The Pomp Podcast - #238 PlanB - Why Bitcoin’s Stock-To-Flow Model Is Becoming More Accurate Over Time

Episode Date: March 10, 2020

PlanB is one of the most notorious Bitcoin investors in the world. He has amassed a loyal and engaged following on Twitter and has popularized the stock-to-flow model that is widely cited throughout the Bitcoin community. In this conversation, Anthony and PlanB discuss his discovery of Bitcoin, what it took to feel comfortable enough to invest, how he came across the s2f model, why his team hasn't bought Bitcoin in their institutional funds, and why PlanB believes the s2f model is actually getting more accurate over time. CRYPTO.COM-----The only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users and download the Crypto.com app today to earn $50 USD using the code ‘pomp2020’ when you sign up for one of their MCO Visa Cards.  TAXBIT-----Refund-maximizing, cryptocurrency tax software you can depend on. Visit taxbit.com/invite/pomp and receive 10% off your tax plan today by signing up for a free trial. TRAVALA.COM-----Travala.com is the world’s leading blockchain-based travel booking platform trusted by thousands of customers worldwide as their preferred online travel agency. Book over 2 Million hotels and accommodations and pay with 25 cryptocurrencies or credit and debit cards.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Plan B is one of the most notorious Bitcoin investors in the world. He has amassed a loyal and engaged following on Twitter and has popularized the stock-to-flow model that is widely cited throughout the Bitcoin community. During this episode, Plan B reveals more about himself, including the fact that he's a member of an institutional investment team that manages approximately $100 billion in assets. In this conversation, we discuss Plan B's discovery of Bitcoin, what it took to get him comfortable enough to invest, how he came across the stock

to flow model, why his team hasn't bought Bitcoin in their institutional funds yet, and why Plan B believes the stock to flow model is actually getting more accurate over time. This was an incredible episode that I really enjoyed. But before we get into it, I want to talk about our three sponsors as well. The first is Crypto.com, a pioneering payment and cryptocurrency platform that seeks to accelerate the world's transition to cryptocurrency. They have a vision to put cryptocurrency in every wallet, which is frankly why we're all here.

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next trip. All right, let's get into this episode with plan B. My guy killed it. You guys are going to love this one. I hope that you guys share it online after you listen to it. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp

as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang, a very special treat today. I have Plan B with us. You have become a legend on the Internet, sir. Thanks so much for coming on and doing this. Yeah, thank you, Anthony. Thanks for having me. OK, so many people know you as the Twitter account that took the Internet by storm and

just started dropping tons of graphs and charts and all of this kind of intelligent analysis of bitcoin and bitcoin price etc uh but you actually have a real job like a day job maybe tell us a little bit about your background and then kind of what you do day to day uh today sure i can go a little bit further than i've done in the past uh so i'm a i'm a dutchman um which you might hear um i'm mid 40s and i'm an institutional investor so i have a day job um it's full-time job twitter There is an evening and weekend project for me. But yeah, the investing part is what I do. I have an economics degree and a law degree, economics in quantitative finance, and a law

degree in bank and financial markets law. Actually, my first job was at a dealing room in Germany where we did AVEX trading, and I got to know all the technical analysis indicators, which was really fun, and there were a lot of them. Actually, that was also when I experienced my first crash in 1998. The Asian Tigers went belly up, also Russia, I think, and some hedge fund, long-time capital management with all the Nobel Prize winners in it. So that was a frightening experience right then. And from there, I moved to banking and where I was responsible for asset liability management and capital management from a small bank. But it was a totally different

game from a dealing room where you were responsible for, well, maybe a couple of million at the bank it was a couple of billion and well yeah that's a couple of zeros but it also changes the whole game and yeah there I experienced the 2000 crash the dot-com bubble when it popped and also the aftermath with regulation in Europe that was Basel capital regulation vassal two at the time so we implemented that and and after that i i moved on to pension balance sheets so uh life and pension balance sheet and the fun thing there it's even bigger than bank balance sheets um so this was um a tens and even hundreds of billions of assets to manage a lot of mortgages in there so that was one of my my main assets

on the balance sheets did a lot of securitization especially with my legal background I was quickly drawn to structured finance so basically all the stuff that that you see in the in the big short movie that could be that was literally my 2008 year and yeah I really learned a lot of that because 2008, I think everybody who worked in investment and was close to the fire sort of knew what was coming because spreads were widening, and yeah, it wasn't a total surprise. What was a total surprise was what the central banks did after that, the quantitative easing that started and the very low

and even negative interest rates in europe so that yeah i i experienced that from from my job from on a day-to-day basis but it also also made me question uh the system and uh and it made me looking for for hedges and and and alternatives plan b's if you will for uh for uh for the assets that we had on the balance sheet. And that's how I came across Bitcoin. I actually read the white paper in 2013. It's a little late, but still it hooked me from the start.

But the price was, of course, very high at the end of 2013. It just went 10x and I didn't buy. And a year later, it was $100 again. So my first investment in Bitcoin, that was a private investment, not as an institutional investor, was in 2015. And that's also when I started lurking the Twitter accounts for information, just lurking information, not actively posting. My first post was actually the March 2019 article about stock to flow. and well yeah from then on it's it's it's uh it's yeah crazy um 70 000 followers yeah it's it's hard

to do it next to a normal job and uh but i i managed till now uh see where that goes for sure so one of the things i want to talk a little bit more about is uh you you said that in 2008 the housing crisis those who were kind of close to it saw it coming maybe explain that a little bit more um and then talk through the things that those uh who saw it coming what did they do um the kind of how they weathered that storm uh and then we can get into kind of what that might mean for uh potential situations you know today moving forward yeah well especially those close to the RMBS and the housing investment, the mortgage investments, they saw it coming.

Because, yeah, what you do is you chop up mortgages and you structure them in a way that results in mortgage bonds and you sell them. And the spreads on those mortgage bonds and what goes in those mortgage bonds was changing over time. So it went from very good quality to a little less quality to really bad quality, especially, of course, in the U.S. But as European investors, you could see sort of what was in there. And also you saw spreads widening, so the credit default spreads of a lot of those companies.

And if spreads widen, that means the risk is increasing. and something is increasing, yeah, something is going on. And you don't know what, but you know there's volatility coming. And I sometimes compare it because it's really easy to say that with hindsight. Oh, everybody saw it coming. That was close. But the feeling is a bit like today with the negative interest rates and very low interest rates in the U.S.

that you yeah you somehow know this is not normal you somehow know this can go forever but well yeah you have to invest and you you're you're part that's part of your day-to-day job and that was the same in 2008 got it and and so when you came across bitcoin coming out of that situation um you described a little bit about reading the white paper but was it a hey this is interesting, but no way it'll work? Or was there some other reaction that you had? Because I think that your experience, especially given a very high degree of knowledge and expertise in finance and institutional investing, et cetera, there's a lot of people in your seat who had the same reaction. So maybe talk a little bit about that. Yeah. I was hooked from the start, just

from reading the white paper so I've read the white paper I guess 10 times I couldn't believe what was there so it was really the white paper only that that got me into it and I was amazed by the elegant way that they that that Satoshi had to solve a very complex problem that many people have been going after for a long time, how to make a digital scarce good. I have to say scarce. Yeah, so digital scarcity, the fact that he succeeded in making that

with the computer program that he wrote and with the hashes and the cryptography and the proof of work. Yeah, that got me from the start. So that was the technical part. And immediately as an investor, you start looking, well, what's the return? What is something like that worth? And then even in 2013, you could see the major asymmetric risk return profile, which is just like heaven for investors. you don't see that very often and i know the volatility in the wild swings might scare the less experienced investor but especially the quant investors they'll know how to deal with the volatility if if the return is big enough and well if you're talking about bitcoin you're

talking about an asset with a sharp ratio bigger than one. And actually, I don't know of any other asset with a sharp ratio that's bigger than one, meaning that the return percentage is bigger than the risk percentage. And to give an example, I mean, Bitcoin can crash once in a while, then it goes like 80 plus percent down so that's the risk 80 percent but you get rewarded for that risk with a on average 200 percent return well that's if you calculate that and we'll talk about that later too for sure but that's that's an amazingly good risk return profile so that yeah And so you start thinking how to slice and dice that, how to structure that, how can we size investments that have less volatility, also less return, but keep this very juicy asymmetric risk return profile. So yeah, from a technical point of view, the invention of digital scarcity, as from an investor point of view, the asymmetric risk return, it was something I needed to know more about.

and um and actually that that was for me that was a very easy route i i never touched um things i shouldn't touch i never um got scammed or lost bitcoins uh i just followed the the the route that the uh the white paper uh laid down in the references there is of course adam back uh he is very active on twitter so i started following him and very fast you can see who he is following and and and retweeting and stuff so you got to uh nick zabo and and um andreas antonopoulos and and uh well all the uh all the bitcoiners and so so i took it from there and um Yeah, I think I'm in it almost 24-7 as far as my job allows it, but almost 24-7 ever since. I love it.

And so when you read the white paper in 2013, you didn't really do anything, you said, until 2015. What was kind of the logic behind waiting for two years, right? So you kind of intellectually got intrigued and curious. Was it a price thing? Was it something else? Why wait? Yeah, well, it isn't easy for someone to buy his first Bitcoin. Also for me, I had to figure out wallets and where to buy it and stuff. And it took me about a month to read and be ready to buy. It was, I think, November or December. But then the price was already up 10 times, 10x, I think in a month it was, one or two months.

So it's exactly those one or two months that I needed to prepare myself. And yeah, well, my experience tells me that then you're a little late and you might better wait for some better opportunity. Although I didn't have a stock-to-flow model or any other model at that time. um my my gut said just just wait a little and maybe this is yeah well i'm too late that was basically the feeling uh where of course a year later in 2014 when it crashed again to um 200 dollars and i thought oh whoa yeah well not okay a little bit more attractive then yeah yeah yeah i'm glad i didn't do it because it's dead and then it went from 100 to 200 and and uh from 200 to 300 and then i started thinking whoa it it went 2x from the bottom and it's rising again

this is the moment boom so i went in yeah that's awesome and so when you started to do that um obviously uh you've made an investment uh and hold bitcoin personally but for a day job you worked at, a fairly large institutional asset management firm or institutional investor. But you guys, along with pretty much 90 plus percent of institutions in the world, have not added exposure to Bitcoin. Maybe talk a little bit about that balance between your personal opinion and risk exposure or risk appetite, and then what you have to do professionally you know as a large institution and how you balance those two yeah uh that's a very interesting topic uh just to say up front um i'm not the only one who has bitcoin in the

company i think my boss has bitcoin um 90 of my colleagues have bitcoin especially the quants but also the investors themselves um and but there's a big difference between investing your own money and investing someone else's money, which is basically what we do professionally. If you manage someone's pension money, Bitcoin is not the first thing maybe you think about, although I think that could be a very nice fit. But the main classic assets that we invest in for pension money is, of course, fixed income assets like bonds, mortgages, consumer loans, everything with interest that you need for paying the pension. So think like, especially things like commodities, gold, and Bitcoin is like that.

There's no dividend yield. There's no return in interest. is not a very logical fit. And that's, I think, where a big difference is. And the other thing is the capital regime, the regulation. So you have a regulator as a bank, but also as a pension company. And regulators, A, they have a regulation that determines how much capital you have to hold for each asset class.

And the more riskier the asset class, the more capital you have to hold. So, you know, Bitcoin isn't even on the list. So it probably gets the highest capital charge that's there, which is okay because there is a return against it. But it doesn't really fit that regulatory capital framework. And the other thing is regulators, of course, the central banks we're talking about, they're not all that fond of Bitcoin. I think there are central banks that are more open to Bitcoin and cryptocurrencies. And I think the Dutch central bank is one of them, by the way. So they're very open, they're congresses, and they talk with fintech companies and with pension funds and banks.

They have a very large congress every year. No, it's not every year, but it's once every several years, and I went to one. So there's a very open discussion with the regulator, with the central bank, but it's not an easy fit. And it's also not something that is, yeah, how do I say that? A good topic to talk about in the meetings you have with the regulator. And that's also one of the reasons I'm anonymous, because I don't want my Bitcoin hobby to be of negative impact for my current employer. And yeah, the other reason, of course, is operational security. i think satoshi gave the perfect example there but uh yeah it's it's by the way one of my dreams

to uh to be the bridge uh between the exotic bitcoin world as it is right now and the more traditional finance world an investing world that i'm in with uh with my other leg um because yeah I think I'm in a perfect position to be that bridge and to start those discussions. So I've already started those discussions, which resulted in some people buying Bitcoin themselves, just to look, just to try, just to see what the asymmetric risk return profile

could do for them. And some are very happy, some are not so happy, but everybody's learning. And I think it's a matter of time before you see the first banks and pension companies that have a balance sheet that invests other people's money to go into Bitcoin. Although I do think that the first and the more easy candidates

will be funds. So the asset management part of the firm that we have, they have funds and people invest in those for their own risk so it's not our general account that that we bear the risk and that we have liabilities pension liabilities on that that will be the second step uh i guess the the fund business will be first got it and so when you think through um some of these large institutions coming into the space what are the arguments um or kind of talking points that you find are most attractive to them or kind of resonate the most versus maybe some that don't actually pique their interest? And the reason why I say that is because

I think the Bitcoin community in general, and this is more kind of the Twitterverse, et cetera, there's so many narratives, right? Is it digital gold? Is it electronic cash? Could it be both? All these things. What do you find that actually gets people to pay attention, especially in these institutional environments? Yeah, that's a good question. I gave a presentation for the whole team, including our chief investment officer at the end of last year about Bitcoin.

It was about a two-hour presentation, one-hour presentation and one-hour questions. So the main thing in the heads is So the picture they have of Bitcoin is shaped by mainstream media and the big financial media firms like Bloomberg. And you and I know how Bloomberg talks about Bitcoin at the moment. It's not very good. So they have this point of view that it's for criminals, that the government will ban it, that it's polluting the environment. And so they have a very negative view.

And I talked about, well, the things that we Bitcoiners talk about, things like it's an asymmetric risk return profile. It is an uncorrelated asset, so not a safe haven asset or negatively correlated asset, but an uncorrelated asset, which is better in my view. because safe haven assets go down where the other things go up and this thing goes up no matter what. So that and also, and that surprised me a little bit, the futures market at the moment.

If you look at the futures market for gold, for example, they are in contango, meaning that the future gold price is higher than the current gold, the spot gold price and and this is actually something that we do that we we do the cash and carry trade um with gold where you buy the gold and sell it um a month or a couple of months later for the premium but if you do that with gold you get one percent and if you look at bitcoin and

the futures on Bitcoin, you can earn 1% to 2% per month. So that's actually, yes, well, somewhere between 10% and 20% lately cash and carry return. So with very little risks, because everything is collateralized. So 10% to 20% cash and carry return on your investment. And that got some ice pops, and we had a lively discussion about that. Still having that discussion, by the way. Yeah, and so it's really interesting because when you mention gold, there's a lot of work that you specifically have done that I think people kind of point and say, oh, that applies to assets like gold as well. Maybe let's start with the stock-to-flow model, and you can kind of walk us through what is it, why does it work, and really how it works, so that people that have seen the charts really can kind of get the explanation behind it. Yes. Yeah. So, what I'm trying to do is shape the Bitcoin world and the investment view in terms that we're familiar, that we as institutional investors are familiar with. So, the Sharpe ratio that I already mentioned.

but the other thing that's really missing i thought that was missing was it was a fundamental model um and and and well that that's true for gold as well a little bit because there is no fundamental valuation model for gold other than um the cost of production of gold and and something similar was there for for bitcoin as well but uh for me that that wasn't enough so i i started actively looking for fundamental models uh for bitcoin and i encountered only technical analysis models and well having worked at dealing rooms technical analysis is nice and it's it's yeah it's kind of a language to to talk in the in the trader community and it describes situations etc etc but they they don't really well maybe i shouldn't say that but they don't really work

well all the time. And it's very difficult to at least mathematically or statistically benchmark them and program them in a way that institutional investors understand. Because institutional investors like banks and pension asset managers, they don't really use the technical analysis uh so stock to flow is a yeah it is it's actually an attempt to quantify the scarcity the scarcity digital scarcity invention that satoshi made and um gold was the nearest asset that i could think of and i'm following gold actively for years actually i am an old gold bug before i was in bitcoin and so so i knew about stock to flow as a ratio of the amount of gold that's there above ground right now and and the amount that's

produced uh every year and and in gold that's 60 around 60 so there's 60 years of production above ground and that's really high because for all the other assets silver palladium platinum it's it's it's really low even even close to one so so not very much stock uh so so i i was reading um safedina musa's book uh the bitcoin standard and and that he is talking about stock to flow as well but then in a bitcoin context so that made the click for me like hey i could use the stock-to-flow concept, that's a familiar thing in the gold community. I can use that for Bitcoin as well. And let's see how that calculates. So I made the model and calculated stock-to-flow for Bitcoin over the last years and, well, sort of correlated that, plotted that first against

the price and that was this very nice straight line in the logarithmic space so yeah from there it was a small step to go to the formula that that is uh uh familiar now um and and that's the stock to flow model um that that came out of there and that that is actually the first time i I had some anchor, some fundamental statistical model that I could rely on to say something intelligent about the price. And I was very happy that this model was verified by others, by many others, I might say. And especially the addition of co-integration that Nick from Australia did was crucial because I talked about co-integration in very different terms because I noticed from the model that every year the price of Bitcoin was below and above the model. It was very tied to the model. So every year it was above and below.

And in mathematical terms, in statistical terms, you can quantify that by co-integration, which is what he added. And that was really, if you want to know more about that, he did a podcast with Stefan Levera lately. Make sure you listen to that. And then later on, the model, when it was published, it got some real attention and others verified it as well. Guys like Marcel Burger from Burger Capital, but also Manuel from Bayern Landesbank and Mark from the Gold Fund Incrementum.

So it was really, I think, about 10 guys that checked the model and all came to the same conclusion, which gave real confidence. So, yeah, it was the thing I needed to take it seriously as a professional investor. And it was also something that could be replicated and checked by others. Yeah, well, that's another important thing. The only thing is that the outcome was rather, well, shocking. It was rather high because it predicted, like you all know, a $50,000 to $100,000 Bitcoin price after the next halving. And that, of course, yeah, it makes you wonder why that is, why it should be so easy to make a 10x on your investment that actually can't be possible. and it also makes you wonder why the model fits as well as it does so so i think that's the

interesting question and a lot of the discussion on twitter is going about that so first of all i think why does stock to flow work yeah because it measures scarcity directly like gold so you can sort of compare it with gold in stock to flow terms but also in in market cap terms and the scarcer something is this yeah the more valuable it should be so that's that's one thing that that's the point i started with but another reason it works very well could be the network effects that that we talk about a lot within bitcoin so there is the the network effects of of developers that more and more developers start working on bitcoin and and more and more merchants start um buying stuff and and selling stuff with uh with bitcoin

and uh investors a number of investors keeps increasing and then there's all sorts of network effects in markets where you have, in the beginning, you didn't have on-ramps and off-ramps. Now you have exchanges in every country and you have even derivatives markets, future markets and option markets and not very exotic ones, but in Chicago, CME or in New York, the bucked futures, those are very important and those build over time. So it could be that the stock-to-flow is quantifying the underlying network effects in Bitcoin. But another reason is quantitative easing is one of the reasons I started looking at Bitcoin in the first place. The central banks have printed trillions of dollars since the start of Bitcoin, which is also the exact moment of the global financial crisis, of course.

So they have started to print trillions of dollars and euros and yens, and this money goes somewhere. I mean, I can see it in my day-to-day business that money is used for buying bonds. that helps states of course but it's also used for buying mortgages and um yeah so so so it could be that a little bit of that money is somehow finding its way into bitcoin and that bitcoin measures the uh yeah the the the increase in money supply if you will of all those fiat currencies and uh yeah i have tweeted once that as long as the central banks keep printing, the Bitcoin keeps rising. It could be some truth in that too.

Maybe a fourth point is why does StructoFlow work? It only works if you have hodlers. So the hodling, of course, is a term in Bitcoin that everybody uses, but it means that there are people that really believe in Bitcoin no matter what somehow, sometimes. So they stick to it, they keep the bit going through crashes, and they're the real hodlers. And you need the hodlers to create a high stock-to-flow value, of course. It's like companies that prefer very loyal shareholders, that if there's a crisis or

something going on, they don't immediately sell your stock and split up your company, but let you build that. If they have the vision that you have, those are the ideal stockholders, shareholders. And the same is true for Bitcoin, I guess. I guess the holding, the hodlers and the holding, the act of holding is very important and might also be something that is quantified by stock-to-flow.

How much of the stock-to-flow model do you think, the accuracy of it is derived from this programmatic scarcity. So scarcity is one component, obviously gold and Bitcoin share. But the idea that the scarcity is so programmatic and predictable, does that help that stock-to-flow model kind of hone in on the accuracy? Or does that not really play a part, do you think? I don't know. I don't know. It certainly helps with the prediction of course because um it helps if if the the variable that you use to predict if is is mathematical um um thing and and uh it's it's deterministic it's it's we know stock to flow for for 100 years to come uh so that really helps with predicting uh something

that you don't have a stochastic variable there um so yeah and and what you also see is that the relationship, the co-integration is getting stronger over time. So that's very interesting and a mere recent discovery, but the co-integration is getting stronger and stronger. So it will be very interesting to see how that holds after the next half. Yeah, and describe that a little bit more. For those that are unfamiliar with co-integration and kind of how that's calculated and why it's important,

maybe just unpack that a little bit. Yeah, I think a lot of people don't understand what co-integration is, and I don't blame them because it's one of the exotic things that even if you study econometrics, you get maybe in your last year if you're lucky. So co-integration, it's actually a technique from the mid-'80s, so it's already 40 years old. It was invented by Granger and Engel. Mr. Granger and Engel got the Nobel Prize for it. And why did they come up with this cointegration formula or technique? It was a solution for an economic problem that they had in the mid-'80s, and that was that there was a lot of spurious regressions.

So in the 80s, when the computers, of course, went mainstream, everybody was running regression analysis on economic time series, macroeconomic, but also financial markets. And then, yeah, you could correlate those time series and then draw all kinds of conclusions from there. But the big problem with time series analysis and especially with regression is that there could be spurious regression. So you find a correlation, a very high R squared, but it says nothing. It's just a spurious regression and they made a lot of mistakes with that. So Engel and Granger came up with this technique to test if the regression was spurious or not, which is very, very useful. And basically what they did is model the difference between two trending series. And by trending series, I mean time series that go up or down, that are non-stationary, as we like to say.

so for example stock to flow is something that goes up all the time you know that and and um so it's it's trending up and the same is true for for the price of bitcoin just so so stock to flow and bitcoin are both trending up and if you run a regression on those series you always find a very nice fit and a high correlation but most of the time that correlation is spurious so what in fact you should do is test for co-integration and um and if you find co-integration uh then you know it's it's not spurious so what is co-integration co-integration is the difference between two trending um uh series and um if so so for example the stock flow model has has this this step function that that we all know and and bitcoin is is uh is moving

around that but it stays very close to the uh to the model value and what you do is you analyze the difference between the model value and the actual bitcoin value and if that difference is stationary which means it is sort of – it's normally – actually, if you look at the residuals of the stock-to-flow model, it's a normal, very nice normal distribution of the errors, of the residuals. And so, yeah, they stay together and that's what it is. The popular story that goes with it is the story of the drunk and the dog.

So the drunk is walking in a random way because he's drunk and his dog is also walking in a random way, but they're connected with the leash. So the difference between, although they're both walking a random walk, if you will, the difference between the drunk and the dog is stationary, is sometimes high, sometimes small, but there's a relation. so they are co-integrated and uh yeah how do you calculate it you need a special um statistic package for that so that could be r or stata or eviews and uh but you can also do it in excel if you know what to do and um yeah i have a tweet about that but it's quite technical but you can do it in excel as well you just have to measure um the distance between the two between the model values and the actual values and run a regression on that one.

So yeah, obviously stock-to-flow and Bitcoin price are co-integrated. And that means it is not spurious. It's real. And all other models that I know, all other time series that I know are not co-integrated. So that's a very important finding.

I looked at hash rate, I looked at difficulty, at time, at the number of accounts, the number of active addresses, the number of Bitcoins. They all show a very nice regression. They all have a very nice R squared, but none of them are co-integrated. So they're all spurious, except stock-to-flow. And that is the real importance of stock-to-flow, of co-integrated stock-to-flow and Bitcoin price. Got it.

And then when you think about the stock-to-flow and co-integration, how does this intersect with this efficient market that you've been kind of talking about recently and looking at? Yeah, yeah, yeah. I got a lot of critique, of course, and that's good. That's why I put it out there and didn't keep it for myself and trade on it or invest in it. So the critique was, well, there's no demand in there, or it goes to infinity, or there's only two halvings, it doesn't work for altcoins, etc., etc.

Those critiques are not very strong, I think. we argued about those a lot and I think they're debunked all but I don't know if this is the time to talk about those but the efficient market hypothesis is I think the steel man argument against the model.

If I were to argue against stock to flow I would argue the efficient market hypothesis argument. what it says is that free money doesn't exist. So there's no free lunch. And the fact that you use information that's out there in the public and a formula that is publicly known means that everybody knows it or the market knows it at least. And that could not be a profitable thing because it's out in the open.

And there's theoretically actually three variants of the efficient market hypothesis. One is the weak variant that says you cannot use price data alone, so univariate data, to predict the price of anything. So you cannot use historical data of Bitcoin to predict Bitcoin. That's the weak form of efficient market hypothesis. And it basically says that technical analysis cannot add value. I think most investors, economists agree that that's true. So the weak form of efficient market hypothesis is true.

Then there's the strong form of efficient market hypothesis, the other end. And that says, yeah, if you have inside information, for example, about a merger of a company, that can be used for making money and making profits. And that's also why that is illegal to use inside information. And it's important to note that not everybody needs to know this inside information. Even if there's one or a couple of people knowing this information, they will buy or sell whatever that information implies, and they will move the price with that buying and selling. So most investors and economists also believe in a strong efficient market hypothesis. But where it gets fuzzy is in the third variant of the efficient market hypothesis, that is the semi-strong efficient market hypothesis. And that tells you that even, so not insider information and not price information, but fundamental information, multivariate models, like the stock-to-flow model.

cannot be used to make a profit in the markets because all that information is already publicly known. So, yeah, that's where the discussion is a little bit. Is stock-to-flow publicly known or is it known to very few people and is it sort of inside information? To be honest, and of course, the discussion is then, is it priced in? Is, for example, the halving that we will have in May this year, and they

predict a 10x increase in price by the stock-to-flow model, is that priced in or not? And in my view, that's semantics. The efficient market hypothesis is a misnomer, actually. It's not a hypothesis. It's not testable. You cannot apply statistics to it. So if we're doing semantics, I would say, and I did in the article that I wrote, yes, I think the stock-to-flow model is priced in because it is built on stock-to-flow information that's publicly known. And the formula is also out there. And like inside information, Not everybody needs to know it, but if like 1% of my followers knows it or some bigger investors know it, well, you know it and I know it. So we will use that information to move the market.

And so in that way, it's priced in. But, again, I think it's semantics, and I'd rather talk about something else that we also professionally talk about, and that's risk. Actually, we never talk about the efficient market hypothesis when we invest professionally. We just assume it's there if it's a reasonably efficient and big market like I think Bitcoin is with 100 billion plus market cap, futures markets, et cetera, et cetera. I also show that in the article that it's pretty efficient if you look at foreign exchange rates and Bitcoin. So if you assume an efficient market, then it's much better to just look at the risks

and are those risks, are they priced in a right way? And there's a couple of models for that. Capital asset pricing model, the Black and Scholes option pricing model. that can be used, but basically it means that, okay, the stock-to-flow model with its high prediction and its major opportunity is known and is priced in, but there's also all sorts of risks that people see, that the market sees, that investors see, that are also priced in. And some of those risks are, for example, the government ban that all my colleagues are

afraid of. Or the futures manipulation, that's something that a lot of people on Twitter talk about. Or the Mt. Gox or plus token scam people selling pressure, that's a big risk. Or minor capitulation, it's a returning risk or narrative every time there's a halving. And right now, of course, there's the coronavirus risk that everybody is talking about. So what I did, that's actually quite interesting. I did some polls the last months. I did three polls. The first poll was three months ago. I asked, what is the biggest risk you see? And more than 50 percent said it's the futures manipulation through futures and futures were introduced at the top of the market the all-time high in december 2017 so futures yeah stock to flow

it might have worked in the past but now we have futures and doesn't work anymore in the future that's a real risk that some people see then a month later i did the same uh paul and another risk popped up at first and that was the u.s introducing draconical uh regulation and laws on bitcoin or the threat that they would do that and that was the uh um that was munchin uh i think he did he uh he threatened uh with draconical bitcoin laws So everybody was afraid of that. The futures were in the second place. And right now, if you do the poll right now, everybody is afraid of the coronavirus. And the virus is, of course, a big risk. But it shows you that there is a recency bias in the risks. So whatever risk is recent and a big thing now, people overreact to that.

So in the end, to wrap that up, I think the efficient market hypothesis is semantics. You better look at risks. And then if we look at the risk, I think the stock-to-flow model might be a little bit underestimated or there might be an underreaction to stock to flow. And there might be a little overreaction to the risk that we see around us, like futures and laws and the coronavirus. Got it. And so I recently had Raul Paul come on the podcast and he really broke down

a situation where, you know, at a minimum, there's a global recession and slowdown at a maximum. So that looks more like a depression. And maybe let's not spend time debating the merits of, you know, what happens. But just in a scenario where there is some sort of slowdown in the economy on a global scale, Bitcoin has really existed in the longest bull market in history. How do you look at kind of that macro environment and any changes there impacting stock to flow, the price of Bitcoin, or any of the things that you've been looking at that have kind of continued to line up? But could they change in those scenarios where there's an economic slowdown? Yeah, that's a big question, what Bitcoin will do in an economic slowdown, because we didn't have that last 10 years. So Bitcoin was, of course, created at the height of the global financial crisis as a result of the global financial crisis.

And yeah, so we haven't had a crisis to test it on. But I think that it will be a bit, it might be a bit similar to the internet so that the internet, of course, was built as a protocol, a communications protocol that kept working under enormous, in wars, in nuclear wars. So if a whole continent was taken out, then how does the message go from A to B? And it was this peer-to-peer decentralized network and a protocol that reroutes the messages around nodes that have been taken out. But that was messages. And Bitcoin is a bit like that. At least that's how I see it. It's very decentralized.

There's 100,000 nodes, 10,000 relaying nodes around the world. So even if there's a really big crisis where people die, like a nuclear war or where something else happens that people cannot go to work or cannot go to leave their house, than who is going to maintain the central bank systems? Who is going to print the money, if you will, create the money because it's all digital? But who is going to operate SWIFT network? Who is going to make the ATMs running and put money in the ATMs and all that stuff?

So there is a whole network of companies and people and costs as well related to the current financial system. And I guess in a situation like that, it doesn't matter what happens, Bitcoin will relay transactions. It will keep working even if all the nodes on Earth are gone because there's also nodes in space. There's satellites with all the Bitcoin transactions and that can relay transactions.

So, yeah, if you ask me, I think Bitcoin is made for a situation like that. Yeah, it's super interesting because it's one of these things when we go and talk to the institutional investors, particularly in the United States, the non-correlation to other assets and kind of this belief that it can be that chaos hedge

has been something that has resonated. But to your point, There's been this bull market that has kind of raged on. And obviously, we see now the central banks are going to do everything they can to keep that going. But it's definitely an interesting thought process, I think. But ultimately, we're going to see what happens at some point. You know what's also very interesting? And maybe that's a question for you, because it must be very difficult for Americans to understand, to really understand what it is to live in a country where there's negative interest rates.

For example, in my country and in Germany, the whole yield curve from one month to 30 years is below zero. There's no interest rates. You pay money if you invest. And that's a real situation. And in America, you read about it, but you don't feel it. It's the only country where the yield curve is still positive. And yeah, you see that turning south rapidly, of course, recently. But what if the U.S. is going sub-zero with their interest rates and there will not be

any country with positive interest rates left. What I see around me is that people get personally very interested in Bitcoin if they see that they get negative interest rates on their money at the bank, which happens in Germany and happened in the Netherlands. It's actually the day after the press release that the banks go negative interest rates, I get calls from people how to invest in Bitcoin. So that will be very, very interesting if that situation will sooner or later be also true for the US. For sure. And it seems like, I think I was reading earlier today that the market's now pricing 100% probability that the Federal Reserve's going to cut rates in about two weeks here. There was an over 80% probability they would cut rates again at the next rate

cut. And so, you know, you get two rate cuts here. It's highly likely that the U.S. will be at or near zero, you know, the next six weeks or so. And then from there, I think you get this really interesting world with it is unlikely that they will want to go negative, but they may have to join the rest of the world. Right. And kind of what happens there in the United States is kind of defended zero to some degree um you know i think it's a weird weird place to be yeah absolutely and and especially your president uh donald trump has of course made some some nice statements about that that he wants some of that uh juicy and negative interest rate money it looks like he's going to get it yeah it's um it's pretty crazy so let me ask this what what is um in your opinion

And as we look at Bitcoin and a lot of these statistical models, I think you and I are very similar in our belief in kind of Bitcoin as a system and how it's designed and what the potential for it is. What would you say the biggest risk is right now for Bitcoin? You know, so if it didn't work or didn't succeed, what would you say was the most likely reason that would be the outcome? oh that's a difficult question um yeah i i do think that that um as a state uh nation states especially the u.s um is a big risk because um other countries and and actually today india for example south korea and germany simultaneously um got got a little bit more positive legally with Bitcoin, but the U.S. is not moving in that direction. So very drastic tax laws, very aggressive anti-money laundering and terror financing checks. So

I guess it will be most difficult for the U.S. to give up the reserve currency status. in the end that might become a very nasty fight. So I think that's a very big risk, but you see at the same time other countries maybe taking advantage of that situation and opening their markets and be very clear legally about Bitcoin and giving it a place as a regular asset.

So that's a risk. The future markets, I don't really see as a risk. I mean, I see it as an opportunity and as a network effect that strengthens Bitcoin. Because, yeah, well, you know, as a miner, you're very happy with future markets because you can take the volatility out of your revenue stream. You can sell the Bitcoins that you expect to mine for the next, well, six months at least. And you can sell them on the future markets and don't have that exchange risk if you convert it to dollars. And so you can do that with futures. And the buyers of those futures are, of course, the funds that don't want to hassle with the keys and the storage and insurance.

So there is a bit of a premium. As you can see, the future markets are in contango. and i think they're a very natural place where miners and and uh trackers and funds meet each other uh of course there is room for for uh governments that same governments that don't like uh bitcoin to um suppress the price to manipulate the price like well i think it's now a fact that they did that with gold but on the other hand that's a very manipulation with With derivatives like futures, in my view, it's like pushing a ball under the water. You can do that temporarily, but not all the time.

And you can do it long, but you get tired and then it goes up. And you see, for example, with futures, with the spoofing, of course, they hit the price down. But it made an opportunity for real believers in gold to buy the actual physical gold. And you've seen for years and years that all the physical gold is going to the East, is going to China and India, et cetera, et cetera. And that's where it is right now. So, yeah, in the end, you'll lose if you manipulate the markets. You can do that temporarily, but not all the time.

So I don't think that is a big, big risk. Coronavirus, of course, yeah, is a big risk now. But we've had viruses last 10 years, like the swine flu and MERS, and there was another one. I'm not a doctor. I cannot assess the risk really well. For sure, it will have an economic impact. But yeah, if you look at it from an investment point of view, it's also very probable that we overestimate, overreact to this risk. So I think in the end, the question that you have to answer as an investor or a potential investor in Bitcoin is,

okay there's all those risks on the one hand and there is a well sort of fundamental model or value uh on the other hand stock to flow or whatever um and and what is the chance what what do you really think the the the valuation model the stock to flow model has a 90 percent of failure So even if there's a 10% chance that it's right, regardless of all the risks there are, but if there's a 10% chance that the Bitcoin value will go to $200,000, then it might be an interesting bet already. And I think those are the numbers that we have to weigh.

everybody has to do that in in context of his own risk preference but 10 success can a chance i think that's i think chances are higher than that i tend to agree i definitely agree i really appreciate you taking the time to uh to do this um you have uh some of the most clarity in in your thought process that i've seen in the space and then obviously given your background It's super cool to kind of see you balancing the personal, you know, interest and frankly belief with the institutional and kind of professional work that you do. So first of all, just from everyone, I think in the Bitcoin community, thank you. The work you've done with the stock to flow and stuff has been incredible. And then, you know, if people can want to get in contact with you or find you, is Twitter the best way to do that?

yeah twitter i'm on twitter so that's plan b at 100 trillion us dollars uh and and um and i'm on um uh what is it the github so there are all the data and and the articles and also the models the formula they're all open source so if people like to play with them themselves please be my guest and if you have questions uh please reach out hey everyone pop here if you like this episode of off the chain and want to help us take crypto to the top of the apple spotify and other podcast charts please do us a favor and rate review and subscribe to review simply go to the off the chain homepage scroll down until you see the five blank stars taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to

the top of the charts i appreciate you listening and see you next time on off the chain