The Breakdown - How Crypto Can Help the Nascent Cannabis Industry

Starting point is 00:00:04 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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, April 24th, and that means it's time for Long Reads Sunday. Before we get into that, however, if you're enjoying the breakdown, please go subscribe to the show, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit. Dotley slash breakdown pod. Also, a disclosure as always. In addition to them being a sponsor of the

Starting point is 00:00:48 show, I also work with FTX. And speaking of FTX, that is the source of today's first thread. Yes, for Long Read Sunday this week, I'm going to do one of the multi-thread reads. And I love these. as I've told you before, this gets back to the roots of Long Read Sunday, which was, in fact, four years ago, a Twitter thread of all of the threads that had happened on Twitter the week before. Anyways, I realized that I had made a grave error this week when on 420 I was casting around trying to figure out what my show was going to be, and the answer was sitting there in the date the whole time. If I were Elon Musk, I certainly wouldn't have made that mistake. But here we are. Still, Brett Harrison, the president of FTX,

Starting point is 00:01:33 U.S. wrote a great thread last month about cannabis and digital assets, and ultimately about a real clear use case for the crypto industry. Cannabis and digital assets. Though cannabis is legal in Illinois, FTXUS's headquarters, and many other states, marijuana-related businesses, MRBs, are effectively underbanked. This is because, A, no major national banking system will take on marijuana-related businesses as customers, and likely won't until cannabis is either legalized federally or legislation like the Safe Banking Act of 2021 is passed to require national banking systems to accept MRBs. B, MRBs are treated by banks as high-risk businesses, similar to gambling and firearms businesses, and the costs associated with the necessary compliance programs may be

Starting point is 00:02:23 prohibitive for local credit unions and community banks. C, even if MRBs are able to obtain local bank accounts. Their own banks and other issuing banks frequently deny access to point-of-sale banking, e.g. use of major credit debit cards and ACH. As a result of the above, MRBs primarily accept and hold cash. Cash stockpiles accumulate at dispensaries, which increases crime risk for local communities and imposes major burdens on law enforcement. Digital assets can play an important role in solving these problems. Crypto exchanges can provide depository services akin to those of banks, but with lower fee access to payment rails and a wider array of payment options on the consumer side. MRBs could accept payments and hold reserves in the form of stablecoins,

Starting point is 00:03:08 which would facilitate instant settlements and transition MRBs away from cash, and MRBs could leverage all the AML and cybersecurity services that centralized exchanges provide. State legalization of cannabis is an effective tool for generating tax revenue, and when paired with pardon programs such as in Illinois by Governor Pritzker, can create new economic opportunities for those who, have been disproportionately disadvantaged by drug sentencing laws. The digital asset industry is uniquely positioned to collaborate with MRBs, helping bypass constraints in legacy financial technologies that are inhibiting growth, creating operational inefficiencies, and posing security risks.

Starting point is 00:03:44 This is something that I find personally super fascinating. We're ending the era of prohibition around marijuana and marijuana-related businesses, and it's clearly going to be a high-growth industry. The opportunity that Brett points out is basically for crypto-powered financial rails to leapfrog the existing system which has all of these constraints that make it unviable for these types of businesses. I anticipate that a lot of the types of operational efficiencies and benefits that Brett is talking about for MRBs are actually likely to be relevant in the long term for lots and lots of different types of companies. But in this area that genuinely can't access those existing alternatives, the adoption potential right now is pretty clear.

Starting point is 00:04:26 surprise probably none of you, but in general I'm pretty excited about crypto's use as a payment rail and a tool for industries that are legal but run afoul of people's moral and ethical sentiments. Looking for ways to step up your crypto game, then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hodlers. You don't even need to sell. Instead, borrow instant cash against your assets. Get the most out of your crypto with nexo at nexo.io. That's nexo.com. Meet Arculus, the next generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a simpler, safer, and smarter way to store, buy, swap, send,

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Starting point is 00:06:14 Download the FTX app today and use referral code breakdown to support the show. Next up, we have an interesting one from Urien Timmer. Urien is the director of global macro at Fidelity and a super smart chap. He writes about why it's good that Bitcoin is boring right now. Bitcoin boring? Gasp. but boring is good if you want institutional adoption. Is the efficient market hypothesis replacing the go-go price discovery of yesteryear?

Starting point is 00:06:45 The chart above shows Bitcoin's fundamentals. The supply curve is dictated by the stock-to-flow model, and the demand curve is driven by network growth, Metcalf's law. Until recently, Bitcoin would often overshoot its intrinsic value to the upside during bull markets and to the downside during bear markets. It was a momentum game with little to no resistance until the trend reached exhaustion. But take a closer look at the chart above. In recent months, the price of Bitcoin has stopped tracking the S2F model and has instead hugged the pink line, a demand model. That makes sense to me.

Starting point is 00:07:16 While the S2F model has been an effective model in the past, in my view, the demand curve will be the dominant driver from here. So in a more efficient two-way market, Bitcoin should deviate around the pink line up into the right. Institutional investors have likely created their own models by now and therefore know when Bitcoin is cheap or rich. For instance, if the demand model says that Bitcoin's intrinsic value is 50k today and 100K two years from now, which is my thesis, then at 30k Bitcoin is going to look a lot better than at 70K. That's the difference between a two-year gain of 3x and 1.5x. While a 25% compound annual growth rate is still a lot, at a vol of 50, the sharp ratio would only be a middle of the road 0.5. The starting point matters

Starting point is 00:07:57 for all assets, including Bitcoin. As Bitcoin's value becomes better understood by more more investors, there could be more efficient accumulation when Bitcoin swoons and more determined distribution when it moons. That's what makes a two-way market. Remember, price is what you pay, but value is what you get. In the early days, most investors only knew the price. But as investors better understand valuation, Bitcoin is less likely to resemble the early boom-bust days and could start behaving like a traditional risk asset. If indeed price starts to move more closely around an upwardly sloping demand curve, it will be more important than ever to get that demand curve right. So I think the interesting takeaway here goes back to that episode that I did earlier this week

Starting point is 00:08:37 about crypto's liminal phase. What Eurian is identifying is that Bitcoin is clearly in this transition, from early volatile asset driven largely by these four-year cycles, plus the booms and busts driven by hype and fud, into something that sits alongside other portfolios. Now, I think Bitcoin is unlikely to ever fully institutionalized just given the composition of its holder base and given all the reasons that people hold it that aren't just a speculative short-term investment. At the same time, though, it does make sense that we're seeing this type of maturation. One of the things that I think has thrown people about this particular cycle is that we never had that crazy two-week run-up and blow off top that we had in previous all-time highs.

Starting point is 00:09:19 We're quite clearly no longer up in the heady days of the 60,000s, and we haven't been for some time. But part of the reason that people didn't really ever treat it like it was a full bare turn is that it simply didn't display the same dynamics that it had in the past. Now, Bitcoin has a way of surprising you, so I wouldn't go too far with any of these predictions, but I still think it's interesting to note how someone from Fidelity is seeing the evolution of the asset. Our last thread comes from Alex Gladstein, the chief strategy officer at the Human Rights Foundation. And it's a summary of a Morgan Stanley report that got a ton of buzz this week. New Morgan Stanley report released today focuses on the prospects of using the Lightning Network

Starting point is 00:09:59 for retail purchases and on, quote, the long-term transition towards payments and settlements using digital and cryptocurrencies instead of fiat currencies like the U.S. dollar. The report was sparked by the Jack Mahler's Miami announcement. Morgan Stanley points out that, quote, one in six point of sale devices globally used software provided by NCR. So this announcement is significant even if only a small proportion of retail shops choose to add the crypto functionality. Morgan Stanley says, quote, in essence, strike is directly competing with Visa Direct, which offers real-time settlement. The main difference for merchants will be charged

Starting point is 00:10:34 a much lower transaction fee, while the benefit for the consumer is that they can, if they want, host their Bitcoin on a private secure network, allowing an element of privacy association with their transaction, end quote. The report talks through the various obstacles to using Bitcoin for payments, volatility, customer psychology, taxes, etc. Morgan Stanley does point out the proposed virtual currency tax fairness act, which would exempt personal Bitcoin transactions from tax where gains are less than $200. But Morgan Stanley says this proposal, quote, may come under considerable scrutiny, as it would directly imply that crypto is a legitimate competitor currency to the U.S. dollar. Indeed. Morgan Stanley examines volatility and

Starting point is 00:11:12 argues that Bitcoin users may be more interested in spending during bare markets, but that Bitcoin user purchasing power may continue to rise over time. Alex also points to what he calls a staggering chart showing U.S. homes priced in Bitcoin versus homes priced in U.S. dollars. The average home went from 993 Bitcoin in 2015 to just 8.27 Bitcoin today. In sum, Alex says, this is an interesting report, significant for its lightning focus, that suggests we are at the beginning of an era where more and more consumers may over time choose to pay for goods using Bitcoin and cryptocurrency. That would certainly be Satoshi's vision. Just to wrap up from my end, between this and the Stripe announcement, crypto for

Starting point is 00:11:53 payments is back on the menu. And I suppose this makes sense. So much of the national conversation about stable coins and central bank digital currencies is about payment rails and new types of payment solutions that offer faster settlement, lower fees, et cetera, et cetera, et cetera. I think Alex is right to point out the significance of this report from a source like Morgan Stanley actually taking lightning seriously in that conversation. Anyways, guys, I hope you enjoyed the Twitter-based Longreeds Sunday. I want to say thanks again to my sponsors, nexus.io, Arculus, and FTX. And thanks to you guys for listening.

Starting point is 00:12:31 Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few.

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The Breakdown - How Crypto Can Help the Nascent Cannabis Industry

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