WBD321 Audio Transcription

Bitcoin as Investment Portfolio Insurance with Greg Foss

Interview date: Monday 15th March

Note: the following is a transcription of my interview with Greg Foss. 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 with Greg about the growing treasury yields, what this means for the markets, inflation and what a debt spiral means for fiat currencies and bitcoin.

“It’s inevitable that if you own zero bitcoin right now, you are taking extreme amounts of risk.”

— Greg Foss

Interview Transcription

Peter McCormack: Greg, how are you, man?

Greg Foss: I'm doing well, this is our second take at this ladies and gentlemen, but thank you again for having me, Peter; it's an honour.

Peter McCormack: Hey, man, well it's great to have you on.  I've read your thesis which I understood some of.  I understood a lot of the Bitcoin stuff, but it's super interesting, it was very, very interesting, I had to get you on.  I listened to your show with John; I haven't listened to the one with Marty yet, but it's nice to see you out there making some moves in the Bitcoin world sharing your ideas with people, you've made me a lot more bullish on Bitcoin, so thank you.

I am going to encourage anyone who listens to this, go into the show notes and follow the link to the Bitcoin thesis that Greg has written; go and check that out and we're going to cover a lot of that today.  I'm going to try and get you to explain some of this to me.

There is a lot of talk recently about the bond markets and I had Lyn Alden on my show and we were talking about bond markets and yield curves and to be honest, I didn't understand all of it, but one thing I wasn't honest with Lyn about and I didn't fully understand until somebody else explained it to me this week, but when the bond yields went up I was like, "Surely this is good because you are going to get a higher return on your bonds, this must be a good thing", yet Zerohedge was making out like it was a bad deal, all the people commenting on their Tweet were saying, "Whoa, popcorn out".  I was a bit embarrassed, dude.  I was like, "I don't understand why this is a bad thing", so could we start with the bond market?  Can we have like a good, broad explanation of what the bond market is and how it works.

Greg Foss: Okay, excellent.  Let's start with the US Treasury market, because that is firstly the biggest bond market in the world.  It sets the base rate of borrowing for the most important borrower in the world, the US Treasury; and it is sometimes defined as setting the risk-free borrowing rate amongst which all other borrowing rates are compared.  Let's talk about the US Treasury ten-year rate right now, 1.5% thereabouts, and it's gone.  In my career, I started trading 32 years ago, when I started trading US Treasury, ten-year rate was 14%.

Peter McCormack: That's an annualised rate?

Greg Foss: That is correct, 14% per year and it decreased all the way to close to zero.  In fact, it hit 60 basis points or 0.6% in the ten-year, in February of last year I believe or probably March of last year.  Now, it's gone from 60 basis points, 0.6%, back to 1.5%.  That has gotten people all bent out of shape and for me it's funny because, "Hey guys, when it started it was 14% and all it's done is gone up 90 to 100 basis points and it feels like the world's unravelling".  It's not unravelling, it's just that the markets are setting a discount rate for returns, risk-adjusted returns, inflation-adjusted returns for the US Treasury in the ten-year; and on that rate, and this is important, Peter, all other discount rates are correlated.

Peter McCormack: This is a key point, and this is where I think the lightbulb went on for me because I was like, "Well, surely this is great because if the yield rates are going up, then you're going to get a better return on your treasury, so surely that's great".  What I didn't realise is this re-sale market for bond rates and when the yields go up, it essentially reprices all the old treasury bills.

Greg Foss: Atta-boy, yeah, exactly!  Treasury bonds, technicalities are important, a T-Bill tends to be 90 days or less, a bond tends to be a ten-year, a note is a five-year, let's not get too bogged down but let's talk about where the rates are right now.  Five years, under 1%; ten years, 1.5%; 30 years, 2.25%; and I'm going to hit something important here.  You said, "Yes, as a lender you're happy that rates are going to higher, because you are able to get higher return".  Lenders are savers, lenders are people like pension funds; they have to match assets and liabilities; yes, they get a higher rate.

But the truth is, when rates are as low as they are right now and Jim Grant was just on CNBC this morning, he says it's hugely biased in favour of the borrower and this has caused opportunistic pricing and opportunistic levels, even as far out as equities, because the equity discount rates are implicitly set by the US Treasury.  Again, equity prices are net present values of cash flows of companies and those cash flows, when the rates that you discount those at change, the net present value of those cash flows change as well.  Again, everything's correlated but the key is the US Treasury 10-year, 30-year, 5-year.

Peter McCormack: Okay.  So, what I'm trying to understand is that there is a really liquid market for these bonds traded continually and let's use the example of the pension funds; they're always happier with a lower return but a safe return, generally speaking.

Greg Foss: It depends.  Again, everything's risk adjusted, so if you're very risky but you're being compensated or you think you're being compensated for it, yeah, you make that investment as well.

Peter McCormack: Say you're holding a certain bond that's got ten years left on it at a certain rate.  Let's say you've still got a 5% rate on it.

Greg Foss: 5% coupon, let's talk, okay so it's got a 5% coupon, yeah.

Peter McCormack: Okay, a 5% coupon; would there be a reason to sell that and then buy a new bond with a new coupon, because you've only got five years left and you think, "Okay, there's another out here it's got a lower yield, but it's got a longer timeframe on it; we'll exchange that out".  Is that what goes on?

Greg Foss: I think you might have just confused something.  If it was a longer timeframe, the yield generally wouldn't be lower, it would be higher.

Peter McCormack: It would be higher.

Greg Foss: Why do bonds trade?  Why do people make adjustments to their portfolio?  There are inflation expectations; they adjust and therefore they say, "If inflation's going to increase, I'm going to decrease my duration.  I'm going to take a 20-year bond and trade that 20-year bond for a 6-year bond", so there could be all sorts of mixing and matching of maturity buckets.  There could be things like, all of a sudden you've been redeemed. 

Let's say you're a bond fund manager and all of a sudden, you're getting tons of people wanting cash; you don't deliver them bonds, you have to deliver them cash; so they have to go to the bond market and sell.  Why would people be redeeming their bond funds as they actually do some maths and say, "Bonds are not a great investment right now", so how do you hedge against that?

You take a 30-year bond, and you sell it and maybe you own a 2-year bond; so your duration and your convexity risk is much lower on the 2-year than it is on a 30-year and this is why bond markets are continuing ebbing and flowing for adjustments according to maturity buckets, redemptions; this is exactly what happens in an open-market setting of the "risk-free rate" of the US treasury.

Peter McCormack: Okay, but there are bonds from all different countries, all different currencies and I guess they have their own risk levels?

Greg Foss: 100%.

Peter McCormack: I imagine the pound the euro are pretty good at the moment, let's just say there's a country like Argentina that issue bonds but because it's a higher risk, higher currency, they have to offer a much higher interest rate.

Greg Foss: You nailed it, yes, exactly.  I like to say though, always look at the various borrowing in the same currency; that way you don't get cross-currency considerations in that interest rate parity.  You remember these finance things in your Econ 101?  If you look at Argentina borrowing in US debt, your dollar-denominated debt versus the US Treasury, yes exactly; there'll be a spread in there that compensates investors for lending money to Argentina, because it's more risky.  That spread is called a credit spread and that credit spread compensates you for the risk that Argentina will not fulfil their borrowing obligation.

Peter McCormack: Why did the yield rates jump recently?  What was the big jump for?  I know what's going on, there is risk of inflation, there was Jerome Powell's comments, there is the continual money printing; we had the $1.9 trillion stimulus.  Why was there a jump in the yield rates?

Greg Foss: Great question.  So there were two events; let's hit the one that I think was very material was the recent seven-year auction.  It was a horrible auction by many people's evaluation.  Barron's came out and said it was the worst auction they had ever seen since they were rating auctions.  You have to understand it still cleared -- the amount of the debt that the Treasury wanted to sell was absolutely scooped up; it's just that the price was a lot higher than they anticipated they had to sell it.  When I say "price", they had to pay a higher yield on their bonds. 

There were still twice as many buyers for the amount of debt, that's called a bid to cover ratio, as was being offered, it just backed up.  I was like they expected it to clear, and I don't even remember where it cleared but let's say they expected it to clear at 1.2% and it ended up clearing at 1.27%.  "Oh my God, seven basis points?"  Hey, guys, this is how markets recalibrate; this happens.  The supply and demand were met, but it was just at a different yield price than the government wanted to stomach.

Peter McCormack: Because the yield rate is essentially people assessing the risk of return?

Greg Foss: Atta- boy, inflation risk and/or credit risk.

Peter McCormack: Yeah.

Greg Foss: Now, people always say that the US Treasury is credit risk free, that's not true.  The credit default swap market which is a very important market and even more esoteric to most people than the bond market, currently charges the US Treasury ten basis points for a five-year term to insure against default.

Peter McCormack: Right, okay, so that price is the risk of default.

Greg Foss: That is, it's included in your total rate.  So what's the most important thing in your total rate is your inflation expectations.  You cannot say it's zero risk of default, because there's a default insurance market out there that's charging you ten basis points.  That means it costs you $10,000 a year for five years to insure $10 million of US Treasury debt against default.

Peter McCormack: What's the scenario where the US does default?

Greg Foss: People don't take their money anymore, so they keep printing and then there will be a de facto default just like in Venezuela; they printed the money to satisfy the obligation, the promise that fiat money ended up on the curve to go to the garbage dump, right.

Peter McCormack: Yeah, okay so the risk of default comes when people won't take the debt anymore because --

Greg Foss: They don't roll it over and that's what happens when you're in a debt spiral, which we are in.  You continually have to roll your debt and if people start rolling the debt, that's a de facto default and we're in big trouble.

Peter McCormack: So, the international bond market is essentially a liquid market for those people with money for looking for interest.

Greg Foss: The most liquid market, correct, and the most sophisticated managers of risk, whether they're pension funds, CalPERS.  Let's just say CalPERS has a portfolio that approaches a 60/40 weighting, 60% equities, 40% debt; that debt has to go somewhere.  It can go into Treasury debt, it can go into corporate debt, it can go into mortgage-backed securities, it can go into foreign debt, but yes that 40% is sophisticated money seeking a lower return than equities, because bonds generally are lower risk than equities, but they're not zero, so you need to be compensated.

Peter McCormack: Yes, okay, I understand it now.  Essentially the bond market is also setting the confidence level in each economy.

Greg Foss: Bingo, man, that's exactly what it is, well said, very well said.

Peter McCormack: I guess there are credit rating agencies for these different markets and currencies?

Greg Foss: There are, yeah.

Peter McCormack: Are they good?  I remember watching The Big Short and how the credit agencies failed.

Greg Foss: Everyone does.

Peter McCormack: The credit agencies failed.

Greg Foss: That was my life, right.  I traded credit default swaps; I know Michael Burry's pain.  Sometimes if you're on the wrong side of a trade, you know you're right but the market's just not going in your direction, so let's start with credit rating agencies.

Credit rating agencies start by generally rating a credit of a country and then that credit ceiling will not allow any corporation within that country to have a higher credit rating than the credit rating of the country.  But here's an interesting statistic: Canada actually still maintains a AAA credit rating, by S&P; the United States is only AA+, meaning it's one notch below Canada. 

This is really funny, because in the credit default swap market, the US pays 10 basis points for 5-year protection and Canada pays 37; three and a half/four times higher even though the credit rating says it's a better credit, the bond market or the credit default swap market is saying, "It's a far worse credit", so who's right?  I always say markets are truth, the rating agencies have gotten it wrong so often.

Peter McCormack: What's going on here like in the broad market, because we have seen yields drop as you said; the interest has dropped from 14% down to, at some points, negative rates.

Greg Foss: No; negative real rates, not negative nominal rates.  In some countries there were negative nominal rates, but come on, how is that possible, let's think about the silliness of that?  You're lending money to somebody and then you get less money back?  It was manufactured, manipulated, you can call it whatever you want, but in a free market like the United States or freer market, it went from 14% down to under 1% and then over the last year, it's gone from under 1% to 1.5%.

Peter McCormack: Yeah, okay.  We should probably explain that thing though, go into that because we covered that in our take one.  I was explaining how when the yield rate jumps, my assumption was, why's that seen as a disaster; why was everyone panicking, because you get a better rate of return?  But it's because it reprices all the other bonds being traded.

Greg Foss: Exactly, it's an opportunity cost.  Here's an example.  So one year ago, they issued a 30-year Treasury bond, United States Treasury bond, it had a 1.25% coupon on it; and today the similar 30-year, so the last 30-year's now 29 years remaining, it's one year into its 30- year, it has 29 years remaining to maturity; that bond, which was issued at 100 cents on the dollar, is now trading at under 75 cents on the dollar because why would someone buy that bond with a 1.25% coupon when they could get the same obligation one year longer from the US Treasury right now at 2.25%? 

The bond market needs to adjust; it adjusts when yields go higher, bond prices go lower and there is your adjustment.

Peter McCormack: When that trades at 75 cents on the dollar, who's lost money there?

Greg Foss: The person that bought it.  It's an opportunity that cost the person that bought it at 100 cents on the dollar.  They don't have to mark their portfolio to market, which a lot of banks don't, and a lot of pension funds don't, it's an opportunity cost.  But if you're a trader who lives and dies by mark to market, you're down 25 points or 25% on a long bond, it'll take you 18 years of coupons to make that back; that's a horrible investment.

Peter McCormack: But, can they get hit overnight with those kind of drops in rates?

Greg Foss: No, 100 basis points is a huge move, they change in 5 basis points.  But it's on a trend, it's like everything, it's trending higher; and so I expect this to continue exactly.

Peter McCormack: So essentially, right now, there is less confidence in the US dollar.

Greg Foss: Okay, so let's take that; I can't draw that conclusion.  I can always say that confidence in the US dollar is very important.  Higher interest rates lead to demand for US dollars because if you can get an interest rate in the United States of 1.5%, but if you're in Japan and your ten-year JGB rate is -- I don't even know what it is, it's like 60 basis points right now, hey maybe you take Japan and you switch into US dollars and therefore you get 1.5% in US dollars.  That could lead to demand for the US dollar.

Peter McCormack: But if inflation rates go higher then that's --

Greg Foss: It's a combination of inflation, yes; you've got to be compensated for inflation as well as credit, correct.

Peter McCormack: As we said previously, inflation is -- depends how you calculate it; there are different ways to calculate it.  But I know, like right now, the real rate of inflation which the government's talking about feels very different from what I'm seeing and experiencing myself.

Greg Foss: And, I think Michael Saylor is very smart when he says it's probably closer to 15%, which is the growth of the money supply, versus the 2% that is the recorded metric that the government is pitching; let's call it a pitch.  I don't believe for a moment that true inflation is anywhere near the CPI.

Peter McCormack: The bond market traders must be aware of this?

Greg Foss: Sort of.  Hey, there are foolish people in all markets, right.  There are people that believe they drink the Kool-Aid, "Oh yeah, it's only 2%".  Well, how come your house has gone up 10% in value then?

Peter McCormack: I was looking at a house here, about a year ago, and it's up at least 10%.  I do also realise my house has gone up around 10%, but the problem is the house I want to buy is bigger.

Greg Foss: Here's a neat thing, as Warren Buffet would say, and let's be careful; I don't want to paraphrase him too much in terms of what he means by stuff.  But if you are living in a house, you want to own a bigger house, you're actually not happy that your own house is going up in value.  You want it to go down in value because the bigger house that you're going to buy is actually going down in value as well.  Warren Buffet says the same thing; if you're a long-term investor in the stock markets, you should be happy that stock prices go down so you can buy it cheaper.

Are house prices really going up?  I'm going to stop talking about Warren and I'm going to say, "Let's talk about what is really happening in housing markets".  Is your house price really going up or is the unit of account, which is the fiat currency, just going down in value?  I think it's more the fact that the fiat currency is going down in value than it's actually your house is increasing in value.

Peter McCormack: You say that; I think it's a bit of both.

Greg Foss: Okay.

Peter McCormack: Yeah, I think it's a bit of both because otherwise everything else would go up at the same rate, but it feels to me like the house prices go up at a higher rate than say fuel.

Greg Foss: Pete, you know what, people need to live somewhere if they have preferences, yeah, 100%; I think that that could be the case.  We could be splitting the atom here a little too finely.  There's no question that hard assets should increase in value more than soft assets and real estate is much closer to a hard asset than a lot of your other exposure.

Peter McCormack: Okay, so how's this going to play out, because if the interest rates have been dropping from 14% over the last 40-odd years to where we are now, we're getting close to a real rate of 0%, there or thereabouts, we've got a risk of inflation, we've got debt-to-GDP ratio's quite high; I've discussed before, like at Lyn Alden's event horizon, of the 135% debt-to-GDP ratio --

Greg Foss: Yes.

Peter McCormack: -- where it becomes almost impossible to pay it off; you say it's mathematically impossible to pay it off?

Greg Foss: It is actually mathematically impossible; that's correct.

Peter McCormack: Okay, is it mathematically impossible to reduce it?

Greg Foss: Okay, no like imagine the pain that that would -- so how do you reduce a deficit, right; you raise taxes?  We could argue that are we already at the point of diminishing returns.  If you raise taxes right now, is there a chance that more of the economy goes underground or on the black market and therefore the tax base actually decreases?  I think that's pretty likely, certainly for some of the tax base. 

The other side of it is this -- so let's talk Lyn and she's such a smart young lady, but I'm going to disagree; not disagree.  Her number is correct, if you're just looking at government debt.  You actually need to look at global debt which includes corporation, states, province, municipality.  Total global debt to total global GDP is actually four times, and since interest expense is tax deductible and your tax base actually is reducing the more people that issue debt, because the interest expense gets tax deducted, it would mean at four times total debt-to-GDP.  

Your coupon in the numerator, total debt, the coupon on that let's say is 3% just for a number.  If it's four times what the GDP or global GDP is, this four times three is 12%.  That means global GDP has to grow at 12% just to stay neutral, but who is staying neutral?  Everyone's just printing, issuing more debt.  Our deficits are spiralling out of control.

So we are in a debt spiral, which means that the currency is guaranteed to debase.  It's only mathematics, do not overthink this; and the currency is what I call the error of term.  The currency satisfies the equation that allows you to continue to grow your numerator, which is your total debt; you can grow it when the economy or the tax base is not keeping pace as long as you print more of this stuff, it allows you to close that equation; it's the error term.

Peter McCormack: Okay, so there are three options: you can raise taxes; you can cut spending; or you can print more money; or a combination of the three.

Greg Foss: So, yeah but what's the easy one?  As a politician, what's the easy one?

Peter McCormack: As I said I was talking to my son about this, I was trying to explain to him.  He was saying, "Why are you putting so much money in Bitcoin?"  I was like, "Because they keep issuing more debt and the debt-to-GDP ratio is going up.

Greg Foss: Atta-boy.

Peter McCormack: Inflation isn't happening, so I want to hold a hard asset and I said, "They're not going to pay it off", and he said, "Well, why won't they?"  I said, "The political cycle, there's no incentive to do it, you can kick the can down the road for four years and try and keep your job".  Imagine going into an election where the government turns round and says, "Listen, we've got this $2.2 trillion debt, we need to cut public services and we need to increase taxes".  You are going to be voted out at the next election?

Greg Foss: It's starting to happen; I mean not yet.  You're limiting yourself to one term.  So what happened in 2007/2008 was basically all the risk, the financial leverage, that was on the balance sheets of banks and the global financial system was transferred to government, because too big to fail was a reality.  They let one of them fail, it was called Lehman Brothers.

Peter McCormack: Lehman Brothers, yeah.

Greg Foss: My God, it was very close to being -- I went to work those days wondering if it was actually over; I honestly was wondering if the financial system was totally unravelling.  It was really scary, it was real, but the governments let Lehman fail and then they realised the contagion or the counterparty risk was just so high, they had to step in and rescue everybody else.  AIG, the world's largest insurer was playing in the credit default swap markets.  If it had failed, Goldman Sachs was done, it was baked, okay.

Peter McCormack: Wow.

Greg Foss: So, was there a reason that they rescued AIG?  I don't know, maybe they didn't want Goldman to go down.

Peter McCormack: Yeah, they saved is it Fannie Mae and Freddie Mac?

Greg Foss: Freddie Mac, correct; but those things are government-sponsored agencies or whatever they're called, GSOs.  It doesn't matter, those things are different; those are a function of the system.

Peter McCormack: Right, okay.

Greg Foss: Goldman is not a function of the system, Goldman is a brilliant investment bank that got a little far over its shoes because it purchased counter party risk from AIG.  It was hedging itself with AIG, a supposed AAA credit; but if AIG is gone, Goldman is all of a sudden exposed to all of the insurance that they had bought from AIG not being paid out, so Goldman would have been gone.

Peter McCormack: Yeah, so I've been listening to this Audible version of When Money Dies, what happened in Germany after the First World War.

Greg Foss: Yes.

Peter McCormack: Every morning, going for a walk, I do about an hour and a half; I've got about two hours left of it to go.  It's crazy listening to it, but it was one of those things when I first started listening to it, "Yeah, but it was after World War I, very different world then.  People didn't really understand the economics so much, they're under a lot of pressure for the money they owe for reparations for the war; it was a very complicated different situation". 

I was like, "Yeah, I understand we get hyperinflation in Venezuela and Zimbabwe, because we might have some despot dictator, but surely this doesn't happen in the US or the UK or Europe.  Surely, we don't see a hyperinflationary event" and then at the same time, I'm seeing 20% of the money supply has been printed in the last year, another $1.9 trillion recently, it's not fixing the problems, if anything it feels it's accelerated them; so it starts to feel like it could happen.

Greg Foss: What it's doing is, it's delaying the problems, there's no question about that.  People feel good about having money in their pocket, that perhaps they didn't earn, it was granted to them.  I understand the compassion of that, but the reality is there's a cost and benefit to everything, right.  You can't just print money like these modern monetary theorists think.  These guys failed mathematics, okay, these guys have not taken maths, they've never traded credit in their lives, they don't realise that credit is a function of confidence. 

When that confidence is gone, it's over.  You cannot regain that confidence and just because you think in theory, "I can continue to print all the money I want", in practice that does not work, look at Venezuela.  There are 188 fiat currencies in the world.  Almost all of them are guaranteed to fail before the US dollar fails and Canada is in that group, the Canadian currency, the loonie, will fail before the US dollar fails, but as Voltaire said --

Peter McCormack: Why particularly the Canadian dollar?

Greg Foss: In bad case I think I laid that out to you, I can't remember if this was take one or take two.

Peter McCormack: Yeah, I can't remember now.

Greg Foss: Canada is rated AAA by S&P.

Peter McCormack: Yeah, we did that in this take.

Greg Foss: In this take I mentioned that, that's right, but here's the funny thing; the market is rating it as a single A.  It's charging it single A default insurance rates, which means Canada is nowhere near a AAA and as soon as that cycle of lack of confidence , the international lender says, "Hey, I don't need you, Canada, I'll take my credit risk elsewhere", and Canada cannot sustain itself just by domestic funds, it needs international lenders.  This is not a drill, people, this is real.

Peter McCormack: So, I get what's going on here, right.  So, eventually every currency will fail, it's mathematically --

Greg Foss: They are all debasing, that is a certainty, some of them are decaying at quicker rates than others, that is also a market function; but anyone who trades fiat against fiat is just like trading a marshmallow against a chocolate bar.  They're all going to get eaten, okay; you just cannot, with unlimited supply -- they're all printing more because that's the global solution and we're listening to people that don't understand maths, like modern monetary theorists.

Peter McCormack: Stephanie Kelton, big shout out!

Greg Foss: I am not a fan of hers, okay; she has never traded credit in her life; she does not understand how bond markets work.  She assumes she understands, and she gets a podium, but I'm afraid she's wrong and it's dangerous how wrong she is.  Still people listen to her because those people like to think that it's all cherry blossoms and blue sky.

Peter McCormack: This is why you have the credit default swap market because --

Greg Foss: 100%, Peter.  The default swap market is truth.  In 2006, you could buy default protection on Lehman Brothers for nine basis points.  That meant it cost you $9,000 a year to insure $10 million of debt.  Three years later, that insurance was worth $6 million a year.  Yes, man, that's what happens.

Peter McCormack: So, they're really pricing the long-term risk of failure because lower basis points is the expectation that it's a low risk of failure, but expecting these rates on the credit default swap to go up over time.

Greg Foss: They thought that Lehman Brothers was too big to fail; they thought the US Treasury would bail them out.  It wasn't too big to fail, but then the Treasury realised, "Uh oh, I guess it was", the Fed I should say, "Uh oh I guess it was", because the contagion flowed to bear starts. 

Imagine if you had purchased default insurance on Lehman Brothers from Goldman Sachs and then all of a sudden, you're worried that Goldman Sachs is going to default; you have to run out and buy protection on Goldman Sachs to protect your first insurance policy, and it becomes circular.  Everyone's running and jumping over everyone else to cross collateralise.

Peter McCormack: That's the systemic risk, right, that they feel.

Greg Foss: 100% man, 100% it's all contagion, it starts in the plumbing, you have to look at when the stresses are building in the plumbing, you have to understand if people need to be rewarded for risks that they're taking, it's not a free pass.

Peter McCormack: Okay, so inflation is inevitable because we have inflation; that is inevitable.  It's looking like the rates of inflation are going to go higher, we're seeing real risk of that in the UK or seeing real evidence of that, and we're seeing that in the US as well and other markets.  So there is a real risk that these bond holders, even though they get paid back their nominal amounts, are actually going to be losing purchasing power.

Greg Foss: Correct, yeah.  That's inflation risk and we have to consider that every rate is a combination of inflation expectations and default expectations.  Now, historically and rightly so, people have assumed that the default risk on the US Treasury is close to zero, but it's not.  If it was zero, there'd be no credit default swap market, it was paying ten basis points for that protection.  That protection, much like Lehman Brothers when it started at 9 basis points, then it went to a 100 basis points then it went to 200 basis points, then it went to default; it goes quickly, because people realise that it's the spiral.

Peter McCormack: Okay, but the end game for this is each individual currency is at some point a collapse.

Greg Foss: I believe so because fiats and fiats, but there's 188 of them so it's not going to happen to all of them at once, but I think we're going in the direction that I know you want this podcast to go, so yes.

Peter McCormack: No, because I'm trying to understand what an actual collapse is.  We saw the collapse in the currency of Lebanon last year, but people are still using it.  Does a currency actually die and they give rebirth?  How does that happen?

Greg Foss: Yeah, maybe, it's hard to say.  As a North American, we had the North American Native Indians traded wampum and to the extent that wampum still functions as a currency, not certain; but here's what I want to come back to first principles, okay. 

Fiat currency facilities trade.  You don't have to trade three chickens for a cow, but what happens when the government or the fed or the central bankers abuse the trust that people have placed in that fiat?  Some countries fail before others and this brings me back to my history.  When I started in finance in 1988, one of my first projects was working on the Brady plan for the Royal Bank of Canada.  I'd gone to school in the US, came back to Canada, worked for Canada's largest financial institution and in 1988, the global financial system was wrestling, lo and behold, with a default of a lot of Latin American and lesser developed countries, okay.

Brazil and Mexico were two of the biggest.  Yes, they borrowed money in US dollars, in a five-year term from the most of the global banks in the world and because of currency fluctuations, could not repay their debt.  Their debt started trading in the secondary market, those loans traded from a value of 100 cents on the dollar down to 25 cents on the dollar and Treasury Secretary Nicholas Brady needed to come up for a solution that banks did not have to write these loans off; because if they did, they would have exhausted their book value of equity. 

Royal Bank of Canada was insolvent when I started working for the Royal Bank in 1988, Canada's largest financial institution.  Royal Bank wasn't alone; so was Citibank, Manufacturers Hanover, JP Morgan, Royal Bank of Scotland, everybody was in the same boat, hence Treasury Secretary Nicholas Brady needed to solve this; he came up with the Brady plan.

At 25 cents on the dollar, the debt was actually quite a good purchase, but do you think any of these banks were adding to their exposure?  No, thank you very much, I made my bed at 100 cents on the dollar, I'm not buying anymore at 25 cents on the dollar, lo and behold.  The bonds, or the restructured debt, went from 25 cents on the dollar back to through par; it actually traded higher than par.  It would have been a monumental investment but at the time, the bonds they originally or the debt they originally lent at 100 cents on the dollar defaulted, countries default all the time and that was the beginning of my quest for, "How is it possible that the banking system maintains the confidence of the public, when it can be insolvent on a regular basis?" and the answer is, because it's backed by the government.  How does the government back it?  By the ability to print more money.

Peter McCormack: I guess the confidence is jurisdiction specific, because I know in Argentina there is no confidence!

Greg Foss: So, there you go, yeah.  But there are 188 countries and as protected as we are in G20 countries, or G7 in the case of yourselves and ourselves and Canada, but Canada is in a bad place relative to the rest of the G7 world; but then there's people in Lebanon that would say, "My God, you have no idea how lucky you are relative to what Lebanon is", and, yeah, that's all true.

Peter McCormack: Is it the point where a government defaults on its debt then that's the trigger point for a collapse?

Greg Foss: There are 188 of them and a lot of them will default before the US does, but as soon as it starts, the domino effect starts taking place, it could happen quickly because it's global confidence.  If you're a global lender and you're just losing money in Argentina and then you're losing money in Country X, Y, Z you're like, "Hey, I'm going to take my money out of Canada before I lose my money in Canada as well". 

It becomes a bit of a steamroller and if you're losing your shirt over here, you're far less pumped up to go and lend money to another country you're going to lose your shirt in.

Peter McCormack: Which is why you have to start thinking about, where the hell can I keep my money, because if it's money, it's got to be some currency.

Greg Foss: Thank you very much.

Peter McCormack: It's like, "They're all fiat currency".

Greg Foss: It doesn't have to be in a currency right, it has to be in a store of value.

Peter McCormack: I'm saying it is in currency.  It's like, where can I put my currency because if I don't want to hold it in a currency, where do I put it, because all fiat currencies are all going to fail, it's like, "Well, I need to put it somewhere".  I have property, gold, Bitcoin --

Greg Foss: There you go, yes.

Peter McCormack: -- fine art, front row at the Lakers.

Greg Foss: All these things, hard assets, and a lot of these -- I love the Bitcoin community so is this okay that we start talking about Bitcoin now?

Peter McCormack: Sure, man, let's do it.

Greg Foss: Here's the cool thing, first of all I'm 57 years old; believe it or not, I've just discovered Twitter and I must say that these guys are some of the smartest people I've ever interacted with, but some of them have high conviction.  There's nothing wrong with high conviction, but the Bitcoin Twitter community is absolutely remarkable in its ability to assess risks that most people, they don't get it. 

It's so neat that having worked in the markets for 30 years, it's really, really neat to come across a community that is so tuned in as I've come across the Bitcoin Twitter community.  It's a pleasure to be a part of it, I'm a pleb, I'm a proud pleb, but this is something I've been looking for for 30 years; I've been looking for this solution for 30 years.

Peter McCormack: How long ago did you discover Bitcoin?

Greg Foss: A great question, to be honest.  I'm lucky enough, I got introduced because I was a founding shareholder in a company called 3iQ, which was the first exchange traded, not ETF, and its exchange listed, closed-end Bitcoin fund on a regulated exchange in the world.  There was Grayscale in the US but that traded on the pink sheets.  We got Bitcoin listed in Canada on the Toronto stock exchange. 

I was a founding shareholder, and it was actually the gentleman whose idea it was for this fund that introduce me to Bitcoin.  I'd heard about it, but I'd never seen it and he sold it to me with one screen; we were actually at one of my pubs in Montreal.  I'm a small business owner in Montreal, even though I live in Toronto.  I own some pubs and we happened to be at one of my pubs in Montreal and he goes, "Look at this thing called TradeBlock", and I'm an engineer and I see this thing in action and like I'd heard of Bitcoin, but what is this thing of beauty; this is the most beautiful thing I've ever seen from an engineering perspective.

I said, "This is the solution I've been looking for for 30 years", at that time 25 years; this was in 2016.  I said, "I'm in, I want this product to be able to be offered for all Canadians to be able to get exposure to the anti-fiat"; I call Bitcoin the anti-fiat and that's what it is, and we were successful, we got it as that fund.

Peter McCormack: Obviously it can be both, but Bitcoin as a solution at an individual level like myself, fearing holding money in the bank, fearing holding money in my company balance sheet, I said to you before my contracts are priced in dollars, the pound has fallen against the dollar from the peak last year of about 17%, I still pay a lot of bill in pound, etc, so there is real risk for me in holding any fiat currency; so I have been putting money into Bitcoin, but that's an individual solution for me. 

But, it's also a potential solution, an aggregate solution, that forces potentially, maybe starting at a smaller state to begin with, but forces people to adopt a Bitcoin standard; and I don't mean that in a hyperbolic way, but moves us to a more honest and better financial system.

Greg Foss: I agree with that.

Peter McCormack: Are you looking at it on both levels?  Have you got a priority on one or the other?

Greg Foss: Yes, my priority is to stop the lunacy in continuing to print fiat money without regard to the eventual outcome.  My kids deserve my full passion and intellect to try and solve this.  This is a disease; it's like a cancer that people think that there are no repercussions from continuing to print money. 

I am going to borrow from Ross Stevens, and this may have been helped along by Robert Breedlove.  I talked to Robert a day or two ago and he mentioned that he's working with NYDIG right now.  The most beautiful thing that Mr Stevens, Ross Stevens wrote was, he goes, "Money has always been a technology for storing the value of the work or time or energy that you expend today for consumption in the future", right? 

Think you're on a hot summer day, you're pounding nails into a roof, putting on asphalt shingles, you earn maybe $20 for four hours of work, $5 an hour and you want to consume that; that's a heck of a lot of tough time and energy that you've expended.  20 years later, you want to consume that $20 that you've worked so hard in the hot summer sun and it turns out to be worth $7.  It's gone from being worth $20 to $7; who is the fool?

You basically helped improve the value of that house, your hard work improved the value of that house, but your energy was debased because the fiat currency was debased; Bitcoin solves that.  Bitcoin is digital energy that preserves its value for use and consumption in the future.  Does it sound like Breedlove was involved in that little prose a little bit; I'd say 100%.

Peter McCormack: Sounds a little bit.  It sounds like a Breedlove tweet!

Greg Foss: It does but I actually wrote a letter, because I'm covered by NYDIG out of Santa Barbara or somewhere in LA anyway, somewhere in California, I know it's near LA.  My guy used to be a Goldman Sachs trader and I said, "You need to tell Ross Stevens that's the most beautiful shareholder letter I've ever read".  He actually did and I think NYDIG is doing some amazing stuff and I hope you're aware; did you see NYDIG raised money yesterday and who they raised the money from?

Peter McCormack: Was it $200 million?

Greg Foss: They did, but more importantly was who the investors were.

Peter McCormack: No, tell me.

Greg Foss: We'll start with MassMutual, New York Life, Morgan Stanley.

Peter McCormack: Insurance.

Greg Foss: Soros, George Soros, so all of the big important money players in the world.  I shouldn't say, "all of them"; some of the world's most important institutional investors see the vision where NYDIG wants to build a platform to distribute insurance products based on Bitcoin, money management, asset management. 

Read the Marty Bent email from last night, it lays it out really nicely.  Listen, this is the most important component of converting digital energy, which comes from natural energy in the ground, goes to digital energy when Bitcoin is mined, and then it's distributed amongst the financial system of the world because of platforms like NYDIG and supported by investors like Morgan Stanley and the like that I just mentioned.

It's happening, you guys, this is a reality, don't overthink this.  Bitcoin is the most beautiful store of energy ever created by man and you need to be a part of it.

Peter McCormack: Right, so the 21 million fixed cap is one of the most important, let's not say the most, but one of the most important features of --

Greg Foss: Actually, for me it's the most important.

Peter McCormack: Yeah.  There are other things that are important like the actual monetary policy, the issuance rate, the fact it is censorship resistant.

Greg Foss: Yeah, the difficulty factor, the difficulty adjustment; it's beautiful, it's a beautiful machine.

Peter McCormack: It is incredible in some ways the fact that it's de-centralised, etc, but most of that -- let's stick to the fact that the 21 million is obviously the important factor because when we're talking about fiat currencies, we're talking about them debasing, we're talking about the government can print whatever they want, the fact that we had something that has ultimately a fixed supply that changes the game for you as an individual if you're patient enough; but also if everyone adopts this Bitcoin standard, it changes the game for everyone else.

Greg Foss: Correct, and you know what my end game is, Peter, is I think that energy companies will want to be paid in Bitcoin for their valuable natural resources rather than being paid in US dollars, a debasing currency.  So as soon as energy companies and as soon as oil and natural gas globally is priced in Bitcoin, which I think is a natural evolution, I think Bitcoin will become the de facto reserve asset of the world; not currency, reserve asset.  But if you ask Russia or Saudi Arabia, "Would you rather own fiat US dollar treasuries or Bitcoin?" I think there are some smart people over there that would think very carefully about owning Bitcoin rather than owning US dollars.

Peter McCormack: I think for different reasons you need some kind of mix at the moment.  Like, for example, to operate my business I need a mix of dollars, pounds and Bitcoin.

Greg Foss: You have to, okay, that might change if the Lightning Network and everything Jack Mallers is doing it comes to fruition; but again, I differentiate between a reserve asset and a reserve currency.

Peter McCormack: It's certainly a reserve asset right now.

Greg Foss: Not yet.  It will be, in my opinion.  Am I 100% certain?

Peter McCormack: It is for me.

Greg Foss: Okay, atta-boy.  I'll just say I play the world from probabilities and I say that every day, it actually increases the likelihood with more announcements, like yesterday's Aker from Norway --

Peter McCormack: I know, amazing.

Greg Foss: -- an energy company that's going to be doing what they're doing; yesterday's announcement with NYDIG.  There are people that realise it, because maths doesn't lie, and the mathematics of a fiat currency in a debt spiral, not death; someone called it a death spiral, but it is a debt spiral, require you to store your valuable work, time and energy in something that does not get debased.

Peter McCormack: The point that I was moving to, one of the flaws of gold standard that seem to me is that it was a centralised standard that anyone could pull out of.  I think it was the UK pulled out first and then I think there was the US after that.

Greg Foss: They wanted their money back, right?  Did France send their ships over to try and get the money out of Fort Knox?

Peter McCormack: They did, apparently.

Greg Foss: Then the gig was up, but here's the neat thing --

Peter McCormack: Sorry, can I just go onto that, because what I was going to say is that it seems like the problem with that is that it's a centralised standard run by the state and the state can opt out if it chooses to.  I've read about one of the reasons the US pulled out the gold standard is that Nixon needed money to finance the Vietnam war.  But the great thing about a Bitcoin standard is it's optional.  I operate on a Bitcoin standard, Michael Saylor operates on a Bitcoin standard, perhaps you do and as more of us do it, the more of us can trade with each other on that standard.

Now, we're not, because none of us want to let go of our Bitcoin right now, so what we're doing is we're dumping our dollars, or pounds and just holding Bitcoin.  I do it basically on a an eight-week basis; I hold business and personal cashflow of eight weeks, which is a month of running costs and a month of leeway.  Everything else is in Bitcoin, so that's my standard.

But what I want to do is I want to be paid in Bitcoin, because that is my standard and I think the great thing about this is that it's optional; but as more people get pulled into the gravity of this Bitcoin standard the stronger it becomes and the weaker the fiat currency becomes and it kind of accelerates it.

Greg Foss: You're 100% correct.  We talked about the store of value.  People out there if you have never transferred money internationally using Bitcoin, if you have a Bitcoin wallet and I've done this, I've sent money to Australia, I've sent it to an indigenous group in Australia that I felt I needed to support.  I never met them, I was able to get it settled within ten minutes, it was more than zero dollars' worth, it was less than a car, but it was a substantial amount of -- I don't want to replay the fact.  The technology was so beautiful.  

If you've ever tried to send an international wire transfer; that is the most painful process that you can possibly go through with commercial banking.  You get worried about these swift codes and I actually did it on Friday.  I've done it before, but on Friday I was transferring some money to Florida.  The address of the bank it was settling in Pittsburgh, so it was PNC Bank in Pittsburgh, I didn't actually have the address; I knew the street the bank was on, we knew the swift code, but there was a chance that because the address was missing that this money would not settle. 

I'm like, "Are you out of your minds?  Is this actually possible in the 21st Century that because you're missing a street address on a bank…", and I couldn't get in touch with anyone so I said, "Okay, send it anyway", but I was highly confident it would settle but I wasn't certain.  Come on, let's stop pretending, you guys.  Bitcoin and the scalability, the visibility, transferability of Bitcoin is the most beautiful thing.

You were talking about gold; come on let's try it, let me try and send gold to Australia, I can try as hard as I want.  Peter Schiff notwithstanding, it isn't as good, it's just not as good.  By the way, how much gold is in seawater?  What if we ever figured how to get gold out of seawater?  Do you think that the gold would only be growing at 2% per year?  Come on guys; it's technology.

Peter McCormack: I think the only thing that's maintaining gold's position right now is the fact that it's a reserve asset for governments.

Greg Foss: Some of them.

Peter McCormack: Yeah, some of them, not Canada anymore.

Greg Foss: Not Canada anymore.

Peter McCormack: That point you talk about, I had it a couple of years ago.  I went out to do an interview in Japan and I hired a local camera crew, and they issued their invoice.  We could not find a way for me to make a bank transfer to them.  Everything I tried, it failed.  So in the end, I think I paid them in Bitcoin, or it might have been PayPal, because the guy was American, but we couldn't do it via the banks.

I took on a sponsor two months ago, they paid me in Bitcoin, like you it appeared within my wallet straightaway, it settled within an hour, job's done; and the stupid banking system thinks they have to protect us from mistakes, and they have to protect us from fraud.  Whereas people like you and me, we don't care.  I'll take the risk; I will take the risk of making this transfer.  If I make a mistake, I lose my Bitcoin; that's my risk to take.

Greg Foss: That's correct, it's on you.  Here's the other thing though; you'd think you were sending their money not your own.  "What's it for?  Are you sure?"  Because it's anti money laundering, "What's it for?  What company?"

Peter McCormack: They closed down my bank accounts in the UK.  I was with Lloyds Bank, I've been with them for more than 25 years, since I was 17 years old, so what's that; 27, 37; yeah, 25 years.  I got a phone call, it was about four months ago, three months ago, and they said, "Hi, we just want to run through some of your transactions with you".  I was like, "What do you mean?"  I was like, "Has there been a fraud on my account", they're like, "No, we just want to know what you're spending some of these transactions on".

The first thing was they brought up an exchange, they said, "What is this money for?"  "For cryptocurrency", I said, "Do I have to tell you this?"  They said, "No, you don't", I was like, "Well, none of your business".  I said, "All of my accounts are in surplus, I don't owe you any money, I'm old enough.  I'm 42 years old, I've raised two children, I've run a company, I'm old enough to make my own financial decisions, it's none of your business.  I'm just not going to tell you.  If I have a problem, I'll let you know". 

A month later or whatever I get a letter saying, "In 65 days all your accounts are being closed because we can no longer service you", after 25 years and I'm like, "You go fuck yourself".  But, do you know what I think the problem is here, as well?  I think there are multiple problems.  They've become too much nanny state, but I think the other problem is, is I'm a useless customer to them because I'm not in my overdraft, I'm not taking out their services and I think they want customers who are broke, who are always in their overdrafts so they're making fees off them.

Greg Foss: Interesting, okay.

Peter McCormack: Because essentially, I get a free service from them, I get free banking because I don't have any costs.

Greg Foss: I'm not going to argue with you, it sounds very logical.

Peter McCormack: We don't need this anymore, so I've switched over to one of these online neobanks and it suits me perfectly.  I don't need a branch.  It was like Blockbuster; their asset was to have all the locations in every city and then that became their liability when Netflix and LoveFilm competed.  The banks are the same.

Greg Foss: Correct, yes, I agree.  Having worked in banking, so I got my start trading at a bank and then I moved to the hedge fund side, so banks were always counterparties.  All the zoomers, they have comfort in their banks because that's how grew up.  None of the kids these days -- they do banking on their phone; they don't actually even go to a physical branch, a retail branch, so that's what's changing there.

Then people say, "Well, Bitcoin has no value.  There's no intrinsic value", according to Peter Schiff and this is where I want to take an issue and if I could, at this point, promote the research I've done.

Peter McCormack: Please do.

Greg Foss: I believe that Bitcoin is default insurance on a basket of solvent credits.  Using that process or narrative, I calculated the value of Bitcoin as a function of the credit default swap markets for an individual country, multiplied by their unfunded and funded liabilities.  Very simply to make a long story short, I came up with a number, a valuation for Bitcoin today; it's between $110,000 and $160,000 per coin.

Peter McCormack: So, it's on discount at the moment?

Greg Foss: That's right and that's just value today.  Now, imagine if these credit default swap spreads start going where I think they're going to go, Peter?  It's on discount today, relative to CDS or credit default swaps today, but as those swap spreads start to adjust to the reality that countries are going to default and start doing it on a more frequent basis, the intrinsic value of Bitcoin will go skyrocketing alongside.

Peter McCormack: I think I know what you're saying.  Sorry, can I replay your thesis at you?

Greg Foss: Yes, sir.

Peter McCormack: If Bitcoin is an insurance, as the spreads increase these investor or these money managers, whatever you call them, these bond guys, they're going to need to more insurance and Bitcoin is a better form of insurance.

Greg Foss: My job here is done, thank you very much, Peter McCormack, that is exactly it.

Peter McCormack: Is this happening?  It's your thesis, you obviously would; but do you know of any bond guys who are using Bitcoin as insurance?

Greg Foss: I do in fact, yes, I do.

Peter McCormack: Wow, okay.

Greg Foss: They have to; they're exposed to the risks of fiat and sovereign default.  They own the obligations, the contractual obligations of these countries.  It is their job to seek out hedges to these potential risks magnifying and, yes, I do absolutely know; and a lot of them take the jump and say, "Well, maybe I'll just own Bitcoin, I don't even need these other things". 

Now, some of them work in insurance companies and I promise you every single money manager in the world worth their salt is doing this analysis.  Fidelity is top shelf, NYDIG best of breed.  I'm involved in a company in Canada right now, so I'm out of 3iQ.  I sold my shares to a very astute, I shouldn't say; yes, I am going to give them kudos, a certain company that's going public within a couple of days in the UK, it's going to be listed.  I sold my shares in 3iQ and I moved onto an energy company.

I want Canadian energy companies to embrace Bitcoin like the Norwegian company did yesterday.  I also want Canadian investment banks to embrace Bitcoin, because I think it's the transfer of natural resource energy into digital energy into the purest form of monetary energy every created and products that are based off of those that make the Bitcoin standard that much easier for people to embrace.  Whether it's insurance, whether it's a platform like a Bitcoin wallet, anything like this; but there are only 21 million of them, so you'd better get your piece of it because it's going way, way higher.

Peter McCormack: Let me just go back on this insurance thing, because I think this is obviously a great idea.  So, if spreads close, would you see that as a reason for the value of Bitcoin to maybe drop some?

Greg Foss: Yes, potentially but they're not going to close.  It's a one-way train, it's just mathematics.  So every transaction, you need a buyer and seller of default protection.  Anyone who is selling default protection on the United States right now, chances are they're using a leverage and that's the dangerous part.  So they're picking ten basis points, they think, "Oh it's free money, I'm levering it".  Maybe they're levering it ten times", so they're getting a full percent for free. 

Then all of a sudden it widens, and they get a tap on it by their boss, "Why are you selling so much; reduce your position".  They as a seller of protection all of a sudden become a buyer and that's what happens; the sellers evaporate because the leverage they were using is gone.

Peter McCormack: The interesting thing here is fiat currencies are set up to fail, as we've talked about in this because of the way the governments print money, but they're in a debt spiral which kind of puts Bitcoin in a -- what would you call the increase; an upward yield spiral?  I don't know, because it's like magnetic forces, right?

Greg Foss: Yes, conservation of energy, so the same thing in finance.  The intrinsic value of it will increase if you buy that valuation methodology.  We don't even have to go there; we can go as a function of total global assets.  Why don't we start with that and just say, "If Bitcoin does become the global reserve asset, then it should occupy a percentage of everybody's portfolio" and I like to start it as, the total global financial assets, as I see them, including real estate is $900 trillion US. 

$900 trillion; is it unreasonable to think that if Bitcoin becomes the global reserve asset, that it could get 5% of global financial assets?  I think 5% is very reasonable.

Peter McCormack: I think that's reasonable.

Greg Foss: 5% of $900 trillion is $45 trillion; $45 trillion divided by 21 million; we're talking some big bananas there, right.  No disrespect Mark Cuban but, yeah, those are real bananas.

Peter McCormack: But, it doesn't work like that that you divide the $45 trillion by 21 million, because what actually happens is $45 trillion tries to go into that, there is the premium as the price shoots up.

Greg Foss: No, I know, you're totally right but you've got to start with something, you've got to start with valuation metrics.  Michael Saylor thinks it goes to $100 trillion, so $100 trillion divided by 21 million so you're talking $5 million.  My point being this, guys, we're at a rounding error right now.  I don't even know what Bitcoin is today, I try not to look at it on a daily basis, although I do trade instruments on the stock exchanges that are impacted, so I should know where it's trading when markets are open; but let's say it's $52,000, which it was this morning, something, or was it $54,000 or $52,000; it doesn't matter.

Peter McCormack: $54,500, we're back over a trillion-dollar market.

Greg Foss: It is such a rounding error compared to where it could go.  Incidentally, I got involved in Bitcoin when it was under $1,000.  Bitcoin is actually less risky and a better trade right now today, than when I got involved in it when it was $1,000.  Why is that the case?  Well, the network's stronger, the adoption, the use case is playing out. 

You got guys like Michael Saylor who is honestly probably the -- I love rocket scientists because I took turbo machinery in engineering; I sort of understand what they guys think.  Listen, he's got it man, he gets it.  Break it down to first laws of thermodynamics, do all that; it's inevitable that if you own zero Bitcoin right now, you're taking extreme amounts of risk compared to if you have an upward folio allocation.  That's what people don't get; risk management is about hedging the upside and the downside.

Peter McCormack: Listen to that point; anyone listening to that point needs to really kind of take that in, that's a quotable thing you've just said there.

Greg Foss: But you need to, I've managed risk my whole life and that's what you have to do, is play probabilities and play expected values.  I sort of like Peter Schiff, maybe not, but here's the thing; he is just absolutely digging himself a deeper hole and as a trader, if you ever did that, you'd blow up and you're done, you're gone, they cart you out, you're on a gurney, you're off the floor and you never return. 

Peter Schiff is just replaying this whole thing; I think it's theatre.  I would love to debate him, I know he wanted to debate Saylor and then called Michael a chicken for not taking the challenge.

Peter McCormack: There's so much, dude.  I know he listens to this show, luckily.  I don't think he does!

Greg Foss: Here it is, okay.  "Hey, Peter, I did send your son Bitcoin for his birthday, yes, I was one of the people, because he actually gets it; Spencer Schiff gets it, he understands maths.  I think you understand maths as well, Peter Schiff, like you're just playing theatre.  You've got to stop playing this theatre, sir, because you are costing so many people their livelihoods and the livelihoods of their kids.  I'm actually taking offence to this now.  You are doing a disservice to risk managers everywhere.  You may be right, but from a risk management perspective, you are so wrong it's embarrassing for you, it's embarrassing for my kids and Spencer Schiff, thank you for calling out your father".

Peter McCormack: Look, I'm going to try and set that up, but that's an interesting point because I'm not a gold hater like some people are.  I'm not one of those people who just says, "Oh gold is dead", but the reality is when you think about the function that Bitcoin is playing as insurance under your term, it's the same function gold could perform but except you have this ability to hold the assets so you can reduce your counterparty risk.  So, it just is a better --

Greg Foss: Stop there, it's 100% you are reducing your counterparty risk, not you "can" reduce your counterparty risk.  You're 100%.

Peter McCormack: It depends, because some people will custody, some people will use a custody solution but --

Greg Foss: So, let's just say that the world finds out you're holding all this gold at your house.

Peter McCormack: Yeah, true, true, true.

Greg Foss: Are you really, really that happy that you have to hold it in a safe and you can't transfer it, you cannot divide it, all the things that Bitcoin offers that gold doesn't?  Don't overthink this.  Gold was a very valuable material for thousands of years as a store of value, okay, but there just happens to be a better horse in the race right now; borrowing Paul Tudor Jones, there's a better horse in the race.

Peter McCormack: Let me work through one of the hurdles that people have.  I have my friend, Louise, she messaged me earlier.  I went to see her on the weekend, I haven't seen her in ages, she's like, "How's the podcast going?"  I was like, "Fine".  She goes, "I don't listen to it", I was like, "It's a Bitcoin podcast you wouldn't", and she's messaged me earlier and she's listened to it.  She's like, "I'm thinking of buying some but it's a bit expensive". 

I think the price of Bitcoin itself is really misleading, I think that unit bias scares people off, but what they're missing is the point is that it's programmed, it's mathematically designed to go up, based on its reaction to the fit monetary system, as you said, at being an insurance.  So you have to ignore the short-term volatility and you have to buy in for long-term protection.  It's long-term insurance, right?

Greg Foss: Yeah, I agree with that now.

Peter McCormack: It's not 30-day insurance, 30-day insurance you could lose money.  

Greg Foss: Here's the new thing, do you buy fire insurance on your home?

Peter McCormack:  I do.

Greg Foss: Okay but then do you sell it?  Now, you own it forever.  Bitcoin is insurance that you own forever and someday, if we move to a Bitcoin standard, then we'll be buying and selling Bitcoin; but until that happens, you need to own this insurance forever.  You don't buy fire insurance from a pyromaniac; you do not buy fiat currencies and buy default protection from the US government.  It's asinine, you need to buy Bitcoin or insurance from someone who is counterparty neutral or no counterparty risk.

Peter McCormack: Let me throw this one at you, tell if I'm right and wrong.  Is the Bitcoin market actually like the bond market and every day we're repricing the insurance?

Greg Foss: Potentially, I mean look a market is a market, it's the most beautiful thing about capitalism; markets are truth, okay.  So, I'm a Bitcoin maxi, I'll be very honest about that, but am I going to tell you there are not other uses of other blockchain technologies out there?  I have my views, but I'm certainly not going to tell you like Peter Schiff tells you that Bitcoin has no intrinsic value, because that would be dumb.

Peter McCormack: No, it clearly does, I tried to debate -- I had him on my show and he just doesn't shut the fuck up when you're trying to talk about it, and also he's intellectually dishonest because he won't actually listen to any arguments, but let's forget him for now.  I'll set up that debate with him.

Greg Foss: For sure.

Peter McCormack: But the point is, if your Bitcoin is insurance, I'm not using it as a currency.  Yes, I'm getting paid, but really I'm getting paid in it because it's almost like I'm being paid in insurance; I'd rather have that.

Greg Foss: Okay.

Peter McCormack: So, I'm getting paid in insurance, and I feel like it's almost like all these things get traded daily.  You've talked about the bond markets being liquid markets, you've talked about the debt markets being traded, you've talked about the credit default swaps being traded; Bitcoin is just one more component of all this.

Greg Foss: It's a $1 trillion market; it was worth $1 trillion.  At $54,000, I think is when it's worth $1 trillion; I know it's worth $1 trillion.  $1 trillion is bigger than the entire Canadian banking system.  The value of Bitcoin is now larger than the entire Canadian banking system; the value of Bitcoin in a couple of hundred and billion more of value will be larger than the entire US banking system, market cap to market cap.  By the way, those banking systems are levered 25 times, okay.  If you tell me that Bitcoin is too risky compared to the Canadian banks, I need to walk you through mathematics again.

Peter McCormack: So, what is it?  You speak to a lot of people in these markets, you've been in this in a long time; what are they missing, the people that aren't buying into this?

Greg Foss: Bias; there's a status quo bias.  It's like Psych 101 and I didn't take nearly enough psych courses when I was growing up, I took too many maths courses.  Psychology; status quo bias; the intellectual laziness.  Jamie Dimon probably really understands Bitcoin, but does he want it to succeed; absolutely not.  He knows it will disintermediate his entire franchise.

Peter McCormack: You know what; every now and again I do an interview and it just makes me more bullish and now I'm like, "Shit I need more Bitcoin".  Greg, you've done it to me, man, done it to me.

Greg Foss: I can talk for hours about this and all I bring to the table is, and I'm going to borrow this from a friend of mine in Canada called Kevin Muir; have you guys ever heard of the macro tourist?  He goes, "All I bring to the table is 25 years of mistakes, that's all I bring to the table, is learning from my mistakes".  If you continually compound your mistakes rather than learn from them and adjust your portfolio accordingly, you won't be in business anymore; it's pure simple risk management.

Peter McCormack: Best asymmetric trade ever, as you say repeatedly.

Greg Foss: That's my opinion, okay.  I have never seen a better trade and by the way, I've actually had some pretty good trades in my career.  I'm not trying to brag, I'm just telling you this is the best asymmetric return distribution that I have ever seen in my career.  Does it mean I'm 100% certain; no.  Anyone who's 100% certain about anything generally is on the wrong side of a trade or somewhat compromised.

Peter McCormack: Where do you think this goes, because it's been a different year for Bitcoin this year?  My convictions have been a lot higher, I've invested more money than I've ever done and my conviction's pretty high, but I think my conviction is --

Greg Foss: You know what I like to say?  Quite simply, talk to you in 20 years.  When I get people involved in it, I say, "I don't want to talk whether it goes from $43,000 to $63,000 to $23,000; those are all rounding errors.  Let's talk in 20 years.

Peter McCormack: When you're 77.

Greg Foss: I hope to be.  At the end of the day I will be if I'm still alive, I guess what I'm saying is, I'm doing this as much for me as I am for my kids.  This is about being part of a system of which I'm partly to blame.  I did not put my hand up soon enough and tell the world that the Royal Bank of Canada was insolvent, okay?  I would have been a pariah. 

Start a bank run in Canada because I know how to do maths?  That's not my goal.  Start a bank run in Canada because I know our politicians are really, really bad at maths?  It's not my goal but, hey, enough is enough.  I'm sorry, with all due respect Ms Kelton your mathematics are horrible.

Peter McCormack: Wow, she gets to sell books and probably gets invited to Sportsweek.

Greg Foss: There is an incentive there that might be -- but I honestly truly believe she just doesn't understand what contagion in a financial market looks like.  Nobody out there who trades equities even understands the importance of the bond markets and the credit markets, because everything starts with credit.  Our whole capitalist system is built on credit, and equity markets are just the pail of the dog and when the dog, which is the credit markets, gets upset, that tail wags like some sort of insane maniac; they whipped around.

Peter McCormack: What's happening in the equity markets right now, we haven't even touched on that.

Greg Foss: One of the things and not looking at what it's doing today, but one of the things that the discount rate is being adjusted for growth stocks like the high tech, where future cash flows are -- a lot of these cash flows come in the future, they're projected, they're not guaranteed; but as you change that discount rate, the value of those cash flows goes down, meaning if you change the discount rate, increase the discount rate, the value of those cash flows goes down and hence the perceived value of that equity goes down.

People are saying there's an equation for what is the discount rate of a dividend in perpetuity, and it's 1/r.  1/r is 1 over the discount rate; so if it's a 10, if your discount rate is 10% or 0.1, your multiple is 10.  But then you have to adjust it for growth and the equation becomes 1/r minus g, so r being the discount rate minus the growth rate.  That's when you can get these huge multiples, okay, because if the growth rate is over 10% you're essentially almost dividing r -- your multiple becomes 1 divided by something very close to zero and then you get huge multiples of cash flow.

All of a sudden if that r starts increasing and that g starts decreasing, wow, your multiple goes down really quickly; is that what's happening?

Peter McCormack: Is this why we've seen what's happened in the Nasdaq?

Greg Foss: It could be.  Honestly, sir, everyone has an opinion, I think that's a component.  I also think the rotation, there's a fixed amount of money in the equity markets, or not fixed, but generally it's fixed and there's a rotation taking place from the growth stocks in the Nasdaq into the old economy stuff.  I'm pretty bullish on energy here.  One of the reasons I'm bullish on energy is because ESG has required most funds not to be able to invest in energy.

I'm going to bring something up there, so I'm involved in an energy company in Canada; it is going to use flare gas to mine Bitcoin.  We're going to drain the environment or cleanse the environment by mining Bitcoin and that's going to open ESG spigots to allow energy companies to wrap themselves in the, "Hey, I'm consuming waste energy, I'm not wasting energy".  This is huge and these things are going to happen and it's all part and parcel of the growth of this new ecosystem built on a beautiful product called Bitcoin.

Peter McCormack: A beautiful thing called Bitcoin, man; I think that's a good ending point.  I think we did well.  I'll take two on that first half an hour.

Greg Foss: I could talk to you for hours and I encourage people if they have questions, I did write a paper on it, only because I know it's such a complex subject.  The paper's not perfect but at least it gets out there and actually puts real value on Bitcoin that no one else, to my knowledge, has brought to the table.  Am I 100% certain I'm right; no, I'm never 100% certain I'm right.  Am I highly confident I'm right; yes, I am; but other people, please poke holes in it.  I'll take all challengers, I'm okay with it.  I'm okay with being wrong if you prove that I'm wrong, but so far I think I have the better part of the trade or the better side of the trade.

Peter McCormack: I love the thesis, I loved it.  Like I say I struggle with some bits which you've answered me today, which is great but I thought it was great.  I'm definitely going to share it in the show notes.

Greg Foss: Thank you so much.

Peter McCormack: I think we'll have you back on the show pretty soon, I just need to wrap my head around this Bitcoin insurance thing.  I'm going to try and set up with Schiff, but I'm going to have to have some specific rules that he shuts the fuck up sometimes.

Greg Foss: I think it would be fun, but if he wants debate someone that will build his Twitter followers, he needs to go after the big boys.  I'd be happy to do it, I've done it with his son.  Here's the funniest story; I actually got Spencer to admit on Twitter that he owned a Bitcoin wallet, but I wasn't sure if I was being, whatever they call like a Russian bot was setting me up or whatever.  I actually had to go to people who had Twitter experience and say, "Do you think this is real?" 

Finally, Peter Schiff did respond, the only time he's ever responded to me in a tweet.  I say, "Peter, your son is smart.  He's playing probabilities.  I think if Bitcoin goes to $1 million a coin, with a 3% probability", Bitcoin was trading at about $10,000 at that time, "with a 3% probability it goes to $1 million a coin and a 97% chance it goes to a zero, the expected value of that binary outcome is $30,000 a coin".  So, 97 times zero is zero, 3% times a million and I quoted Raoul Pal, I said, "Going to million", like Raoul Pal. 

Peter Schiff finally responds to me, he goes, "My son's only 18 years old, he's an idiot; what's your excuse?"  That was the only response I got out of him, and since that day I'm like, "Well first of all, your son is way smarter than you".

Peter McCormack: He is; I'd love to see him debate it.

Greg Foss: He said, "My son's only 18 years old, what's your excuse?"  So, he didn't call his son an idiot, he implied certainly I was an idiot and I'm okay with that.  Come on, Peter, let's do this and talk real mathematics rather than subjective evaluations of what you think is value.

Peter McCormack: He's been wrong for a decade.  I'd love to set it up, but the problem is he won't shut the fuck up when you debate with him.  He talks over everyone and what he won't ever do is go, "Let me just comprehend what you're saying, let me rationalise it".

Greg Foss: Correct.

Peter McCormack: "Have you got a point or something?"  He does that high thing, he takes his position and post-rationalises.  It's almost a waste of time.

Greg Foss: It's fair, but also as a money manager, he'd never mange any of my money because if you don't admit you're wrong at times, and no one is ever 100% correct, then you have to make adjustments to your portfolio.  By not adjusting that portfolio he deserves 0% of people's money.

Peter McCormack: Let's forget that guy.  Listen Greg, this was amazing, I love this Bitcoin is insurance.  Okay, it's going to go out soon, I think we will have to do a follow up because I think we're going to get a bunch of questions on this; I've loved this though and please keep doing what you're doing.

Greg Foss: My pleasure.

Peter McCormack: If I can ever do anything for you, just ping me, reach out my man.

Greg Foss: I'll tell you what, I can't wait till we meet in person in some continent or whatever.  I love the stuff you're doing and I wanted to thank you as well for being -- you're helping my kids.  You're helping your own kids, you're helping my kids, you're helping the kids of every country in the future so thank you.

Peter McCormack: I want to come to your pubs.

Greg Foss: We had eight of them, I don't know how many we'll have after this whole COVID mess, but they're pretty fun.

Peter McCormack: Where are they, what cities?

Greg Foss: Montreal, they're all in Montreal.

Peter McCormack: I am meant to be going to Canada, this summer.

Greg Foss: It's a sort of small country, but I'll make sure to hook up with you if you're anywhere in this country.

Peter McCormack: I've done the drive from Calgary to Vancouver which was awesome, but I've not been to Montreal and I talked to the kids about doing it and I said, "If we're going, we're going to go to Montreal", because I've not seen it, so there is a possibility.

Greg Foss: Montreal's beautiful, visit Quebec City, I currently live in Toronto.  There's so much history in Quebec and then it's very close, so Montreal is really really close to Boston and New York City.  You could go to Montreal and drive to Boston, drive to New York.  They're about five hours away each of them, which isn't crazy, it's not like European close but it's not that far.

Peter McCormack: Yeah, all right well if that happens I'll let you know, but listen love this, take care, anything you need you do reach out to me, my man.

Greg Foss: You are the man, I really appreciate it, thank you, Peter.

Peter McCormack: Thank you.