The Bitcoin Tipping Point

New Money: Issue #7

NEW MONEY is a recap of the week in Bitcoin. Everything you need to know, right to the point. New Money, is published by Adam Pokornicky of DAIM Digital, a Registered Investment Advisor for Bitcoin and Digital Assets. Twitter: @callmethebear

It’s Sunday morning here in Venice, CA and as I sit here writing my weekly missive as an ex-Wall Street hedge fund trader turned magic internet money evangelist turned Bitcoin Wealth Manager, I find myself questioning what mighty coercive power has brought me to this point of extreme bullishness for the future of Bitcoin.

Malcolm Gladwell's book, The Tipping Point, provides me some comfort for none of this is my fault. My obsession with Bitcoin is merely a product of the networks I am and have been a part of and their natural tendency to distribute information, ideas, products, and, of course, the gospel of that magic internet money known as Bitcoin. If you are not familiar with Gladwell’s book, he writes about epidemics but not the viral invisible pathogen type like Covid-19 that is currently wreaking havoc with the world.

Gladwell's epidemics are social. A social epidemic is the rapid spread of ideas, messages, behaviors, and products through a population in the same exponential way that viruses spread. While his book describes epidemics of all kinds of phenomena, for the most part these phenomena can be reduced to messages and their spread in what he calls social epidemics. Social epidemics have two other characteristics:

  1. they can be set in motion by seemingly tiny causes where the spread of the epidemics are often triggered by causes that seem reasonably inconsequential compared to the magnitude of their effects.

  2. there is a particular moment in time when these epidemics break loose from being contained within a small population and begin to spread. This is what Gladwell calls a tipping point.

According to Gladwell, the "tipping point" is "that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire."

It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.” - Satoshi

For the purpose of this week’s newsletter I will focus on the characteristic #2 for I believe a specific moment this past week marked a tipping point for Bitcoin and it’s crossover from its cultish following of freaks, geeks, anarchists and early adopters and their love of magic internet money to the investment asset of choice to hedge against inflation by legendary macro investor Paul Tudor Jones.

I’d be remiss if I didn’t articulate that my point of view is a product of my 11 years of trading and investment management at an extremely successful credit focused event driven hedge fund and my perspective of how the supposed “smart money” operates and my 7 year run with Bitcoin and Digital Assets and it’s collection of brilliant minds, misfits, hacks, shady f*cks and anonymous animal twitter avatars that drive innovation, influence and conversation.

I absolutely love being part of the Bitcoin community. It’s given me a place to channel my energy, time and personal wealth towards a future and alternative financial system backed by math and open source code that I find easy to believe in. As I’ve returned to Wealth Management in building DAiM(Digital Asset Investment Management), the first licensed Registered Investment Advisor for Bitcoin and Digital Assets, I’ve come to realize that despite the outrageously impressive innovation and success that Bitcoin has achieved to date, it still has a bit of a credibility problem and is not being taken seriously as a legitimate new asset(and class) that should be included (or at least considered) in every single investor portfolio at the highest levels of finance and Wealth Management. Until Now.

We manage and advise individuals who want exposure to Bitcoin in their 401k, IRA or cash brokerage account. We’ve built a secure model with Gemini for trading and cold storage of assets that has been vetted by regulators. I constantly speak with Hedge Fund managers, Financial Advisors, Mutual Fund managers, broker dealers, 401k providers and Wealth Managers every single day (except Sundays when I speak to you 😉) to see how we can work with them to safely and securely enter the space. I’ve presented research primers, Bitcoin 101 explainers, Modern Portfolio analysis with efficient frontier models and hard data and their behavior and reactions towards Bitcoin as an investable asset is mostly uninterested, hostile or down right dismissive. And I get it, even though most have not taken the time to open their minds and learn about Bitcoin, hearing the message from a outsider praising Bitcoin’s value or diversification and risk-adjusted return benefits is going to be considered suspect and something they can easily dismiss.

It’s Bitcoin….Why do I care so much about what they think? Because last time I checked, The Global Asset Management industry was over $88.5 Trillion in AUM. $29.8 Trillion of that is in some sort of retirement accounts. We get inquiries about adding Bitcoin to company sponsored 401k’s plans all the time and it’s next to impossible to help. These people are the gatekeepers of a flood of investment capital that for the most part has completely ignored Bitcoin or had no way in. Wealth management industry is basically a complete zero with exposure to Bitcoin and nothing has seemed to be able to move the needle.

But what happens when the message comes from one of their own, who just so happens to be one of the most successful and legendary macro investors over the past 40 years? All the sudden in one headline followed by a beautifully penned 10 page investor letter??! Well, everybody starts paying attention and all the sudden it’s no longer a taboo investment and career risk, rather an asset (and class) you need to have an opinion on.

For those unfamiliar with Paul Tudor Jones, he is a billionaire Hedge Fund Manager who basically put the hedge in Hedge Fund. When he speaks, people listen. And that’s precisely what happened a few days ago when he shook the financial asset and Digital Asset worlds, announcing a position in Bitcoin and dropped an investor letter that came out largely bullish on Bitcoin.

(you can read his full letter here).

As important as the investment itself, I personally was particularly fascinated by the co-author of the letter, a one Lorenzo Giorgianni, a brilliant economist and Head of Research at Tudor Investments, who worked at the highest levels of the IMF.

So why is this is little detail so important?

Lorenzo Giorgianni is NOT some crypto insider, kid or cypher punk recommending Bitcoin to his boss. While PTJ is an investing legend, Lorenzo Giorgianni is an accomplished former Senior Leader at the IMF who spent his entire career prior to Tudor at the highest levels of Global banking.

When he was at the IMF, he was the deputy chief of the IMF’s Strategy, Policy and Review Department. He was directly involved in managing financial crises in Asia, Argentina, Turkey and the Euro Area and was responsible for developing the institution’s policies and overseeing their implementation in program countries, such as Greece, Portugal, Ireland and more recently Jamaica.

Paul Tudor Jones is not driving Tudor’s investment in Bitcoin, Lorenzo Giorgianni is and when you read the opening paragraph it’s like a buckshot dead center between the eyes. He notes that COVID-19 has caused unprecedented Central Bank action that has taken the modern monetary theory (MMT) experiment to its absolute extreme and the world is now in unchartered territory. His words remind the reader just exactly how unchartered the territory of this brave new world is:

COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally. The depth and magnitude of the economic drop-off took modern monetary theory — or the direct monetization of massive fiscal spending — from the theoretical to practice without any debate. It has happened globally with such speed that even a market veteran like myself was left speechless. Just since February, a global total of $3.9 trillion (6.6% of global GDP) has been magically created through quantitative easing. We are witnessing the Great Monetary Inflation (GMI) — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.

Again, reminder, this is a career banker and Senior IMF official that has witnessed and overseen currency and financial crises himself flat out telling you Central Bankers are fcking up the money and endorsing Bitcoin as a potential alternative to the insanity of the current situation. Lorenzo’s friends and inner circle are a lot different than yours and mine. Lorenzo hobnobs with Finance Ministers, Head of States and International Policy makers. You can bet your ass Lorenzo’s conversations about Bitcoin are being discussed and talked about at the highest levels of global finance.

  • “in a world that craves new safe assets, there may be a growing role for Bitcoin” [as opposed to Gold]

  • “it is not inconceivable that the economy-wide debt ratio may increase by 50% of GDP over the next year and a half”

  • Since the end of February, the Fed’s balance sheet has already grown by 60% and is on track to more than double by the end of the year”

  • The current Fed leadership has made it a centerpiece of its new monetary policy framework to do whatever it takes to overshoot the inflation target in the recovery phase. This is a risky strategy.”

Seeking Refuge from the Great Monetary Inflation

They went on to lay out a list of inflation hedges ranked in order of they called the inflation race and noted that the goal, of course, is to be invested in the fastest horse over the duration of the ride

One thing that piqued my interest from this list of assets, and that one day might be brought to prominence by the GMI, is Bitcoin. Truth in advertising, I am not a hard-money nor a crypto nut. I am not a millennial investing in cryptocurrency, which is very popular in that generation, but a baby boomer who wants to capture the opportunity set while protecting my capital in ever-changing environments

Ok Boomer, You have my attention….keep going…..

At the end of the day, the best profit-maximizing strategy is to own the fastest horse. Just own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin.

They went on to layout the top 4 inflation hedges and score them on the following criteria:

  • Purchasing Power – How does this asset retain its value over time

  • Trustworthiness – How is it perceived through time and universally as a store of value?

  • Liquidity – How quickly can the asset be monetized into a transactional currency?

  • Portability – Can you geographically move this asset if you had to for an unforeseen reason?

So that was the flavor behind some of the discussions that were had when scoring the suitability of each asset as a store of value. What was surprising to me was not that Bitcoin came in last, but that it scored as high as it did. Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200th of that. It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it's the price of Bitcoin.

I’m a drop that quote one more time for the haters in the back….

Something appears wrong here and my guess is it's the price of Bitcoin

I couldn’t help but laugh and cry at the same time reading the following: “The most surprising result of our research group poll was the score ascribed to fiat cash. It got a 0 almost across the board! The cry from the troops was “If something is by design going to depreciate 2% per year through inflation, why own it?”

More Digital Gold from Lorenzo and PTJ:

If you are beginning to think that these guys might be on to something, then you’ll really appreciate how much they truly get it:

On the halving:

I also made the case for owning Bitcoin, the quintessence of scarcity premium. It is literally the only large tradeable asset in the world that has a known fixed maximum supply. By its design, the total quantity of Bitcoins (including those not yet mined) cannot exceed 21 million. Approximately 18.5 million Bitcoins have already been mined, leaving about 10% remaining. On May 12th Bitcoin’s mining reward – the pace at which the supply of Bitcoin is increased – will for the third time be “halved”….This brilliant feature of Bitcoin was designed by the anonymous creator of Bitcoin to protect its integrity by making it increasingly near and dear, a concept alien to the current thinking of central banks and governments.

On Facebook Libra and China DCEP On-boarding New Users":

The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by COVID-19. Bull markets are built on an ever-expanding universe of buyers. Central to the price of Bitcoin is how many more (or less) owners of Bitcoin will there be beyond the 60 million who currently own it? The probable introduction of Facebook’s Libra (whose value will be pegged to the US dollar and will not be a store of value in that sense) as well as China’s DCEP, also tied to the yuan, will make virtual digital wallets a commonplace tool for the world. It will make the understanding, utility, and ease of ownership of Bitcoin a much more commonplace option than it is today.

This letter reads like monetary poetry and is being spread like wildfire as Bitcoin 101 for precoiners, noobs and the Wall Street dumb dumbs that have been sh*tting on Bitcoin because they missed early trade and have been too lazy to ever try to understand it.

Sometimes is not about the message but the messenger

Paul Tudor Jones and Lorenzo Giorgianni accomplished in a simple and well written investment letter what us Bitcoiners have been trying to articulate for the past 11 years. There is not a single Bitcoiner that hasn’t made the exact same argument themselves, but sometimes is not the message but the messenger. The way he articulates this point is so simple it just makes sense.

I asked my mentor and former Hedge Fund Manager (I’ll leave his name out for privacy purposes) for his perspective on Paul Tudor Jones investing in Bitcoin and he offered the following thoughts which related his investment to the historical introduction of new assets to Wall Street.

“New investable asset classes rarely get created on Wall Street. They don't just happen fortuitously. What one day may be viewed as a backwater business populated by misfits, geeks or outsiders can quickly become accepted by a skeptical investment community. Likewise, crises or periods of unprecedented volatility can give rise to new investment products designed to mitigate risks. 

Perhaps, that is what Paul Tudor Jones and Lorenzo Giorgianni had in mind when they penned their letter to investors this past Thursday announcing plans to invest in Bitcoin.

I am sure Messrs Jones and Giorgianni know that Michael Milken and the high yield market were completely ignored by and sh*tted on by Wall Street for a long time because Milken operated far away from the financial center of New York and dealt with lowly companies deemed less worthy than their investment grade counterparts. Likewise, the two hedge fund managers also are aware Lewis Ranieri, an uncouth trader from Brooklyn who had not graduated college, was able to create a mortgage-backed securities market by battling with the federal government for years to remove legal and tax barriers. 

In both cases, a visionary came along and changed the course of finance and created a product that not only became an acceptable investment, but also solved real world problems and benefitted individuals.

Bitcoin as an investment, and digital assets as an asset class, have not had that type of visionary leading the charge. On the contrary, a decentralized, distributed ledger, by definition, has no one person in control; and the absent inventor of Bitcoin, Satoshi Nakamoto, does not count as a visionary in the sense of cattling the wall street herd.

Nor has Bitcoin had the backing of a well-known organization like a State Street inventing the Spider ETF, or a Fidelity creating a mutual fund complex.

But, what Bitcoin now has is the first domino to fall; the first well-known manager of a hedge fund who operates a “Global Macro” investment strategy that currently has about $1 trillion under management. It would be a surprise if Mr. Jones' peers, competitors and imitators did not follow his lead”

I write about how rare it is for new assets to come along and their benefits to portfolios for diversification purposes and offering superior risk-adjusted returns in The Modern Portfolio - The Case for Allocating to Bitcoin but I never really thought about Bitcoin as a new asset like High Yield bonds and Mortgage backed securities, innovative new products “that not only became an acceptable investment, but also solved real world problems and benefitted individuals” who both were completely ignored originally by Wall Street until they weren’t.

This is the moment

To me, this signals a massive seminal moment of legitimacy that can not be understated. Hedge Fund guys are said to be the smart money but the truth is, with QE infinity forcing yields to zero, there’s not a whole lot of alpha to generate, leaving fund managers mostly investing in the same dog shyt, copycatting each other and chasing returns. In a world where managers are just trying to index or clip there 2 & 20 and avoid career risk in getting blown up, Paul Tudor Jones just green lighted a move into Bitcoin that now puts the risk on fund managers for NOT having exposure and lagging significantly in performance. Getting exposure to Bitcoin is the #1 buzz going around hedge funds, which will eventually trickle down to Independent Wealth Managers, Advisors and Mutual Funds. And while I don’t expect capital to flow in overnight, this is exactly how it starts.

This is precisely why I believe Paul Tudor Jones foray into Bitcoin has created a that “tipping point” or that magic moment for Bitcoin where it crosses a threshold, tips, and spreads like wildfire into mainstream finance.

The Bitcoin Halving is Tomorrow

If you don’t know what the halving is you can read my past issue of New Money where I explain the the halving in detail. After the 2020 halving, Bitcoin will have a lower inflation rate than gold. I expect price action around the halving to be bumpy and volatile… Buckle up!!!

This Week’s Top Bitcoin & Crypto News

  • Legendary hedge funder Paul Tudor Jones announces serious entrance into bitcoin as a hedge against the “Great Monetary Inflation”

  • Square’s Cash App reports $306m in bitcoin revenue in Q1 - up from $178m in Q4

  • Coinstar plans expansion on 40% spike in Bitcoin ATM usage

  • Open interest in CME bitcoin futures reaches new all time high

  • The Libra Association has named a CEO - frmr HSBC chief legal officer Stuart Levy

  • Iran gets a new licensed bitcoin farm in advance of the halving

Touching briefly on the Iran data point above, the geopolitical game theory is going to get really, really interesting really, really soon.

I touch on this concept of Nation State investing into Bitcoin in my research presentation “Get Off Zero: The Case for Bitcoin and Why a 1% Allocation Should Be Considered” when I discuss Bitcoin’s S-Curve of Technological Adoptions and the exponentially increasing Gartner Hype Cycles that follow.

I note that in the Final Gartner Hype Cycle Stage known as the “Plateau of Productivity” at some point in the near future we will see the entrance of Nation States accumulating Bitcoin and adding it to their Foreign Reserves. When it does happen, first state to officially add bitcoins to their reserves will likely trigger a stampede for others to do so… will this happen sooner than later?

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