I think, and a group of people should run it and drive the roadmap. This of course would come with more transparent financials and reporting. At this point given the way ETH was distributed at its origin and now is essentially completely regulated, it might as well be a security. There may be value in that, I’m not sure, and there is a lot of competition with others like Solana, Cardano, etc. What I do know is that ETH can never be good money at this point. Money that even enemies can trade and agree on because it is uncensorable and decentralized. Bitcoin stands alone in this regard. The moat is now wider. There is no competition other than fiat itself. Bitcoin has the gun.
2. NFTs – Facebook (Meta) launched support of NFTs on Instagram recently. I urge everyone to remain cautious here. NFTs will have value in the future, especially for things like data that can be bought and sold. However, in its current iteration on Instagram people are buying and selling jpegs. That’s fine if you really love the art. But have you seen what Artificial Intelligence is capable of these days? Literally, anyone can speak these jpegs/art into existence. How valuable is that? Time will tell. Sure each one is different, but how much work went into its production? With AI – essentially zero. Compare that to the Mona Lisa. People value that for its scarcity, but also because of the talent and work that it took. Anyone can speak a jpeg into existence. Sports cards are valuable because players that were/are great put in the work to achieve greatness, and that is valuable to people – especially if it’s a limited edition card. I continue to emphasize work so that it triggers your brain to understand why bitcoin and Proof of Work (not proof of stake like ETH) is so important and valuable.
Remember, people who bought hundreds of thousands of ETH or any other POS token at 0.01 cents and did no proof of work for it during the insider sale can mint an NFT jpeg for free, list it for an insane valuation, buy it under a different wallet address at that price, and then sell it to you for a “discount” at a lower price while they make out like a bandit, but you think you got a “deal”. You’re left with an expensive digital jpeg that most would only take for free. Be careful out there. It is the wild wild west. I see zero NFT value in the current state.
Bitcoin
I know these articles lately are depressing and negative. I’m sorry about that. Nearly every asset class is having its worst year since the Great Depression of 1929 and there’s likely still more to come.
You can’t hide from this reality or deny it. It sucks. However, this section is all about the future and what’s happening underneath the surface with Bitcoin that will one day propel it to the lofty heights I have set for it. You build in bear markets and take profits in bull markets. This is a bear market and the building is happening at “Lightning” speed, no pun intended.
Let’s first start with adoption drivers. Basically, no public company or private large institution besides some of the crazy ones (Microstrategy, Square, Tesla) will hold bitcoin as a treasury reserve asset today. Why? Old school outdated fair accounting rules. Basically, if the price of bitcoin goes up and you hold it on your balance sheet as an asset, you don’t get to report the higher price, only the price you bought it for unless you sell it (suboptimal with taxes). However, if the price of bitcoin goes down, the company would have to report that as a loss even if they don’t sell it.
Yea, it’s messed up. The CEO of Microstrategy (a “crazy one”) has been arguing about this unfair rule and successfully got it challenged. Although not law yet, it is on the fast track to be rectified, likely within 1-2 years.
Why does this matter? Apple, Google, and other major institutions don’t want to report a bad balance sheet during their quarterly earnings calls. It’s bad for business if an asset you have declined by billions of dollars and you don’t get to capture the upside unless you sell. Thus, only a few public companies have dared to do it. I expect this to open the doors to big money institutions that want to hold bitcoin as a non-cash, non-equity, non-fixed income (bond) asset to diversify their portfolio.
Rapid fire adoption:
Walmart selling bitcoin miners? Check.
Ever think you’d see that? Running nodes and mining bitcoin will probably be like having a wifi router in your house in the future. People used to say that would never happen too.
Other big names in the news getting involved…
Cash app is integrating the Lightning Network for payments. A closed network Web 2.0 fintech company that built its business on payments is integrating an open payments network built on bitcoin. Let that sink in. They see the future. Everyone is waiting for bitcoin’s mainstream moment, and it’s coming in two forms, with Lightning being one of them. The first will be when many countries, companies, and individuals consider it a must-have asset to diversify their portfolios and use it as a store of value. The second will be the use of the Lightning network for instantaneous final settlement payments at almost no cost.
Essentially, the Lightning Network allows streaming money.
I first heard this description on a podcast a few weeks ago and a lightbulb went off in my head.
Streaming money…wow. What a simple, beautiful, powerful way to convey the breakthrough and potential of bitcoin and the Lightning Network built on top of it.
Everyone knows how streaming movies, music, and TV disrupted legacy industries and is overall an awesome thing – we all use streaming services today regularly without even thinking about it. Streaming money is how the Lightning network will change traditional payments and spur mainstream adoption. You’ll use it and not even think about it, just like streaming Netflix.
For clarification, you cannot stream money today. When you pay a bill to anyone it takes days to weeks to months to “settle”. When you Venmo your friend or pay with a credit card, the digits change on the screen but it’s not a “settled” transaction for quite some time at the banking level. This is inefficient for businesses primarily and adds costs along the way. Intermediaries to make the settlement happen take their cuts. Streaming money via Lightning (built on top of the bitcoin base layer) is the breakthrough. No, ETH cannot do this.
It’s really hard to explain in text so I urge you to listen to this podcast to better understand the concept. The cliff notes version is imagine paying your electric bill (or any bill for that matter) via streaming money every second of the day during the month for the energy you consume.
Or maybe your TV service bill, just for the content and time you actually watch. Your apps on your phone you use, your internet usage, your podcasts (this is live today with Fountain podcast app), whatever it is…stream the service provider the money you owe. The benefits? This will cut costs dramatically for service providers given the settlement is real-time and instantaneous without intermediaries. That will allow them to pass on savings to you (“pay with Lightning and save 10-20% on your bill” or “pay only for what you use if you use Lightning payments” or “we’ll PAY YOU to listen/watch”). It will massively disrupt modern-day companies and business models. New winners will emerge as consumers seek out the best product and the lowest price. Just like you could never have imagined streaming a movie on your phone while on an airplane when you were buying movies at Blockbuster and getting charged late fees for not rewinding fully, streaming money will also become the new norm, but not by tomorrow.
Starting to wrap this up, I probably think about bitcoin every day in some capacity and have for years. I’m not sure if that’s sad or kinda cool. Regardless, I’m still trying to put it in a traditional bucket, and after spending thousands of hours trying I still can’t. It is this completely novel thing that deserves its own bucket I think.
It is the first ever digital commodity that incorporates features of groundbreaking technology in payments (a risk on asset) and incentivizes low-cost energy production while also harnessing wasted energy, is decentralized and scarce like gold (a risk off asset) as a commodity, responds quickly to government liquidity injections into the markets via QE (a risk on asset), but will also in the future be considered a flight to safety like a government bond (a risk off asset) given it has no counterparty risk and will likely provide yield like a bond via bitcoin loans.
It’s some sort of technology-commodity-bond mutant that separates money from state, is an open digital savings account and payment network for the world while providing property rights, and promotes the discovery, creation, and use of cheap renewable energy via proof of work to power and secure the network. It is the internet of money. It is like nothing ever before, and its inevitable adoption can only be slowed, not stopped, because it is an idea whose time has come.
There are only 21 million bitcoin, ever. 19 million of them are out in circulation. A few million of them are certainly lost forever by accident. I’m not selling mine and there’s a small but growing bitcoin army out there with me that is saying the same thing. If that doesn’t inspire visions of 300, Gladiator, or V for Vendetta in your head, you need to go watch those movies! Want proof? That’s what I love about bitcoin, the data is on chain! Have a look for yourself.
Something like 84% haven’t sold in 3 months and around 65% haven’t sold in 6-12 months! These people are nuts! It shows the power of scarcity and how humans value it. There is no other asset more scarce the bitcoin with superior monetary properties. Those who see that now will be the biggest benefactors in my humble but not guaranteed opinion.
Owning bitcoin is like being a crazy member of Fight Club, except the first rule of Bitcoin is that you always talk about bitcoin. There is an ever-growing segment of the population that will hold this thing down to zero if that’s what it takes. If you know what you hold, you will never let it go, especially if you understand basic math. You have to be a little crazy to withstand the heckling, but that’s what it’s going to take to fix the money. I’m here for it.
What’s my happy, bullish, short to medium-term outlook? This war I doubt will go on forever. It will eventually become too politically and economically challenging for someone and it will end. Globalization will also not end completely and supply chains will get back to normal. It may take time, but eventually, energy supplies will become abundant again. Whether that is fossil fuels or more ESG-friendly solar, hydro, wind, and nuclear I’m not sure, but it’s probably a healthy mix of all. Bitcoin will catalyze this energy revolution. Inflation will abate likely within the next year or two but we’ll have to deal with a recession/depression as a result. That will also not last forever. Interest rates will come down and QE will resume. Stocks will go back up. Technology will help mitigate the labor shortage and productivity may actually increase as a result. Government regulation, despite the fears of many, will actually accelerate bitcoin and crypto adoption. This will facilitate the allowance of a real spot price Bitcoin ETF in the US that will make it easy for people to get access to it as an asset to diversify their portfolio. Possibly around that time, another bitcoin halving is coming in 2024, and with it, I predict unprecedented FOMO. In the shadows, just like internet companies after the 2000 dot com bubble, crypto companies are furiously and relentlessly building. Who emerges is unclear, but I have zero doubt this asset class is going away. Everything will be tokenized.
I’m training myself to get better at thinking about cycles vs. trends. I’m fairly confident in the trend regarding debt, demographics, and technology’s impact (including bitcoin), it’s just that business cycles will overlay that. I’ve sometimes been too quick to think that trends will play out while a business cycle is happening in real-time. That’s where we’re at right now. An economic contraction within the business cycle with the long-term trend intact.
Patience is key. We’re still checked in to the Hotel California but are just stepping outside for some fresh air (i.e. interest rate hikes). During a bear market, as an investor, there’s not much else to do but sit back, relax with a drink, and keep learning. So…
“I called up the Captain
"Please bring me my wine"
He said, “Crypto Pulse is awesome, share it!”
Until next time
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