Transcription
Something will break differently, and it will have to break, I think, much more astronomically because of the capacity for what this means. It doesn't surprise me that the equity market will continue to go up. If you really think the whole play for a while was you needed the equity market to kind of participate in price action where you saw liquidity breaks, like we we're just going to see less of these liquidity events.
Does Bitcoin go up because QT ended? I think Bitcoin will go up when...
What's going on, guys? Today, we got a great conversation with Jeff Park. Jeff is a partner and the Chief Investment Officer at ProAP BTC. In this conversation, we talk about what's going on with MicroStrategy or Strategy. What's going on with Tether? There's a lot of FUD, controversy, debate. Are these companies in trouble, or is everyone just freaking out for the wrong reasons? Then we talk about Bitcoin and crypto sentiment. Everyone seems to be in the toilet there, and they're very worried about what's going on with price. And of course, we end up with QT is over and QE is back, baby. All that and much more in this conversation with Jeff Bark.
All right, Jeff, let's start with the crypto sentiment online is not very good. People are very upset. Now, I noticed that consumer sentiment in the United States is not very good. There's kind of a reason to explain that crypto sentiment, like price, is pretty much the only thing that seems to be heading in the wrong direction. Every other data point is up and to the right, and like we should be all excited. What's going on?
Yeah, there's no industry like crypto where you know the bottoms in when the people turn against each other. It's incredible. Every cycle, the crypto enthusiasts turn on each other, which you never see almost in any other industry, even amongst competitors. And I always found that to be such a profound thing because, on one hand, that is what a democratic movement is ultimately about, with free thoughts and free speech and having open arguments and debates. Uh, but crypto really takes it to the next level. Well, sometimes I worry the self-fulfilling cycle of the bearish sentiment is, uh, entrusted from within, even when the macro can look so compelling as one of the best times to still invest in crypto. Um, but yeah, sentiment's been horrible, and I've been thinking all about why this would be the case. Um, especially against what I still think is one of the most compelling macro backdrops we've wanted for a long time. We are now seeing the global carry trade in itself being at the center of a lot of the tensions in the way that central banks operate. We're seeing dollar weakness. We're seeing, um, rates come in. All the things that feel like they're, they're heading in the right direction, and yet sentiment is horrible. Um, and I think there's a piece I read over Thanksgiving that put out, and it's a great thinker, uh, great writer, and it was titled "In Defense of Exponentials." And my first thought was, if you didn't know who I was, you didn't know what Dragonfly was, and you just saw that title, does the first thought go to crypto or something else? And the truth is, if you are not in the space, I think most people would have thought of AI.
When anyone talks about exponential right now, the thing people are really interested in is the abundance of AI and its delivery mechanisms. So, in a simple way, at a very high level, you can explain part of the reason why crypto is just not interesting is because there's another thing that's pretty exponential that has taken a lot of mind share. Now, of course, talks about crypto, uh, and it's about crypto, uh, and and if you read through, uh, the defense of the exponential opportunity in crypto, a lot of comparisons are made about what early software looks like, but how eventually a network effect takes over and wins, open source, and and and assets wanting to be free in general. Uh, but sometimes I think what that misses is the truth that crypto, at the end, is still more of an ideological battle than anything else. And in ideological battles, it's either going to be a zero or a one. And that tail risk can also be pretty extraordinary. And so, as people talk about, like, there's never been a greater time for, uh, blockchain opportunities, you know, it's not always clear to me that everyone is talking about the same thing.
So, for example, Larry Fink put out an article in The Economist, um, recently talking about tokenization. So, if you just read the headline, it's like, "Tokenization is coming. Good for crypto." But if you actually read their article, the benefits that they tout about tokenization is things like cost efficiency by getting rid of paperwork. It's about instantaneous settlement. But those two things are actually not a crypto-solving output, right? Those are just databases.
Crypto what solves is neutral, censorship-resistant kind of defensibility and having more than just relational databases. And so, when people talk about tokenization being good for crypto, I'm not sure if this is a crypto thesis anymore. When people say private when blockchains are going to make a dent, are we are we talking about Tempo, for example, as a consideration versus Tether? Is is Tempo Circle's stablecoin, uh, also like the thing that people are bucketing now with the crypto mission? And at the core, this then becomes a really ideological question. And that's why I think when we compare exponential opportunities in crypto, we have to remember it's not just about the asymmetric upside, but the fact that that upside can go entirely away if we lose the ideological battle of what it is that crypto stands for. And I do think one thing with the excitement of mainstream adoption, we've seen with the adoption of the ETFs and the White House and it administration, is that perhaps the soul of what crypto really, really stands for when we say that there's opportunities in blockchain like never before, is in fact, maybe not what the original crypto mission is. And I think that is what you're seeing ultimately reflected in poor altcoin price actions, when you're seeing that a lot of the value accrual mechanisms that's been touted for years has simply not panned out in the way that has benefited the end users of these decentralized platforms. I think there are a few things that happened recently that continue to challenge that. One is, as I mentioned, the launch of Tempo and ARC, and these stablecoins that are backed with conglomerates and corporates like the like the likes of Stripe. And then the second is when Uniswap also once, uh, had a CC Corp that was different than the protocol in which it would serve on the front end for revenue generation. That is not the same thing as a line of the protocol economics. And so, when these things start to happen, again, I I go back to like the importance of what the original ideology is. And on that point, I think, uh, maybe there's some rooms to be gained.
Now, do you think that could be affecting Bitcoin's price?
So, I think Bitcoin's different. So, when I talk about crypto, I'm really talking about the technological opportunity, uh, that is more akin to like the network effect that's possible in open-source code. Bitcoin's different,
because it's more like a macro asset.
Yeah. Yeah. I always think Bitcoin has found its narrative to be a different, uh, lane that it walks, which is that people are now becoming more open-minded to this being a store of value that competes more as a macro asset than like a technological play, uh, of an exponential opportunity and productivity gains. Um, Bitcoin's price action, I think, has been generally more challenging because really, we've seen tremendous supply coming online, and the supply that is coming online has not coincided with what people would have thought to still be a great opportunity for incremental demand to be had. And we saw a slowdown with the ETFs, we saw a slowdown with, um, the digital asset treasury companies in general. And these are the marginal buyers that have stepped up that have somewhat kind of lessened, and the supply hasn't really, uh, cut either. And I think that's that's part of it. It's it's really a commodities market at the end, right? Um, and what you're seeing is that there has been some structural challenges with different leverage that was built into people, um, thinking maybe this was like a tactical opportunity to buy the dip. And of course, Bitcoin can always sniff out leverage, and it'll always push until the limits are to be had. And so, you saw a bunch of levered long liquidations come through. Um, and all to say, I think that the sentiment on Bitcoin got wound up in, um, the rest of the altcoin weakness going back to October. Uh, so there's a little bit of that dynamic. Uh, but, you know, I think Bitcoin still walks its own, uh, tune, and and we're seeing that today as Bitcoin has now once again reclaimed above 90k, and it's been a volatile week, but in the end, I still think volatility is a great feature for Bitcoin. It's a good thing that Bitcoin, uh, implied VA is now in the 50s. Uh, at one point, it got as high as the 60s, and yet people will realize this is still below where we started the year, which was closer in the 70s. So, so one of the things I've been paying attention to is the correlations between these assets and, um, stocks have been doing very well. It's up, you know, S&P's up like 13% this year. Um, gold's obviously been on a tear, 60%. Uh, treasuries are down, and Bitcoin is down on the, uh, the last 12 months. And so, I think over the last five years or so, there's been very tight correlation between especially Bitcoin and equities. And you saw, you know, kind of 2021 everyone went up, 22 everyone went down, and then kind of the recovery over the last couple of years. But before 2020, I think one of the big, you know, data points that people, especially when they talk to institutional investors or kind of sophisticated finance, you know, portfolio managers, used to be, hey, this is an asymmetric, non-correlated asset that if you put it in your portfolio, it increases the Sharpe ratio and and all stuff. The non-correlation was actually like a pretty interesting, uh, you know, feature for putting it in a portfolio. Do you think that it is going to remain non-correlated? Do you think that we'll kind of fluctuate between high correlation and kind of lower correlation? How do you look at this stuff? Especially as Wall Street adopts this, and you get kind of the groupthink of, you know, institutional PMs that all kind of, you know, put the same trades on at the same time, and and things like that.
Yeah. Yeah. There's a world in which Bitcoin is both a risk-on asset and also a risk-off asset. And I think based on the psychology of the institutional investors and which paradigm Bitcoin's fitting their worldview, it can morph. And so, it can look like gold at times and could also look like equities at different times. And I think we're going to just see a constant dynamism in the role that Bitcoin serves in those portfolios. At the end of the day, um, I think in the end, what will really matter for Bitcoin's price action will be the gains and losses to be realized by those institutional investors. And so, one thing that is dramatically going to look different going forward is that as institutional investors participate in the Bitcoin market, these are generally not principal actors, they're fiduciaries. And fiduciaries have a different risk tolerance than the principal retail investors where they're investing for their own capital. That means the duration of their investment horizon is different. That means their, um, ability to tolerate downside is different. And those flows, as they became more dominant, will start affecting the microstructure of Bitcoin's price action.
So, recently I put out a thought piece that as the four-year cycle is now definitively likely over, what's going to happen is the emergence of a new two-year cycle or a two to three-year cycle. And that two to three-year cycle will be based on exactly what you said, institutional behavior on profit-taking. Because let's say you're a PM at a multi-asset macro fund or a long-short equity fund or a mutual fund, and you have Bitcoin as part of your exposure. You probably have to underwrite that investment thesis in a two to three-year time horizon for your investment committee.
And the goal then would be to demonstrate the chance that it could outperform, let's say, roughly the 25 to 30% type of order, which is where Saylor benchmarks his his target for Bitcoin return for the next 10 years. And time then moves forward from that point on as you put on your position. And so, what's going to start happening is that it's not just where the Bitcoin price is that matters, but how seasoned that holding period has been for that particular investor over a period of time. Meaning, if Bitcoin doesn't move at all in the first year, then the bogey to earn 30% over a two-year period means now Bitcoin has to go up more than 60% in the next year for the investment to have been worthwhile.
So, now there's a path dependency that's happening, not just depending on the price, but the holding period. And this calculus is actually what drives a lot of fund managers' behavior. If you think about the classic pattern of year-end as an important data point, and why we have a Santa Claus rally in January, it's because those are fund manager behaviors where they're crystallizing their fees at an annual performance track record. And so, those types of things will be more, I think, acutely present in Bitcoin. And in some sense, I think it's a renewed opportunity for people to track other metrics that are more relevant for that world than historically what would have been like on-chain metrics that really dominated with retail profit and loss taking. Now, we're heading into a world where institutional profit-taking and loss-taking is going to be a big inflection point for price action at the marginal level.
Today's episode is brought to you by Arch Public. As markets shift, headlines break, and interest rates swing, one thing stays true: opportunity is everywhere. At Arch Public, they help you do more than just buy and hold. Yes, their dynamic accumulation algorithms are built for long-term investors, but where they really shine is their arbitrage algos, designed to farm volatility and turbocharge your core positions. The best part of Arch Public's products is they're free. Yeah, you heard that right. Try Arch Public for free. Take advantage of wild moves in assets like Solana, Sui, and Doge, and use them to stack more Bitcoin completely hands-free. Arch Public is already a preferred partner with Coinbase, Kraken, Gemini, and Robinhood, and their team is here to help you build smarter in any market. Visit Arch Public today at archpub.com, and your portfolio will thank you.
How do you think about, uh, Strategy? Um, there's a lot of controversy. It reminds me a lot of Tesla and Palantir, and, you know, these things that, um, you can take a lot of smart people, put them in a room, they all disagree, and they think the other side's like very dumb, right? For for believing what they believe. Um, I saw headlines this week of, you know, traders are being punished. Uh, the, I think one of the headlines was, "Sailor's Bitcoin Hype Machine Has a Glitch," you know, so like, I mean, just like great, great headlines. I don't know how, uh, how well they'll look over the long run, but how do you kind of view some of the critiques and then also, you know, maybe some of the defenses from, uh, from the supporters or holders of the stock?
Yeah, there's, uh, I actually this past weekend got to watch a play by Keanu Reeves, um, which I've been dying to see. It's "Waiting for Godot." I don't know if you have ever had a chance to read or see it. Um, but there's a really great line in the play, and the line is, "There lies there in lies a man, once again, you know, blaming his shoe when his foot is guilty."
And it's a classic line about some absurdity within a sense of existentialism where men are always looking for excuses when, in fact, the likely source of your own misunderstanding comes within. Um, and the Strategy fight, I think, at some level, is a reflection of that. There are times when Sailor's the savior, and then there are times when people will pin him as like the creator of a Ponzi scheme, as if he's the culprit of the latest price action. And so, markets can swing wildly on that opinion. And the most important thing is you stay on course, be transparent about what you're trying to do, and, um, overcommunicate on the milestones to which investors should be able to hold, uh, management teams accountable for, and then you got to deliver. I I think it's that simple. And we should also take the moment to understand the Bitcoin market's very dynamic, and one of the experimentation that we're seeing with what digital credit might look like under the Strategy thesis is an ever-changing, um, ever-changing kind of construct. So, the latest news that hit was that there's now a USD reserve under Strategy's balance sheet that is meant to fund at least the next two years' worth of dividends for the preferred equity investors. And if you calculate generally at the current state, what that liability is, it's about $800 million of interest or coupon, if you will, that has to be paid out annually. The question had always been, where is the cash going to come from if there's no dollar reserve? And so, the creation of this dollar reserve is meant to facilitate that conversation. At the same time, I think, uh, what everyone knows and everyone will keep reminding is, if you look at just the holding company value of Bitcoin on Strategy's balance sheet, which is now around 650,000, so around 55, 57, uh, billion dollars, that can fund the dividends for essentially seven years. It'll outlive us all at this current price. Of course, Bitcoin can go down or it can go up and change the math. But the point is that the leverage is very, very low. Um, so I think that is the most important thing. And at the end, what you then get to realize is that this is ultimately an asset-liability matching question. And all of the greatest creations in money and fiat and banking and store of value is the game of asset-liability matching. That's what the central banks do. That's what a fractional reserve banking system is. And one version of now how to appreciate Strategy is they are in the same business. It's an asset-liability matching question. What are your short-term cash needs to fund the ongoing expenses and operations, and what are the long-term assets that can defend and support that endeavor? And because now there's a component that requires current income, as the construction of the preferred equities have existed, it just so happens that gap is looking more explicit.
But in the end, if you fundamentally believe the asset will outperform the cost of capital, then the terminal value should accrue towards equity. The question then becomes, what is the path dependency in which that value is realized? And along the way, are there potential triggers or covenants that could deconstruct the balance sheet in an irreversible way that damages the future possibilities? And, um, and in the end, it, it, that's that's what I think Sailor has come ahead to explain, at least there's going to be dollars on the balance sheet. So you do not need to worry about there not being current income associated with these preps. And the other thing I would add is it's probably the kind of thing that rating agencies ultimately will need to check a box. One of the box-checking endeavors of these rating agencies is whether there is enough collateral to fund, uh, short-term interest versus long-term liabilities. And having a cash reserve essentially will mitigate those optics. And if you appreciate it from even that lens, I think it was probably a strategically, uh, sound decision. Even though what I worry about is ultimately, um, it means that potentially the volatility of Strategy is going to be muted relative to the fact that now they hold a little bit more cash than Bitcoin. So technically, holding cash instead of Bitcoin is a volatility muter. Paying, uh, current income in the way that preps exist is also technically a volatility muter. And so, if the original thesis of Strategy was as a volatility amplifier, as a construct for the equity, the one, you know, worrying thought you may have is that these actions by creating digital credit potentially reduce the volatility of the residual. Um, but again, it's, it's, it's a question of, uh, time frame and how you observe that duration window.
Now, um, he in this recent presentation talked about, I think for the first time ever, like when, if ever, would he sell Bitcoin, right? Um, and I took the answer as very, like, prudent and rational and, uh, non-concerning, but I do think that, and I saw some people talking about online, like, "Hey, wait a second. I'd never heard that before." How did you read that, or or what were your thoughts about that, um, you know, kind of development?
Yeah, this is, uh, this is a million-dollar question.
When someone...
Maybe the trillion-dollar question.
Maybe the trillion-dollar question. Um, you know, for someone who's been, uh, memeing "never sell your Bitcoin" for as long as we've all appreciated the Strategy story, I can understand why it would tick a nerve off to people when he mentions the possibility of even selling Bitcoin on the balance sheet because it's antithetical to the original thesis that he's been delineating and outwardly communicating as a management executive. Um, there is something to be said, which is that if you ultimately end up selling your Bitcoin, your asset pool will decrease, and if you do that to pay current liabilities to which you're not seeing the benefit that long-term, it will be a death spiral. There is a version of this which has to be empirically, um, stated, and that is because you're, uh, essentially enriching the creditors at the loss of the equity holders, and so that's a fact. At the same time, perhaps what may have been misconstrued, or maybe not said as strongly as, uh, I think it could have been done, is it could be more of a last resort thing than other options they may have on the table to still find ways to generate current income to pay the dividends. So, on that point, uh, Sailor had mentioned selling Bitcoin in the context of three options. One was that he could continue to dilute MSTR. The other option was that, for the first time, as I can recall him mentioning more on the public arena, is using options and derivatives to earn current income on the Bitcoin assets. And the third would be to sell your Bitcoin. And so, if you were to at least kind of think about the hierarchy of onerous actions you could take, my view would be that the selling Bitcoin action is the last on that list. Um, but at the same time, you could theoretically do it if you felt that the it elongated your runway for the current, um, liabilities that ultimately you still believed Bitcoin would go to a higher price trajectory. So, again, this is an asset-liability question, and,
and a Bitcoin denomination versus US dollar denomination, right? Like if you bought Bitcoin at 10k and it goes to 20, and you sell half, yes, you have half of the Bitcoin left, but you still have the same dollar value.
Yeah. And so, I do think like, uh, that also contributes to some of the controversy is like, some people are like, "Well, if you're just selling future profits in dollars," versus the Bitcoiners are like, "No, no, no, no. 650,000, you know, however many Bitcoin, we don't want you to sell any of them."
Yeah. Well, this is this is the thing, like I think people really like Strategy as a volatility amplifier. So, if the whole machine is based around the fact that you have the ability to borrow using preps, which have a fixed kind of yield, relatively fixed yield, to then buy, uh, unlimited upside with Bitcoin price action, if that's your perpetual kind of flywheel in motion that you're pitching, selling your Bitcoin is is antithetical to this because now you're just making the leverage ratio higher. You're enriching the preps, and you're not letting the equity holder participate in the volatility machine. So, this goes back to, I think, the fundamental question is like, why are people interested in buying Strategy versus Bitcoin ETFs?
And I've always held the view that it's because, at some level, people are looking for an amplified exposure to Bitcoin in a more capital-efficient way with some leadership and thoughtful financial engineering. And if you start selling your Bitcoin for cash, that's a volatility muter.
Uh, I think the ultimate realization investors have to make is that just because you do it once or twice doesn't mean now it's a linear thing. You scale for the next 10 years that it's going to be consistently selling. Quite unlikely, actually, that you're probably on an accumulation phase once again, and then you'll still end up buying Bitcoin over a longer period of time. It's kind of no different than how the Fed balance sheet looks from having engaged in QE and then, uh, stopping it and then engaging in QT and stopping it. You can see like, it, it moves, um, in a certain kind of ebb and flows, but the direction of the trend is clear, just as much as the central bank is continuing to grow its balance sheet. Right now, it's, it's about 6.5 trillion, which is astronomical relative to where the world was 20 years ago. I think the view you can still make for MicroStrategy is that, just the same way, the long-term trend is that it will be a Bitcoin accumulator.
Today's episode is brought to you by Bitcoin IRA. Are you a crypto investor with a retirement account but don't have any crypto in that retirement account? Then listen up. This message is for you. Bitcoin IRA is revolutionizing the way Americans save for retirement. They're helping smart investors diversify their savings with access to over 80 cryptocurrencies. With world-class customer service, military-grade encryption, and a vertically integrated licensed trust company, it's no wonder more than 200,000 Americans trust Bitcoin IRA to secure their financial future. Getting started is quick and easy. It takes just three minutes to open an account. Once you're set up, their team of IRA specialists will reach out to guide you through every step of the process. Whether you're transferring an IRA from a legacy bank, rolling over an old 401k, or starting fresh with new contributions, the Bitcoin IRA team is here to help you access real crypto in your retirement account. And here's the best part: As a Pump podcast listener, you can earn up to $1,000 in rewards. All you have to do is add funds to your account. Search for Bitcoin IRA in the app store or visit bitcoinirra.com/pump, and you can join 200,000 Americans on their journey to upgrade their retirement. That's bitcoinirra.com/pump to upgrade your retirement today.
Um, Tether has gone through similar, uh, controversy, FUD, uh, debate. Um, there's recent, like, they do these attestations. Um, so there's information that goes out. Uh, some people read them and I think you'd walk away and be like, "They 100% understand it." Some people read them and you're like, "They have zero clue." And then there's a lot of people in between who like, maybe they understand what's in the documents 80%, and and, you know, it's no different than if a company was to send you their P&L.
Usually, you would sit down with them and say, "Okay, explain this. Explain this. Explain this." And like, you had a pretty good sense for it, but being able to ask a couple of clarifying questions, right? And get some, you know, explanation helps. That's not what the internet does. The internet is,
No.
This is the most amazing business ever. Look at their profit per employee, or liabilities don't match, you know, uh, assets, and this thing is going to be a zero. They're gambling.
Which is it?
Yeah, this is actually exactly what I was telling you about how crypto turns on each other with the most interesting experimentations that we're living out in history. Uh, I believe Arthur Hayes was actually maybe one of the catalysts in having put some flame on it by walking through the math in which Tether could, in theory, become insolvent. And I love this term, "theoretically insolvent." It's like the boogeyman of finance. It's like anything that is theoretically insolvent that becomes this FUDdy thing. Well, in crypto, just for, uh, in the defense of the insolvent, uh, uh, seekers,
Yes.
There have been a couple that have been insolvent over the crypto years.
It's fair. It's fair. But I think it's unfair to box Tether and Strategy in a theoretically insolvent scenario when the whole world of fiat is actually built on theoretical insolvency. If you think about China's GDP, uh, and debt leverage, Japan's GDP leverage, US's debt to GDP leverage, all of these countries are technically underwater and have been now for decades.
If you think about the foundation of fractional reserve banking as a system where you have a money multiplier effect on the lending profile,
the theoretical value of a fractional reserve banking system is insolvent by definition, by design. So, I just think it's tremendously unfair to put crypto on one lens when the reality is most of credit creation happens with theoretical insolvency. The question is always, is there liquidity to avoid theoretical insolvency? And that's the key.
If you have liquidity to meet the moment, insolvency, then you're okay.
That's how the system works. So, then we got to go and look at Tether's balance sheet, right? Tether has about $180 billion of assets and about $175 billion of liabilities. So, technically, the reserve is overfunded. There's there's equity there. There's a cushion. Now, what sometimes people fought about is what exactly constitutes that $180 billion dollars of assets. And if you look into it a little bit closer, it is true that not all of the $180 is cash and money market funds and treasury bills. There is a chunk that could have risk appetite. So, about $20 billion or so is in precious metals, which is basically gold and Bitcoin, and then there's another portion that is basically margin loans, that's going to be about another $105 billion in that mix. So, if you take some of that out of the $180 billion, you could theoretically imagine that the one-to-one par value of treasuries to the liabilities is not exactly one.
This is true. But again, the question is, will Tether have the liquidity to meet the demand upon which there's redemptions? And so, that brings to the second point. Tether technically has tremendous equity cushion at the hold code level.
I believe it's about $30 billion.
$30 billion is more than enough of a plug that can be used to fill that gap that we just discussed. And we know in crypto that there's always rooms to plug gaps with equity, as long as customers are made whole. That's actually what the banking system does anyway. It just uses the printing press. And then the third thing I would mention is Tether has incredible profitability. It has generated $10 billion of profit to the end of Q3. So, we're talking about by the end of the year, it'll be closer to $13 billion. Well, that $13 billion literally plugs that hole that I just mentioned about margin loans in a year. So, I think this is again the classic asset-liability question. How much running cash flow is there that's coming into the company, and what is the demand that might be met upon redemption requirements for which they might not have sufficient liquidity for? And when you look through the lens in that manner, I think most people have reached the conclusion Tether is probably one of the most overcollateralized and liquid, uh, asset-liability machine that exists on the face of this planet.
I'm not worried about Tether.
I know. And by the way, and one thing to just point it out, like,
if people are rooting for Tether to fail as a crypto, uh, entrepreneur, I cannot imagine what is ideologically worse than the mission that we're on board for, right? Because Tether is one of the most clean, um, use cases that crypto has found, which is stablecoin remittances, and it is backed by the dollar. You can literally marry the national interest of American supremacy with the goal of exporting financial access to the emerging world. I cannot imagine what is more and like pro-crypto as a crypto entrepreneur and operator to want to see success in, uh, no matter how much, um, kind of misgivings there might exist on transparency or potentially bad actors involved in the space. But we must, at least in theory, root for the success of this particular paradigm of a world order if we want one, America to succeed, and two, we want to broaden financial economic freedom for the rest of the world.
When, um, when you look at this stuff with the backdrop of QT ending and a return to quantitative easing, our old friend, uh, the, uh, the buoy of the market. Um, anything really going to change, or has everyone been acting as if QE was here anyways?
Well, let's see. Um, man, it's funny. I feel like the definition of QE has changed also from 2008. I think for a long time, um, the narrow definition of QE was just expansion of the Fed's balance sheet. But now people have become more targeted about QE meaning something a little bit more than just that, which is that it's engaging in a different kind of credit transformation to really bring more liquidity into the system. So, it's not enough to just buy treasuries if it's basically replacing the existent, um, kind of yield management program as is. The way QE then becomes more effective is you need to engage in a liquidity transformation by the shape of the curve or some kind of credit transformation where you're choosing to buy assets that are not just treasuries, but going back again to ABS's and other defunct debt that are in need. Um, so, look, I think QT ending on December 1st is historic, and it was well telegraphed, so no one should be surprised that it ended, but I think it's historic because in a way, it really, really, uh, like signals the beginning of a new era of what the role of the Fed is in the monetary policy toolkits it's been able to build upon since. So, we used to call the Fed the lender of last resort. And I think what we're now going to have to admit is, with the adoption of the standing repo facility that's been put in place during the QT era or thereafter, where it is essentially now the lender of continuous resort, right? I mean, just yesterday, on December 1st, it was tapped for close to $14 billion, like for liquidity purposes, like the day QT ended, the Fed just intervened. It used to be a big deal, and now the Fed just intervenes every day. So, the role of monetary policy that is now being conducted in this regime, which is basically what, when Fed governors talk about the ample reserve system, is like this is the future of the Fed. We don't want to go back to a scarce reserve system. We're not going to be in an abundant reserve system, but we're in this now ample reserve system where we have now believed that $6 trillion is like the right amount of balance sheet capital for the Fed to be maintaining, and actually having unlimited capital on standby upon the request of the banks. And that means you're basically muting the possibility of there ever being like a, like a financial crisis. You're you're muting price discovery and and liquidity discovery. And so, yeah, I think QT ending alongside having the standard repo facility in place is is is a totally new regime. Uh, and this should matter to most investors because historically, those who have looked at the Fed acting as a lender of last resort to step in when there's tremendous volatility in the market, the structure that we have now inherited is that we may not really see that kind of volatility again. Like something will break differently, and it will have to break, I think, much more astronomically because of the capacity for what this means. Um, and in that sense, it doesn't surprise me that the equity market will continue to go up. If you really think the whole play for a while was you needed the equity market to kind of participate in price action where you saw liquidity breaks, like we we're just going to see less of these liquidity events.
Does Bitcoin go up because QT ended?
I think Bitcoin will go up when there's another acronym that comes out of the Scrabble board that the Fed has to rediscover to create a new emergency and intervention program. And I think part of why QT ending is a good deal is because now everyone can go back to the drawing board and figure out what the next thing that's going to break and the next acronym that the Fed's going to have, private credit,
right?
Or you know what? AI data center backs, stop by the government. I mean, if you really think about every time now that there is some concern in the market, immediately people say, "Is the actor going to come to the table?"
Yeah. Yeah.
Right? Will the government backstop the loans to the AI guys? Will they step into the private credit market? Will they buy company, you know, equity? I mean, just, it's pretty incredible.
This is correct. It's absolutely correct. When we like think about the role of the Fed as a lender of last resort, it really was for liquidity provisioning and emergencies. What we've now just seen is that the Fed has accepted its role to basically be like a backstop for every kind of, uh, like dollar-based assets where the next question then is, like, what more can they backstop? So, you're exactly right. This is why I think the next time QE happens, it will be much more onerous in the ways that it's going to play the credit spread game, where just like it bailed out, um, kind of the housing market and different ABS sectors, it could go back in that lane where there's going to be trouble in some sector that requires more bailouts and funding to kind of keep the growth engine going. And at that point, the role between the Treasury and the Fed does start to look a little bit, um,
a little bit mixed.
Uh, which is going back to the question of like, is this an independent monetary authority, uh, or is it actually more aligned with, like, different congressional actions?
I don't think it's anything independent, right? I mean, just if you look at, uh, I love the people who are like, uh, you know, the administration's going to put somebody in there that's going to follow their policy, like every administration does that, right?
Yeah. Yeah. I think sometimes too, people, um, if you study the history of the Bank of England, uh, the Bank of England was actually technically a private entity until 1946.
This is a really interesting, um, kind of historical fact that most central banks, and actually, like, even the Swiss, uh, central bank is publicly traded. I I think you can actually buy the Swiss National Bank. And, um, the line between kind of public, private, quasi-sovereign mix in a central bank is never very clear in history. And so, when 1946, the nationalization act happens for the Bank of England to actually now become part of the government. If you read the act, there's a line in which it explicitly states that upon the need and the consultation from the Treasury, that it can intervene.
And of course, it's never been used because this is a great facade of what the central banks are supposed to be. But the very fact that the line is even in the nationalization act, and you can just read it, the Treasury can actually work with a governor in moments of emergencies.
This is national policy, right? And what we're seeing is the emergence of the Federal Reserve also becoming politicized as an arm of the government alongside the US Treasury to engage in these liquidity and credit transformations to assist in GDP growth. The government knows best, they say. We're going to find out.
All right, where can we send people to find you online?
You can find me on X. My handle is DGT100011. And you can also find me on my Substack link in my profile.
Which you recently wrote a new piece.
Yes, I did.
Right. Just give us a two-second plug on what is the piece.
Yeah. Uh, I actually wrote, um, a couple new pieces. One is about the Bitcoin four-year cycle and why we should expect a different kind of cycle going forward. We talked about that a little bit today. Um, and the other is more just generally about, uh, Bitcoin positioning as we should expect for year-end and what we, we can hope for.
Two Jeff Park pieces. That's how we know we're making progress around here. All right, we'll do this again next week.
Sounds good.