Bitcoin as an Investment – Individual & Corporate Adoption, James Lavish (Bitcoin Atlantis, Madeira 2024)
INTRODUCTION
There is an elephant in the room that we all know it’s there. We talked about it a little bit. But, we are not doing anything about it. It’s debt. We all love to borrow. Every single person, every single country around the world, every single company, loves to borrow, and it’s a problem.
Back in 2019, it seemed like it was getting a little bit ahead of itself but we pretty much emerged from the global financial crisis, not unscathed, but the whole world seems to be borrowing more and more every year. Still it seemed kind of manageable. If we could just spend a little bit less. Maybe borrow a little bit less. We could reign in a bit. Ramp up productivity. You know we have great technology, maybe that would help. But what did we do instead, we shut down the world and we shut down productivity and we flooded the market with more bonds and more borrowing. Debt skyrocketed and it is up 50% in just the last eight years.
THE WORLD’S DEBT PROBLEM
So we’ve entered what we call an exponential growth phase where debt compounds on itself and I’ll show you how in a moment. But the problem here is in the next debt crisis we could see a 50% rise in just a couple of years. This is where we are. These are the best countries, the G7. Every single country is borrowing more than it makes, 100% debt to GDP that is the borrowing over the productivity of the country.
$100 trillion of debt has been accumulated, a 40% increase just since 2019. This right here is why we need Bitcoin and there is no other escape. But let’s take a peek at the US. That’s where I’m from and it’s the global reserve currency and global reserve asset. It’s the strongest country out there as far as debt to GDP from the world’s view. We’ve got the global reserve asset so we’re doing great. Look at our productivity, solid growth, and that’s what matters right. That’s what we need is strong growth of productivity and this is what we can borrow from. Here’s the problem. In 2013, we surpassed our productivity with our debt and we haven’t looked back since. The US currently borrows $1 for every $1.33 that we create in productivity. If we look at all the debt in the nation, it’s even worse. This includes all households, businesses, and government. The blue line is what primarily pays for that debt. Can you see the problem?
THE ZOMBIE
If the United States was a company on the New York Stock exchange, I know it’s not, but let’s just pretend so you can visualize this. The issue is we spend so much money that we simply cannot make the interest payments on that debt. So what do I mean by that? Well entitlement spending is like social security, medicare, medicaid. These are programs that are signed into legislation so they are mandatory expenses that we cannot miss these payments. Then when you add the interest on the debt and you compare it to the revenue that we make, we spend too much.
Here’s some simple maths for you. This is from the congressional budget office, these are their numbers, they’re not mine and this is actually what’s going on. The tax revenues for this year are expected to be $4.9 trillion, when you add in those entitlements, those mandatory expenses, that’s $3.8 trillion, plus the $850 billion of defense spending, the $870 billion of net interest payments. So this where we’re spending over $1 trillion every year on interest. We’re getting a little bit of that back because we have inter-government agencies that are sending some interest payments back to us. But you don’t have to be a maths genius to see that this just doesn’t work.
The issue is it’s just getting worse. So this is the budget. This is where the congressional budget office comes up with the budget that the legislators have passed their laws. This is how much they’re going to spend. We all know they’re lying and that they’re going to spend more, they do it every year, and so this is optimistic. What we’re seeing here is that we’re spending over $2 trillion dollars a year more than we make. Now when I say when we make, that’s productivity, that’s the taxes on the productivity, that’s our earnings. The United States government doesn’t “make anything”, they just take things. They just take it from us. So they’re not covering the interest payments, they’re not covering all the expenses, it’s not even close. The thing is over the next 10 years we’re going to borrow more than $20 trillion and we’re going to spend more than we make. Here’s the best part about this, these numbers assume there’s no recession, that it’s a stable environment, there’s no black swans, that interest rates remain stable, this is super optimistic. It’s an absolute joke! This is the balance sheet of the United States.
RECOGNIZING THE ISSUE
So if you all think that we are strong, you’re wrong! Everybody talks about the debt and how much debt we have, it’s $34 trillion. Oh my God it’s another $1 trillion this week. We actually owe $247 trillion when you add up all the expenses that we have to make. My business partner David Foley, mentioned to me this morning that the average baby boomer, the oldest generation in our country, or the second oldest generation in our country, the average baby boomer is 71 years old. So what does that mean? It means that these expenses, the ones in the bright red, are due. It’s like somebody took a grenade, pulled the pin, and threw it in the room. It’s happening and there’s nothing we can do. So what do we do to pay these expenses? We need to borrow. We need to borrow more, and more, and more, and more, and more, and more, and more.
The congressional budget office knows. This is their chart. They’re showing how those expenses, that top purple line are the mandatory expenses we must make, that’s a primary deficit. The blue line down below, that’s the interest payments on that debt. So when I said that we’re in that exponential growth phase where debt compounds on debt, it’s because the interest payments are getting bigger, and bigger, and bigger. Remember you can see in 2006 what happened to those deficits and then again in 2020. They’ve got all the way out to 2051 with no recessions, no unexpected happenings, and look at how bad it gets. They know that this is what’s happening to the debt. It’s going vertical, it’s parabolic!
The treasury knows it too. So remember the treasury just does congress’s bidding. They don’t make the decisions on how much to spend, they just enable it. How do they do that? They borrow. They go out into the market and they issue bonds and we stupidly buy them. In their report that they periodically put this out every single year, they subtitled the report “an unsustainable fiscal path”. They put this out online for the whole world to see. This is a report that the treasury made for congress and they’re basically telling them “hey listen you’ve got to stop, we can’t keep doing this.”
Why? This is a chart that was in that report. I think Lyn Alden found it first but they’ve since removed it but we have the receipts. They put this out there for the whole world to see, they actually admitted it. I think Congress got mad so they took it down.
But why is this such a problem? Well as we were saying debt compounds on top of debt. Here are the interest payments we’re making on the debt. That’s $1 trillion every single year. I know it’s hard to get your head around this because the numbers are so big it’s actually almost laughable, if it was funny, but it’s not.
Here’s what keeps them up at night. This is what keeps the treasury up at night right here. 50% of our debt is coming due in the next three years.
DEBASEMENT AND THE DREADED DEBT SPIRAL
The problem is the interest payments on this debt, the yield on this debt is about 2.3%. If you’re the treasury you issue a bond and that bond eventually matures. Well how do you pay for that? Well, taxes. We don’t have money in taxes, you saw that. So what you do is you have to borrow more, you have to put out another bond to pay the principal on that original bond. When you do that now with interest rates at 4% or 5% you’re paying double the interest rate. That’s why that is happening. As debt matures, we must issue more debt. There’s no way around it. Remember we’re in a deficit. The problem is that we’ve had a few auctions recently and you probably don’t watch auctions. It’s okay, it’s boring unless you follow my Twitter feed. I make it a little bit more fun. In November we had a 30-year treasury auction that was super ugly. What does it mean, it means that it was unexpectedly weak. It was so poor that the treasury kind of scrambled to make sure that everybody knew that they weren going to borrow as much as people thought they were in the future. Well then we had a 20-year treasury auction this month that was equally as ugly. It was the worst tail in an auction in the history of the 20-year treasury. What does that mean? It means that when bonds trade, they trade beforehand in a when-issued market, it’s like a pre-market, they traded at a price that was nowhere near what the actual auction went to. It’s got the treasury nervous.
Why? You might recognize this if you’re from the region. This is an article that was put in the New York Times in 2011 that was about Greece. Does it look familiar? So what happens when a country enters what we call a debt spiral. Well deficits we’ve already told you we have deficits. They require debt which leads to higher interest cost and we showed you that chart of the interest cost. This leads to larger deficits which leads to more debt which leads to eventually higher interest rates. Why? Because you will demand higher interest rates because of the risk that either the debt provider defaults, which we won’t do, but what we would rather do is to allow high inflation. So you want to be paid for that higher inflation which creates even larger deficits, which creates even more debt, and the cycle repeats. We enter what’s called a debt spiral. The whole world is in it. The United States is in it too make no mistake.
So what are the solutions? Well you can have austerity. You could cut spending but nobody’s going to do that though. What government, what politicians are going to cut spending? They won’t get reelected. They can’t do that. They try to trick each other into doing it but they don’t do it. Mele does, that’s right, we’ve got one. So you could raise taxes but raising taxes disincentivizes productivity. It disincentivizes companies from investing in more R&D and expanding on profitable lines so you end up in the same spot. Productivity falls, higher taxes on that lower productivity, it doesn’t work. We’ve seen it doesn’t work.
You could just issue more debt which is what we’ve been doing. You just issue more debt, compound the debt, and hope and pray that it works out by the time that you get reelected. You’re not going to retire of course, we don’t retire, we just die in office. So no country that issues its own debt in its own currency would ever default though. What do they do? They just print money. What does printing money do? It causes inflation as we have all experienced. I mean are you fucking kidding me with all this inflation. It’s ridiculous. We all feel it, we know it. If you took an equivalent Euro, I know it wasn’t around earlier than the 90s, I was on Wall Street when it was created. But if you took an equivalent Euro from the European region from 1960, it would be worth just 6 Euro now. A 100 Euro would be worth just 6 Euro and that’s the inflation rate that they admit to you. But it’s worse, we all know it’s worse. If you had a dollar in 1960 it’s now worth just 6 cents and that’s on the CPI the inflation rate that they tell us. But we know it’s a lie. What’s the inflation rate? The inflation rate is closer to the expansion of the money supply. So if you actually use the 7% plus running number every year, this dollar would be worth a fraction of a penny.
So make no mistake. They must keep printing. They have no choice, they have to. They must debase the fiat currencies. Why do they do that? I’ll make it very simple for you. You saw the debt, you saw how much debt is out there. Well how are they going to pay that off? They’re never going to pay that off? How do they keep it going? They keep it going by raising productivity. How do they raise productivity? Not with AI, they fake it. They dump, they flood the market with more money so it creates productivity which is fake. It’s just a higher GDP number. It’s more dollars out there, more Euros out there, and then they make you pay taxes on those higher earnings so the taxes go up. But this is what we call “in nominal terms”. This is not real GDP because real GDP is a lot lower than the nominal GDP. You have to add inflation to get real GDP.
WE HAVE A CHOICE
So they don’t have a choice. None of us have a choice. Except the ones in this arena and some of your friends who have come to understand what Bitcoin is. Now we have a choice. We can opt out of this madness.
Here’s what the global currencies have done against the US dollar. You can’t read this so I’ll read some of them for you. The Venezuelan bolivar is down 99.9%, the Syrian pound is down 99.1%, the Argentinian peso is down 98.3% against the dollar. You saw how bad the dollar was but look at Bitcoin in the corner, it’s up 21,000% and this is before this week.
I won’t go into this, you know what Bitcoin is. It’s decentralized, it’s immutable, scarce, all of that. It’s the most pure, it’s the absolute purest store of value that’s ever been created.
Now this is what you wanted me to talk about, right. We were going to talk about institutional investing, not debt. Well it matters because now the institutions cannot ignore it anymore. They were ignoring it for a long time. Why? Because it’s difficult for institutions to own Bitcoin. I have had this conversation so many times in my life with people who were not in investing like I have been in institutional investing for 30 years. When I talk about red tape, my God. If you are an institutional investor and you want to own Bitcoin, these are the kind of steps you have to go through. Let’s pretend that you are an analyst and you found Bitcoin. You’re a young, hip guy, you’ve got a hoodie, and you found Bitcoin. You’re like I think we should own some of this. I think we should own some Bitcoin and you convince your portfolio manager that you should own Bitcoin and that’s a tall hurdle. But if you convince them that you should, then he finally gets the point. He does some research and he’s like okay, we will own some but he’s got to go to the investment committee. He’s got to convince the investment manager, the chief investment officer, and then they have to sit in front of a committee that has to be convinced. Then you sit in front of the panel of compliance and they’ve got to get comfortable with it. What is this Bitcoin thing? It’s been used to buy drugs, it’s not real money, it’s fake we shouldn’t be buying this. If you can somehow convince your chief compliance officer that you should be buying Bitcoin, wow! I mean well done, bravo! But you have problems. Where are you going to trade it? How is it going to get settled? Who’s going to settle it? Who’s going to custody it? Are you going to have your own keys? What investment manager from one of these huge pension funds wants to hold their own keys to a billion dollars of Bitcoin? Does that sound like career risk? It does to me. They’re not getting paid for that. They’re getting paid to own bonds. We’ll get into that in a second. You have to go through all of these layers.
For the first time in history, you all have been able to front run the institutions. I remember back in the late 1990s and 2000 we used to have these hot IPOs like Amazon and Netflix and all these super hot IPOs and as an Institutional investor we would front run everybody. It was legal. We would just get an allocation of a thousand shares and our allocation would be at the IPO price which was let’s say it’s $20 for a stock. What happened when that stock got listed that day of the IPO? Well it ran. Not from $20 to $30, but to $50, $80, $100, $180, $1000. Who was buying it? You and I were. So who got the benefit? Well they were selling it to you. They got it at $20 and they were selling it to you at $180. Well this is our time. We’ve been buying Bitcoin for years and they’re just now getting in. The ETFs have changed the world for Bitcoin and I want to make this clear. Bitcoin doesn’t need the institutions to survive. There’s going to be a lot of money that comes into the space really quickly and you guys have been able to get there first.
A second thing is this FASB ruling which is complicated and I’m not going to get into this here. Michael Saylor’s done an incredible job explaining this is one of things that has been a pain point for the companies who own Bitcoin especially for Michael. Essentially the old ruling made companies treat Bitcoin as an impaired asset. If its price went down it hurt your balance sheet, it was very painful. But this has changed so now companies can own Bitcoin. Micro strategy at the end of January, 2024 held 190,000 Bitcoin and I know he’s bought a few more the last few weeks. His purchase price was $5.9 billion.That Bitcoin today is worth over 11 billion. Well done Michael, wow! Apple has $60 billion on their balance sheet in cash. They are sitting on that melting ice cube. I know they think they are smart because they’ve bought T-bills. So they own T-bills and they’re getting 5% on those T-bills and this is great I’m making so much money. No you’re not. Your purchasing power is falling. Microsoft has $111 billion on their balance sheet. Can you imagine when these companies come into Bitcoin! Now they can, there’s no excuse anymore.
Remember we’re really early in the Bitcoin adoption cycle. There is just under one quadrillion dollars of investable assets in the world. Residential real estate has been ridiculous, it’s now $500 trillion. Commercial real estate it says is $115 trillion. Bitcoin is currently 0.1% of the global investment assets.
We talked about the bonds. We talked about how institutional investors own bonds and that 60/40 portfolio. Well now they don’t have a choice but to start paying attention to bitcoin. I mean here’s the US Treasury rate. This is the global reserve asset and this is what happened to the global reserve asset in the last couple years.
This is why Silicon Valley Bank in the United States failed last year. As interest rates go up and you hold this on your balance sheet, this is what happens to your holdings. We had the worst drawdown in the history of the US bond market which caused that bank to crash. It caused the treasury and the FED to scramble and make this fancy program for these banks to borrow without having to be impaired on their assets.
Who wants to own this in their 60/40 portfolio when you could have owned bitcoin instead. This is bitcoin against long-term treasuries.
Here’s Bitcoin versus gold. I like gold and it’s not a bad thing. It’s been a tremendous store of value for thousands of years and there’s nothing wrong with it’s just bitcoin’s better. This is what bitcoin has done against gold.
But surely bitcoin couldn’t have beat the S&P right? I mean that thing has been on a tear with the US markets at all-time highs. Wrong! Here’s bitcoin versus the S&P 500.
The S&P 500 has been driven by the magnificent seven, these few stocks that have been driving it higher. So surely bitcoin hasn’t beaten that! Yes it has! If you own bitcoin for the last nine years, you would have 3x what you would have had in the magnificent seven.
A lot of people say well the problem is there is so much volatility. Look, Bitcoin went up, it went down, it went up, and it went down. You know, that’s right. Bitcoin is volatile! But volatility in a rising asset is good. It’s hard to wrap your mind around that but as an investor I can tell you it’s good. Here’s a portfolio for the last 12 years. That blue line down at the bottom, that’s a portfolio with no bitcoin. The line right above it, the grey one, is with 1% bitcoin. The line above it is with 2% bitcoin, and that third line up at the top, the green one, is with 3% bitcoin. You could have doubled your returns in the last 12 years if you own just 3% of bitcoin instead of a 60/40 portfolio.
If you look at those returns in the last 12 years, the maximum drawdown, meaning the most you lost at any point in those 12 years, was 21% with the 3% bitcoin and 20% without. Whereas your returns were 13% with bitcoin versus 9% without.
Now we have the ETFs. Institutions know all this and they’re coming. It’s been slow and everybody thought that, me included, that optimistically the ETFs and the institutions are ready for it. But they weren’t. So what we had is we have this super highway that’s been built for the ETFs that makes it super easy for the institutions to buy, it’s just like buying a regular stock. Now they could buy it with their same broker, on the same exchanges that are overseen by the SEC, they can settle it with the same prime broker, and custody there. It’s super easy, it’s just like buying a stock. So they can do that now, they know this, and so we’ve seen over $6 billion of inflows since the inception of the ETFs and the assets now are $40 billion and this is just the start. You see a surge. Why is this happening? Because brokers, investment managers, now have their compliance in place. They’re starting to talk to their investors. I’m an absolute proponent of owning your own bitcoin, keeping your own keys, if you can do that. But some of the investment products in the United States don’t allow for you to do that, especially retirement accounts. But you can own bitcoin in your retirement account now just by buying the ETF, it’s super simple!
THE BOTTOM LINE
I’m going to leave you with this. The bottom line is bitcoin has been the best performing asset class in eight out of the last 11 years and if this doesn’t convince you to add bitcoin to your portfolio, then maybe you shouldn’t be managing money. At least not for other people!
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Also read: What’s a Debt Spiral, and is the US already in one?
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