WBD304 Audio Transcription

WSB, Bitcoin & Ethereum with Lyn Alden

Interview date: Friday 29th January

Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Lyn Alden, a macroeconomist and investment strategist. We discuss the Bitcoin price action, retail investors/WSBs and Lyn’s economic analysis of Ethereum.

“I wouldn’t be surprised to see over $50k this year… you hear some of these really high targets and it is hard to put those aside.”

— Lyn Alden

Interview Transcription

Peter McCormack: Lyn, I know it's the end of January, but Happy New Year!

Lyn Alden: Yeah, you too.

Peter McCormack: Did you have a good break?

Lyn Alden: Yeah, pretty good.  How about you?

Peter McCormack: Yeah, pretty good.  So, last time we spoke, Bitcoin had just set an all-time high; about $22,000 we were at when we last spoke.

Lyn Alden: Yeah, I forget the exact number, but yeah, sometime in December, so it must have been a lot lower.

Peter McCormack: Yeah, and then we ran up to $42,000, then we jumped down to like $28,500, $29,000.  Now we're quite comfortably back around $34,500-ish.  How do you read all this; what's your take on all this?

Lyn Alden: Well, if you look at a lot of indicators, it was kind of near to overbought by a number of indicators, so it's not really surprising to see.  We've also seen somewhat of a bounce in the dollar, and so basically there might be a slight kind of risk off in some of these markets; so I think that's healthy.  And for example, one thing you put out last time is, I think you asked, do I miss going all in on it; and, that's the type of thing why I prefer to distribute in a couple of different asset classes, so when we get those volatility events, it's more easily manageable.

Peter McCormack: Yeah, well I am all in and more, but that suits me.  I mean, I read your reports; they're excellent by the way.  If you're listening to this and you haven't checked out Lyn's reports, go on the show notes; you should check them out; they're amazing.  But for me, it would be far too complicated to have such a diverse portfolio; I wouldn't even know where to start with managing it.  It's just much easier to protect one asset.  It does put a lot of risk, but I like a bit of risk.

Anyway, look, we've got lots to talk about.  I do want to talk about the general market stuff, because you always do an amazing job of explaining what's going on.  But, I do want to talk about Ethereum, because you've kind of created some enemies, not on purpose.  You've done probably one of the most detailed write-ups of Ethereum, which is very, very good, and I've also read the reply from the Bankless team, but I do want to touch on that.

But, let's start with the macro stuff.  So from your side, what's going on; what are you looking at right now?

Lyn Alden: Well, there are a couple of different things.  One is, we're starting to see extraordinarily high levels of speculation in markets.  So for example, if you look at the evaluations of unprofitable tech stocks, if you look at, in the US, small trader call option buying, kind of Wall Street bets, Robinhood style, that's basically off the charts; I mean, we've never seen anything like this.  You have to pretty much go back to 1999 to find something, anything kind of similar.

If you look at the put-call ratio, that's extraordinarily skewed towards calls, so basically there are multiple indicators showing that people are going all in.  We're also seeing margin debt go up a lot, so people are just taking a leverage option or leverage based bets that the assets keep going up.  And so, those are always tricky times, because we are having a currency issue at the moment.  People, they can go into assets, or they can go into, for example, treasuries or bank accounts that are yielding less than inflation; so, there's basically a rock and a hard place.  But, whenever you get to a period where it's overleveraged or overbought, the amount of risk in the environment goes up, for having some sort of volatility event or something like that.

We're also seeing a little bit of a bounce in the dollar compared to other currencies.  So if you look at over the past, say year, the dollar has been very inversely correlated to most risk assets.  Whenever the dollar's falling, they're going up; and, whenever the dollar kind of has a sideways consolidation or a little bit of a bounce, that's when you also tend to see a consolidation or a little bit of a pullback in some of those risk assets.  So, that's something I'm monitoring at the moment.

Peter McCormack: Right, couple of questions there, because some people listening might not know.  Can you just explain what a "put" and a "call" is, so people listening understand; and then talk about what that ratio is that you talked about?

Lyn Alden: Yeah.  So, a call option is basically a contract where you basically agree that someone will sell you shares at a certain price.  So, if it gets to expiration without the share price getting to your target price, that option expires worthless.  So, it's not something you buy and hold; it's something where you're making a specific bet that a stock or ETF is going to go up to a certain price by a certain date, so they're mostly short-dated options.  There are ones that stretch out to a year or more, but the vast majority of them are pulled forward to days, weeks and months.

A put will be the opposite.  It's another way of shorting a stock essentially.  You can basically bet that the share price is going to go down by a certain period of time.  A lot of people use that as hedging, so they might be long on the market and if they want to de-risk a little bit, instead of selling their positions and generating capital gains, they could have a small put position to kind of offset some of their long position.  So, they tend to be a little bit more sophisticated used, and you can over time look at -- there are a couple of things.

One is, you can look at the percentage of the volume that's being moved by small traders buying call options, which right now is record highs.  And then also, you can look at the put-call ratio to see how many people are buying puts compared to how many people are buying calls.  And, it tends to be a contrarian indicator.  So, if a lot of people are buying calls, that ends up being a good time to buy puts.  And, if a lot of people are buying puts, that ends up being a good time to buy calls, or simply go long on the market.

Peter McCormack: How do they differ from futures?

Lyn Alden: Because it's basically more of a leverage bet.  So futures are, you're betting on the direction of something and then you can lever it up; whereas this, you're betting on -- it's a contract that says, for example, let's say a share price is $100 right now and I could say I want call options that are for a strike price of $120 three months out; and I might pay $5.  And, if that share price goes up to $150, I made a lot of multiple on the little $5 I put in.

But, say it closes at $112 three months from now, so never got up there, my $5 then has just completely vanished.  So, they can be used sophisticated because you can have a very small position.  They can actually be used to reduce risk if you use them in a sophisticated way because, instead of putting a large chunk of your portfolio in something, you can have a small bet that something's going to basically be asymmetric.

But, if they're used kind of willy-nilly and you just go all in with these YOLO calls, right, you just kind of say, "I'm going to put a third of my net worth in these call options", that either can ruin a portfolio, or you can go up 10X.  And, that's the kind of speculation we're seeing at the moment.

Peter McCormack: The dollar thing's quite interesting as well, because I'm looking at the chart here; and back in March 2020, it was 86 pence to the $1 and now, we're at about 73 pence.  For me, as somebody who most of my clients are in America, that's actually not very good for me.  I've lost every month essentially from that point.  I mean, that was a bit of a spike, but I've lost about 10% of my income by the fall in the value of the dollar.  What is actually going on with the dollar; you said there's a bit of a bounce right now?

Lyn Alden: Yeah.  So, if you look at specifically this past, say, month or so, so if you kind of go back to the whole year, we had that big spike in March; and so the dollar index, which is the way I -- because, you're comparing basically one currency to another currency, whereas I'm referring to the dollar index, which is basically comparing the dollar to a basket of currencies.  The euro is the biggest component, but the pound is in there, the yen is in there.

So, that peak did something like 1.03 back in March during the heart of the liquidity shock and pandemic.  And then, when the Federal Reserves released the floodgates, you know, they released the crack in liquidity, that came down pretty sharply; so, that fell back into the high 90s.  Then it had some pretty disorderly decline.  It touched down into the upper 80s at one point.  And it had a couple of consolidations.

So, for example, this past summer, it went down in the summer, but then it levelled off a little bit, and that's where we got some kind of correction in some of these risk assets.  We started to see oil stocks roll back down, we started to see all sorts of things kind of go sideways a little bit.  And then, it kind of had another sharp decline, the dollar, and so that was another boom for risk assets.

Lately, we've been seeing again, it's back in the low 90s, so we're seeing a little bit of a bounce and a consolidation here.  That's normal, because things just don't go straight up or down forever, but that's something that people can be aware of if they're trying to understand why certain positions might have some turbulence.

Peter McCormack: So, it sounds like to me, you say there's a lot of leverage, there's a lot of margin debt, there's this ratio of put-calls; so, it seems to imply that you're saying there's a lot of risk-taking.  Is this a typical thing early in the year, or is this a response to something else?

Lyn Alden: So, if you look at the chart, this is actually pretty unprecedented.  It seems to be tied to the massive amount of stimulus.  So, if you look back prior to March 2020, we started to see some overheating back in kind of late 2019, but it wasn't very significant; and then, it all got kind of rekked in March of 2020.  But then, in the months that followed, when you had stimulus cheques go out and you had all this, you know, money supply go up 26% year over year, then you started to see this massive vertical boom in the amount of call options, the amount of penny stocks being traded. 

Pretty much, anywhere you looked for ways to quantify how much speculation's happening, all of those just went vertical to places we haven't seen for at least ten years and, in some cases, all-time highs.

Peter McCormack: So, we're just in crazy season still?

Lyn Alden: Yeah, pretty much!

Peter McCormack: When does this end?  It feels like we are heading towards some kind of financial implosion?

Lyn Alden: Well, that's always the tricky thing.  For example, if people were monitoring what was happening in the late 1990s, there were multiple parts where it was excessive; and then, it got even more excessive.  And so, you never kind of know ahead of time when exactly it's going to roll over.  It could be that stimulus stops coming out, or transforms from, for example, stimulus cheques to infrastructure, or something like that; so, it's kind of a slower money that doesn't just enter in the Robinhood accounts.

Basically, there could be various shocks along the way.  They just kind of exhaust the amount of money being poured into markets.  And, it's one of the things where, while it's going up, it's a virtuous cycle; so, it feeds on itself; it pushes higher than you think; but then, if that were to reverse for any reason, that can plummet pretty hard.  And, I think it's important to separate with what's going to happen with high-quality assets that are appropriately priced, compared to some things that are just bid up from pure speculation.

We're also seeing Wall Street bets, for example, they're targeting stocks that are highly shorted, which is actually a pretty smart strategy.  The SEC might eventually be looking at that sort of thing, because it's kind of coordinated behaviour in markets; but, for example, if you look at the company GameStop, which is a classic retail kind of -- it's being displaced by the digital distribution of video games and things like that.  But, it was a highly shorted stock and it's another contrite indicator that stocks that are too highly shorted end up, you know, if they have a bounce, it means that some of those people shorting it have to cover their short, meaning they have to buy their shares.

So, for example if you look back a decade ago, Volkswagen briefly became the most valuable company in the world, because its share price --

Peter McCormack: Yeah, I remember.

Lyn Alden: Yeah, they took a massive short squeeze.  And we're seeing a smaller scale, but something similar with GameStop where it's up dramatically, because all these people are piled into it on the short side; and then, a bunch of these creditors saw that and said, "Well, let's just all buy calls and let's all buy shares and just drive the price up and force them to keep covering", and then it becomes a self -- then, even more people have to cover and then people can keep buying, until it hits a breaking point and just has its vertical blow-off top.

Peter McCormack: So, what would you say right now then is appropriately priced?  If people are listening to this and they're thinking where to invest, I'm obviously telling people in terms of Bitcoin.  People might not have the sophistication that you have, but where are things appropriately priced, because I think stocks right now are a very hard thing for somebody who isn't experienced in the market to come and invest in?

Lyn Alden: I think from, say, a five-year perspective, I think a number of non-US equities are reasonably priced.  And in general, both in the US and elsewhere, stocks that are more on the value side of the spectrum are reasonably priced.  And, that's where people will debate whether or not they should be cheap or are they dying, for example.  You can have something called a "value trap", where everybody says, "Oh, look, it's cheap.  It's got low price to book, low price to earnings", but then those earnings just kind of bleed out and the industry's dying and then it's over.

Or, if you look back in history, if you look at high-quality companies, when they get cheap, that tends to be a good time to buy.  And so, I'm seeing that some of the more cyclical, industrial type of things, they tend to be pretty cheap at the moment.  And, anything that's outside the United States in the form of the equity market, so for example, there are fairly high-quality Japanese stocks that are trading pretty cheaply; there are emerging market stocks that are trading pretty cheaply; that's where the areas tend to be because a lot of capital has kind of concentrated in US equity markets.

Now, it's different from real estate, because real estate's not liquid.  And so, a lot of these markets that have fairly cheap equity markets tend to have highly-priced real estate markets.  And so, specifically the equity markets in some of these non-US places are more reasonably priced.  A number of commodities, I think, are still reasonably priced.  We've had a big run up, so I wouldn't be surprised to see pullbacks or consolidations. 

But, from a historical perspective, compared to other things, like US equities or something like that, commodities tend to be pretty cheap at the moment.  And of course, I remain bullish on Bitcoin.  You can't necessarily call that expensive or cheap.  But as a percentage of what I think it could grow into, I would still classify that as a positive, asymmetric bet.

Peter McCormack: Have you bought anymore Bitcoin?

Lyn Alden: Yeah.  I've been dollar cost averaging a little bit.

Peter McCormack: Good.  While Michael Saylor million dollar cost averaging; what was it, $10 million he put in the other day? 

Lyn Alden: I think so.

Peter McCormack: Okay, what about in response to the Biden administration; what are you seeing with regards to policy from them; how are you reacting to that; what can we take from their administration so far?  Obviously, we've seen there's a potential for huge stimulus plans.  I've also read about them cancelling this pipeline, and that's going to have an impact on jobs in the oil industry.  What are you taking from the early days of the Biden administration?

Lyn Alden: It's pretty early to tell so far, but basically they're looking for a multi-trillion dollar stimulus package; so that includes faster money up front, and then they want to get into more infrastructure stuff.  And that includes green energy; that includes all sorts of things.  He also, I mean, they're moving to reduce the amount of oil that can be drilled on federal lands.  Last I checked, there's something like 10% of US production.

But, there's always nuanced stories.  So for example, a lot of the drillers already have permits to drill on federal land; and so, just because they don't issue new permits, doesn't mean that tomorrow, drilling on federal land stops.  It means that it kind of, over the next three to four years, if they were to keep that freeze in place that whole time, that would drop off over time.  And therefore, US energy production would maybe level out or decline, because they'd only be able to drill on privately owned land.

So, that's one thing I'm watching.  You mentioned the pipeline as well.  And I think the biggest news, as it effects the dollar or markets, is what they're going to do with stimulus because so far, the United States has done more stimulus as a percentage of GDP than most other countries; and, they still seem to feel the need to do more.  And, if you look at who's impacted, there are still tons of people out of jobs, and so that creates a socio-political aspect.

We've seen, for example, rising tensions, different types of populism, both from the left and the right.  People express their frustration in different ways.  And so, they're looking to do another round of stimulus cheques and then pile on top of that over time, more and more infrastructure or green energy things.

So, a couple of things to watch is that, the Senate is really split, because it's 50 people that caucus with the Democrats; 50 people that caucus with the Republicans; and then, in that situation, the Vice President is the tiebreaker vote.  But there are, for example, a handful of Democrats that lean more Conservative, so it's not like, you know, we don't for example have the Progressive wing versus the Conservative wing; it's not like, the left side of the spectrum is completely in control of the Senate; it's actually a centrist Senate.  So, it's going to be interesting to see what Joe Biden is going to be able to get through that group.

Peter McCormack: Another interesting thing I found in your report which I read, and I don't want to take too much from it, because I think other people should go and subscribe and read it; but, at the same time, when you talked about COVID, or you talked about post-COVID, because people talk about this return to normal.  But, you talked about the fact that we might have a fundamentally different economy; we may not return to the same old world.

I think one of the big impacts is obviously in terms of geography; people feel like they can live anywhere; feel like they can set up business anywhere.  We've seen what's happening with the Mayor of Miami drawing people in.  I think I just read today Peter Thiel bought two properties there.  We've also seen this migration of people to Austin and to Wyoming. 

What other things are you looking at in terms of a post-COVID world; what other kind of dynamic changes are you expecting, or let's say, looking out for?

Lyn Alden: That depends on what timeframe you look for.  So, the harsh reality from the beginning is that the amount of jobs to get back to the number of jobs we had, in a recession; that normally takes years, and this was a bigger decline than most.  Different countries of course have different metrics; so for example, the United States had a pretty sharp decline in jobs, so it was going to take a long time to work that back. 

In the meantime, there are a lot of tensions, especially because we've seen that, you know, they keep calling it the K-shaped recovery where, if you can work from home, if you work in tech, basically if you have a higher income situation, you're generally pretty okay; whereas, if you were working in a blue collar hands-on capacity, you tended to suffer more; or, if you were running a small business that was reliant on having a physical presence.

So, we're seeing kind of a somewhat permanent destruction in small businesses; so for example, it's not like every restaurant that closed is going to reopen.  So, that's a really big challenge there.  And then you have, beyond that, as people can work from home more, we're seeing less of an interest in working in these key hubs like New York or San Francisco, and more willingness to move to secondary cities or in some cases, more rural areas.  But especially, those secondary cities that have far cheaper places to live while also, because of things like zoom and other things like that, they still have full access for the most part.

We're also probably seeing some impacts on business travel for similar reasons, where leisure travel's likely to bounce back, because that's not something that can be replicated on zoom; whereas business travel, at least a percentage of it could be displaced.  So, there are always people going to want to go to conferences and network in person, or go to business dinners; basically interface with executives real time.  But, there's a percentage of more kind of grindy corporate work that can be done remotely.

Peter McCormack: Well, yeah, I mean I used to travel relentlessly with work prior to COVID.  Every other month, I would be away for two to three weeks.  I'm certainly not returning to that, to the additional cost; I've adjusted.  I think, once you've adjusted your business and you've come to terms with this new world, why bring back that cost?  I mean, I do want to travel, but not like I used to.

Are we seeing anything in terms of inflation numbers, because I know here in the UK, we haven't seen a huge growth in the inflation numbers, but we do have record borrowing?  I think the last month was the third biggest since something like World War II.  But what we are seeing is things like, for example, house prices here seem to be going up quite significantly.  Are you seeing anything in inflation; are there ways that government is hiding inflation numbers?

Lyn Alden: So, we're primarily seeing asset price inflation; so, anything that's considered a financial asset, like real estate, equities, digital assets in this case, all sorts of different assets that people can own and consider a long-term financial thing, those have basically been skyrocketing.  And so if you look at Apple stock, for example, not just in terms of price, but in terms of actual valuation, like price-to-earnings ratios, or price-to-sales ratios; it's far more expensive than it was 12 to 18 months ago.

So basically, people have just re-evaluated that and been willing to pay a much higher price for it because they don't want to be in cash, or they think it's going to keep going higher, whatever the case may be depending on the trader in question.  And, we're starting to see some inflation around the margins; so for example, we're seeing commodity prices start to wake up.  So, copper's up to something like an eight-year high; iron's up; beef is at all-time highs and twice as expensive as it was two years ago.  Back then, two years, it was also at all-time highs.  So, it's not like it was a big dip that it increased from; it was already expensive two years ago and it just doubled.  So, we are starting to see some of that.

We're also seeing the cost of shipping on a container ship; that basically went vertical.  If you look at the price to ship container ships from China to UK or to the United States, that absolutely went vertical because of the shortage.  So, we're starting to see a combination of supply chain limitations running into the fact that money supply increased by 10%, 15%, 20% or more, depending on what country you're talking about; we are starting to see that.

The one thing, or the two things that are really holding down official CPI are, one, is that oil and gas prices are still quite low, and that commodity market is far larger than other commodities and that kind of trickles into all sorts of manufactured goods and stuff like that.  And so, until that were to tick up, that can help keep inflation modest.  And then, two, because we're seeing a destruction in some of these service sector jobs, we don't see a lot of people spending super freely. 

Now, you see a subset of people speculating on markets if they're already comfortable, but you don't see a lot of people that are kind of living paycheque to paycheque going out and buying stuff, because they're having enough trouble as it is paying rent.  And so, we're not seeing that kind of broad uptick in energy prices or general spending, but we're seeing it in all the places where it otherwise can show up, like financial assets and EX-Energy commodities.

Peter McCormack: Okay, I've got two questions.  I saw your mention of the shipping costs, but I also saw an article in the UK that the cost of shipping a container from China to the UK, I think it's gone up from £1,800 to around £10,000, which is a massive increase.  And I specifically read about a lady and her business, that she has her lighting business; she has the light fixtures manufactured in China and essentially, she can't make a profit now, which kind of blew my mind.

So, first question is, why are these shipping costs going up?  But the second question I have is, just a separate one.  When you talked about Apple stocks and people putting money into Apple stocks, look, I don't trade stocks and shares.  I looked at it before a few years ago and what I would do, I would spend time reading the Financial Times and looking on websites and trying to find tips, and I would do a little bit of research; try and understand what is cheap and what is overvalued.

With things like Robinhood, have we essentially removed the friction to investing in stocks; and, have we essentially flooded the market with lots of inexperienced investors?  We now have TikTok investors, which blows my mind; and essentially, is it a much more immature market now and therefore, is this why the prices are being inflated?

Lyn Alden: Yes, definitely to some extent.  So for example, if you look at, over the past decade, we didn't see a lot of retail participation in markets.  There was a lot of institutional; there were a lot of corporations buying their own shares back; but, we didn't really see that frenzy.  The last time we saw that retail frenzy was in the late 1990s.  And so, for the first time, we're starting to see that and that started to show up a little bit in 2018/2019, because as you point out, Robinhood reduced the friction.

That of course spreads to, now it's pretty common, at least in the US and some other countries, to have zero-commission trades.  So, you see some of the smaller investors kind of flipping around in stocks a lot more than they used to, so you're starting to see a number of trades going up in 2018/2019.  But, 2020 went completely vertical; they basically quadrupled or quintupled.  It wasn't, say, 50% increase; it was a multiple increase.

So, that's the combination of that frictionless access point, plus basically just a flood of liquidity coming out, people getting cheques.  And then, they treat the cheques differently than if they had earned them.  If you just kind of get this thing you're like, "Well, I mean the market's going up, I don't want to be left behind", so you put it in the market.  So, we're kind of seeing that behaviour.

And, your other question about shipping containers, that's kind of a niche thing.  So, there are people that are experts on the shipping industry that can dive into that more than I have.  I haven't done a deep dive on that particular issue, but my understanding is, it's basically related to supply limitations of those containers.  And so, it could have been COVID-related; it could have been supply chains are reorganising; I don't have the specific reason.  But, when you have that bottleneck and then you have that demand that kind of comes back and you have money supply growing pretty substantially, if you have an inelastic supply, then the price can just go up 3X, 4X, and that's just kind of what we've seen.

Peter McCormack: All right, so I want to talk a little bit about Bitcoin before we get into Ethereum.  Again, amazing!  I felt like Bitcoin over $30,000 felt fairly stable.  I know we had a big drop, but I still feel like it's been fairly stable.  I didn't have any fear in myself to sell.  My dad tends to phone me every couple of days and panic and say, "Pete, it's fallen from $42,000 to $30,000, what's going on?"  I'm like, "Dad, we were at less than $10,000 a few months ago".  But, it feels pretty stable.

It does also still feel to be very much driven by an institutional interest, Grayscale are buying a lot; what's your read on it right now?

Lyn Alden: Yeah, so we started to see a consolidation.  We had that correction at first and then we started to kind of level out.  And then we had that perfect storm.  We had a number of central bankers or officials come out and say it's essentially an illegal activity and needs to be clamped down upon, so that probably wasn't great for the narrative for a couple of days. 

Then we saw inaccurate reporting about the double-spend situation, which is a block reorganisation that got misunderstood by the media.  And so, that seemed to have coincided with that really sharp capitulation that we had.  And, it's been bouncing back and so, it's important to watch.

Now, most of the indicators that are commonplace during these bull markets, they still look reasonably healthy.  So for example, if you look at the percentage of Bitcoins that haven't moved in over a year, for example; that still indicates mid-bull market.  If you look at some of the overbought indicators, like say market capitalisation compared to realised capitalisation; those were looking somewhat heated before the correction, because we had that really sharp run up from just December into early January.  But, they weren't looking, say, like blow-off top kind of halving cycle high; they were just looking like correction territory.  So, we did let off some of the steam there and return down to levels that it can start building up from again.

And of course, it remains to be seen if it's going to happen, but we are still seeing strong, institutional buying.  And Grayscale had this thing where they were on a hiatus, where they weren't buying; they tend to do that sometimes.  But, they started buying again and they've had some record inflows.  At the same time, Michael Saylor is getting ready to host that conference to basically shill the idea of Bitcoin to corporate treasuries, to give his playbook and his pitch on why they should have a -- I don't think they're going to go all in like he did, but basically why they should be more like Square and have Bitcoin on their balance sheet somewhere.

Peter McCormack: Yeah, well we had another one announced today, and also he's really upset Peter Schiff again; Peter Schiff's not very happy about this conference that he's going to be doing, but it is what it is.

I feel like it's very structurally similar to the market back in 2017 and CryptoCobain put out a chart that was a very similar chart to 2017; this first 30% drop.  I feel like the market's pretty strong, but this increase in FUD is quite interesting in the volume that's come out, because it isn't just with regards to the double-spend FUD, or it isn't just with regards to the central banks; but, we've seen an increase in articles from the likes, in the UK, of The Times, The Guardian, The Telegraph and just nonsense articles.  And, we've seen a massive increase in this and it's really frustrating.  But, I guess a sign of the market, similar to how and your and my replies are full of Winkelvoss promotions and Elon Musk promotions, which is relentless. 

With regards to the Tether stuff, how much have you looked at that?

Lyn Alden: So, I've looked at it pretty significantly and it's just kind of interesting to watch, because that came around last time too.  I wasn't really active in the crypto space back then, but I know just from history that came up again; so, we are starting to see that.  Actually, I've gotten so many emails about that, I basically have a template email that I just kind of have so I don't have to rewrite a response every time!  So, that shows the kind of fear in the market about that, or at least a segment, because that article seems to have gone pretty viral.  That definitely touched a lot of nerves of people.

Peter McCormack: Yeah.  The article that's from an anonymous person who managed to buy the bottom and sell the top!

Lyn Alden: Well, maybe he's buying back now.  That's the thing; you don't know who's putting out that information.  But basically, what we've seen from Tether is that they, like most stablecoins, they claim to be backed.  What exactly that's backing it is open up for questions.  We're seeing the legal action against them, to some extent.  But, the overall arguments range from the extreme to the mild.

So, the mild cases are pretty acceptable.  You know, they should be audited; do they have 100% backing; what does the backing consist of; things like that.  So, is it something that people should use?  But then, when you get into the extreme end of the side, it's the claim that nothing is going in; they're purely just printing tens of billions of dollars' worth of Tether; and that's entirely responsible for blowing up the Bitcoin price.  Even though, if you just look over the past year, Grayscale alone pretty much bought as many Bitcoins as were mined that year. 

Then, if you add MicroStrategy and PayPal and Cash App and all these others that are just buying and putting it into cold storage, that had to come from the existing market, because they bought more than were mined by a significant percentage; and so, that had to come from existing holders.  And so, you had that natural kind of supply and demand characteristic.  So, I think it's normal. 

I think some degree of FUD is healthy because otherwise, you get this euphoria, you kind of pull forward all the gains, you get this blow-off top and then you have this big problem.  But, they call it the "wall of worry".  It applies to stocks; it applies to pretty much any type of asset that is in a healthy bull market, that it goes up and then you have some concerns and you have a pullback; then it goes up again, and you have more concerns and people debating about their valuation, debating about the merits of the asset

We're starting to see that to some extent where you have people -- I'm getting emails about quantum computing, emails about Tether, emails about, "What if it's banned?" all sorts of things.  Some of that is healthy, except when it goes viral and people panic sell.  We actually saw, for example, when Michael Saylor bought that dip, there was actually another company that sold a couple of million dollars' worth of Bitcoin, and they had just bought it like a month ago.

Peter McCormack: They made $200,000 profit.

Lyn Alden: Yeah, so they were, I guess, a weaker hand.  And I think they cited the supposed double-spend attack without realising it's a block confirmation issue.  Block reorgs happen and if you want to have a payment be finalised, you have to wait a certain number of blocks.

Peter McCormack: Yeah, institutionally weak hands, I call those.  I thought that was kind of interesting, but probably the wrong company to be buying Bitcoin if they're going to panic in that way.  Okay, very interesting.  I should probably, if you've got those templates ready, can I just forward all my emails that I get to you then, and you can reply for me?!

Lyn Alden: Hopefully not; I get so many!

Peter McCormack: I get the same ones.  I get the kill quantum ones, I get the same.  Today was miner centralisation.  I've also been talking to Mike Green.  Did you listen to his show with Nic Carter yet?

Lyn Alden: I got the first half; I didn't get a chance to see the second half.

Peter McCormack: The second half is mainly Tether.  I thought it was an interesting chat.

Lyn Alden: Yeah, I mean the first half that I listened to was not about, is Bitcoin going to be successful; it was more like whether or not it should be successful.  I mean, Mike Green's argument seems to be that he doesn't want it to be successful.  He thinks it would be bad if it were successful, rather than he thinks it won't be.  It was more of a moral argument than anything else.

Peter McCormack: Yeah, well he feels it's a risk to the US dollar.

Lyn Alden: He feels it's a risk to the dollar; he feels it was unfairly distributed; he had a number of points that he thought were more moral, in his view, rather than maths-based, or an assessment of what the market's going to do.

Peter McCormack: Yeah, well I felt like his giveaway was when he said, if he'd listened to his wife's opinion, he would have been on the same side of the table as Nic, which kind of irks back to the thing in The Righteous Mind where he talks about, people tend to shoot from the hip and then post-rationalise.  I think it probably was an indication that he was a bit disappointed that he hadn't invested.  But, it is what it is; I thought it was a good show.

Okay, let's talk about Ethereum.  You dived in and took a good look at Ethereum?  So I imagine, Lyn, if you felt like it was a good investment, you would invest.  You're not ideologically opposed to investing, like maybe someone like I am.  I am Bitcoin only; that's it; you can't convince me of anything else.  My assumption is that if you felt like you thought it was a good long-term investment, you would; am I wrong?

Lyn Alden: Yeah, so for example, I think that utility protocols, in some way, are going to be here for a while.  And so, for example, I think the stablecoin usage will probably increase over time.  There will be different smart contract applications that will likely be here in some form.  And then the question is, which ones will stick around; whether or not their tokens will achieve some sort of moneyness; so, will they be viewed as money, or will they be viewed more like a commodity?  And so, I just kind of explored that question.

So basically, if you look at the whole digital asset ecosystem, Bitcoin is head and shoulders over any other token that's trying to be money.  So, most of those other ones are, in some cases, less than 1% of Bitcoin's market capitalisation, sometimes they're 1.5%; they're all a very, very tiny percentage of the security, the distribution, whatever network effect you want to use to measure that.

The only other kind of asset that's in the same ballpark would be Ethereum, in the sense that its market capitalisation is sizeable, still notably lower.  The amount of volume settled, or value settled, on Ethereum has eclipsed Bitcoin, because it's used for the stablecoins, or its velocity is far higher and therefore, it's used for that.  And, naturally I get a lot of emails about Ethereum, because I've explained multiple times why I'm long Bitcoin, why I have articles on Bitcoin and so, naturally, I get a number of questions like, "What about Ethereum?  Are you going to invest in Ethereum?  Do you like Ethereum?"

So I was like, let me just write an article and just analyse Ethereum and say my views on it.  So, it wasn't outright negative.  I wasn't saying, "Ethereum's going to go down; it's bad".  It was more like, "Here are some of the pros and cons of Ethereum", and that I think some investors could put most of their portfolio in Bitcoin and have a side bet on Ethereum.  I don't think it's irrational for people that are following that market to do that; I think that would make sense for them.

But from my case, I haven't seen a really good kind of risk reward for Ethereum, because it's still changing the underlying mechanism for how the protocol works; so, shifting from proof of work to proof of stake; they're changing their monetary policy; they're potentially sharding it with -- they have multiple parallel chains that are linked to a beacon chain; but now, they're doing roll ups.  There are all sorts of different scaling mechanisms, because they are running into their throughput limit.

So basically, I was just trying to highlight to people that sure, it could be a healthy ecosystem, it could take off, but you have to understand the risks there.  It's not kind of this more finished product, it's more of this experimental product, and I just didn't want people to go into an alt season without understanding the risks they get into when they try to trade all of these non-Bitcoin protocols.

Peter McCormack: Yeah.  And even in an alt season, people can make money whilst the protocol itself might not have any meaningful long-term usage.  But, the term that really stood out when reading your report was that it's a big, circular, speculative party.  So firstly, I'd obviously want you to explain why you think it's a big, circular, speculative party; but then also, in some ways, isn't Bitcoin a speculative party?

Lyn Alden: To some extent, yeah.  So, any sort of network effect has that kind of circular notion where the more people use it, the better it does.  My point with Ethereum is that it's highly used for leverage and these shorter-term bets.  And so, for example, if you look at what's all the money that's locked in DeFi, a lot of that is decentralised exchanges, so that's its own thing. 

Then you have liquidity or leverage providers for those exchanges, so some people can deposit stablecoins, for example, and collect interest on them; and the other side of that is they're basically borrowing stablecoins at a pretty high interest rate and then, some of them could be using that for life expenses, but many of them are using it to speculate on different sorts of tokens, using that to have a leverage play on different sorts of tokens.  And especially because some of those tokens are lower market capitalisation altcoins, it's got a substantial amount of risk and speculation.

So, when you're in that bull market, you can see the amount of leverage builds up, the amount of yields can be high; it's an attractive situation.  But, if that were to turn down into an alt season, you know, the opposite of that, a bear market in alts, that's where some of that leverage could become very painful.  And we saw a hint of that back in March, where you had that liquidity issue and you had some kind of liquidations. 

But, that is a much higher level now; the amount of money locked in DeFi is far higher.  And so, if you were to get that kind of a sharp pullback in some of these, even Bitcoin, but let alone if you get Bitcoin and these other ones and you kind of go into a bear market, that's a more sensitive area that could be impacted.

It's kind of like how if you look at just equities; it's not even unique to DeFi.  If you look at equities, those periods where the bull market's happening and the margins are going up, that feels really good while it's happening.  And you just have to make sure that when that party ends and it's turned over, some things end up being steady and they correct but then they bounce back, and other things that were mostly bid up due to margin or due to other things, they have a tendency to suffer more; so we'll see what happens.

For example, back in the previous bull run, Ethereum outperformed to the upside and then underperformed to the downside on the other direction.  We'll see if that happens again; or, every cycle is going to have its own unique characteristics.

Peter McCormack: Yeah.  There are a couple of other things I found quite interesting, a couple of other quotes from you.  Firstly, that it's more expensive to run lines of code on Ethereum as a web service; so, I thought that was kind of interesting because essentially, you're paying a premium for this decentralised service. 

But at the same time, how meaningful is decentralised because again, you pointed out the inferior risk and the potential, if there was a government crackdown; it's not like with Bitcoin where I think we're all in agreement, it's impossible for there to be a government crackdown on Bitcoin in terms of, you can legislate against people using it, but you can't switch all the nodes off on the network.

So, how big a risk did you think this is and, do you think Ethereum is meaningfully decentralised, or even should be considered as a decentralised project?

Lyn Alden: I think it's a step towards decentralisation.  It's more decentralised than some of the things that came before it, but it's less decentralised as it otherwise could be.  So I think, in some ways, permissionless is a better way to describe it than decentralised, because it's more decentralised for the user side. 

So, you don't need permission to, for example, use DeFi, so it's permissionless for the user, and that's the side of decentralisation that has improved.  And then the part that's still somewhat centralised is the clustering of the infrastructure to provide that to users.  So, it's somewhat vulnerable to a government crackdown if you were to get a kind of focus on it.

Peter McCormack: You didn't even think it was worth putting in a very small amount of your portfolio into it?

Lyn Alden: I mean, maybe as a side bet.  I mean, I can see why -- like, even in the article I point out that 80/20, 90/10 or 100/0 all make sense to me.  And, my preference is to focus on Bitcoin at this time.  I think the risk reward is good there.  Now, during a bull run, that doesn't mean I think that Bitcoin will be the best performing of these assets.  I mean, generally there will be various alts, perhaps Ethereum itself, that outperform Bitcoin to the upside; kind of like what we saw in 2020 where, for example, Ethereum outperformed Bitcoin. 

So, I even said in the article that if it goes over $1,400 decisively, I wouldn’t be surprised to see some pretty bullish action on Ethereum's price.  The question is more about the long-term value of that project; and if they're going to successfully navigate some of those transitions from Ethereum 1.0 to Ethereum 2.0, it's kind of like changing the engine in a car while you're running it.  So, it's a very complex challenge to do, and so the risk reward is, to me, to some extent less attractive.

But, yeah, I fully see why people want to have a percentage of their portfolio in Ethereum.  People should just understand what they're getting into with these different assets.

Peter McCormack: I think also it's the timing of the entry and exit which is quite difficult.  It might outperform for a few months, or it might only perform for a month here and a month there.  For me, I just feel a lot more comfortable during a bull market to be fully in Bitcoin; for me, it's too much of a risk.  I mean, I'm not keen on the project, but I'm not like a full maxi, opposed to anyone else investing in that if they want to do that.  I do see the value of the stablecoins on the network, but it's quite interesting.

What did you make of the reply from the Bankless guys?  Do you think they made a fair reply, do you think they were kind of rationalising things?

Lyn Alden: Well I think, you know, it always depends on your perspective.  So, I think most of them were very polite, and they basically put their reply --

Peter McCormack: Not all of them.

Lyn Alden: Yeah, not all of them; but, I think the Bankless guys were, the two that run that platform.  But, you know, you get down into the Twitterverse and sure, you get into the far less polite people!  But, yeah, so part of their response didn't really refute the initial thing.  I mean, some things they agreed with.  They were like, "It's experimental, but that's why you should invest now and it will go up more if it is successful", so it's kind of reframing it more towards that bullish view.

I think one of the big sticking points is whether or not the tokens will be monetised.  And so, for example, there was a paperback in 2017 by John Pfeffer that argued that some of these utility protocols, the velocity can be so high if the tokens don't acquire some sort of moneyness that even though the ecosystem could be very large, the market capitalisation or per-token value might not follow that trajectory.

In some ways, that's what we've seen.  For example, over the past three years, Ethereum's settlement volume went up dramatically and even outpaced Bitcoin; whereas, its market capitalisation has not caught up to that same degree.  So, if you're looking at it from the Ethereum bullish side, you say, "Well, that's because Ethereum's undervalued, and Ethereum's going to catch up and it's going to outperform".  But, if you're looking at it from, say, that John Pfeffer view, you're saying, "No, that's to be expected, because the tokens are money to the same degree that, say, Bitcoin is, and so the ecosystem can grow a lot faster than the per-token value, because there's higher velocity in the system".

The Ethereum counterargument to that is that, the combination of staking, if they get Ethereum 2.0 working, that's basically a liquidity sink, that's an incentive to hodl for them, to earn yield; and, two, that Ethereum can be used as collateral in these DeFi, or these different sorts of markets, and that those would be sufficient liquidity sinks to basically monetise Ethereum. 

So, we'll see if that plays out or not but, because that's a somewhat speculative thing because Ethereum 2.0 is not finished yet, so staking is more of this kind of one-way staking at the moment, where people are putting into Ethereum 2.0 in the hopes that the developers will roll that out in a reasonable timeframe in a year or two.  And so, it remains to be seen to what extent these utility protocols can monetise.

In the meantime, because we're seeing somewhat higher transaction fees on Ethereum, we are starting to see, for example, more Tether transactions occur on Tron than on Ethereum, because some of the smaller transactions have spilled over due to the high fees.  And so, we're seeing this competition between utility protocols at a time when Ethereum's kind of changing itself substantially.

So, I think there's certainly upside potential there, but there's also a lot of risk, because unlike Bitcoin that's mostly a steady state project that's just getting security and privacy updates over time; whereas, Ethereum's still a rapidly evolving system.  It's more of a tech stock than a money at the moment.

Peter McCormack: Right, okay.  Well, I'm not going to invest.  Anyway, Lyn, always lovely to catch up with you; I always learn so much.  Before we close out, two things: just tell people where they can sign up to your newsletter and give me a Bitcoin price target for the year!

Lyn Alden: So, I'm at lynalden.com; people can check that out.  And, I don't have a firm price target in Bitcoin, however the metrics still look quite attractive as far as kind of a mid-cycle bull run goes.  So, I wouldn't be surprised to see well over $50,000 this year and the upper end of that is, you hear some of these really high targets and it is hard to put those aside because, for example, so far Bitcoin is outperforming its 2017 halving, you know, 2016/2017 halving period, and it's so far kind of above that.  So, we'll see if that streak continues or not.  So, rather than having an end price target, I just continue to monitor it as it goes.

Peter McCormack: Fantastic.  Well, listen, good to see you and I will see you in about four weeks.  Take care.

Lyn Alden: Yeah, bye.