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Fed Watch - Bitcoin and Macro

Feb 23, 2022

In this episode of Bitcoin Magazine’s Fed Watch podcast, CK and I had the opportunity to sit down and have an epic conversation with Log Scale of twitter, and host of The Bitcoin Spot series of Twitter Spaces, and new YouTube channel. This episode is a big white pill for those down about the recent price dip and who think of the US as an evil empire. We get into many aspects of institutional client money coming into bitcoin this year, and why the US is likely to be one of the most friendly bitcoin jurisdictions in the future.

Fed Watch is a podcast for people interested in central bank current events. Bitcoin will consume central banks one day, understanding and documenting how that is happening is what we are about here at Fed Watch.

A Valuation Model for Bitocin 

Log Scale had a very interesting Twitter thread several weeks ago. The first part of this episode is him laying out the arguments he made there. Corporate treasuries diversifying into bitcoin has been a major source of optimism in bitcoin over the last year or two, but Log says they are only 2% of all investable wealth in the world. Signs are starting to shift toward the other $500 trillion are looking at bitcoin, too.

You can find estimates for total investable wealth from several sources. Log cites Credit Suisse in this episode and McKinsey in his tweet thread. Both have a multi-hundred trillion dollar estimate.

Of course, every dollar that is used to buy bitcoin is not going to have a 1:1 effect on the bitcoin market cap. The multiplier is not a steady variable, the Bank of America has estimated it at 107x, but in his conservative valuation model, Log uses 3x. Now, what his model needs is an estimate for the amount of money that will come into bitcoin.

For this he draws from the very well-respected Ric Edelman’s 2022 predictions for bitcoin. He is “Edelman, one of the most prominent thought leaders in the investment advisory field and founder of Edelman Financial Engines.” Nearly all of his 2021 predictions proved correct, and this year he has some big ones. He says that by the end of the year, 1) 1/3rd of Americans will own bitcoin, and 2) financial advisors will be recommending between 3-5% allocation to bitcoin.

With those numbers, Log’s valuation model is just a matter of plugging in the numbers, yielding a result that the bitcoin market cap could increase by $11 trillion this year.

Gensler and Why the US will be Friendly to Bitcoin

The next part of the podcast might be controversial. We spend some time discussing Gary Gensler and possible reasons behind his appointment as Chairman of the SEC at such a pivotal time, with such a clear pro-bitcoin bias.

Most people think that the US government will fight bitcoin adoption, but Log Scale explains why they aren’t special, bitcoin’s incentives work on regulators the exact same way as everyone else. As an aside, we see that blatantly in the Ukraine and Russia at the moment, with friendly bitcoin policies coming about due to the rich and powerful there owning a lot of bitcoin.

If the US government is worried about losing its supposed currency advantage, it’s easy enough for them to buy bitcoin and back the dollar. If the choice is between losing global dominance of the dollar or buying bitcoin, that is an easy choice. There is no downside for the US government. The other option, fight it and impose sanctions, on top of being politically unpopular with the 1/3rd of Americans that will own bitcoin, it risks losing.

Back to Gensler. Log Scale tells us that Gensler is a big admirer of Satoshi and taught a course on bitcoin/blockchain at MIT prior to becoming Chairman of the SEC. The one outstanding qualification Gensler had over other options for the SEC was that he is an expert and the lover of bitcoin.

Q&A about Powell and Fed Policy

At the end of the show, Log Scale and CK had to leave, but there was still a few minutes to fill on the Livestream segment, before the next guest came on. This gave me a great opportunity to answer some questions from the Livestream host Q about Powell, their likely policy path this year, and other topics around central banking.

It is a recurring theme of questions I receive that people think the Fed is going to crash the market by raising interest rates. However, the powerful insight is that the markets are in control, not the Fed. The Fed’s job is to predict where the market will be in 6-12 months, sometimes 24 months, and position a narrative for their monetary policy to be ahead of that move. The most they can do is try to mold market sentiment.

If their monetary tools actually worked as they are believed to, through concrete quantitative effects, they wouldn’t need such tailored and precise language, and there wouldn’t be so much confusion on the path of inflation or the economy. The Fed could just adjust the dials to get the economy they wanted. That’s not the case.

Listen to the end to get more truth bombs on what’s coming in 2022 from the Fed.

That does it for this week. Thanks to the watchers and listeners. If you enjoy this content please SUBSCRIBE, and REVIEW on iTunes, and SHARE!