Greg-Foss-Peter-McCormack-Bitcoin-Insurance

Greg Foss on Bitcoin as Investment Portfolio Insurance | What Bitcoin Did Podcast

Check out the What Bitcoin Did Episode Page & Show Notes

Key Takeaways

  • Bond yields reflect the market assessment of inflation and credit risks. Higher risk currencies have to offer higher return bond rates
    • When yields go higher, bond prices go lower. Additionally, a change in rates re-prices all the old treasury bonds.
      • For instance, a 30-year treasury bond was issued 1 year ago at a 1.25% coupon. Investors would rather buy the same obligation today at a 2.25% coupon and one year longer maturity
  • Contrary to popular belief, US treasury is not credit risk-free. The Credit Default Swap (CDS) market currently charges 10 basis points to insure against US treasury bonds default
    • “I believe Bitcoin is default insurance on a basket of sovereign credits” – Greg Foss
      • Under that narrative, Bitcoin’s value today can be estimated at $110K-160K per bitcoin, not accounting for future spread increase.
  • “It’s inevitable that if you own zero bitcoin right now, you are taking extreme amounts of risk” – Greg Foss
  • The currency is the error term that allows the total debt to grow without the economy and tax base keeping up
    • Debt becomes mathematically impossible to pay off once the debt/GDP ratio crosses 135%
    • While the government is pitching CPI at 2%, real inflation is reflected in the growth of the money supply, 15%
  • As a global reserve asset, 5% of the global financial asset market valued at $900Tr puts Bitcoin at a $45Tr market cap

Intro

How Bonds Are Priced

  • The world’s biggest bond market is the US treasury bond market and it sets the base rate for the prime borrower: The US Treasury
    • US treasury bond yield rate is considered the risk-free rate, to which all other rates are compared
      • US 10Yr yield bond rates went from 14% down to 1.5% over the past 32 years
    • Lenders and savers (e.g. Pension Funds) prefer yields to climb. However, historically low rates favor borrowers and cause opportunistic pricing
  • When yields go higher, bond prices go lower. Additionally, a change in rates re-prices all the old treasury bonds, here is why:
    • A 30-year treasury bond was issued 1 year ago at a 1.25% coupon. Investors would rather buy the same obligation today at a 2.25% coupon and one year longer maturity
    • As a result, the older bond was issued 100 cents on the dollar and is now trading at under 75 cents
      • As a trader, you are down 25% and it will take 18 years of coupons to make it back. That said, many market participants don’t mark their portfolio to market (e.g. banks and pension funds)
  • In a recent treasury auction, the US treasury had to pay higher yields than expected
    • Bond yields reflect the market assessment of inflation and credit risks. For instance, higher inflation expectations lower demand for longer bond duration

The Credit Default Swap Market (CDS)

  • Contrary to popular belief, US treasury is not credit risk-free. The CDS market currently charges the US treasury 10 basis points to insure against default
    • That is, it costs $10K per year for 5 years to insure 10 million dollars of US treasury debt against default
  • Higher risk currencies have to offer higher return bond rates, this is called a credit spread
    • In a sense, the bond market reflects the confidence level in each economy
  • Keep in mind, USA has an AA+ credit rating, one notch below Canada’s AAA rating. That said, Canada’s CDS is 3.5x – 4x higher than the USA.
    • In other words, the market is charging Canada the default insurance rate of a single A, despite the rating agencies ranking

Debt Event horizon

  • Debt becomes mathematically impossible to pay off once the debt/GDP ratio crosses 135%
  • The currency is the error term that allows the total debt to grow without the economy and tax base keeping up
    • “We are in a debt spiral, which means that the currency is guaranteed to debase”
  • While the government is pitching CPI at 2%. Real inflation is reflected in the growth of the money supply, 15%
    • “I don’t believe for a moment that true inflation is anywhere near the CPI” – Greg Foss

When Money Dies

  • While an inflationary event may be hard to imagine, 20% money supply expansion in a year is still failing to fix problems
    • In MMT theory, you can print all the money you want. In practice, a currency dies once confidence is broken
    • The end game for fiat currencies is to collapse at some point, each in its own time
  • “The credit default swap market is truth” – Greg Foss
    • Case study: In 2006, default protection on Lehman Brothers cost $9K per $10MM. Three years later, this insurance was worth $6MM
      • Additionally, the entire financial system is interconnected and required government intervention to stop the dominoes from falling

Bitcoin as Investment Portfolio Insurance 

  • “I believe Bitcoin is default insurance on a basket of sovereign credits” – Greg Foss
    • Under that narrative, Bitcoin’s value today can be estimated at $110K-160K per bitcoin
    • Put simply: If Bitcoin is insurance, as the spreads increase, investors will need more insurance and Bitcoin is a better form of insurance
  • Sellers of default protection on US bonds are using leverage, thinking it’s free money. At someone, they turn into buyers, and sellers evaporate.
    • “It’s inevitable that if you own zero bitcoin right now, you are taking extreme amounts of risk” – Greg Foss
  • As a global reserve asset, 5% of the global financial asset market valued at $900Tr puts Bitcoin at a $45Tr market cap
    • Additionally, the Bitcoin network is strong, has more users and a higher market cap, which makes it a safer investment than ever before
    • “I promise you every single money manager in the world worth their salt is doing this analysis” – Greg Foss
      • For instance, NYDIG recently raised $200MM from some of the largest institutional investors (e.g. Mass Mutual, NewYork Life, Morgan Stanley, and George Soros)

Bitcoin is Superior

  • Bitcoin offers global peer-to-peer transfers with final settlement within an hour. By contrast, traditional banking is slow, archaic, and makes no sense to younger generations
    • Compared to gold, “Gold was a very valuable material for thousands of years as a store of value, but there just happened to be a better horse in the race right now” – Greg Foss
  • “Money is and always has been a technology for storing the value of the work, time, energy that you expend today for consumption in the future” – Ross Stevens
    • “Bitcoin is digital energy that preserves its value for use and consumption in the future” – Greg Foss
    • Individuals, corporations, and states are all incentivized to adopt a bitcoin standard
  • Mining bitcoin doesn’t waste energy. Rather, it consumes wasted energy.
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