Good Things Are Coming Into The Crypto Landscape! | Kitco NEWS

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Kevin: Great to have you with us.

Roy: Thank you! Great to be here.

Kevin: Alright, Kevin, as wonderful as it is to have Mr. Wonderful, we also have quant maestro and Bitcoin OG Roy Niederhoffer. Roy has been a Bitcoin bull since 2011. He's the president and founder of RG Niederhoffer Capital Management, a diversified hedge fund with nearly a billion dollars of assets under management. Roy, good to have you with us.

Roy: Thanks, Michelle. Great to see you again.

Kevin: Alright, Kevin, let's start with you and let's start with a macro picture because it's now exactly one month since Putin invaded Ukraine, and the conflict is not going as he expected. We've got these rising geopolitical tensions, sanctions on Russia, and seeing a surge in commodity prices. The IMF is now projecting global growth to slow down by at least one and a half percent in 2022.

We have inflation at 40-year highs here in the U.S., the Fed hiking rates for the first time since 2018. Powell says he still thinks he's going to be able to like to rate to hike rates at least six times this year, and we've got recession projections increasing, Goldman saying there's a 35 percent chance of recession over the next year. So let's start with your big macroeconomic read on the environment, Kevin.

Kevin: Yeah, for as tragic as the Russia-Ukraine situation is, as far as markets and investing go, I don't put much weight on it. I'll explain why. That represents less than one percent of the S&P earnings, no matter how you triangulate it.

Um, obviously these sanctions are unprecedented in economic pressure, and the fact that the Swiss actually shut down Russian accounts is also unprecedented. Now as far as crypto goes, and you know Roy and I are obviously focused on that, I don't think that matters as much as this—what I call the four vectors of policy coming at crypto right now. Let me walk just through the shopping list; this is also unprecedented.

Number one, you've got the Loomis bill, and it's mostly positive. I've read a lot of positive policy in that. Number two, you've got the executive order from Biden that says we must embrace this and regulate it—also good news; it could have gone the other way. He could have said we want to make this illegal.

Number three, you've got the SEC talking about carbon audits, and I'll get to that in a moment; that just happened last week. And number four, you've got this remarkable situation coming out of BlackRock, the world's largest money manager, decrying and talking about Bitcoin mining and carbon credits not aligning. I think there's a lot of policy in all of that, but the fact that that's all happening shows you that crypto is never going away.

And I think the more it gets regulated, the more institutional assets flow into this asset class. And I want to initially separate the concept of Bitcoin and cryptos for this question, because I'd like for you to make your case for Bitcoin in this current environment.

My view right now is that the Russian conflict has made the case for one of the best features of Bitcoin, which is, of course, that it's always there, wherever you are. So the initial attraction I had for the asset back in 2011 was it seemed to solve a historical problem, which is how to take your things from place to place if they're too big to carry.

And of course, Bitcoin is always there on the blockchain, wherever you are. So in terms of asset transport, it's pretty clear that there's a great use case for it. But we have a much bigger situation happening, and it has really very little to do with Russia and Ukraine.

For me, the big reason to be interested in Bitcoin and the space in general, but in particular the largest assets in the space—Bitcoin and Ether—is that the balance sheet expansion of the Federal Reserve has gotten so far out of control that there is no heading off inflation caused by the printing of dollars.

Now, a lot of people blame things like gas prices at $4.30 a gallon, which is where they are right now, on the Russia conflict, but that's not what caused it in my view. Maybe the last few tens of cents, but in reality we already had gas at three dollars and forty cents a gallon, up almost 50 percent in the last 12 months before the Ukraine conflict even began, and that's caused by too many dollars chasing too few goods.

So what I'm going to do right now is make a case that I think is going to make a very reasonable, sensible prediction that we get Bitcoin prices ten, one thousand, and even ten thousand times what the price is right now. Now that sounds probably a little crazy, but let me take you through it.

Right now, the inflation rate is about 10 percent. I think most people would say it's fairly reasonable to think that we could have 10 percent inflation for another 20 or 30 years. That doesn't sound so out of control.

It's also reasonable to think that Bitcoin itself grows from where it is right now; it's about the size of the Thai Baht, and if Bitcoin happens to get a little more acceptance and grows to the market cap of the British pound, that's about five times what it is right now. You put those together, in 20 years you have a Bitcoin price 30 times what it is now; in 30, 85 times what it is right now.

So we're talking about a Bitcoin price of $3.8 million. Even if a very reasonable current assumption holds true, we can go beyond that. Let's say there's 15 percent inflation for 30 years and the Bitcoin market cap rivals that of the Euro; we're talking about a Bitcoin price of $56 million.

And if Bitcoin becomes the world reserve currency and we have 20 percent inflation, the Bitcoin price is going to be almost $500 million. Remember, it's trading at $45,000 approximately right now. So these are edge cases, I admit, you'll probably look at this in 20 years and say, "Wow, what a silly idea that was to predict that," but I think they are non-zero cases. There are reasonable assumptions to make and for many other reasons I think it's a very interesting investment right now.

Roy: Alright, so you're saying that there is an edge case of Bitcoin at $500 million in the next 30 years?

Kevin: Yes, and that is not even a hyperinflationary case. Hyperinflation, we'd be talking about billions or trillions. Of course, the dollar would be essentially worthless at that point.

Kevin: Roy, what are your thoughts? Do you think that Roy could be onto something here with this hypothesis?

Roy: I think it's impossible to predict price or volatility, and obviously the trend is your friend. And as far as Bitcoin is concerned, what affects price near-term and mid-term more than anything else is to get policy out of the U.S. regulatory on Bitcoin and stablecoins. The two, if you read the Loomis bill, are really focused on Ethereum, Bitcoin, and stablecoins.

And so that’s interesting because the fact is today—and I work in the indexing market where we try and index for institutions—I’ll give you an example. If you’re a sovereign wealth fund in the Middle East and you want exposure, some of these countries generate $250 million of cash a day, and they want, obviously, to get diversification. They already have oil, so they want the S&P 500 ex-energy.

Two years ago, they started saying, “Well, we’re not allowed to own Bitcoin, but how do we get exposure to Bitcoin volatility?” At that time, the way that was really working was many companies had raised capital in the U.S. markets that were Bitcoin miners—pure miners. They just were awarded coins; they kept them on their balance sheet.

The theory was that if you owned the equities, you could get exposure in a legitimate way to the volatility, and indeed, if you look at the price of Bitcoin vis-à-vis let's call an index of some of the popular ones, that would be Hud-8, Marathon, Riot, and Hive, which were very popular to be indexed, they really traded in tandem with Bitcoin, so it worked for a while.

But that's why I talked about the four vectors: that correlation is going to fall off pretty quickly now that we have, for the first time, calls for carbon audits. Most of the public companies in the U.S. that have been used for proxies have been saying, “Okay, we’ll just buy some carbon offsets,” and that worked fine, but now that the SEC wants to audit this, you can’t find an auditor that’s willing to sign off on that ledger because you can’t say, “I’m using, you know, dirty energy to mine coin, and I bought, you know, an acre of the Amazon forest,” and try and pass them off; it doesn’t work.

There's no way to audit carbon credits, so we are in a bit of a—let's call it a bit of a pickle right now. And I'll be frank and transparent on this; I have dumped all those stocks as soon as I read the executive order out of Biden.

Kevin: Which stocks are those specifically?

Roy: Specifically, we owned Hud. We were indexing some of our mandate. I can't own Bitcoin. I mean, I can own it personally, but if it's an operating company, I can't do it because we don't have a regulation or rule on that yet. And that's why most of it is actually held by high net worth and hedge funds like Roy's, where they don't have that compliance issue. I do have a compliance issue, so we indexed and it was working just great. Marathon, fantastic trading vehicle against the price of Bitcoin, Riot, Hud-8, and Hive.

And so they're good liquid stocks; they're easy to get in and out of. But I don't own a single share; I dumped them all. I mean, they are going to be forced; they're going to run into carbon audits, and their expenses are going to go up. We can talk about where capital is flowing, but it certainly isn't that model anymore.

Michelle: Okay, but before we get into that and touch on the ESG topic, which you were well ahead of the curve on, Kevin, I just want you to go back to Roy's macro hypothesis here and all the elements that he's brought into it, including this hyperinflation. Does it fit within your realms of possibility that we do hit that kind of high for Bitcoin in 30 years, or is that not even something that you think is feasible?

Kevin: You can’t say that it’s a zero. As Roy pointed out, his scenario when he talks about these extreme prices is hyperinflation—15, 20, 25 percent. I don’t know if that's going to happen, but I am on board with him on the train. As your friend on pricing, I think the reason we own so much Bitcoin and Ethereum right now—and 32 other positions—is I believe this sector will be the 12th sector of the S&P, as you pointed out earlier.

And I believe that you want diversification. When I own a sector like energy in the S&P, I have no position more than five percent. Well, I have 32 positions on, and my view is simply that Bitcoin is not a coin; it’s software. Ethereum’s software, Polygon, software, it’s alone, and software—all of this stuff is software.

So I’m just investing in software development that has the potential to provide productivity and the market will value it based on its scarcity in the case of Bitcoin, or the proposal of economic increase like Polygon reducing fees and friction, and you know HBAR being used by Boeing for supply chain management. All of these different scenarios—I don’t know which one’s going to work, but I don’t need them all to work. I just need a few to work, and I’m going to make a ton of money; that's the way I look at it.

Roy: Alright, how are you allocating your crypto portfolio at the moment? And I’d like to point out that you bought Bitcoin in 2011; I believe it was ten dollars at the time, and you also bought Ethereum in the double digits. So when we know Ethereum's at $3,100, so you've obviously called these protocols, coins correctly. Give us your portfolio breakdown right now.

Roy: Well, I’m a big believer in having the blue-chip names in any index and concentrating on those. So I think right now it’s a very tough call to pick us an altcoin—let's call them the number six to twenty coins.

Things like Terra, Solana, Polkadot, Avalanche, these are coins that have about 20 to 30 billion dollars in market cap. When we talk about Bitcoin, we’re at $841 billion; ETH is at $375 billion. So what that means is you’re looking at, for an institutional investor, something that has 20, 30, 40 times the liquidity.

And what this means is that if my scenario becomes a possibility—let’s say institutions go into the space—they’re going to go for the largest coins because that’s where the liquidity is. No one ever got fired for investing in cryptocurrency—in Bitcoin. Well, maybe they did—but if you have to explain why you picked Polkadot and not Avalanche, when Avalanche was the one that went up and Polkadot went down, that’s a much tougher call.

But buying the big market capital, I think, is the first step for most people; it’s the entry-level trade. But I think also because of the liquidity in this trade, that's where the money is going to go. And to me, the largest prize here and the offset idea, the moral good comparing compared to the carbon emissions and all the other things that might be bad about Bitcoin—the holy grail of this space is to give billions of people the access to lending, to investments, to savings, and to money transfer in a form that is supply constrained and ubiquitous all over the world.

That's never happened before. All of those things either were impossible from a good chunk of the world's population to access or they had to access it in the form of their local currency, which has enormous risk and can be devalued.

And in fact, if you look historically, almost or near or even exactly a hundred percent of all fiat currencies have been devalued by 99 plus percent over, say, a 200-year period. There are maybe only a couple of exceptions for that, and I think that's where we're headed.

In the United States, the value of the U.S. dollar is down about 99 percent over the last 120 years in real terms, and I think that's a risk that everyone faces. To offer the world billions of people decentralized finance in a stable currency, aka Bitcoin, is the big prize, and I think it's going to be Bitcoin that does it. It’s been demonstrated already technologically; I think that’s what El Salvador is seeing already.

Kevin: Do you agree? Do you see Bitcoin as the ultimate prize, the ultimate savior in this economy and in this environment?

Roy: I see it as the number one destination for institutions that are allowed to index it. When they can index it, they would be picking up one to three percent weighting if they could. They tried to do it, as I mentioned earlier, using equities that mine Bitcoin, and that's in a bit of turmoil because of ESG mandates.

But Bitcoin itself will provide enough liquidity for an institution. And I would add this: regardless of what you think your target price is, if it does become an indexed asset—and I think, once the SEC mandates it, it will—the volatility will decline dramatically.

Because what happens in an indexing model is when prices decline, and your weighting is one and a half basis points or 150 bips, you simply buy up to 150 bips maximum. When prices exceed that, then you trim back, but that provides tremendous stability for any asset.

So you find that stocks that get indexed or assets that could index— all of a sudden, prices go up and stability becomes part of what their story is for a very long period of time.

Kevin: Now, I’ll add that the Canadian regulator, specifically the OSC, in the last two years has been extremely enlightened. And they’re not—what I believe, this is a personal opinion, and I’ve said this before, but I believe that all the regulators talk to each other practically every day.

But there’s a special relationship between the OSC and the SEC because they regulate markets that are so similar in nature. And so I believe that whatever is going on in Ontario has already been quasi-approved by the brethren at the SEC. They’re using Ontario and the Canadian provinces as guinea pig states to try these ideas out.

And what ideas are those? The first ETF with the underlying asset real Bitcoin. The first ETF with the underlying asset Ethereum. The very first global crypto exchange attached to a dealer broker license, both sides regulated—that was extraordinary.

That was called Bitbuy. I know that one because, just a few hours ago, I wondered if I acquired 100 percent of it. So now, Wonderful, which has decentralized finance, has combined with centralized wallets; that's never been done before.

In addition to that, the OSC has made the order by which that was licensed public; many other jurisdictions are reading the 300-plus page document and using it as a blueprint for other jurisdictions like the United Arab Emirates, Brazil, Switzerland, and England.

So those regulators are marching ahead, making the assumption that there will be SEC policies. So if you’re an investor now, like I am and clearly Roy is, we take our positions pre the stabilization of indexing by institutions. Why? We’ll be rewarded for taking that position now, and when it happens, I don’t know—it could be six months, 12 months, 18 months, 24 months—who knows? But when it happens, prices are going nowhere but up.

Kevin: I completely agree with you. I think you're making a really important point about what speculators do. We recognize right now that the reason that prices for these cryptocurrencies are as low as they are are all the fear, uncertainty, and doubt that there is around them. And were those not to be the case, you suddenly have an asset that's worth 10 and 50X what it is right now.

So I think that's really a good demonstration of the role of what people who invest the way we do are for. I think you make another really good point about the Canadian regulators making the case for cryptocurrencies.

They also did something that I think we have to mention, which was they took the bank accounts of people whose behavior they didn’t like, and that if there were ever a use case for cryptocurrencies, that is a very, very dangerous place for anyone with assets to think that your behavior on the ground could cause you to lose all of your assets.

Obviously, Russian oligarchs are feeling the same way. And so I think when a government can come and take your money—be it reserve assets or your bank account, as a trucker—that’s a time when you want to have your assets everywhere in a highly protected place.

Another reason I want to augment your point about reducing volatility: why these things will be less crazy to own. They’re not going to go up five and ten percent and down five or ten percent in a day anymore when things stabilize. The reason for that will also be the development of a robust derivatives market.

We saw this happen with the S&P; as the options market developed, any market that has a robust derivatives market will decline in volatility. And if anyone talked to me three years ago, you know how much I was complaining about no volatility in the stock market? There will be a time when people complain about the lack of volatility in Bitcoin.

Roy, does this lack of volatility mean that you're both anticipating, mean that the potential for dramatic price appreciations are also going to be gone?

Roy: Absolutely. One of the risks right now when you buy Bitcoin is it’s going to go down 50 or 90 percent. We just had a, what, 70 or 80 percent decline two years ago. Right around this time two years ago, Bitcoin was trading in the three thousands, even slightly below. So one interesting piece of it is that ninety percent of the wealth in cryptocurrencies has been created in the last 24 months—it's that new.

And a reason why we’re also today going to be talking about decentralized finance and all the opportunities is that approximately $2 trillion in wealth has been created mostly over the last two years.

Kevin: Alright, Roy, you’ve touched on two big themes here: regulation—rather, Kevin, you’ve touched on two big themes: regulation and ESG. We know Ethereum, the second biggest crypto by market cap, has a very significant development expected in June for Ethereum ETH 2.0.

That's expected to launch, and that’s expected to be the merge of the blockchain's proof of work and proof of stake chains, which reduces its energy consumption dramatically. Now, Kevin, you again have long stated that institutions focused on ESG compliance and regulation have been holding back because of this ESG concern and the rise of ESG has put the inefficiency of Bitcoin’s proof of work model on investors' radars.

Just recently, the European Union considered banning Bitcoin because of its environmental impact. So now we have ETH 2.0 merging proof of work and proof of stake, and that is expected to reduce energy consumption by about 99 percent.

So, Kevin, do you think that ESG concerns will then take institutional money out of Bitcoin and into Ethereum?

Kevin: So let’s just dissect that. Because you've made a few statements there that are very important. Let’s just talk about Ethereum 2.0. That has been on the calendar for over two years, and it’s always just coming to a theater near you.

And the reason it doesn’t happen that quickly, and probably won’t happen on schedule here, is not everybody within the ETH community agrees with this move, and there’s a bunch of stakeholders that don’t benefit from a move like this.

Removing, you know, proof of work to prove stake is not going to be to everybody’s benefit, so that fork in the road could be a bump—not just an upside—and so I don’t know the answer to that.

ETH remains the platform of, you know, the standard if you wish, but at the end of the day, it doesn’t mean it’ll be successful. Let’s go back to the comment regarding all of this policy around ESG. It is remarkable that you have both government policy and private policy dictated by the BlackRocks of the world and corporations making claims of carbon neutrality, that all of this would be happening at the same time that it takes a lot of energy to actually be awarded a coin.

And here’s why I argue to investors and institutional investors why it’s a good thing that there is proof of work. I’ll walk you through it. Alright, in America, 85 percent of the dams that were created in the last 150 years contemplated turbine power; however, 85 percent of them, the turbines were never installed.

Now, whose economic interest would it be to go back and install those turbines to get access to 100 percent carbon neutral power? I’d argue that is going to be capital that would set up data centers and mine Bitcoin with 100 percent hydroelectricity. In fact, that has actually happened already.

The capital that actually did that was sovereign wealth out of the Middle East. In Norway, they’ve built out a facility on its way to 300 megawatts, and we’ll see that. I think they’re up at 40 already; they have been hashing coins since December.

It’s the new model; they call it the Norway model—100 percent compliant. The actual institutions are not allowed to own Bitcoin that actually funded that thing, but they’re keeping every coin they’re awarded on the balance sheet.

And they’ve done one thing else, which I think will become part of the new model, and I’m arguing now for why capital will pursue this. They’ve been able to figure out a way to take the network awards that you can never allocate to where they came from; they could come from China, wherever, and actually remove them as what they call slag from the coin that was awarded.

So what is sitting on the balance sheet of that company called Bitzero? It’s their first facility, but they’re contemplating ones in Upstate New York, Tennessee, Montana, and the amount of capital they’re going to burn up doing this is hundreds of millions of dollars.

But it's there from institutions that are taking their money out of the public stocks that are going to get audited. So I’m arguing that Bitcoin mining is good for sustainability, it’s good for longevity, it’s good for productivity, and it’s going to do something that’s really important for America.

It’s going to put those turbines back in those dams because that’s the number one use, and then they'll let the communities use excess power when it’s needed. I think this is a good thing, and this is going to be one of the big topics that you’re going to hear about at Bitcoin 2022.

In fact, there are multiple keynotes around this whole issue because of the squeeze happening right now on this ESG thing, and ESG has to be dealt with—the private sector, the public sector, the president, the Loomis—all of these bills, the SEC—they're coming down hard on carbon and carbon audits, and it’s going to affect this industry in a really, I argue, positive way, except if you’re an existing Bitcoin miner that is using carbon credits, then you’re screwed.

Kevin: Alright, so Kevin, let me understand this because we know that Elon Musk, Michael Saylor—they launched the Bitcoin Mining Council last year in response to these ESG concerns.

We've had several guests on Kitco saying what you're saying: that Bitcoin mining is actually facilitating the development of green energy resources because it's funding these projects, so it's good for decarbonization in the sense that, as you're saying, it’s funding alternative sources of energy.

Does it come to a point though that boards looking at ESG then view that as a positive and saying we'll invest in Bitcoin because it serves to promote development and funding of clean energy sources? Do you see that flip happening?

Roy: Not yet. The only funds that have done this have been sovereign so far. I think it will happen. I think after the Norway project is proven, which would be in about 12 to 14 months, that will become the model.

That same model will show up in Montana, upstate New York, and Tennessee—everywhere where there’s excess power available—that's the model that they’re going to use.

Now, the fact that you’ve got institutions funding it—and the reason I know this is I actually became an Emirati citizen six months ago just so I could vest alongside them, and I’m very proud of that—but I own a piece of that Norway facility, and that, for me, solves my problem.

Nobody can give me an ESG audit; there’s nothing to audit; I have no carbon. There’s zero, zero, zero carbon there. So all of this noise that’s coming at everybody about this, I’m saying what carbon? We’re just using hydroelectricity, and we’re doing it on a sustainable model.

And we’re providing for the university up in Norway access to high-speed computers, and on top of this—I mean, you couldn’t even dream of when they built it—they put beside it a hydroponic stack for tomatoes and a canning plant, and they take the heat off the stacks and grow tomatoes. Talk about community; I mean, they don’t want to lose that Bitcoin mine.

Now, it’s not one of these miners that rips into town, mines some coin, gets awarded, and blows out. These guys have long-term power at under four cents a kilowatt-hour. So the whole point is that is the model, and I think that’s what’s going to solve this problem for POTUS’s executive order, what Larry Fink wants to do, what the SEC is doing.

But right now, as you pointed out, nobody—very few institutions are taking that—they’re just staying away from it completely because they’re saying ESG mandates too scary, carbon audits too scary, SEC too scary, you know, we don’t want to lose BlackRock in terms of managing our funds—all of this stuff—and we’re going to wait for the Loomis bill to come out.

So right, we’re in the transition period. Roy pointed that out, but I bet you when we have this conversation, the two of us again in a year, it’s going to be remarkably different.

Kevin: Alright, I completely agree with you. I actually think that there’s even more optimism here because I actually run an Ethereum mine in Upstate New York, and it's getting so expensive right now that you basically can’t do it using hydrocarbons.

And that’s what’s happening all around the world. The increase in the oil price and the resulting increase in energy costs has meant that unless your power is essentially free, you can’t do it—and hydrocarbons will never be free because there will always be a demand for hydrocarbons.

Alright, what does this mean? It means hydro, and it means potentially even Gen 4 nuclear is going to be the source. But I also want to put this in perspective here: I think most people have heard a lot about Bitcoin and all the terrible energy use of Bitcoin.

The total energy use of Bitcoin—just think for a moment—what percentage of global energy, of global carbon emissions, come from Bitcoin? But what would you say that number is?

The answer is 1/500th. The gold mining industry is three times the carbon emission of Bitcoin; airplanes use 50 times the carbon emission of Bitcoin—and so on. You can—I mean, so my point here is that there's a flip side to this.

There’s a social good—billions of people having access to stable investments, etc.

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