The Breakdown - The Great Inflation Escape: Where Bitcoin Fits In the New Monetary Order [Money Reimagined Pt. 3]

Episode Date: May 16, 2020

Niall Ferguson has called this moment an “age of experimentation” when it comes to currencies. One of the unique features of this moment is the experiments are not limited to the traditional actors. It is not just nation-states trying to elevate their currencies in the face of the global dominance of the dollar, but non-sovereign monies born of decentralized networks that are plausible contenders in this game of currency thrones.  Bitcoin was a byproduct of the last financial crisis. This connection was immortalized in the message embedded in the genesis block: “Jan 03/2009 Chancellor on the brink of a second bailout for banks.”  More than a decade on, in our new financial crisis, the size, scale and implications of that bank bailout seem positively quaint in comparison.  This episode looks at where bitcoin and other permissionless, non-state cryptocurrencies fit in the battle for the future of money.  It starts with a look at the bitcoin narrative in the wake of the market crash. With the most significant stock market correlation of its life, did bitcoin’s digital gold narrative evaporate alongside the S&P 500? From there, we move to an asset that has been massively in demand since the beginning of the crisis: USD stablecoins. We explore whether this is simply an affirmation of the supremacy of the dollar or represents a more disruptive force in the global monetary order. We conclude with a look at the relevance of bitcoin on the other side of the crisis. As the market moves from deflationary to inflationary, there are many who will be looking to hard assets and sound money as a cure. In that context, bitcoin could thrive. 

Welcome back to The Breakdown, Money Reimagined, a special podcast micro-series about the battle for the future of money in the post-COVID-19 world. This episode is sponsored by Aris X, the Stellar Development Foundation, and Grayscale Digital Large Cap Fund. And now, here's your host, NLW. Welcome back to the breakdowns, Money Reimagined. This is a series about the battle for the future of money and how they're going to be a book. the evolving economic crisis surrounding COVID-19 is transforming that battle. Before we dive into our episode today about Bitcoin and stable coins and these off-system alternatives, let's quickly refresh where we were in our story.

In episode one, we started with the strange paradox of the almighty US dollar. On the one hand was the promise of never-ending money from the Fed. From Fed Governor Neil Kashkari appearing on 60 Minutes saying that, they had infinite cash to an ever-expanding portfolio of special-purpose vehicles to backstop markets in increasingly exotic ways, the last two months have been filled with the inescapable burr of the money printer. Yet for anyone who thought that this potential debasement of the dollar would slow its demand, they would have been wrong. Around the world, demand for dollars has only gone up, often at the expense of local currencies. Still, even if it wasn't some hyperinflationary event,

the dollar-recking ball, as some called it, still has called into question the foundations of the global monetary system. Episode two then was about the contenders who are seeking to replace the dollar system, but doing so by working within the larger monetary order. We looked at the euro, the Libra, and China's digital currency electronic payment system, or DSEP. TLDR, none are looking particularly strong right now. The euro is stuck in the mire of ongoing questions of political legitimacy of the European Union as a whole. COVID-19 has driven member countries further apart rather than closer together. The Libra, for its part, has kowtowed to regulatory pressure, particularly from the Americans. And instead of a disruptive basket of currencies approach

akin to a modern version of the bank or that Keynes proposed at Bretton Woods, it now seems the project is trying to simply position itself as a partner for future central bank digital currency efforts. China is certainly streaming forward with their digital currency, but face headwinds of large geopolitical backlash around their handling of the coronavirus crisis, and animosity heaped on top of the fact that the yuan remains primarily at this point a national currency. Professor Neil Ferguson called this moment the era of currency experimentation, and part of what makes this experiment so unique is that the contenders in the battle for the future of money, aren't only trying to work within the system. The fact is that Bitcoin, the emergent

monetary alternative that so many are looking to today, was born in direct opposition to the system. Embedded in its very genesis block was the famous message, a headline from the Times of London from January 3, 2009, Chancellor on the brink of second bailout for banks, that forever positioned it in opposition to the debasable fiat money regime. This episode is about Bitcoin and asks the question of whether a non-sovereign money, something that is rooted truly outside the existing political and monetary power structure, can provide an alternative on the world scale. As we'll see, it is also about the way in which another crypto domain,

permissionless dollar stablecoins, are challenging the system as we know it as well. The Bitcoin narrative can be a highly capricious thing. Such is the challenge of an asset created by a pseudonymous and long-remove founder and propagated and supported by a decentralized network of miners, hoddlers, and businesses who don't represent any one single interest or perspective. Still, by the end of 2019 and heading into this year, the digital gold narrative of Bitcoin was largely dominant. This was an emerging asset class whose most notable feature was its fixed supply and decreasing

rate of issuance and which, many believed, might act like gold in times of crisis. The beginning of the year was good to Bitcoin from a price perspective. From a low of just under 7,000 in the first few days of January, Bitcoin raced all the way past 10,000 by mid-February. Then COVID, or at least Western market awareness of COVID, hit. And it hit with a fury. As equity markets sold off, so too did Bitcoin. The biggest drop came on Thursday, March 12th, Black Thursday, as it would come to be known,

when the Bitcoin price crashed from around 8,000 to as low as 3,800 before starting to rebrand. bound. For some, this was definitive proof of the failure of the digital gold narrative. Bitcoin was behaving in a way more correlated than ever in selling off like a risk asset. Didn't that mean it had failed the store of value test? Speaking on this show two weeks later, Morgan Creek Capital founder and CEO Mark Yusko was quick to dispel that notion. The Bitcoin drop 12 days ago was a great example. You know, I had all these people screaming, you know, what's going on? I thought Bitcoin's a safe haven. I'm like, guys, it is a safe haven as a store of value, as an ultimate currency for the long term. Gold has been a currency for 5,000 years, one ounce buys a fine man suit.

You know, 875 paper currencies, three quarters of them have disappeared. The pound sterling, 374 years ago, one pound note got you one pound sterling, a pound of sterling silver. Today it costs 374 pounds of sterling silver. So paper currencies devalue and, go away and real money, sound money, stays forever. But, but, but we're young in Bitcoin's life. And Bitcoin is owned by two types of people, maybe more than two, but really two. One is hodlers, right? People who own it, believe in it, want it to be their store of value. And then speculators who are like, hey, this thing moves. I like things that move. I'm going to trade it. And the problem is people bought in sometime after the low back at 3100 in December 18 and they didn't

get it right at the bottom they got it sometime the 4,000, 5,000 whenever it was and they wrote it up and we had the big rally up through 12,000 and then it starts to roll over again. Be like, wait a second, wait a second. Well, those were weak hands and some of them started to sell. But when this crisis hit and stocks started being liquid. And hedge funds started being liquidated. And, you know, individuals started getting margin calls. In a margin call or in a liquidation, you don't get to sell what you want to sell. You have to sell what you have to sell. You have to sell what's liquid. And there were a lot of hedge funds and a lot of individuals, individual investors, that bought Bitcoin, not really understanding or caring what it was or what it is, but they just wanted it because it was moving. And so, So the fact that it fell dramatically when everything was getting liquidated should not have been a surprise to anyone. So if Bitcoin was still holding on to this idea of being a digital gold, how did regular gold do?

Delphi Digital's Kevin Kelly reinforced the point that in a liquidity crunch, everything gets sold, regardless of the properties that make it interesting in the long term. And really the only thing that's been surging higher has been, you know, long-dated U.S. treasuries. I think a lot of that is because people are assessing. essentially trying to sell whatever is that they have. And gold is actually a relatively liquid market compared to a lot of other assets and asset classes. And so in a situation like this, again, you know, having a position in gold to fight, you know, the broad-based risk of currency devaluation, all these things we talk about with central bank policy and rate cuts. Over the long term certainly makes sense. But in these short-term kind of windows, you know,

it's also subject to these liquidity events where people are, again, trying to sell whatever as they can. Investor and podcaster Anthony Pompliano reiterated these points about the idea that correlation goes to one in a liquidity crisis, but also added something distinct. In his estimation, the smartest investors weren't just thinking about Bitcoin in the context of right now, but were focused a few steps down the line as the environment would move inevitably from deflationary to inflationary. What people need to understand is in the institutional world, they understand how a liquidity crisis works. They realize that in times of liquidity crisis, asset correlations go towards one. Every asset with liquid market is going to sell off. And we have historical example

after historical example of this happening. Gold in 2008 is the best example. I don't think anyone's going to claim that gold is not a store of value. But in 2008, during the liquidity crisis, about six months, it sold off almost 30%. And then it ended the entire crisis up over 300%. And so what ends up happening is it just was a liquidity crisis. But we're two to three weeks into this. And people are yelling and screaming about their analysis of Bitcoin has changed when this crisis is going to be months, if not two years long. And so you can't make an analysis on something in the middle of the crisis. And so what I think is happening is that a lot of people in the institutional world, they have one of two perspectives.

if Bitcoin was a very big part of what they did. So take hedge funds that started trading Bitcoin a lot, et cetera, they sold the Bitcoin, right? They just sold it off. We saw 50% drop end of the day on Black Thursday down 30%. These people spent every day trading Bitcoin and cryptocurrencies. They just sold it. They needed the liquidity. They're actually a small part of the institutional world, a very small part.

The majority of institutional investors could care less about. Bitcoin right now, not because of anything Bitcoin did, but because they have bigger problems. And so if you're sitting there and you manage, let's say, you know, a $5 billion pool of capital, whether you're an endowment, a foundation, a pension, etc., Bitcoin at most was like 25 basis points of your portfolio. If it goes to zero, literally you've lost more money in the stock market than you lost if Bitcoin went to zero, right? And so it's just not that material to their portfolios. Now, the smart ones, I think, are the ones who are thinking two or three steps ahead, what they're starting to realize is, wait a second. We're in a deflationary environment. All assets

are selling off, the dollar strengthening. The only way to stabilize markets and reverse those asset prices is to flood the market with dollars through quantitative easing. We're seeing that start to happen. There's likely to be much more coming. In that scenario, when we switch from a deflationary to an inflationary environment, I need to protect my portfolio. I need to go into real estate gold, Bitcoin, etc. And so what some of them are starting to say is, wait a second, I'm not fully on the Bitcoin train where I'm going to go put 5, 10% on my portfolio, but I actually want to have the conversation now because in a world where we switch

from deflationary to inflationary, I want actually to get exposure. And so I think it's encouraging that kind of the more sophisticated institutional investors are realizing, wait a second, this is exactly what Bitcoin was built for. And I actually may want to get some exposure to this thing because I don't have very many other places to go to protect my portfolio in the world we're going into. A lot of people analyze where we are right now and they're saying, oh, Bitcoin didn't work, but that's not true because you have to look at it over the entire lifetime of the crisis. And actually, when we switch from deflationary to inflation, that's when Bitcoin should do the best.

Before we get to the inflationary part of our story, however, we need to look at something far away from the realm of the theoretical and firmly in the realm of the real. For while Twitter was debating Bitcoin narratives, in the real world, something fascinating was happening. The supply of permissionless USD-pegged stablecoins was surging. More on that after the break. Support for this podcast and this message come from Eris X. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed U.S.-based exchange. ArisX believes in fair access for all. Sign up to date to take advantage. of zero fees and learn more at erisX.com slash consensus.

This episode is also sponsored by the Stellar Development Foundation. The Stellar Network connects your business to the global financial infrastructure, whether you're looking to power of payments application, or issue digital assets like Stablecoins or digital dollars. Stellar is easy to learn and fast implement. Start your journey today at Stellar.org slash coin desk. For most of their short existence, stable coins had been primarily a tool for making the day-in, day-out,

functioning of crypto traders and exchanges work more smoothly. As the COVID-19 crisis took hold, however, the total supply of permissionless stable coins started to rise, and increasingly it seemed not to be just based on the traditional crypto use cases. CoinDesks Michael Casey explains, We've written some articles about stable coins and the rising demand for them that we've seen in the past few weeks as the COVID crisis has taken hold. And I think it's still early days to draw lasting conclusions about what's going on. But it's certainly anecdotally, if you look at where some of the demand, some of the new demand, most importantly,

that's coming into some of the stable coins is coming from, it does appear that this is going beyond. I'm talking specifically what we heard from USDC here. This is the folks from Center, the Coinbase and Circle, and the demand for their new business services product. where the demand is coming from e-commerce sites and, you know, cross-border payment providers and payroll organizers and, you know, entities that need currency or need dollars in particular because they're cross-border, but need money to keep their business running,

have started to look to stablecoins as an option. This nascent appearance of demand from these other entities that we're hearing about from circle in particular is fascinating, because, Because why now, right? Why are these e-commerce sites that aren't crypto participants buying into this? And the argument that Jeremy Aller, the CEO of Circle, put to us, and again, this is just an early interpretation, is a compelling one. And that is that among some people like that, there's going to be concerns that, yes,

I need dollars. Everybody needs dollars now. But if my dollars are provided to me by, say, a European bank, and I'm worried. worried about the banking crisis that they're facing, then those dollars themselves are, you know, backed by the fractional reserve banking system. I'm not so certain that just having dollars is enough. Maybe I'm not protected enough if the bank itself is under some sort of stress. And where there's a confidence crisis around debt and dollars and banking, maybe I need something much more reliable. So a run on the bank, a traditional run on the bank is like

take it literally into banknotes, right, into cash. But that's not going to help me if I need to keep my payment system going and my global e-commerce site and paying for invoices and payroll and everything else. I need something that can move money around the world, but give me that confidence that it's, you know, it's not going to just go away as a result of some crisis. And stable coins, you know, can potentially be that, right? It's an open question as to how truly free of fractional reserve banking risks something like USDC is because they still have a bank account behind them. But, you know, in theory, there's supposed to be most of those reserves, those reserves are dedicated toward very, very liquid, secure assets like, you know, treasury bills. They're not relent out, as is the case in a banking system.

Whatever the reason, what's undeniable is that the supply of stable coins has skyrocketed all the way to more than $10 billion, more than doubling on the year. As this has happened, to some, it's. looks more like stable coins have jumped out of the crypto context and started to resemble something that looks more like a modern permissionless version of the euro dollar system that is an integral part of today's global monetary order. Block Tower Capital's Avi Felman explains that Eurodollar system here. Euro dollars are dollars held outside of the United States by foreign entities or overseas versions of American banks. Now, I don't want anybody to get confused by the name

Eurodollar. The Eurodollar has nothing to do with the Euro itself, and it doesn't really have anything to do with Europe. It purely refers to the fact that the Eurodollar system emerged after World War II as the U.S. was giving dollars to Europe to rebuild infrastructure through the Marshall Plan. And so the name stuck, the name Eurodollar just stuck. Now, the size of the Eurodollar market is pretty massive. According to the BIS, there were $4.5 trillion dollars. in offshore dollar deposits by the start of Q4 2016, nearly 33% of all M2 money stock at the time. The euro dollar market is actually so big that the Fed recently began monitoring offshore interest rates with the understanding that foreign funding actually has a material impact

at the Fed funds rate at home. So this similarity in funding rates has only increased demand for Euro dollars as foreign entities can lend at the same rate as the Fed does, and they don't have to be regulated by the U.S. government. The system has gotten so large and liquid that derivatives on Eurodollar lending rates have become the de facto way for global investors to speculate on and hedge changes in the federal funds rate. So the rampant demand for dollar exposure has actually catapulted Eurodollar derivatives to be one of the largest products traded on CME by volume and total interest. There's now broader demand for U.S. dollars. And so what you're seeing is you're seeing stable coins actually being demanded by people.

people in countries that want access to a stable currency, especially in the face of a crisis. So in a crisis, cash becomes king, and the dollar is the king of cash. Independent researcher Hasu takes these ideas even further, making the point that the Fed policy of near 0% interest rates makes crypto dollars even more appealing than traditional dollar exposure. People were definitely using stable coins to get dollar exposure. even before the crisis. But the crisis seems to have accelerated demand

quite a bit, leading to supply increase of these crypto dollars from about $3 billion pre-crisis to over $10 billion today. And I see that as the result of four different trends. First, when the overall market volatility is high and demand for safe haven assets goes up also. And stable coins, definitely satisfy this demand in the crypto markets very similar to

fiat or an exchange. But many exchanges still don't support fiat pairs and the fiat also tends to be stuck on exchanges that do support it. Second, the opportunity cost of holding crypto dollars has declined now that the Fed has lowered the federal funds rate to near zero. So you no longer miss out on any interest by putting the money into crypto dollars compared to an onshore bank. Third, we have seen increased demand for dollars from emerging markets, and crypto dollars make it easier than ever to get dollar exposure if you're living in Russia, Brazil, Argentina, and so on. All of these are local currencies that have had double-digit inflation against the dollar so far this year.

So if the most dominant crypto use case during this crisis has been for people around the world to more easily access dollars, does that mean that the core ideas of crypto are ultimately just simply subservient to the broader order? Castle Island Ventures Nick Carter would argue no. In this clip, he makes the point that an essential aspect of Bitcoin and cryptocurrencies is that they allow people to store wealth in a way that can avoid the vagaries and whims of local political regimes. In that context, stablecoins are doing something incredibly important. initially I thought stable coins were just for traders to move money around exchanges and retain them within the crypto industry while going risk off. But it's become clear to me in more recent months that stable coins actually have a genuine usage here, even for non-traders, just for regular people.

And it's just a matter of entrepreneurs creating products around them that maybe abstract away some of the complexity and just reinforce the fact that these are unencumbered dollar IOUs. and typically in offshore banks that are always convertible, at par, redeemable, and you can use them without restriction. That's a very powerful thing. Those are digital dollars outside the confines of the banking system, or at least out the confines of the local banking system. And that's where dollarization has fallen short a lot of times in places like Argentina, Zimbabwe, Ecuador actually had a product like they had a central bank digital currency, which was dollar denominated. In all those cases, the banking system was the point of failure that the government used, because typically they wanted to confiscate the value of individual savers. They wanted to confiscate savings from the general

public. So they were always able to lean on their local commercial banks to confiscate funds in various roundabout methods. And stable coins instead, they take a, single governance regime, whether it is tether's governance rules or the Circle Consortium or something else, you know, there's like 50 stable coin issuers maybe. And it outsources that or exports that, rather, to the whole world, which is pretty cool if you ask me. And my guess is that those monetary arrangements are going to be more suitable or there'll be demand for those over. receives monetary arrangements in places where physical dollar cash is hard to obtain. And the local banking system doesn't support dollar deposits and savings because they're, you know,

denominated in whatever the local currency is. And the truth is that even though we make fun of the dollar as Bitcoiners, the dollar is pretty much the best sovereign currency relative to all the other ones. And in a time of crisis, people have dollar denomination. debts, they need dollars. That's why we've seen dollar rallying so much, really breathtaking, actually, in the last couple weeks. And I think what the ultimate effect of this will be, you know, I don't think cryptocurrency or Bitcoin is going to destroy fiat. I do think it potentially accelerates the destruction, a lot of weaker currencies, because it gives these non-financial rails to flow out of some local currency and into a currency of your choosing, most of the time

that's the dollar. That's what people are familiar with. In some cases, they already have a feeling for what it's like as a unit of account. They might have some dollars, some physical dollars. So I think, you know, in the near term, the biggest contribution of cryptocurrency is not catalyzing some hyper-bitquinization event and toppling all the central banks. it's giving people easier access to the dollar or to a tokenized representation of the dollar

under a number of issuers of their choosing and I'm sure there's going to be more and more credible ones like we'll see what the Libra does here you know that's a pretty interesting thing so that's kind of the concept I've been obsessed to it for the last few months and in the last month I think the supply of stable coins has gone from about four and a half billion to just crossed eight billion today

I could easily see it over $50 billion by the end of the year. Coming up after the break, we return to Bitcoin, and why a moment in which every central bank rushes to print whatever it takes to backstop the economy might be, in fact, the exact moment it was made for. Support for this podcast and this message come from Grayscale Digital Large Cap Fund. In times like these, diversification is key. Consider Grayscale Digital Large Cap Fund, ticker symbol GDLC. It's the only publicly traded investment product that offers diversified exposure to large-cap

digital currencies, all from your brokerage account. For more information, visit grayscale.co slash coin desk. That's g-r-a-y-scale.c-o slash coin desk. Let's pause here to take stock. We've got a real use of crypto in stable coins that are providing permissionless access into dollars and away from local monetary regimes. We've got a narrative battle over weather right now in this. moment, Bitcoin is a risk asset or a safe haven. But we also have a gnawing question of what happens

on the other side of the immediate shock of this crisis, as demand returns and markets are left trying to figure out what to do absolutely awash in fiat currencies. Masari founder and CEO, Ryan Selkis, discusses the potential true relevance for Bitcoin in that context. My co-founder Dan McArdle wrote in July of 2018 a thread, about how Bitcoin will perform and what the narrative will be when there is the next financial crisis and next recession. And the whole premise was Bitcoin is not a safe haven. It's not an inversely correlated asset where people will flock to it in times of distress. And it will ultimately act no differently than gold did during the 08 crisis.

When there's a flight to liquidity, all correlations go to one. And that is going to include Bitcoin as a risk asset, just like it did with gold. long term, if people are concerned about currency weakness, emerging market currency crises or failures, if they're worried about the destruction and debasement of the dollar or other existing reserves, that's when the digital gold and gold narrative plays out. And ultimately, this has to be a cycle in which Bitcoin does well. On March 13th, before significant Fed intervention was announced, podcaster and investor Preston Pish joined the breakdown to discuss some of these exact dynamics and how we get from what is now

an economic crisis to what could at some point become a currency crisis. So what you're having right now, because because central banks haven't stepped in yet, you have a total bid on fiat. There's a total demand for the underlying fiat, not the credit. It spends like the real monetary baseline money, but it is not. And when it dries up, it causes impairment on the other person's balance. sheet and you're set in this position. So now when the central bank step in, you get the exact opposite situation play out. Instead of the fiat getting bid, now you have just a total

overabundance of it. And then all that fiat infusion goes into the scarce resources, currencies, if there are any, call it gold, Bitcoin, right? All of that starts getting plugged into those locations and that's when you have this whipsaw effect. And so you can understand why so many people don't understand what's going on is because you go from a total bid of Fiat to a total how can I get rid of this and own something that actually has some scarcity to it because it's gotten totally debased in the blink of an eye. It happens literally like at the snap of a finger. Now as far as like market time that it plays out during the 2008-2009 crisis, you had this liquidity crunch, right? The government steps in, they print like crazy, and you saw that all get adjudicated

within, I don't know, I would call it two months, that flippening of getting bid in Fiat to total debasement happened very quickly. And you saw gold, people don't realize this, but if you go back and you look at gold in 2008, it went down 30% during this liquidity crunch that occurred. But then as soon as that flippinging of the QE and all the easing that the central banks did, as soon as that bottomed out, which took a couple months, as soon as that bottomed out and it flipped the other way, you saw gold go, I think gold went 200% plus. So that's what's playing out right now. And it's going to continue to play out until the central banks step in in a major, massive, unprecedented way. In the clip you just heard, Preston Pish was talking about the theoretical example of what happens before Fed intervention and after Fed intervention.

Well, since that was recorded, the Fed intervened in a major way. We have seen a doubling of the Fed's balance sheet, trillions of dollars in stimulus, more stimulus proposed, a blurring of the line between the Fed and the Treasury. And this is all just in the U.S. Around the world, the story is the same. Canada's central bank has tripled the size of its balance sheet. Australia's has grown by 43% and so the story goes. So what might happen as people look to this incredible new dollar creation

and start to lose faith or have worry in the very dollar system, the very idea of a sovereign fiat currency as the global backstop? Investor and researcher Luke Gromman argues for the need for a neutral settlement asset. The bedrock underpinning this $57 trillion monster in the offshore dollar markets was the dollar will be kept as good as gold for oil. And now it's not, you know, despite it's the contrary. And now it's definitively not. And so I think particularly in the aftermath of 08, you saw the central banks move first when they started buying gold again for the first time in 35 years. And then in 3Q14, they stopped buying treasuries altogether, but they kept buying gold and they keep buying gold.

And so to me, this system, the way it has organically shifted, it still needs some sort of neutral settlement asset. You cannot have a depleting asset like oil where the U.S. has the ability to basically print money for that oil in short. Because energy, it's energy, right? Energy, there's no such thing as free energy anywhere in the world. And I have to give credit to that, I think, to Josh Crum, who came my job. up with that. I think it's a great concept. The way of explaining us, there is no such thing as a free energy machine in the world. And the dollar system has structured from 44 to 71 was a free energy machine in a way, but it had that gold tie. So there was, there was a governor on it.

Post-71, there was less of a governor on it, you know, but we still managed to keep the dollar as good as gold for oil. Post-O-3, it's gone into La La Land. And there's no governor on it. And so it naturally begins to push people back toward the market solution, which is you need a neutral settlement asset. You need a bank core. And I think ultimately, I think gold and Bitcoin as neutral settlement assets for what I would say gold for the official sector and big institutions. And Bitcoin for the people, if you will, are these bank core solutions that allow you to, you know, to allow creditors to assess. this system because you in the system we're describing in a UBI world you cannot store your surplus wealth in the debt of another when that debt is just being created when that debt effectively

becomes currency which is what we just described so I think gold and and Bitcoin do extremely well they've you know Bitcoin obviously done extraordinarily well gold's finally showing some legs in the last 12 months after a long period of time but I I think they are likely to be two of the biggest winners in terms of assets over the next five to 10 years. Preston Pish again argues the benefits of Bitcoin over something like gold and why it seems to him like governments looking to move away from the dollar system are likely to begin hedging into Bitcoin. For me, the next sequence of events after they start printing, then you're going to see

the bond market start just selling off like you have never seen a sell off. And then you're going to get into a point where people are saying, hold on, there's something wrong with this currency? Like, this is a currency failure. And then it's just going to be like, holy hell, what can I own that doesn't, you know, and I think you're going to see some countries that start stepping in and start seeing what in the world's happening. And I think they're going to actually start taking, even if they take for a country, it's a small position to go ahead and buy, you know, a billion dollars worth of Bitcoin, right? And that's a hedge if that becomes the next global money. I mean, what else are they going to buy? What other settlement currency is there other than

gold? Okay. So they can do that and they have been doing that. But now you've got a wrinkle in the equation because you couldn't go to Starbucks and spend an ounce of gold, right? Or a small portion of the gold. So now you've kind of turned this on its head and where you've even turned it on its head in a way that's so different than anything we've seen in history is I can take physical possession of it immediately. I don't have to wait to receive it, right? So I think central bankers in some other countries that are looking at this and they're seeing a meltdown in fiat and specifically the dollar and the euro are saying, wait a minute, maybe we just have some small exposure. Then all of a sudden it just kind of starts going in a direction that nobody

was expecting. At least people that are outside of the Bitcoin space. There is, of course, another possibility that isn't so adversarial. One idea that some have floated is some new Bretton Woods conference. In other words, a new moment of international cooperation, where some synthetic basket currency is created and adopted to replace the dollar at the center of the global order. Without the buy-in of the U.S., however, a political possibility that is basically unimaginable as it stands, most are skeptical, and in that skepticism, Bitcoin rises to the top. Jeff Booth is the author of The Price of Tomorrow, why deflation is key to an abundant future.

In it, he argues that the inherent deflationary power of technology to drive prices down is on a direct collision course with the Fed and other central bank's inflationary economic policy. In this clip, he echoes Preston's skepticism of the possibility of global cooperation, for a new standard. If I could choose to have my Bitcoin go to zero and governments chose to have a Bitcoin-like equivalent so that we could transition to this in an orderly way, I would take that choice

because it meant society actually prevailed and you could make this transition hopefully peacefully. I don't think there's any chance of that. So I think Bitcoin is going to, I think Bitcoin is going to dominate, but it's going to dominate because of, because countries cannot get together and develop a currency that has Bitcoin type equivalence. Each country is going to try to create their own currency to manipulate rules because we have a low trust environment right now. And so I don't think that that will happen.

And as a byproduct of that, then Bitcoin is going to be very, very successful. If they don't, and you accept the thesis, so I talked about technology. technological deflation and what governments are doing to try to stop it, it's going to happen anyways. It's just going to happen to Bitcoin because it also creates an incentive for other governments to get together earlier, potentially buying Bitcoin in behind the scenes before a group of governments to send a minute and say, okay, we're pegging to this because it has more security than the US dollar. So it creates by not doing it, it also creates an incentive. it to happen faster.

Hish again reinforces the difficulty of a new Bretton Woods, arguing that is not just about getting people to agree, but breaking the spending habits as part of that agreement. This will transition to a new form of currency, whatever that is. My opinion is that Bitcoin's going to have a huge part in that. I could be wrong, but at the same time, I don't know what else there is out there other than all these countries coming to the table and agreeing. that an SDR is pegged to gold or something like that or you have a new Breton Woods. And I think that the reason that those two scenarios are not highly probable, but could happen,

is because you have to have all these countries that come to the table and agree that they now are going to be fiscally responsible in the way that they're spending. I think that the habits that have been established from a macro standpoint, Congressional, fiscal spending-wise, has grown to, it's almost like a person who just has a really bad eating habit, right? They just eat nothing but junk food. And they've been doing it for 40 years. That's where you're at with the spending habits, not just in the U.S., but globally, they have been spending at a rate that is uncontrollable at this point. So I just don't know how they're all going to come to the table and agree that they're now going to be fiscally responsible,

and they're all going to agree on a common currency that's all pegged like we had back with Bretton Woods. I think that was a different scenario than when we got now. In many ways, all of these arguments for Bitcoin have been some sort of Bitcoin by default becomes the best option. Nick Carter, however, makes another really important point that Bitcoin isn't just a sound money, but a money that is free from political discretion and capture. Bitcoin is an emerging monetary alternative. It's a project that will take decades to reach maturity.

And we're still at the earliest stages. This is the moment for crypto enthusiasts to step up and say, hey, look, we created an alternative, which is not totally immune, but much more immune to political discretion. And I think this is something that's been lost a little bit. You know, the dollars purchasing power is actually increasing at a time when effectively lots more dollars are being implicitly created, which is confusing to a lot of people, right?

But that's because the dollar is exposed to all these other dynamics, not just the supply side dynamics, but the demand side, especially from emerging markets. But, you know, it's not strictly speaking, the purchasing power, the Bitcoin, you know, unanticipated purchasing power collapses due to inflation the Bitcoin hedges against. Bitcoin does much more than that.

It insulates the money, from political discretion. So under a Bitcoin standard, you don't have the ability to bail out, you know, corporates that might have taken on too much risk. The money is issued in a very specific way, and it's issued in a free market way.

So the only way to get it is to compete in the market to be a mentor of Bitcoin. You know, that's a very profound thing. To me, the monetary issuance traits are absolutely critical and often overlooking. looked. And the whole point is to eliminate discretion in the system. That's where these crises come from, in my opinion, from the implicit guarantee. That's why you get the risk taking. Now, granted,

there's plenty of cases in the crypto industry where protocol developers do create slush funds and they monetize their protocol proximity, so to speak. So you have Cantion insiders in some of these other protocols, but very much not so in Bitcoin. And that's one of the things I like about Bitcoin, it's predictability, it's institutional stability, the fact that we're all on even footing in terms of the money supply, the fact that it really is robustly free market and how the units are issued. Those are the things that really matter, and nothing has changed from that perspective. So what are we left with? The reality is that this is a story that is still in progress. Just as we couldn't foresee this exact virus rock context or have predicted the

shutdowns that came as a response, or guessed at the exact mechanism of government intervention. No one can know exactly how the rest of the economic story will unfold, and what capacity Bitcoin has to offer as a true global alternative to today's fiat system. What is clear, however, is that more people than ever are taking notice. On May 7th, legendary hedge funder Paul Tudor Jones shocked the finance world when he released a full-throated argument for Bitcoin just days ahead of the having, the every four-year event where Bitcoin's rate of issuance and block reward is cut in half. What is clear is that Bitcoin is an asset that is becoming more scarce, right as every other currency is becoming more profligate. While this may not lead to

inflation or the currency debasement that we expect, the narrative power of the contrast is inescapable. On that note, let's wrap with a clip from CNBC's squawk box between Joe Kernan in Chamath Palahapitia. Chimoth is considered by many to be this generation's Buffett, and his article for Bloomberg in 2013 calling Bitcoin Schmuck Insurance was one of the most influential in Bitcoin's history. We had Paul Tudor Jones on yesterday, and he was talking about, you know, QE Infinity,

however you want to look at it, and that maybe the time will come when you need to have some type of asset that there's a fixed amount of, and he was referring to Bitcoin Jones. I think maybe even Paul Tudor Jones. Say the words. Say the words. I have to disclose that I own, I mean, compared to you, I own like three cents out of a dollar or something.

You know what I mean? But I have to disclose and I own it. But Paul Trudeau Jones made the case yesterday. And you know, yesterday was the having. I don't know. The having was yesterday. So the stock to flow has now gone up. Joe, this is again.

Now you're seeing a lot of lines of different thinking converge. So when we started to believe in the law. long-term value of Bitcoin, it was as a store of value, and it was that schmuck insurance that you kept under the mattress. And there was a small cohort of us that I believe this for like almost the last 10 years now. But when you have people like Paul Tudor Jones' sophisticated market participants who don't necessarily come to it from that perspective because he was probably first in gold or, you know, curve steepeners or whatever, now all of a sudden even he is looking at Bitcoin.

And the reason is because we are in this massive deflationary spiral. And you have to figure out how to protect yourself. And so however you think about it from a classic economic theory or the schmuck insurance where you're somewhat skeptical of the established governing masses, it is important that we have a hedge, non-correlated hedge. And I still struggle to find anything that is as uncorrelated to anything else and to everything else than Bitcoin. And I think that, you know, if we see it have its day, it's a moment where you're going to wish that you had just bought the 1% and just kept it. So there you have it.

Whether it's schmuck insurance, digital gold, an escape valve from undesirable local currency regimes, or simply the most uncorrelated asset around, in this battle for the future of money, Bitcoin will play a role. Next time on the final episode of Money Reimagined, a recap of the most interesting insights about the future of money from the Consensus distributed virtual summit. You've been listening to The Breakdown, Money Reimagined. Our theme song is Faith in My Money, Money Printer Go Bur, a new track from DJ Scrilla, which is available as part of his newly released Sound Money album. This episode featured content from NLW, Mark Yusko, Kevin Kelly, Anthony Pompliano,

Michael Casey, Avi Feldman, Hassu, Nick Carter, Ryan Selkis, Preston Pish, Luke Gromman, Jeff Booth, and a clip from CNBC's squawk box between Joe Kernan and Chimath Polyapatia. This episode is written and produced by NLW, announced, scored, and executive produced by Adam B. Levine and edited by Rob Mitchell. If you have any questions or comments, email us at podcast at coin desk.com, and stay tuned for the last installment in our continuing story. Second bailout for banks