Wealthy investors are allocating more to Bitcoin, this is why - Steven Lubka (Pt 1/2)

Introduction

In this section, Michelle McCoury introduces the Kitco News special coverage of Bitcoin 2023 from Miami. She interviews Steven Lupka, Managing Director and Head of Private Clients and Family Offices at Swan Bitcoin.

Bitcoin Miami Conference

• The conference is slightly smaller than the previous year but still has great energy and attendance.

• Lupka predicts that the conference will be below 2022 but above 2021 in terms of attendance.

• Despite prices being down, there is continued interest and growth in the space in Bitcoin. There is a lot of interest from family offices and high net worth individuals.

About Swan Bitcoin

• Swan Bitcoin serves high net worth investors, family offices, corporations, financial advisors, RIAs trusts, and retirement accounts.

• Since the collapse of Silicon Valley Bank (SVB), there has been a huge uptick in family offices taking large bitcoin positions.

• Family offices have the most control over their ability to invest in alternative assets compared to other institutional capital segments.

Banking Crisis Situation

In this section, Michelle McCoury discusses with Steven Lupka about banking crisis situations happening back in Washington DC while they are attending the Bitcoin Miami Conference.

Bank Executives Testify on Capitol Hill

• Bank executives testified on Capitol Hill to a Senate committee about bank collapses such as Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank.

• Michael Rothler said that his collapse was due to contagion from other regional bank failures that triggered deposit outflows called it a crisis of confidence again this was the second-largest bank failure in U.S history.

• Lupka disagrees with Rothler's statement that none of these banks could have possibly foreseen these problems. He believes that if you think your job as a risk manager is to adequately manage risk and provide a sound foundation for your depositors and clients, then you should have foreseen it.

Conclusion

• Every bank wants to blame depositors for withdrawing their funds, but they should have been better prepared for such situations.

Securities, Collateral and Investments

The value of collateral and investments can fluctuate significantly in an environment where interest rates change. The Fed's communication about rate changes is not always clear, making it difficult for investors to interpret their signals.

Fluctuating Value of Collateral

• Securities and various forms of collateral and investments can be affected by changes in the federal funds rate.

• Investors may be led to believe that rates will remain low, only to find out later that they are increasing.

• This can cause the value of their collateral to fluctuate significantly, making it difficult for them to fulfill their liabilities.

Unclear Communication from the Fed

• The Fed's communication about rate changes is not always clear or easy to interpret.

• While they did communicate clearly about raising rates, they also claimed that inflation was transitory.

• It can be challenging for investors to know how to interpret what the Fed says.

Banking System Resilience

Modern banking is a confidence game. Banks need depositors' trust in order to function properly. However, if banks were not sound and resilient, they would never admit it because this would undermine confidence in the system.

Confidence Game

• Modern banking is a confidence game; banks need depositors' trust in order to function properly.

• Banks often blame depositors for withdrawing their deposits when there is a crisis.

• However, the function of a bank should be to provide depositors with their deposits.

Soundness and Resilience

• The Fed claims that the banking system is sound and resilient.

• However, most banks are still sitting on huge drawdowns in their portfolios.

• If major banks were to experience crises similar to those seen before, we would likely see the federal government and the Fed step in to backstop them.

Bitcoin as a Hedge Against Bank Failures

Bitcoin has responded positively whenever banks have come under pressure. High net worth individuals, family offices, and corporations are turning to Bitcoin as a hedge against bank failures.

Positive Response from Bitcoin

• Whenever banks have come under pressure, Bitcoin has responded positively.

• This is because some investors see it as an alternative monetary system and a hedge against monetary policy.

• High net worth individuals, family offices, and corporations are turning to Bitcoin as a diversification strategy.

Interest from Investors

• Swan is seeing interest from high net worth individuals, family offices, and corporations.

• Some corporations are signing up with Swan to put 5% of their balance sheet into Bitcoin as a "break glass in case of emergency" strategy.

• The range of assets under management for these investors varies widely but generally falls between $10 million on the individual side up to $1 billion on the family office side.

Bitcoin and Banking Crisis Bitcoin as a Hedge Against Banking Crisis

In this section, the speaker discusses how Bitcoin is becoming a legitimate asset to own in portfolios due to the recent banking crisis. The Federal Reserve's tightening policies have led to bank collapses, causing investors to turn towards Bitcoin as a hedge against financial calamity.

Legitimacy of Bitcoin as an Asset

• Bitcoin is now considered a legitimate asset to own in portfolios.

• Wealthy and sophisticated investors are turning towards Swan private for making investments in Bitcoin.

• The Federal Reserve's tightening policies have led to bank collapses, causing investors to turn towards Bitcoin as a hedge against financial calamity.

Impact of Bank Collapses on Bitcoin

• The speaker believes that the Fed will not raise rates much above where they are currently.

• More bank collapses may signal positive for Bitcoin in the long run.

• A true financial calamity may cause all assets to sell off together initially, but ultimately it could be positive for Bitcoin.

Fed's Policies and Inflation

• The Fed is likely not going to continue raising rates beyond 6.5% - 7%.

• There is contentious debate among economists about whether raising rates combats inflation or not.

• Raising rates absent fiscal reductions in spending had no effect on inflation and was even found to be inflationary by some researchers.

Money Market Accounts and Inflation

The speaker discusses the impact of money market accounts on inflation and how Bitcoin can be a hedge against inflation.

Trillions of Dollars in Money Market Accounts

• Trillions of dollars are currently held in money market accounts.

• This is new dollar issuance coming into the market, which can be an inflationary pressure.

Bitcoin as a Hedge Against Inflation

• Bitcoin is a hedge against monetary supply increase, which historically has been the definition of inflation.

• Consumer price increases are a lagging indicator of monetary supply increase.

• Buying Bitcoin when there is an announcement of stimulus checks or other forms of monetary supply increase can lead to significant returns.

• As Milton Friedman said, "inflation is always and everywhere a monetary phenomenon."

Defining Inflation and Bitcoin's Role

The speaker defines inflation and explains how Bitcoin can act as an inflation hedge.

Defining Inflation

• Historically, inflation meant monetary supply increases rather than consumer price increases.

• Consumer price increases are the end result of monetary supply increase.

Bitcoin as an Inflation Hedge

• A disruption to the price of goods due to supply constraints does not necessarily mean there is an increase in monetary supply.

• Buying Bitcoin when there is an announcement of stimulus checks or other forms of monetary supply increase can lead to significant returns.

• High prices for critical inputs like oil contain information that entrepreneurs need to make economic decisions.

• However, CPI increases driven purely by monetary issuance are noise in the system.

Bitcoin as an Inflation Hedge

The speaker explains how Bitcoin can function as an inflation hedge.

Bitcoin as a Hedge Against Monetary Supply Increase

• Buying Bitcoin when there is an announcement of stimulus checks or other forms of monetary supply increase can lead to significant returns.

• Consumer price increases are a lagging indicator of monetary supply increase.

• As Milton Friedman said, "inflation is always and everywhere a monetary phenomenon."

• Bitcoin is a hedge against monetary supply increase, which historically has been the definition of inflation.

Factors Affecting Bitcoin's Price

In this section, the speaker explains the factors that affect Bitcoin's price.

Net Liquidity and Anticipated Liquidity

• Rising net liquidity in the markets can cause Bitcoin to go up.

• Investors anticipate liquidity coming into the market via funding programs, which can also cause Bitcoin to go up.

Adoption and Recovery Component

• Increasing adoption of Bitcoin can lead to an increase in its price.

• The oversold nature of Bitcoin after a significant drop can also contribute to its recovery.

Potential Scenarios for Future Price Outlook

• If Bitcoin captures 1% of global assets, its price will be exponentially higher.

• The global asset bucket is so large that even if Bitcoin captures a small percentage, its price will still be significantly higher.

Future Price Outlook for Bitcoin

In this section, the speaker discusses their outlook on the future price of Bitcoin.

Portfolio Tool for Valuation

• Swan Research has built a portfolio tool called Nakamotoportfolio.com that allows users to plug in assumptions on how much of a market they think Bitcoin will capture and get an estimated valuation.

Probable Future Scenario

• Most people believe it is likely that Bitcoin captures at least 1% of global assets.

• If this happens, the price of Bitcoin will be exponentially higher.

• If it captures 2 or 3% of global assets, its price could reach high six figures or seven figures.

The Role of Inflationary Money and Bitcoin's Monetary Premium

In this section, the speaker discusses the role of inflationary money and how it forces people to invest in assets. They also explain how Bitcoin can capture the monetary premium that real estate currently holds.

Forced Investment in Assets

• Inflationary money forces people to invest their cash in assets.

• People buy real estate not because they want a home or think it's a great investment, but because they need to invest their money.

• Real estate values are higher than they would be if people weren't forced to invest their cash.

Bitcoin's Monetary Premium

• Bitcoin can capture the monetary premium that real estate currently holds.

• If people have an asset like Bitcoin that they can save as money, then the monetary premium on real estate may come down.

Price Point Forecast for Bitcoin by 2024

In this section, the speaker provides a price point forecast for Bitcoin by 2024 based on assumptions and models from Swan Bitcoin.

Forecasted Price Point for Bitcoin by 2024

• The speaker predicts that we will see six-figure prices for Bitcoin by the end of 2024.

• This prediction is not outlandish and has been made by other experts in the field.

Resistance Levels and Investor Psychology

• There is no specific price point or resistance level that signals whether or not Bitcoin will continue to rise.

• Market realities happen based on investor psychology, liquidity, and access to investment opportunities.

• Family offices and high net worth individuals have access to a wider range of investment opportunities than the typical retail investor.

Five-Year Bitcoin Forecast

In this section, the speaker provides a five-year forecast for Bitcoin based on Swan Bitcoin's models and assumptions.

Forecasted Price Point for Bitcoin by 2030

• The speaker predicts that we will see million-dollar prices for Bitcoin by 2030.

• This prediction takes into account a devalued dollar and varying rates of inflation.

Confidence in Bitcoin's Future

• The speaker is personally very confident that Bitcoin will still be around in five generations.

• However, there is more risk associated with Bitcoin than with gold due to its newness and combative nature towards the financial system.

Bitcoin Risk and Longevity

In this section, the speaker discusses how investors often confuse volatility with risk when evaluating Bitcoin's risk profile. They also talk about the probability of Bitcoin failing and compare it to other investments like Apple stock and General Motors. The speaker then talks about their outlook on the longevity of Bitcoin.

Volatility vs Risk

• Investors often confuse volatility with risk when evaluating Bitcoin's risk profile.

• The speaker defines risk as an investment's chance of failure or going to zero, not just its price volatility.

• Every investment has some level of risk, including Blue Chip stocks like Apple and General Motors.

Probability of Failure

• High net worth individuals and family offices do not express concerns about the probability of Bitcoin failing.

• While every investment has some level of risk, the speaker does not believe that Bitcoin has an extremely high probability of failure compared to other investments.

• The speaker compares investing in GE or General Motors instead of Amazon to illustrate how missing out on a successful investment can be a greater concern than investing in something that may fail.

Longevity of Bitcoin

• The speaker believes that if Bitcoin becomes adopted as a global store of value, it could outlast companies like Amazon.

• While they have few concerns about the longevity of Bitcoin if it is successful, they caution against predicting too far into the future since humans are bad at predicting long-term outcomes.

• If Bitcoin becomes a global store value, it will likely be used for multiple human generations.

Aha Moment for Bitcoin

In this section, the speaker is asked about their "aha" moment with Bitcoin.

• The speaker does not provide a direct answer to the question but instead talks about how they became interested in Bitcoin after reading about it online and doing their own research. They were drawn to its potential as a global store of value and its ability to operate outside of traditional financial systems.

Understanding Bitcoin as a Monetary Solution

In this section, the speaker talks about his journey of understanding Bitcoin and how it clicked for him as a monetary solution. He also explains why he thinks Bitcoin is significant in today's financial system.

Journey of Understanding Bitcoin

• Initially found Bitcoin interesting but did not fully understand its significance.

• Later came to understand the contemporary financial system and monetary history, which made him realize the importance of Bitcoin.

• Believes that excessive financialization is harmful to the economy and that Bitcoin offers a way to de-financialize.

Significance of Bitcoin

• Financialization has led to excessive creation of financial products, which can be harmful to the economy.

• Forced investment leads to malinvestment and diverts resources from productive uses.

• Smartest people are incentivized to work on advertising algorithms or Wall Street instead of working on things that benefit society.

• Believes that having a Bitcoin standard would change incentives and encourage more entrepreneurial activity focused on creating tangible goods rather than just making money through financial services or advertising.

Full Reserve Investment Bank

In this section, Stephen Lupko explains how VC funds work and why they need to be selective with their investments.

VC Funds and Capital Discipline

• VC funds can only invest their own money and are not fractionally reserved.

• They have a limited pool of capital, so they need to make good decisions when investing.

• When there is less consequence to not having capital discipline, people become lazy or greedy with their investments.

• Being more selective changes what you invest in and on a systemic level, it changes the economy we have.

Bitcoin Thesis

In this section, Stephen Lupko talks about his belief in Bitcoin and what could potentially change his mind.

Belief in Bitcoin

• Stephen Lupko has tremendous conviction regarding Bitcoin.

• He believes that the extent and excess to which financial services have ballooned into behemoths gets curtailed by Bitcoin.

Potential Changes to His Belief

• The interviewer asks what scenarios or developments could potentially derail his belief in Bitcoin.