“Bitcoin is unequivocally a macro asset,” said Travis Kling, the former hedge funder and now founder and CIO of Ikigai Asset Management.
“It is a fledgling macro asset,” Kling continued, adding:
“Seven-plus years of [bitcoin’s life] it really was just kind of a computer science experiment in the closet of a bunch of computer science nerds. And then, it was a magic internet money for drug dealers to buy drugs on the internet. And then, it was ‘blockchain and not bitcoin.’ And then, it was for Americans to buy coffee at Starbucks, maybe it was to save Venezuelans from a million percent inflation. It’s gone through a number of phases in its history, but I would say that two-three years ago, it stepped out onto the global stage and its presence there has only strengthened since then.”
Kling spoke with CoinDesk for one of the inaugural episodes of Bitcoin Macro, a pop-up podcast featuring the speakers and themes of CoinDesk’s upcoming Invest: NYC conference on Tuesday, Nov. 12.
Listen to the podcast here or read the whole transcript below.
The last six months have seen a growing dialogue between the bitcoin industry and the larger global macro community. No longer written off as some ignorable niche, people are increasingly asking: Is bitcoin a macro asset? Is it a safe-haven asset? How will it perform in the next recession?
Travis Kling has exploded onto the bitcoin scene over the past year. Spending ten years in traditional finance before moving to crypto, Kling has become a mainstay for his clear-headed analysis of larger market trends – which he has called “the longest monetary policy experiment in history.”
In this episode of Bitcoin Macro, CoinDesk’s Nolan Bauerle sat down with Kling to discuss:
- Why bitcoin is a fledgling macro asset that has significantly increased its footprint on the global stage.
- Why bitcoin is currently a risk asset, but why people think it’s showing signs of a future safe haven asset.
- Why how bitcoin reacts in a recession might be based on what type of recession it is.
- Why he believes Fed Repo market intervention has impacted the recent bitcoin price downtick.
- Why every time the bitcoin price crashes and recovers, it brings more recalcitrant institutions into the fold.
- Why the most interesting charts of the year to him are those comparing bitcoin to other safe-haven assets.
Nolan Bauerle: Welcome to Bitcoin Macro, a popup podcast produced as part of the CoinDesk Invest New York Conference in November. I’m your host, Nolan Bauerle. Both the podcast and the event explore the intersection of bitcoin and the global macro economy with perspectives from some of the leading thinkers in finance, crypto, and beyond.
I’m here with Travis Kling from Ikigai Asset Management. Ikigai Asset Management is a crypto hedge fund. We’re here really to give a preview of the kind of content and speaker that we’ll have at our event in November. One of our major themes this year is really bitcoin as it is in the world today. We want to get some idea from some of our speakers of how they see bitcoin on the global stage.
So, we’re going to be running a series of speakers through this podcast over the next few weeks to answer some preview questions about things that we’ll be talking about on stage. So, these questions will be of a similar order for each of the speakers, and really are about bitcoin’s behavior. The first question, Travis, is bitcoin a macro asset?
Travis Kling: Thanks for having me, Nolan. Bitcoin in unequivocally a macro asset. It is a fledgling macro asset. It’s been around for going on 11 years now. And first, I would say seven plus years of that it really was just kind of a computer science experiment in the closet of a bunch of computer science nerds. And then, it was a magic internet money for drug dealers to buy drugs on the internet. And then, it was blockchain and not bitcoin. And then, it was for Americans to buy coffee at Starbucks, maybe it was to save Venezuelans from a million percent inflation. It’s gone through a number of phases in its history, but I would say that two-three years ago, it stepped out onto the global stage and its presence there has only strengthened since then. It’s definitely our expectation that it’s going to continue to strength over time.
Nolan Bauerle: So, as you see some of these movements, global uncertainty, we see this sort of, perhaps what people have called it de-globalization of the world with a lot of these trade war issues. Do you see bitcoin … so you’ve got sort of the main stage of macro assets within that, is bitcoin in the wings waiting to come on stage? Is it actually on stage and maybe in the background? Where is it in that scene? Is it right in the main stage already and no one knows, or is it in the wings, is it a background singer? Where is it?
Travis Kling: I think it’s a baby X-Man.
Nolan Bauerle: A baby X-Man?
Travis Kling: That’s what I think it is.
Nolan Bauerle: So, the X-Man being the mutation part of it?
Travis Kling: And stronger than everything else, but still a baby. So, a normal person could probably walk over and push on a baby X-Man and it’ll tump over and maybe it’ll even cry a little bit. But it’s pretty clear what it’s going to be when it grows up.
Nolan Bauerle: I like that assessment. And would you say that the grow up part is really a sort of Lindy effect aspect? That the length of time that it’s around, does that make it more like gold because it survived?
Travis Kling: Lindy effect definitely matters. Seeing these booms in the boom and bust cycles matters. The amount of people paying attention to it as it booms and busts, I think definitely matters. Because I think 2017 ushered in … like, that brought Bitcoin to the global stage and it ran up 13X in calendar year 2017, and it went down 73 percentage points in calendar year 2018. And you know, when we were sitting here in mid-December of 2018, there were a lot of no-coiners that were feeling really vindicated, right?
And there were a lot of RIAs that had their clients banging down their doors telling them, “Why am I not in this? Don’t I need to get into this?” Everybody was feeling very vindicated, right? And then, just like that, it’s up 160% year to date and is the best performing asset class by a wide margin. The expectation is for that to continue. And I think that the way that that continues to play out over the next couple years is pretty unequivocally heading in the right direction. And now that there are more and more eyes on it then we’ve got more and more potential people that have now done the work and are ready to invest.
Nolan Bauerle: So, you had mentioned a note about Venezuela. Is bitcoin a safe haven asset? Is this something that can be used in instances where there are this kind of trouble? Is there a larger scenario than the ones we’re always talking about, about Venezuela? Can this be used for what’s going on in Hong Kong, for example? By safe-haven asset, I mean, is this something that really is a manipulatable or maneuverable instrument right now for a lot of these people? Is it accessible to them?
Travis Kling: Yeah. Like we talked about a minute ago, bitcoin’s gone through a bunch of phases in its life, and I think that sometimes people get confused about literally what is bitcoin. And so, I always like to take the opportunity. Bitcoin is a non-sovereign, hard cap supply, global, immutable, decentralized, digital store of value. And that’s a lot of adjectives to throw in front of there. But each one of them is important. It is a hedge against monetary and fiscal policy, irresponsibility from central banks and governments globally. Now, bitcoin is undoubtedly a risk asset today and it acts as such. It is not a safe haven asset today. People are speculating that bitcoin will become a safe haven asset one day because it has the characteristics to be a safe haven asset. Gold has been gold for 5,000 years. Before we stored value in gold, we stored value in seashells. We stored value in salt. We stored value in really big rocks in the Asian-Pacific islands.
There’s characteristics around what makes a good store of value. And it’s the six characteristics of money, it’s an Austrian economics framework. It’s durable, it’s divisible, it’s portable, it’s uniform, it’s accepted, and it’s scarce. And when you look at gold next to BTC within that framework, BTC actually lines up really well. Like I said, gold’s been gold for 5,000 years, bitcoin’s been around for 10 and a half years. It jumped out of obscurity about three years ago. So, it’s going to take a little bit longer than three years to usurp a 5,000-year store of value. And you know, I’m not even saying that that’s necessarily going to happen in our lifetime. But BTC’s market cap is 160 billion right now, and gold’s market cap is eight trillion. If you just claw into just a part of that, then obviously the return potential is tremendous from here.
Nolan Bauerle: So, the question then is, who gets to nine trillion first?
Travis Kling: I would guess with what’s going on in the world right now, gold will get there first. The future’s exceedingly bright. And to go back to the Venezuelan point, and I don’t want to talk about something that I don’t know about because I’ve never been to Venezuela, and I really feel for the folks and the situation that’s going on down there. But I think that if I’m in Venezuela and I can choose between a bolivar or a bitcoin, I’m definitely going to choose a bitcoin. But what I really want is a dollar. And a dollar is a great method of exchange.
Right now, bitcoin is not as good of a method of exchange and that’s okay. I like to say that bitcoin’s too good at being a store of value today to be a good method of exchange today because nobody wants to be the bitcoin pizza guy that spent 1,000 BTC on a pizza. And the expectation is that the price is going to continue to rise, realized volatility is going to continue to fall as it has been. I like to remind people of that. Bitcoin’s a very volatile asset, but the realized volatility of bitcoin is decreasing at a logarithmic rate. So, really quickly. As quickly as the price is going up, which is 22 million percent over bitcoin’s lifetime.
As that continues to occur and you have Lightning Network being built out, which is Bitcoin’s Layer 2 scaling solution, and eventually it’s our expectation that you’re going to have a make or die type of solution built on Lightning, where you can stake BTC, get back stable coin, pay interest on that stable coin as long as you pay that back, then you get your BTC back. Lightning is essentially infinitely scalable. And so, it’s okay that it’s not a great method of exchange right now.
Nolan Bauerle: So, you had mentioned that it’s got these qualities, but that it is still able to be, let’s say, pushed over as this baby X-Man, which I think is great image. You know, it’s on stage and it can be pushed over. And the next question is, what does it do in a recession? Does a recession push it over, or do we start to see the actual attributes, those super powers come out in a recession? Because we might be there. So, this is a low time preference question.
Travis Kling: It’s a great question. It’s a complicated answer. I think the first thing I’d say is it depends on what type of recession. And it depends on where the recession emanates from. It depends on the severity of the cause or causes of the recession. And it depends on what the response of central banks and governments globally to that recession are. So, for example, right now we’re going through this dollar shortage situation that has been certainly all over mainstream financial media, and for good reason.
Nolan Bauerle: Looks like 2006.
Travis Kling: Yeah. I mean, there’s aspects. The first symptom of this dollar shortage situation first popped up when the Fed funds was offsides from the overnight offer rate, and then you had the repo market, and that’s been going on now for like six months. That’s not supposed to happen. The rational actor explanation for why that spread between the Fed funds and the overnight offer rate would persistently stay open is one that’s kind of scary. And then, we have the repo market blowout last week. And you had the treasury, Fed, have to step in and essentially issue 53 billion dollars worth of quantitative easing to assuage this situation.
And people, Jay Powell, at the Fed meeting last week and others are calling this transitory, saying, “This is because corporations have to pay their cash taxes right now,” even though they have to pay cash taxes every time this year, so everybody should know that that’s going on. They’re saying that it’s because of the 600 billion of treasuries issued between now and the end of the year, that’s sucking up all the dollars. There’s probably some truth to that. But this is exactly what happened right before Lehman. They said it was transitory then too. And I’m not saying that there’s a Lehman lurking around the corner, because I don’t think that there is. But there are problems starting to show up here.
The global economic data is undoubtedly turning down right now. And it’s turning down in concert. It’s all turning down at the same time. It’s all turning down at the same time because the whole world is now on this central bank trade, and on this cheap money trade. But it’s apparent that central banks are going to cut interest rates and juice QE into infinity to either prevent a recession or kind of have the recession be as soft as possible. And those forms of quantitative easing are going to be increasingly more exotic because in the same way that, you know, if you do heroin long enough, then you got to keep taking a bigger and bigger shot of heroin, you need increasingly more exotic forms of QE to get a similar type of effect. Because if you’re in Europe and you cut the interest rates from -40 bips to -50 bips, it just doesn’t make that big of a difference.
Nolan Bauerle: Yeah, they’re not going to change their habits all of a sudden.
Travis Kling: Yeah. And so, if there is a big liquidity squeeze that kind of immediately kicked off the financial crisis last time around … the financial crisis, it wasn’t … like, Lehman didn’t go down because of subprime. It went down because of the overnight lending market. And then, there was a liquidity crunch. Subprime was sort of the skeleton in the closet, but it was the overnight market, repo markets that really caused this;
Nolan Bauerle: That’s what made it irredeemable.
Travis Kling: Yeah. And so, if you have some kind of liquidity squeeze like that again that kicks off another recession, yeah, it’s my expectation that bitcoin price will go down in that. I mean, we’re sitting here talking about this the day after bitcoin’s price went down more than 10%, which was a week after the repo market blew out.
Nolan Bauerle: How do you mean they’re related? In a sense that they … from a certain point of view, it’s the exact opposite behavior you would expect.
Travis Kling: So, the euro-dollar market is another way to think about this, which is literally like a quadrillion dollar market annually, and most liquid sort of market of anything in the world. If you throw a big rock in the middle of a pond, how far do the ripples emanate? They ripple all the way out, increasingly smaller ripples. So, if you throw a wrench in the quadrillion dollar euro-dollar market, how far do the hiccups spread? And the 30-day circulating supply of bitcoin is 15 billion dollars. So, how small does the ripple of the global liquidity market have to be to send the 15 billion dollars of circulating supply of BTC down 10 percent on any given day. It just doesn’t take much.
Nolan Bauerle: There was a chart, I think, that you mentioned to me a little while ago about the HODL Waves along that line which was, look, what bitcoin is actually available out there because you’ve got all the HODLers, and they have this bet and they’ve had this bet for a long time about the extinguishment of power of central banks and that that will be a trade, and that the global traders are coming to bet against the banks. So, you mentioned this HODL chart. How do you use this HODL chart to see what’s going on, and to really understand bitcoin’s liquidity in this instance?
Travis Kling: Yeah. So, we like to look at just overall trends, and we look at how much BTC has moved in the last 1 day, in the last 7 days, 30 days, 90 days, 6 months, 1 year, 3 years, and five years. And you know, a gentle reminder that there’s like two and a half million bitcoin that have never moved before, right? And so, all bitcoin in existence is like 18 million, but like two and a half million of those are probably lost or they’re Satoshi’s, and I don’t think he’s moving them any time soon.
And you can see trends. There’s really interesting trends in terms of periods of accumulation, and then periods of distribution in terms of old coins not moving for an extended period of time, and then moving. And the bottom line is that if you’re seeing older coins stay put, then the price really can’t go down all that much because you’re just continuing to take new coin that is in sort of loose hands and transferring it into stronger hands that understand the potential and the promise of bitcoin and aren’t going to sell them for $3,000 a coin, for example, in mid-December.
And so, there’s lots of derivations of work that we do around HODL Waves, and we also talk about days destroyed, bitcoin days destroyed, which is the sort of opposite side of HODL Waves, which is, if I buy one bitcoin, hold it in my wallet for a year, and then I send it to an exchange. On that day, there are 365 bitcoin days destroyed, right? Because you stacked up, you held the bitcoin for a year, and then you moved it. And the beauty of the blockchain is that every single Satoshi you can track like that in real time. And so, for a naturally analytical guy like myself, there’s a whole host of really fun analysis you can do there.
Nolan Bauerle: It’s a dear diary.
Travis Kling: Yeah, it’s great.
Nolan Bauerle: Dear diary…
So, I want to go back a bit to what we were talking about just a few minutes ago about the quantitative easing and that large trade that the central banks are asking everyone to make. You know, it’s always been my opinion anyway, that Satoshi Nakamoto took the Japanese pseudonym in order to say and have a type of authority that, “I know what happened in Japan in the 90s and the lost decade and the negative yield,” and all that stuff. And basically, wagging his finger to America and the rest of the world to say that, “You’re now in this boat. You now have a completely weakened central bank that doesn’t actually have the levers to pull any longer. They will fall into the cycle of perpetual QE.” Is that sort of a … and I’m not saying you have to subscribe to the Satoshi Nakamoto, 1990s, tying it in to Japan thing, but is that what you’re seeing? Is it basically that, that the levers are broken and this is the trade to make because this power is gone?
Travis Kling: I had never thought about the Japanese aspect of it, and it makes a lot of sense. It strikes me as, from what we know about Satoshi, it strikes me as the kind of thing that he would do. Unequivocally libertarian, unequivocally cognizant of what central banks were doing at the time, the white paper came out the week after Lehman collapsed. I mean, look no further than what written on the Genesis Block on January 3rd, 2009, “Chancellor on brink of second bailout of banks.” I think that tells you all you need to know about what Satoshi was thinking about when he was creating and giving bitcoin to the world.\
Nolan Bauerle: So, Travis, you do come from a more traditional background. And the next question is really about how you, I guess you can say, still peer over that fence. So, how has the narrative changed round bitcoin in the mainstream financial world over the last six months? Is it that different? And I’m saying six months, not from 2017.
Travis Kling: Yeah.
Nolan Bauerle: You did mention a bit about how there was a bunch of schadenfreude back in December when everyone was laughing at bitcoin people. You know, and now here we are, I guess almost 10 months from that big laugh they had. Where are we?
Travis Kling: So, the first thing I’d say is still not dead, right?
Nolan Bauerle: Mm-hmm (affirmative), which is a very important thing.
Travis Kling: Yeah. Bitcoin’s price has declined more than 70% seven times in its history. In ’18 it did another one of those. And you know, every single time it’s sort of come roaring back to life and now it’s 230% off the lows in mid-December, far and away the best performing asset of 2019 across all asset classes. There has been increasingly more work that’s been done by institutional investors and folks from more traditional asset classes that didn’t have experience in crypto that have done more of the research to understand what bitcoin is, some of the mechanics around how it works because it’s like, look, the mechanics are not bite-sized, I get it. I knew nothing about cryptography before I jumped into all this. I knew nothing about computer science before I jumped into all this. Mechanism design, game theory, sociology, governance. There’s a lot of things that you have to think through-
Nolan Bauerle: A deep talent stack.
Travis Kling: Yeah, I mean, it encompasses many things. And so, you’re not going to bang out three 30-minute blog posts and get it, right? You’re not going to listen to one podcast and get it. But increasingly investors have done the work and are incentivized to do the work because now everybody’s sitting in there, thinking about what they were doing in mid-December when bitcoin was $3,000 or January/February when it was low $3,000s, and thinking, “Oh man, if I’d of … you know, I almost put 100 grand into that thing at the time. If I’d of just done that, I would have had the down payment on a nice house right now.” People think like that, right?
Nolan Bauerle: Mm-hmm (affirmative).
Travis Kling: Institutional investors think like that. We’re humans. And so, I think that that’s part of it. And then, in the meantime, look you’ve got increasingly more institutional grade infrastructure that’s being built, right? A year ago, Fidelity didn’t custody this thing. A year ago, the New York Stock Exchange didn’t trade this thing. A year ago, Whole Foods didn’t accept this thing. A year ago, Microsoft wasn’t building an identity platform on top of this thing. A year ago, you didn’t have half a dozen qualified custodians in this thing. So, regulated exchanges all … like, the space’s maturation, you know, sometimes I wish it moved faster but when you take a step back and look at the forest through the trees, we’ve covered a lot of ground over the last two years. And so, I think the outside world is definitely taking note of that.
Nolan Bauerle: So, we’ve talked about a lot of things today. We talked about QE, we’ve talked about global hedge, we’ve talked about safe-haven currency, a bit about the technical innovations coming on bitcoin. But what I would like now, is really just a chart that informs this, I’d say, really optimistic and powerful belief you have behind bitcoin.
Travis Kling: Yeah. So, my chart is the chart of over the last year of the price of gold, the price of the offshore renminbi, and the price of bitcoin, which moved pretty much in tandem until a little over a month ago. And then, BTC has pulled back while gold and the renminbi have shot up higher. The safe-haven store of value digital gold, I’ve heard some macro investors call bitcoin high beta gold, which I think is like an interesting way to sort of think about it.
There’s been a disconnect over the last six weeks or so. And why is that disconnect happening? I’m not going to pretend here and say that I know exactly. There may be a situation where bitcoin can act as a safe haven asset up to a certain level of stress in financial markets, or act as a safe haven towards some types of financial stress, or it may just be that it’s a safe haven at $6,000. And it wasn’t a safe haven at $13,000. And you know, bitcoin’s price moves swiftly. And so, we’ll see how all of that plays out.
Travis Kling: But I think, you know, I could throw aggregate negative-yielding sovereign debt, I could throw that on that chart and it would look like a pretty similar situation. I could throw the 10-year break even in terms of the inflation expectations. It’s all sort of … it’s all wrapped up in this same sort of central banker type of driven trade. And you know, I think bitcoin has the ability to be right there in the middle of it. We’ll see how it plays out through the rest of this year and moving into 2020.
Nolan Bauerle: Travis, thanks a ton for your time. Really interesting stuff. See you in November at Consensus Invest.
Travis Kling: Pleasure. Thanks, Nolan.
Nolan Bauerle: Thanks a ton.
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