The Pomp Podcast - #1007 Nic Carter On The Systemic Issues In American Financial System

Episode Date: June 16, 2022

Nic Carter is a Partner at Castle Island Ventures and is a Co-Founder of Coin Metrics In this conversation, we talk about the Bitcoin price crash and all the factors that have led up to the crash. Nic helps to break down Celsius & stETh, discusses why Bitcoin may no longer be an inflation hedge, and why the price of Bitcoin may continue to drop due to selling by miners. ======================= Bullish is a powerful new exchange for digital assets that offers deep liquidity, automated market making, and industry-leading security. Combining the innovations of DeFi with the regulated environment of traditional finance, Bullish empowers users to trade with certainty and earn passively at scale across variable market conditions, in an environment backed by multibillion-dollar liquidity contributions from the Bullish Treasury. Visit bullish.com/pomp today to learn more.   Note: Bullish is licensed by the Gibraltar Financial Services Commission. Virtual assets and related products are high risk. Consult your investment advisor and trade responsibly. Bullish is available in select locations only and not to U.S persons. Visit bullish.com/legal for important information and risk warnings. ======================= Since 2018 Copper has been at the forefront of institutional digital asset development.   From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world.    No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co   Copper - the unfair advantage. ======================= Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting. Compass was founded with the goal of making it easy for everyone to mine bitcoin.  Visit http://compassmining.io to start mining bitcoin today!  =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Nick Carter is a partner at Castle Island Ventures and also a co-founder of Coinmetrics. In this conversation, we talk about Bitcoin, the various aspects of the crypto market, macro environment, the Federal Reserve, many of the bears, and also how he is looking to the future. I really enjoyed this conversation with Nick and hope you guys enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. This episode is brought to you by Bullish. Bullish has reinvented the digital asset exchange.

They give you access to DeFi features like automated market making and liquidity pools all in a regulated environment. It's a whole new way to generate alpha. Seems like something that game changing should be making some noise, right? Well, bang, bang, it is. Bullish's total trading volumes have exceeded $25 billion, just seven months since it launched in November. And in May, they exceeded $2 billion in total daily trading volumes for the first time. That's obviously massive. So why all the traction? Well, get this. Bullish offers the deepest liquidity on the planet for the Bitcoin to USD market. That's right, deeper than any other exchange in the world, according to Bullish. With a recent upgrade, introducing range bound liquidity to its hybrid

order book, Bullish has tripled order book depth for BTC USD trading pairs. And measured by bids and offers within 2% of the market price. This industry-leading order depth means you can trade confidently when you want at scale with better pricing and lower risk, all within a regulated market environment. Good reasons to be bullish. Learn more at bullish.com slash pomp and follow at bullish on Twitter today. Bullish is licensed by the Gibraltar Financial Services Commission. Virtual assets and related products are high risk. Consult your investment advisor and trade responsibly. Bullish is available in select locations only and not to US persons. Visit bullish.com slash legal for more important information and risk warnings. Today's episode

is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset development. From award-winning custody solutions to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services in lockstep with a rapidly changing world. No other infrastructure provider covers as many assets across as many exchanges with the speed and security that Copper can offer. To learn how Copper helps the world's largest institutional investors secure their digital assets, head over to copper.co. Again, copper, the unfair advantage. Check them out at copper.co today. Next up is Compass Mining. Compass Mining is the world's largest marketplace for mining hardware and hosting. With Compass,

everyone can mine Bitcoin. Their team makes it easy to start mining wherever you want, at home or in one of their 23 hosting facilities around the world. Through the Compass marketplace, retail miners can access mining hardware with similar prices and purchase plans as the world's largest mining companies. Compass miners own their machines, they choose whatever mining pool they want, and they mine directly to their own wallets. Miners who don't want to host their machines can order ASICs directly to their doorstep. Simple and low cost hosting agreements coupled with best in class customer service are the reasons why Compass is the simplest and most popular way to mine Bitcoin. Start mining your own Bitcoin today by visiting compassmining.io. Again,

compassmining.io. Go check them out and let me know what you think. of his personal opinion. This podcast is for informational purposes only. Ladies and gentlemen, boys and girls, the Fudbusters here. What's up, Nick? I'm so underdressed. What's going on here?

I didn't know it was suit day at the office. This is the suit and tie that broke the bear market in 2018. So we're wearing this until the bear market's over. I already hate it because I'm on day two. We'll see how long it goes. But as you can see here, you know. I thought it was like, you know, now that crypto is dead, we have to get like normie jobs again.

and we got to wear suits i don't think that i could do that at this point i think people would be like all right uh you have a lion's not sheep hat on though that's right yeah we're not we're not capitulator yeah we got suits hats whatever y'all need careful we may have to sell the suit and the hat if uh things keep going uh let's start with uh bitcoin in general it's continued to bleed down it was 69 000 in november it's like 20 000 today uh if you go on the internet half the people are crying and screaming the other half are posting memes what's going on yeah it's shocking i honestly i didn't expect it to uh to get this low um i think it's just a huge amount of leverage is being flushed out of the the crypto industry right now obviously it's um

you know terror kind of kicked it off and then you sort of like get these cascading uh failures um a lot of a lot of people thought there was sort of a daisy chain of risk and between DeFi, centralized lenders and then sort of like these origination sources of risk like Terra that's happening you can trace a causal chain from the blow up of things like Terra

to Celsius, to certain funds that are impaired to some of the larger lenders in the space so Bitcoin is implicated in that Bitcoin is sort of, you know, key collateral in the system. And as you have these forced liquidations, you just, you know, you never want to be a forced seller, but that's what we're seeing a ton of for selling right now. And so a lot of this just goes back to leverage in the system and leverage exists in the legacy system. It exists in this system as well. Are you surprised at how well the system has stood up to liquidations, people selling? In some cases,

we've seen people have to sell, you know, 80,000 Bitcoin or whatever it is. If this was the legacy system. I would think at this point there would be bailout talk and government stepping in. There's none of that in Bitcoin and crypto land. I was just joking last night. I wish we had a lender of last resort. Don't let the TradFi people hear us say that.

Frankly, actually, DeFi has held up really well, I'd say, in terms of performing in an orderly manner. I initially was impressed that the crypto industry as a whole was able to weather the Celsius or not Celsius, the Terra blow-up

which evaporated around $60 billion in nominal value without too much knock-on effects but then it looks like we're seeing those knock-on effects now with the delay. I think there was a huge, huge amount of leverage built up both in DeFi and the CeFi corners of the market and we're really, really suffering with that overhang now.

It doesn't help that financial conditions are about as tight as they've ever been. You know, I think the Fed is probably going to have to reverse course here at some point. And they're sort of posturing, you know, being like the Volcker and, you know, really sticking it to inflation, stuff like that. So it doesn't help. It's really a perfect storm. So when you look at that perfect storm, obviously we have the Fed, which said a couple weeks ago, hey, we're going to do 50 basis point hikes in June and July. That was kind of their signal. Now there was a leak two days ago that they may do 75 basis points in June, which many people read into. That'd be June and July.

They have started to conduct quantitative tightening. What's your read on like the Federal Reserve? They're in control and just the more aggressive they are, we should expect asset prices to sell off. I think they're in the opposite of control. I think they are in a really tight spot here. fundamentally, if you zoom out a little bit, the Fed can't raise rates to whip inflation here without basically bankrupting everything.

There is so much debt in the system, both at the sovereign and the corporate level, that if you allow rates to rise, people become insolvent really quickly. And you could say crypto is a canary in the coal mine there. So if you look back at the 1970s, when it was the last time we had inflation this bad, Paul Volcker raised rates to 20% or thereabouts.

And that was a contributing factor in containing inflation. Now, if you raise rates to 5%, the U.S. government would default, right? Because our debt-to-GDP ratio is 120 as opposed to 30 as it was back then. And our deficit is around 7% this year as opposed to 2%, 3% as it was back then. So the system cannot tolerate rising interest rates.

So I don't actually believe that the Fed can sort of carry out their stated agenda. I know they're talking really tough and they're posturing, but I think what's actually in store for us is something more like yield curve control, which we're seeing in Japan right now, where you're capping yields at a very low rate and you're printing unlimited amounts of fiat in order to cap those yields. Because I don't think there's appetite for cutting entitlement spending or defense spending or anything like that.

So I'll stare you out of the picture. And I don't think there's appetite for default, obviously. The U.S. government's never going to default. So the only thing that we can actually do here is actually an inflationary pivot here. Now, I don't know what the effect of that will be on asset prices, but things are already breaking in the financial system. If you look closely, we're seeing basically any macro chart that you look at, whether it's two-year treasuries, whether it's the price of the yen,

whether it's mortgage-backed security market, all of these things are showing enormous stress, and the rapidity of these moves is breathtaking. So I think the Fed is actually going to be responding to that. some commentators say they have a shadow third mandate, which is the orderly functioning of the bond market. As that bond market starts to break, and it is breaking, in my opinion, if you look at a lot of these indicators, they're going to have to revisit their sort of proposed agenda here. A couple of weeks ago, I was talking to folks and I said that while I would not bet on

it, I do think that there's an outsized chance that we will actually get a rate cut before the end of the year. Is that your viewpoint as well? Or how do you think about like where this goes through the end of December. Yeah, I share the view of commentators like Zoltan Pozar or Luke Grohman or Lynn Alden that basically it would be genuinely impossible, especially in an election year, for the Fed to keep hiking here

because that crushes asset prices, that reduces tax receipts. Tax receipts are basically a function of asset prices now. It crushes the economy and it's basically sending us not into recession territory but into depression territory right now if they continue on their sort of trajectory. So I don't believe that they're going to do that

because that would be an insane thing to do. And I believe that they'll reverse course. I think they just started reducing their balance sheet as of a couple days ago. Fundamentally, I don't think the U.S. can even handle 4% rates here. It's just the amount of debt and leverage that's built up is so, so considerable.

If you had to pick an over-under, how high they get before they reverse course, Is it like 2%, 3%, 2.5%? I would say the reversal will come no later than Q4 this year. Q4, yeah. ECB holding an emergency meeting, I think, last night or this morning. How do you read into like other central banks, right? Obviously, the ECB said, hey, we're going to keep rates negative.

We don't care what the Fed's doing. We're going to kind of break from them. Then they reversed course and they said, oh, actually, maybe we'll go back to kind of 0% interest rates and we'll follow. Now they have emergency rate meetings. It just seems chaotic. What are these other central banks thinking in regards to the Fed? Yeah, I will admit I'm sort of quite parochial, so I'm mostly a Fed watcher, and I don't really understand what's going on in Europe.

It just seems insane. I would say fundamentally Europe's problem is that they have an energy crisis, and sort of like everything follows from that. The other problem is that they're trying to unite all these disparate economies under a single monetary policy, which doesn't seem to work and ends up just being highly, you know, leading to inegalitarian outcomes, and they've got this one blunt weapon. The central bank, you know, aside from the U.S. I'm watching right now is Japan. They're imposing yield curve control, right?

So they're capping yields, I think, at 25 basis points. and even though they have unlimited funds to keep the pressure impose that ceiling on yields incredibly, I think it traded above 25 basis points a couple days ago which is crazy because you're trading in something with infinite ammo, the printing press

and the yen is depreciating enormously rapidly as a consequence of that So that kind of is a – I think that's a glimpse into our future is yield curve control, keeping rates low in order to keep the government solvent, and then the exit valve is the dollar. Yeah, and so when you think about this, inflation obviously at 8.6%. I think they thought it peaked in March. April looked like, okay, that narrative was going to stick. Now we kind of accelerate, hit a new 40-year high.

Do you expect like price controls as well? like you're talking about yield controls and all that but like if inflation continues to run up we've already seen politicians talking about price gouging or corporate greed etc like argentina's got plenty of price control should we expect that in the u.s at some point yes yield sort of control is the ultimate price control right um you're trying to control uh what the market thinks about the solvency of the biggest borrower which is u.s government so that alone is a price control to impose it if you want to look at history when did we last have it we had in the 1940s when we were dealing with basically a similar situation.

Enormously high debt to GDP. We'd just fought a war. We had that sort of overhang of huge, huge deficits. We'd had zero rates before that. So it was a similar situation. I think the 40s is your analogous situation, as many commentators, including Lynn Alden, have been saying. And what was life like in the 40s?

Well, there was rationing, right? You could only buy so much sugar and flour. You know, that's kind of the world that you want to look to. There were capital controls, right? And that's the thing with yield curve control. You can't just impose it. You have to really restrict where people can put their savings. You have to force financial institutions, endowments, pensions, banks,

you know, mutual funds to hold treasuries. You have to force them to hold it. Nobody wants to hold them, right? They're a toxic asset. That's what monetary repression is. You run inflation hot and you keep interest rates low. the government's able to reset its balance sheet based on that delta, but the way they do that

is by forcing savers to hold these terrible negative yielding government debt instruments. So you create that environment of monetary repression by determining what people can and can't do. Gold at that point, you couldn't hold it in the 40s, it was illegal. And so I expect that. I also do expect price controls

because you're looking at an inflationary environment Governments are going to react with these crazy short-term measures. We just had Biden this morning, I think, asking oil companies to explain why they're making so much money. So it's like crazy town out there. And yeah, I think you're going to look at stuff that you see typically in emerging markets. You're going to look at the government trying to deal with these symptoms

and not the underlying cause. What should the Fed do? Like I get that they are responding to current economic situation. I get that there is an implicit political pressure given that there's midterm elections, but they claim that they are independent and not aware of that. There's also a claim that they don't pay attention to asset prices and can kind of stomach whatever happens there. But what do you think is like the answer for them? Or is there actually a situation where it's like lose-lose and they don't really have an option? It's pick the best of the worst options.

Yeah, we're dealing for our historical mistakes here, right? So we've had like 70 years of debt accumulation. We've been on pure fiat for 50 years. The whole system is highly leveraged. We're at the worst sort of solvency position since World War II. The Fed doesn't really have a choice. So it's not really what should they do. It's just what are they going to do, basically.

So if I were the Fed, I would quit posturing about trying to vulgar it, which is just literally not possible. And I would opt for yield curve control right now, which we have to take our medicine, basically. It's like nobody ever wants to deleverage. Nobody wants to declare bankruptcy and no one wants to pay down their debt, but you have to, right?

So that's what we are going to have to do. Run inflation hot 20, 30% for a few years. Get to debt to GDP down to 60, 70% back to a normal historical level. But the consequence of all that is inflation is going to be just catastrophic like you think it's bad today yeah catastrophic when you think about that environment um we've seen many people uh with access to data sets that the government may or may not have access to you know take jack dorsey's probably the the most well-known one

saying hey hyperinflation you know essentially is happening uh the situation you just described is um to essentially cap their ability or kind of handicap their ability to use certain tools that central bank has available to them and really just let inflation run wild and in that environment if the official numbers show 20 right which sounds crazy until you're like well it's only two and a half times from where we are right now uh unofficial inflation and certain people in the economy may be experiencing 50 inflation at that point uh that's argentina right i mean like like this is a very serious situation is that like your base case at this point or is that still something that's an outlier and you think that there's kind of this like soft landing that they keep pointing to no

No, no, no. Soft landing is completely impossible. There's no precedent for hiking into a recession successfully, right? And it doesn't happen normally. That's where we're going. We're hiking into a recession. You're making financial conditions extra tight as the economy is slowing down. It's like ludicrous. Why doesn't the mainstream media or like the legacy finance world,

why don't they see this, understand it? Is it just like they're repeating the talking points of the Fed? or is there some divergence of understanding the financial system from, I'll call it the Bitcoin community and the non-Bitcoin community? Because it feels like Bitcoin is all like, yeah, this is so obvious, but I don't hear that from the other communities. I would say the press, for the most part, the corporate press, they're just stenographers of power,

so they're just repeating effectively what the press secretary and the government tells them to. That's their job, is just to communicate Washington's dictates. I'm seeing defections in some corners of the MSN like the New York Times wrote an interesting article recently saying, hey actually inflation is probably undercounted and here's why, and I'm like oh my god they admitted it, we were right

and we have been and continue to be right inflation is undercounted, they changed the methodology for inflation to include owner's equivalent rent instead of looking at actual house prices if you do incorporate that, inflation is double digits right now so you're seeing defections actually in the most sort of like regime proximate uh news sources which is really interesting so they're kind of breaking ranks i have a theory as to why uh we're going to start seeing more of this and we have started to see a couple is uh one of the groups

of people who actually are not allowed to have investments are journalists right and so if you are essentially given artificial capital controls by your employer that says you have to stay in cash or cash equivalent type assets, uh, you get screwed the worst. And so there's almost this, uh, sensitivity, like how much pain will you take before you quote unquote lash out and lashing out is writing an article that says, Hey, everyone wake up, right? That this isn't real. This isn't the accurate number. And so I was surprised when I saw it, but in hindsight, like that's actually a group of people that are going to get hurt the most here. And so I wouldn't be surprised if we see more and more people kind of defecting from the mainstream talking points.

Yeah, show me the incentive and I'll show you the outcome, right? The author of this particular piece in the New York Times when it was notable is Jenna Smielek, I think. She's the chief Fed writer at the New York Times. So if even the top economics correspondents at the Times are saying, hey guys, yeah, actually, you know what? CPI does undercount inflation. We admit it.

That's a sign that something's deeply wrong. I think people are seeing now, you know, the Fed has acknowledged they made mistakes. They were wrong. You can't deny that, right? These people look like, you know, this like inviolate priest class where they're just handing down knowledge from the heavens, right? Their inadequacies have been exposed, right? They have been wrong. There's no denying that they've been wrong.

And I think you have to admit it at this point. I think that's part of the problem is they don't have credibility. When you see that the Fed is in this position, you can go look and there was articles that said inflation is good because wages will go up. I think emphatically you can look at the data. Real wages went down. Inflation adjusted average hourly wages in America

have been down for 14 months, right? How bad is it for like the average person right now? Official inflation is 8.6%. Average hourly wages are down. Like just what is the pain? How do you think about that? I think people fixate on measures of inflation like CPI like this and they forget what we're really talking about,

which is how much can our fiat currency buy us in terms of real world resources. The Fed's theory is basically we can induce demand destruction, we can lower asset prices, and we can get inflation under control by literally destroying our ability to spend. They think a lot of it has to do with asset prices, which is why they want stocks and crypto to go down, actually.

because then you're going to spend less if you feel poor. That's like someone compared it to giving yourself a root canal with a shotgun, basically. Decreasing everyone's aggregate wealth in order to reduce inflation. The thing is that might work in the short term, but the problem is in the long term, the reason we have inflation is we have

a real world resources commodities crisis. We have deglobalization. We have a shrinking workforce, and we have an energy crisis. If you can't cheaply extract natural gas out of the ground, that's going to be inflationary. The 2010s were disinflationary because we had this shale boom. There was tons of abundant energy. That's over, that time is over.

It's politically difficult to extract oil and gas from the ground. The world is at war, the world is fragmenting, deglobalization is occurring. These are secular long-term trends. They're not going to change. So even if you do have lots of demand destruction and you sort of temporarily get inflation under control, the core underlying trends are not changing. That means we're in for inflation for the foreseeable. It won't change. There's a lot of folks in the Bitcoin community who said Bitcoin was an inflation hedge. It was at 69,000. It's at 20,000. Inflation's at 8.6%. Is Bitcoin an inflation hedge?

It's definitely not a hedge, I guess, at this point. I'll admit it. However, has anything about Bitcoin changed? No. Has the monetary policy changed? No. Is it unsound in any way? Has any feature of the Bitcoin system changed? No. Are the fiats of the world debauching themselves? Yes. Unquestionably, yes.

Will they continue to debauch themselves? Yes. And these are the most credible fiat currencies in the world, and it's just total, total chaos out there. So yes, has liquidity and financial conditions affected the price of Bitcoin and all other cryptocurrencies? Absolutely. Does our monetary system, the Bitcoin monetary system, does it look more or less credible relative to the outside?

More credible, relatively speaking, because everything out there, we're looking at a wave of sovereign defaults. We're looking at massive devaluations, probably a lot of these weaker emerging market currencies. When the dollar rallies, emerging market currencies die, a lot of these currencies are going to fail, they will cease to exist. The dollar is at generational high level of inflation will go higher. The yen is, you know,

experiencing a collapse, basically. So from my perspective, and I know this sounds like I'm denying reality or something, our system continues to be sound and work perfectly. And I think it looks better, relatively speaking. I obviously agree. One of the things that I think about that I don't hear a lot of people talking about is that if you go back to March of 2020, there's a liquidity crisis. It was a very sharp liquidity crisis and kind of very severe in the sense of they ordered everyone to go home. You had got the velocity of money to slow down. People panicked. There was uncertainty, public health, all these things. And so correlations of all assets trend towards one in those moments. This is also a liquidity crisis. It just is drawn out over

eight months now. And I wonder how much of Bitcoin's price and kind of the divergence from the value, we see hash rate at all time highs, we see, you know, lightning network capacity, growing adoption, all these underlying fundamentals and metrics. How much of price right now is just simply correlations going towards one in a liquidity crisis, and we should expect a decoupling of Bitcoin to other assets, you know, as we come out of this? Yeah, I think it'll happen. And conventional wisdom is that, you know, the Bitcoin risk asset correlation is going to stay high forever. That's crazy. I remember when the Bitcoin risk asset correlation was zero. And I also thought it was crazy. I'm like, no, it's probably going to increase because

we're having a more institutional holder base and things like that. If you now believe that Bitcoin is going to stay correlated to stocks forever, you're also bound to be wrong. I think the analogy with 2020 is very apt. We rocketed off the bottom. Bitcoin moves first. Financial assets follow the lead, because Bitcoin is basically the most liquid market, informationally efficient in the world, in my opinion. What also happened in March 2020, bonds, treasuries sold off alongside stocks. That's not meant to happen, right? They're meant to be inversely correlated. So it's not just us that are dealing with the correlation issue. It's the 60-40 portfolio, where you have your stocks and you have your bonds. And in theory, the bonds rally when the stocks sell off and vice versa.

that didn't happen because now the world is reconsidering the prospect of the U.S. government defaulting. We're in for an advanced inflationary period, so bonds, people are now worried about them. They're selling off at the same time. So it's all asset classes that are having this correlation issue. In the last few months, there's no safe haven. It's not gold, it's not stocks, it's not value, it's not growth,

it's not emerging markets, and it's not U.S. treasuries, and it's not cash either. So there's no safe haven. Now, are we particularly correlated to risk assets? Yes, correlations are at an all-time high. But also, no one else has anywhere else to hide, and I think people are forgetting that. In particular, Treasury is selling off alongside stocks.

That is something to be very, very nervous about. When I asked the question about inflation hedge, obviously the critic will point to, well, it's at 69,000. Inflation is now at 8.6%. It's down at 20,000. It's not a hedge. But I think that the timeframe that you analyze this is pretty important. One of the things that seems to be completely forgotten is if you were to go back to January

1st, 2020, so kind of right before the pandemic really came to the United States, Bitcoin is up like 300%. It's drastically outperformed stocks, bonds, other currencies, commodities, real estate, just everything. How do you think about measuring whether something has served as a good inflation hedge or a good safe haven? and are there certain time frames that you tend to kind of evaluate these assets on?

Yeah, I mean, I think if you want to understand the nature of the asset, looking at short-term, looking at returns, looking at Sharpe ratios, looking at volatility, those are the wrong ways to determine what the thing is. To understand what Bitcoin is, you have to really think about it deeply and see that it's basically a synthetic kind of commodity

and you shouldn't make a determination to what kind of an asset it is based on three months of price performance or two years. You could do the same with gold. Gold is selling off right now. Does that mean gold is not a good thing to hold? Does that mean it's not a good savings device? No, it's a good savings device over long-term trends.

So Bitcoin is so new, so everybody's trying to look at price charts and its return profile. These financial abstractions, they don't actually speak to the core of what it is. What it is is a system where you can hold your wealth personally, secretly, confidentially, and nobody can interfere with it.

That's what it really is. And so, of course, yeah, there's volatility here and there, and that hurts, right? But that doesn't speak to the true nature of the asset, and I think people miss that. When you think about Bitcoin moving forward in this environment where you describe kind of yield controls, high inflation, do you expect Bitcoin to go down further?

Do you expect it kind of just to go sideways for a while? What's your expectation for the actual price of Bitcoin? We could continue puking here if there's further cascading liquidations, in particular the daisy chain of risk that we're seeing from some of these blowups. That's possible. I'm not ruling it out. If Tether fails, we could see another downward slug. I know there's a lot of fear out there in the markets about Tether. I personally don't subscribe to those bearish views.

all that said, if there's a massive inflationary pivot by the Fed, I think the Bitcoin will do well if there are massive sovereign defaults and the major fiat currencies start to die off which basically I expect to happen I think Bitcoin will do great and frankly as inflation picks up that will also help

I can't say it's a hedge and I can't tell you the time frame specifically but basically the thing I think about is for the next 10 years of my life, what would I rather own? Like dollar-denominated assets, stocks, where the price-earnings ratios are still in the 30s. Do I want to own government debt, which is negatively yielding in real terms? Or do I want to own this asset, which is a synthetic commodity,

which is finite, which I understand very well, which is held by hundreds of millions of people worldwide? To me, I want to hold the Bitcoin. And yeah, my portfolio is going to look crazy. It's going to be all over the place, like it is this week. But, you know, ultimately, to me, what really matters is the true nature of the asset and how it does alongside rapidly depreciating fiat. You talked about liquidations and some of this cascading risk. Explain what your thoughts are around Celsius and some of this kind of staked ETH.

Those seem to be the two most urgent, you know, kind of current events that people are paying attention to. How do you view those two events, you know, given the price movements? Yeah, and I want to give credit to a few people that were really loud about Celsius and the risks there. Corey Clemenstein in particular, Mike Alfred, I think they were correct and they did warn people and I think they probably saved people money. And I was actually looking at my DMs today,

there were a few people DMing me, they have stuff like, wow, you saved my ass, dude. And I look back at the chat and it's because they asked me about Celsius and I said, it's probably not sound. And I'm not here to trash anyone's startup or any protocol on crypto, but it was known that Celsius was putting client funds in DeFi. And we knew that because they kept losing money in DeFi hacks.

So that was fully known. And so they were pursuing the riskiest strategies possible including putting funds in Anchor which was sort of not a sustainable thing. And so based on that we kind of knew that something all was not well. So it was kind of foreseeable. What I expect to happen with Celsius

is some kind of administration receivership, some sort of orderly bankruptcy proceeding where we're going to find out who's a secured creditor and who's an unsecured creditor. Unfortunately, the retail depositors at Celsius are unsecured creditors and they're not going to get 100% of their stake back, if I had to guess. That's going to take a while.

That's going to be like the Gox proceeding, the Quadriga, the Cryptopia. Those would be your templates to understand how long this is going to take. Ironically, that means it's going to lock up a lot of coin for a while. So that might be sort of like conditionally positive. The problem is that these lenders are all interlinked.

They all have relationships with each other. It's not clear what the causality is between a Celsius, a Terra. We know that obviously Celsius had funds in Terra. They were able to withdraw them. But that probably also sparked a bit of run on the bank because people were like, holy crap, they were putting client funds in Terra?

What else are they doing? So we know there's sort of a relationship there. We don't necessarily know the causality of one caused the other. Celsius might have actually caused the collapse of Tether. So it could go both ways. But yeah, all these big intermediaries, they have relationships with each other.

And so one of them failing kind of causes defaults with another one. And I think that's actually what we're seeing with the price action today. You're seeing people are chasing the stops, they're trying to induce liquidations, trying to make these people become forced sellers. That's all happening right now. That leverage is flushing out of the system. But yeah, I think we also probably have some ways to go there.

How do you respond when I see people talking online about almost like this like gamesmanship or this like, I think I saw someone describe it as like PVP between a lot of these traders and trying to figure out where the liquidation points are. Do you feel like that's definitely happening kind of behind the scenes that there are almost these sharks or predators in the market looking at the order books trying to figure out where the liquidation points are? Yeah, completely. And that's the funny thing about DeFi is it's basically all public. And that's sort of not something you want. I like the transparency of DeFi it's all on the blockchain, it's great obviously founded a blockchain analytics company

so I enjoy that from an analytical perspective but from a trading perspective the thing you never want to do is to tell the person trading against you where you're going to be liquidated that's the worst thing because they're going to make you a forced seller at that point

because they know exactly what the threshold they have to hit to screw you over and so I think that's actually a big part of the problem here is that Celsius had so many positions in DeFi they're basically one of the largest entities providing liquidity to DeFi and they're levered, they have leverage they've got these big maker vaults and things like that

so right now the dynamic is you have funds chasing their stops and it's all known including some of these other funds that are experiencing distress it's the same thing there's lots of great analytics services out there that it can use to determine where these funds become for sellers. So that creates this crazy dynamic, and that really adds to the volatility. What about staked ETH, or STETH, as many people see it online?

Yeah, I think it's trading at, what, $0.94, $0.95 on the dollar now. So the problem is when you have these instruments that people think are pegged to something or are fixed in price that aren't. And that was the problem with money market mutual funds in 2008. That was the real problem, because everybody behaved like they were. meant to trade at a dollar or whatever. That was the problem with UST

because people thought that it was secure and so they built financial products on top of it. And that's also the problem with staked ETH is because people thought it was always going to be worth one ETH. And they built that assumption into all these other systems. That was the problem. And staked ETH, if you understand the nature of a closed-end trust, for instance, like a grayscale GBDC,

you would know that it shouldn't be trading at par. There's one law, there's one axiom in finance which is axiomatic and true, which is no convertibility, no parity. Staked ETH is not convertible for ETH. It's only ETH that's convertible to staked ETH. It's a one-way peg. In some unknown amount of time,

it could be 12 months, it could be 18 months, that staked ETH will be redeemable for ETH after certain key sort of events happen. But it's not convertible today. So of course it should be trading at a discount. It's a closed-end trust. That always happens. That's the same with JBDC, basically.

And also there's a lot of uncertainty as to when the merge is going to occur and the schedule of unlocks for the stake-deeth. So naturally it's trading at a discount. It's just that people don't have an appreciation for these concepts. They think everything is brand new in crypto and there's nothing to learn from traditional finance, right?

And so that's the problem. And now it's another thing where the liquidation thresholds are known. So there's also an incentive to attack it. And there's all these entities that have staked ETH that treat it as equivalent to ETH and they now have to get out of the position. And the problem is they don't want to take a haircut

to do that, but they have to. So you talked about the transparency of DeFi. There's some downsides to it in terms of the transparency as well. But there's a whole group of people in the Bitcoin community that thinks we're going to take all the DeFi ideas, it's kind of R&D on these other chains, and eventually build it on top of Bitcoin, whether that's on top of Lightning or in some other capacity. Do you think that that's a realistic kind of path or outcome over the long

run for these DeFi type applications? Or do you think that actually we'll get kind of both, right? Because I think the Bitcoin community probably still keep doing this work. But do you think the other stuff kind of survives, if you will? Yeah, it's funny, because I was a co author on a paper that argued this recently with Ross Stevens and Alan Farrington. Night Egg published it. I recommend you read it. And the idea there was like, yeah, DeFi is deeply flawed and Lightning or Bitcoin is a stable foundation.

And I do believe that Bitcoin is the most stable foundation. We're seeing what happens when you build on an unstable foundation, like a Solana, for instance. People get really skittish about putting liquidity on there if the blockchain can go down. Kind of the same thing with Ethereum. There's a lot of questions about the merge and what it's going to look like, when's that going to happen.

And financial products, they need to be ironclad. They need to really work and be predictable. All of that said, I don't think you can deny that there's a huge amount of momentum built up in DeFi on smart contract platforms. I don't know how much TVL there is on Ethereum-based DeFi, but I believe it's in the hundreds of billions. Maybe it's less today, actually.

So that doesn't mean that there's value there necessarily. Like Terra had TVL in the tens of billions and if you were valuing Terra on the basis of that TVL, that was illusory. But I also don't think you can deny that there's this infrastructure that works and that ETH DeFi is a big head start. And also the culture is different, right?

Like Bitcoiners are generally not willing to do token-based issuance to subsidize liquidity in DeFi, which puts rocket fuel under your protocol whether it's prudent or not whereas you do see that in sort of Ethereum land or the other smart contract chains so I think Bitcoin itself optimizes for one thing which is really cultivating the Bitcoin UTXO set

and there's actually a bunch of decisions in the history of Bitcoin where you look back they actually didn't want foreign assets to be circulating on Bitcoin I think Lightning is an excellent substrate for stablecoin transactions So I'm keeping an eye on the Taro system and the potential insertion of stablecoins back into Lightning

because that's a very lightweight and data-efficient way to transact. And that's what stablecoin users want, is low fees. And that's why we see a lot of stablecoins on Tron. All that said, the sort of natively composable infrastructure that we see in established DeFi, I probably have a hard time seeing that built on Bitcoin, and that's sort of okay. You know, you can have Bitcoin denominated DeFi occurring on Ethereum via a virus wrapped Bitcoin product.

So I actually think that's sort of the more likely outcome is that, you know, Bitcoin ends up being bridged to all these other blockchains and they become a transactional venue for units of Bitcoin. Now, a lot of purists don't like that. They're going to say it's not real Bitcoin. But just realistically speaking, I think that's sort of going to be the outcome here. We've seen a bunch of conversation publicly from regulators, policymakers, Luna Terra situation obviously blows up. People start saying, hey, there needs to be more regulation. We've seen Senator Lummis and Senator Gildebrand put forward some legislation around how we should regulate various assets, what's security, what's not a security. What do you kind of evaluate the current regulatory environment? And do you think that we're headed towards significantly more regulation in the coming months and years? Absolutely. It's going to depend on what happens in Congress.

I think even a fully Republican Congress, let's say they win both houses in November, is still interested in crypto regulation because you get regulatory advances when people lose money. You look at the financial crisis of 1929, we got the SEC in 1934. You look at the dot-com bubble

and that financial crisis, we got Glass-Steagall after that. You look at 2009, 2008, you got Dodd-Frank. So you always get significant regulatory developments after a crisis because there's political will to do that. A lot of people lost money in Celsius. A lot of people are going to lose money, lost money in just like crypto generally.

There will be appetite for that. And you'll actually see the opinions of crypto market participants reflect this. People are evolving their views like, oh, maybe actually there should be some safeguards and maybe there should be some disclosure standards here. Like maybe the fully anarchic world is not the one we want. How much of that is – if you look at Bitcoin as an example, I've seen multiple studies. It used to be 100% of people who owned Bitcoin only owned Bitcoin, right? And that was because Bitcoin was the only kind of game in town.

Now one of the latest studies I've seen shows 87% of people who hold Bitcoin hold at least one other token. And that could be a stable coin or that could be something, you know, super risky and defy or whatever. How much of like the change in regulatory perspective of the industry is just like new people coming in who maybe didn't subscribe to the old viewpoint versus is actually a transition, people who used to think, hey, no regulation or whatever, they're actually changing their mind. And that's affecting kind of the overall industry perspective. Yeah, that's a great point. I mean, how many people worldwide would you say have exposure to crypto assets generally, like two, 300 million? I think that's a World Bank study.

a lot of those came in the last couple of years and for a lot of them their first brush with crypto was actually NFTs or it was something in the Binance smart chain or Solana ecosystem or it was a DeFi protocol those people I think will they're not necessarily the earliest adopters so they maybe didn't learn that much about key management

they didn't learn the sort of cypherpunk ideology or anything like that, we can't expect them to and they'll probably be much more open to the establishment of regulatory confines. Now, that's not to say there's no regulation in the crypto industry, but I do think that the holder base as it is today is actually probably more open

to some sort of regulatory imposition. Now, I hope that it sort of looks like the Lamas-Gillibrand bill as opposed to the Stable Act or something, or the Token Taxonomy Act. So I hope that we get it right, And I think we do have some of the right parties in Congress to get it right, and they're getting the right advice.

But yeah, I think it's inevitable at this point. I think it'll concern stablecoins. It'll concern crypto exchanges. I think the listing standards of crypto exchanges will change. They will have to change. It'll concern DeFi protocols. Right now, it's just gray market liquidity. Nobody knows who's trading with whom.

That's probably going to change, frankly. You're going to see more permission liquidity. And it'll concern token issuance, right? of course. Um, so yeah, I think it'll be really, really material and, uh, you'll see certain countries clam up completely and basically trying to outlaw crypto. Yeah. Talking about miners, obviously, uh, if we go back to kind of Q1 of 2021, uh, mining was 65% in China and spread out the rest, uh, throughout the world. Uh, China banned it. We had a migration to the United States. I think the U S now is over 30% of all, uh, hash rate globally. Texas has like 10%,

what are the ramifications of price going down for the miners and should we expect any kind of pressure from them or does this actually benefit them so this is another shoe to drop I hate to tell you all but public miners if you add it up go to bitcointreasuries.com

they've got like 40-50,000 bitcoin sitting there so they've got almost one teras worth of bitcoin there's a lot of bitcoin they have because the public markets rewarded the miners that accumulate a lot of Bitcoin and didn't sell it. That was sort of the metagame. Get as much Bitcoin as possible, don't sell it. So it's a pro-cyclical phenomenon.

It means that they make the bull market steeper and the bear market's worse. The same thing happened in 2018. Miners, I think the last leg down in 2018 or 2019 to 3000, I think that actually was miner selling driven. If you sort of like do the on-chain archaeology. Now, if you look on-chain, I know people say on-chain has no alpha or whatever.

Just look at it, guys. There's some interesting stuff there. Miners are selling. You don't have to look on-chain. You could look at the SEC blockchain or look at the SEC filings, right? The SEC blockchain. Yeah, it's all on a ledger somewhere.

So miners are selling their Bitcoin. They have a lot more Bitcoin to sell, and they're going to sell it for a number of reasons. a lot of them are out of business they can't afford their next payment they're just not going to exist in a year's time so there can be insolvencies there a lot of them are too highly levered

and they're not going to be able to pay their bills whether it's power or they're not going to be able to make interest payments and they'll be out of business a lot of miners will buy the now bankrupt miners they're going to buy it with Bitcoin on their balance sheet or cash but Bitcoin is a liquid asset that they have ready to go so there'll be a wave of consolidation

all that means is that a lot of the Bitcoin that the miners accumulated will be liquidated and this has kind of been my view since we saw the liquidations in 2018 is miners are this pro-cyclical force which I think is a very different view from the stock-to-flow narrative where the stock-to-flow narrative it doesn't incorporate what miner behavior really is and their actual behavior is

during the bull phases, they want to hold the Bitcoin. And then during market downturns, they're forced to sell the Bitcoin. And we haven't seen that completed yet, but I think we will. And so for me, that would be actually a bottom signal once they're done liquidating all their Bitcoins. How would you know that they're done? You could look on-chain, you can look at a lot of them are publicly traded, so you can see they'll have to announce it.

Yeah. And when you think about those miners, do you expect hash rate to come down as they're doing some of this some of them go out of business should we expect hash rate to continue to hit all time highs and grow what's your expectations there double whammy, hash rate can keep growing so as a miner the worst possible thing to happen is the price of Bitcoin to fall and hash rate to grow

because that means hash rate grows that means that your constant hash rate, your share of the pie is shrinking your amount of Bitcoin mined is less that's happening, continuing to happen and that's going to make it very very challenging to be a miner if you're not the most efficient. And so there'll be a big push towards efficiency, towards cheap power acquisition,

towards long-term PPAs, towards being vertically integrated so that maybe you own the underlying power asset. So I think it's healthy overall. It forces miners to find the cheapest power possible, oftentimes the most sustainable because solar and wind have no, you don't have to use fuel to generate those power sources.

They have no real sort of like ongoing costs once they're put in the ground. So I think it'll actually be a drive towards creativity among miners. But yeah, I think it's going to be a really, really challenging time in the public miner space. And I think we'll see a lot of consolidation. My last question is around geopolitics. We've obviously seen the Russia-Ukraine situation. There was a ton of crypto, not just Bitcoin, but all kinds of assets that were donated there. I think that was a positive story.

inside of the Bitcoin community, the El Salvador story, I think it's been a very positive kind of, oh, look what is possible. The Central Africa Republic, I think is the name of the organization, right? Has become very Bitcoin friendly, maybe. I'll say, I don't know exactly what they've done or haven't done, but they seem to be very interested.

How do you think about nation states and Bitcoin when the price is at 69,000? It sounds a lot better than when it's at 20,000, but we also have Bukele tweeting saying, Maybe I should buy more. How do you think about this? Basically, I think the Russia conflict that provoked the U.S. sanctions

and completely unprecedented kind of thing, Russia's 11th largest economy in the world, and we froze their central bank assets, which is the accumulated surplus of an entire nation. So basically an act of theft, in my opinion. Those sanctions are failing. They're not working, right? And so the moral justification for them is really,

it looks weak now. It's funny, I think the last time I was on your show was the day before the Russia invasion, I believe. Yeah, you were. And I'll fess up, I think I said Russia is not going to invade Ukraine, so I got that one wrong. A lot of us were wrong. But the sanctions to me was incredibly dramatic

and it meant that people are no longer trusting U.S. treasuries. Because if the U.S. is willing to do that to Russia, they'll do it to anyone. I mean, huge nation, huge energy. Everyone's dependent on Russian energy at the end of the day. So I think that's sort of the key geopolitical story is I think you will see nation states defecting from the U.S.-led order.

That, to me, is the big story of the decade here. El Salvador is doing that. Now, did they do it at the right entry prices? Maybe not. Central African Republic, look at their discourse. It's the same thing. It's all about a neutral monetary asset. Read the president's tweets.

He's on Twitter. They haven't verified him. President of the Central African Republic. He's a mathematician. He has two PhDs. He's not an idiot. No, he's an incredibly smart guy. Two PhDs.

How many heads of state have two PhDs in math? So he understands that if you look at what him and Bukele say, and actually look at what Russia has to say about Bitcoin, or Ukraine even, it's all about a neutral asset that can't be interfered with. Everybody benefits from that, including two belligerents on the opposite side of a war. Talk about money for enemies, right?

They're both saying pro-Bitcoin stuff now. So generally speaking, as the world's global reserve currency becomes highly, highly politicized, and it becomes our tool for strategic power projection, which is the way the US uses the dollar, people are looking for alternatives. So I do think this is the decade of sovereign adoption. The first few countries that crossed the threshold,

they probably took a bit of a loss on the price of Bitcoin, but long-term, if they hold the line, they treat it like long-term holding. I think they're going to be just fine. And I think the earliest adopters are still going to do great. I tend to agree completely that the neutrality seems weird because we've never seen that before.

We're not used to it. But at the end of the day, if you were to redesign a system, neutrality would be at the heart of it. Yeah, I mean, if it's a monetary network, you want a network where there's no political barriers to being a node on that network, right? The U.S. dollar network is highly politicized in so many different ways, at the sovereign level

all the way down to the individual level. The Bitcoin network doesn't care, And that's why it's a fundamentally better system. That's why it's going to win. Yeah, I could literally talk to you for like 20 hours. Where can we send people to find you on the internet? Twitter, Nick underscore underscore Carter. That's two underscores.

Don't get that wrong. There is another one underscore Nick Carter out there. Poor guy, he probably gets mentioned a lot. I don't know what's going on with him. Probably gets a lot of followers, people looking for you and get confused. And I will say I'm 50% of the way to the Nick Carter flippening against the Backstreet Boy Nick Carter. so um you know please help me out i want to become the number one nick carter in the world

he also likes cardano so that's another reason that you should follow me and not him should we should we have you both come on the show and do like a nick nick carter yeah i want to debate him yeah i want to debate him how long do you think he would last in a debate with you you know i think he's a pretty sharp guy he's he's a better singer than me um probably better looking you talk he sings and we'll see what happens um yeah so i want to face him down nick carter uh let's let's debate all right well thank you for coming in i think people learned a a ton uh there was people in the beginning here like who is this guy he's got great content so i think you're uh you're doing all right um and uh we will definitely have you come back again uh and no backstreet is not back

ladies and gentlemen so thanks so much take care talk soon thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more, and I'll meet you guys for the next episode. Thank you.