Clay Finck (03:34):

The printing of money by the Federal Reserve is very beneficial to asset owners. In the U.S, the top 10% of Americans own 90% of the stock market, and the bottom 50% own just 0.5% of the stock market. Also, the top 1% own 16 times as much wealth as the bottom 50%. As more and more money is printed, this disproportionately benefits the wealthy that owns the assets such as businesses, stocks, and real estate while the bottom half of America that don’t own financial assets have to work extra hours or take another job just to keep up with the higher prices of goods due to the money printing. Another recent statistic that was circulating recently was that 50% of all adults would have difficulty paying for an unexpected $400 expense. And one in five adults would not be able to pay for that expense at all. So seeing the recent high inflation is definitely hurting the consumer.

Clay Finck (04:31):

I’ve also seen a number of charts that showed the money supply plotted against the S&P 500 over the past decade. And you can see in this chart that the S&P 500 has essentially increased in lockstep with the increase in the money supply. Zooming in to look at what happened over the past couple of years, specifically since January 1st, 2020, the S&P 500 has increased by around 27% while the M2 money supply in the U.S. has increased by 41%. Now, the S&P has come down a little bit recently but the money supply hasn’t, so that used to be a lot more in line. One has to wonder whether their stocks are actually going up in value or if the dollar’s value is actually going down. With so much money being printed over the past few years, it can be concerning and make one consider how sustainable it actually is. Despite all of this money printing, interest rates still seem to be held artificially low. This environment of artificially low interest rates and high valuations on financial assets has pushed investors to other asset classes to try and get yield and maintain their buying power.

Clay Finck (05:40):

With all of that said, the Federal Reserve seems to be in an extremely difficult position as inflation is running hot, but you can’t really afford interest rates to go up too much because our overall economy is so indebted. I believe I heard Jeff Booth mention that 22% of all companies in the S&P 500 are zombie companies, meaning that they need to take on an ever increasing level of debt just to keep their operations going. So companies like this require very low interest rates or else they’ll just go bankrupt. This is what our overall economy looks like across the board in my opinion. Our government is over indebted. Corporations, for the most part, are over indebted. And individuals, as well for the most part, are over indebted.

Clay Finck (06:26):

Another point I’d like to mention is that just a few months ago, Russia was cut off from the SWIFT financial system following their invasion in Ukraine. Russia has been cut off from international financial markets, and they are the largest commodity producer in the world. They’re going to have to figure out how they’ll accept payments if they have to quit using the U.S. dollar. I also took a look at what Russia’s U.S. Treasury holdings look like. In early 2020, their holdings for U.S. treasuries were over $10 trillion, but today that’s only $2 trillion. And now being cut off from the SWIFT system, it seems pretty logical that Russia will want to hold some sort of non-sovereign asset such as gold or even potentially Bitcoin.

Clay Finck (07:12):

Now, one thing is clear when it comes to the macro picture, and that is that the current trajectory that we are on is not sustainable and eventually something is going to have to give. What that is exactly, I’m not sure. And this is where I think Bitcoin could potentially come into play. With all these increasing tensions and uncertainty, I personally see this as potential catalyst for people to want to hold something like Bitcoin. You have extremely high inflation in countries like Venezuela, Turkey, Zimbabwe, Lebanon, and many others.

Clay Finck (07:46):

In many of these countries, you see high Bitcoin adoption. Oftentimes in some of these countries, you’ll see high levels of government overreach and capital controls. So their citizens have gone through periods where they’ve lost literally everything. So citizens that have experienced that see massive value in something like Bitcoin. Because one, no government can print more Bitcoin, so that protects them from currency debasement. And two, no government can touch it or steal it from you. It’s probably one of the most difficult things to steal, as you can store the seed phrase or the password to your Bitcoin in your head. You can’t do that with gold, real estate, stocks or anything else that I can think of.

Clay Finck (08:27):

Now, the struggle that many investors come to with Bitcoin is that you can’t necessarily place a value on it, or what value investors would call an intrinsic value. Bitcoin isn’t like stocks, bonds, or real estate in that you can place a value in it because of the cash flows it produces. Since, as Bitcoin is a monetary good like gold and fiat currency. The value of monetary goods are more so based on game theory, a fundamentally sound monetary good, or in other words, a good form of money, has properties that the free market prefers over time. Throughout history, gold has been used as money because it’s best met the properties of being good money. The primary properties of good money include durability, portability, fungibility, verifiability, divisibility, and scarcity. And I’m not going to walk through what all of these mean during this episode, but Vijay Boyapati defines all of them and his brilliant article, The Bullish Case for Bitcoin, that I will be sure to link in the show notes.

Clay Finck (09:32):

Bitcoin has almost perfected all of these properties of money, and it’s still very early in its adoption cycle as money and as a store value, which is why it’s still so volatile today. Many people are hesitant to adopt Bitcoin because it hasn’t had that established history that gold has. Gold’s been used for thousands of years as a store of value, but Bitcoin’s only 13 years into being created. But the longer that Bitcoin proves that it can survive in the market and continue to increase the number of people that interact with it and use it, the more established and entrenched it becomes in society. Bitcoin is also a massive beneficiary to the phenomena of network effects. Network effect is something that becomes more valuable with each incremental user that joins the network. This is something that’s referred to with many popular networks, such as the internet, Facebook, Amazon, and some of these other big tech networks.

Clay Finck (10:30):

I had Chris Kuiper from Fidelity Digital Assets on our show, and he believes that the network effects that Bitcoin has built is one of its most important attributes. And I pulled a quote from my interview with him that I’d like to read to you. And here it is. “At the very best, someone can come along and completely copy Bitcoin’s code. It’s open source, right? So they’ve made another Bitcoin that’s just as decentralized or secure or in theory, could be. Right? But in practice, it’s not, because of its network effects. And so the example that we can give, I could copy Wikipedia’s code, but my Wikipedia wouldn’t be nearly as successful because why would people have an incentive to jump to mine when it’s exactly the same?”

Clay Finck (11:12):

“We use the example of reinventing the wheel. Once you see Bitcoin, you can’t unsee it. You can’t make a better one, right? If people are already with Bitcoin, it was the first mover. It’s the most decentralized. It’s the most secure. We think this one is going to have the dominant network effects. And if you think network effects are strong for things like Facebook, which has half the globe on its network, wait until you see the network effects of money. Because the incentive is so high to choose the right monetary network, you are literally going to lose money if you don’t choose the right one. And so we don’t see anything usurping that, because again, if you want money, are you going to choose one that’s the most decentralized or secure, or are you going to choose something else? That’s why we see Bitcoin in a league of its own.” End quote.

Clay Finck (12:01):

Now, I recently posted a chart on Twitter that shows the number of addresses that own 0.1 Bitcoin or more. In 2013, this was around 250,000 users or addresses. In 2016, this crossed one million users. And in 2020, this crossed three million users. So the coins appear to continue to disperse across more and more users and adoption continues to grow based on this data. Today, it is estimated that over 100 million people globally own some level of Bitcoin. Another chart I found very interesting is one that Dylan LeClair shared that showed that 65% of all Bitcoin has not moved in the past year, which is at an all time high. My takeaway from this stat is that people are treating Bitcoin like a savings technology. They buy it and they hold it.

Clay Finck (12:54):

Many people are buying it for different reasons. It could be because they want to hold something outside of the current system, or they want to own something that has potential to increase very rapidly. But whatever the reason, they are holding it through the massive volatility in the Bitcoin price. We’ve seen it run up to the 60 thousands down to below 30 and everything in between. And I think something else that’s often overlooked is that a lot of the coins were accumulated years ago when the price was well under $1,000 per coin. So these people are locking up that supply and simply not selling it. If they do sell, then they’re going to be curing these substantial capital gains taxes as well.

Clay Finck (13:34):

I think it’s pretty clear that more and more people are realizing the value proposition that Bitcoin offers them, and they are grabbing their share of the network. And for the most part, they’re holding it. And I think that since our current fiat system requires more and more manipulation to function, this could be just a force for people to continue to want to adopt something like Bitcoin. And hearing me talk about Bitcoin being a form of money, you might be thinking, “What in the world is this guy talking about?” No one is using Bitcoin to go out and buy things and you’d be right. But money has to gradually emerge and become a stable store of value before it’s used as a medium of exchange for payments.

Clay Finck (14:14):

The life cycle that Bitcoin would have to go through to become a medium of exchange would be first, it has to be used as a collectible based on a few of its specific properties. Then it would start being used as a store of value. And once it is widely adopted and its value has stabilized, then it can be used as a medium of exchange. So Bitcoin is in the process of being monetized and it’s going through this price discovery phase. If you zoom out and look at the Bitcoin price chart on a log scale, you can clearly see that its trajectory is up and to the right as adoption continues as fast as even internet adoption in the mid ’90s.

Clay Finck (14:51):

So Bitcoin currently is partly monetized and is in the process of being fully monetized as adoption continues. So volatility, uncertainty, and risk is expected in the future as that monetization continues. As Bitcoin has seemingly appeared out of nowhere and it’s currently being monetized, its purchasing power has soared over the years. It’s been called a bubble probably every year it’s existed and it’s had its fair share of price corrections of 80% or more on multiple occasions. But it has continued to hit new highs and the lows within each four year cycle so far have always been higher than the previous high from the previous cycle. And this is a sign that adoption continues to grow as you see higher highs and higher lows. This adoption rate is not going to move in a straight line though, so there will be the booms and busts that we’ve seen and the speculators and the traders will come in and eventually get washed out with each bear market.

Clay Finck (15:49):

If I were to think about if somehow a superior monetary good just appeared out of nowhere as Bitcoin did, it makes sense the trajectory it has taken thus far. It wouldn’t go from zero to a global reserve currency overnight. It would take time for it to ever make it that far. Initially the only people who even knew about Bitcoin were the cryptographers, the computer scientists, and cipher punks that at this point, when Bitcoin was trading for less than $1, they were probably just surprised that it was actually working as it was intended. And they were probably just experimenting with it, too. Essentially it would be held as a collectible for those people who are fascinated with the technology. They probably didn’t expect to get rich off of it. Then came the early adopters and some of the libertarian type people who were mainly interested in owning something outside of the government’s control.

Clay Finck (16:41):

After Bitcoin hit $1 early on, it had its bull run in 2011, where it went up all the way to $30. After the front end of that early adopters, then came the early retail and institutional adoption. Of the little bit of liquidity available in Bitcoin early on, most of it came from the Mt. Gox exchange. And after the price stabilized at around $100 in 2013, it had its next bull run all the way up to $1,100. Then the price crashed as the Mt. Gox exchange got hacked and many people ended up losing their Bitcoin and liquidity really dried up at the time because there weren’t many exchanges at all. And then most people are familiar with the 2017 bull run as Bitcoin ran from under $1,000 to over $19,000. And then now here we are today at around $30,000.

Clay Finck (17:32):

When looking at Bitcoin’s history, it’s interesting to think about how much of an impact the overall liquidity had on its price. When Bitcoin was under $1, there weren’t any exchanges where you could buy it. Then Mt. Gox had most of that early liquidity in the early years. And that exchange going down had a significant impact on the price. I actually bought a little bit of Bitcoin in 2017 and the go-to exchange then was to use Coinbase. And I’ve heard many stories of people trying to buy drugs or whatever else back in 2013 or so, but they spend hours on a computer just to try and figure out how to buy Bitcoin. It was just so difficult to do back then. So you can tell that there was very little liquidity relative to today.

Clay Finck (18:16):

And now, today we have more and more institutions that are allowing their customers to buy Bitcoin and more and more people are getting easier and easier access to the asset. For example, Fidelity is working to allow people to invest in Bitcoin in their 401(k). And more and more institutions on Wall Street, like J.P. Morgan, are starting to offer Bitcoin services for their wealthy clients. And NYDIG is continually working with large institutions to educate them and get them invested in Bitcoin. And we’re seeing Bitcoin going more and more mainstream as more and more companies continue to get involved. In 2017, I remember you’d be considered pretty crazy if you said you own Bitcoin. Now just five years later, it’s pretty typical to have it as a part of your portfolio as billionaires like Ray Dalio, Elon Musk, Jack Dorsey, Stan Druckenmiller, and Bill Miller all own it and actively support it.

Clay Finck (19:09):

As many of you probably know, we’re also seeing public companies start to adopt Bitcoin as a part of their treasury strategy, such as Block, previously known as Square, Tesla, and Micro Strategies. I actually interviewed Kevin McGarvey, who was a small business owner that went on a Bitcoin standard. If you’re interested in checking that episode out, that is episode 1, 51. And on the institutional side, I haven’t even touched on the Bitcoin mining industry, which could be an episode of its own with energy companies like Exxon starting to dip their toes in Bitcoin mining. And now you even have countries getting into the mix. El Salvador made Bitcoin legal tender in their country in 2021, and the Central African Republic also made it legal tender in 2022.

Clay Finck (19:53):

Just thinking about the potential game theory around nation-stated option is interesting. All countries know that Bitcoin has a limited supply cap of 21 million coins, and those who are the first to adopt it stand to benefit the most should Bitcoin continue to grow. So if one or two larger countries decide to adopt Bitcoin and make it legal tender, we could see a stampede of many others coming in to try and stake their claim on the network while they still can. This is pure speculation on whether this happens or not. I really have no idea. But it’s pretty incredible to see two countries already starting to embrace Bitcoin, given that it’s only been around for 13 years. Any country that decides they want to adopt Bitcoin can be assured that the 21 million supply cap will almost certainly never be changed and no other country will be able to take away their stake in that network.

Clay Finck (20:46):

Again, I encourage all the listeners to do their own research and come to your own conclusions. Please question everything I just said. A popular phrase in the Bitcoin space is, “Don’t trust. Verify.” Go out and learn for yourself what this Bitcoin thing is all about. Also, I wanted to mention that Preston Pysh recently had the founders of Looking Glass Education on his show. I went through this website and they just do an incredible job of explaining why Bitcoin is so important and without all of the financial jargon that you see when you dive into Bitcoin.

Clay Finck (21:21):

So if you’re interested in that, I will link that in the show notes as well. They have this short course and a number of articles that are all free to check out if you’re interested. I hope you enjoyed this episode and maybe learn something new. If you guys have any questions related to anything I discussed during this episode, feel free to reach out to me. My email is clay@theinvestorspodcast.com. And on Twitter, my username is @clay_finck. That’s C-L-A-Y underscore F-I-N-C-K. All right. That’s all I have for today. Thanks for tuning in.

Outro (21:55):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.