Could Bitcoin’s Price Reach $1,000,000? With Balaji Srinivasan and Cathie Wood

Introduction

The podcast is an intellectual discussion on technologically enabled disruption. Arc invest is a registered investment advisor focused on investing in disruptive innovation.

Bitcoin's Value Proposition

Kathy and Balaji discuss the implications of the current macro landscape on bitcoin.

Bitcoin as a Safe Haven Asset

• Biology believes that irresponsible money printing to come out of this crisis will lead to a rush to exit the system into assets like Bitcoin.

• Kathy and Biology agree that bitcoin's value proposition makes it an insurance policy, a flight to safety against confiscation of wealth.

Deflation vs Hyperinflation

Kathy explains how they could possibly be thinking about deflation given what's going on out there.

Warning Flags for Deflation

• Signals like credit default swaps on banks and many other companies going up.

• Yield curve inversion has always led within 12 to 18 months to a recession.

• Commodity prices were falling, and oil price peaked at $130 in March of last year but has been nearly cut in half.

Fed Hiking Interest Rates

• Kathy wrote a letter to the FED pointing out that hiking interest rates faster than necessary could lead to deflation.

Banks' Mistakes

The banks made two mistakes. First, they invested in long-term government-backed securities assuming that interest rates would stay low for a long time. Second, they assumed that deposits would not leave the system.

Banks' Mistakes

• Banks invested in long-term government-backed securities assuming that interest rates would stay low for a long time.

• Banks assumed that deposits would not leave the system because money market rates are more competitive than what people are getting in their bank accounts.

Deflationary Bust

There is a decline in M2 on a year-over-year basis since December 2020, which looks like it will be down three percent in March 2021. This has all the hallmarks of a potentially deflationary bust.

Deflationary Bust

• There is a decline in M2 on a year-over-year basis since December 2020.

• This decline looks like it will be down three percent in March 2021.

• This has all the hallmarks of a potentially deflationary bust.

Unusual Economic Times

Traditional economic relationships may not necessarily guide what's going to happen within the economy. The FED is printing trillions while hiking rates at the same time, and this has led to banks bursting holes in the side as they become insolvent or suffer huge losses.

Unusual Economic Times

• Traditional economic relationships may not necessarily guide what's going to happen within the economy.

• The FED is printing trillions while hiking rates at the same time.

• Banks are bursting holes in the side as they become insolvent or suffer huge losses.

Bitcoin as a Safe Haven

People will want to get out of this economy, and Bitcoin is something that people can use to exit. There are three currency regimes in the world: the Western system, the Eastern system, and BTC.

Bitcoin as a Safe Haven

• People will want to get out of this economy, and Bitcoin is something that people can use to exit.

• There are three currency regimes in the world: the Western system, the Eastern system, and BTC.

The Role of the FED

In this section, the speaker discusses the role of the Federal Reserve (FED) in controlling the financial system.

The FED as a System Administrator

• The FED is like a system administrator that controls the financial system.

• They can indirectly freeze accounts and make numbers go up on screens.

• However, they cannot control what happens in other economies or mint bread.

• The 21 million limit of Bitcoin is outside their control.

Financial Instability and Inflation

In this section, the speaker talks about how financial instability can impact inflation and how compartmentalization by the FED can lead to confusion.

Financial Instability and Inflation

• Financial instability can impact inflation.

• The velocity of money is going to decline due to this crisis.

• If velocity declines too much, it could lead to hyperinflation.

Compartmentalization by the FED

• The FED has compartmentalized its responsibilities which leads to confusion.

• They have tools to deal with liquidity crises but their primary role is fighting inflation.

• This compartmentalization confuses that financial instability will impact inflation.

Desire for Exit from Economy

In this section, the speaker discusses his thesis on why people want to exit this economy.

Thesis on Exiting Economy

• People desire an exit from this economy more than anything else.

• It's not about System Dynamics within which he finds unpredictable.

Velocity of Money

In this section, the speaker talks about velocity of money and how it impacts inflation.

Velocity of Money

• The velocity of money has been declining since the 1990s.

• It peaked in 1997 and has been on a long-term decline.

• If velocity declines too much, it could lead to hyperinflation.

Impact on Inflation

• Financial instability will impact inflation through a serious decline in the velocity of money.

• The FED's primary role is fighting inflation but they have compartmentalized their responsibilities which leads to confusion.

First Quarter Economic Numbers

In this section, the speaker talks about economic numbers from the first quarter.

Economic Numbers

• Year-over-year money supply flattened out in Q4 2021.

• GDP was up 7.3% year-over-year in Q4 2021.

• Velocity had to absorb that increase and was up 7.1% year-over-year and 11.4% sequentially at an annual rate.

• M on a year-over-year basis went flat in Q4 2021 and seems to be accelerating to the downside in Q1 2022.

Velocity and GDP

In this section, the speakers discuss the relationship between velocity and GDP, as well as the impact of money leaving the banking system on GDP.

Velocity and Money Leaving Banking System

• Velocity had to accelerate to 9.9% YoY basis for Q1.

• M2 is down 3.5% in Q2 due to demand deposits leaving the banking system.

• Consensus estimates for Q2 GDP are roughly -2.8% YoY basis.

• If velocity stays flat, a hard landing could occur.

Flight to Safety

• People are leaving banks for safety reasons.

• Treasury mutual funds have left the banking system, which will not contribute to production of goods and services in the economy.

Macroeconomic Arguments

In this section, the speakers discuss macroeconomic arguments and their limitations.

Cause and Effect Relationships in Economics

• There aren't many great cause-and-effect relationships in economics due to dealing with huge aggregates in different times with different technology and people.

• It's hard to do experiments on large numbers of people ethically or partitioning a population subject them to two different policies.

Keynesianism

• Much of what passes for macroeconomic theory is like soft Soviet kind of thing where there are tons of equations but it's very hard to do experiments in macroeconomics where you're actually partitioning a population you're subject them to two different policies.

Critique of the Fed's Economic Policy

In this section, the speaker critiques the Federal Reserve's economic policy and compares it to Bitcoin's predictable fixed policy.

The Fed as God

• Many people treat the Fed as God or a referee.

• The Fed is more powerful than the president, and people hang on every word.

• However, blaming the Fed for everything is like blaming the refs in a game.

Different Theory of First Mover

• Those in tradfi think of the Fed as the sun around which everything orbits.

• In cryptocurrency, there is a different theory of who that first mover is.

• Bitcoin has a fixed policy that is predictable and can be planned against for years.

Systemic Problem with Economic Policy

• The speaker believes that there is a systemic problem with economic policy.

• The chaotic curve of up and down does not seem like an effective solution to some equation R star or committee voting and doing political things.

• Bitcoin's predictability makes it much more reliable than the Fed over time.

The Macro Frame

In this section, the speakers discuss how social media and cryptocurrency are destabilizing traditional systems of power and control. They draw parallels between the destabilization caused by glasnost and perestroika in the Soviet Union and what is happening now with free speech on social media and free markets in cryptocurrency.

American Glasnost and Perestroika

• Glasnost was more free speech, while perestroika was more free markets.

• Social media is American glasnost, allowing for greater freedom of speech.

• Cryptocurrency is American perestroika, allowing for greater freedom in markets.

• The true election is between USD and BTC, where people are voting against central planning of a different kind.

Instability Caused by the FED

• The FED has been causing instability through its actions.

• It's impossible to predict every gyration they will make.

• Passengers are hitting the eject button and turning to Bitcoin as a parachute.

Volcker vs Powell

In this section, the speakers compare Paul Volcker's approach to inflation in the 1980s with Jerome Powell's approach today. They discuss how Volcker focused on money supply to get inflation down while Powell has taken interest rates up 20-fold.

Volcker's Approach

• Volcker took interest rates up two-fold from 10% to 20%.

• He focused on money supply to get inflation down during a hyperinflationary period.

Powell's Approach

• Powell has taken interest rates up 20-fold from near zero to where they are now.

• The bond market is worried about something, typically recession, and we are currently in an inverted yield curve.

Inverted Yield Curve

In this section, the speakers discuss the current state of the economy and how it compares to the inflationary period of the 1980s. They explain what an inverted yield curve is and how it indicates a recession.

Inverted Yield Curve

• An inverted yield curve occurs when long-term interest rates drop below short-term interest rates.

• The bond market is currently worried about something, typically recession.

Understanding Bitcoin and Monetary Policy

In this section, the speaker discusses the price volatility of Bitcoin and compares it to gold. They also talk about monetary policy during the Greenspan years and how it relates to a rules-based monetary system.

Price Volatility of Bitcoin and Gold

• The speaker compares the price volatility of Bitcoin to that of gold.

• During the Greenspan years, Alan Greenspan used the gold price as his guide for a stable price level.

• The Fed funds rate was volatile during this time, but Greenspan was using a rules-based monetary system to preserve purchasing power.

Rules-Based Monetary System

• After Greenspan's tenure, Fed policy ran into bureaucratic issues and relied on policies from earlier decades.

• Art Laffer believes in a rules-based monetary system with a price rule for stability. He thinks quantity rules are fine for appreciation.

Bitcoin's Potential Impact on Monetary Policy

• Art Laffer collaborated on a paper about Bitcoin in 2015 and believes in a global rules-based monetary system.

• The speaker wonders if Bitcoin takes off, whether we will need a similar approach to managing money as with gold.

Bitcoin and the Future of Global Economy

In this section, the speaker discusses the policy point of view in terms of managing the economy globally. He also talks about Bitcoin's usefulness and potential future as a digital gold standard.

Bitcoin's Usefulness and Potential Future

• The speaker believes that there is no circumstance where Bitcoin loses its usefulness entirely.

• The speaker thinks that we are moving towards potentially redenominating many fiat currencies on digital gold like a return to the gold standard.

• Countries like El Salvador are first movers towards this trend, which will become more obvious in years to come.

• The North American Latin American flipping may happen, where people move to South America due to currency crises in North America.

Flight to Safety: Why People Are Moving Money into Big Banks and Money Market Funds

In this section, the speaker explains why people are moving their money into big banks and money market funds. He also shares his thoughts on whether it is a good idea or not.

Reasons for Moving Money into Big Banks and Money Market Funds

• People are draining many banks because they are missing billions or hundreds of billions of dollars.

• Many people are moving their money into big banks and money market funds for safety reasons.

Speaker's Thoughts on Moving Money into Big Banks and Money Market Funds

• The speaker thinks that it will be a mistake if people move all their money into big banks and money market funds because it makes it easier to freeze, seize, or corral assets.

The Collapse of SVV and the Banking System

In this section, the collapse of SVV is discussed, and how it affected people's perception of the banking system.

Fear in Losing Job vs. Life Savings

• The collapse of SVV meant that 40,000 Tech CEOs got the message that the U.S banking system is unsafe.

• People had their money in deposits at a bank, which forced them to focus on what they're earning in banks versus what they could get into money markets.

• They've all become yield farmers to lower their risk by leaving the banking system and increase their return.

Lending Shutdown

• Lending will ultimately shut down.

• Regional banks are getting crushed on everything - commercial real estate loans out there are done in the regional banking system.

• Residential will be hit because there has been so much overbuilding with capital markets now facilitating this of multi-family homes that we have now coming online.

Economic Activity

• Rents will come down dramatically velocity is coming down.

• GDP and economic activity are worrying.

Cash as a Risk Asset

This section discusses how cash has become a risk asset for many people after the collapse of SVV.

Deception by SUV Management

• Evidence of deception by SUV management basically means that banks hide their literal insolvency in footnotes.

• Banks disclose but don't really disclose; you're not told if your bank is insolvent or could be insolvent.

Tech CEO Perception

• Combination of fear by tech elites and financial elites means that every single tech CEO got the message that cash is a risk asset.

Understanding the Risks of Banks

In this section, the speaker discusses how banks can become insolvent due to various reasons and how it is difficult to determine if a bank is dead or alive. The speaker also talks about the risks that banks face and how they manage their assets.

Schrodinger's Bank

• Banks can become insolvent due to a write-down of their loan book or opaque derivatives.

• It is difficult to determine if a bank is dead or alive, making it Schrodinger's Bank.

• A Stanford study suggests that many banks face similar risks.

Mismatch in Durations

• Banks always have a mismatch in their durations, with long-term assets and short-term liabilities.

• The issue arises when holding assets until maturity, as they may not be money good.

• During COVID, banks faced an unexpected venture funding drought and a 20-fold increase in interest rates.

Unusual Times

• Deposits are leaving the banking system at an unprecedented rate since 1948.

• M2 has declined by around 3%, which hasn't happened since the Great Depression in the 30s.

• The current situation is worse than typical fractional reserve because even the assets on hand were not enough due to unrealized losses.

Digital Bank Run

• We are in the age of digital bank runs where funds can disappear instantly due to wire transfers.

• Dodd-Frank presumes physical friction during bank runs.

The Model of Risk Capital

In this section, the speaker discusses the model of risk capital and how it allows for conscious risk-taking with a percentage of capital while keeping the rest safe.

Conscious Risk-Taking

• The model involves separating out risk capital from full Reserve Bank.

• Only a percentage of capital is used for conscious risk-taking.

• The remaining amount is kept safe and not used for taking risks.

Safe Investment Options

• Safe investment options include Bitcoin, other cryptocurrencies, gold, or full custodial accounts.

• Full custodial accounts ensure that money is not being used to make loans or engage in risky behavior.

Dialing Risk

• By using only a portion of capital for risk-taking, investors can dial their level of risk.

• This allows them to avoid being forced into taking risks they do not want to take.

Central Bank Crisis

In this section, the speaker discusses how all assumptions about the US banking system are breaking down at once.

Breaking Assumptions

• All assumptions about the US banking system are breaking down at once.

• These assumptions include interest rate control by the FED and digital bank runs being impossible.

Central Bank Crisis

• There is a central bank crisis rather than a bank crisis.

• Unrealized losses in securities are common among banks but have spooked the entire market.

Hyperbitcoinization

• Money is becoming super liquid and digital, seeking safety above all else.

• If some money starts moving into Bitcoin as a result, it could lead to hyperbitcoinization.

Velocity and Economic Downturn

In this section, the speaker discusses how velocity will go down due to economic downturn and risks to the economy are on the downside.

Velocity Decrease

• Everything discussed points towards a decrease in velocity.

• Risks to the economy are on the downside, including inflation.

Flight to Safety

• Bitcoin's rise from $19,000 to nearly $28,000 was a flight to safety.

• Decentralization, transparency, and auditability make it an attractive option.

Fed's Market Signals

• The FED is not looking at market signals but instead relying on lagging indicators from the Industrial Age.

• This is a big problem as they do not respect market signals.

The Banking System and Risks to the Economy

In this section, the speaker discusses the risks to the economy and how it may not be inflation that we should worry about. They also talk about how the dollar is measured and its current state.

The Dollar's State

• The dollar is going up when measured in terms of prices and goods and services.

• Commodity prices have come down in the last few months.

• The speaker believes that many people who say that the dollar will collapse are wrong.

Micro Data on Asset Deposit Ratio

• Pilkington found that last week had the highest ever change in asset deposit ratio, which is an interesting way of thinking about deposits going down.

• This data provides a different lens on how exceptional this situation is.

Bitcoin and Keynesian Economists

In this section, the speaker talks about how Bitcoin has violated Keynesian economists' theories. They also discuss how digital gold like Bitcoin exists despite their predictions.

Keynesian Economists' Theory vs. Bitcoin

• Many Keynesian economists denounced Bitcoin, saying it couldn't exist because it violated their economic laws.

• Their theory does not account for digital gold-like things like Bitcoin existing.

• Unlike early generations of Keynesians who defeated gold, this group doesn't take digital gold seriously yet.

Digital Gold vs Physical Gold

• Physical gold has been defeated by fiat currency but digital gold hasn't been defeated yet.

• Fiat currency improves on physical gold in some ways but cryptocurrency incorporates aspects of both physical and fiat currencies.

The Impact of the Banking Crisis on Tech Elites

In this section, the speaker discusses how the banking crisis has affected tech elites and their perception of American banks.

Tech Elites' Perception of American Banks

• Indian founders have lost trust in American banks due to the banking crisis.

• Investors in banks are being told that depositors' money is secure, but any equity or bond investor who uses these words will be wiped out.

• The stock market is levitating through all of this because it smells the end of rising rates and sees much lower interest rates due to deflationary pull from monetary policy.

Adding Bitcoin to Monetary Base for a Better Picture

In this section, the speaker talks about adding Bitcoin to the monetary base for a better understanding of what's going on with the economy.

Adding Bitcoin to Monetary Base

• Art Laffer suggests adding Bitcoin to the monetary base for a better picture.

• Adding Bitcoin, which is a little over 500 billion, to the eight and a half trillion in the monetary base would be a start.

• This idea of adding Bitcoin could help us deal with the world we're living in and understand what's really going on out there.

Market Signals and Converging Platforms

In this section, the speaker discusses market signals and how different platforms are converging.

Market Signals

• Credit default swaps are settling down a bit.

• The Regional Bank index hasn't v-shaped yet, but there's a risk of another episode.

• The stock market is very sensitive to all of this and is levitating through all of this because it smells the end of rising rates.

Converging Platforms

• Enormous growth in everything blockchain-related, as well as other platforms such as multi-omic sequencing, robotics, energy storage, and artificial intelligence.

• All these platforms are going to start converging.

State-chartered Banks and Bitcoin

In this section, the speaker discusses how certain states in the US are trying to attract capital and labor by allowing state-chartered banks to deal with cryptocurrencies like Bitcoin.

State-chartered Banks and Crypto

• Florida and other states are trying to attract capital and labor by allowing state-chartered banks to deal with cryptocurrencies.

• States like Texas, Mississippi, Montana, Wyoming, Tennessee, Colorado, and New Hampshire have passed bills or shown support for cryptocurrency.

• The speaker believes that these pro-crypto states could create their own simple exchanges (like Coinbase in 2013), where people can buy, sell, send and receive Bitcoin. The state would take a cut of each transaction.

• The speaker thinks it's unlikely that the federal government would try to shut down access to these state-chartered banks dealing with crypto. If they did try to do so, it would show the potential financial totalitarianism of a central bank digital currency (CBDC).

Benefits of State-chartered Banks Dealing with Crypto

• Allowing state-chartered banks to deal with crypto benefits local states because they can accumulate digital gold.

• This move builds upon existing "shall not be infringed" DAO language and mayors accepting Bitcoin.

• If the current financial system is going down, having an orderly exit through a Bitcoin-backed local state government could be a positive vision for the future.

Exit from US Banking System to Bitcoin

In this section, the speaker discusses the possibility of an exit from the US banking system towards Bitcoin in the coming weeks, months, and years. The speaker believes that prepping for this exit is easy and compares it to prepping for COVID-19 lockdowns.

Prepping for Exit

• Prepping for an exit from the US banking system towards Bitcoin is similar to prepping for COVID-19 lockdowns.

• Building exits to Bitcoin before digital lockdown comes in July is important.

• Other kinds of exits should also be built.

Conclusion and Disclaimer

In this section, the speakers conclude their discussion and provide a disclaimer regarding the accuracy and completeness of information presented.

Conclusion and Disclaimer

• The speakers thank each other for their time and express interest in doing this again at another moment in time.

• A disclaimer is provided regarding the accuracy or completeness of any information presented. Historical results are not indications of future results. Certain statements contained in this podcast may be statements of future expectations and other forward-looking statements that involve known unknown risks and uncertainties that could cause actual results performance or events to differ materially from those expressed or implied in such statements.