
March 31, 2021
Will Clemente on Bitcoin Analytics | The Pomp Podcast
Check out the Pomp Podcast Page
Key Takeaways
- Bitcoin’s fixed supply is the missing constant in the financial markets.
- Bitcoin, as deflationary sound money, incentivizes saving and allows people to get ahead. The world is becoming cheaper for bitcoin holders
- Previous bitcoin adoption cycles saw a rise in bitcoins deposited on exchanges. By contrast, the current price rise is coupled with diminishing bitcoin reserves on exchanges
- Investors looking to arbitrage the spreads between futures and spot have to over-collateralize to borrow coins, this collateral is taken off the market and locked in escrow.
- This is a self-enforcing positive feedback loop: more coins taken off exchanges drive the price and volatility higher, which increases spreads and causes more people to take the trade
- Speculative attacks involve leveraging a weak currency to acquire a hard currency. An example in action is Michael Saylor issuing debt notes at 0% to acquire more bitcoins
- Bitcoin lending rates are rising in the free market. We will see complete asset repricing when markets recognize bitcoin yields as the real risk-free rate
Intro
- Will Clemente (@WClementeIII) is a Finance Major at East Carolina University, and a rising Bitcoin analyst
- Host – Anthony “Pomp” Pompliano (@APompliano)
How Will Came Across Bitcoin
- Motivated by quick profits, Will started in finance after the March 2020 market crash.
- His first realization: Value investors mistakenly assume money is sound. In reality, no investor can fight the Fed
- This is why growth and momentum strategies have outperformed value investing in the recent years
- His first realization: Value investors mistakenly assume money is sound. In reality, no investor can fight the Fed
- Will’s Bitcoin learning resources include:
- Podcasts: The Investors’ Podcast, Stephan Livera, What Bitcoin Did, and The Pomp Podcast (Checkout the Podcast Notes from all these shows)
Why is Bitcoin Important?
- Bitcoin grew in a sustainable macro-economic backdrop of quantitative easing, zero or lower interest rates, and calls for Universal Basic Income
- Bitcoin’s fixed supply is the missing constant in the financial markets.
- There will only ever be 21 million bitcoins that are issued at a fixed predetermined rate. In contrast to gold’s supply, which can increase with price appreciation
The Bitcoin Renaissance
- Sound money is essential to human development. Bitcoin, as deflationary sound money, incentivizes saving and allows people to get ahead again
- The world is becoming cheaper for bitcoin holders
- Inflationary monetary policy increases economic inequality, savers get destroyed, and owning assets is the only way to stay ahead
- This manifests in the increasing social unrest
Is this Bitcoin Cycle Different?
- Previous bitcoin adoption cycles saw a rise of bitcoins deposited on exchanges. By contrast, the current price rise is coupled with diminishing bitcoin reserves on exchanges. Three possible explanations:
- Investors are aware of the importance of self-custody
- Miners have stopped selling freshly minted bitcoins
- Arbitrage trades between spot and futures prices, which involves investors locking up bitcoins as collateral and further reducing the available supply
- 60% of coins haven’t moved in over a year. This period saw a 50% drop in a single day, multiple 20-30% corrections, and several hundred percent price appreciations
- Additionally, the 40% remaining supply is quickly being taken off the market
- “I would be terrified not to own some bitcoin right now” – William Clemente
- Additionally, the 40% remaining supply is quickly being taken off the market
Contango and Over Collateralization
- Storage costs cause commodity futures to trade at a premium to spot prices. That said, Bitcoin has no storage cost and still trades at a multi-thousand dollar premium to spot price. Two possible reasons:
- Regulatory restrictions on institutions’ exposure to spot bitcoin
- It’s easier to get leverage in futures markets
- Investors looking to arbitrage the spreads between futures and spot have to over-collateralize to borrow coins, this collateral is taken off the market and locked in escrow.
- This is a self-enforcing positive feedback loop: more coins taken off exchanges drive the price and volatility higher, which increases spreads and causes more people to take the trade
- This trade is especially attractive to fixed income investors who are dealing with near negative-yielding instruments
- This is a self-enforcing positive feedback loop: more coins taken off exchanges drive the price and volatility higher, which increases spreads and causes more people to take the trade
The Bitcoin Black Hole Effect
- Speculative attacks involve leveraging a weak currency to acquire a hard currency. An example in action is Michael Saylor issuing debt notes at 0% to acquire more bitcoins
- Essentially, it’s the use of free money to acquire a scarce asset with an increasing purchasing power
- Saylor’s offering at 0% was oversubscribed. Moreover, investors will even buy negative-yielding bonds because they are betting that the yields will go further negative
- Bitcoin’s supply halves every 4 years, this results in growing adoption and network effects and sucks the monetary premium from all other assets.
- Akin to a battering ram constantly hammering against the traditional financial system, eventually breaking through
- Rising rates in a global macro backdrop of infinite QE is dangerous. The Fed will have to keep buying through the fixed income market to keep yields down. Else, everything will unravel.
- On the other hand, Bitcoin lending rates are rising in the free market. We will see complete asset repricing when markets recognize bitcoin yields as the real risk-free rate
- The market prices stocks off the treasury yield, currently at 1.5%, whereas bitcoin yields 10%-15%
- As a result, the current average PE ratio of over 35 will drop to below 5. In other words, a 75-80% correction in the stock market
- On the other hand, Bitcoin lending rates are rising in the free market. We will see complete asset repricing when markets recognize bitcoin yields as the real risk-free rate