Lyn Alden, Founder of Lyn Alden Investment Strategy, and Mauricio di Bartolomeo, Co-founder of Ledn, discuss how inflation could affect the digital asset industry.
- how Mauricio’s upbringing in Venezuela and firsthand experience with inflation led him to Bitcoin
- what a “long-term debt cycle” is and why Lyn thinks the 2020s could be similar to the 1930s and 1940s
- the difference between inflation and hyperinflation
- how inflation changes consumer investing and purchasing decisions
- what the impact of inflation is on Bitcoin
- how Russia’s war on Ukraine will continue to impact inflation
- how rising interest rates will affect Bitcoin and stablecoin adoption
- what type of economic environment is worst for BTC growth
- whether Bitcoin is an inflation hedge
- why Lyn is long-term bullish on stablecoins and Bitcoin
- what effect a global recession would have on Bitcoin
- how global inflation has changed adoption rates for BTC in developing economies
- how Venezuelans use and perceive Bitcoin
- why Lyn and Mauricio are excited about Lightning Network in developing countries
- what Lyn and Mauricio think about El Salvador’s adoption of BTC and its billion dollar BTC bond
- how Ledn, as a lending company, was able to navigate the Celsius/Voyager crash
- how Lyn analyzes the risks associated with firms like BlockFi
- what lessons Lyn and Mauricio have learned in 2022 about digital assets and the economy
Thank you to our sponsors!
Ava Labs: https://www.avax.network/
- Twitter: https://twitter.com/LynAldenContact
- Website: https://www.lynalden.com/
- Previous Unchained episodes:
- Is Ethereum a Good Investment: https://unchainedpodcast.com/lyn-alden-and-raoul-pal-is-ethereum-a-good-investment/
- Why Bitcoin Now: https://unchainedpodcast.com/why-bitcoin-now-meltem-demirors-and-lyn-alden-on-the-perfect-conditions-for-bitcoin/
Mauricio di Bartolomeo
- Twitter: https://twitter.com/cryptonomista
- LinkedIn: https://www.linkedin.com/in/mauricio-di-bartolomeo-780284101
Recommended Lyn Reading on Inflation
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the August 2, 2022 episode of Unchained.
Every other week, Unchained hosts The Chopping Block where crypto insiders Haseeb Qureshi, Tom Schmidt, Robert Leshner, and Tarun Chitra chop it up about the latest in the digital asset industry. Catch the latest episode on YouTube and all podcast platforms.
Oasis Network is one of the fastest growing Layer 1 blockchains, designed to support privacy, speed, and scalability in Web3. Learn more and join the community at OasisProtocol.org.
With the Crypto.com app, you can buy, earn, and spend crypto in one place. Download and get 25 dollars with the code Laura. Link in the description.
Harness the full power of the Avalanche network with Core, your new Web3 command center. Built by Ava Labs, Core is more than just a wallet. It’s a non-custodial browser extension engineered for users to seamlessly and securely experience Web3 like never before. Explore Avalanche dapps, NFTs, bridges, subnets, and more today.
Today’s topic is inflation and how it will affect Bitcoin or crypto. Here to discuss are Lyn Alden, founder of Lyn Alden Investment Strategy, and Mauricio di Bartolomeo, co-founder and chief strategy officer at Ledn. Welcome, Lyn and Mauricio.
Thanks for having us.
Mauricio di Bartolomeo:
Thanks for having us.
With inflation at 9.1 per cent, there’s been quite a bit of concern about where the economy is headed, and that will also have big implications for crypto, and it already has. Mauricio, let’s start the conversation with you because you have a really personal and fascinating story about inflation, and it’s a story that brought you to Bitcoin. Tell us what happened there.
Mauricio di Bartolomeo:
Yes, and thank you. So, I’m originally born and raised in Venezuela, and so, actually Venezuela has been experiencing double digit inflation since 1983. So, I was literally born into double-digit inflation. I was born in ’85. So, I spent a lot of time as a kid trying to understand a lot of things that seemed broken in society, and so, you know, inflation was always bad in Venezuela from what I remember, but it took a turn for the absolute worst when authoritarianism essentially started getting entrenched in the country, and corruption started running amok essentially, and the Chavez party essentially took away or dismantled the institutions that protected democracy, and so, I went through the sort of inflation to hyperinflation transition, and it was in that hyper…
And this happened, just to give people context, Chavez took office in Venezuela in 1999, and he took office when the oil barrel was trading at around 15 to 20 dollars, and Chavez essentially, as he was installing his sort of communist system into the country, oil was rallying, and so, this kept offsetting the effects of his budget because as he kept doing things that made people want to take their money out of the country, oils revenues were inflating, and so, that sort of negated the impact of his agenda in the economy, and it wasn’t up until 2013 when he actually dies, so Chavez dies and an election has to be called in Venezuela, and this is the election where everybody thinks that democracy is going to get regained and we’re going to have a triumphant return back into a country that you can vote, but this is not what happened. In fact, the sort of…Maduro, who was at that point left in charge, took the reins of the country on a fraudulent election, and it was at this point that inflation switches to hyperinflation, and from 2014 onwards, Venezuelan inflation goes from sub-hundred percent to now into the thousands and eventually peaking into the millions of percent, sort of surpassing the inflation that was seen historically in Zimbabwe, Argentina, and others, and when I found Bitcoin was in fact during this turmoil.
As many people were leaving Venezuela because this hyperinflation despair created the biggest migration crisis in the history of America, of continental America from Venezuela outwards, all of my friends were leaving, and they were depressed, and everybody was understandably very, very sad. In this…my youngest brother was actually just graduating university and we were all encouraging him to leave the country, but he didn’t want to leave. He refused because he didn’t want to, he just didn’t want to leave, and in his reluctance, he starts trying to find businesses that work in this environment, and he starts mining Bitcoin, and when I went down to visit him again, he was essentially…his positivity and the success of his business was infecting everyone around him, and all of sudden his friends started mining Bitcoin, my parents started mining Bitcoin, my uncles and aunts and cousins started mining Bitcoin, and I see they’re the only guys with smiles as everybody else is leaving, and so, this is the point, you know, we can go deeper into the story, sorry, I get overextended, but that’s how I fell in love with Bitcoin, and I knew we couldn’t build a business in Venezuela to grow and to contribute to the community, and so, that’s why we decided to step up Ledn in Canada, and we can get into what we do later at Ledn, but it’s a tool to help people in that situation.
Yeah. I love how much your story kind of brings like a lot of this history to life because, you know, even if it’s recent history, a lot of times I feel like when we talk about the economy it can feel very abstract, but actually Lyn offers a really great perspective in that regard because a bunch of Lyn’s recent writings on all this have been analogizing the early like 2000s up until, you know, the present day to the period kind of from the 1920s to the 1940s. So, Lyn, can you explain your theory there, and then also shed some light on what you see as the current causes of inflation?
The way I would break that down is a lot of countries that have had very high inflation, but if you look at the broad set of developed markets, super high inflation is, you know, is pretty constrained to certain decades, and so, the work that I did on that kind of cycle analysis was inspired originally by Ray Dalio. He proposed a long-term debt cycle, and the theory there is that in normal credit cycles, right, so debt as a percentage of GDP builds up, some of that is malinvestment, and then there’s some sort of inevitable downturn, a contraction. It could be caused by the central bank trying to tighten it, or it could be some sort of external shock, or it could just run its course, and then you go through a period of deleveraging, but because of the way that our current systems are designed, that’s when policymakers will step in.
They will cut interest rates. They will encourage credit growth again, and as a result, you generally don’t deleverage all the way as a percentage of GDP than you did in the beginning of that cycle, and usually interest rates end up lower than they started that cycle, and so, instead of looking like a debt sine wave, a debt percentage of GDP sine wave, instead you have like an upward sloping sine wave cycle after cycle. You keep getting higher highs and higher lows in terms of debt as a percentage of GDP, and you get lower highs and lower lows for interest rates, and so, the long-term debt cycle kind of says, well, what happens when you hit zero, or in some cases mildly negative?
There’s really not much more they can do, and you start to, you know, debt itself gets super high. Interest rates are near zero, and that’s when you’re more likely to experience, you know, pretty significant currency devaluation, basically they run out of the tool to, you know, cut interest rates alone, and so, they shift toward deficit monetization and can shift towards large fiscal deficits. It could be up to and including things like helicopter money that we saw during the pandemic, basically literally sending people money, but it can include all sorts of fiscal programs that are monetized in large part by the central bank.
Generally speaking, I mean there’s studies that show once a country gets over 100 percent debt to GDP, I think the study I was looking at before from Hershman Capital was 130 percent debt to GDP, there’s like a 98 percent chance you’re going to default in some way over the next 15 years, and if the liabilities are in your own currency, you’re most likely going to “default through inflation,” meaning that people will get paid back the number of units that they’re owed, but they will be significantly devalued, that they won’t be worth the same as anywhere near kind of the same as when they were issued, and so, most of my analysis shows that much like the, you know, the 1930s and the 2010s roughly were kind of the aftermaths of these big long-term debt cycles starting to pop, specifically the private debt cycle, and so, in the 1929 crash, that was a lot of private debt coming undone, and you go through this very long, stagnant, disinflationary period, and then you had rising populism, rising economic discontent, both in the United States but also elsewhere in the world, especially in Europe.
What we’re seeing now is that, you know, the 2008 crisis happened. You had, again, you had a big private debt bubble unfolding. Then we went through a very long malaise, very slow economic growth. It wasn’t obviously the same as the Great Depression. We have better technology. We have different monetary policies this time around, but you know, for both the United States and many countries around the world, this was a very slow growth decade. Again, you had rising populism, rising economic discontent in many places around the world, and in both cases when you kind of have another shock of some sort, in the prior cycle it was war, and in this cycle it was a pandemic, you know, you have a very fragile system and when it gets hit by something that’s when they really go towards fiscal, and that’s when you start to get that more inflationary type of response, and what makes that type of inflation different than say the 1970s is in the 1970s, one, the inflation was from bank lending.
So, banks were creating a lot of loans, and that was increasing the money supply rather than mostly fiscal deficits, and number two in the ’70s, because debt was very low as a percentage of GDP, they could raise interest rates in order to try to quell inflation, whereas in the ’40s as inflation runs up to sometimes double digits, they still had to hold rates low because of how high debt is, and so, I’ll stop there, but essentially that’s the thesis that we’re in an environment where debt’s so high, and so, we’re likely to experience periods of, you know, high inflation without necessarily corresponding interest rates, and we can get into all the other things like underinvestment in assets, lack of energy CAPEX, supply chain problems. There’s all sorts of real constraints that are one side of the equation, while the pretty substantial increase in the money supply is the other side of the equation.
Before we dive into those other factors, I’m curious for both of you, you know, like I said, I think you offer different perspectives. How is it that you think inflation, or in the case of Mauricio, what you described, hyperinflation, how do those things change the way everyday people think about money or the way they think about, yeah, just kind of their investments or the way they spend money, and in general, how does that affect the way the economy runs?
Mauricio di Bartolomeo:
Yeah. I can give you kind of my two cents based on what I saw in Venezuela, and before I get into that, I want to make a quick distinction in the way I interpret inflation versus hyperinflation because I actually…people tend to think of inflation and hyperinflation as an extension of the same phenomenon, but I actually think that they are two very different phenomenons and they have different root causes.
I think inflation as we see it today and as we understand it in the US is just a rational actor’s response to an increase in the money supply. So, if the money supply increases by 20 percent, I will reprice my assets by 20 percent because I still believe that the assets are valuable, just there’s a different ratio of units to value.
In the hyperinflationary scenario, I actually think that this is a political issue. Hyperinflation kicks in when a person loses all faith in the government and the central bank, and all bets are off and the government has no means to bring the economy back in the rails, and so, it’s basically hit the liquation button, and you’re just liquating anything that comes in, whether it’s local currency, anything that is tied to the local system is getting chopped. That’s hyperinflation, and the two I would argue make subtle shifts in your behavior on a day-to-day basis, right?
So, when it comes to inflation, you don’t necessarily think of, you know, 20 percent inflation annually or 30 percent inflation annually as a shift that’ll make you go and try to sell all your local currency immediately and sort of not live off of it. It’s a lot more manageable. When inflation starts running high, one of the things that starts happening, this is, again, subtle changes with inflation, but a subtle change when inflation starts running double digits is time horizons become shorter. So, if you were going to invest in a five-year project, now you’re looking for a three-year project, and as inflation goes higher, you’re looking for a two-year project and a one-year project and a three-month project, and the paybacks need to be higher and higher, and you keep looking for more and more aggressive returns, and that leads to short-term thinking and short-term behavior.
When hyperinflation hits, it’s a completely different game because I describe this as you having two jobs. You have your 9 to 5 which you have to work to get paid, and the second you get paid, you have another job that goes on until infinity because you need to get rid of that asset before it melts in 24 hours, and so, you’re forced to become a trader, an investor. In many cases, what governments do in hyperinflation is they lock all access to dollars, and so, when they do this, they effectively send people into digital assets or the barter system because everything gets monetized. You know, cars get monetized.
Any asset that can get repriced gets monetized in lieu of the currency, and so, I remember distinctly, you know, buying tires to then to be able to trade them for sugar, and so, these types of things, and this sounds crazy for someone in North America to talk about today, but it’s very real back there, and to Lyn’s point, I actually, we can get into this later, but the strength of the dollar today is causing…it’s a wrecking ball for emerging markets and frontier markets right now. It’s causing social discontent on a daily basis, and we’re going to see populism rise up again in these places. Not to be the bearer of bad news, but just the writing’s on the wall, and so, I think it’s a really interesting trend how a lot of these 1940s analogies are playing out, in my opinion, will play out in the next few years.
Yeah. I would just urge listeners who haven’t heard the episode with Wences Casares to listen to that because he describes that very scenario that you’re talking about where his mother picked up him and his sister from school, and she literally had her salary in paper bags like in cash, and she made him and his sister run through the grocery aisles ahead of the person who was like updating all the prices on the food with a new sticker because the value of the Argentine peso was plummeting so rapidly, and they were, you know, having to gather all the food and then run up to the cashier, and every time there was any money left over, she would send them back for more food, and his sister was like, why don’t you just save your money and then we can buy more food later when we need the food? And his mom was like, no, because it’s going to be worth less tomorrow, and you know, it created such a big impression on him as a high schooler, and so, that was why years later he kind of immediately understood the significance of Bitcoin. Lyn, do you want to weigh in on this question about how inflation kind of changes the way people act?
I think he described it perfectly. Basically, if you look at it from let’s say the business perspective, for example, it’s very hard to make long-term plans, especially for long-term contracts involving money if you don’t know what the value of money is going to be, and that can apply at high single digit inflation or it can, you know, it’s even worse obviously the higher it gets, and I also agree that inflation and hyperinflation are fundamentally different.
Generally with hyperinflations, something severe happened to the economy’s ability to out, you know, produce things, right? So, kind of the most famous example might be Weimar, you know, is after a disastrous war. There’s other ones like, you know, disastrous government changes, kind of extreme government programs, authoritarianism, Venezuela being a key example, Zimbabwe, another thing. Basically when you’re kind of going after what has people produce things and you’re not having all those natural incentives work normally or you’re just severely impaired because if your infrastructure from a war or from things like that, those are the types of conditions that can lead to outright hyperinflation.
And another factor is that, you know, to touch on what Mauricio just said is that a lot of countries, what makes a frontier, an emerging market different than a developed market kind of at its core is that a lot of them, you know, their debts are denominated in dollars, or sometimes other currencies like euros, but most of it’s dollars, which is a currency that they can’t print, and so, when you look at say the United States, Europe, Japan, these are developed countries. Their debts are denominated almost entirely in their own currencies, and so, if they start to have a debt problem, they, you know, they have a lot of leverage they can pull to kind of have that move down more slowly. China’s now in mostly this scenario as well. They have some dollar-based debts, but a lot of it is based in their own currency. So, they’re kind of a hybrid at the moment still, but as you go out to emerging markets, they have these external debts, and the problem is that, you know, the Federal Reserve can increase interest rates. They can do quantitative easing. They can do quantitative tightening. They can do things to purposely strengthen or weaken their currency.
It’s like imagine if you took out a loan for a house in gold, right, and then gold went up in price relative to your currency, that’d be terrible because your debts are getting stronger compared to your asset values and compared to your cash flows, and so, that’s something we see unfortunately for a lot of markets right now, and that’s why you get these, whenever you have that dollar strengthening period, you generally get emerging market crises, it’s really worse on frontier markets, and that eventually cycles back and hits the United States because people are selling, you know, various entities are selling dollar-denominated assets to get dollars, which means they’re really not buying a lot of treasuries, and also, it’s, you know, it’s very hard for American companies to keep selling goods and services at the same pace they have been because we’re all interconnected, and so, it’s just, it’s a very challenging time. The money system really that’s been in place for decades is really kind of, you know, it’s got a lot of issues right now that is both in developed markets and then also in emerging markets, and I do think that, yeah, people’s behavior changes around that based on what’s happening with their money supply.
So, let’s also now talk about the impact of inflation on Bitcoin, and why don’t we limit the remarks to, you know, kind of the inflation that we’re seeing here in the US and Europe. We can talk about hyperinflation a little bit later, although I think also we sort of touched on that. So, yeah, just what do you see as happening to Bitcoin in this environment?
Mauricio di Bartolomeo:
Again, a bit of a distinction between what behaviors are happening in North America versus the rest of the world. I think in North America, there’s still a sort of tendency to think of Bitcoin as a risk asset and not necessarily as a reserve yet, and so, it is because of this I think that you see a trading with a high correlation to say the Nasdaq or the S&P 500, and so, the thinking here around, I think in North America and in investor markets in general, people still see Bitcoin as one more tool to add a little bit of upside I guess or excitement to their portfolios, and they are sort of opportunity driven and they’ll make decisions based on macroeconomic indicators, The Fed, et cetera.
What’s happening in other markets is very different because what I think we’re about to see as a result of this wave of inflation that’s affecting the rest of the world is the strength of the US dollar is places like Argentina, Columbia, you know, they’re having to deal with local inflation, and they’re going to probably start placing restrictions around the dollar. This is exactly what happened in Venezuela. In Venezuela, they locked us all out of the dollar, and that was the exact circumstance in which I found Bitcoin, and I found Bitcoin at the time because it was the only thing that…when the government locks you out of the dollar market, you stop being able to buy dollars through the bank, so you have to start buying dollars through P2P, so literally people, and these people that you will call will tell you I don’t have dollars right now because the liquidity dries up too. There’s…you know, everybody wants to buy dollars, nobody wants to sell dollars, and so, what ended up happening in Venezuela, who filled that spot was Bitcoin, and it was actually done by Bitcoin arbitragers.
So, in these environments, buying Bitcoin trades at a premium to what it would cost in say the United States or what it would trade in a different market, and the natural seller of that Bitcoin is an arbitrager that can basically sell you the Bitcoin into bolívares, use those bolívares to buy dollars, top off their exchange account somewhere else, buy the Bitcoin and lock that arbitrage. So, long and short, I think we’re going to see a lot of Bitcoin demand for non-investor markets, and I think that we may not see the same level of spike that we saw in 2017, 2018, or 2016 because stablecoins weren’t so popular and available back then. I do think that because stablecoins exist today and the de facto protection tool for hyperinflationary, person suffering from hyperinflation is the dollar broadly, I think you’re going to see a lot of that demand go to stablecoins this time around, but I still see the demand for Bitcoin primarily coming from non-investor markets in the next year or two.
Yeah. I think we can also start off by dividing inflation into two types, right? So, there’s monetary inflation and then there’s broad price inflation, and how Bitcoin relates to them is very different. So, monetary inflation is the actual money supply itself going up, and historically that tends to somewhat precede price inflation going up because, you know, it’s hard to get broad price increases if the money supply itself’s not going up very fast, and when the money supply does go up very fast for multiple reasons, that takes a little bit of time to trickle into the economy and people start adjusting their prices upward until all, you know, the equilibrium gets re-found at whatever higher rate the new price levels will be, and there have been some really good charts by macro people showing that if you look at say Bitcoin price year over year compared to global money supply in dollar terms, you know, if you translate all the different monies around the world, you translate them into dollars, and what is that money supply doing on a year over year basis, so the rate of change?
Generally Bitcoin’s bull markets coincide with increases in the money supply globally, and that can take two forms. It could be that the money supply itself in a lot of places is actually going up, as we saw in 2020, 2021, or it could be that the dollar’s weakening significantly, and so, the number of dollars that, you know, that money supply kind of translates to is going up, which is relevant because the dollar is, as we discussed before, a lot of the international debt around the world, and so, Bitcoin is very positively correlated with increases in the money supply, and vice versa when that starts to contract.
Now that we actually have unusually high price inflation in the developed world, we had, you know, the biggest broad money supply spike since the 1940s, that kind of goes back to my prior analogy where I described it, and now we’re getting one of the, you know, the biggest price inflation increases since the ’70s and the ’40s, but we’re also in a period where the central bank is fighting back. So, the Federal Reserve is trying to raise interest rates. They’re no longer doing QE. They’re starting to do small amounts of quantitative tightening. So, they’re letting some bonds mature off their balance sheet, and so, that’s putting downward pressure on a lot of asset prices, and because Bitcoin is still small and volatile and not widely held and not super understood still by the broad public, it is perceived as a risk asset.
A lot is being made of how low energy supplies caused by the Russian war in Ukraine has impacted inflation, particularly in Europe. How do you see the war continuing to impact inflation? Do you think it’s possible to pull back inflation at all while Russia is still at war?
Well, so, their natural gas prices spiked in late 2021, which is before the war broke out. Obviously, the war added a lot of uncertainty to the whole mix and is now contributing to inflation, but that energy supply side problem is bigger than just Russia and the war, and so, generally if we look back in history, there are these commodity cycles because, you know, it’s the industry where you can’t control the price of your own product, which makes running a business very hard, and so, when you have these kind of periods of oversupply, prices are low, the market starts to work, and basically nobody wants to put new capital in because they won’t get good returns on their capital, but eventually demand keeps going up and eventually supply starts to dwindle, existing supplies, and you start to get more of a squeeze and it pushes the price up, and that’s what encourages new investment to come in, and then of course they end up overbuilding and causing the next cycle of oversupply.
And so, because of the length of time it takes, especially for some of the long duration commodity projects, and this also involves, you know, oil and gas, those tend to be like we say these 15-year long cycles. You might have a decade of kind of higher, like rising and higher prices, and then like a decade or more of just like stagnant, low prices, oversupply, and so, partly just from where we are in the cycle, we are in a period where we, you know, we’ve had low prices for a while until recently, and there’s pretty low CAPEX, and so, now that we have kind of the fiscal stimulus to kind of increase demand for a period of time, and because we’re just, you know, our supplies, we’re not keeping up with kind of organic demand growth, we’re in this more inflationary kind of shortage type of environment for energy, and I think the only way out of that longer term is to bring new supplies to market, but then of course there are areas in the world where it’s worse than others.
So, the United States and Canada are pretty good on that front, but we have a lot of our own supplies obviously, whereas if you are in Europe or Japan, you have to import a high percentage of your energy, and for Europe in particular, I mean a very large percentage of their natural gas comes from a handful of pipelines from Russia, and so, obviously that’s a very challenging political environment, but yeah, I just think it’s now a narrative that it’s because of the war, and while that’s certainly making it worse, the actual like huge spike you saw in natural gas prices preceded the war by several months. So, it’s just, that whole thing is adding fuel to a fire that was already there.
And so, at this moment, you know, already we’re going to see that interest rates will be rising probably for some period. How do you think all of that will affect the adoption of Bitcoin?
Mauricio di Bartolomeo:
Yeah. So, I just wanted to basically add quickly on what Lyn said about how hard it is to increase oil production. So, in Venezuela, big oil producing country, when Chavez took office, we were producing 3.5 million barrels of oil per day. Today, Venezuela produces less than 700,000 barrels of oil per day, and so, this just shows you how even to maintain your production capacity, you have to invest a great deal to just keep it the same, otherwise it just deteriorates, and I would argue that this is what’s been happening everywhere outside of obviously the countries that have this type of infrastructure, and so, just sort of to highlight how difficult it is to bring back production online even if you have the reserves to go explore.
In the context of interest rates going higher and how that could potentially impact Bitcoin, my personal view is that as interest rates go higher and conditions continue to tighten, that’s going to put a headwind not just on Bitcoin but most risk assets, again, and because so much of the demand is disproportionately driven by US clients…like it’ll take all of Argentina to buy up what Michael Saylor sells. So, you know, it is a big deal. It is quite imbalanced in that sense, and so, I think that, because of that, it’s going to be in many ways a headwind, but what it will do, this increase of interest rates and strengthening the dollar, because that’s what it does, I think that is going to shoot the demand for stablecoins internationally. So, I think that both Bitcoin and stablecoins work as this sort of yin and yang in digital assets, that when one is not soaking up the capital the other one is, and so, inevitably it gets to the same endpoint, but it’s just the conduit on how it gets there can shift. That’s kind of my view.
I agree with that, and you know, one caveat I would add is that if you map Bitcoin correlations onto different things, the correlation to interest rates are pretty mixed in and of themselves. Like we discussed before, it’s more linked to money supply growth. It’s more linked to…you can also link it to PMI cycles, so purchasing managers index. It’s kind of a measure of economic growth or contraction, and more specifically acceleration or deceleration. Those are the types of things that Bitcoin’s heavily correlated with.
So, for example, in 2017 during the huge bull run in Bitcoin and broadly in crypto, the Federal Reserve was raising rates throughout that whole year, but key difference was that you had a period of economic acceleration, so they could raise rates into a pretty strong economic environment, and so, the other factors were better for Bitcoin than the raising rates was bad for Bitcoin, right? So, you had more good things going for you than bad things going for you, and where you really run into trouble is when the central bank, you know, The Fed is hiking interest rates or otherwise tightening monetary policy into a slowdown, and so, that’s what we saw in late 2018 when you had that big Bitcoin capitulation, and that’s also the environment that we found ourselves in throughout this year so far, and so, those are the pretty dangerous environments for, really for risk assets in general, and then, yes, as you go out the volatility spectrum towards assets like Bitcoin, they tend to be pretty impacted by that.
We are starting to see signs that when you look forward, you know, maybe a couple quarters, they’re going to have trouble raising rates probably past that point. We’re already starting to see forward market expectations of, you know, different ways that the market prices out what they think The Fed’s going to do over a given period of time. Those have already gone down compared to the levels that they were at a couple months, and we’re also, you know, we’ve seen yield-curve inversion. So, even though they’re increasing the short end of the curve, the long end of the curve is no longer going up in the same way that it was before, and so, you have that inversion that is generally indicative of potential recessionary conditions upcoming. It usually starts to signal, you know, maybe not the very end of a tightening cycle, but it becomes increasingly hard to keep tightening policy when you have an economic contraction of that type, and so, I do think that right now we’re in this kind of dollar hardening period as The Fed is kind of hiking into a slowdown, but I think if we were repeat this conversation next year, I think we probably would be in a somewhat different policy regime by that point.
So, in a moment we’re going to talk a little bit about how recent events have affected certain Bitcoin narratives, as well as this possible impending recession, but first a quick word from the sponsors who make this show possible.
Join over 10 million people using Crypto.com, the easiest place to buy, earn, and spend over 150 cryptocurrencies. Spend your crypto anywhere using the Crypto.com Visa card. Get up to 8 percent cash back instantly, plus 100 percent rebates for your Netflix, Spotify, and Amazon Prime subscriptions. Download the Crypto.com app now and get 25 dollars with the code Laura. Link in the description.
Is your Web3 experience hindered by inadequate crypto wallets and browser extensions? Ava Labs has created Core, the free non-custodial browser extension engineered for Avalanche users to have a more seamless and secure Web3 experience. The best-in-class Avalanche bridge now offers native support for the Bitcoin network. Put your Bitcoin to work in the robust DeFi ecosystem by bridging BTC to Avalanche today. With Core, you can also easily swap assets, display your NFTs in style, store your assets in a Ledger-enabled wallet, and put real dollars into your crypto wallet in just a few clicks. Core has everything you need for a simple, secure, and convenient Web3 experience. Download the free Core browser extension from Google Chrome’s app store today.
Oasis aims to offer improved privacy and scalability compared to other existing blockchains. They feature 99 percent lower gas fees versus Ethereum, high throughput, instant finality, and defense against MEV, making it ideal for decentralized applications. Oasis invites prominent Web3 developers to apply for its grants program and receive full ecosystem support along with up to 50,000 dollars in grant funding to create dapps in DeFi, GameFi, or NFTs. Join the community of innovative developers today and build the future of Web3 with Oasis Network.
Back to my conversation with Lyn and Mauricio. So, as we’ve been discussing for like roughly the last year, there’s been inflation at least in the US of 9.1 percent, and during that time Bitcoin dropped in price from $31,000 to $20,000, and this is despite sort of the long-time narrative that Bitcoin serves as a hedge against inflation. What do you think has happened to that narrative? Does it still hold up? If so, why did it not hold during this period, or you know, if not, why do you think it didn’t hold?
Mauricio di Bartolomeo:
So, I think, you know, Lyn probably can add more color into this, but my general view is that it did work as an inflation hedge because you don’t necessarily have to look at inflation in the last two months and then Bitcoin’s performance over the last two months. I think the inflation that we’re seeing today is a product of the excessive money printing that we saw back in 2020, and if you actually look at Bitcoin’s price performance from the sort of darkest times of the COVID crisis, which is when the government sort of started printing on or turning on the jets, and you look at Bitcoin’s price performance from say, I don’t know, April or June, like even a month or two post the actual COVID event, the base that you should be using for that calculation is closer to 5,000 or 10,000 dollars, and so, when you draw that line from 10 to 20 or from 5 to 20, so I actually think it has worked as a monetary base expansion hedge, and perhaps right now when that is now translating itself into consumer price index increases, it’s a bit of lag effect on it. That’s kind of the way I think about it is sort of like a delayed effect from when the monetary base increases and from the time that happens and when it permeates down to actual prices of goods and services, but I don’t know, Lyn, if you agree or disagree.
I agree. This touches on what I mentioned before that, you know, multiple charts show that Bitcoin price is very highly correlated to broad money supply growth, and so, it’s highly correlated to monetary inflation, which as Mauricio just pointed out, precedes price inflation, and so, now that we’re actually having the headline price inflation and we have the central bank trying their, you know, to raise rates into that, that’s not the environment we should necessarily expect Bitcoin to do its best. I mean, if you look at broad money supply growth year over year, it’s gone down significantly. It’s still positive over the past year, but that rate of change has slowed significantly compared to what it was doing in 2020 and early 2021, and so, in that sense you basically…it did serve as an inflation hedge, and now that inflation ironically is behind us, as there’s a different type of inflation here.
I do think that does however impact the public narrative around it. I mean, if they see, you know…they don’t see the M2 growth, most people. They’re looking at the gasoline prices and they’re seeing Bitcoin do poorly while other things are going up in price. So, I don’t think it was very good from that standpoint as like “marketing” standpoint for the asset, but I think that from a macro analyst type of lens, I think it behaved kind of rationally, and this, you know, it’s always hard to predict ahead of time what it’s going to do because, you know, an observation I made before is that Bitcoin tends to do very well in say raising PMI environments, meaning economic expansion. It tends to do poorly in falling PMI environments, and so, my big question going into this year is what happens…?
You know, normally in a falling PMI environment, usually it’s a disinflationary environment if you don’t have supply side inflation or like wartime finance, like huge fiscal types of things, and so, this was the first down PMI period in a while where we’d have high inflation, and so, you know, one of my questions was what is Bitcoin going to do? And I think we got an answer to that, which was not great so far. I think the real test comes in the next couple of years if The Fed is unable to keep tightening into that situation and you start to get that kind of longer run type of inflation and you start to get I think the second stage because right now they’re in their aggressive tightening phase. I mean, we haven’t had 75 base point, you know, overnight increases in the federal funds rate for decades, right? So, I think that right now the bigger force is how aggressive they’re trying to tighten monetary policy into a slowdown more so than the headline inflation itself.
It’s so interesting, you know, because I have seen so much commentary from different people saying, oh, Bitcoin as an inflation hedge hasn’t worked. What’s the new narrative? So, I find your perspective here really interesting and a really good point, but I did want to ask a little bit more about the stablecoins point that Mauricio made earlier because, I mean, I think that’s so fascinating, and I feel like that could kind of undercut some of the interest in Bitcoin. So, as we kind of continue to see these economic conditions play out, how do you think we’ll see that…? You know, give us more detail on what you see that doing to stablecoins, and then how you see that affecting Bitcoin.
So, I largely agree, and I’ve been pretty bullish on the proliferation of stablecoins for the past couple of years. It’s something I wrote about back when I was analyzing Ethereum and other assets basically saying that, you know, there’s a lot of things I found concerning about some of those ecosystems but that stablecoins was to me the clearest use case. Years ago, Bitcoin was the unit of account on offshore exchanges. You’d use that as your trading pair, but with the introduction of stablecoins, it displaced Bitcoin as, you know, kind of the asset you go back to as your unit of account, and then also we’re seeing its usage in, you know, for more practical purposes in these countries that are struggling with currency crisis, and an Argentinian described it very well.
He’s like, you know, I have local money for the next month, and then I have dollar, like stablecoins for the next say 6 months, 12 months, 24 months, and then anything that I want for like 3 to 5 years savings is in Bitcoin or real estate, things like that, and I think that’s a reasonable way to think about it for a lot of those markets because you can’t have all your liquid savings in something that can go up or down, you know, 80 percent in a pretty short period of time, but there’s still…you know, when you look at a long enough time horizon, I mean Bitcoin’s money supply is going up by something like one-and-a-half percent, and of course every four years that rate’s going to get cut in half, you know, basically, and you have the dollar supply’s going up pretty rapidly. We have nine percent inflation and still very low interest rates, and so, I think that over the long arc of time, Bitcoin is a harder asset than dollars, but it doesn’t serve everyone’s kind of intermediate-term savings needs in the way that stablecoins do.
So, that’s why I’m long-term bullish both on Bitcoin and then intermediate to long-term bullish on stablecoins. Now, at the moment because, you know, a lot of those stablecoins are used for that type of trading environment, we have seen a reduction in the amount of stablecoins outstanding. I’m only referring to fully collateralized ones, not like the algorithmic ones, but we’ve seen a reduction in Tether, Circle’s you know, that’s held up better, but overall if you add them both together, there has been a reduction.
Yeah, and by the way, there’s been a reduction in algorithmic ones too, but it wasn’t the kind that anybody would say is a positive one, but anyway.
Exactly. Yeah. That’s a lot of, you know…you would think that over time some of that demand would then flow into the “real” stablecoin, to the actual collateralized ones, but right now, yeah, we’re seeing kind of a contraction of stablecoins, but I do think that when this kind of hardening is kind of less aggressive, I do think we’ll eventually see a liquidity come back into the ecosystem and probably a continued increase in stablecoin market cap.
Mauricio di Bartolomeo:
Yeah, no, I would agree with that, and so, I like to think of it as….so, again, just going off of the experience I had in Venezuela, and just to put some context as to how people get into digital assets in these markets. It’s very different than the journey here. The journey here can go through some, you know, just to talk about specifics, if somebody was a big, you know, Austrian economics fan, and then they got really into sort of money supply, et cetera, and then read a few books, and then they found this sort of intellectual curiosity path towards Bitcoin, and then they got there, and they had all this time to analyze and build this connection. Contrast that with you just got paid. It’s going to become half the next day. You are told to then go look for options that your government’s trying to prevent you from, and you’re then presented with these alternatives that are many times not in your language, in a currency that you don’t understand, in a format that is unknown to you, and you can’t really even understand the terms and conditions, and so, in that situation, as many unknowns as you can remove from your equation, you will take it. You will be a happy camper, and so, if in this situation I tell you that I have this dollar, but it just comes on a different wrapper and you just have to get an address to get it and you can go out and buy it, that is a much easier decision for me to make than to say, oh, I have this thing called Bitcoin. It is quite volatile. Today, it’s worth this many dollars. Tomorrow, you will have to sell it to secure the number of dollars that you are now acquiring from me.
Most people think in dollars, and if you give them another thing to go in and out of, it makes the decision harder, and so, I think that because of that stablecoins are…they almost even have I would argue a human rights element to them because they allow you to opt out from a tyrannical monetary system into something you understand, and I think in a long enough timeframe, Bitcoin will serve as that human rights option for the dollar eventually, if and when it gets there, right, and I think that’s why both of them are almost like a sequence of dominoes in human rights, right?
Like, I think you need…I think of fiat currencies as a set of like dominoes that like, you know, are destined to fall, and the second last domino is the US dollar, and the last kind of domino would be gold or Bitcoin or real estate or sort of harder, increasingly harder assets become the farther out dominoes, and so, this is how I see this playing out. I think right now my domino fell, Venezuela, right? Like, our currency should have been dead 20 years ago. I’ve said this oftentimes. In my lifetime, I’ve removed 14 zeroes from our currency, and it’s still out there today, but people still flock to the other dominoes, right, and that’s kind of how I see them. I see stablecoins as almost like a necessity for people to bridge their way into Bitcoin, and that’s why we’re big believers in stablecoins, you know, myself and at Ledn.
Yeah, and speaking of the human rights issue, I should say that we all met at the Human Rights Foundation’s Oslo Freedom Forum where definitely a lot of this was being discussed, and you know, just to circle back to the stablecoins things. I recently was asked by somebody who like, you know, he’s not in crypto, but was just sort of interested in it, and he said, oh, don’t you think that when central bank digital currencies get released that then that will kill off Bitcoin? And I was like, oh, no, no, no, no. What’s going to happen is that then people will get used to transacting with a digital wallet, with some kind of blockchain-based currency. They’ll learn how to do security for it, et cetera, and so, you know, maybe in the beginning all the kind of interest will flow directly to the central bank digital currency, but over time I would imagine that that then just widens the market for things like Bitcoin. Yeah, I agree with you that probably in the short term we would see, you know, more interest in stablecoins. So, as we’ve been mentioning, a lot of economists seem concerned that we’re on the verge of a global recession, whether or not that actually happens sort of remains to be seen, but if we do find ourselves in one, what do you expect the effect will be on Bitcoin?
Mauricio di Bartolomeo:
The recession can, a global recession I think, you know…one of the things I like to think about is like the world is a set of interconnected systems. So, it becomes kind of difficult for the entire globe to experience the same economic conditions at one point. Usually one place is suffering, the other place is thriving. So, a good example right now is what’s happening in the Middle East, right? Like, Dubai, UAE, all those guys are getting very active on the investment side. They’re announcing all these new funds and initiatives, and again, you know, the world, the oil consumers are suffering. The oil producers are doing well, and so, it’s really kind of hard to kind of figure out where we’ll all net out, but again, I think today investor markets make up a disproportionate amount of the buying supply in Bitcoin, and so, I think there will be a heavy tilt to what happens to these investor market economies, because again, the consumers in these economies are disproportionately bigger than everyone combined, and so, you know, if the US and Europe suffers, even though these aren’t the countries that need Bitcoin the most, they will likely impact prices the most, and so, I think…I guess it’s not really a great answer, but it’s really hard to kind of, for me to kind of suss how it will shake out for Bitcoin because so much of the price is driven by the people that need it the least, and so, that kind of distorts the signals.
And I think as we go through…so one is that, you know, a lot of economic indicators do suggest that we are probably in the early phases of like a recession or recessionary like condition. You either have a significant economic slowdown or an outright contraction, depending on what region you’re looking at, and so, for example, Europe is generally in, you know, rougher shape than the United States, but even the United States economy looks really problematic right now.
Historically, Bitcoin tends to bottom before the depths of the recession, but of course the sample size for that cycle is not very large. In that sense what I’m referring to is the PMI cycle. So, not all economic slowdowns result in recessions, and in the United States, for example, the PMI cycle is, you know, the purchasing managers index, that’s roughly a three-year cycle, and so, you get…it’s kind of correlated very strongly to the price action we’ve seen in Bitcoin over the long term, and right now Bitcoin price has been going down. PMIs have been going down, and so, my overall base case would be to kind of expect a choppy period for a while. I think it’s going to be a constraint as you have, you know, PMIs still going down.
Whether or not we see new lows, I really don’t know. That’s more of a trading call, and there’s all sorts of things like, you know, there’s pockets of leverage and liquidations that can happen, like we saw recently. You can never say which firm is going to end up having to, you know, basically sell at the bottom and get liquated. So, there’s all these like specific events that can either have Bitcoin already bottomed or still has yet to find a bottom, but the thing I would look towards mainly is the part in the cycle where liquidity stops getting worse, which I think will precede the bottom of the economic recession, and that’s the part where you probably want to be in digital assets I guess. That’s where you probably want to be in Bitcoin, and that’s where I would expect to see a lot of inflows back into stablecoins as well.
So, I still see struggle ahead, but I think that it’ll probably end up bottoming before, you know, kind of the economy does, but it remains to be seen. I mean, it depends. Every cycle’s going to be a little bit different. I think a lot of the pain’s already, you know, been squeezed out of the market, but bottoms can take a long period of time. I mean, if you looked at prior Bitcoin bear markets, you can just chop along sideways in no man’s land for the better part of a year or a couple years, and I wouldn’t be shocked to see something like that happen again.
Yeah. I would second that because I have seen those myself. We kind of spent part of the last, you know, section of the conversation focused more on sort of the developed part of the world, but I did want to circle back to the developing economies. What’s your sense of kind of like how the global inflation or these indicators of recession have affected the adoption of Bitcoin in developing economies, or you know, as Mauricio would say, the people who need Bitcoin more?
So, I mean, Chainanalysis showed that, you know, adoption rates among developing countries are generally higher on a per capita basis, but as Mauricio pointed out, the actual capital volumes are largely driven by North America and Europe. That’s where a lot of the capital is. So, we do generally see in a lot of those markets that there is a lot of adoption because they’re, you know, they’re the ones that have a more obvious use case for it right away.
There’s a lot of people in the United States, for example, that are like what use case could Bitcoin possibly have? I can’t conceive of a use case for this, or stablecoins, or whatever asset we want to talk about, whereas if you look at any country that has authoritarianism in it, right, which according to Freedom House is somewhere around half of the world population lives in either authoritarianism or semi-authoritarianism, so the self-custodial and censorship-resistant nature of Bitcoin is useful for them, and then, two, all those areas with kind of persistent currency problems, persistently high inflation, the more alternatives they have either to get dollar access or to get something even harder over the long term, like Bitcoin, that increases their options to opt out of those currencies, and so, I do think that’s going to be a big story over the coming decade is more and more people in countries running into these issues, you know, shifting out into things like Bitcoin and stablecoins.
Mauricio di Bartolomeo:
Yeah. I mean, I agree. I think, you know, I keep going back to this concept that we’re about to, at least in my view, I think we’re heading into some pretty hostile economic environments in many parts of LatAm, particularly when it comes to dollars and accessing dollars, and I go back to, even though I hate saying that because I, you know, I’ve been through something very similar and it’s very painful, and it is that same environment in which I found Bitcoin in the first place, and so, the message that I’ve been repeating on and on to our team here today, because over half of our clients come from Latin America, and that’s largely because we offer those services in Spanish and we’re kind of right place, right time, what I keep saying to them is far from being a headwind, this is the moment that Bitcoin was created for for that part of the world, and this is the time where they’re going to need it more than ever since it was created, and it’s our job as a community, as content creators, as educators to let them know about all the options they have because they’re going to need them.
And again, to Lyn’s point, it might not be the biggest dollar tickets, the ones that are coming on, but to those people, being able to protect 100 dollars, I would argue is more meaningful than for someone like Michael Saylor or someone else to be able to protect 10 to 20 million dollars, and so, again, it goes back to how this impacts people on their day to day, and it’s very, very meaningful, and that’s why it has the viralization potential because I have never seen somebody spread the word of something with so much joy as the Bitcoiners that were basically telling other people to mine Bitcoin in Venezuela in 2016, 2017. It was like telling somebody you found El Dorado, and I think that’s going to happen again. I wish the best to everyone in these economies that are kind of about to go through this, but you know, we’re going to hopefully be right there trying to do our best to help.
Well, I actually wanted to circle back to you and ask you more specific questions about Venezuela because, so as far as I understand, the government cracked down on Bitcoin mining there, and so, I don’t really know kind of like what Bitcoin usage or adoption looks like on the ground nowadays, or even if in general people don’t have as much access to it. What is the kind of perception of it after that experience?
Mauricio di Bartolomeo:
Yeah. So, I think, you know, to Lyn’s point, it has…a lot of people bought Bitcoin on the inflation hedge narrative back in 2017, and a lot of them probably did so again just now in this current cycle, and naturally a lot of people, or some people, if you bought in ’20 and you’re looking at the current prices, you’re in pain, especially if you didn’t have that much wealth to protect in the first place, and so, there has been this sort of unfortunate association with Bitcoin as a risk asset even in those markets, and I think that’s also what’s driven many to even explore stablecoins in the first place.
You know, we get so many questions about stablecoins and different rails to avoid or to pay lower fees because a lot of time, like fees are everything down there, and right now, frankly Ethereum is very hard to transact on. That’s led to proliferation of using stablecoins on things like Tron, Solana, et cetera, and I found that to be quite interesting, and so, again, Bitcoin’s volatility can many times play against it in these types of situations, but again, it was the genesis that enabled this whole ecosystem to exist, right? So, I think Bitcoin is the very long game, and for the medium to short term I think stablecoins will be the Trojan horse that sort of get us the adoption that we need, and then if and when they need it, we can hop over into the sort of, you know, the ark, the Bitcoin, Noah’s Ark, which would be Bitcoin I guess, if the dollar sinks. I think we’ll have huge problems. I don’t know if the ark can fit us all, but it’ll be interesting.
One of the developments I’m watching along those lines is to see what comes out of this Taro announcement from Lightning Labs because if we…you know, to his point, stablecoins have migrated from blockchain to blockchain in response to fee pressures and all sorts of things like that. So, they, you know, they started on top of a Bitcoin layer. They went over to Ethereum. Ethereum got expensive. They went over to Tron and other blockchains, and you know, a lot of people don’t care really what blockchain it’s on as long as it works and it’s fast and it’s cheap because I mean the stablecoin itself is centralized anyway. What matters to them is that it’s, you know, at least the central hub is outside of their country, and that’s the key part for them, and we’ve seen an announcement from Lightning Labs that they have this new proposal called Taro that with the Taproot update for Bitcoin they can potentially bring, you know, really any asset, but I think the one everyone’s thinking about is putting stablecoins on Lightning, and again, it remains to be seen what timeline that might happen on if it’ll happen. If it does happen, will people use it?
But in theory, that’s a very fast and cheap way to send around stablecoins, and it also gets around the fact that say in the United States, I mean, you don’t really see a lot of Lightning usage because if you spend Bitcoin, one, people don’t want to spend their Bitcoin, and two, it’s a taxable event even if they do, and to be able to kind of use some of the speeds and features of Lightning Network, but you know, transacting on a dollar basis over Bitcoin rails I think is pretty interesting. So, I’m going to watch that space to see if those two kinds of separate areas converge at all or if they remain kind of the current state of being mostly separate. There are some stablecoins that run on liquid on Bitcoin, but the vast, vast majority of them are over on, you know, Tron and Ethereum and these other blockchains.
Yeah. I agree that actually that would be a really…that might be a way where we see Lightning take off because otherwise I don’t think there’s been a huge amount of usage. Mauricio, what were you going to say?
Mauricio di Bartolomeo:
No. I just…plus one on Taro. I’m watching it like, yeah, I’m watching it closely. I’m staying very close to the, well, following the Lightning team pretty closely, Elizabeth, Ryan, and all those guys, they’re doing great. So, I’m excited at what that can bring and what that could do because actually I went to El Salvador last year for La Bit Conf just to kind of see how things have been evolving with Chivo, and one of the things that I came back with was I very impressed with Lightning, you know? It is sort of spotty in the sense that there’s still some people that have some challenges with the concept of Bitcoin in general, but there were so many people that were Lightning savvy. I paid for, you know, drinks and taxis and stuff on Lightning. I paid a street vendor with Lightning, and so, it was really, really eye-opening for me to see that, and I came back quite encouraged, to be honest. I was a bit skeptical on my way down, but I came back pretty optimistic.
You know, it’s so fascinating because my next question was just going to be about El Salvador, and I recently had a Salvadoran journalist, Nelson Rauda from El Faro…actually he was at OFF with us, and he was saying that he noticed, for instance, that even though Salvadoran president Nayib Bukele is extremely popular, Bitcoin was the subject of kind of the first big protest of his currency, and that in general there isn’t much uptake of Bitcoin in El Salvador. Only 14 percent of the country’s businesses have made Bitcoin transactions since it was introduced in September. Only three percent perceive any business value in it. Only one percent of remittances have been through digital wallets. So, what he was saying on my show was that he felt that President Bukele’s embrace of Bitcoin is more of a publicity stunt for foreigners. So, what’s your opinion on his comments there?
Mauricio di Bartolomeo:
So, I don’t necessarily disagree that it’s publicity. I think it’s been done as a way of drawing attention to El Salvador, and just to make a point, we’re talking about El Salvador right here on this show right now because of it, and that wasn’t going to happen. I remember the last time I mentioned El Salvador was probably 15 years ago, and so, not only are we talking about it here, I’ve been there to a conference. My company invested into a sponsoring the event. We took a team down. We are looking at the market closely, and I would argue that it worked. I would argue that it has brought a great deal of investment.
Now, I am…I’ve been through too much to align myself or say I fully agree with any politician in Latin America, and so, I’ve learned my lesson in that front, and I do have some concerns about his administration and some concerns about some of the decisions that have been made. I don’t love the idea that first thing he did after Bitcoin price went up was to take out a loan to build a pet hospital. I don’t necessarily love the idea that he announced Bitcoin City with like fireworks on the back. You probably could’ve done without the fireworks, but again, if he wanted to do this with ill intention, he could’ve launched his own token. He could’ve done, you know, a lot of other things that would make it easier for him or for that administration to be corrupt around it, and I would argue that the decisions that they’ve made and the assets that they’ve purchased have kind of signaled, at least to me, that they have good intentions.
Now, from intentions to implementation, there’s a big gap and a lot of things could go wrong, but at least I feel encouraged by the selection of the asset and kind of how it’s been brought to the public. In fact, I think if you consider the fact that Chivo was rolled out in the timeframe that it was rolled out to the amount of people that it was rolled out, I would argue that it probably should’ve had a lot more bugs and issues if it’s trying to sort of become available to millions of people on day one. I don’t really know a single wallet that has actually gone through that, but again, there’s two sides. I mean, I think a lot remains to be seen, but I think that the benefits of that decision are not going to be seen by people from El Salvador in three months or six months. They will likely be seen, it’ll start bearing fruits in a couple of years from now once we go into another cycle.
And for Lyn, I wanted to ask you about the initial plan to sell a one billion dollar Bitcoin bond, which didn’t happen. I was just curious for what your take was on that.
So, one of the challenges that they’re facing, and now this has spread to a lot of frontier markets, is that going back to that whole dollar-based liability thing we were discussing earlier, you know, they issued these dollar bonds, and global investors don’t have a very strong appetite for frontier market debt right now, and El Salvador in particular, you know, when they started announcing Bitcoin, their bonds started selling off, and that wasn’t even necessarily because it was actually doing any harm for their economy, quite the contrary. At bare minimum, I think it’s been good for their tourism and their, you know, their brand awareness, but nonetheless, global investors got spooked around that, along with other action.
It’s hard to map out one to one, you know, always why are global investors selling bonds in a specific country, but it’s not been a very great correlation, and so, you know, the whole idea of that Bitcoin bond potentially gives them another avenue to get capital with, especially among say Bitcoiners that want to see that country do well, both for its own sake and because it’s, you know, it’s now like the biggest test case for Bitcoin, and I think the challenge there is any sort of top-down thing like that’s going to be hard. I mean, you can argue that maybe they came in too early. Maybe they could’ve done something like, you know, they could’ve put it a little bit in their reserves. They could’ve said, you know…they could’ve made a legal tender and they could’ve done various tools that are less aggressive than kind of how hard they went into it.
There’s all sorts of different scenarios that they could’ve done, and I think because, you know, of the bear market conditions and things like that, it doesn’t seem like there’s a ton of demand for those bonds right now, but I think that’s not shelved last I heard. I’m not the best person to follow up on that. I think that’s still something that, you know, the interested parties are talking to, and it is something I’m going to watch to see if they ever do get that issuance off the ground or not. I don’t really have a strong opinion on the success of how that’s going to be at this point. Last year when it was announced, I mean I talked to Adam Back about it. We were on like a podcast together kind of just feeling out what they were going to do, and it’s, you know, it’s potentially optimistic that they could have a different way to get capital, but at the end of the day it’s going to come down to execution and whether or not the buyers show up.
Yeah. So, while I have you both on the show, I had to ask about the situation with crypto lending. Obviously, Mauricio, you’re directly involved in that, but we’ve seen numerous crypto lenders run into trouble, and two of them had to file for bankruptcy, Celsius and Voyager. In terms of BlockFi, another one of the troubled lenders, it was reported that Ledn did put in a bid to try to provide them new funding, although now it looks like BlockFi has an agreement to be acquired by FTX. So, how is it that Ledn was able to avoid not just the operational issues, but also be in a position to try to rescue another one of these failing lenders?
Mauricio di Bartolomeo:
Yeah. Thank you for the question. I think it’s a hugely important topic obviously in our industry, and I think I would, you know, to kind of give you a summarized version of what I think happened. I think this just sort of brought to light the fact that not all lending companies were created equal and they were all not managing risk in the same way, and so, if you look at most of the issues that led to these platforms being where they are now, they are not…there’s no one particular event that you can point to. It’s a combination of things that basically added up together, and so, some of these platforms were getting client assets and turning around and placing them in DeFi protocols, and they were putting them on lending protocols and bridges, and these bridges got hacked, and they started suffering losses from that outset, right?
Then a lot of them were using the Anchor protocol at Terra to generate interest for their stablecoins, and a few of them had a lot of close calls, and because this is all decentralized, it was very easy to identify who was having close calls. When clients were able to associate platforms to Anchor, rightfully they started withdrawing assets from that platform, and when they started withdrawing assets from that platform, that started exposing another issue, which was that these platforms were creating asset mismatches because they were taking one asset that had no institutional market and they were converting it to a different asset so that they could lend it, and they created an asset mismatch from what they owed the client into what they had currently earning into somewhere else, and that created this rush of liquidity to try to get it back to the client, and a good example of this is ETH to staked ETH. There was no way to come back, and that created some issues, and the other one was that many companies got into maturity mismatching. They were taking money from clients. The clients could withdraw at any time, and they were turning around and financing 1, 2, or 3-year loan projects, and this basically meant that they didn’t have the capital to fulfill the withdrawals, and when all this happened, that put companies in the same place.
At Ledn, very short, we don’t expose our client assets to DeFi protocols. So, we were not exposed to…we were not affected by any hacks or any issues. We have only Bitcoin and USDC, so those are the two most liquid assets and the biggest demand in the institutional space. We were only and the first lender that does proof of reserve attestations every six months, that our clients can verify that we gave the accountant the right balance, that’s unique to Ledn, and we have maturity matched across the board, and we have assets matched across the board, and so, this is really why we were not in the same situation and why our balance sheet is essentially intact. We didn’t have any loan losses in any side of the book or the house, institution, or retail, and that puts us in a position where we can now look at opportunities, and you know, hopefully cement ourselves as a bigger player going forward.
And so, then how were you generating yield?
Mauricio di Bartolomeo:
You can still lend to institutions, and you can do the proper credit analysis. As an example, we didn’t lend to Three Arrows. They didn’t pass our counterparty onboarding analysis, but others did, and we work with them still, you know, and they’ve been great. We monitor almost on a daily basis our institutional partners. We look at their balance sheets. We interview their management. Our security team tests their technology stack. We test their strategies to make sure that what they’re telling us checks out, and so, we are I would argue very, very diligent when it comes to that side of our business, and unfortunately some others were misrepresenting these risks tremendously, and you know, we got to the unfortunate situation we’re in now.
And Lyn, I’m sure you’re aware, there were people criticizing some of the Bitcoiners who had said not your keys, not your coins, but then had also promoted these platforms, and I saw some people were criticizing you for having written a blog post where you said that people could put a small amount of their Bitcoin to work in a platform like BlockFi. What’s your response to people who criticize these centralized crypto lenders?
So, I think it comes down in large part to whether or not it’s, you know, whether or not you do risk analysis and whether or not you’re transparent about it, right, and so, when I recommended BlockFi, for example, or I wrote that blog post about it, I talked to the CEO, and I used it myself, but I also made it clear in the article, I was like this is not FDIC insured. This is…you know, here are the risks that can happen to them. Here’s how they, you know, state they want to deal with these risks, and when it came down to the whole thing, it’s like, okay, if you want to do this, I mean you shouldn’t put any sort of like super meaningful like large part of your stack on these types of platforms because you’re taking on counterparty risk, which can go against kind of the main point of Bitcoin, self-custodial money, but I’m an investor at heart, so I always try to find areas where I can, you know, take these small bets here and there, and so, I think that there’s, on one hand, there are a lot of people say aggressively marketing Celsius, right? I think that’s something I wouldn’t go anywhere near.
On the other hand, like as Mauricio pointed out, there’s a spectrum of quality here, and so, you had, you know, on one hand you have something like Celsius, and then BlockFi’s so far held up reasonably well, and then Ledn has held up very well, and so, it really comes down to understanding the one that you’re entrusting with your funds, and then also just managing your size carefully. I tend to not view the world in black and white. Instead I view it in terms of, you know, just analysis, analyzing things on a case-by-case basis, and so, I don’t think there’s necessarily any sort of hard conflict between, you know, not your keys, not your coins versus willing to put capital to work somewhere. I just think that this is still a very early industry. It’s obviously a very volatile industry, and you have to really understand the risks that you’re getting involved with when you engage in this type lending.
Yeah, and it’s clear, I mean for anybody who’s read any of your blog posts that, yes, you deal in nuance. In general, I would say we seem to be at an inflection point both in terms of the economy and the crypto markets. So, what are some new lessons you’ll be applying as we move forward into this next phase of a possible recession or coming out of this very tumultuous period with the crypto markets?
Mauricio di Bartolomeo:
I think one big lesson that this left the markets in general was that, you know, don’t trust, verify. I think people are going to be a lot more diligent right now when they’re considering where or what platform to interact with, I think rightfully so. I think what this will also lead to will be eventual regulation, which I think will be good for the space because it’ll potentially or hopefully stop things like Terra from happening again, or Quadriga from happening again, and so, I think that’s kind of par for the course with how I had seen or how I had envisioned this kind of play out. I didn’t envision the blow-up losses from Terra, but I did think eventually regulation would come, and it would probably be triggered by one of these unfortunate events.
So, I think we’re about to see sort of a big divide in the world because I think there’s going to be the sort of G7, you know, very powerful nations that are going to create very good regulatory framework where people are going to want to comply, but I also think that the recession and the strength of the dollar are going to cause a lot of authoritarianism in other parts of the world where people will want to be opting out of those systems very quickly and to have no regard for that regulatory framework, and so, I think there’s going to be…the poles are going to get pulled farther apart in that sense.
I think one of the big lessons to…you know, there’s a quote from Matt Odell, stay humble, stack sats, and it’s, you know, it’s kind of like, yeah, I think that’s, cycle after cycle, I think that’s, you know, that’s one of the best phrases just because there’s so much risk in this ecosystem. There’s outright fraud. I mean, basically, imagine if you could just market penny stocks to the public, right? I mean, that’s kind of the wild west that, you know, large swaths of this industry are still in. The technology has enabled, things that, you know, types of scams that would have otherwise occurred in say paper form and direct mail or whatever and things like that can now happen much faster over the internet, and so, I do think regulators are going to catch up to some degree on some of this and clamp down on some of the worst parts of it, some of the exchange practices or some of the, you know, the more fraudulent types of tokens that are out there.
Even large established projects, as we saw, can fail spectacularly, and so, I do think that there will be generally more analysis and caution I think, especially among regulators and institutional types of capital, but I also think that a number of, you know, a number of retail investors were hurt in different parts of the cycle, and they’ve, you know, I think that some percentage of them…I mean, some might just leave the industry for a while. Other ones I think will have learned something and gravitate towards safer things, like Bitcoin, stablecoins, assets like that, and so, I still think that, you know, there’s long-term growth ahead. I think there’s real useful technology here, and I just think that you can’t get over your skis in terms of leverage and in terms of risk you’re taking and being able to, you know, wanting to go into any sort of new project and then as well as just the ethics of the industry when it comes to marketing projects like that to the public.
Yeah. I would say from working on my book that one of the things I learned is when you go through these really challenging periods, as long as you survive it actually just makes you stronger in the end. So, we’ll have to see what happens. Thank you both so much. It has been such a pleasure discussing inflation, recession, you know, all the craziness with the crypto lending. Where can people learn more about each of you and your work?
Mauricio di Bartolomeo:
You can find me on Twitter @cryptonomista. Our company is Ledn, ledn.io, and our Twitter handle is @hodlwithLedn. I also write the weekly newsletter for Ledn, so if you’re a Ledn client, you can get it automatically. If not, you can sign up at ledn.io/blog.
And I’m at lynalden.com, and I’m active on Twitter @LynAldenContact.
Perfect. It’s been a pleasure having both of you on Unchained.
Thanks for having us.
Mauricio di Bartolomeo:
Thanks so much for joining us today. To learn more about Lyn, Mauricio, and the impact of inflation on Bitcoin, check out the show notes for this episode. Get exclusive access to even more of my content through Bulletin. Subscribe for interviews you won’t find on Unchained, weekly news roundups, and more. Visit laurashin.bulletin.com. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Matt Pilchard, Juan Aranovich, Pam Majumdar, Shashank, and CLK Transcription. Thanks for listening.