Hi, I’m Nik.
And I’m Yuri. You’re watching Moon Tower HQ.
And today, we’re going to be talking and discussing a little bit about the concept of Bitcoin as a hedge. One of the really interesting things I believe about Bitcoin, in general, is its discussion in I think the current narrative with everything that’s happening in the markets is whether it is a good positional bet against the current trends.
And if you look at it from a mathematical perspective and you take the S&P 500 for example, and you do run a correlation and a regression on it, you start to actually see that there’s quite a high level of correlation between the two assets.
Now, of course, correlation does not imply causation. That’s where you have to go a little bit deeper and look at the R squared. The R squared actually looks at whether the two correlations have any type of cause and effect between them.
Now, this number has actually been relatively high above the 80 mark for I believe the last two or three years at the very least. You can see that over the long-term and this is more of a macro trend that those two following sync. And very recently, you can also see that to as it goes down, Bitcoin does tend to follow.
Now even though from a market perspective, there is that strong correlation and causation between those two, that doesn’t necessarily imply that those two assets are tied together. What it does imply in general is that actually, Bitcoin is a certain type of asset class. In this particular case, it is a risk on asset.
What a risk on asset essentially means for those who are not quite familiar with the term is it’s something that the general market participants tend to enter in when there’s a high appetite for risk.
When markets are going up traditionally and when everything seems fine and the returns are not that great, you start to move into riskier and riskier asset classes, Bitcoin being one of them. And in an environment such as risk off or during financial turmoil or instability, you do see its sell off just like with any other asset classes. And a lot of people will talk about, well, could it possibly be an actual hedge right during those particular times. And well, the mathematical answer is actually no. But the interesting piece I think that and one that is valuable to try to discuss and maybe understand a little bit further is actually, what does Bitcoin provide in general outside of this kind of risk off environment for the long-term?
So Yuri, can you talk to us a bit about the Bitcoin fundamentals and how that relates to its long-term trajectory?
Well, definitely. If you remember, Bitcoin has a cap on its insurance. You can only have 21 million Bitcoins, that’s the supply cap. And what it gives to the investor, like myself or to many others, is that it gives you certainty. It gives you certainty or in the future, it gives you certainty about how many Bitcoins will be in circulation.
Why is certainty important? Well, first of all, you can see what happens with Fiat currencies all over the world, no matter what currency it is; the US dollar, the Russian Ruble, which just recently fell by 10%. It’s the unpredictability that matters because people don’t know how many units of currency will be circulating just a year from now, let alone 50 years from now. With Bitcoin, this is highly predictable because the supply cap is baked into the protocol.
Essentially, this predictability gives me personally, and that’s my take, confidence in the system overall. If there is no black Swan event that for some reason manages to destroy Bitcoin, maybe a technical glitch, maybe something else, global kind of event, then I think, this asset has the best potential out there out of all, even better than gold as you know. Because Bitcoin while as good as gold has other properties on top of it that make it a little bit better, such things as transportability and stock to flow ratio is a lot better with Bitcoin. Bitcoin is considered the hardest money ever created.
What do I mean by hard money? Hard monies mean money that is difficult to create. It’s hard to create as opposed to easy money, which is the US dollar for example. How easy is it to create the US dollar? It is quite easy. The press of a button, you’re going to have a billion more dollars. Or banks when they loan out funds, essentially create new money. With Bitcoin, it’s impossible because the whole thing is predetermined.
So, that’s my take on the certainty of the Bitcoin supplier. I think this is the most important part of it. And that’s why I think when we talk about the correlation with other assets, yes, short term, the market fluctuations make correlate because it’s just human action. People get afraid. They can sell off irrationally or they can buy what? Irrationally as well. But what matters is long-term and I think long-term, the asset like Bitcoin wins.
So, would you feel that it’s fair to say that really Bitcoin, outside of its immediate emotional response, which is relatively I think in step with the general markets is actually more or less, I carefully use this word, but a hedge against the poor economic long-term policy on the global environment.
Meaning with regards to Fiat currencies where you’re basically printing an endless supply. Would you feel that that notion is something that you can strongly relate to yourself as well? Or do you really feel that, well, perhaps, there’s some kind of maybe commingling or two 20 between them in the future?
No, definitely in my personal opinion, a Bitcoin is the hedge against the global hegemony of these financial institutions that simply pretend to know what’s going to happen in the future and try to pull many leavers and control the whole society and its financial operations. Which I think is impossible because it’s impossible to control human action. That’s what Ludwig von Mises talks about extensively in his book ‘Human Action’.
It’s just essentially, people act independently from each other on a global scale. And in Bitcoin, this is a great example because Bitcoin is a much smaller market. It’s just a drop in the bucket compared to other trillion dollar markets out there. Even gold is much bigger than Bitcoin.
So in Bitcoin, you can clearly see how the market can be manipulated. Now, Bitcoin has just dropped by $2,000. Was it because of coronavirus or was it because someone decided to sell off some Bitcoin and just to take some profit, right? We don’t know. We can’t know because the market is small to tell.
However, in the traditional financial markets which are highly liquid and are much bigger, you can more or less say that things can be affected by global events like the coronavirus because people get scared, people stop traveling, stocks for fuel and companies that, travel agencies and transportation companies, they go down along with all the other markets. I can definitely say that Bitcoin is something that will give you more certainty in the future, and that’s my thing.
And I agree with you very much and it’s very interesting to me personally to see how on the longer scale, Bitcoin behaves as not only just kind of its own isolated space, even though it does show a certain, again, correlations with additional markets. But from a fundamental perspective, it’s still isolated, right? And it’s isolated to the point of, of course, eliminated cabin supply and also the intricacies of the network itself.
If you’re looking at it from a really long lens or a long time horizon lens, I would really say that Bitcoin is on its way to make its own stand within this global economy. And of course, there is not going to be such a time, personally I believe that it’s going to take over the monetary systems of today. But I truly think that it’s actually going to be an integral part and a very large one at that, of this economic system.
And the reason being is because as we talked about the fiscal behavior of certain countries, you see negative interest rates in places like Switzerland for example, and a lot of people are speculating that the US might go that way as well. And do you see with this type of monetary policy that, well, to put it simply without getting too technical, you go to put your money into a bank and not only are you not getting paid an interest rate, but they’re actually charging you to hold your money there.
That is, I believe a psychological tipping point for a lot of people. And when you start to get into talks of these types of environments, when you have a currency or an asset that not only just holds in value but actually appreciates in value over time at the real level. And I’m talking about the real levelize in its buying capacity in the world, not just a US dollar denomination value, but what it can actually truly do for you in a global system.
From that perspective, there is a clear separation, I think between those two areas of Bitcoin and the global economic system, where the global economic system can very much print its way out of certain troubles. Although, there probably is going to come a time where that will come to haunt us. But without going too deep into that portion on the Bitcoin side, you have again, a very clear and stable stock that’s available, that you can create a certain type of predictive models based on this. And not only that, but you can actually access this entire ecosystem outside of the modern economic structures.
Yes, you do need to have certain types of onboarding and offboarding ramps. I believe but you’re always going to be there. But when you have Bitcoin, you don’t need financial intermediary to send Bitcoin to do payments for any kind of services or any kind of goods.
I believe really that’s the big separation between these two, I believe, not just really asset classes, but methodologies as we move forward into the future. And I’m firmly of the opinion that these two can actually co-exist. I think that really you can’t have one without the other. And this is also an interesting little piece, and maybe you can expand on it a little bit earlier.
But originally, a lot of people say that Bitcoin was created and thrived as a result of the issues that we have, the current economic systems. And if our current economic systems were not flawed in terms of their ability to fund the amount of funds, that Bitcoin would have never really taken hold. What are your thoughts about that?
Well, I think you’re right. And Saifedean Ammous, author of ‘The Bitcoin Standard’ for example, talks about how, if it weren’t for the current financial system and how it’s operated with their printing press, central bank in Fiat money, most likely, we would be fine under the gold standard that existed over a hundred years ago.
And for example, he considers return to the gold standard, the biggest threat to Bitcoin because suddenly, if governments decided to go back to the gold standard which is highly unlikely, people wouldn’t have that much incentive to try out these new systems because Bitcoin is still not very easy to learn to use. Whereas gold, everybody knows what gold is. Everybody at least heard about it. You don’t have to also hold physical gold and you can just use paper receipts or electronic documents or whatnot. And that’s how most gold trade happens right now anyway.
But according to Saifedean, that’s pretty much the main threat to Bitcoin. At the same time, he believes that it’s highly unlikely because this debt machine that’s going on right now is not just unstable, it’s impossible to stop until it just implodes, so we will have to see what’s going to happen.
But at the same time, there are different opinions on how this hyper Bitcoin useation, so to speak will happen. By hyper Bitcoin useation, I mean an event that essentially replaces the traditional financial system with one that is backed by Bitcoin in which Bitcoin becomes a world reserve currency or at least one of a few reserve currencies in the world.
Now, some people believe that upon hyper useation, Bitcoin will just absorb all the financial instruments out there, all the Fiat currencies will die and it will be the dominating currency in the world. Other people believe that it will like you mentioned, coexist with the current financial system to some degree, but obviously, as people see the advantages of using Bitcoin, especially in terms of its ability to store and multiply value over time, slowly but surely, the traditional financial system will start draining these resources into Bitcoin. And it will still keep growing little by little and take dominance.
But at the same time, two systems can exist and there are different opinions on that. Either a peaceful revolution with an alternative financial system bringing up based on Bitcoin and the existing system existing at the same time. Or it will be something, a violent or financial revolution that will happen very quickly maybe within a couple of months where things will turn really ugly. I don’t know what will happen. We’ll see.
Yeah, and I think that if we can kind of maybe summarize all of this up, it really would speak to the fact that Bitcoin is really a multigenerational asset class. And what particular that means is that when you’re investing in this particular thing, you are investing not just into your lifetime but into the future of your family’s lifetime and their generations to follow.
And the reason being is because if you look again at what’s going on with the pension plans in the United States, in North America and some other countries, you starting to see a lot of articles and information come out that around 2026, a lot of those things are going to be drying up. And that’s the fiscal support that our elderly generation is really dependent upon, and for us moving forward, there really is not much of a safety net being created and in fact, it’s being printed away.
I would definitely agree that whether the two systems are going to live with one another or whether there’s going to be some kind of hostile takeover, if you will, of one by the other. What is definitely clear in my mind is that if you are not actively aware of these situations and protecting yourself against the possible risks of not only having your future you served from you, but also kind of this economic instability that might follow, that you’re really doing yourself and your family a disservice.
And that’s one of the topics that we’ll also talk about a little bit later. But for now, I think this would be a great time to summarize it all up and say, think about it, think about the future, discuss, analyze, and always keep your wits about you in this market.