New Money: Issue #21
NEW MONEY is a discussion of trends, news and macro events related to Bitcoin, Money, and Digital Assets, published by Adam Pokornicky of DAIM Advisors, a Registered Investment Advisor for Bitcoin and Digital Assets. Opinions are my own. Twitter: @callmethebear
For investment inquiries, connect with me or my partner Bryan Courchesne at [email protected]
Greetings my fellow Bitcoiners, Precoiners and internet Friends…..As I write our Feb letter, the price of Bitcoin is once again flirting with $40k. The Last time I wrote New Money, back in late December 2020, the price of Bitcoin was $23,000. Ironically, we discussed Bitcoin’s price in, “Is the Price of Bitcoin Too Damn High?” and I focused on contextualizing the price of Bitcoin and how cheap and misunderstood it was versus stocks and other asset classes it’s competing against.
Here we are, six weeks later on the cusp of Bitcoin breaking out of three-week 25-30% bull market retracement after hitting all-time highs and tapping $42,000 in mid-January. We’ve seen Bitcoin, Ethereum and several De-Fi tokens post extraordinary gains in January and early February. Meanwhile, Bitcoin has consolidated around $35k, prepping itself for the next leg of its long journey towards 6 figures and global adoption as a store of value and eventually money.
For myself and my partner Bryan, the past four months have been rewarding and validating. Our efforts to build a gold standard regulated and compliant Investment Advisor and Asset Management firm dedicated to an industry and asset class that most people have either overlooked or considered too risky/too crazy for the past decade have begun paying off. Our mission at DAiM is to help individuals “Get Off Zero” and help them accumulate more Bitcoin through wealth management strategies and tax efficiency. Our measurement of success at DAIM will always be valued in Bitcoin. How much Bitcoin did you start with vs how much Bitcoin do you have now?!?! There is no more important measurement for any individual investing in Bitcoin than to accumulate more of the most scarce monetary asset ever created through proper wealth management and wealth preservation strategies. Our performance speaks for itself.
On a personal note, this is the ideal opportunity to express our sincerest gratitude to our clients for working with us, entrusting us with your money, and recommending friends, family, and colleagues to us. Much of our growth is organic and a function of client recommendations, who we are able to generously reward through a share of our fees through our Partner Program. Our high touch service, personalized client interactions and platform features, including our model portfolio and the ability to earn yield in brokerage and retirement accounts, are unmatched. Our 3 foundational services are seeing unprecedented demand:
Individual and Institutional Asset Management
TPAM/SubAdvisory for Wealth Managers and Financial Advisors
ERISA Compliant 401k Plans with Bitcoin
As an organization, we couldn’t be better positioned to capture adoption and provide wealth management services to individuals, endowments, family offices, corporations, 401k plans, and other Financial Advisors and Wealth Managers. While the past few years have been challenging both personally and professionally to grow a business in a misunderstood asset class in the middle of a bear market where progress and growth are not accurately reflected in AUM and demand, I couldn’t be more excited and proud of what we’ve built and the opportunities ahead. Six months ago, individual demand was steady, but it was a struggle to get institutions and wealth managers/financial advisors to pick up a call or engage. Now, opportunity is abundant, as they’re barrelling down our door looking for a regulated, compliant, and transparent way to get exposure, access, and expertise managing Bitcoin.
For me, this is the most exciting time of being involved in Bitcoin since I started investing back in late 2012. While, I’ve experienced multiple bull and bear markets, exchange hacks, setbacks, and hype cycles, I’ve never experienced retail and institutional demand like this coming from so many directions and use cases. The world is waking up to the sound money properties of Bitcoin in a world awash in fiat currency that is being debased and while central bankers intentionally create inflation and make the value of your hard-earned money worthless. The hard work of convincing people to take Bitcoin seriously is over. The past 6 months have unequivocally shown us that Bitcoin has crossed the chasm from fringe to mainstream finance and that it is here to stay. What was once mocked and shunned is now being widely considered as an acceptable 1-5% portfolio allocation and will likely be viewed going forward as a Permanent Balance Sheet Allocation. If you are still doubting the merits of Bitcoin in your portfolio, please have a read of my work: Modern Portfolio- The Investment Case for Bitcoin.
As I prepare to give you an inside look into my thoughts about Bitcoin, Digital Assets, and Asset management, in general, going into 2021, I think it’s best that I offer some context about myself and how my mindset has evolved since late 2012 and why I am so bullish on the ability to help individuals use both Bitcoin and Digital Assets to navigate their portfolios moving forward.
I’ve made a lot of mistakes since buying my first Bitcoin back in December 2012. Mt Gox, Sim swaps, taxes, etc…, It’s probably what makes me one of the most seasoned, experienced and OPSEC obsessed Bitcoiners you could ever interact with. For Asset Management and Financial Advisory, I honestly don’t think there’s a licensed Financial Professional that has the Investment Management experience and understanding of Bitcoin, Digital and Traditional Assets as I do and truly enjoys helping as many people as possible get off zero.
My love affair with Bitcoin started in late 2012 and into early 2013 when I understood how Wikileaks was able to take donations throug Bitcoin after being cutoff by banks and payment processors. This lead to reading the whitepaper and realizing how unique its scarcity and fixed supply was relative to Gold and Silver, which were being created in unlimited quantities by Wall Street through paper derivatives, Futures, rehypothecation and price-fixing.
I give a lot of credit to two of my most valuable friends and resources, Michael Krieger(former Alliance Bernstein Energy Strategist: highly recommend following him on Twitter) and my former colleague at Scottwood Capital where I worked from 2002 to late 2012 who I will keep anonymous. We’ve been in a chatroom together for over a decade, have helped each other navigate the past 13 years since the beginning of the financial crisis, and discovered and invested in Bitcoin together. Being invested and passionate about Bitcoin has always felt like walking around with a secret that no one else knows and feeling crazy trying to explain it to everyone else. I owe much of my early adoption and understanding of Bitcoin to having open-minded, thought-provoking, and free-thinking humans as resources to expand my mind, challenge me to question everything, and explore things outside of my comfort zones. Bitcoin is and always will be an evolving learning experience about money, economics, governance, property rights, free speech, game theory, and perhaps a little religion. You don’t need to understand all of it today, you just need to have a little skin in the game and be on the right side of history. This is why I write, this is why I work with individuals and this is why I care so much about exposure, education, and empowerment.
So why am I telling you all this?!?!?! Well, because 2021 is going to be a banner year for Bitcoin and Digital Assets, but more importantly for society to push back against traditional systems, hierarchies, and power. The explosive growth we’ve seen to date will be dwarfed by the value expansion and global interest in Bitcoin, with simply not enough supply to satisfy demand. Structurally, the macro environment is doing much of the heavy lifting that is making the case for Bitcoin and Digital Assets in general, creating tailwinds that make Bitcoin a safer investment now then ever before in its 12 year history.
Bitcoin is and will be the biggest beneficiary of societal and economic divides we’ve been dealing with for decades because it is governed by rules not rulers. As more people recognize that politicians, tech oligarchs, unelected bankers, and Wall Street can manipulate the money, silence dissent, deplatform free speech and change the rules to benefit themselves whenever they want, individuals will continue to push back, opt-out and stop playing the game. Our government is not going to save us. Four-year election cycles will do nothing to help us and you can't beat Wall Street using Wall Street. Switch to Bitcoin and watch the powerful become powerless.
The Era of Decentralization Begins
The Age of Aquarius started December 25th when Jupiter and Saturn joined forces at 0° Aquarius. The age of Aquarius will be defined by “we versus I” mentality of visionary, rebellious, innovative, and eccentric Aquarians. It focuses on pursuits of valuing each person’s individuality, holding and taking care of each other as a unit, and a disruption of the system and major shift in power dynamics. For as long as most of us can remember, power has rested in traditional, oppressive hierarchical structures, and their beliefs and systems have dictated our reality. In the Age of Aquarius, power is turning over to the individual and giving us the freedom to choose our own reality based on what aligns with our soul. It’s important to realize these developments are really reflections of an inner shift taking place, one that relates to an awakening of mind throughout our culture as the times ahead will likely usher in major advances in humanity's intellectual growth, though probably at widely varying levels of sophistication.
So how does this all tie into Bitcoin, Money and the future?
It’s been a little over 5 weeks since the dawn of Aquarius and people are realizing the immense power that is held by a handful of corporations, that has led to a sudden rebellion or ‘wait a minute, that’s not right’ reaction. Things are already happening fast as a cultural and economic revolution are upon us.
Over the past month, many people have left the big Social Media networks and/or are migrating to other communication channels. Tens of millions of people ditched WhatsApp for Signal upon learning about its privacy terms. Many conservatives left Twitter as their speech was silenced were deplatformed. Wall Street Bets and Robinhood showed that Hedge Funds and Wall Street can change the rules and play a different game whenever they feel like it.
In short, the battle lines are being drawn around private companies – which were once seen as democratizing forces but have trended towards “illiberalism” – versus open-source platforms that anyone can use, indisputably and in perpetuity.
Connecting the dots to the crypto industry, noted technologist Balaji Srinivasan said,
“Crypto and WallStreetBets have the same spirit: a vision of truly free markets where everyone plays by the same rules.” A disparate group of traders, banned together by social networks like Reddit and Discord, now, conceivably, can have as much influence on markets as Wall Street, Srinivasan argued.
So what happened? People have suddenly woken up to the fact that these so-called ‘free social networks’ and apps are not really that ‘free’: they hold an unhealthy amount of power, sell our data, and influence our behavior. People no longer want to be at the mercy of companies that can read our private messages, sell our data, shut down our accounts any time, and have such sway over our lives.
If it’s not clear yet, it will be soon that decentralization in the way communication is distributed and consumed will be the most prominent theme moving forward. Bitcoin, as free speech money and a decentralized form of money and value transfer, will be the biggest beneficiary of the decentralization theme moving forward. Furthermore, companies and institutions focused on innovation, value creation and the fair distribution and democratization of value, will be the big winners moving forward.
So what will this look like?
People start to become dubious about the centralized power held by just a few corporations and institutions that can dictate pretty much everything and impact our lives without us having any say.
People rebel against this unjust balance/distribution of power and take coordinated, bottom-up action to change the rules of the game.
New rules that better reflect a fair and balanced distribution of information and resources.
Themes to expect ahead:
People taking coordinated action
Democratization of information
Decentralization of power, with groups of people fighting for freedom and sovereignty
Power to the people
People coming together in look-alike groups to change the rules of the game
I bring all of this up because I believe the era/revolution that is upon us that will eventually democratize our society - will be lead by Bitcoin. An ark, a lifeboat and monetary vessel which can never be inflated into oblivion, accumulating energy and influence over time. The decentralized nature of Bitcoin and the digital systems, exchanges, and platforms being built in this new decentralized financial paradigm are providing us with the resources, vision, and the determination to build healthy new structures that are a better fit for our current society. While I have a strong opinion of where Bitcoin is going, the road ahead to dismantle power structures won't necessarily be smooth. However, if we want change, we have to shake things up first. Our society will be healthier and stronger because of it.
2021 Outlook from DAiM
Bitcoin as a Permanent Balance Sheet Allocation
Decentralized Finance(DeFi) Opportunities
Portfolio Allocation || Redefining the Modern Portfolio
Fixed income Portfolios vs Digital Asset Lending
Our thought process on Bitcoin is evolving.
Bitcoin should be a Permanent Balance Sheet Allocation of at least 5% and up to 15%. I’ve backtested enough portfolios and reviewed enough data that demonstrate that Bitcoin is not only an asset that deserves a place in your portfolio but its attributes as a Store of Value, Growth/Tech Innovation, and ability to earn yields of up to 6% make it more than appropriate allocation away from stocks, bonds, and real estate. Once you invest in Bitcoin, your mindset should be that this is a permanent allocation.
DeFi: The innovation and advances occurring in DeFi are extremely exciting and this is the future of finance. Over the next month, I will be taking a deep dive into DeFi opportunities that I believe will be the horses to ride moving forward. What I really like about several DeFi services and platforms is they look like traditional investments that I can model on revenue and cash flow. They look more like equities and bonds to me and the ability to value them this way gives me strong confidence as to how to think about them fundamentally and allocate to them as part of a portfolio. Names like UNI, SUSH, YFI, AAVE, BAL, and NXM are all on my radar and will likely be something we recommend in the future as an allocation away from equities and fixed income(more on this below).
Portfolio Allocation: I believe there is merit to investing in ETH and many of the DeFi names above as long as you are willing to allocate away from equities/traditional assets rather than Bitcoin. This is a change in my thought process and the distinction is important. I am prepared to make the argument that Bitcoin needs to be its own bucket or allocation that should not be touched and that there is room for other investments as long as you are willing to allocate away from some other asset classes. Modern 60/40 and even 70/30 portfolios are dead and we need a new framework for building portfolios that represent the environment we are experiencing.
Bailouts and an explosion of the supply of the monetary base at a rate of over 22% a year, has cattle prodded investors out the risk curve and forced them to over-allocate to risk assets like stocks, bonds, and real estate, offering poor risk-adjusted returns. We are in an environment where central bankers are intentionally trying to create inflation through the debasement of our currency and politicians are trying to stimulate the economy through debt-funded stimulus to create growth. The overall increased risk exposure to stocks and chasing yield creates a systemic form of risk that also puts one’s savings and investments at risk and has lulled into treating this as the norm. Historically speaking, portfolios built primarily around stocks and bonds struggle in periods where interest rates are close to zero (1930s U.S., post 1990 Japan, Europe today) as well as when inflation is rapidly rising (the U.S. in the 1970s). In these scenarios, bonds can become correlated to risk assets like stocks and real estate causing them to all decline at the same time.
Any meaningful uptick in inflation and growth will result in a backup in Treasury yields that will have a knock-on effect on all risk assets. Defensive assets like volatility, gold, and now Bitcoin must be considered to diversify portfolios, smooth out returns and provide dry powder in periods of volatility.
For these reasons, we are thinking about portfolio management in a totally different way and will be utilizing every tool in the toolbox, to provide investors with a more modern approach to preserving and growing their wealth. We believe we are uniquely positioned given our overlap in both traditional and digital assets and welcome the advancement of this conversation with clients and potential investors to re-evaluate the way they are thinking about their entire portfolio.
Yield and Lending: we are seeing incredible opportunities to earn income/yield on Bitcoin, Digital Asset and cash that doesn’t exist in traditional markets. The ability to earn yields of 4-6% on Bitcoin and Ethereum(7-10% on TEY in tax-advantaged accounts) and 9-11% interest on cash in overcollateralized lending is one of the strongest opportunities available to augment low yielding and poorly performing fixed-income allocations that have significant duration and convexity risk from any back up in yields from here.
So why does this opportunity exist? Inefficiency and imperfect information. The digital asset space is a newer asset class and both counterparty risk management and collateral are misunderstood by the market. Collateral posted is typically highly liquid and demand for digital assets is currently very high producing outsized yield profiles for lending and borrowing. As the market matures, we expect greater market intelligence and credit evaluation insight to normalize rates over time. But for now, this remains one of the best opportunities for investors to replace cash and fixed income with secured lending facilities that have collateral coverage that dwarfs anything available in traditional markets.
2021 is likely to be the biggest year yet for Bitcoin and Digital Assets and now is the time to think about how are you are currently positioned and how you can take advantage of so many different opportunities to augment not just your Bitcoin and Digital Asset exposure but utilizing all the tools and resources available to rethink your overall portfolio. We welcome the opportunity to advance these conversations with you and if you want to learn more or schedule a consult with DAiM, please reach out to us below:
Alright thats it! I hope you enjoyed the latest issue of New Money.. until next time!
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