We Study Billionaires - The Investor’s Podcast Network - BTC090: Risk Free Rates on Bitcoin's Lightning Network w/ Joe Consorti (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. Today's guest is Mr. Joe Consorti, who's a Bitcoin educator and investor. On the show, he talks to us about how the Lightning Network is slowly emerging as a risk-free rate within the Bitcoin ecosystem, what drives the Bitcoin market cycles, a little bit about his confluence model that he's recently developed, among many other interesting topics. Joe's an expert communicator, and I have no doubt you're going to learn some really interesting things on today's show. So with that, here's my interview with Joe Consorty.

Starting point is 00:00:38 You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. Like I said in the introduction, I'm here with Joe. Joe, welcome to the Investors podcast and Bitcoin Fundamentals. Thanks for having me, Preston. Hey, so you had recently posted a thread that I thought was phenomenal, really interesting point of view and you had some charts with it. And it all relates to the Lightning Network and it relates to what I would think you're describing here as a risk-free rate. So instead of describing it as whatever, I'm going to pass it over to you. I think the title of your thread was called Time Value of Lightning and walk us through what you think's going on here.

Starting point is 00:01:35 For sure. Absolutely. So to take a step back all the way back to 2018, when Nick Bautier, originally published the time value of Bitcoin. Within there, he originally talked about how in order for, you know, sort of this Bitcoin capital market to emerge, the time value of Bitcoin, right? So, you know, a rate of return earned on Bitcoin would need to be published, right? And so at that point in time, obviously there was, you know, the Lightning Network hadn't even, you know, it didn't have a tremendous amount of capacity, but it was positive that the Lightning Network would be sort of the way that this could be made possible. Fastly. forward four years now.

Starting point is 00:02:13 And we have a couple of examples of that. In terms of there being a risk-free rate, basically the reason I posited this in the thread was because it's underwritten this concept of a Lightning Network reference rate, right? Being able to park your capital on the Lightning Network and earn yield with no implicit default risk whatsoever, this sort of this concept I came to is because arguably Bitcoin and Lightning have the lowest counterparty risk profile of just about any capital market in existence, right? Because they're underwritten by an asset that when custody, it doesn't have any counterparty risk. And so for that reason, you know, I went ahead

Starting point is 00:02:53 and developed this article and then I turned it into a thread that essentially goes through all of the different innovations that have happened across Bitcoin, but also across Lightning and the Lightning landscape that have sort of inches closer to a capital market that's underwritten by the rails of Bitcoin and Lightning. So for a person who is potentially not intimately familiar with Lightning and you use this terminology, no implicit default risk, walk us through opening a channel and then why there's no implicit default risk for a person that would open a channel and participate in the rules in a ethical way.

Starting point is 00:03:32 So there are a couple of risks when it comes to operating a Lightning Channel. One of the first ones is hot wallet risk, right? So the risk that a bad actor, if a channel does have a whole lot of Bitcoin within it, then a bad actor could potentially hack into one of the participants in that channel and then drain funds. So there is a little bit more risk associated with a lightning channel than something like cold storage Bitcoin, essentially to back it up even further on the Lightning Network, essentially it's a way of making Bitcoin more scalable because the main blockchain for Bitcoin

Starting point is 00:04:05 doesn't have a lot of transactional capacity, you know, seven transactions per second compared to visas 40,000 or something to that tune, Bitcoin essentially wouldn't function as something like a medium of exchange without a scaling solution in order to make it more viable. And that's where the Lightning Network steps in. Essentially, you can open up a channel between participants. And essentially, in the simplest terms, you can sort of hold Bitcoin in escrow between two participants and then basically add and subtract from a ledger just between you two, who owes who what. So, for example, going into a coffee shop and ordering a coffee, you know, the channel between myself and the coffee shop owner, basically balances just get updated within our personal ledger

Starting point is 00:04:49 as opposed to having to record that transaction on the main Bitcoin blockchain. And we can transact between each other infinitely until we decide to finally settle up and then close off our channel on the main chain. And the beautiful thing about the Lightning Network is that participants can use channels that have connections that aren't directly to them. So instead of every single new person who goes into this coffee shop, having to open up a channel with the coffee shop owner, let's say I have a channel that's opened up with my friend,

Starting point is 00:05:20 who's opened up a channel with the coffee shop, my payment gets routed through his channel into the coffee shop. And so essentially what you've got is this web of interacting channels with one another that liquidity gets routed through. The beautiful thing about it too is your payment is going to, to go through the channel that is routed most efficiently, i.e. has the lowest fees. And so it really attacks one of those pain points of Bitcoin, which was, it's extremely expensive to move funds on chain when there's a lot of demand for transactional capacity. And Lightning Network

Starting point is 00:05:53 really came onto the scene and provided a solution for that. So there are various risks with having a channel. There's hot wallet risk. There's inactive peer risk, which let's say the coffee shop owner goes offline and we can't settle up on the blockchain. There's force closure risk where, you know, whether it be an inactive partner or some other reason our channel gets forcibly closed, there are a lot of risks in operating a lightning channel. But for various reasons, not unlike Goldsmiths being the individuals who held everybody's gold in reserve and then they manage the ownership between participants, I believe, and Nick and I believe, that that something like Lightning banks will emerge where these sort of entities who can allocate

Starting point is 00:06:39 capital most efficiently, who can manage these channels, who have the technical wherewithal to manage these channels, they will be the ones who end up routing liquidity, managing these channels over time as transactional capacity increases for the Lightning Network. Just an important highlight there, you were talking about the force closures between channels on the Lightning Network. But I think people need to understand is when we say there's risk there, let's say you and I open a channel together and you drop off the network and I just, I can't communicate with your note anymore and we have an open channel. I can force close that channel. And if you continue to be

Starting point is 00:07:18 gone and off the network, after a certain number of blocks, it's going to close that out. We're going to adjudicate the on-chain fees in order to write that into the layer one Bitcoin. and you're going to get your stats and I'm going to get my stats in that situation, even though you left the network and it turned into a forced closure. So it's not that the funds were at risk because the other network participant disappeared. We can still close it out. It's the time that I think would probably be quantified as the risk of funds being locked as you're going through that forced closure situation.

Starting point is 00:07:58 And so I just want to highlight this because people that aren't intimately familiar running their own node, having open lightning channels and things like that, they hear things on the surface and they're saying, oh my God, it just sounds risky. I don't understand any of that. And the real risk, I would say, is just the lack of understanding and the execution of doing something like this. But your funds are very secure. I mean, the node that I've run, like, I have never run into an issue where or a concern of like, I'm not going to get my funds back that I opened the channel. on. I don't know if you would have a different way to quantify that. And I'm not trying to undersell risk here, but it's way different than putting it on a centralized exchange and lending out coins. It's like not even in the same universe as far as risk goes. Right. That's exactly right. I mean, exactly as you mentioned, the risk here is more so that your funds are inaccessible for a brief amount of time. And the fact that this is, you know, a risk that isn't even having anything to do with lost funds. It just goes to show like we're reaching to try and find risks that are on the Lightning Network.

Starting point is 00:09:04 Whereas in traditional capital markets, right, let's say you move your way up the risk curve to something like venture capital or equities, there's far more associated risk with that. There's far more associated risk with, you know, other cryptocurrency on the Lightning Network. You know, I sort of make this argument that because, you know, there are so few risks, as we mentioned. and a lot of these risks actually don't involve permanent deletion or inaccessibility to funds, then it is more considered more risk-free than the moniker that we give to base layer money, like the United States Treasury's, which do incur explicit and implicit default risk. I mean, we've never defaulted on our debt in a major way as far as I'm aware, but we can, right?

Starting point is 00:09:50 That is an explicit risk, the implicit risk of holding a negative yielding bond, right? There are various associated risks with traditional finance instruments that just aren't present, I feel to the same degree, you know, on Bitcoin and Lightning. Hey, I just popped up this picture of this risk curve that you were sort of talking about. Let me pull it back up here and then just kind of describe to the people that are listening, what we're looking at and what this really represents as far as you're concerned. Of course, the way that we can quantify a capital market is by plotting the different financial instruments in said capital market based on their risk profile.

Starting point is 00:10:31 And we do that for the people who are listening on audio, we have a return on the Y axis and risk on the X axis. And essentially, as you plot these instruments against one another, you have lower risk profiles at the bottom of the curve all the way up to very, very high associated risk at the top end of the curve. And this is a pretty easy way of visualizing risk in any capital market that you're dealing with. And so up here on the screen, physical gold is at the very bottom of the traditional finance risk curve, specifically because not unlike Bitcoin, when you're custodying it on your own, there's no default risk, there's no counterparty risk,

Starting point is 00:11:11 no custodial risk, right? If you hold it physically and you're defending it and it's done securely by the owner. Obviously, the tradeoff here is that you have to have the security in place, you have to have the technical wherewithal to defend it. So that comes with the tradeoff, right? Not only is it non-yielding, but it requires a lot of additional work to secure it well. And that's why a little bit up the risk curve is U.S. Treasuries. Now, for people watching on video, I'm not saying U.S. treasuries are much further up the risk curve than physical gold.

Starting point is 00:11:42 Obviously, it's been said many a time that they're as good as gold. But as I mentioned, there's explicit and implicit risk withholding U.S. Treasuries. Moving up the curve yet still, our corporate bonds, obviously they have higher default risk. And so they trade at a spread to U.S. treasuries. And so every single rung up this risk curve, it demands a higher rate of return because of the increased associated risk with it. And so this is sort of the easiest way for market participants who are hunting for collateral to take a look at all the instruments available to them and based on their risk tolerance,

Starting point is 00:12:21 whether they're a corporation or a sovereign or an individual, to take a look at this risk curve and then determine where they want to allocate their capital. This is the traditional finance risk curve in a nutshell, basically. You know what's interesting is I'm looking at this chart, and what's really noticeable about the shape of it is kind of, it's not linear. It has this bow in it as you're going higher up into the riskier categories. And I would argue that as you get into a currency debacle or a situation that we're currently experiencing on a global level, that this probably shifts to being more linear than the shape

Starting point is 00:13:01 that you're kind of seeing on this chart where like the U.S. treasuries are still having, the risk is going up as the return is being diminished. And you're not getting this shape that you have displayed here. but I'm not criticizing the chart. I just find it maybe as an interesting observation as to the current macro setting that we've been experiencing here in the last few years, that maybe the shape of some of this stuff is getting all out of whack from what we would typically see. Oh, absolutely.

Starting point is 00:13:32 I mean, you take a look at emerging markets. They have record levels of distressed debt. As of right now, actually, with the last week or two, corporate credit spreads have been coming down investment grade and high yield. So, you know, some credit stress is being alleviated, but you're absolutely right. Like in situations where maybe, you know, your country doesn't have dollar denomination in its capital market and you're a really distressed fiat currency. I mean, look at basically all of Southern Europe right now. You know, they're about to enter crisis mode and they hiked, you know, 50 basis points for the, it was their first hike in over 10 years,

Starting point is 00:14:08 right? So for more distressed nations, more distressed currencies, you're absolutely. Absolutely right. I would say it's more linear. Hey, so let's talk more on the specifics of the Lightning Network and this yield curve. I'm going to put up a chart right now that I find really interesting, and I'm kind of curious as to why you're seeing this bump that's being displayed here. So this is the Lightning liquidity weekly average annual percentage rate from May till August. You see it looks like it's trying to hover around two percent. But you have this jump in June that it surged up to 8%. I'm curious what caused that and then just more generally speaking some of your thoughts

Starting point is 00:14:51 on just interest that's being received here. So as for the spike in June, and for people who are listening, what we have up on the screen right now is this is from AmBoss Technologies. They recently launched earlier this year something called Magma, which is actually a Lightning Channel marketplace where market participants can go and they can lease the liquidity. And essentially, this is one of the first major examples of a widely reported interest rate. And we'll talk about why that's important in just a second. As for the bump in June, it's in all likelihood due to increased demand for channel liquidity. And the reason it, you know,

Starting point is 00:15:29 it 4x is all the way up past 8% there is because as of right now on Magma, I'm looking here, there's only one, there's only 31 Bitcoin deployed as of right now. There's 667 channels opened. So, you know, it has a very, very small liquidity profile. And so, you know, demand shocks in, you know, my estimation are probably what spiked that significantly up. I think, you know, over time, we talk about transactional capacity. Over time, as there's more transactional capacity for things like Lightning as, you know, the Lightning Network sort of emerges as this layer that people want to earn a return on, and its liquidity profile increases in tandem with that, then, you know,

Starting point is 00:16:08 ultimately like this APR and other interest rates that are driving for the Lightning Network will smooth out. But this technology is all in its infancy. Most of what I wrote about is conceptual. So it's, you know, to me, it's just pretty remarkable to see all this stuff widely reported. I have not played around with Magma. So how would a person go about pulling this up? How would just walk us through the steps if somebody at home wanted to try it out? For sure, yeah. So you can go to amboss.com.com. magma. And basically, you can log in with your node. They have a process for doing that. And you can also, you don't need a node in order to peruse all of the different information on

Starting point is 00:16:50 there. So on the homepage, you could see the total amount of SATs earned in interest. As of right now, it's 8 million SATs. So again, you know, relatively infantile network. Only 10% of the Bitcoin has been earned in interest as of right now. But you could also scroll down. And again, this is a liquidity marketplace. So, like, you can take a look at every single channel that's up for lease, you know, the minimum and maximum APR, you know, the history of the market participant. It's all transparent. So you can choose these nodes based on the time that you want to lock up or the time that you want to lease the liquidity for, you know, the reputation of the individual, not unlike, you know, a traditional fixed income market,

Starting point is 00:17:31 which is really remarkable. I mean, this is sort of the first instance in Bitcoin. One of the first instances, I know that Lightning Labs had something similar with Pool, but this is one of the first major instances of participants being able to peruse and lease liquidity over Lightning. Again, not unlike a traditional fixed income market. Another graphic I sent was the Bitcoin Lightning risk curve. And it's basically the same thing as the traditional finance risk curve, the same concept. But I've gone ahead and replace each point on the risk curve with these different Bitcoin capital market instruments. So cold storage Bitcoin obviously doesn't have any yield,

Starting point is 00:18:11 doesn't have any counterparty risk because you're custody on your own. And then, you know, this Lightning Network liquidity lease, you know, is another rung up the risk curve and it's trading at a basis point spread, not to get too technical, just like traditional fixed income markets. And then, again, numerous other instruments that are available on the Lightning Network. And this is conceptual. Again, you know, what we've seen in implementation, is magma and a couple of other and boss and a couple of other liquidity marketplaces,

Starting point is 00:18:38 excuse me. But if anything, what it demonstrates is that there's a structural demand for secondary markets of liquidity. There is demand for the use of Bitcoin as a place where people can buy and sell collateral as they need to. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:23:00 All right. Back to the show. So I'm a little familiar with Poole. Is there much difference between Magma and Poole? And if there is, what are some of the differences? I'm not the best person to comment on that. For this piece in particular, I dove especially deep into Magma because they have a pretty fantastic UI, you know, very, very friendly user interface. Cool, I think, is a little bit more complex.

Starting point is 00:23:26 I'm pretty sure it's closed off to node operators. Like, you know, for Magma, I mentioned to the listeners, you could hop right on and take a look at all the available channels for sale. Whereas with something like Pool, I'm not sure that somebody who isn't a node operator could do that. Oh, okay. And can somebody who's running an umbrella node just log into that AmBoss. Dot space slash magma and set this up, like easy peasy? Yeah, absolutely. You can't.

Starting point is 00:23:54 I need to try this out. I'm very curious. Yeah, it's cool. I mean, if you're an efficient capital manager, if you're efficient at channel management, you could earn a rate of return on top of your existing routing. It's pretty cool. That sounds awesome. I'm going to definitely check it out.

Starting point is 00:24:10 Okay, so for the last like 260 days, we've been in a bear market, a pretty aggressive bear market. For people in traditional markets, they would describe it as a death spiral bear market. What are some of your thoughts on the leverage and really kind of Ponzi-like situation that's unfolded with Luna and 3AC and all these others? What are some of your thoughts? Most definitely. I mean, I think the best way to describe it is a chain of dominoes, right?

Starting point is 00:24:45 So with Luna, again, like in the truest sense, Tara Luna mirrored a Ponzi scheme almost one-to-one. And they would burn and create new tokens amongst both of them as new participants entered and exited. And then when there was a huge dash for the exits, there wasn't enough liquidity to go around and the token went to zero, both of them. And so that was sort of the finger that knocked over this chain of dominoes of extremely fragile market participants in terms of their balance sheet fragility, namely three hours capital, right?

Starting point is 00:25:19 Three hours capital, obviously $58 billion fund. you know, for those listening, for those curious, that's the same size as Bernie Madoff's fund, right? So it's absolutely major. A lot of people are calling this, you know, the Lehman moment for cryptocurrency more broadly. And I tend to agree, right? You had major players, FtX, Deribit, Bitmex, BlockFi, Genesis, Voyager, Voyager went bankrupt, right? They declared, I think it was Chapter 11, bankruptcy protection. And so, you know, you had all these different market participants that were very highly intertwined with Three Arrow's Capital. And they were lending, a lot of them were lending to Three Arrow's Capital under collateralized

Starting point is 00:25:59 or with no collateral at all based on reputation alone. For example, Voyager, they lent Three Arrow's $665 million completely uncollateralized, completely uncollateralized. And so, you know, when Word got out that Three Arrows was having solvency issues, you know, places like BlockFi, they had a $1 billion collateralized loan. 80% marcher requirement, they were able to liquidate it. They were fine. But because places like Voyager, they essentially lent to 3AC based on reputation alone,

Starting point is 00:26:33 and they got smoke because of it. Client funds out the door, who's to say how much of it will be recovered? Players like Celsius also very heavily intertwined with this, Celsius was more so taking customer funds and putting them into these yield protocols. We just spent 20 minutes talking about a real way to earn yield. But for the listeners and viewers, the way that Celsius was, you know, parking their funds in these different protocols, they were earning essentially yield from nowhere, yield from nothing, yield from printing these worthless tokens. And essentially, over two months,

Starting point is 00:27:08 Bitcoin, right, as a result of all this, experienced $5 billion in cell pressure, five billion dollars, and it was still able to find a cohort of buyers around the $20,000 area. So absolutely remarkable. I'm of the belief that we've seen the worst of it. But who knows? I mean, you know, Lehman occurred after, you know, the majority of it, the majority of the turmoil had already gone by. As far as I know, I was, I was seven years old at the time. But who knows, there could still be some, could still be some skeletons in the closet for Bitcoin. Hey, so I've got the chart that you just said these numbers. And I mean, it's, this is a massive number, 2036,000 Bitcoin liquidation. by large known entities since May 12th alone.

Starting point is 00:27:56 And, yeah, Luna was massive 80,000 Bitcoin out of that Ponzi scheme. The other one that you didn't mention by name here was Tesla, 29,000 Bitcoin sold into the market. I'm kind of curious on your thoughts on Tesla in general. So, you know, when Tesla made this announcement that they were going to buy Bitcoin, And I'm just looking at the stability of their free cash flows. And it's gotten better since they've made that announcement as far as, like, their ability to demonstrate, like, some semblance of bringing cash through the door. But up until that point, like, they weren't, they were not stacking free cash flows.

Starting point is 00:28:39 They didn't have free cash flows. So much of whatever was coming through the door was subsidies from the government. it wasn't like good organic like free cash flows. And so for me, the announcement that they were putting on the balance sheet just, and I even told Anthony Pompliano and I were talking about it when they made the announcement, I was like, this caught me totally off guard. This would have been one of the last companies that I would expect it. He said he had the opposite opinion.

Starting point is 00:29:05 What are your thoughts? Like this seems inevitable to me that they would be a seller at this point. Like you've got to have free positive cash flows in order to, stack bitcoins. Michael Saylor is a great example of that point. I mean, Tesla sort of a company living off of subsidies, to put it bluntly, and we actually did a report on this over at the Bitcoin layer, Nick and I, we talked about essentially this was just window dressing, right, from Tesla. We titled it Tesla's new drapes, you know, on their Q2 earnings call. They sold 75% of the Bitcoin, so they still have some Bitcoin, but you're exactly right. You know,

Starting point is 00:29:45 In my purview, it's just an accounting gimmick, right? You know, by selling, you know, the 29,000 Bitcoin, they were able to add 936 million bucks to their balance sheet, right? Their cash balance actually would have shrunk by $117 million, and it would have been their, it would have been their first quarter of the year, where they had a negative cash balance. And so, you know, in my purview, that's just,

Starting point is 00:30:12 it's just window dressing. You know, Tesla is still the second largest corporation in terms of the Bitcoin treasury. But, I mean, in times like these, it's important to remember, right, cash flows king. I mean, Michael Saylor is doing it right with micro strategy. They have a solid software business. They can rely, you know, on those free cash flows. Tesla, not so much, right? It was pretty bold of them to add a Bitcoin strategy when, as you said, you know, they're really

Starting point is 00:30:39 struggling with cash flows even now. and they rely heavily on, you know, good regulatory environment from the United States government to stay aflob. Yeah. It just amazes me online. You just see so many comments from people that just don't understand the basics of companies producing free cash. I don't know if it's the market environment that everyone's just used to, oh, just do another fundraising round or just sell more shares. And it's like earnings just don't matter. Maybe that's the hardcore of. value investor background in me coming out. But what that is right? I mean, we've, we've had more zombie companies than ever.

Starting point is 00:31:18 I mean, money has been essentially free. People have been able to borrow at, you know, a small spread to the T-Bell for since 2008, basically free money. You've seen the impact of that now that the effective price of money, right? I mean, the policy rate right now is what, 250? People can't survive when they're borrowing at a spread to to that. It's quite remarkable. It is.

Starting point is 00:31:43 I'm going to throw up another chart here, kind of going back to what we were talking about earlier with the risk curve versus the return. And you have it adapted for lightning. And walk us through what you're showing here. And it looks like you're, I'll let you, yeah, you describe what you think here on this. For sure, yeah. So there's one aspect of the risk curve that I'll describe when we get there. But I mentioned Bitcoin's capital market and its risk profile can sort of be illustrated best

Starting point is 00:32:18 with the risk curve. So we talked about the traditional finance risk curve. You know, you've got gold at the bottom, the least risky, least no counterparty risk. If you're holding it on your own, no custodial risk, you know, unless it gets demonetized. And then venture capital all the way at the top being the riskiest. And what I've gone ahead and done, and again, this piece was very conceptual. This is sort of a future conceptual Bitcoin Lightning Risk Curve. The reason I wanted to do this was so people who are very adept when it comes to building

Starting point is 00:32:47 instruments like these, they can take a look at this and become inspired. I took a lot of inspiration from Nick's original piece way back in 2018 to sort of adapt when he did there and bring it into the present and sort of give people an update on the way that these protocols were evolving in tandem. But at the bottom of the risk curve is cold storage Bitcoin, right? Obviously, you know, it's non-heal, obviously, but it's non-custodial counterparty free. You know, and unlike the United States government, obviously, we've never defaulted on our debt. But physical cold storage Bitcoin could be considered, you know, completely devoid of all

Starting point is 00:33:26 counterparty risk, all default risk, all custodial risk. So it sort of mirrors physical goal in its risk profile. And, you know, if you play these two risk curves back to. back, you could sort of see how these instruments align with one another in terms of having similar risk profiles. And then a step above that is the Lightning Network reference rate. This was originally coined by Nick back in 2018 in order to describe basically a standardized rate of return that people could earn through parking their capital on a Lightning Channel.

Starting point is 00:33:57 This is at a spread to Cold Storage Bitcoin because obviously it incurs all of the lightning risks inherent to the protocol that we talked about earlier. The utility of publishing a Lightning Network reference rate is just to show market participants, right, that Bitcoin can be a fully fledged capital market in and of itself. The idea of having a widely reported return on your investment, you know, the idea there is that it attracts liquidity to the ecosystem. So that's a step above cold storage Bitcoin obviously requires a little bit more work to manage. Then the Lightning liquidity lease, this is to Ellis.

Starting point is 00:34:35 marketplaces like magma, these liquidity lease marketplaces where, you know, not unlike a bank issuing alone, somebody can put up their channel liquidity for lease. You know, people can come purchase it for specified periods of time. And underneath it, you'll notice I put LNR plus 50 BIPs, right? Now, you know, this is not alien talk. This is mostly just to illustrate how this sort of emulates traditional risk, traditional fixed income instrument. So LNRR is the Lightning Network reference rate and something that's a little bit more risky, something that incurs things like, you know, the risk of the marketplace going down

Starting point is 00:35:14 and other associated risks. It trades at a basis point spread to Lightning Network reference rates, right? So it's a little bit more expensive than the proverbial risk-free rate of the Lightning Network. And then one step above that, I've put TerraO asset lending. And we can talk about this, but Terra by Lightning Labs is essentially a protocol that's in development by them. That would allow for asset issuance, any asset on Bitcoin and Lightning, right? So essentially, the reason this trade's out of spread to L on liquidity lease is because obviously that incurs all of the associated risk with anybody who issues an asset on their own. And then at the very top, off-chain lending, that incurs the most risk, and so it's the most expensive. But you'll

Starting point is 00:36:02 have a pretty high potential for return. Obviously, you know, when you're off-chain, you incur default risk, you incur counterparty risk. Counterparty risk at a level that isn't present with all the other four risks on the curve. And really, this is just a way of illustrating every single instrument on Bitcoin's future potential capital market based on the way I see things are going. Yeah, on the tarot asset. So this is something that I think maybe I've talked about it once or twice on the show with guests. This is very similar to what Adam Back did with the Liquid Network, but it's on top of Lightning. And I think that's the key difference between what Adam did with Liquid and with Terra at Lightning Labs is trying to do here. But don't you think that from a risk

Starting point is 00:36:53 standpoint, because that's what we're talking about, so much of it comes down to what that digital asset is representing. So if it's just, if it's representing a token in a video game, that's one thing. But if it's representing something physical in the real world or an NFT or whatever, it really depends on what that digital token is representing. So as far as the 150 bips that you have listed there next to that plus your lightning reference rate, I'm assuming that's a very flexible spread depending on what type of digital asset you're talking about. Absolutely. That's definitely variable because, you know, somebody could be issuing stable coins or somebody could be issuing a photo of a monkey. So, you know, similar to the fixed income space,

Starting point is 00:37:41 it all depends on the credit worthiness of the issuer. You know, it all depends on the reputation of the issuer. That spread is absolutely variable. But it's interesting. I mean, Terra is, you can issue assets on the Bitcoin main chain, but it can be sent over lightning, which is the real innovation in my purview.

Starting point is 00:38:04 But ultimately, like, what is, what's made possible through this is any asset you can think of, primarily in my mind, where that immediately jumps to is like all the world's currencies, right? You know, we've got dozens, hundreds of fiat currencies all circulating, And those currencies can be traded between market participants and, you know, for goods and services between participants and in and amongst one another, right?

Starting point is 00:38:35 So sort of inter and intra currency all over Bitcoin denominated financial rails, right? So it's sort of, it's using these Satoshi's, these 100 million units of a Bitcoin as the vehicle for sending these currencies back and forth. And so even if people aren't a fan of monkey JPEGs trading on using the Bitcoin and Lightning networks as transmittal rails, I think what people should be looking at is that any increase in demand for transactional capacity will also come with increased network liquidity on Bitcoin in order to facilitate those transactions. And so to me, for participants who live maybe in El Salvador or other countries that are thinking about adopting this technology,

Starting point is 00:39:24 a major onboarding milestone would be the ability to hold Bitcoin and dollars in the same wallet. Right now, that's sort of reliance on a third party, right? Right, like strike. They create a user interface and they're not in the same wallet, but they're in the same application. And Terra sort of jumps directly over that and sort of allows for all these different. currencies to be held within one Bitcoin wallet. It's pretty remarkable. That's crazy. So if you wanted to hold now, obviously, Tether, USDC, all of these tokens that are being issued by those entities have the risk of those entities actually owning dollars or whatever they're using as the peg

Starting point is 00:40:09 in some type of account to represent that token that's issued. But you're saying the token itself, even though it's USDA or Tether can now be held physically, physically held in your Bitcoin wallet over the TARO network. Did I describe that correctly? You're basically entirely on point. And the fantastic thing about this is that the only thing that the channels on the Laiy Network need to know is that they're routing liquidity. And that's already what they do.

Starting point is 00:40:39 They don't need to know what asset they're routing. All they know is their routing Bitcoin, right? So if I wanted to send USDC to you, you know, through the channels, the first hop into the Lightning Network per se, it gets converted my Bitcoin or my USDC gets converted to Bitcoin, gets sent through the Lightning Network in the most optimal way. And then on the last hop to you, gets converted right back into USC, which sounds a lot like Strikes business model, right? Strike, you know, the idea that you could send dollars, somebody receives Bitcoin and vice versa.

Starting point is 00:41:09 But this essentially takes that business model and embeds it, you know, creates a method for betting it into Bitcoin and lighting itself. It's pretty cool. How is that possible? Yeah, right. How the heck is anybody smart enough to piece that together is the question. It's like unreal. It's crazy. Okay, you have said to me, rates lead the dance. Yes. What do you mean by this? If you want to pull up the chart, what I've done here is I've mapped the United States two, United States two-year treasury yield against the federal funds rate upper bounds. So Fed funds is obviously the policy rate that gets set by the central bank, the Federal Reserve. And as you can see here, every single time that the two-year yield falls below the federal funds rate, the Fed pauses their

Starting point is 00:42:04 hike cycle. And then ultimately, when it becomes a precipitous fall below the federal funds rate, then they're forced to pivot their hiking cycle in the other direction. You know, this is a historical precedent for those wondering the reason the two-year yield was chosen is because the two-year yield trades with forward policy rate expectations. So the two-year yield can sort of be thought of as where the market believes the policy rate is going to be. And so that's essentially one of the charts that you can use to gauge whether or not a pause or a pivot would be coming. And as of right now, the two-year, it bounced this week, you know, but it's channeling sideways in that range as of right now.

Starting point is 00:42:48 And at the Bitcoin layer, we're not saying a pivot is coming. We're just reading the charts. You know, we try to play things probabilistically as opposed to, you know, being extremely granular and trying to make, you know, all these minute predictions. But looking at this and then taking a look at Fed Fund's futures, which is something that is derived with overnight index swap data. which also shows that a policy rate pivot, or at least pause, is coming early Q1 next year. You know, for those reasons, we sort of presuppose that September could be, you know,

Starting point is 00:43:27 the last hike we see before a pause, not the terminal rate by any means, you know, unless something extreme were to blow up, credit spreads blew out, you know, and then the Fed was forced to jump in. We don't view that as likely. We don't view like we don't view as if that's coming soon. but taking a look at the two-year versus Fed funds and then also this overnight index swap policy rate expectation. We're taking a look that the Fed is, you know, they're walking a pretty tight rope here.

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Starting point is 00:47:17 All right. Back to the show. I love this chart. And you're exactly right. I mean, look at when those two intersect and every time they've paused. at least since 2000 on this chart that we're displaying. And I'm sure if you went back another 10 or 20 years, you'd see that this continues to hold true to where they're at.

Starting point is 00:47:40 And thanks for the futures chart here and showing everybody where, you know, a lot of people will throw out comments. Yeah, I think they're going to pause at the beginning of the year, but they don't understand the analysis or like the data that's supporting that opinion. And that's exactly what you're showing us right here. So what do you think is going to happen in the fall? I mean, it really feels like things are going to start getting spicy here in the fall. What do you think?

Starting point is 00:48:06 Oh, absolutely. You know, if rates continue their precipitous fall, you know, and they fall below Fed funds, then we could see a pause sooner than we think. The upper bound of the terminal rate that we're at right now is, you know, if we actually go beyond this, if in September, which by all accounts they are going to, Jerome Powell is going to speak late August about, you know, probably. give some foreguidance about what they're actually going to do. But, you know, when they hike another 50 basis points or 75, and we'll get a better understanding of what consensus is as we move forward.

Starting point is 00:48:37 And that would be the first time since I'm pretty sure the very early 80s when, you know, Volker hikes to 17, 18 percent, that the policy rate will be high, that the terminal rate for this hike cycle will be higher than the terminal rate for the last hike cycle, which would be pretty remarkable, especially considering debt to GDP has what doubled, tripled in the time frame since the last hike cycle. It's insane. You know, the Fed in order to bring down this inflation, which obviously is their mandate, because they're also facing a pretty big credibility problem.

Starting point is 00:49:10 You know, Jerome Powell is, as Jeff Snyder says, he's channeling his Paul Volker. He's trying to do his best impression of somebody who's willing to fight inflation at all costs. And, you know, they stand the risk of bankrupting all these fracturing. all these fragile, softer nations that hold this dollar-denominated debt. It's, it's a crazy situation. You know, I think in the fall, Southern European nations, other emerging markets, we see, you know, defaults ensue over there among the more fragile ones in terms of their credit risk. It's not a, it's not a pretty look for the fall in my opinion. Yeah, what do you think about, and I know this is really short term. I like, like you, I like to talk about the longer moves, but what do you think

Starting point is 00:49:51 of this bounce that we're seeing right now. So for people listening, a lot of people from the future listening, it's, it's three August. We've had quite a bounce in equities. I'll tell you my opinion after you respond, because I don't want to, you know, go ahead. What are your thoughts on this bounce? So there's two schools of thought. You know, there's a school of thought that this is, this is a bare market rally, you know, spurred on by the fact that, oh my gosh, you know, In a month, we saw 15% 20% losses to the NASDAQ to the S&P. And people are buying euphorically thinking that, ah, a pivot or a pause is coming. And there's a school of thought.

Starting point is 00:50:29 There are a couple of different schools of thought. So we'll stop saying schools of thought. But there's also the idea that, okay, two years are trending down. Ten year fell pretty precipitously. At its highest week, it was 3.5. And now it actually waked down to 2.5. And so the, you know, risk is, is forward looking. And so there's an idea that, okay, because risk is forward looking, they're seeing all

Starting point is 00:50:54 these key rates begin falling. Okay, now it's time to, you know, now it's time to rally once again, potentially balance sheet conditions moving into the next year are going to be more optimal because, you know, maybe by some miracle these companies were able to, you know, roll their debt in such a way that these massive rate increases haven't impacted them. There are a lot of different scenarios, but I think the most doomsday scenario, I think it was Alessio on Twitter, Alessio Urban, great macro guy. He put the fractal of when Lehman went under. I saw this.

Starting point is 00:51:28 I saw this. It was. Yeah. And so the S&P would have room to fall to 1,100 if that was in case. So there are a number of different scenarios, you know, more, more, you know, taking a stance of absolute doom and gloom versus, okay. this is a relief rally spurred on by lower rates. And as of right now, you know, basically we're just, you know, myself and Nick and what we do at the Bitcoin layer, we're just trying to weigh things probabilistically, right?

Starting point is 00:51:54 So whenever the charts are telling us, we try to relay that information and sort of give all the probabilities. But, you know, those are sort of your scenarios, I'm guessing. Yeah. I'm a little suspect on the last one because I think back in 2008, when that all happened, And I think they were still trying to wrap their head around like, what is this that's happening? And why is it so, why is the liquidity and the credit in the system seizing up like this, right? Now I think they're looking at it and they're well aware of that, of it getting that bad.

Starting point is 00:52:30 And I think as soon as they even get a hint of it kind of turning in such a direction, their response is going to be there. but who knows. I'm in the first scenario you described. I think this is a bounce. I think we're in a in a very bare market. When I look at the 10 and the two, and I'm seeing that we're almost hitting like all-time lows in a negative, I think we're like negative 0.3 between the 10 minus the two. Yeah, negative 3, 7. Negative 3, 7. I think negative 0.5 is the deepest that we've seen back in 2000 and in 1989, when you look at that and you look at the unemployment rates at those exact moments in time, unemployment has always been at its fever pitch low. And that's exactly what

Starting point is 00:53:20 we're seeing right now. So what comes next is typically from an unemployment standpoint, pretty disgusting when this starts to reverse itself. And so for that chart, because it's just been so accurate throughout time. It's a little hard for me to suggest that or to think that we're going to be able to, and there's obviously other factors, but I'm not buying it for a second. I'm just not. Hopefully I'm wrong for all the people that are in long positions. Most definitely. Yeah, a lot of people, you mentioned unemployment. A lot of people have been, and even the Fed does this, they take a look at things that are still looking good, but they're lagging indicators like unemployment. And then, you know, the Fed will use.

Starting point is 00:54:03 that, oh, well, you know, we're still at 3.6% unemployment, and they'll use that to job on the market as if it's a good thing, but that thing's lagging. So lagging. Yeah, it's unbelievable. I mean, like, I'm sure Jerome Powell can afford a Bloomberg terminal. Just take a look at, you know, all the jobs data that's coming out, all these other really important economic releases that are coming out. You know, things are getting more dismal.

Starting point is 00:54:25 You know, the labor market's extremely tight. As you said, the last, we actually didn't get below 3.6 percent, the last percent unemployment, the last hike cycle in 2019, you know, before that started to rise too. And then obviously COVID happened. So yeah, not looking at deal. Hey, so I want to put up a chart here. I really like this chart that you shared with me. For people listening, this is the S&P 500. And on the bottom, you have the three month note. And what you're doing is you're showing the how once they started tightening and you see the three month coming up on the yield and selling off. You see a corresponding almost down to what is this, a weekly chart, down to the week of when the S&P hit its peak and it started to begin its sell-off. So walk us through why you're choosing the three-month as kind of the indicator here and just some of your general thoughts on this chart.

Starting point is 00:55:23 If anything, I think that the broad strokes for anybody watching is that rates lead the Fed and rates guide risk. Risk is forward-looking, you know, six to 12 months. And they see essentially, the reason I chose the three-month was because, you know, of all the different maturities, of all the different tenors across the United States treasuries, the one that gets borrowed against the most, I'd say, or considered the proverbial risk-free rate would be the three-month. You know, obviously, the further you go out along the yield curve, you know, the more

Starting point is 00:55:55 duration, the more interest rate risk you incur. And so the reason I use the three month was because, you know, again, corporates borrow at the, at a spread to this. And for that reason, I felt, and actually, Nick published this initially. So I'm taking a little bit of his thunder. Essentially, this is what corporations borrow at. So, you know, naturally you could extend that out and say that's what things like the S&P would be the most responsive to. And it's pretty remarkable. You know, the moment you saw the three month kick up, I think the wake up, I think the wake

Starting point is 00:56:27 didn't even go as high as 50 basis points. You saw the S&P begin a pretty substantial move down. And that just goes to show how dependent on cheap, cheap, cheap debt we are. We talked about zombie companies earlier. And I think this is the easiest visualization for anybody, you know, to see how over levered everybody is on this cheap debt. We've been able to binge on it, you know, for the last 14 years since the great financial crisis. but also during COVID when the Fed decided to backstop literally everything, you know,

Starting point is 00:57:02 and inject the economy with all of this liquidity. And now you're seeing, okay, once the music is up, the S&P has been brought down a pretty substantial amount and has only started a rally once rates have begun to level off and reverse. Let's go to this next one, which is basically the exact same chart only you now have Bitcoin at the top. And, you know, when we were kind of trading notes before we started, you had a statement that Bitcoin has been kind of a leading indicator to market moves. And I think a lot of people in finance would agree with this. And in here, you're kind of demoing that where the price started

Starting point is 00:57:41 selling off on Bitcoin well before the three-month started to also sell off. What do you think's causing that, why do you think Bitcoin would lead the market on recoveries and whatnot? For sure. So Bitcoin leads other traditional risk assets for a couple of reasons. But I'll also preface it with Bitcoin is, it also acts as a false alarm sometimes. You know, Bitcoin has these extremely volatile swings. And sometimes, and in this case, when Bitcoin started to decline, in eight weeks before the three months started it increasing. In this case, it wasn't a false alarm. But if you look back, even just on this chart, back to last May,

Starting point is 00:58:27 if you looked at that and then thought that broader risk was going to puk to, you were wrong. If you looked at that and thought, oh, rates must be increasing relatively soon, you were wrong. But by that same token, Bitcoin does get it right sometimes. And the reason I feel, and we're going to publish a longer form piece on this, we're going to do a longer form spy versus SP 500 versus Bitcoin study is because of Bitcoin's very, very tiny liquidity profile compared to the S&P 500. Bitcoin, that's reason number one. So Bitcoin's market cap is 450 billion roughly, and the SP 500 is right around 35 trillion.

Starting point is 00:59:03 And so, you know, Bitcoin being a fraction of a fraction of the S&P 500, but also trading with very high beta to other risk assets, it means that as Luke Groman puts it, Bitcoin can be sort of a fire alarm. When you're looking for something that could be a leading indicator on the direction of risk, Bitcoin, in this case, it led the S&P 500 by eight weeks. The other thing is sort of this extreme excess of leverage. So obviously, we had this massive leverage on wind, you know, sparked by the collapse of Terra Luna. And then all these insolvencies that we talked about, some odd billion dollars, or excuse me, $5 billion some odd dollars of cell pressure. And, you know, I guess it's just a symptom of a free market, a market where there aren't a

Starting point is 00:59:49 tremendous amount of regulations in terms of leverage on the balance sheet, but also leverage, you know, with these various exotic financial products that people can take on. And as a result of that, when leverage gets purged, the price tanks pretty expeditiously compared to other risk assets. But that said, you know, while Bitcoin can sometimes be unreliable, it led the 2017 S&P 500 top by something like two months. It led the 2018 top by something like six months. And then in 2021, the one that we just showed, it led it by, you know, eight full weeks. So obviously as Bitcoin monetizes and its market capitalization comes closer to that of the SP 500, it'll be a less effective fire alarm. But as of right now, you know, it's a moderately

Starting point is 01:00:32 reliable indicator for when things are going south in traditional markets. Hey, we talked about the 10-year minus the two-year. I talked with Alf last week a little bit about this. Your chart here that you shared with me, when you're looking at the largest disparity from a negative spread standpoint for the 10 minus the two-year on these previous periods going back to the 2000, basically right as 2007 started, you didn't really hit a recession in two-year. until one year later, which is your red lines here on the Bloomberg chart. Then let's go back and look at the year 2000. It was about six months later, you were officially in a recession. And then in the 1989, when it was at the peak negative 0.5, it took nearly a year and a quarter to a year and a half before you had officially hit. And I'm completely disregarding COVID there in 2020 because I just kind of think that that was maybe a little bit of a different scenario of just an unprecedented type event.

Starting point is 01:01:45 This looks like so similar to what we were seeing there. And you had mentioned earlier about how this is a much better leading indicator to a recession. Are there other leading indicators that you would pay attention to beyond the 10-year minus the two-year? There are, yeah. The 10-year, two-year, just to provide some context as well. I mentioned how 2s trade with policy rate expectations, tens trade with forward growth and inflation expectations. And so the way, because this chart's been thrown around a whole lot, the way that this can be interpreted from 30,000 feet is below the red line. And when these curves invert is when growth expectations, forward growth expectations,

Starting point is 01:02:31 annual inflation, the Fed targets at 2% are below the policy rate expectations, right? So in other words, the price of money, right, policy rate, is higher than expected growth, which is very bad, which is why sort of this 2's 10 spread is such a good indicator. But looking at the rate of change there, that's not good. A couple of other things I tend to look at, Nick tends to look at, are the five year, five year inflation swap, not necessarily as a recession barometer, but how forward growth expectations are looking. As of right now, things are channeling relatively steadily. We know that the Fed actually looks at the five year, five year inflation swap for some perspective as to

Starting point is 01:03:13 whether or not inflation expectations. And this means inflation expectations six to 10 years from now are coming down. They're increasing, and that's sort of what they use to dictate their policy rate. You know, it did start moving down steadily, but it's continuously channeling around that to five level. So we'll see. And then the other thing that we tend to look at is the three-month, 10-year treasury spread. And that, as opposed to two's tens, because the Fed likes to wait until the very, very, very last

Starting point is 01:03:44 minute, they like to look at the three-month, 10-year spread for when, oops, we've gone too far, time to reverse course. You know, ultimately, the Fed, they could be a lot more ahead of the curve if they looked out further on the yield curve and addressed issues with monetary policy when the longer tenors on the curve started to invert, right? You know, when five's tens begins to invert or even, you know, tens-thirties. Like, nobody takes a look at tens-thirties, nobody takes a look at tens-twenties, especially not the Fed.

Starting point is 01:04:13 But if they did, maybe they'd be able to adjust monetary policy ahead of some of these major cataclysmic events happening. Instead, what they monitor is the three-month tenure, which is perhaps the shortest inversion and the most severe inversion you could possibly measure. I don't know why we pay these people. I really think. You know, when I'm thinking about like just the way they're reacting, I think so much of it is they just can't deal with a negative yield curve from a management of.

Starting point is 01:04:43 of banking balance sheets. Like all of these banking balance sheets, for them to have quote unquote assets in a fractional reserve system, it's all based on the duration arbitrage that they have on their balance sheets. So as soon as the yield curve starts flipping that way, like they have got to, they've got to act because it'll get messy real fast. And unfortunately, I think that that's kind of what's brewing right now

Starting point is 01:05:09 is in short order, but we'll see. All right, Joe, these charts are phenomenal. This is amazing. There was one final one that I want to talk to you about. This is much more Bitcoin-related. You have a confluence indicator that you and Nick have worked on. Let me bring it up here for folks so they can kind of look at it. And walk us through as I'm pulling this up, talk us through what this is.

Starting point is 01:05:38 Of course. So the first chart here is our fair valuation framework. And basically, this is something Nick and I worked up a month or two ago when we were trying to figure out the clearest and highest signal way in order to value Bitcoin. Oftentimes people will get way too muddled when it comes to whatever indicator they're using. They lean too heavily into on-chain or they lean too heavily into technical analysis. And ultimately, it ends up, you know, your chart ends up looking like a five-year-old's

Starting point is 01:06:06 finger painting more than, you know, an actual financial analysis chart that you can derive signal from. And so basically the idea behind this was that simplicity, 30,000 foot view will give us the highest signal. And really the way we went about this was going across three completely separate financial disciplines in order to find the floor in every single one of them. And what I mean by that is we went through on-chain, right, on-chain analysis. We went through traditional technical analysis. And then we went through energy. And the three metrics we derived in order to create this floor, our realized price, 200-week moving average,

Starting point is 01:06:45 and actually proprietary metric that I created called the electricity hash value. This was based on Charles Edwards Bitcoin production cost. And basically, the way that that gets derived is multiplying terra-hashes per Bitcoin by it's, I'm losing it. But essentially, it's the production cost of one Bitcoin. And basically the idea is that if you zoom out, even I have this chart up to 2019 because I think it's helpful to just take a look at the most recent cycle or couple of years. But if you zoom out, you can see every single one of these floors moving in a stepwise

Starting point is 01:07:18 function underneath the Bitcoin price. And this is very helpful because when Bitcoin approaches or falls beneath these floors, you can identify, okay, Bitcoin is cheap, Bitcoin is closer to its fair value. And when the spread between these widens, you can say, okay, Bitcoin is overvalued, right? And the reason we kept it at only three metrics was because, again, we feel that you could derive the most signal, you know, if you eliminate all of the unnecessary things. And so I just toggled to the next chart here, where you combined those three, the realized price, the 200 weekly moving average and the electrical hash value into a single confluence price.

Starting point is 01:07:59 And people can kind of look at that. I'd be really curious to see, I'm assuming it looks really good if you continue to zoom out. Oh, yeah, it does. Not to Twitter horns at all. I mean, this people have, so many people have come before in terms of this. In terms of doing similar charts to this, I know I'm certainly not the first person who has used the word confluence to create a chart that describes a floor. But again, you know, the fair value framework, you do, you know, taking that idea of simplifying it even further, we made a really just a simple average

Starting point is 01:08:32 at all three up divided by three. And it provides a whole lot of signal as to whether Bitcoin is over or undervalued. One of the cool things is that we also put an oscillator underneath. So you could see whether Bitcoin was expensive or cheap. And we published this every week on our substack for free every Saturday. We do sort of a weekly update. And this is one of our top of the line charts. We have a whole monitor that we go through.

Starting point is 01:08:57 We talk about sort of Bitcoin's correlations, its prices. And this is one of the charts that we include because I think really anybody who takes a look at this can understand, okay, what does this mean? In the top left corner, it says exactly the inputs, the value of all of those inputs. And then at the bottom, you know, I put expensive and cheap underneath that line to show when the the spot price of Bitcoin falls below the floor. And it's a really simple, I feel, high signal way of determining whether or not Bitcoin is over undervalued. Let's say that the doomsday scenario and macro plays out here in the coming two quarters. How do you feel about a model like this holding up, considering the period that Bitcoin has

Starting point is 01:09:43 existed relative to not really experiencing a 2008-2009-like scenario? Some might argue that COVID you saw, but I think they came with such a fire hose of Fiat printing in such a short, quick response kind of way that Bitcoin had a massive sell-off, but it rebounded within literally days back to levels that it was before. I think it recovered within 60 days of where it was at. So for people that might read this and be like, oh, well, it's below the price, but not necessarily having appreciation for the macro setup that we're in and they're really not being a historical precedence. How do you think through that? And what would you say to a person like

Starting point is 01:10:27 that that might be looking at this chart and getting excited? Right. Absolutely. So you really have to look at all of it through, you know, what we try to do at the Bitcoin layer is look at Bitcoin through a macro lens. Look at it through the lens of what rates are telling us and sort of the geopolitical landscape and how things are playing out. Because if you take a look at this chart, it doesn't paint the full picture. You have to consider what credit conditions are like, what rates are telling us about how expensive money is at a certain point in time, what the Fed is telling us about how it's going to guide monetary policy. So looking at any one chart, especially a chart like that, doesn't paint a full picture. In 2020, I would say we

Starting point is 01:11:09 definitely didn't see a sustained recession. As you said, you tend to discount when the curve inverted in 2020. I do as well. You know, it wasn't a sustained recession, as you said, the Fed backstopped with liquidity almost immediately. You know, they created several, several new institutions in order to do so. And chances are they will in the next one. But as of right now, the Fed is being extremely hawkish with sucking liquidity out of the economy. And their tenor, apart from a couple of minute things, it hasn't changed much. And so the question has to be asked, Like, how is Bitcoin going to perform in what might be like its first sustained recession or major economic contraction?

Starting point is 01:11:51 However, they decide to change up the definitions. And I would say that the best thing you could do there in order to try and figure out how Bitcoin is going to perform is taking a look at these historical levels, you know, sort of combining that with the adoption trend of Bitcoin, you know, how many new people are coming on to the network. And more so than anything else, understanding that. Bitcoin sort of leads other risk assets in this regard. I think Bitcoin stands to continue channeling around this level for a pretty sustained period of time unless we see a pause in

Starting point is 01:12:28 rate hikes, which very likely, you know, there's a scenario in which that could happen, then Bitcoin could, you know, begin an uptrend. But as of right now, you know, I wouldn't expect Bitcoin to massively break up or massively break down. We saw that there was a huge bond cohort around the 20,000 level. So really anything can happen. You know, the Fed has, again, they're hawkish and that, you know, they're not ending their liquidity draining from the economy anytime soon. And Bitcoin actually trades basically one-to-one with global money supply. I didn't include the chart here, but two weeks ago, Bloomberg has a very, very nice indicator that basically compiles every single reported country's M2 money stock. And just like other risk assets, Bitcoin

Starting point is 01:13:13 rises and falls and rises and falls. And so as of right now, the year over year change for liquidity, global liquidity, it's the lowest it's ever been. It's the lowest it's ever been in the last three or four decades. You take a look at the rate of chains for the policy rate. It's the highest it's been in several decades. And so you have to wonder how much longer can the Fed keep up with draining liquidity from the economy?

Starting point is 01:13:36 And the answer in my purview is not very long before bankrupting, not just corporations, but emerging markets, other very fragile entities. And when they eventually reverse course, right, that's when Bitcoin stands to benefit. Because of Bitcoin's extremely low liquidity profile, really any major player stepping in, which would undoubtedly happen if the Fed were to pivot, would send Bitcoin flying. So as of right now, cautious, you know, until the Fed sort of changes its tone. But, you know, that's where we stand. I just can't even imagine the consolidation of like the hands.

Starting point is 01:14:11 hands that are buying these prices for this long through this. And like you said, if it continues to go sideways in the low 20s, and even if it dips back below 20 again, those people that are buying and gobbling up all those sellers' coins, like, I just cannot imagine what that's going to entail when you eventually do have a Fed pivot. And it seems to me like they're going to have to come with whatever this thing is that's brewing, they're going to have to come with a fire hose of liquidity that we have not even remotely seen historically is what I suspect. And I'm assuming you see it the same way. Absolutely.

Starting point is 01:14:55 You know, new and creative ways of pumping the economy with liquidity is the Fed's third mandate. I like that. What a pleasure talking to you, Joe. your charts and just your analysis and ability to kind of communicate is just phenomenal. Really enjoyed this. Please give people a handoff. Your Twitter feed is amazing. We'll have a link to that in the show notes, but give people a handoff to anything else you want to highlight.

Starting point is 01:15:23 Absolutely. Thank you for having me on Preston. You could find me on Twitter at Joe Consorti. And I'd also redirect listeners to my Bitcoin and Macro Substack publication. I do it with Nick Batia, author of Layered Money. It is at the Bitcoinlayer.substack.com. It's a premium Bitcoin and Macro newsletter. And we also have a free post that go up quite frequently.

Starting point is 01:15:48 You know, in terms of high signal, that's basically where everything's going. So point people to the Bitcoinlayer.substack.com. Fantastic. Joe, thanks for making time and coming on the show and looking forward to chatting with you more in the future. Absolutely. Thanks, Preston. Thanks. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application

Starting point is 01:16:08 you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - BTC090: Risk Free Rates on Bitcoin's Lightning Network w/ Joe Consorti (Bitcoin Podcast)

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