“2020 was the perfect storm for Bitcoin… The macro environment couldn’t be more attractive. We saw broad money supply increase 25% year-over-year.”
Lyn Alden is founder of Lyn Alden Investment Strategy where she provides investors with research, information, and tools to help them build wealth.
Initially, there were concerns around Bitcoin that made it too risky to feel confident in. Over a few years, concerns over potential competitors and vulnerabilities were addressed, greatly de-risking the asset. To cap a strong 2-3 year run, 2020 presented an ideal environment for Bitcoin to make a big jump. “2020 was the perfect storm for Bitcoin… The macro environment couldn’t be more attractive. We saw broad money supply increase 25% year-over-year.”
Bitcoin follows Metcalfe’s Law which means that as the number of users increase, the cryptocurrency’s value grows exponentially- this is often known as the network effect. In addition, due to the verification process, Bitcoin becomes more secure as the price goes up.
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SPEAKER
Lyn Alden
Founder
Lyn Alden Investment Strategy
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone and welcome back to SALT Talks. My name is John Darcy. I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series with leading investors, creators and thinkers.
John Darcy: (00:26)
What we're trying to do on these SALT Talks like we try to do at our SALT conferences, which we're going to hopefully resume the second half of 2021, is provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. In our view, there are few bigger ideas out there today than the digital assets and Bitcoin space.
John Darcy: (00:47)
We're thrilled today to welcome Lyn Alden, one of the leading commentators and experts on the digital assets and Bitcoin space to SALT Talks. Lyn Alden's background lies at the intersection of engineering and finance. She has a bachelor's degree in electrical engineering and a master's degree in engineering management, with the focus on engineering economics and financial modeling. She oversees the finances and the day-to-day operations of an engineering facility.
John Darcy: (01:13)
Lyn has been performing investment research for over 15 years in various public and private capacities. Her work has been editorially featured or cited on Business Insider, MarketWatch Times Money Magazine, The Daily Telegraph, The Philadelphia Inquirer, The Street, CNBC, U.S. News & World Report, Kiplinger and The Huffington Post. In addition, she's appeared on Kitco, Real Vision, The Investor's Podcast Network, the Rebel Capitalist Show, Macro Voices, the Macro Huddle, What Bitcoin Did and many other podcasts and we're now proud to say today, she has appeared on SALTs. Hopefully that will make it in her bio as well. She's also a regular contributor to seeking Alpha Fed Week and Elliot Wave Trader.
John Darcy: (01:56)
Hosting today's talk is Brett Messing, the President and Chief Operating Officer of SkyBridge Capital, a global alternative investment firm that recently at the beginning of this year, launched a Bitcoin fund, and SkyBridge also made a substantial investment into Bitcoin via our flagship funds. With that, no further ado, I'll turn it over to Brett to conduct the interview.
Brett Messing: (02:19)
Well, Lyn welcome. Glad you could join us.
Lyn Alden: (02:22)
Thanks for having me.
Brett Messing: (02:24)
As I told you, before we went on the air. I'm a Lyn Alden fan and you actually helped me by extension us on our journey to investing in Bitcoin in our fund. We presently have, I think about $400 million invested in Bitcoin. We're not messing around. We even have hats that say Bitcoin.
Lyn Alden: (02:41)
Congratulations on your fund by the way.
Brett Messing: (02:44)
Thank you. We're super excited about it. You start off, can you just talk about your journey to going from Bitcoin is interesting too, this is a legitimate investible asset. Then next one, I want to talk about your report to take on it right now, which of course we share. But I'd like to understand that preliminary step.
Lyn Alden: (03:07)
Absolutely. I first heard of Bitcoin back in 2010, 2011. But I thought it was neat, I understood the basics of the technology, but I didn't really have a way to price it or a way to think that it would get very big, and so I didn't really go into that space. I didn't really keep to close tabs on it.
Lyn Alden: (03:23)
But then of course, when he had that giant run-up in 2017, I started getting more and more emails from my investment clients. Asked me what my thoughts are on it. Do I think it's a good opportunity. Of course, there's nothing like price to change public sentiment on it. For example, whatever is doing well at a time, I tend to get emails from clients about that particular thing because we had the pot stock bubble, we had the gold stock spike, we had Bitcoin go up into...
Lyn Alden: (03:46)
All these different years have a different theme. Right now a lot of interest in electrical vehicles stocks, for example. But during that 2017 run-up I said, okay, I need to do a deeper dive on this. I need to have a price model here. I need to understand some of the risks and opportunities. I did a long form research piece on it.
Lyn Alden: (04:04)
My conclusion at the time was that it is really interesting. It is really useful technology and that I'm not exactly bearish on it but that I can't bring myself to be bullish on it either. I had that neutral to slightly bear's outlook on and I took no position. I had a couple of key concerns at the time.
Lyn Alden: (04:22)
One was that sure, that Bitcoin is scarce but then now that Satoshi Nakamoto published how to do it, all these other cryptocurrencies can come in its wake, and so my concern was that potentially that the market would become very diluted. For example, even if a trillion dollars of capital pours in, what if it just goes into all these different alt coins and there's no one dominant network effect.
Lyn Alden: (04:45)
The second concern I had was that Bitcoin had recently split. I had the Bitcoin cash hard fork because there was a difference of opinion among the developer committee about whether to maximize the ease of running a full node versus try to increase transaction throughput on the base layer so that you had that kind of disagreement, and they went in two different directions.
Lyn Alden: (05:06)
My concern at the time was okay, we just had a massive price run up. I see some of these dilution risks, and so I sat out. That was around 7,000 a coin. Then of course we had the blow off top a couple months later, then we had the massive correction. We had this multi-year consolidation, and so it did actually underperform any other assets for awhile.
Lyn Alden: (05:24)
But then I started to pay attention to it again in late 2019 because by then, a lot of my initial concerns were addressed. Bitcoin won out over its hard fork in terms of hash rate and price, so it retained a very dominant market share. One of their hard forks had another hard fork into Bitcoin's Toshi vision, and those are less than one to 2% of Bitcoin's market capitalization and hash rate. They never really became sizeable competitors from a store value perspective.
Brett Messing: (05:56)
You can call them shit coins. We're fine with that. We're not on the broadcast networks here.
Lyn Alden: (06:01)
Because they never took off, they never took Bitcoin's market share, Bitcoin regained some degree of Bitcoin dominance, meaning a percentage of market cap of the total digital asset space, and so I started paying attention to it. Then of course in early 2020, when we had that big liquidation event in March, pretty much every asset class across the board was going down in price rapidly because we had liquidity issues and the global banking system.
Lyn Alden: (06:28)
I saw that Bitcoin behaved a lot like gold and silver did, and so when it was starting to come back up in April, I bought into Bitcoin. Ironically it was roughly the same price. It was just under seven 7,000 that I analyze it back in 2017. However, I viewed as significantly de-risked. And forced its scarcity by making sure that some of these hard forks couldn't take market share from it. Basically, it retained a lot of its key principles.
Lyn Alden: (06:56)
Then when you look forward about where it is in it's four-year having cycle, it's in a much more favorable place relative to the cycle that it goes through. I had a high conviction on it that I wasn't sure it would take off. But I figured that that the risk to award ratio was some of the best I've seen in any asset class, so I had to have a position.
Brett Messing: (07:16)
Can you just take a moment and explain the halving? I think for some of our audience that would be helpful.
Lyn Alden: (07:23)
Absolutely. The way Bitcoin is programmed, roughly every 10 minutes there's a new block added to the blockchain. It does an automatic network difficulty adjustment to ensure that that rate stays that about every 10 minutes. After, I believe it's 210,000 blocks, which is roughly four years, there's a halving. Basically, every time there's a new block generated, the minor that creates that block gets to create a number of Bitcoins for themselves.
Lyn Alden: (07:51)
In the first four years, that was 50 Bitcoin generated per block. Then after four years, the algorithm is pre-programmed to cut that in half, and so that went down to 25 new Bitcoins per block. Then four years later, it's 12 and a half Bitcoins per block. And so every four years, the new supply of Bitcoin generated per unit of time it gets cut in half.
Lyn Alden: (08:15)
The pattern we tend to see is that if you look at what Bitcoin did in the launch cycle for the first year, so it didn't even have a price history, and then it went up pretty dramatically. Then it had this blow off top and then it reaches consolidation, and it finally had this balance between supply and demand.
Lyn Alden: (08:31)
When it got that balance, we had a supply shock. The amount of supply got cut in half, demand was still pretty persistent and that drove the price up again. Then of course, you get momentum traders, jump on board. You bring it up to a new high, you have another blow off top and it crashed a correction. Then it finds another equilibrium base at a higher price level. Right when it does that, there's another halving. The supply gets cut in half again, and it has another four-year run. That's the cycle we've seen play out about three times.
Brett Messing: (08:59)
Okay, that's great. You had a terrific piece of summary which I sent to a lot of people. The three reasons that you're bullish on Bitcoin. You mentioned the halving cycle, the network effect which I think everyone's familiar with. That's all the value that's been created in Google information network. Amazon or retail network has come from just this collection of people all on the same system. Then the third obviously is the macro environment. You're an economist. Can you just speak to that a little bit?
Lyn Alden: (09:29)
Basically, this know 2020 was the perfect storm for Bitcoin. Because in addition to being in a good place in its own halving cycle and in addition to having one over some of those four competitors, the macro environment couldn't be more attractive. The narrative for why you'd want to buy Bitcoin is some of the best around.
Lyn Alden: (09:47)
For example, we saw broad money supply in the United States increased by about 25% year over year over the past 12 months. That's of course because we had very large fiscal deficits. Then we had a significant degree of monetization where the central bank was basically forced to buy a significant percentage of the treasuries issue to do all this fiscal deficits.
Lyn Alden: (10:09)
We see that in countries around the world to different degrees, so in many countries you see money supply growth growing over 10% year over year. The United States was actually one of the largest with over 25% year over year money supply increase. When you have that massive increase in money supply, if it doesn't show up in say price inflation, it can show up more easily in asset price inflation. You've seen a reflation and anything that's scare. Real estate, commodities, most equities, things like that.
Brett Messing: (10:40)
That's perfect. I'll talk a little bit the value, how to value Bitcoin. Bill Miller was on CNBC last week and he said that as Bitcoin goes up in value, it actually becomes more valuable and less risky as it shucks more money into it. I'm going to put a pin on that for a second. There are two other ways that I think are common way to value Bitcoin.
Brett Messing: (11:05)
One is Metcalf's law, which is by looking at the number of users on the network. I've seen some research where if you track the price against the number of people that are believed to own Bitcoin, attracts at about a 96% correlation. Then the third methodology is the stock to flow model. Which looks at the amount of outstanding Bitcoin as the numerator, and the amount is being mined as the denominator.
Brett Messing: (11:31)
As you discussed earlier with the halving cycle, as that fraction becomes more favorable, it drives the price. I'd like your thoughts on just generally how you value Bitcoin. Probably starting first with Bill Miller's comment and then how these three in your mind work together or don't.
Lyn Alden: (11:52)
Absolutely. Basically what Bill Miller points out is correct. As Bitcoin's price goes up, what we generally see is that the hash rate goes up. That's the amount of computing power that goes into verifying the network. If you look at some of the alt coins, they have very low hash rate.
Lyn Alden: (12:09)
Meaning that if you were to try 51% attack on the network, meaning if you were to somehow get enough mining capacity or processing power to be able to be a majority miner in that network, then you can change the blockchain in your favor. You can basically cheat the system and give yourself more coins. You basically can break the network.
Lyn Alden: (12:28)
With some of those, very cheap coins, low market capitalization, low hash rate, it's not that expensive to either either buy hardware or rent computing power or whatever their algorithm needs, and go ahead and attack that network and basically profit from that.
Lyn Alden: (12:44)
Bitcoin is unique in the sense that it has by far the most hash rate of any digital asset out there. Because it was the first, it's been this 12-year history of ever increasing hash rate. As the price goes up, it enables more and more mining capacity to come online and verify the network. Because most of their money comes from mining Bitcoin, generating block.
Lyn Alden: (13:09)
They also generate fees for verifying transactions, and so the higher overall market capitalization of the system, the more fees go into mining and the more expensive it would be to try to do a 51% attack. Basically as it gets more expensive, it also gets more secure in that sense.
Lyn Alden: (13:25)
Then you look at other ways of modeling it. I do think Metcalf's law is a key way to look at it. You've seen Bitcoin, and then we've also seen the theory, for example, play along those kinds of network effects. Whereas more and more people jump on, you generally have the price go up. But of course as you have these four-year halving cycles, you can undershoot or overshoot that trendline.
Lyn Alden: (13:48)
For example, if you look at the stock to flow ratio, which is a supply only model, it doesn't take into account demand. You generally see that they have pretty steady levels of where they expect the price to be at any given time based on the four year halving cycle we talked about. But you generally see that during the end of that bull run, you'll massively overshoot the model, and then you'll fall back below the model, and then you'll come to an equilibrium, and that's because demand is a variable that can fluctuate over time.
Lyn Alden: (14:15)
When you bring in another class of investors, that can push briefly way above the model until momentum phase and it dies back down. Then use it to the next halving cycled that triggers another bull run.
Brett Messing: (14:28)
I don't want to touch on the network effect for a second. Because again, I think people make this analogy which has work right between social networks and Bitcoin is a monetary network. But it seems to me that on Facebook, almost everyone is created equal. In the context of a monetary network, I don't think that's the case.
Brett Messing: (14:50)
Michael Saylor is way more than my daughter who joined the network. But for the purpose of calculating the way the model works, it doesn't account for the fact that you have players that have vastly different value to the overall network. How would you think about that? Is that just Metcalfe's law plus or does that make Metcalfe's law less relevant here?
Lyn Alden: (15:17)
Each type of network has different characteristics. For example, if you look at a phone system, every note on the phone system is pretty much equal. Whereas if you look at something like E-bay, you have two different types of nodes. You have buyers and sellers, and you need to attract a bunch of both in order to make it work. You don't have this equal distribution. You have more buyers than sellers.
Lyn Alden: (15:37)
With Bitcoin, there's a couple of different ways to measure the network. One is just hash rate, for example. The sheer amount of hash rate and security that the system has. Another way to look at it is the number of nodes, which are separate from miners. Whereas mining is a very expensive capital intensive operation, a full node can be run by anybody with a basic laptop.
Lyn Alden: (15:59)
Bitcoin has far more full nodes verifying the network from enthusiasts and all people around the world. And as far more globally distributed, whereas mining tends to be concentrated in China. Bitcoin does verification in the network. Then of course, because it's the leading brand and it has the most security, and it has a ton of liquidity, that's the one that people go to when they want to get into the space.
Lyn Alden: (16:26)
For example, SkyBridge didn't buy into light coin, as far as I know. It's Bitcoin. You basically buy the one, the blue chip of the space. As it has that large and larger network effect, that's the one that people go into when they want that security, the one that they know is going to have really useful value, and it pretty much can be in some ways accepted around the world.
Lyn Alden: (16:47)
We see in addition, once a network effect takes off, then the surrounding ecosystem gets stronger. For example, now there are Bitcoin-only hardware wallets. In the beginning, we had these hardware wallets that you could hold a bunch of digital assets. But then as the Bitcoin community diverge a little bit from the other crypto assets, we see things like Bitcoin-only hardware wallets that dedicate to Bitcoin.
Lyn Alden: (17:12)
Same thing with security companies like Casa that focus on multisignature solutions. It started to get more and more development in the surrounding ecosystem or apps that run on Bitcoin. Or you see rewards cards that pay you in Bitcoin. Whereas you see a lot less of that in some of the smaller coins because they haven't hit the critical mass to have that better and better ecosystem.
Lyn Alden: (17:35)
Then of course, once one of the protocols reaches that high level and get that better ecosystem, that gives more access points for people to invest in it, more money pours into it and then that can make the surrounding ecosystem even better.
Brett Messing: (17:49)
Thank you. That's helpful and interesting. Let's talk about volatility. Because Bitcoin went up 100% in three weeks and down about 28% in two days. JPMorgan has issued a note over the last couple of weeks. We're really thrilled that JPMorgan is writing about Bitcoin. Although I have to say, I don't agree with much of what they write.
Brett Messing: (18:10)
For example, they wrote last week that a Bitcoin ETF would be bad for Bitcoin, which I violently disagree with. But they also wrote the week before interestingly, that if you look at Bitcoin on a volatility adjusted basis, that essentially it's fairly valued. Particularly in comparison to gold. If you look at market cap in comparison to volatility. Do you have any thoughts on that?
Lyn Alden: (18:36)
Yeah. I view, there's often that narrative of Bitcoin as a store of value, and of course you have to push back to say, how can you call it a store of value if you can literally wake up and the next day your Bitcoin's down by like a third. That's because I'd classify it as an emergent store value. It's basically a whole new asset class and it's currently in the price discovery phase whereas the whole world kind of discovers what is this thing worth?
Lyn Alden: (18:59)
It's first decade of its existence, it was mostly retail investors. The past couple of years, especially 2020, we've seen it at more institutional interest. If you look at that classic, S-curve of adoption, where you have that initial early adopters and then you have that mass adoption phase and then the maturity phase. Where something like gold is of course. It's a fully mature store of value. It's been around for thousands of years and so we have a lot less volatility.
Lyn Alden: (19:23)
Whereas Bitcoin is still in that earlier phase of its of its adoption cycle. It has more risk, it has more volatility, but then people that are investing in it are basically expecting that it over time, it'll become more widely distributed, more broadly owned, and that its volatility will go down over time. There are a couple of different ways to measure volatility.
Lyn Alden: (19:42)
One of the simplest ways just to look at, say, draw downs from all time highs. The problem there is that because Bitcoin has these illiquidity events. For example, if look back in late 2017, we hit that really high level, but there's actually very little volume at that super high level. Whereas I think one of the best ways to measure volatility is to look at the market capitalization compared to the realized capitalization. Which is basically, the realized cap is basically, it's like a cost basis for Bitcoin, is basically looking at the price.
Lyn Alden: (20:17)
The weighted average of looking at the blockchain is seeing when coins last moved and looking at the price at which they moved, and you can come with a cost basis of when the system last moved. Then compare that to market cap and of course those are both rolling numbers. If you look at it like that, Bitcoin volatility has reduced in every four-year cycle.
Lyn Alden: (20:38)
That's basically that that the actual cost basis where people bought their coins has generally become a little bit more stable each time, although it still is significantly volatile because if you were to listen to the Bitcoin bowls, it's still fairly early on in its adoption cycle, and that it could become several, several times larger before the volatility would go down and perhaps resemble more like gold or silver.
Brett Messing: (21:03)
Speaking of the Bitcoin bowls, Cameron and Tyler Winklevoss wrote a piece earlier in the year, $500,000 target for Bitcoin, basically that it will equal the price target, which means the market cap of gold? What's your reaction to that?
Lyn Alden: (21:18)
I think it's possible. I try to avoid specific price targets especially within a given cycle because I can have a high conviction that it's going to do well in the cycle. But then the question is how high. For example, my base case early this summer is if you look at the price performance of Bitcoin each four-year halving cycle, each one was obviously explosive, but each one was a smaller gain percentage-wise in the cycle before it.
Lyn Alden: (21:45)
That makes sense because as you go from a micro cap to a small cap to a medium cap to a large cap, you should expect smaller percent gains. Now this cycle so far was surprising me to the upside because it's actually tried to do better so far compared to where we are from the halving compared to the previous four-year cycle. Maybe that's because we've had institutional interest, so we've had an extra kick of big money coming in.
Lyn Alden: (22:08)
There could be a variety of maybe it's the macro environment. There could be a variety of reasons. My price target was significantly know if there was but without trying to give it a firm conviction. I said, I would expect at least a trillion dollar market capitalization in this cycle. I think four to equal gold, I think that's a real possibility. I would actually break it down a little bit though into the different types of gold.
Lyn Alden: (22:31)
For example if you look at gold as something like a $10 trillion market capitalization. But that of course consists of central banks owning it, that consists of a very large stock pile of jewelry around the world, and also consists of outright investment demand in the form of ETFs or gold bars and things like that.
Lyn Alden: (22:50)
I think the first step is to overtake or match gold investment demand. Which would be a subset that might be... I don't have the numbers on me but it might be something like two trillion, maybe three trillion, and then from there we'll see where it goes to overtake say the jewelry amount, the Central Bank amount. That's a whole separate use case. But over time, I do think that that Bitcoin could potentially rival gold if it continues to be seen and have this four-year halving cycle keep playing out in the way that it has.
Brett Messing: (23:21)
Do you think Bitcoin could de-monetize other asset classes? For example, art is a store of value. Most art doesn't sit on people's walls. It sits in these big storage facilities where people aren't owning it to enjoy it. There are three out in Manhattan right now. Lots of foreign people own apartments here that they never visit. They're treating New York real estate is just a store of value. Could you see a scenario where Bitcoin takes a big chunk of those other alternative asset class? Are we which are we thinking too narrowly by focusing on gold?
Lyn Alden: (23:56)
Yeah, that's the most bullish case overall, and so I think it's helpful to actually think of it in terms of layers. You can basically say, what if Bitcoin overtakes the investment case for gold? Then it's what if Bitcoin overtakes all of gold? Then it's, what if Bitcoin becomes such a broad store of value that it begins demonetizing, those other stores of value?
Lyn Alden: (24:15)
In that case, you can get the tens of trillions of dollars in market capitalization because you're taking away from all those different areas. I think that's a possibility. I think my focus is to emphasize one four-year halving cycle at a time, and let's see where we get in this cycle, then from there we'll have more information to judge what the next four-year cycle might look like.
Lyn Alden: (24:37)
Whereas I try not to speculate too far in advance, but I do think that those situations are possible. I agree with you. Basically the world has a store of value problem. That's actually, I think one of the reasons why the core Bitcoin software took off and not some of these other derivatives of it that tried to emphasize higher throughput. Because the world has all sorts of payment technologies. It's pretty easy for most people to pay.
Lyn Alden: (25:01)
Now, there are some edge cases and for example, a lot of people sending small international money. It's actually a lot of people that have that issue, and so for them, they have a particular issue. But if you look at where big pools of capital are, they primarily have a store of value problem. Because banks are paying a level of interest that doesn't keep up with inflation. Same thing for most sovereign bonds around the world. All these investors have this store value problem.
Lyn Alden: (25:27)
We see things being bid up like fine wine, fine art, beachfront property, all these different things. A lot of them, obviously they don't generate cash flow. For example, you point out that apartments in New York are empty. I like to go to beaches where they just have these $30 million homes and no one's there. They only go there maybe two weeks out of the year, and then the whole beach is yours. Because they're primarily just using that at beach front property as stores of value. I do think that over time, Bitcoin can chip away at some of those. I don't know if it will displace them, but it certainly gives an alternative that is more fungible, more liquid.
Brett Messing: (26:04)
I would add Malibu to your list of beaches with beautiful houses to go visit where there aren't many people there. Where do we go wrong, Lyn? What do you worry about? If we're all wrong... Of course the thing I worry about the most is, Dick Cheney's unknown unknowns. I'm less worried about the things in front of me, but of the things that we have the imagination to contemplate, what are the one or two or three things that you worry about and we should be worrying about?
Lyn Alden: (26:34)
One would be obviously a big bug in the software. Some of these protocols had bugs in their early days. For example, Bitcoin had an inflation bug back in 2010. It was fixed within hours. Ethereum had a big bug in its early period. But now, Bitcoin's an open source software. There's tons of people scrutinizing every line of code. It's in the phase where to finish product now. It undergos security updates, privacy updates, but it's not radically changing.
Lyn Alden: (27:04)
But that is a tail risk if something were to go wrong, technically. Besides that, I think we still have a big regulation hurdle to get through. For example, a lot of people are concerned that a Bitcoin gets too big, it faces more regulatory scrutiny and it risks being banned. Whereas I've argued somewhat the opposite that the bigger it gets, the harder it is to outright ban. Then instead, the key risk is regulation.
Lyn Alden: (27:30)
They want to know who's buying it, they want to build a track it for tax purposes. They want to do all sorts of things like that. They want to have know-your-customer regulations at the gateways. But the probability of it being banned by major capital markets goes down pretty significantly once it becomes a multi-hundred billion dollar or trillion dollar market capitalization. And once you have a lot of institutional investors in it. I think that that's being de-risked but you still have to take into account any headlines that could come out, things like that.
Lyn Alden: (27:59)
I think the last point is that so far, Bitcoin has done very well on every halving cycle. I think it'd be pretty bearish if you were to see a halving cycle where Bitcoin does not reach new all time highs. Because that kills the long-term structural momentum and its adoption cycle. I think that's a key thing to monitor for the health of how Bitcoin is adopting.
Lyn Alden: (28:21)
You can also monitor things like how many new addresses are being used. You can also look at things like development of the lightning network, that potentially make Bitcoin better as a medium of exchange. Because right now the base layer is optimized as store value. You can monitor the ecosystem around it. Some of these other apps, some of these hardware solutions, some of these increased throughput solutions. You can see basically, what is the health of that system? Is it deteriorating or does it continue to do pretty well?
Brett Messing: (28:49)
I absolutely agree with you particularly on the regulation point. I think what Bill Miller was talking about, I've actually had the privilege to speak to him, is yes the network is getting stronger, but also it gets de-risked from a regulatory standpoint, the bigger it gets. So that we want more people, particularly institutions to own it. The government then again, has to build a regulatory infrastructure around, but it just becomes something that exists.
Brett Messing: (29:19)
Just a quick one or two, I'm going to throw it over to John. Yesterday Anchorage Digital Bank was made the first nationally chartered digital bank in the country. We have two state charter banks and digital banks in Wyoming. What do you think the significance of that is, if any?
Lyn Alden: (29:39)
Well, I think it's good. Over the past several months seen increasing news like this. For example, we've seen that they approve the fact that banks can custody digital assets. A while ago that was a broader statement. We've seen also statements about banks being able to use stable coins or other blockchain technology, and of course now we have this nuisance.
Lyn Alden: (30:01)
I think this is just a further compounding of the adoption curve of the network effect of regulatory de-risking. I think that that all continues to support the story of Bitcoin. We've also seen, for example Singapore's largest bank, DBS is getting into custody and trading for credit and institutional investors.
Lyn Alden: (30:24)
Around the world, you see these other entities popping up. They want to be like Fidelity, they want to be like Gemini, they want to have these exposure to that industry. You're seeing it in all of these different markets around the world, and I think it's a good thing.
Brett Messing: (30:40)
Gary Gensler, buy, sell, hold.
Lyn Alden: (30:45)
I think overall, it's fine for Bitcoin. I'd be more worried if I was in some of those coin spaces, some of the scammier things. But I don't see it as a key issue for Bitcoin.
Brett Messing: (31:00)
Right. There are some people that believe it will probably accelerate in ETF. Vanek filed one in December. I think we'll see but he seemed too... he was teaching a class on blockchain at MIT. I guess if we're chilly reading, that's pretty good.
Lyn Alden: (31:19)
I think so.
Brett Messing: (31:21)
John, I'm going to throw it over to you.
John Darcy: (31:23)
All right. Well, I'm going to sneak in a few questions here before we let you go, Lyn. For everybody watching this, I would encourage you to go to Lyn's website, which is lynalden.com. It's a tremendous resource for very thoughtful analysis on the Bitcoin space. A lot of times you speak to people who are in this space who are somewhat one-sided. They're big time believers in Bitcoin and they don't take a balanced look necessarily at the issues.
John Darcy: (31:45)
I think when you do a tremendous job, both on this SALT Talk here today and in general about having a sober analysis of all the different factors that go into Bitcoin and have a few questions based on reading that I've done on your website. The first one is, you've done a thoughtful analysis of different ways to buy Bitcoin and the pluses and minuses to using each one.
John Darcy: (32:06)
Whether that be buying direct and owning on your own flashdrive or buying through an exchange or buying using a fund structure. Could you talk through the pluses and minuses in your mind as the people potentially that are watching this SALT Talk are evaluating, okay, I'm bought into the story, but how do I gain exposure in a way that's comfortable and safe for me?
Lyn Alden: (32:24)
It really depends on-
Brett Messing: (32:26)
Remember, we have a fund. I'm just kidding. Please speak freely.
Lyn Alden: (32:32)
I was going to say, it depends on the use case of the institution or the person, as well as how much money they want to put in. For a lot of people, the first step is to go on an exchange or to go... Now there's even places that do dollar cost averaging, for example, like Swan Bitcoin. But whatever the case may be, there's these retail portals that people can go through, and they can just get exposure to it directly. It's one of the more cost-effective ways to do it.
Lyn Alden: (32:58)
Then from there, if they want to increase their security, they can self custody of the coins. You can transfer coins from most of those platforms to yourself custody. But of course there's learning curve there. So if you don't know what you're doing, you actually have lower security because you have a higher chance of doing something wrong and losing your coins. But if you learn how to do it, that is actually one of the safest ways to hold it, is to have self custody or multisignature self custody.
Lyn Alden: (33:23)
Then from there we have a lot of vehicles around for. Of course we have the Grayscale Bitcoin Trust that people can use if they want a proxy. The thing I point out there is that for retail investors or institutions who just want to hold it on the market, it does often trade at a premium to nav. You're buying into a Bitcoin fund but you're not getting your dollar per dollar worth of Bitcoin usually.
Lyn Alden: (33:48)
I would just monitor that premium to make sure that you're not buying in at a level that is too high. Some degree of premium is fine because there's no Bitcoin ETF yet, and people can also hold that, and things like their retirement account so that those tax advantages can chip away at the premium, but it's something to watch. I think your fund does actually, that gives another access point.
Lyn Alden: (34:13)
I saw that the fees quite reasonable it's pretty low. That actually I think for funds. Because they can have regulatory issues around self custody. I've talked to some firms. They say that their regulators did not let them self custody. Of course they're reliant on these custody solutions like fidelity, like your fund, things like that that they can put a pretty big money into and have a cost effective way to hold it without worrying about a lot of the technical details.
John Darcy: (34:40)
Going more into depth on GBTC, there is that premium that you mentioned and really they're a victim of their own success. I think last week they bought two and a half times the number of Bitcoin that were even mined, and Grayscale has obviously done a ton to help institutionalize and broaden the adoption of Bitcoin. How concerned are you about that premium long-term if we do see a Bitcoin ETF, that potential of that premium could evaporate or even the fund could trade at a discount.
Lyn Alden: (35:07)
I would expect to see the premium go down to near zero, if you were to get an ETF, just because the reason for that would be not much less. Now you have a pretty good arbitrage opportunity with GBTC because people can accredit investors can buy into it at nav. Then later you have a lock up period and then of course the whole dynamics of it normally trading at a premium.
Lyn Alden: (35:30)
But if you were to have a Bitcoin ETF, that limits that arbitrage opportunity. I do think that over time, investors will have more access points and that those funds will probably be less critical. It also presents somewhat of a central allocation risk. For example, that's a lot of Bitcoins held in one custody area. That's something to monitor as well, is that you have to make sure that your custody solution's rock solid if you're using one big custody solution for your Bitcoin holding.
John Darcy: (36:06)
Switching gears a little bit, we've had Michael Saylor on SALT Talks and he talks about how he believes that a Bitcoin is really a thermodynamic wave that's revolutionizing the monetary system, and that inherently, the technology has some level of intrinsic value. But the common criticism that you hear from older people, baby boomers, Brett is an enlightened a boomer.
John Darcy: (36:28)
But you hear a lot of criticism from older people who say, well, Bitcoin has no intrinsic value. It's just a piece of code that was invented out of thin air. How do you respond to people who say that Bitcoin has no intrinsic value? How do you help them conceptualize what you believe to be some level of intrinsic value?
Lyn Alden: (36:46)
We talked before about some of these stores of value have been monetized. Things like beach front property or fine art, fine wine, they do have utility in the course of what they do, but they're also valued for their scarcity and their kind of monetary premium. Bitcoin is so far the same thing. It has real-world utility, in the sense that you can perform permissionless payments internationally, and that there's no third party that can just stop you from doing it. That has a massive amount of utility.
Lyn Alden: (37:16)
It's also extremely mobile. Imagine, for example, trying to transport gold if you were to want to move from say, one country to another country, imagine trying to get gold across borders, or trying to navigate through the banking system. Especially if there's some crisis or some issue. Because tons of different countries in the world there are going through different things at different times.
Lyn Alden: (37:43)
Whereas Bitcoin, you can literally transport your funds across borders just by remembering a 12-word zip phrase. That level of self custody or self sovereignty gives that a higher mobility of funds than most other stores value or transfers of value. We're also starting to see some payment networks that are beginning to use it. For example, you have Bitcoin which is the base layer.
Lyn Alden: (38:05)
Then you have lightening which is a secondary layer that can increase transaction throughput and decrease fees per transaction. We're starting to see apps that make use of that for fee to fee payments. It'll basically take your money, convert it to Bitcoin. A split second later, converts it from Bitcoin to another currency in another part of the world. And you basically do an international payment for almost free using that inherent liquidity on the lightning network.
Lyn Alden: (38:32)
I think over time, you'll see more and more utility like that, and when you combine that with the fact that there's a really wide network effect, there's a very high level of security backing up Bitcoin's network compared to other alt coins, that overall gives it a similar store value property. We have that utility combined with a monetary premium.
John Darcy: (38:52)
We had somebody recently ask us about Bitcoin cash and how these forks work, and you've had a great write-up again on lynalden.com, your website about this issue. Why do these forks happen? Specifically, you can talk about Bitcoin cash and why part of the Bitcoin movement decided to fork it. Are those forks in any way, a threat to the future of Bitcoin?
Lyn Alden: (39:13)
I would say no. We've seen that play out in terms of the market. They've decreased substantially in terms of hash rate and price relative to Bitcoin so that they're a small fraction of what Bitcoin is. But basically going back to the fork wars and why they happened if you look at Satoshi Nakamoto's original white paper, people often try to divine, what was his intention? Based on the white paper, based on his forum posts, what did he want to accomplish?
Lyn Alden: (39:38)
He called it E-cash. He envisioned basically being able to use Bitcoins as this permission-less cash. He also talked about how to keep the node really small so that you can compress the size of the blockchain so that the blockchain doesn't get very big and you need high storage capacity to hold it, so that you basically keep it, so that a normal computer can run it.
Lyn Alden: (40:00)
Over time we've seen some of a trade-off occur. If you want to keep the blockchain easy for say, a typical computer to be able to run, have that full node, you have to have transaction throughput in terms of the number of transactions per second to be pretty low. That doesn't limit how much value can be transacted because there's no limit to the size of those transactions. But there's a limit to the number of transactions that can occur.
Lyn Alden: (40:27)
On the other hand, if you want to increase the number of transactions on that base layer, you need to increase the block size, you need to make basically nodes much harder to run, which means that the average user can't necessarily run a full node and verify and audit the monetary supply of the network. Which is one of the key things that that Bitcoin can do is that you don't trust, you verify. You can monitor the entire money supply with your laptop.
Lyn Alden: (40:52)
We've had that trade-off, that big argument among developers happened in 2017. It's split and Bitcoin cash, they increase the block size. It's hard to run a full node but you can do more transactions per second on the base layer. Core Bitcoin, their solution instead is to say, okay, the base layer is like a settlement layer. You can settle any amount of value even though you're limited to the number of transactions.
Lyn Alden: (41:16)
However, we can build secondary layers like the lightning network that can increase the amount of transactions per unit time and settle them in a batch on the network. Actually for example, if you look at something like credit card companies and all these, or PayPal, things that do high volume payments, they're settling in batches later.
Lyn Alden: (41:38)
Bitcoin would basically operate the same way, where these other layers can handle high transaction throughput. Whereas the base layer can handle large key settlements. That's been the design trade-off. So far, the market has vastly appreciated, that high hash rate, the widely distributed node network that settlement aspect of Bitcoin.
John Darcy: (42:03)
Well Lyn, it's been a pleasure to have you on SALT Talks. Again, I would encourage everybody who's watching this talk, if you want to learn more and get more of Lyn's thoughtful analysis on the space, lynalden.com. She has a great newsletter and great investment research. But it's a pleasure to have you on. Brett, do you have any final words for Lyn before we let her go?
Brett Messing: (42:19)
I just wanted to Lyn to know that we run a full-noded SkyBridge. We are doing all we can, we want to be part of the community. We figured it's good karma.
Lyn Alden: (42:27)
Nice. You're helping to verify the network.
John Darcy: (42:32)
All right. Well, thank you again, Lyn, and thank you for everybody who joined us on today's SALT talk. Just a reminder. If you missed any part of this talk or you want to access our SALT Talks with Michael Saylor, other people in the crypto space or across finance tech and public policy, our three main verticals, you can see our entire archive at salt.org\talks\archive. And you can sign up for all of our upcoming talks at salt.org\talks.
John Darcy: (42:56)
Please follow us on YouTube as well. We broadcast a lot of these talks on YouTube. We have a fast growing audience there and are continuing to build out our digital assets vertical there, so please follow us on YouTube. Please follow us on all social media outlets. We're on Twitter, Facebook, Instagram and LinkedIn. But on behalf of the entire SALT team, this is John Darcy signing off for today. We'll see you back here again tomorrow on SALT Talks.