Can Bitcoin Beat Out Bonds as a Store of Value?

Talk of inflation is everywhere.

Just last week, Treasury Secretary Janet Yellen said inflation could climb as high as 3% this year as the economy recovers from the depths of the coronavirus recession.

But the Federal Reserve has promised to keep interest rates low through the end of 2022 and plans on continuing its money-printing policy in hopes of boosting the stock market.

The Fed is of the opinion that any spikes in inflation are transitory and don’t warrant a change in policy to combat it.

In this past Weiss Crypto Sunday Special, crypto analyst Alex Benfield joined Chris Coney in a deep dive into inflation, and Bitcoin’s position as a store-of-value asset.

You can watch the full video here, or read on for the transcript:

Chris Coney:

Hi there, guys, and welcome to this edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney.

My guest analyst today is Alex Benfield and the macroeconomic topic we will be discussing this week is Bitcoin (BTC, Tech/Adoption Grade “A-”), bonds and hyperinflation. First of all, Alex, welcome back to the Sunday Special, mate.

Alex Benfield:

Thank you very much. Glad to be here.

Chris:

Glad to have you back.

Alex:

Glad to discuss this topic.

Chris:

Absolutely. When we we’re discussing how we can do this episode and I came to you said, “This is my idea, and I’ve written all these notes about it.”

So, what we’re going to do is I’ll run through that — set the case out as far as I understand it — and then we’ll do it a bit discussion around that. Okay?

Alex:

Great.

Chris:

Okay. Good. This episode was inspired by Ray Dalio. If you guys haven’t heard of that guy, he’s the founder of Bridgewater Associates, the biggest hedge fund in the world with $140 billion under management.

He went from being a Bitcoin skeptic in the early days to recently announcing that he’s bought some Bitcoin. Then [he posted] the famous tweet that went around [where] he said he would rather own Bitcoin than a bond.

That’s a huge statement. So, he said that principally because he doesn’t believe bonds are going to pay more than inflation. That’s where we’ll start.

The trouble I find with this topic is that it’s quite complex. I was speaking to Juan about it in the chat, and it’s like monetary policy meets fiscal policy meets interest rates, government bonds, treasuries, investors, retail investors and the central banks all behind the assets and different incentives at different times. It’s trying to keep that in balance and if it gets wayward, it gets wayward really bad really quickly.

Today, we’re just going to try and stick to one facet of it just for the sake of time then we’ll come back and maybe look at other facets in the future.

Interest rates on government bonds: They’re a two-sided market like any other. On the one side, governments want rates to be high enough to attract investors because investors want the best deal possible. But on the other side, that interest rate is the rate that the government is paying on the debt, which is what a government bond or a Treasury is.

If that interest rate is too high, it’ll be very attractive to investors but dreadful for governments, because they’re going to pay an enormous amount of interest.

It’s fine as long as interest rates remain in balance — as long as the market [is] sweet enough for investors, but not too expensive for governments. And that’s been happening for a while, that whole balancing act since government bonds were created.

But what’s been happening over the last few decades is massive government deficits — which is spending more than you earn, basically.

Just like any individual, good financial advice [is], “Live within your means.” Except, governments don’t do that, do they? They spend more than they bring in.

In fact, most of the time, the deficit for ongoing years is financed by borrowing more money, which is kind of like ... I always think of it as the same on an individual level. It’s like, “Okay. I can’t afford to pay my debt back, so I’ll take out another credit card and another personal loan in order to keep up with the payments on my existing debt.”

Now, that is ultimately not sustainable.

Eventually you’re going to run out of credit and you’re not going to borrow anymore because whoever does a credit check on you is going to go, “You don’t earn enough to take out this much debt.”

Yet governments seem to get away with it because they’ve got the ability to tax citizens, supposedly to infinity, which obviously isn’t plausible.

So, when the government wants to issue new debt, if there’s no appetite amongst retail investors for those new treasuries, the central bank is always there to create new currency and buy those bonds.

Now, the last time I was looking at this, the last time the government had a budget surplus — where they spent less than they earned — was 2001. It’s usaspending.gov.

That means every year from 2002 until now, [the government has] been spending more than it’s been earning. That culminated in 2020 with the Coronavirus Pandemic Relief Fund, where they spent $3 trillion more than they brought it in. It’s just a mind-blowing amount.

When you look at all the charts, the bar on the bar chart for 2020 is just way bigger than anything you’ve ever seen. As governments issue new bonds, the central banks create the new currency and use that currency to buy [the bonds].

That’s how the amount of money in circulation increases: The new money is created, and that new money is first spent by buying government bonds. Then, the second transaction is where the government then spends that money on expenditure: It pays its staff, invests in infrastructure projects, hires private contractors, building companies, stuff like that.

At that point, it’s made it into the pockets of your average man, who then goes out and spends it in their local community, right? So, the central bank gets the greatest purchasing power, and the government gets to spend it a second time before that new money has created any kind of inflation whatsoever.

The last to get it is Main Street and that’s where the solution becomes the problem, right?

The more money the government spends into existence by borrowing from the central bank, the greater the pressure on price inflation because you’re only supposed to create currency to keep up with a fast-moving economy.

If the dollar is moving around at a high velocity, you need to put in more money to keep up with that. But just creating the currency doesn’t create that velocity.

That’s the problem: Putting money into the economy without greater amounts of goods and services just puts pressure on price inflation.

If the government deficit were the same each year, maybe that will be okay. But it shot up sharply in 2008 after the financial crisis because banks needed to buy a lot of liquidity. It started to reduce up until 2015, but then has increased every year since. And now it looks like an exponential increase since the Coronavirus Relief Fund.

If the rapid acceleration in new money entering the economy causes prices to rise too fast, then the central bank reacts to that by doing the other thing they can do: Increase interest rates.

That’s typically what they’ll do to discourage people from borrowing — including the government — because they want to discourage new credit creation to slow down the expansion of the money supply.

It’ll have the effect of cooling down spending, but it also cools down the government spending, right?

Well, the higher the interest rate goes, eventually it’ll get to the point where the government has this massive mountain of debt — which is expensive enough to service anyway — and it’ll need to spend even more on interest payments.

That’s really where it gets catastrophic.

That brings me back to Ray Dalio: If he sees 10-year government Treasury bonds paying interest rate [of] 1.6%, and he calculates price inflation to be 5%, the bond is no longer viable.

If he parks [his money] in cash, it devalues by the rate of inflation. If he parks it in a bond, that helps a little bit by subsidizing about 1.6% interest. But if price inflation is 5%, he’s still losing 3.4% of the value in his cash balance every single year.

And that is probably why Ray Dalio has turned to Bitcoin, and why he would rather hold it than a bond.

So, as long as Bitcoin outperforms basic price inflation, you’re better off holding Bitcoin despite all the volatility. In the long run, if you’re at 5% inflation, and Bitcoin goes up by an average of 5% a year, you’re better off doing that than a bond that yields 1.6%.

We know governments can’t afford 5% interest because they’re struggling. They’re struggling now at 1.6% interest on the massive pile of debt. And higher interest rates cause higher payments, which pile on top of their already massive deficit with no end in sight.

Tripling their interest payments by putting interest rates, or bond yields, up from 1.5% to, say, 4.5% would just is absolutely bankrupt them. That’s just education — not investment advice of course.

Those are all the thoughts that came to my mind when the Ray Dalio tweet came out and I thought, “Okay. What does he mean he would rather hold Bitcoin than a bond?”

I knew that intellectually, but I thought, “Let me just break it down and look at it in a systemic way.” I’ll shut up at that point. Alex, got anything to add to that?

Alex:

Yeah. That was a great walkthrough of the whole situation. It shed some light as to why Ray Dalio and perhaps other big-time investors are looking at Bitcoin as a hedge against inflation.

I would say almost every year, Bitcoin’s existence has returned more than a 5% yield, so the likelihood that it outperforms inflation is pretty high, especially when you’re considering maybe a two- or three-year hold.

Chris:

Mm-hmm (affirmative).

Alex:

It’s most likely going to outpace inflation by a good bit.

Chris:

I don’t know how long people typically hold a bond for, but that would be a perfect bit of data to have. Like, if you hold a bond for a year or two years, what would it be like if you held Bitcoin for the same length of time, right? That would be a fair comparison.

Alex:

Right. I do know that if looking at any four-year point in Bitcoin’s existence ... if you hold for more than four years, it’s been profitable.

Chris:

Right.

Alex:

There’s literally no four-year span in Bitcoin’s history where it has returned a negative yield.

Chris:

Right. If you take a four-year cycle.

Alex:

Exactly. It depends how long you want to hold it. The longer you hold Bitcoin, the better off you would likely be.

Chris:

Sure.

Alex:

This is a very interesting topic. I’m really curious to see if big investors are going to move away from bonds and into Bitcoin.

This could kind of help to push the price of Bitcoin upwards, as well, depending on the amount of volume that does come in. It could also really change the tune of people’s perception of Bitcoin towards more of a store of value, which a lot of Bitcoin insiders have been pushing for a while now. It would kind of be validating for the space.

Chris:

Mm-hmm (affirmative).

Investors used to use, and still do use, bonds almost like cash in their investment portfolios, right? Rather than holding cash, you would at least put it in the risk-free rate.

The risk-free rate is usually putting it into a bond because Treasurys are seen to be risk-free and that will be then the benchmark.

Alex:

Right.

Chris:

Parking your cash in a bond at 1.6%, then you have to have some alpha on top of that.

Alex:

I would argue that [depending on] the yield of those bonds and inflation, it isn’t exactly risk-free.

Chris:

That’s a good point. Exactly. It’s not risk-free if you include the rate of inflation, which no one seems to be able to agree on. What do you think about that?

Alex:

I don’t know. I’ve heard many people saying that inflation is not a big, scary risk, not something to really worry about at all right now. I understand those people not wanting market investors to panic.

Chris:

Mm-hmm (affirmative).

Alex:

That’s understandable. But I think downplaying inflation as a whole is ... It’s not the move.

Alex:

I don’t know how else to put it there. Ignoring it completely I don’t think is the way to go.

Chris:

Why do they do that? Why did they downplay inflation in the eyes of the masses? What do they think the masses are going to do if they think that price inflation is worrisome?

Alex:

If the masses were worried about inflation, perhaps they would move their money elsewhere. Perhaps they’d move towards Bitcoin.

Chris:

Okay. All right.

Alex:

They would most likely move their money out of cash and bonds.

Chris:

Right. That’s it, isn’t it. It’s Ray Dalio again, but on Main Street.

He’s a super wise guy. So, of course, he can do that [calculation]: 5% inflation — or whatever it happens to be — minus the risk-free rate, then you’ve got your real gain or loss in purchasing power.

Whereas Main Street doesn’t think like that. They’re looking to news agencies, the governments, official figures, whatever, for clues because they’re haven’t got time to study it.

I suppose that’s to their disadvantage: It’s quite time consuming to keep an eye on all this stuff.

If you’re Ray Dalio, though, you’ve got $140 billion of assets: You better be paying attention. He should know what’s going on.

But Main Street — who gives their pension, 401(k), whatever — to a wealth management company, they’re assuming [the wealth management company is] keeping an eye on things.

Alex:

I would argue that those Main Street people also have a lot more to lose. I think they have a lot smaller of a margin where the downside is a lot higher for them if their assets are devalued by inflation.

Chris:

Mm-hmm (affirmative). That is a good call. The Ray Dalio’s of the world would ... I imagine.

Alex:

He’ll be fine.

Chris:

He’s got plenty of plenty of assets that are without debt against them. He like ... owns them outright. I suppose even if his business imploded ... like, if Bridgewater Associates went bankrupt, he personally would be absolutely fine.

Alex:

I would argue that Bridgewater could afford to lose 3.4% for a few years. It’s 3.4%. But it could be the difference between making rent or mortgage payment for your average Main Street small-business owner.

Chris:

I didn’t quite catch that. What do you mean? Go and break it down. The 3.4%.

Alex:

If you just deduct 3.4% of the monthly cashflow for a small-business owner on Main Street, that could be the difference between being in profit that month and losing money.

Chris:

Totally get it: It’s invisible because it’s inflation. The silent robber, they call it … the silent tax. It doesn’t show up in your accounts but, really, it’s a very subtle decline.

Alex:

Again, taking this [example of a] small business: If the price of goods were to go up by an additional 3.4% or 5% for a restaurant owner, that could cut into their profit margins pretty well. It’s a very small profit margin in the restaurant business.

Chris:

Mm-hmm (affirmative).

Alex:

And hacking 5% off of that ... like I said, it could make a big difference. You might not be making mortgage payments that month.

Chris:

I’m totally with you. I know these big corporations are good at systematically raising prices every year, like the telecoms companies always send me an e-mail saying, “Due to inflation, this has got to be the new price and we’re sticking 5% on it,” or whatever it is, and they do it like clockwork.

Small businesses are not that systematic with it. Is that because they’re not aware of it?

Alex:

I don’t know. I don’t know exactly what would happen with that. But again, just sticking to the same example, if the patrons of those small businesses are also having to deal with an additional 5% inflation each month, if that little restaurant raises their prices, perhaps those typical patrons are just going to have to turn to the bigger businesses because that’s all they can afford — the cheaper goods that those big businesses can offer.

Chris:

The economies of scale.

Alex:

Exactly. There’s a ripple effect that trickles all the way down when inflation is high like this. It’s a scary thing, and there are many consequences of high inflation like this.

Chris:

Mm-hmm (affirmative). Let’s just go back to that park and cash in bonds thingy, because that is important when you comparing bonds to Bitcoin. Yes. Bitcoin is a store of value. Fine. But over what time period?

You’re saying four-year cycles [are] pretty safe. If you bought $100 worth of Bitcoin at the beginning of a four-year period, four years later, almost always historically, you’re going to be up or at least pat or even on that $100.

Alex:

Right.

Chris:

Whereas, if Ray Dalio is using it as a place to park capital, well ... The bonds are not that volatile. They’re not as volatile as Bitcoin because they’re so liquid. That’s another point: If people like Bridgewater is going to seriously consider Bitcoin instead of a bond for the same purposes ...

I just don’t think Bitcoin’s liquid enough yet. Right? It’s just an edge over a trillion-dollar market. Off the top of my head, don’t know how big the bond market is. Do you?

Alex:

No.

Chris:

No? Okay. I imagine it’s astronomical compared to the size of Bitcoin.

Alex:

I would assume it’s a lot bigger than a trillion dollars.

Chris:

Right. That is a bit of a problem. Maybe a bit of a squeeze. Perhaps that’s where, if there were a panic in the bond market and people were aware of Bitcoin at least, there could be one of those stampedes through a very narrow door situation.

Alex:

Yeah. There are a lot of worrisome things that could happen if people do switch away from bonds in a rapid manner. First of all, it’s worrisome for the government if they’re not having people buy their debt.

Chris:

Mm-hmm (affirmative).

Alex:

Second of all, it’s hard for the institutions in Bitcoin to keep up with a surge in demand.

Chris:

It is.

Alex:

You see exchange outages pretty often. That’s just retail volume really. It can drive these institutional outages. I don’t know if the infrastructure is there for Bitcoin yet in order to handle something like this.

That’s not to say that it can’t happen. There could be a stampede of people away from bonds into Bitcoin, and Bitcoin’s infrastructure will just have to manage. I just don’t think that the existing infrastructure around Bitcoin is really robust enough to handle that many more people in the space. That is something to worry about.

Chris:

You’re talking about the Bitcoin. You’re talking about the exchanges and ...

Alex:

No. I’m talking about the infrastructural ecosystem around Bitcoin.

Chris:

Right.

Alex:

I’m talking about exchanges, but I’m also talking about lending platforms.

Chris:

Wallet providers.

Alex:

Wallets.

Chris:

Yeah. Sure.

Alex:

What’s the word I’m looking for? Custodians.

Chris:

Yes.

Alex:

That’s another big thing. I think for a huge rush into Bitcoin like this, you really need a great custodial ecosystem and I don’t know if ... I know there are some companies out there that are doing very well and they’re growing, but I don’t think that they’re ready for a huge influx.

Chris:

Stampede.

Alex:

Yeah.

Chris:

It’s the limit.

Because we’re talking about human beings here, it’s very difficult to make it orderly. Like, “We’ll just have this many people, just lined up and in turn.” No, when the price goes mental, that creates the demand and then it just be as though ... It’s kind of hard to predict the demand. You don’t know when the masses are going to suddenly act on Bitcoin and the infrastructure.

Alex:

Right. Not to mention the fact that a huge surge in volume like that is going to send the Bitcoin price through the roof. Again, those Main Street investors are going to have a higher price to pay to get into Bitcoin.

Chris:

Mm-hmm (affirmative).

Alex:

It’s going to be a lot more expensive for them to store their money.

Chris:

That’s okay for the retail investors, but I wouldn’t want ... Because we’re talking about bonds, right? And the large bond holders are the wealth managers, the institutional investors, investment banks and so on.

I hope they don’t wait until then before they wake up and start allocating a portion to the asset class that we call Bitcoin.

Alex:

Right.

Chris:

Right? Cause at least then ... You would think the institutional investor would be smart enough to average in overtime and earn a lot.

Alex:

Yes.

Chris:

You know what I’m saying?

Alex:

You would assume that they’d be smart enough. You have to factor in hubris though. These are people that have been downplaying Bitcoin for a decade now. For them to suddenly capitulate at this point just proves that they’ve been wrong for 10 years.

Chris:

True.

Alex:

A lot of these people are too prideful to admit that.

Chris:

Right. That’s a good point. It even took Ray Dalio long enough time to turn around, to see the light, but you’d be hearing...

Alex:

Ray Dalio is one of the smartest investors of our time.

Chris:

Exactly. And It took him a while, but he knew the method we used earlier on: He doesn’t think that bonds will outpace inflation. That’s quite simple math, though.

Just a rhetorical question: Did he not notice that before now? With the first time you came across Bitcoin, wasn’t that thought already in his head, like are bonds going to outpace inflation?

Alex:

That’s what’s interesting to me about this whole thing is this isn’t exactly a warm embrace of Bitcoin by Ray Dalio.

Chris:

Mm-hmm (affirmative).

Alex:

It’s just him just suddenly realizing that perhaps in times [where bonds are outpaced by inflation], Bitcoin’s a better store of value than government bonds which isn’t exactly the hottest takeout there.

Bitcoin typically tends to yield more than 5%, and government bonds during times of hyperinflation aren’t exactly a great place to park your money. This is simple math to come to this conclusion.

Chris:

Mm-hmm (affirmative).

Alex:

I’m glad that Ray Dalio is starting to think this way but it’s ... This is no genius take.

Chris:

Exactly. We also don’t know how much he’s bought, like what allocation. It’s not clear to me.

Alex:

That’s true.

Chris:

I don’t know if you know this. It’s not clear to me whether he was talking about if he bought it for his personal portfolio or whether Bridgewater bought it.

I don’t think that was obvious. When he says he would rather hold Bitcoin than bond, is he speaking personally or as a Bridgewater associate? I don’t know the answer to that.

Alex:

I don’t know. You would have to assume that those two things are tied.

Chris:

Mm-hmm (affirmative).

Alex:

You would assume that he’s investing the same way that Bridgewater is.

Chris:

Very true.

Alex:

I don’t know. That could just be an ignorant assumption on my part, but I’ll give him the benefit of the doubt there.

Chris:

Right. Sure.

Alex:

Another thing that I want to point out while we’re on this topic is that there are lending platforms right now in cryptocurrencies that are offering 5% returns, and even higher. Most are offering 7% to 8% on USD stablecoins.

Chris:

Mm-hmm (affirmative). Very good.

Alex:

This already vastly outweighs the returns of government bonds and outpaces potential inflation. Just simply putting your money into a stablecoin and parking that stablecoin on a lending platform is a very low risk thing and you’re already outpacing inflation by a good amount.

Chris:

This is just a matter of discovery. People just don’t know this exists.

Alex:

Exactly. That’s the point. I think people just haven’t really explored this happening yet. It’s not to say that there aren’t great solutions to this exact problem. This is pretty much what Bitcoin is created for. You ask people to look at Bitcoin in times of hyperinflation. This is the solution.

Chris:

It’s probably because if you’ve been in traditional finance for so long, it sets your expectations. What I mean is, when someone watches this and hears you say that about stablecoins and lending platforms, they might dismiss it based on the belief of “It’s too good to be true. Can’t be possible.”

Alex:

Yes. It’s possible. It’s happening. It’s been happening.

Chris:

You’re doing it, right?

Alex:

I’m doing it. Yes. Believe me, that is one of the most basic lessons you will learn in strategies and cryptocurrencies.

Chris:

Yeah.

Alex:

Yes. This is real.

Chris:

We’re definitely sold on it. Ray Dalio has capitulated. I wonder how much influence that will have over his peers, but we shall see.

Alex:

I do know that Ray Dalio is very highly respected in the world of finance. Many of my previous employers were former employees of Bridgewater.

Chris:

Okay.

Alex:

And [they] highly valued Ray Dalio’s opinion. I would say that this is probably going to stir the pot and hopefully get a few more people excited about Bitcoin.

Chris:

Cool stuff. Alright, Alex, thank you very much for being on Sunday special. I think we’ll wrap it up there. You got any closing comments?

Alex:

I don’t. Thank you very much for having me.

Chris:

Great stuff. That’s all for this edition of the Wise Crypto Sunday Special. Thanks again, Alex, for being with us. Keep your eye on your inbox for the next episode of the Weiss Crypto Sunday Special. Until then, it’s me Chris Coney saying bye for now.

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