The Breakdown - Here for the Bitcoin Revolution or Just the Sick Macro Gains?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, October 10th, and that means it's time for Long Read Sunday. Now, I have been having a ton of fun returning to the Long Read Sunday roots by reading you guys Twitter threads, but today we are going to going to do a little something different. We're going to go back to the essay format. One of the things CoinDesk has been doing more this year is focusing on helping advisors, financial advisors, get the info that they need to help their clients get into Bitcoin and digital assets.

Starting point is 00:00:54 This week, I noticed a piece from Adam Blumberg on CoinDesk called Revolution, Macro, and Micro, three ways to look at a Bitcoin investment. Adam is the co-founder and chief educator for Interaxis, a company trying to bridge the education gap between digital assets and traditional finance. He is, I believe, a breakdown listener. So hello, Adam, if you're hearing this. I know I've interacted with Adam on Twitter a number of times. So I was excited to see this piece. And I just think it's a great, super simple, heuristic framework, whatever you want to call it, to help people understand different doors that new Bitcoiners might come through. So again, the piece is called Revolution, Macro and Micro, three ways to look at a Bitcoin.

Starting point is 00:01:36 investment. Let's dive in. Investment in cryptocurrencies is all the rage, and Bitcoin is clearly the biggest. It has the largest market capitalization, the most infrastructure, the longest track record, and is the most decentralized. In previous columns, I've stressed the conversations you, as an advisor, will need to have with clients and how different they are from any conversations you've previously had to have about financial planning. Now we get to talk about three different ways to look at an investment in Bitcoin for you and or your clients. Bitcoin as the revolution, Bitcoin as a macro investment, and Bitcoin as a micro investment. I'll review these three investment thesis so you can not only determine why to allocate to Bitcoin, but also so you can help your

Starting point is 00:02:22 clients better understand the implications of certain news items, media hype, and social media posts. You and your clients will inevitably read articles and posts from people who fit into all these categories. Having an understanding of where they're coming from will help you in your practice. Keep in mind, we can't necessarily lump every investor or every thesis into one of these three categories. Bitcoin as the revolution. This was really the original air quotes investment in Bitcoin. Starting shortly after the release of the Bitcoin blockchain's white paper in 2008, people were mining Bitcoin using their home computers and felt like this new currency would be needed sometime in the future. They likely didn't think it would be worth it.

Starting point is 00:03:02 the mid-five figure someday, nor did they think of it in institutional investor terms. They held it in private wallets long before we had crypto-custodians and even used it for early transactions, like the infamous Bitcoin Pizza and Silk Road. Along the way, others have started investing in Bitcoin as a hedge against governments, censorship, and overly powerful banks. The Revolution Investment thesis is that, when fiat currency, governments, and banks fail or falter, we can count on Bitcoin. Because Bitcoin is completely decentralized, the value isn't determined and possibly manipulated by a central bank, and the transfer can't be restricted. While this doesn't seem to be much of a need here in the U.S. and most of the developed world,

Starting point is 00:03:40 we can see the value in countries where the government might routinely devalue their own currency to pay down national debt or limit withdrawals from banks. We've seen relatively recent examples in Turkey, Argentina, and Nicaragua. If I'm living in one of those countries, or I just don't trust many of the world leaders, I might own Bitcoin and store it offline in a hard wallet. I know that my Bitcoin is wherever I am. The Revolution Investment Thesis might not be just because I think I'm going to need Bitcoin to trade for goods and services, but because I just want to show my disgust with the current government and banking system, so I'm not going to let them participate in my wealth creation

Starting point is 00:04:14 and growth. While this investment thesis in Bitcoin might be out of necessity or out of revolution, its proponents are vigilant about letting the public know they should hold Bitcoin. Many of the arguments hinge less on actual macroeconomics driving the dollar value, and more on the need to own Bitcoin as a hedge against powerful parties and as a political statement. This podcast is sponsored by NIDIG, and they put out a research newsletter that's one of the best ways to track market insights and track the turning points of Bitcoin adoption. Sign up at NIDIG.com slash NLW. That's NYDIG forward slash NLW.

Starting point is 00:05:01 Bitcoin as a macro investment. This investment thesis looks at Bitcoin as a store of value and compares the macroeconomic factors at play in the U.S. and in the world. The thought behind it is that as we see inflation rise due to the increased supply of fiat currency, the value of Bitcoin will rise dramatically because Bitcoin has a very fixed supply. This is the thesis that many Bitcoin investors have been following for years, but it became very popular and well-known in 2020, when legendary macro hedge fund manager Paul Tudor Jones announced he was allocating some of his portfolio to Bitcoin. He was followed shortly by Stanley Druckenmiller and Bill Miller, who are also macro investors. The fiat money printing in the U.S. and in most of the Western world, as a result of the COVID-19

Starting point is 00:05:39 pandemic, accelerated the potential for inflation, as we have seen trillions more dollars created and dispersed into the economy. Now, we have finally started to see evidence of inflation, which adds fuel to this Bitcoin investment thesis. Why would I need to hold Bitcoin as an inflation hedge or store a value? Let's assume I can hypothetically buy a loaf of bread for $1 today. In a year, what if the same loaf of bread cost me $1.5? Which means we had 5% inflation. That happens because we added more dollars, but not more bread, to the system. Therefore, the bread is worth more dollars. If I keep all my money and dollars in the bank, where I'm earning virtually no interest, I can't buy a loaf of bread in a year with my $1. If I think that will happen,

Starting point is 00:06:19 I'll want my money saved in an asset that also has a limited supply, just like the bread. In the past, that asset might have been gold. Now, however, we have an asset with a very limited supply, which is very easy to buy and keep safe compared to physical gold. I can hold my dollar in Bitcoin, and in a year I would assume the price of my Bitcoin would go up by at least the same amount as the bread. Therefore, if I need to buy bread, I can sell my Bitcoin for at least $1.5. Now, extrapolate that investment over the entire world economy, and we can see why these titans of macro investing want to allocate 2% to 5% of their holdings to Bitcoin. They see inflation coming, and they want an asset with finite supply that will increase in value with a decrease in dollar value.

Starting point is 00:06:57 When you or your clients reads about an increase in inflation leading to a possible increase in the value of Bitcoin, or about institutions like insurance companies and pensions investing in Bitcoin, this is usually the thesis they're using. Bitcoin as a micro-investment. This is where most advisors are going to stand with their clients. Your role here is to identify, partly based on the previously mentioned investment theses, how to help your clients allocate to Bitcoin. Based on the risk profile, technical prowess, and time horizon of your clients,

Starting point is 00:07:26 you can assess not only the allocation to Bitcoin, but also the treatment of the asset, when you trade, how often do you rebalance, etc. Remember that many of those institutions investing in Bitcoin for the inflation hedge have a very long or even infinite time horizon. Your clients have a limited time horizon, and each will be different. If your clients are in their early 40s, you're probably talking to them about the impact inflation will have on their retirement funds. If we also assume you subscribe to the inflation hedge thesis above, Bitcoin fits as part of your client's retirement planning at a reasonable allocation based on their risk tolerance. The volatility of Bitcoin also allows for an investment when

Starting point is 00:07:59 thinking about it for individual clients. Because Bitcoin is not correlated and highly liquid, you have the ability to rebalance possibly quarterly and provide clients with overall portfolio returns that are more normalized. This Bitcoin microinvestment thesis is about taking the possible effects of the price of Bitcoin and adapting them to individual family portfolios, with more limited time horizons, necessary expenses, and traditional assets. Using these investment thesis as a lens. As you start to learn more about Bitcoin, and even to help your clients with allocations to crypto. You will definitely hear from influencers, analysts and Bitcoin enthusiasts about the reasoning for holding or not holding Bitcoin. Your role as an advisor is to understand these

Starting point is 00:08:36 main investment thesis, and you have the ability to determine how any opinions or analyses affects your client's portfolios and financial lives. If you see an influencer or analysts or the news through the lens of one of these investment thesis, you'll be better prepared to have those important conversations with your clients. Back to NLW here. As I said yesterday in the show, I've been thinking a lot recently based on some people asking me the question, what phase of the market were in? If I had to summarize where Bitcoin and crypto are right now, what is it? And the answer that I gave yesterday or two days ago, I can't even remember at this point, was something like on the cusp. And what I meant is that Bitcoin has been on the verge of mainstream for a long time, but it is

Starting point is 00:09:16 really, really on the cusp now. We're sitting here with there being a good percentage chance of a Bitcoin futures ETF finally approved. And while I've gone to and two why that might not be that big a deal, it is a meaningful moment in historical significance. We, of course, have the experiment in El Salvador, where there is an entire country running on the Lightning Network, increasingly bringing that economic activity to the Bitcoin system. We have a significant number of new actors, new types of people getting involved in crypto and digital assets every single day. And while some are sure here for a quick buck, there are many who are being orange-pilled into this space and really, really going deep and trying to understand.

Starting point is 00:09:55 understand it. We have obviously huge mainstream marketing activity from numerous crypto companies around the world and integrations and partnerships with major, major brands everywhere you look. Bitcoin and digital assets are on the verge, and I think what's important about pieces like this is it shows that there's more than one door to walk through as people start their journey to get comfortable with this whole space. I'm a huge fan of us being more articulate about different doors that people can walk through, to give them a chance to find the reason this makes sense for them, to come in at their own pace in their own way. I think anyone who's here, probably who's listening to this podcast, has a sense of just how much this industry will pull you in, if you let it

Starting point is 00:10:38 even a little bit. In many ways, it feels like the doors themselves are more important than where people end up. Either way, I appreciate this piece from Adam, and I hope you enjoyed it as well. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Here for the Bitcoin Revolution or Just the Sick Macro Gains?

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