Why Bitcoin Now: Meltem Demirors and Lyn Alden on the Perfect Conditions for Bitcoin

In this seventh installment of the Why Bitcoin Now series, Meltem Demirors, the chief strategy officer at Coinshares, and Lyn Alden, the founder of Lyn Alden Investment Strategy, discuss the state of Bitcoin since June, amidst the presidential election – which takes place on the date of publication of the show — and a global pandemic. Topics discussed include:

• the significance of bitcoin staying above $10k for over three months
• why the pandemic has created the conditions for which Bitcoin was designed
• how the markets may react to a Trump or Biden win
• why they believe, no matter which party wins, there will be massive deficits and a money-printing debt spiral
• why other countries see opportunities to erode the supremacy of the US dollar
• why Bitcoin has shown that it’s possible to have money without state
• how the current record unemployment and massive stimulus efforts during the pandemic have impacted Bitcoin
• the increasing interest in Bitcoin from traditional investors
• the IMF’s recent call for a “New Bretton Woods moment”  and how it may impact crypto
• China’s DCEP central bank digital currency and the effects it may have on increasing China’s trade leverage
• why the pandemic has made clear the importance of bringing more Bitcoin mining onshore
• whether or not Bitcoin will be able to remedy growing wealth inequality
• why privacy/encryption will be the main issue Bitcoiners need to watch from the coming administration

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Episode links: 

Lyn Alden: https://twitter.com/LynAldenContact

Lyn Alden Investment Strategy: lynalden.com

Meltem Demirors: https://twitter.com/Melt_Dem

Coinshares: https://www.coinshares.com/

Lyn’s post on how the economy and stock market perform under Democratic vs. Republican presidents: https://www.lynalden.com/presidential-elections/

US stimulus spending: https://datalab.usaspending.gov/federal-covid-funding/#section-tracking

IMF New Bretton Woods speech: https://www.imf.org/en/News/Articles/2020/10/15/sp101520-a-new-bretton-woods-moment

Stocks in a bubble: https://www.longtermtrends.net/sp500-price-earnings-shiller-pe-ratio/

Meltem on the financialization of internet infrastructure: https://medium.com/coinshares/the-financialization-of-compute-connectivity-66beaffe7501

BitOoda report on Bitcoin mining: https://bitooda.medium.com/bitcoin-mining-hashrate-and-power-analysis-bitooda-research-ebc25f5650bf

Bloomberg wealth report: https://www.bloomberg.com/news/articles/2020-10-08/top-50-richest-people-in-the-us-are-worth-as-much-as-poorest-165-million

Cash app’s Bitcoin sales: https://www.theblockcrypto.com/linked/74001/square-q2-bitcoin-cash-app

JPMorgan research note on Bitcoin: https://fortune.com/2020/10/26/jp-morgan-chase-bitcoin-predictions-analyst-jpm-cryptocurrency/ https://twitter.com/DTAPCAP/status/1319703750450302980?s=20

Forbes interview with Daniel Masters of Coinshares: https://www.forbes.com/sites/michaeldelcastillo/2020/10/24/jp-morgan-veteran-daniel-masters-explains-how-blockchain-will-end-commercial-banks/#77ec4f6a6bdd

Transcript: 

Laura Shin: 

Hi folks, we have a fabulous episode with Meltem Demirors and Lyn Alden on the macro environment surrounding Bitcoin pegged to the US presidential election, which takes place the day this show comes out.

However, first, I would like to add context to the Unchained interview with Andre Cronje of Yearn Finance. Whether or not Andre’s statements in his episode are inaccurate is up to interpretation, but the additional context can help you all decide. 

During the episode, I asked Andre about a dispute he had with Fantom and XAR, which involves Greg Van der Spuy of ZAR network, and Andre said, “there is no contractual agreements between me and them.” The additional context I would like to provide here is that Greg, Andre and two other parties had a memorandum of understanding dating back to May 2019 to establish a blockchain platform called ZAR (Z-A-R) Network. Later, a contract between an entity named Kirknewtown, of which Andre had 25%, and the Fantom Network was signed in August 2019. 

Andre also said, “The long and the short is all of this only happened after Yearn’s success.” Andre dates Yearn’s success to May 2020 when Yearn reached a TVL of more than $10 million. Greg’s first legal letter to Andre was June 16, 2020. However, text messages show discord between Andre and Greg in April. 

I also asked Andre about their allegations that he was running yearn.finance, yearn.exchange and yearn.fi, on their infrastructure. Andre said that the civil action against him was “based on the fact that I had unlawful access to our [Amazon Web Services] account, which was registered under my credit card that I have proof and evidence for.” Greg says it is true that Andre registered those on Andre’s personal AWS and with his personal credit card. However, on the WhoIs lookup, for yearn.finance and yearn.exchange, the registrant organization, which is another word for owner, is ZAR network, spelled Z-A-R, which is the blockchain platform described in the memorandum of understanding. 

Also, Greg says that Andre originally tried to register 12 domains using Greg’s personal credit card and Greg’s AWS account, but that when the payment for the domains for yearn.finance, yearn.fi and yearn.exchange was declined on Greg’s card, Andre registered those on his personal card. Andre claims that it was a shared AWS for the company. Greg says it is his account. In a text exchange, Andre informed Greg he had accidentally registered those domains on what Greg calls “our” account, and Andre responds he thought he was logged in on his account and so would reimburse Greg. Greg responds, “No need at all dude.”

Additionally, it looks like Andre had stored the logo that is now used as the Yearn logo on the XAR — X-A-R Google drive, and the ileverage.finance, iliquidate.finance and itrade.finance domains were also stored on Greg’s AWS, and those domains now show notices that they are “the subject of an active criminal investigation (Case number CAS 176/7/2020) of fraud, theft and crimen injuria with the South African Police Services.” The notice says this also applies to a list of other domains, including yearn.finance. 

Lastly, Andre said in the show, “Greg himself later came out and said there is no case against me,” however Greg says there is an active criminal investigation into Andre opened in Sea Point, Cape Town. Andre says his attorneys have looked for the case, but haven’t found anything. I reached out to the South African Police in multiple ways and was not able to determine the validity of the claims of either side. However, the police did say that the notice on the websites was not placed by them since the contact address is a Gmail address, and not a South African Police Service or SAPS email.  

I and the team at Unchained regret not reaching out to XAR or Fantom in this dispute for comment before publishing the show. Now, onto my conversation with Meltem and Lyn. 

Laura Shin: 

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full time.

Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com/C/UnchainedPodcast, and subscribe today. 

Laura Shin: 

This is the seventh episode in the Why Bitcoin Now series, in which we take a closer look at bitcoin in the context of macroeconomic forces, including the pandemic and the economic response.

The series launched at the end of June with a look at the macro environment then and how it intersected with bitcoin, and now, four months later, we’re going to regroup on that topic amidst the presidential election, to cover the many macro developments since then and how they impact bitcoin. Here to discuss are Meltem Demirors, Chief Strategy Officer at CoinShares, and Lyn Alden, Founder of Lyn Alden Investment Strategy. Welcome, Meltem and Lyn.

Meltem Demirors:
Hi. It’s so exciting to be here, and I’m so thrilled, I have to say, to finally do a podcast with Lyn.

Lyn Alden:

Yeah, thanks for having me, and I’m glad to meet both of you, and I’m really excited for this.

Laura Shin:

So, let’s just start with kind of like a little price check-in before we dive into all the macro stuff. As of the time of this recording, bitcoin has passed the three-month mark of having a price above 10K. During the 2017 to 2018 bull run, it only stayed above that price for two months. What do you think is the significance of this, and what does it say about how bitcoin and the circumstances surrounding bitcoin have changed over that period?

Meltem Demirors:

Well, Lyn, why don’t you kick this off, and then I’ll go into the crypto nitty-gritty?

Lyn Alden:

Sure. So, I mean, you know, I look a lot about bitcoin in the context of the halving cycle. So this is actually pretty normal for where we are, you know, this many months after the halving, and so, of course, every cycle, you don’t know if it’s going to perform like the last couple cycles have, but it’s one of the strongest kind of patterns we have so far, even though it’s a pretty small sample size. So combining that with the macro backdrop, it’s not surprising to see how bitcoin’s holding up.

You know, I think a key thing to watch is that, you know, going forward, a lot of the macroeconomic situation, in addition to being tied to the virus, is very tied to stimulus, and so we see, you know, whenever there’s not enough stimulus, we see kind of disinflationary pressures reassert themselves, and it’s going to be interesting to see if bitcoin’s kind of bullish halving cycle, how that relates to potentially that volatile aspect, and so far, it’s holding up quite well compared to precious metals, compared to equities. So far, it’s kind of doing its own thing, to some extent.

Meltem Demirors:

And I’ll just add onto what Lyn said. I think one of the other interesting things, you know, since the inception of bitcoin and the writing of the bitcoin white paper, which, we’re going to celebrate the 12-year birthday this weekend, which is exciting, one important thing to keep in mind is we’ve never really seen how bitcoin behaves during economic recession, and at this point, I think it’s fair to say we are in a recession after two quarters of back-to-back economic contraction.

So what I think is really interesting is, for the first time, we are actually watching bitcoin in the environment for which bitcoin was sort of designed, if you will. If you look at what’s happening, which Lyn has alluded to and has written about in so much of her research, the environment we’re in right now that is unfolding, you know, there’s all this money printing going on. When money printer go brrr, right, we anticipate inflation will happen.

And just because it hasn’t happened yet and just because, from a CPI, or consumer price index, perspective, we aren’t feeling inflation, doesn’t mean it’s not rampant in the market. If we look at the facts, US home prices are seeing their fastest quarter-over-quarter increase in recent history, I think in a 40-year history. So, home prices are going up at a very rapid pace. We’re seeing equities, right…equities are trading 2025 forward P/E multiples.

So, people are pricing in their expectations of the future today, and they’re looking for growth. So, I think bitcoin is actually starting to find its place in the narrative. We talk about narrative all the time in the crypto space, and I think one of the things Lyn alluded to when she talked about the halving cycle, you know, this is one of the narratives. It’s also substantiated with a lot of data, but the halving narrative is a consistent one we’ve had over sort of the last 12 years of bitcoin.

I think what we’re seeing now, and the reason I talk about all of these facts, is this narrative that we’ve talked about in the bitcoin community for, you know, the last seven years that I’ve been in it, is now finally unfolding in the real world, and so watching bitcoin’s behavior in this environment I think is really exciting. To me, you know, we’re going to continue to test bitcoin’s strength. I think bitcoin’s decoupling from equity has been interesting to watch.

Bitcoin’s breakout from gold has been interesting to watch, but until this actually plays out and we have the data and the evidence…which, again is what I love about Lyn, is she’s like, show me the receipts, right? Show me the receipts. So until we have the receipts to prove bitcoin’s behavior in this environment we’ve hypothesized about for so long, it’ll be difficult to sort of say definitively what’ll happen, but my view, I’m very bullish, very excited, and as our friend Raoul Pal likes to say, irresponsibly long.

Laura Shin:

Yeah, I love how you phrased that when you said that this is the environment that bitcoin was designed for. In a way, that’s, like, perhaps a more succinct way of explaining why I’m doing this series now. You know, when the pandemic started happening and the stimulus response came in, I just thought, how are these not the perfect conditions for bitcoin, and it should be a time when I would’ve expected that a lot of people would be doing research about it.

So that’s why I was like, I should probably do a series on all this, and so another big development going on is that the day this episode comes out will be the Presidential Election, and Lyn, you wrote up a really thorough analysis of US GDP growth, federal debt growth, and stock market performance under Republican and Democratic presidents.

And something that struck me about it is that the GDP and stock performance was better under Democratic presidents than Republican ones, which surprised me because I thought markets generally went up on positive news for Republicans. You know, for instance, like when Trump won the election in 2016, and then, actually, the other thing I noticed was even things like federal debt have tended to rise under Republicans more than Democrats, and then, again, the conventional wisdom tends to be that Democrats are the big spenders and Republicans are fiscally conservative.

So why is there this disconnect between the narrative and the data, and how do you think the markets will react to a Trump win versus a Biden win, especially one in which their party also takes the legislature if that happens?

Lyn Alden:

Yeah, and I think, you know, one thing I kind of point out in the article was the difficulty of forecasting, because, first, you have to be right about the outcome and then right about the, you know…when you get that outcome, how does the market respond to it? So one thing I point out is back when Trump and Clinton were going together, the narrative was that, you know, because Trump was the outsider, he was the long shot, and so people were like, if he wins, the markets are probably going to crash.

There were a couple of economists that were kind of pointing that out, and so when he did have that upset win, markets immediately sold off for a few hours that night and then just soared, of course, in the month that followed, and that’s, of course, because they were correctly pricing in their corporate tax cuts that were going to come, and so, you know, we’ve seen that play out. Now, going forward, I don’t have a strong differentiator between if you get a Trump win and a red hold in the Senate or if you get a Biden win.

I think there are certain sectors that could perform very differently, but kind of the two things I’m weighing against each other are, of course, if you get the blue sweep, you have a higher probability of corporate tax rates going up and potentially other taxes going up. We also have potentially more stimulus spending, which could benefit some of those companies’ bottom lines, especially if you look a little bit more in the cyclical stocks or their value stocks.

On the other hand, if you have kind of a more red sweep, you know, you’re increasing the probability that you’re locking in the existing tax cuts and potentially getting more tax cuts, but you’re also potentially factoring in somewhat lower stimulus spending, and I think, actually, the thing that people aren’t focusing on enough is whether or not you get a gridlock scenario.

So I’m actually paying a little bit closer attention to the Senate race as it pertains to asset prices than I am to the presidential race because, in many ways, you know, Trump, he doesn’t fit cleanly in with either party, to some extent. He’s not kind of a traditional fiscal conservative. He wants very large stimulus. So the Senate is a little bit more of a battleground between fiscal conservatism and some of the more progressive aspects that we’re seeing.

So I’m actually focusing on more so who wins the Senate because, for example, a Biden win with a red Senate is a very different outcome than a Biden win with a blue Senate or even a Trump win with a red Senate, because he could potentially get more things through that Senate than Biden could. So, I think that’s kind of the key thing to look out for, is how kind of gridlocked it is or how decisive it is.

Laura Shin:

Meltem, do you want to add anything to that, because I was a little bit…it just wasn’t the kind of analysis…or the conclusions of it were not what I was expecting, and that made me wonder how things would go with this election.

Meltem Demirors:

Yeah. Absolutely. Well, this is why I love reading Lyn’s research. Like, not to fan girl for Lyn, which I do on a regular basis, but she has the receipts, which, obviously, you know, one of my big focuses, particularly with the way I look at the crypto ecosystem and what I like to share is, you know, let’s look at the data. Let’s look at the facts and see whether those facts substantiate the narrative, and I think what Lyn’s research piece very helpfully points out is the fact, right?

When we look at the data, they don’t support the popular narrative. I think she’s absolutely right in terms of the Senate and House races mattering much more than the presidential race. The other thing that’s been really interesting to see that I don’t think we talk about enough is stimulus and tax cuts, right, and typically, I think the way people frame their thinking is Democrats are all for stimulus, social aid, benefits. People call them “socialist policies” because they focus more on distributive economics and sort of distributing wealth and creating a bigger state and sort of this idea of, you know, distributing wealth, whereas I think the Republicans and the way the GOP is sort of framing policy right now is in the form of tax cuts, right? So, minimizing the amount that gets taken out of your paycheck, making sure that some of the regulatory restrictions that are making it more challenging…this is their framing, not mine.

For certain businesses to operate or remove, making it easier for people, you know, and part of this also really matters in what’s happening on the Supreme Court right now. If you’ll recall, RBG was staunchly anti-corporate, and she defended workers’ rights. Amy Coney Barrett, you know, we don’t have that much data about her rulings, but my sense is she’s probably more pro-corporate and less workers’ rights. So, I anticipate there will be some erosion of workers’ rights under the current construction of the Supreme Court, which is important to consider.

But I think what people mistake is stimulus and tax cuts have the same effect in the sense that they create a massive deficit, and the story here is regardless of who gets elected, we have a massive, massive deficit in this country, and then you factor in the one really important thing that I think neither party talks about is unaccounted-for liabilities, right? So, typically, if people are, you know, putting together the balance sheet, if you will, for the United States.

And we have tax revenues every year on the scale, somewhere between 4 and 5 trillion dollars, and then we have all of these liabilities, which is our spending. We have a bunch of unfunded liabilities in the form of Medicare, Medicaid, and social security, and those unfunded liabilities are only going to get larger as more and more people start to retire, right? We are seeing the biggest shift in our labor force ever. We’re seeing, supposedly, a massive generational wealth transfer. But healthcare costs are highly, highly inflationary and continuing to rise, and so my biggest concern is this. Under either party, we have a huge problem with the deficit. We have a huge problem with the liability of social security, Medicare, and Medicaid. We have a population where wealth has disproportionately accrued to the older generations, and younger generations are not accumulating wealth. So, what we have is this setup for a cataclysmic retirement crisis, and in this environment, there is no possible way…I don’t care if you’re blue, you’re red, or you’re orange. I don’t care what color you are. In this environment, there is no possible way for any party to do anything other than continue to inflate 401(k)s and retirement accounts and continue to inflate home prices, which constitute the majority of wealth that the average American holds, right? The largest asset they typically have is their 401(k) or their retirement account and their home value, and in this environment, both sides, they have to print money. It’s not even a partisan issue.

What this leads to…and this, again, sort of goes back to a lot of what Lyn writes about. There is no foreseeable way out of this debt spiral or money-printing spiral. It is completely and fundamentally unsustainable, and so, you know, I’m very interested to see, over the next 4 or 5 years, how political parties might actually start to change because of this wealth gap. I’m in Texas right now, in Houston. Young voters are turning out in droves, right? The power is shifting. States that were previously red are becoming purple, or in some cases, may flip blue. States that were blue in the past are starting to become maybe purple or shifting towards red.

It’s like the battleground is shifting, and people don’t talk enough about the demographic changes that are influencing those shifts and the underlying sort of culture war that is emerging between the old way and sort of this new way, and at the end of the day, you know, I’m not going to work 40 hours a week as a 25-year-old so I can pay 80% of my income to make sure grandma and grandpa have medical care and can live comfortably in retirement. That’s not going to fly. So, I’m very curious to see how these dynamics unfold, and I don’t think people talk about that enough in terms of sort of the political landscape.

Laura Shin:

We’ve had a number of unique circumstances this year. The pandemic hit, and we saw record unemployment, especially in the US, and obviously, certain industries pretty much came to a near halt, but then at least, also in the US, we saw the US government deployed 2.6 trillion dollars in stimulus…

Meltem Demirors:

Nine zeroes, Laura. Add nine zeroes.

Laura Shin:

Yeah, things would look a little different if it was 2.6 million, but anyway, there was about 20 trillion dollars in stimulus deployed overall worldwide according to the IMF, and I just wondered, how would you say these countervailing factors, you know, the record unemployment and these industries just coming to a halt against all the stimulus, how would you say that those have affected the macro environment and bitcoin so far this year?

Lyn Alden:

So, a big thing I’m kind of focusing on is where we are in the long-term debt cycle. So a lot of my work, you know, Ray Dalio popularized that concept, and it’s something that I’ve incorporated, as well, which is that, you know, you have the normal 5- to 10-year business cycle, but they don’t just…every time you get to the end of that cycle and restart, you don’t start fresh, right?

So every cycle, you get lower and lower interest rates. You get higher and higher debt levels, and they string a bunch of those together until you hit zero-bound interest rates, and until you get extraordinarily high debt levels as a percentage of GDP, and so then that subsequent deleveraging of it looks very different than, you know, say, the 5 or 6 or 7 normal deleveraging events that transpired before then, and so the last time we were in a situation where the long-term debt cycle was unfolding was way back in the 1930s and ‘40s.

So, you know, it’s a very challenging period to compare it to because, you know, technology’s so different, culture’s so different, geopolitics are so different, but it’s the closest thing we have to in terms of where policymakers are, in terms of fiscal monetary policy, and that’s actually true that the same kind of structures are in place for most developed countries in the world and to some extent, emerging markets, but mostly to a developed market phenomenon.

So, you know, if this pandemic had happened in, say, a much less levered world, the response could’ve been much smaller because, you know, people would’ve had more savings, less debt levels, and so stimulus could’ve been more targeted, more specific, but because it’s such a highly leveraged system, so the impact of shutting down a highly leveraged system is so systemic, that’s why we’ve seen such massive stimulus, and you know, the federal government, for example, went into this running trillion-dollar deficits with debt-to-GDP ratios not seen since the 1940s. And so this just blew out that fiscal situation and put pressure on the fact that housing and corporate sector debts are still extraordinarily high, and so that’s kind of how I’m looking at this, and that’s why, you know, the election, to some extent, it matters in the sense that how gridlocked it is, and there will be specific differences between who wins, but as Meltem pointed out, whoever wins, the deficits are still going to continue to be very large, you know, years out, regardless of almost any political outcome.

Meltem Demirors:

Yeah, and I’ll add to some of what Lyn said. I think the other thing that’s really notable, Laura, I mean, we saw this with how stimulus was implemented, right? Large corporations who have spent decades doing share buybacks, paying large bonus packages, and basically, you know, operating on really high levels of debt, turn to the government and needed bailouts to stay afloat, and I think that is, like, endemic to a form of corporate social…like, we don’t live in a democracy. We live in a corporate socialist society where the government takes money from taxpayers. Seventy-five percent of tax revenues come from individuals. Seventy-five percent. Only 11% comes from corporations. So, they’re taking taxpayer dollars, right, and they are using it to finance bailouts for large corporations. It happened in 2008, which is where we learned that this was totally acceptable behavior, and basically, other than a handful of groups like, you know, Occupy Wall Street, nobody really cared and bankers walked away, we know, with massive bonus packages, and this process continued for another 10 years.

Now it’s happening again, you know? Government’s going to do what they can get away with. You know, people have talked a lot about sort of the Cantillon Effect or the fact that people who are closest to the money printer are those who are most likely to receive bailouts, and you see this, right? The private sector has ingratiated itself with the public sector. There is very little distinction here, and it’s really Wall Street that’s driving policy when it comes to the stimulus, right, and both sides…again, I think people try to, you know, differentiate political parties by their policies, particularly their economic policies. I call BS, right? I’m not going to cuss, but it’s total BS. They’re one in the same. Both parties are one in the same. They’re going to engage in the same behavior. Some will be more overt about it. Some will be more covert about it. Some will be more subtle. Some will be more, you know, in your face, and we’ve seen with Trump’s sort of personal styling, that he is very overt about his actions.

But the Democrats are really no different in their behavior, and they were complicit in one of the largest sort of tax fraud instances with TARP, right? There are billions of dollars that were unaccounted for. There are still billions of dollars that are unaccounted for. So, I think the same cycle is sort of continuing. There’s total lack of accountability. There’s a total lack of responsibility. There’s total lack of leadership, and so I don’t see this changing anytime soon, and the prevailing ideology, it’s not just in the US, it’s everywhere. Spend, spend, spend. The last point I’ll make, which I think’s interesting, is, you know, Lyn, you just said zero is the limit. Zero is no longer the limit, right? Like, Marvin Goodfriend predicted this many, many years ago. Marvin Goodfriend, you know, he predicted NRP, or negative rate policies. He also predicted that the only way you could implement NRP, or negative rate policy, was through a central bank digital currency or some way to keep people from exiting the system. So, again, like, we’re in this setup. We’re entering, you know…people overuse this phrase, but we’re entering an unprecedented period in history. We’ve never seen something like this before. Our rates are zero for the foreseeable future. Inflation target is 2 to 2.5%. How does that work? So, to me, the answer then, is it’s bitcoin, it’s gold, right? They’re assets that people believe are resilient in the face of inflation, and what’s interesting, and the last thing I say, which I already said, but one more thing.

So, people like to say, you know, the stock market, oh, it’s bullish stock market. It’s over-performing. Stocks are not going up. What’s happening is the value of the dollar is going down, right, and that really, I think, is the fundamental framing that people don’t understand until they start to grasp the idea of bitcoin and things that are scarce in nature. We can print more dollars. We can’t print more bitcoins. The reason the price of stocks is going up is because there are more and more dollars in the system chasing fewer and fewer assets, and so, again, what I think this means for bitcoin, if I’m looking at my portfolio, right, let’s say I’m an advisor and I charge 2% to my clients to manage their portfolios and I have them in a typical 60/40 portfolio, meaning I have 60% in equities and 40% in bonds. My 40 just got wiped to zero. My 40 is now zero, and so there is no way that my client is going to continue to pay me 2% to give them zero or very close to zero.

So, how am I going to deliver performance? How am I effectively going to diversify, and how am I going to keep pace with inflation, and I think all across the world in investment committees, these conversations are happening, and they have to happen. They’re starting slowly, but I think as this realization sets up, right, with the boomers who are running these banks…and no offense because they generally are men in their 50s and 60s who have a certain set of beliefs of how the world functions, and that belief has been completely shattered. They have not yet adapted to their new reality, but they soon will have to. I’m sure, Lyn, you’ve been talking to many banks who are like, what do we do? We’ve been talking to banks and asset managers who are asking, what do we do, and is bitcoin maybe part of the answer to how we stay relevant, how we keep AUM and actually deliver a product that our clients will pay for? Like, it’s not rocket science, right? It’s simple math. It’s addition and multiplication. Like, any number times zero is zero.

Laura Shin:

And Lyn, are you having similar conversations? Because I do wonder if this is part of, you know, the fuel that’s led to things like the recent J.P. Morgan research note that, finally, after many of us have been in this space and recognize that oh, yeah, some of the assets in gold could be transferred over to bitcoin or things like that. You know, they finally published something like that. Are you noticing similar thoughts from other traditional investors?

Lyn Alden:

Absolutely. I mean, you know, one of my common questions from my research clients is what do I do with the bond portfolio, the portion of my portfolio that’s bonds, because they’re looking at equities, and they’re saying, okay, you know, so stocks, in many cases, are quite expensive based on most metrics. On the other hand, the one metric where stocks are not expensive is the equity risk premium.

So if you compare, say, the S&P 500 earnings yield of the dividend yield compared to the 10-year treasury, that’s actually still moderate, and it’s because, as expensive the stocks are, bonds, in many ways, are even more expensive if you look at it, you know, in that way because their yields are so low, and so they’re saying, you know, what’s left? So, I often point to certain foreign markets potentially offer better risk-reward scenarios with more attractive valuations relative to their growth potential. I also point to alternative assets, like gold and bitcoin. I think, for example, gold can replace a segment of a bond portfolio, for example, and so it’s definitely one of the most common questions I get, and it’s getting more and more mainstream, the concern about what is going to happen to my cash if I just hold this at zero yield for the next five years? And for example, the other day, I gave a presentation to a bank board of directors, and bitcoin wasn’t one of my kind of presentation points. I was just talking about fiscal monetary policy, and then one of the first things they asked when I was done was what do I think about bitcoin, because they had noticed, for example, the Michael Saylor…you know, at this point, it’s worth half a billion dollars in bitcoin that he put on his balance sheet, and they had heard in one of the interviews that when he was convincing his board of directors, he sent a bunch of different materials to them, and one of the things he sent was my article on bitcoin.

So the board’s like, so how real is this? So is this, like, still an asset class for the crazies or is it, you know, an actual…that’s how they phrased it. Or is it an actual…like, do you treat it like a commodity? Do you treat it like a currency? So, I gave then kind of my five-minute bullish overview for bitcoin.

So, yeah, I’m definitely kind of seeing this both down to the retail investor and all the way up to people kind of overseeing banks and just thinking, you know, what are we looking at here, and interesting from the people running the banks. I mean, they even questioned whether or not things like CPI are accurate measures of inflation because, in some ways, they were actually referring to the Austrian definition of inflation, which is just increase in the monetary supply. So, they were saying that, you know, this year, their deposit place just blew up, right?

So, the amount of deposits coming in has grown dramatically for them, which is true if you look nationwide what have banks’ deposits done? Because money supply has gone up so much, because bank deposits went up so much, they were viewing that as a form of inflation and saying, you know, is this going to be different than, say, 2008? So that was kind of how they were looking at it.

Laura Shin:

Wow, this is really fascinating, and it makes me reminisce a little bit about those days when we used to talk about the wall of institutional money that was going to come in to this space, and now I’m a little bit like, oh, okay, well, maybe it will actually happen, finally.

Meltem Demirors:

Wait. Hold on, Laura. You know, I want to say something about that, and this is something I get very fired up about. We don’t need the wall of institutional money coming into bitcoin. Institutions do not get bitcoin. They have not gotten bitcoin, and the way they’re thinking about bitcoin now is completely antithetical to the point of bitcoin. What they want to do with bitcoin is stick it into a vault, right, however you do that through their custody solution.

And then they want to hypothecate it and multiply the bitcoin supply by creating synthetic products on top of the bitcoin they hold. Okay, for bitcoin to go mainstream…and we can even, like, categorize what mainstream means. If we want the number to go up, right, the way a number goes up is very simple. We need more demand than supply. That’s already happened, and that’s the halvening that Lyn mentioned earlier.

But the thing is, like, everyone keeps talking about institutional money. I don’t care about the institutional money, because the institutional money, we keep trying to take bitcoin and shove it into a box so that institutions will want to buy it, hold it. We’re like, hey, if we take this and we package it and we shove it down your throat, do you want it? And they’re like, oh, if we package it this way, like, yes. I don’t want to do that, right?

Bitcoin needs to fundamentally change the way that we think about financial institutions. That is the whole point, and I think that’s what so many people are proving with the way they’re building their bitcoin-focused businesses, but taking all of the bitcoin in the world and shoving it into BNY’s custody solution and then building a bunch of synthetic derivatives around it so you get bitcoin depository receipts, that is not different than the paper money we hold today, right?

Like, it’s marginally better maybe sort of from a monetary policy perspective, but it’s nonsensical. So, I actually reject this notion that institutions need to adopt bitcoin. Bitcoin is going to fundamentally change the why that institutions function. That is my goal. That is my objective. That is my belief.

Yes, there will be a transition period or an evolutionary period over which that happens, but if the objective is to take bitcoin and make it look, feel, small, taste, you know, look like what banking looks like today, then we have completely missed the point. So, I would say forget about the institutional wall of money. Focus on changing what it means to be an institution servicing a new asset like bitcoin.

Laura Shin:

Yeah, actually, it’s funny that you say all this because I have been thinking to myself, oh, once Kraken launches its bank and Avanti Bank launches, I just wonder how these things will change the way banking is done, because their business model is going to be quite different, but so this is kind of like a perfect moment, actually, because we’re going to take a little break, and there’s so much else to discuss because there’s this whole geopolitical thing going on in the world that really intersects with everything going on in bitcoin. So, we will take about that in a moment after this quick word from our sponsors. 

Laura Shin:

Back to my conversation with Meltem and Lyn. So, we’ve been kind of focused on what’s been going on in the US, but I also wanted to talk about how the IMF recently made waves for a speech in which the Washington, DC managing director Kristalina Georgieva called for a new Bretton Woods moment. The speech itself was actually kind of anodyne to me. You know, she called for financial inclusion, closing the gender inequality gap, addressing climate change, but then, you know, a lot of people were talking about this and saying there was a lot more under the hood to what she was saying. So, what do you think is or will be the significance of this speech, particularly for digital assets and bitcoin, amidst, you know, everything else going on?

Meltem Demirors:
So, I can hop in here to start, and then, Lyn, I’ll pass it to you. Look, I think the notable thing about what’s unfolding…and it’s not just the IMF. It’s the ECB. It’s, you know, Bank of Japan. It’s the PBC, the People’s Bank of China. There’s all of this monetary talk unfolding, right, and basically, what’s happening is, for the last, gosh, 60 years, the dollar, really since World War II, right, and arguably, maybe even before, the dollar has been the supreme currency.

The US has had both political and economic hegemony, and in many ways, you know, the US has benefited from its ability to export inflation by printing more dollars and by sort of having the entire global economy run on dollars, largely fueled, by the way, by sort of the petrodollars, right, or the use of the dollars in the oil and gas industry, which, for many, many years, defined the nature of global geopolitical conflict and the largest financial flows between nation states.

And so, for the first time, I think everyone around the world is seeing an opportunity to erode the supremacy of the US dollar, and when I say that, I don’t necessarily think that’s a negative thing, but I think the US dollar has sort of been in this dominant position for so long, that people now see a window of opportunity to sort of redefine where the US dollar fits in the global monetary system. Bitcoin, I think, is sort of the initial challenge. If bitcoin has proven one thing that I think’s really valuable, it’s that there is room for things like bitcoin to not only exist, but to actually thrive, right, and what’s so fun to me, a few years ago…I love sharing this story. A few years ago, I went to Eurofee, which is an event for European central bankers, and I was at a dinner with several central bankers, including, you know, the Bundesbank Bank and BIS and some of these large, large global banks, and I was talking about bitcoin. And of course, right, I was the crazy bitcoin lady. Only woman in the room, but also the crazy bitcoin lady, and one of the people around some of these things said to me, well, you can’t have a currency. You don’t have an Army, and I said, excuse me, I have an Army. It’s called CryptoTwitter, and I say this in a slightly joking way, but it’s very serious. Like, for the first time, we have proven that the intractable link between money and state can be broken and you can have money without state, right, and the idea of digital statehood, which I know Lyn and I both want to get into, and the internet versus everything else, we’ve proven this idea, and I think that is extremely powerful. It’s extremely scary. I don’t think people grasp how serious it is and you can’t put it back, right? Bitcoin has reached a point where you can’t go back. It’s an inevitability.

So, to me, I think bitcoin has actually forced a conversation that maybe would’ve not happened for another 10, 15, 20 years if these events hadn’t unfolded in this way. Maybe it’s serendipitous. Like, maybe there are greater forces at play, but I definitely think a lot of people, whether they will admit it or not, have been inspired by bitcoin, both positive and negative, right, but they’ve seen the potential of what can be done when you build a global movement, and bitcoin’s not just technology or money, right? It’s also a social and political movement.

Lyn Alden:

Yeah, I agree, and you know, one thing I’ve been focusing on…so a lot of people now are kind of asking what are my thoughts on the “new Bretton Woods” proposal, or now we’re using words like great reset, things like that. So, I view a lot of this as kind of framing a narrative. However, if you back over the past years, there’ve been kind of cracks in the current system building for a while, and so we were already kind of moving towards…you know, I think the outcome can take many forums. But we were already kind of moving towards the necessity for the current system to kind of shift over into another system, and so this is kind of like…you know, now the pandemic kind of pulled forward maybe the next three years or so and just put that more in the forefront, we’re already kind of getting there. So, we have the Bretton Woods system, which was that the dollar’s backed by gold, and the other currencies back themselves by the dollar.

But that kind of ended, of course, in 1971 when the US was exporting a lot of its gold, and so that was an unsustainable situation. So, then the dollar’s backed by nothing, and you know, globally, we had then a pretty rapid period of currency devaluation. So we had high inflation in multiple countries. In the US in particular, we had some issues, and so the next stage of that system was the petrodollar system where, you know, using the United States’ large military presence and ability to protect supply lines, to protect certain nations, they set it up so that, you know, almost all oil pricing worldwide happened in dollars.

So people often refer to the fact that every, say, 50 to 100 years, you have another global sort of currency, but what made this period unique is that, in those past periods, it wasn’t necessarily the currency itself that was a global sort of asset. I mean, there are still, like, precious metals that were kind of the core of that, but it was the fact that that currency was widely accepted. Whereas the petrodollar system was a more unique period where one currency had a total lock on global commodity pricing, which is different from the previous ones.

And so we had the situation where all countries had to have the dollar in order to buy commodities, especially oil, but that also makes the situation where we had to make sure that we had tons of dollars out there in the system, which necessarily means that we’re running very large trade deficits, you know, over decades, pretty much, and there were economists back when this was set up that warned that…back in the Bretton Woods system, they warned that this would be an issue over time, but basically, you know, we said, okay, we don’t care about what happens 50 years from now. We want to structure the system to kind of solidify power now, but now that we’re decades later, you know, now that those decades later are here, so, basically, if you look back over the past several decades, the United States has run very persistent trade deficits, and the system itself is reinforcing. So, because there’s so much dollar demand out there, right, because there’s demand for the dollar in order to buy commodities, and then, over time, you get more and more dollar-dominated debt outside of the US, right?

So, corporations and countries around the world, they get financing in dollars, and so to service those debts, they need dollars. So, we had this kind of dual demand for the dollar that’s really persistent. So, for most countries, if they start running big trade deficits, you know, next time they have a recession or crisis, they usually get a currency devaluation, and that increases their export competitiveness and reduces their import ability, and so it kind of helps correct their imbalance.

The US never really experiences that correction because there’s this extra demand for the dollar at all times, and so we’ve basically, over, you know, say, 50 years, exported a very large portion of our industrial base, even more than many other developed countries. Like if you compare us to Europe or compare us to Japan, we’ve really kind of doubled down on the services sector and exported a lot of our industrial base, of course. And that has had profound impacts, especially with craftsmen, blue collar, labor, and to the benefit of many types of white-collar labor, for example. So we’ve had some of the benefits accrue to some segments of society and not to others, but this system’s really kind of stretched now because the world is so saturated with dollar debt. At the same time, the US is just so kind of hollowed out in terms of its industrial base, and now there’s a narrative that we want to bring back industrial base, but that’s really challenging to do with the current system as structured.

So, there are so many things pointing to another system slowly emerging, and we started to see this, you know, for the past decades whenever a country tries to price oil in something other than dollars, their next several years tend to not be very pleasant, militarily speaking, but we started to see, for example, when Russia says that they want to start pricing oil in euros, there’s not much that the US can do about that physically. So, instead, we sanction them. We say mean things, but there’s not a ton we can directly do about it, and similarly, if you looked at, for example, trade between Russia and China over the past several years, if you look back, you know, 2-3 years ago, something like 80% of their trade was dollar based, and that’s now fallen to something like, you know, 45%. So, they started using the euro more. They started using some of their local currencies, and so we’re starting to see somewhat of a multi-polar system, and so, in some ways, you know, people are worried about how that would affect the dollar and America’s status in the world, but in many cases, even the United States is really harmed by this current system as structured, right, because we’re the ones that have to run very large deficits, and so, as we move onto the next system, it’s going to be some sort of multi-polar system or neutral reserve settlement assets.

There are all sorts of…you know, of course, digital assets now present another type of technology we can incorporate into the ways that these countries can go about that, but the general theme is that it’s less based on one country’s currency and more based on either a multi-polar system or on a neutral reserve asset.

Laura Shin:

Yeah, so this is the perfect segue to my next question because, obviously, in the mix with all of this, China has began rolling out its digital currency DCEP, and amidst, you know, all these kind of things it’s doing with trading partners, such as Russia, I also wondered what you thought about how the DCEP will affect the balance, particularly when it comes to Africa because, you know, the population there is so young, and that’s where we’re seeing digital asset adoption maybe can move a bit faster, because the legacy financial system there is less robust. So, I wondered what effect you thought the DCEP would have on the playing field? Do you think it gives China a leg up, especially if it can use that as a leverage point when it comes to dealing with these emerging economies, particularly around the Belt and Road Initiative, or do you think that, you know, people and many businesses and countries have inherent trust issues with China? So, I wondered if that would always limit the impact of DCEP?

Meltem Demirors:

If I may jump in here, so we’ve invested in a number of companies at CoinShares outside of the US and particularly in emerging markets, including Southeast Asia, Middle East regions where China is attempting to extend its influence. So, let’s just talk quickly about DCEP. I think there are two things that are really important about DCEP that are not talked about enough. I believe that we will have over 1 billion Chinese consumers interacting with digital renminbi before western governments write a single definitive policy guidance.

Okay, and I say this not to lambast the leadership of western “democracies,” although I certainly do that in other conversations, I say that because the fundamental difference between China and the US, for example, China’s a command and control system, right? There is one philosophy, one ideology. There is one ruler, and it flows downhill. The US has been in partisan gridlock for a long time now, and we see it in the regulatory environment, right? There are lots of different regulators. They’re state rights versus federal rights, and the system of checks and balances that has been set up to sort of, you know, protect the republic and this concept of American democracy in the form in which it had historically existed is no longer really relevant in our digital world, and I think what we’re seeing is the struggle of the American republic in its governance structure to operate successfully in the digital world. Like, it’s very difficult to define where physical jurisdiction begins and ends in a world that’s digital, right?

This concept is intractable. Like, these two ideas are fundamentally incompatible, which is why you see so much of cryptocurrency-focused regulation is defined by physical jurisdiction. Bitcoin doesn’t have a physical jurisdiction. It just doesn’t, and so we see I think, one, is, you know, there’s this fundamental difference, and it means that China moves at a much higher speed. The second thing that I think is really interesting is China has one singular focus. Their focus is empire, right, and here, I’m sort of projecting a bit, but the focus is empire, and I think what’s been interesting to observe is in the Chinese system, when there’s support for something, there’s an unlimited amount of economic capital, investment capital, but also political capital that’s made available to make this thing happen, right? So, you look at the investment in manufacturing capabilities. You look at the investment in R&D and semiconductor fab, right? You look at different parts of their economy. Now you look at DCEP and BRI, the Belt and Road Initiative. Like, these are all a function of the fact that China has unlimited economic and political will. 

Lyn shared an interesting statistic on her blog that, 10 years from now, the Chinese economy will comprise close to 30% of the global economy, and the US economy will sort of shrink over time, and I think this shifting and rebalancing of the world is an interesting one. One topic we haven’t talked about is India. India, actually, in a way, is I think an under-discussed topic. The Indian subcontinent is more populous than North America, South America, and Europe combined, right, but also I think the Indian subcontinent is just less understood, perhaps, than China. People don’t talk about it as much, and I think politically, maybe it’s been a little less organized, but I do think what you’re seeing right now is a realigning, a polarization, right? If we think about the results of 1945 and the drawing of spheres of influence and the splitting of the world into axes and allies, we’re now seeing a new type of polarization. I call it the new Cold War. Maybe that’s a bad characterization, but I definitely think there’s sort of a schism, and it exists along three primary lines. It’s economic, and we’ve talked a little bit about the currency war and some of the things happening there. It’s digital in terms of infrastructure information, where information resides, how it flows, who develops software, who uses software, and we see this playing out, right? Like Huawei getting hit with RICO charges and not being able to build 5G in the US or in Europe, the implementation of the Clean Act, which tries to remove Chinese influence and makes an American firewall more explicit in terms of our telecommunications infrastructure. We see it with TikTok, right, and President Trump bragging about selling TikTok when, in fact, the only thing that TikTok actually did was move its US data into a data center run by Oracle, which is a US corporation, but like, fundamentally, the company ByteDance is still domiciled in China. So, it’s very bizarre.

So, you see this sort of digital war that’s breaking down, and then the last one, again, is it’s a culture war, and I think, again, this is where it starts to get really interesting. The demographics of the west are aging, sick populations and an extreme disparity of wealth in many ways, but in also extreme distributions of wealth, meaning older generations have much more wealth than younger generations, and the ability of younger generations to earn wealth is less than before in each successive generation.

Whereas in these emerging economies, in these rising powers, right, the demographic situation’s much different. They have a young population. It’s not as old. They have a booming young population. That young populations very entrepreneurial. They’re starting to see more and more economic opportunity. They’re building businesses. So I think there are these fundamental differences that are starting to emerge. Economic warfare, digital warfare, and then I think there’s sort of a demographic or culture war that’s emerging, and all three of these are working together to sort of redefine the fabric of our world. I’m not an expert by any means in any one of these. I just find this very fascinating because I don’t think people think about them in tandem enough. I think there are people who specialize, right, in the economic implications, maybe in the infrastructure implications, and maybe separately on the culture and sort of demographic implications.

But none of these things exist in isolation, and when you look at them together, I think the story is so telling, and it’s terrifying in some way, but I think change is good. Like, I’m a proponent of change, right? Though, a universe tends towards entropy and chaos, so you might as well lean in, embrace it, and sort of build for a future filled with chaos and uncertainty. So, my belief is more chaos, more uncertainty, and increased polarization.

Laura Shin:

So, I know this episode is mostly about bitcoin, but I just have to call out this essay that you wrote in The Digital War because it was so fascinating to me. I hadn’t really…I mean, like you say, you’re just pulling in kinds of all these different things together into one piece, but one thing that fascinated me about your conclusion was that you said that you felt that all these things going on in terms of the digital war would result in more metered bandwidth consumption, which is basically a definition of Ethereum. You know, it’s a platform in which you pay for the computation that you use, and so, of course, I know this episode and this series does focus on bitcoin, but this was actually the first time I’d seen a clear argument for how macro forces will drive usage of Ethereum. So, can we just take a couple minutes for you to explain that, because that was so fascinating? I hadn’t really heard anybody articulate it in that way before.

Meltem Demirors:

I think it’s not a necessarily, you know, an articulation of the value proposition of Ethereum. I actually want to go back to something I vehemently believe, which is that bitcoin, at its core, is a telecommunications protocol, right? It’s a protocol that allows us to communicate, but it allows us to communicate about UTXOs and value in the form of bitcoin. What I think’s really interesting is the bitcoin mining community, the physical network that is the back…so bitcoin has three layers, sort of, in my simple construction. There’s the protocol, which is the code that actually governs or is the governance layer of bitcoin, if you will. Governs how consensus operates in bitcoin world. There’s the physical bitcoin network, right, which is how the protocol gets implemented. It includes routing logic, but really, that mining layer ensures the security of the bitcoin network, and the hash rate is a function of that, and you have to expand electrons and silicon to make that happen, and it’s very expensive, both from a CAPEX and OPEX perspective. And then, on top of that, you have applications and products and services and all of that. What I think’s really interesting is bitcoin mining is going through its own evolution because of the introduction of asset-backed debt. For the first time ever, you can utilize bitcoin itself, the output of this process, to finance further investment in bitcoin mining capabilities, and what’s happening is, as a result of this new financing vehicle, we’re seeing bitcoin mining pop up in different parts of the world. We’re also seeing a concerted effort to onshore bitcoin mining into the US, and what’s really interesting here is I actually think that bitcoin, at its core as a communication protocol, means that bitcoin starts to become vital to companies and nation states in terms of preserving their access and their ability to access the bitcoin network, right? Because if I’m a bitcoin miner…this doesn’t really happen today, I can choose and sort of prioritize what transactions I want to mine into a block.

So, in my view, investment in physical bitcoin infrastructure is closely associated sort of with security and the military-industrial complex, and I think as bitcoin’s use becomes more prevalent, bitcoin will become a matter of national security and investment, and bitcoin infrastructure will become a matter of security, just as today, we see people realizing and nation states realizing, right, that semiconductor fabs, semiconductor R&D that’s being onshored to the US.

Why? Because it’s vitally important. We have chips inside of our phones, inside of our devices that are manufactured in China. Now, it’s known, right, that there are back doors that are installed into these chips and into these systems that we use. There’s all sorts of really interesting data when you start to get into the world of cyber security, which is a world I love. Again, I’m a novice at it. I learn every day from people who are way smarter than me.

But I think there is this whole dynamic that’s unfolding that closely couples together the manufacturing process that Lyn spoke about, right, that we’ve historically exported and now needs to be re-imported because there is a fundamental relationship between physical assets and physical infrastructure and the digital world, and people seem to believe that, like, Wi-Fi and internet just floats around in the ether and it materializes by magic. No, it doesn’t. It doesn’t. People seem to think that blockchain compute is accessible and available to everyone and it’s a free resource…like, no it’s not. These things require electricity and silicon to run. They require rare resources. They require things that are in short supply, and the loss of thermodynamics dictate that there is a limited amount of energy in the universe. Energy cannot be created or destroyed. Matter cannot be created or destroyed. It can only mute or change from.

And so, like, this is a very long-winded and very metaphysical way of saying there is a fundamental relationship between the investments we make today and the world we see tomorrow, and I think we have chronically under-invested in very important infrastructure that supports our ability to communicate, to transact, and to function in this new digital world, and other countries have been over-investing, particularly China.

And this I think is one of the greatest travesties of modern democracy, is through regulation and really piss poor public policy, we have chronically, chronically damaged American infrastructure and European infrastructure to the point where I believe it will be fundamentally impossible to compete. Our infrastructure, our technology, our capacity for R&D, our capacity for capitalizing this infrastructure built is not even a discussion. Lyn, I’d be curious to see what you think. Sorry, I went off there, Laura.

Laura Shin:

No, no, but that was fascinating, and it surprises me that…because I felt like your essay was arguing that this was why Ethereum was important, but people can read that essay later and decide what they think, but yeah, Lyn, what’s your take on this?

Lyn Alden:

So, I think I can tie two points together. Laura, you mentioned that, you know, we’re starting to see kind of more adoption of certain things in other countries. So, for example, Africans have a younger population. They’ve been more prone to digital assets, for example, and we’ve also seen…if you look at mobile payments, you know, China and India have been huge centers of mobile payment adoption. They kind of leapfrogged over the credit card model, you know, straight from cash to mobile rather than cash to credit and then slowly into mobile, like we have here in the United States.

And so that kind of gave them an advantage in certain ways. So, we’ve seen China really kind of spearhead the digital payments area with Alipay and WeChat, and going back about the point about how the whole internet, the way everything runs is still kind of essential for certain commodities and certain infrastructure. So, in addition to securing semiconductor capabilities, it’s also about making sure that countries have certain key commodity exposure.

If you look at China in particular, that’s always been one of their weaknesses, is that Asia, they’re not very energy rich, and then they’re rich in certain minerals, but overall, most Asian countries are net importers of commodities, and so, you know, going back to that whole kind of structure of the way everything has been over the past 50 years or so, first, when the US is running really massive deficits, trade deficits, our first kind of major source was to Europe. So, Europe would sell us things. We would give them dollars, and they would take those dollars, and they’d reinvest in our treasuries. So, they would finance our deficits, and we’d be importing treasuries and dollars for goods. Then, you know, we kind of matured that relationship, and we started to see the rise of Japan. So, Japan kind of took over as the really big country that was running big trade surpluses with us and then reinvesting those dollars into our treasuries, and then starting around roughly 20 years ago, you know, as that relationship with Japan matured, it became China.

So, China was this big rising power. They ran massive trade surpluses with us, and then they took those dollars to reinvest it into our treasuries, and so it hurt a lot of blue-collar labor, but the whole geopolitical kind of alignment was all just, you know, it’s nice, and it’s going fine, but then, about 5-6 years ago, China said it’s really no longer in their interest to keep buying treasuries. So, if we look at China’s treasury holdings, they kind of leveled off, and so instead, they started taking those dollars and they started the whole kind of Belt and Road Initiative. They started basically using those dollars…they would lend them to countries in Africa, other countries in Asia, South America, all around the world to basically secure resources. So, instead of kind of funneling those dollars back into treasuries, they, in most cases, funneled those dollars back into hard assets to secure food imports, energy imports, metals, all the different kind of materials they need to basically run their economy and so that started the conflict. Is, okay, well, now, United States is saying, okay, they’re using the current global dollar system against us instead of playing along in this kind of cycle we go through. Now it’s, you know, we’re sending dollars to them, and they’re using those dollars to secure their infrastructure, their commodities, and so the US was kind of on the losing side of that, and that’s what I often point out that, as currently structured, the global reserve status doesn’t even really benefit the US anymore in the same way that it did, you know, back in the ‘70s, ‘80s. Now it’s a very different world, and so I think it’s a key point that, you know, some of these other areas have really gotten a strong leg up in terms of advancing infrastructure, securing certain commodity rights, and it’s something that, as we go forward in this decade, we’re probably going to see more and more kind of a focus on different regions, making sure they’re as self-sufficient as possible. So, the US found out the hard way that, you know, we didn’t make masks. Most of our medicines come from Chinese components. So, trade deficits, like, don’t matter until they matter, right? So until, you know, it’s a pandemic and there’s a shortage and we say, wait, so we don’t make any of this? Like, we literally are totally reliant on countries that we’re not too friendly with anymore? So, both in terms of semiconductors, in terms of vital medicines, and just kind of the whole supply chains are kind of slowly reorganizing more and more, and of course, that’s further benefitted by automation, right? So, automation can replace some forms of cheap labor. So that can kind of give some of the wealthier companies the ability to manufacture things affordably that they couldn’t necessarily manufacture before and that they had to outsource if they wanted to be competitive. So I think that kind of ties into…you know, that’s the trend we’re seeing, and some of these other markets, just they’re so far ahead in terms of mobile payments and acceptance of digital assets, that they have kind of an advantage there.

Laura Shin:

Yeah, and actually, Lyn, I think Meltem answered this question first, and then I asked her something else, but I actually just wanted to get your take on how the rollout of DCEP in China, amidst everything that you just said, would affect the balance of power financially, but then also how you think all these things will affect the adoption of bitcoin?

Lyn Alden:

Yeah, so, for China, I mean, the main thing that China and Russia and some other countries are doing is they want to build a bypass to the dollar system. So, you know, a lot of people view China as wanting to overtake the US as the global reserve currency, but as far as most analysts are concerned, that’s not really their primary target. They want to be able to buy commodities without the dollars, essentially. So, it’s not necessarily that they want massive holdings. They don’t want to repeat the whole kind of Triffin dilemma that the US just went through over the past 50 years, of having to export our supply chains. China just, you know, they had a very export-driven economy for the past 20 years, and now they’re moving onto more of the empire stage, right? So they want to have all these tendrils to other countries, and now they’re the biggest commodity importer.

So, you know, their newer technologies around their currency, one of the goals is to make their currency more accessible, more usable, and to increase its ability to go around the dollar system. So I think that adds to the current trend of more trade happening outside of the dollar. I think that’s kind of the key thing to focus on, and how bitcoin fits into that, I think we’ll see. I mean, China, so far, has not been, you know, really friendly to bitcoin in some ways. Maybe Meltem has more details on this. So, there’s kind of a war between making their currency more accessible while we have some of these more decentralized currencies. So, of course, bitcoin is a totally decentralized, neutral asset. Gold, historically, has also been the older, the less technologically advanced form of that where, you know, over the past, say, five years, as we’ve seen countries not really buy treasuries, they have instead slowly stocked up on gold. They’ve been net purchasers of gold more so than treasuries over the past five years in their central bank holding. So, there is kind of a shift towards these neutral assets. So, you know, of course, bitcoin’s a much smaller asset. So it might start to see that show up in some of these smaller players. Whereas you’ve already kind of seen that trend going in gold’s direction. So, there is definitely kind of a demand for these neutral assets.

Meltem Demirors:

Yeah, I think on bitcoin in China, the only thing I will say is, you know, we’ve watched the bitcoin / China narrative unfold. We call it the China FUD, or the China Fear, Uncertainty, and Doubt in the bitcoin space. Like, if you’re a bitcoiner, you’re probably laughing because, in 2014, 2015, every month, there would be new China FUD like, China shut down mining. China shut down exchanges, this exchange CEO was arrested. Like, we just saw this happen with OKEx, right?

So, look, the China FUD in the bitcoin space has been going on for a long time. The only thing I will say that I’ve been surprised by, and I think in a pleasant way, is how permissive the Chinese authorities have been towards bitcoin as of late, in particular, but really, in the last few years, right, there hasn’t been much regulatory crackdown. I think there’s been…you know, maybe they’re ignoring bitcoin. Maybe they think bitcoin is actually not positive to achieving some of the goals that Lyn outlined in terms of bypassing the US dollar system.

And therefore, supporting bitcoin, whether explicitly or in a more subtle way by not doing anything or ignoring it, effectively, from policy perspectives sort of path forward, but I actually have been fairly surprised, Laura, because I would’ve expected more action against bitcoin, particularly as a way to stem people removing money from China’s sort of capital controls, but we haven’t really seen that, and I think that’s actually been surprising. I certainly was surprised. I expected more Draconian enforcement, but instead, we’ve actually seen the US trending that way.

Lyn Alden:

I think that kind of highlights the dilemma that, you know, China’s made things. They want to make sure there’s not a lot of export capital happening. They don’t want a lot of money flowing out, but on the other hand, if there’s a system that makes global payments easier and is a store of value and competes with the dollar, they’re all for that in a certain way. So if that can kind of take off without harming them, so they’re kind of in that balance I think.

Laura Shin:

One thing I was curious about is Meltem did talk earlier about the growing inequality, and The World Economic Forum recently published a report saying “the pandemic is a boon for the ultra rich.” In the US, over 44 million people lost their jobs and unemployment surged toward 15% between April and June. Yet the fortunes of the top five billionaires rose by 102 billion dollars, increasing their wealth by 26%. In fact, the combined wealth of US billionaires increased by over 637 billion to a total of 3.6 trillion, which is considerably more than the entire wealth of the 54 countries on the African continent. 

So, there is this meme on Twitter. I’m sure you guys have seen it. Bitcoin solves this, and you know, bitcoin is supposed to represent this democratization of finance, but based on what we’re seeing so far, it feels to me at least…Tell me if I’m wrong, that bitcoin is currently being dominated by those who are already at the top of the ladder, you know, the Chamath Palihapitiyas of the world, the Winklevoss Twins of the world, the Paul Tudor Joneses of the world, and not the people who might be suffering in this pandemic. So, do you think bitcoin will ever help address this inequality, and if so, how, and if not, you know, why do you think it won’t fulfill that potential?

Meltem Demirors:

I want to just start by clarifying terms, though, Laura. Democracy does not mean equal distribution.

Laura Shin:

Right.

Meltem Demirors:
Right, so the…

Laura Shin:

But we’re even just talking about access.

Meltem Demirors:

Yeah. Absolutely. Right. So, inequality and extreme inequality is a problem, and I think one of the things that’s been interesting to study, just sort of going back to facts now, I have the receipts in this situation. If we look at the Gini coefficient, right, it’s not just the income Gini coefficient, but the wealth Gini coefficient. If we look at the wealth coefficient in developed countries, developing economies, and in the bitcoin economy, in bitcoin, I haven’t looked at it since about 2018 and Balaji Srinivasan was the first one who sort of written about it back in 2015.

The Gini wealth coefficient of bitcoin was initially really bad, right? Very few people owned a lot of bitcoin, and then there was a long tail of people who owned very little bitcoin, but the thing about bitcoin is, because it is limited in supply, it’s fundamentally distributive in nature, meaning as the price of bitcoin goes up, people who have a lot of it will sell it, and sort of that very distorted curve where you have a really, really fat grouping at the top where you have a few people holding a lot of wealth, that sort of gets compressed. And then the tail starts to get fatter as there are more people further down the line who start to have the ability to accumulate more bitcoin. 

So, I think what I would focus on is the equality of opportunity, right? Someone who has 10 dollars and has the choice of what to do with 10 dollars, they’ve always had the option of buying bitcoin. It’s just that a lot of people haven’t done it, right, and there’s sort of this other meme that isn’t bitcoin fixes this, but it’s like, you know, heard about bitcoin in 2015. Didn’t buy it. Heard about it in 2016. Didn’t buy it. 2017, didn’t buy it, and then in 2020, the person is crying in the fetal position. So, anyway, yes, it is problematic. The distribution’s not equal, yes, but at the same time, I don’t think it’s bitcoiners’ responsibility to fix the quality of access and to fix fundamental, systemic problems. These are complex systemic problems. I do think, though, that bitcoin does provide a certain equality of opportunity. Like, anyone with a smartphone today can get exposure to bitcoin and participate in the bitcoin economy if they have a phone and the will to do so. So, I do think there is an equality of opportunity that maybe is not seen in other assets. Maybe I’m being overly optimistic because, obviously, I’m invested in bitcoin and I’m naturally incentivized to, you know, say nice things about bitcoin, but Lyn, I’d be curious to hear your thoughts.

Lyn Alden:

So I think there are kind of two sides of it, two totally different ways to look at the whole bitcoin fixes this as it relates to wealth concentration. So one is, obviously, the practical aspect, that if you have this really small asset class that is mostly driven by small investors, retail investors, and if bitcoin bulls continue to be right about it…right, so it’s already made a lot of millionaires, for example.

And so if you see the 2020s play out anywhere like the 2010s and you see kind of bitcoin continue to get a larger and larger market capitalization, what that essentially is, is a wealth transfer from…it’s retail driven, it’s young driven. So, you see kind of a transfer from some of the older generations to the younger generations. You see big banks hopping on late, big investors hopping on late. So, it’s more folks on the retail market, and some of these early adopters for wealth managers and hedge fund managers stay in their offices.

So, it makes some rich people richer, but you know, if you look at kind of the really big money centers compared to who initiated and continued this trend, that kind of practically would benefit from people that get on that train if they are correct about it continuing to expand in market composition. I think the other kind of way of looking in that is somewhat kind of the Austrian economic view or the ability of hard money to pressure government’s ability to spend in a certain way, in the sense that, you know, I think it was Meltem that earlier pointed out that, in some ways, we don’t really have, say, a free market. We have kind of socialism for the well connected and capitalism for the unconnected, right? So if you’re working a job, I mean, it’s very capitalism oriented. If you lose your job, you get some benefit, but then you’re kind of on our own. Whereas if you’re a large money center bank, if you’re a systemically important organization, if you fail, you get bailed out. The executives are fine. They get golden parachutes. They’re not allowed to fail.

We also see a disparity in financing, right? So, if you’re a large organization, you can access capital markets, get really low borrowing rates, and then the fed comes in and makes those borrowing rates even lower by being willing to buy your bonds, even if they’re not necessarily investment grade. Whereas if you’re running…say you’re a family-run restaurant, right, it’s harder for you to get financing, especially at attractive rates, if you want to continue through this difficult time. So we see kind of that different access to capital, and so, you know, I think one of the subsets of bitcoiners is the view that that can pressure government’s ability to keep distributing to the top more so than the bottom if they can kind of invest in these harder assets, and if those assets grow big enough, that they challenge some of those money systems. I think those are kind of the two ways to look at that outcome.

Laura Shin:

And so let’s just circle back to the Presidential Election because I was wondering…so regardless of what administration does come into office next year, what signals or signs will you be looking for from that administration as you continue investing in the bitcoin space? Like, are there any particular types of legislation or appointments or changes in the handling of the pandemic or the stimulus or whatever it might be? What are you going to be looking for when you think about how the industry will develop going forward and how that will impact bitcoin?

Meltem Demirors:

I’m only looking at one thing, and it’s laws associated with privacy. Right now, encryption is under attack in the United States and in most western nations, most developed countries. So, there are a number of bills on the floor right now. They’re sponsored by Republicans, particularly Mitch McConnell and Lindsey Graham. The EARN IT Bill, in particular, is what I’m referring to, which would seek to limit and severely curtail the use of end-to-end encryption in consumer-focused applications, and implement, effectively, a back door for the NSA and other intelligence agencies. And Five Eyes, you know, this organization of intelligence agencies around the world, have sort of signed off on this. We saw a few weeks ago, there was a statement from the DOJ and sort of the powers that be that the calling for more surveillance on the crypto ecosystem, travel rule is seeking to go from 3,000-transaction limit to a 250-dollar transaction limit. Around the world, privacy is under attack, and that means bitcoin is under attack in many ways.

Governments want to tax bitcoin. They want to know who holds bitcoin. They want to know what you’re doing with it, and I think this is an existential threat to bitcoiners everywhere. You know, again, I think the premise that Lyn raises, premise of hard money, when you can be identified and pressured into, you know, having to pay taxes on these hard assets you hold…you know, Turkey right now is trying to implement a tax on gold. They’re trying to figure out how to feasibly tax gold when much of the gold there is held by retail owners under their mattresses and not in bank vaults. Very hard to do, but taxing something like bitcoin is very easy to do, and you can quickly see states try to seize these assets from people. This is my greatest fear. So, I’m very focused on privacy and privacy-related issues. I believe it’s fundamentally important that we maintain the ability for consumers around the world to use products and services that facilitate end-to-end encryption and protect their privacy. 

Lyn Alden:

I agree. So, you know, I think one thing you can look at is the last time where we were at this point in a long-term debt cycle, so I imagine before…we have to go back to the ‘30s and ‘40s to find a similar time, and as you look back then, there was roughly a 40-year period where 10-year treasuries didn’t really give positive returns. So, you know, because you had the inflation in the 1940s, you had the inflation in the 1970s. There’s a little bit in the middle there where they did okay, but they were still actually pretty low rates and just kind of barely tread water with inflation. So, there was a period from…if you had bought treasuries in the mid 1930s, by the time those matured, you were already in the middle of the inflation there in 1940s. So, you actually lost money compared to inflation. So, roughly, from the mid 1930s to the mid 1970s, it was not great to hold treasuries.

And it overlaps almost perfectly with the period where gold was illegal to own for Americans. So, one of the primary release valves of that kind of monetary system…so, at the end of a long-term debt cycle, it’s basically currency devaluation, is what’s used to alleviate those debts. So instead of debts going down nominally, you basically have a little bit of deleveraging here and there. Mostly it’s that they just massively increased the amount of currency units in the system.

So you lower, say, debt-to-GDP. You lower debt-to-money supply, mostly because the denominator’s going up. Now, but the big pressure to that is if people take those assets out and they go into other things, and of course, you know, from the government’s perspective, there are certain assets that are more acceptable, like stocks or real estate, that they’d prefer you to put into, but when people try to go those other routes, like into gold or into cryptocurrencies, the government’s less thrilled about those release valves for currency protection.

So the problem, though, is that, you know, for example, when they banned gold, it was really hard to enforce. So, it actually was backed up by pretty severe penalties, but the number of instances where they enforced that were low because they didn’t send people with guns around every home and check everyone’s gold, right? It’s more costly to enforce. So, they basically tried to enforce it just through threats, essentially, and you know, some kind of around-the-margins enforcement in hoping that people stick with it.

So, you know, bitcoin, of course, is unconfiscatable, so, again, it’s like how would you enforce it? So if you were to…people always say, well they banned cryptocurrency. Of course they can’t ban it, but they can pressure the exchanges. They can get in the way. Now, lately, we’ve seen the opposite. We’ve seen, for example, laws that, in many cases, favor the custodian of digital assets. I’m sure Meltem covers these way more closely than I do.

But I do think that, you know, focusing on privacy’s important, and also if they can’t ban things, the next thing they can do is tax things. So one thing that is…gold’s always had an unfavorable tax treatment. It’s usually taxed as a collectible, which means that the long-term capital gains are at a higher rate than, say, stocks, and so there’s basically ways that they can pressure these scarce assets by saying, okay, you know, you can have it, but we want to know who has it, and we want to tax it to add an egregious amount.

Meltem Demirors:

By the way, they will know who has it. On the 2021 tax forms, the top question on your 1040 is not did you buy or sell cryptocurrency, which was the last year’s or this year’s question. It’s do you own cryptocurrency? Do you hold any cryptocurrency? And the IRS has gone on numerous fishing expeditions. The Coinbase fishing expedition has been widely documented, but what’s not documented is more important. They go on fishing expeditions on a daily, weekly basis. If you live in the United States and even if you don’t, they know who holds cryptocurrency and who doesn’t, and that information will be used at some point, is my belief.

Lyn Alden:

Yeah, I think so. I think, you know, in the most benign way, is that they want to make sure they get their taxes for it, and of course, there are more insidious things they can do, and kind of one of the whole “benefits of digital currencies” from the government’s perspective is they get more transparency. They get more control. They get more control over interest rates, even, let alone they can do different things. Like, they can program it to be spendable in certain jurisdictions on certain things depending on how far down the rabbit hole they go into how advanced they want to get with digital currencies, and so any sort of decentralized asset is just, it’s not part of what they want to be going well, generally. So, it is something I think to watch for, to see that kind of balance between it becoming more and more accepted. At a certain point, you can argue how big does it have to be? Some people say the government won’t consider it a threat until it’s big enough. From the other end of the spectrum, once it’s big enough that, you know, it would impact so many investors to harm it, that’s also another way of protecting it, right? So, if the donor class is heavily involved in bitcoin, suddenly, it’s a lot harder to kind of pressure bitcoin. So there’s always these kind of counter forces that are always at play.

Laura Shin:

All right. Well, we will have to see what happens. Maybe next year, I’ll have you guys back, and we can regroup and see what we think. Well, this has been a great discussion. Where can people learn more about each of you?

Lyn Alden:

I’m at LynAlden.com. I’m at Twitter @LynAldenContact, and I do a lot of free material focused on macro. I cover a bunch of hidden asset classes, so I’m not specifically in the digital asset space, although I’ve been more involved lately because I’ve been bullish on bitcoin. 

Meltem Demirors:

Yeah, so, highly recommend reading Lyn’s research. I think it’s really good, and I will say you were one of the first people, Lyn, to actually write research coverage on bitcoin from sort of an investor perspective, macro perspective. So, I give you a lot of credit for that. You were willing to dip your toe in when a lot of people were sort of running for the hills. So, kudos to you. Me, you can find me on Twitter @Melt_Dem. You can find me at Coinshares.com. I write on various forums. I am very online and very easy to find if you ever cannot find me, feel free to drop me a DM in Twitter, and I will certainly try to write back to you.

Laura Shin:

Great. Well, thank you both so much for coming on Unchained.

Meltem Demirors:

Thanks, Laura. Appreciate it.

Lyn Alden:

Yeah, thanks for having me. I think it was a great discussion, and again, I really enjoyed meeting you.

Laura Shin:

Yeah. Yeah. This was super fun. Thanks so much for joining us today. To learn more about Meltem and Lyn, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/C/UnchainedPodcast, and subscribe today. Unchained is produced by me Laura Shin with help from Anthony Yoon, Daniel Nuss, Bossi Baker, Shashank, and the team at CLK Transcription. Thanks for listening.