The Breakdown - Why Bitcoin Is Bigger Than an Inflation Hedge, feat. Dan Tapiero

Episode Date: January 2, 2021

Dan Tapiero is an investor and entrepreneur with deep experience in gold and bitcoin. In this conversation with NLW he discusses the new group of institutional investors coming into the space and why, for them, bitcoin represents much more than just a hedge against possible future inflation. Find our guest online: @DTAPCAP Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

It is possible that some of these institutions start to look at Ethereum as an allocation as well. I don't want to say it's a prediction, but if you ask me, like, what could be a surprising thing that could happen that people aren't thinking about? That would be surprising. Ethereum is not a digital gold. It's something completely different. The Northern Trust is going to custody Bitcoin and Ethereum. That means they have clients that want to buy both of them. 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 nexo.io and produced and distributed by CoinDess. What's going on, guys? it is Saturday, January 2nd, and we are back with the breakdowns end of year extravaganza, I guess the beginning of year extravaganza now, with Dan Tapiero. Dan is a serial finance entrepreneur with businesses focused on both gold and Bitcoin. He's extremely thoughtful with regard to what markets are actually telling us. He avoids ideology that distracts him, and I really appreciate that about him.

So let's get into another great conversation with Dan. All right, Dan, welcome back to the break. It's great to have you here again. NLW. Great to be here. So it should be a fun show. We're recording on $20,000 day, so moods are running high. Coinbase is broken as it's want to do. But let's start, I guess, even on a higher level than just that. What, in your opinion, was the most important economic story of 2020? Oh, I mean, I think that's an easy one. It was the central bank's response to COVID. And I think I've put it. posted a few times on Twitter, and I've definitely talked about this a lot, is that the expansion

in the central bank balance sheets and the increase in M2 in the U.S. specifically, I think it's a 24% year-over-year rate. And when you look at that chart, you see that in the last 30 years, M2 growth has been at a 0 to 10% range, and all of a sudden you have a spike up that is so huge and so fast, I think it changes almost everything, I think, going forward. And so I think investors need to really think in a different framework. And I think the framework is still developing, but almost anything that you used to think, I think, you have to think, has now changed. And, you know, bottom line is if you add up all of the fiscal and monetary stimulus that was done and try to put a value on it, you know, in, you know, this year, you're looking at an amount

over $30 trillion of stimulus was put into the world economy. You know, that's one and a half sizes of the U.S. economy injected into the world. So, you know, I don't think we even understand. understand yet what the ramifications are. It's not clearly inflation like some think, I don't think, but it may be. You know, we're not sure. But there's a lot of money floating out there and $20,000 a day, perfect day, I think, to discuss this kind of thing. So I think the way that you just described it is actually really interesting that people need to update their frameworks. And obviously in the in the Bitcoin space, we've been talking a lot about the, the kind of raft of new entrants into the space from Paul Tudor Joneses and Bill Miller,

the BlackRock CEO and CEO. We're talking about Bitcoin and, you know, kind of all these things have been happening. But you spend more time with this type of investor, you know, macro focused institutional investor than I think, you know, obviously we do. How widespread is that feeling, not necessarily of being interested in Bitcoin, but just a sense that our macro frameworks need to change? Is that kind of more widespread than just these folks who have come out with some big new Bitcoin position or some big new inflation hedge position? Well, I think it's starting. I mean, you see someone who I think, you know, is sort of has a little more of a traditional mindset in the macro world like Ray Dalio. And he still hasn't quite come around, quite come around to

But I would say, you know, I would say many of the macro hedge fund managers, portfolio managers, and also I would say more savvy institutional fund managers and asset managers. I think a lot of them, you know, have little bits of Bitcoin in their, you know, Coinbase accounts or their cracking accounts. but I definitely do not think that the allocation is large. I mean, think about this Paul Tudor Jones, who is really one of the sort of handful of most respected guys in that entire world.

He just came out this summer, right, with an analysis that he wrote up, eight pages. I thought very good. but, you know, really from a macro trader's perspective and as an inflation hedge, and you and I both know Bitcoin is something that's much bigger than that, the digital asset ecosystem that's growing up, the whole world of, you know, with stable coins and defy, all the Ethereum projects. It's a pretty big world out there that he's really not that plugged into or focused on. And so I think it's just the first. inning for those guys. You know, there's $3 trillion in the hedge fund business. The business as a whole, I think, is contracting. It's just the returns haven't been great, and a lot of the opportunities have been arbed out. But, you know, the top 1% of the guys in that business will always make money, and everyone will listen to them in the broader money management

world. So the Tudor Jones comments and the 8-page PC road, I think we're very, you know, very important, but it's just the first inning for those guys. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.i. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.i. Let me ask you a kind of a different slant on the first question. So we talked about the most

important economic story. What do you think was the most important economic story that people didn't pay enough attention to? So something that flew too under the radar? You know, I don't know if people didn't pay attention to it, but, you know, I think that there's a view that all of this stimulus will lead to inflation. And I think that that, you know, that was sort of at the heart of Tudor's paper, right? He has his gold and he has his Bitcoin and, you know, he's concerned about an inflationary scenario. But the data that's all coming in has all been the other way. I mean, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, posted something on Twitter last week about the Chinese CPI and PPI. And China is going to have positive growth.

They're sort of the strongest economy right now out there. And prices are still dropping. You know, U.S. inflation indicators, like a lot of people say the CPI is garbage or whatever it is. But if you look at the deflator, you look at, you know, PCE deflators, GDP deflators, all, you know, let's say five to 10 different metrics of inflation, they're not going up. So yes, there's maybe pressure on house prices in Greenwich because everyone's moving out from New York and maybe in, you know, Palm Beach and in Austin, you know, there are price pressures that are localized. But general price pressure, we've just not seen it. I think it's just, and I think that's sort of a surprise. I think people, now some people might say, okay, it's coming. That might be the case. Or other people might say, well, you have it in the equity market. Well, okay, but that's not going to force, you know, the Fed to change its policy at all. So I think just inflation, and that may be, that may speak to the point I made earlier about framework, a new framework.

And I don't want to see that we'll never have inflation, but the deflation that's coming out of technology is just extremely powerful. And I want to let you ask the next question, but I want to say one thing that I've noticed myself is very anecdotal, but I think it's playing out over the overall economy. And that is that productivity gains are absolutely gigantic. And what do I mean by that? Just as an example, you know, we're about to launch in the next month a fund called 10T Holdings. And I've been raising money for this fund for the past year and a half, okay? and I was supposed to go to Australia to meet a bunch of investors. And, you know, there were 20 investors down there through a friend of mine who, you know, he wanted to introduce me to.

Anyway, COVID hits. I can't go. I originally had planned to go for two weeks to do all the meals and, you know, go with colleagues, spend all the time, fly there. It probably would have cost me $50,000. What happened? August comes along. Everything's still closed. up, I do one Zoom call for one hour and secure a significant investment.

And so I think about all that time and energy that I would have had to use and spend and money and focus to actually, and then fly there. And all I had to do, really me, was just this one hour Zoom call. So, you know, I think that's replicated across the world. And I think that Zoom, the Zoom productivity enhancement is permanent. So, and I think that's part of the reason why maybe there's a, there is a, you know, a general cover on inflation as well. So again, that's sort of what I was talking about, like a new framework. I'm not sure that that's right, but it's feeling right to me.

Like, I feel like I may be doing five to seven Zooms a day, but the amount of the benefit that I'm getting, the output has exploded. So I think that's something that people are going to start talking about a lot more next year and the year after. You know, it's fascinating. I've had a lot of these conversations now. we're doing 14 of these kind of end-of-year interviews. Plus, obviously, I do the show every day and have talked about, I would say that the most common answer to the, as we move into the

vaccine era, what is coming back, what's a real long-term change? The most common answer to the real long-term change is the remote work thing, right? Because people have, we've shifted our habits in such ways. You're the first person who's put it in the context of productivity gains, which I think is really fascinating, especially if you, you know, you're kind of experiencing that productivity gain in the context of that investment meeting just from your perspective, think about the total hours lost or changed on their side as well, right? 20 investors times lunches, dinners, random meetings, feelings of forced socialization, like all of which could be really good, you know, you could have met one of your new best

friends there. I'm not diminishing any of the real human contact stuff, but you're talking about potentially thousands of hours spread across all these people to come to the same conclusion, or at least a a similar enough conclusion that there really is a lot of additional capacity to be deployed towards other things, right? Yeah, or towards the same thing, just 10x. Yeah. And I think, you know, to be fair, I think Kathy Wood, you know, Kathy.

I did a interview with her and Laura Shin a few weeks ago. I think she has some, she's mentioned this somewhere in her work or written something about this. more formally. You know, so I, I, I, I, I, I'm not, I don't think I'm first. I mean, but in this idea, but there, there's some work out there on it. She's really on the cutting edge of stuff. Yeah. So, you know, I would suggest people, you know, check out her website as well.

Yeah, we'll be, we'll be waiting for the ARC work productivity gains ETF next, I guess. It's not impossible. I mean, no, I don't think it's impossible at all. I'm only half joking. Yeah. All right. So another question, I guess, kind of reflecting on this year. What when all was said and done was the biggest story in Bitcoin or cryptocurrency?

You know, the funny thing is, is that every week it seems to change. You know, it really, you know, there are so many. But from my perspective, where I sit, coming from the institutional money management world and as an entrepreneur, look, I was very surprised at the mass mutual allocation. And, you know, of course, the tutor piece was important. And, you know, of course, you know, PayPal through Paxos onboarding 350 million people, that's important. You know, grayscale's ramp up. But for me, really, the fact that a very traditional insurance company is allocating to Bitcoin is just way out there. I mean, you know, I don't, you know, maybe they're thought leaders in their space.

I have no idea. But there certainly historically have not been ahead of some of the, you know, very well-known investors in the world who don't have any allocation. So I was really surprised, and that is going to be a super signal for, I don't want to say, all the other insurance companies, but I think, you know, they're all doing their work now and trying to figure out what is, you know, what does mass mutual see that we aren't? And what I think really will drive a lot of Bitcoin gains in the next, you know, five years plus, not really so much the move out of gold because I don't think institutions own much gold at all.

I mean, I think the number is something like one to two percent of their portfolios. You know, I doubt most insurance companies have zero gold. So I don't think it's so much out of gold, but they do own a ton of government bonds. And when I mean a ton, I mean, in some cases, you're looking at 30 to 40 percent of their entire portfolio is sitting in government bonds yielding 50 basis points or 90 basis points or whatever it is. And so I think there's in the next five to 10 years the most important decision that all investors need to make in the 2020s is what to do with that massive allocation. Because remember, Nathaniel, that 60-40 portfolio has really performed very well going all the way back to 1981. And every single time that there's been a slowdown in the economy, world economy, or there's been a hiccup in the equity market, they've always had their capital gains from bonds and a yield to boot. And now that we're close to zero, if we have a slowdown type period, the bonds really can't go below zero.

And they don't pay you anything while you wait. So I think we have an entire massive asset class that is no longer relevant. It's no longer functioning. It's dead wood on institutions' portfolios. And I think gold, for instance, is the most liquid hedge asset that exists in the world. So I think there'll be some flow into gold out of bonds. And then I also think that there's flow out of bonds also into Bitcoin in a much smaller way, because I think Bitcoin, you know, is a much more asymmetric bet.

It's not just, you know, a hedge. I don't even really see Bitcoin. as so much of a hedge is, you know, as you know, we've talked about this, I think Bitcoin is much bigger than just a digital gold. I think it's, you know, this incredible invention discovery akin to the invention of the combustion engine, you know, or electricity, and that it will, you know, it will be the base layer, the value protocol for the entire internet eventually. And so, that's a lot more than just one asset. And you know, and people know I'm biased gold. Yes, I do own a gold company. And I think it has its role in an institutional portfolio. But as Tudor Jones says, Bitcoin will be the

fastest horse, you know, and if you're an individual or a retail speculator and you want to giddy up on the fastest horse and you don't want to have as much gold and you want to have more Bitcoin, that makes a lot of sense. But if you're a $250 billion insurance company and you're sitting with 30 to 40 percent in government bonds yielding 70 bips or even corporate bonds yielding 1.5 percent or whatever it is, you've got a real problem on your hands. And Bitcoin can help solve that a little bit, right? You're going to put 1 to 2 percent of Bitcoin maybe or 3 but you know, you can't buy 20, 30 billion dollars of Bitcoin like you can of gold. So I really like those two assets, but I, in my view, that it's really being driven by

this, this huge change in the fact that, you know, the second largest, or the second or even large, that this massive acid class has just become neutered. Yeah, that's fascinating. I think that's a really important context for how to think about these things, you know, and look at them holistically. This is, I mean, it's such a fascinating conversation. I think I could go a lot longer. But I guess just kind of to close out and maybe zoom forward a little bit, we already started heading that direction. But, you know, when you sit back and you look at 2021, what do you think is one prediction that only you have?

It is possible that some of these institutions start to look at 2026. start to look at Ethereum. And you have not heard anything about that, you know, as an allocation as well. And it may not be right. I don't know. And I don't want to say it's a prediction. But if you ask me, like,

what could be a surprising thing that could happen that people aren't thinking about? like that would be something that would be surprising, right? If, you know, and I just mentioned, so what I think is probably the, I didn't finish the question before, the most important bullish thing that's happened this year, it may be some news that just came out recently regarding Northern Trust. Again, I said Mass Mutual, you know, last week was the most important thing of the year, you know, to have an insurance company make that allocation. But the fact that Northern Trust, which is a very state, very traditional custodian, has

come out and said they're going to custody cryptocurrency. Now, they have $13 trillion in custody, of assets in custody and 1.3 trillion in, 1.3 trillion in assets under management. And so what could happen? Maybe, you know, and it's cryptocurrency. So they're custodying Bitcoin and Ethereum. So I think that that, you know, I think that if we start to see that, you might really start to have another leg under Ethereum. And again, Ethereum has outperformed Bitcoin this year. And is a lot of, you know, certainly there's a lot of rocket fuel there. I think the problem is just that it's so complex.

And yes, there's no specifically defined amount like $21 million. The supply seems to be under control. I don't know that it's in anyone's benefit to start flooding the market there. But again, it's a totally different animal from Bitcoin in my view. But if people really start to get deep into this new digital asset ecosystem, and I think that it's possible that we see that. And I think that would be very, that would be very surprising because the Ethereum is not a digital gold. It's something completely different.

And it's not, yeah. So you might not hear that much. So anyway, I'll leave you with that thought. Because if Northern Trust is going to custody Bitcoin and Ethereum, that means they have clients that want to buy both of them. No, I love it. So we're going to have to do another one of these conversations in a couple months to check back in.

Obviously, a couple months will feel like 18 years in the world that we have. but I appreciate you hanging out today. Super interesting thoughts and going to be really fun to see what 2021 holds. So thanks for joining the show today. Anytime. Thanks again.