“Nobody got fired for buying IBM”
…but you might get fired for not buying Bitcoin

Every Bitcoin cycle has a theme and a core driver, and sometimes we’re so close to it, we can’t really figure out what it is (or was) until it’s in the rear-view mirror.

In 2013, I always said it was the Cyprus Bail-Ins and the realization that the banking system was heading in a direction where the expression, “safe as money in the bank”, wasn’t quite true anymore. The core driver was the rise of centralized exchanges – even though one of them, Mt. Gox, blew itself up in a meltdown event which is still unwinding to this day.

The 2017 cycle was about the explosion of the cryptocurrency space as an asset class unto itself: Ethereum stormed onto the scene and with the ERC-20 token specification, igniting a mania of “tokenize all the things”. The ICO boom drove the momentum – and the advent of stablecoins like Tether provided the lubricant to get capital into the digital asset space.

For the 2020 cycle, it was the arrival of the first maverick billionaires – Paul Tudor Jones, Stan Druckenmiller, Elon Musk, Michael Saylor – at the time when their entrance was mistakenly taken to mean, “the institutions are coming” into Bitcoin as an asset class.

Not even close. But what did happen was that a lot of hedge funds and high rollers who were ahead of the curve and out to capture alpha started piling into what was then called “The GBTC arb trade” – long story, explained in detail here but essentially meant that trading desks could book fat profits before they were actually realized, at the cost of  locking up their capital for six months.

When it finally came apart (the cycle ended), the GBTC premium morphed into a discount to NAV – and when things went really bad (LUNA, 3AC, Celsius … FTX) GBTC’s own parent entity, DCG, went bankrupt and GBTC became an island of trapped capital, over $30 billion worth.

Now we’re in a new Bitcoin cycle:

We have a new theme and a new catalyst. GBTC comes into the picture here again, because it is both the reason why the Bitcoin price was somewhat muted once the catalyst hit, and also part of the new catalyst.

Remember what we’ve been saying for a year, maybe more: in the next cycle, the institutions will show up, and because of the huge asymmetry in Bitcoin, they will find it compelling enough to allocate a small percentage to it.

I predicted a new investment mantra for institutional fund managers, “The 1% Allocation”.

Let the data points commence: Fidelity, with $12.6 trillion AUM and one of the spot ETF providers (the only one who built out their own custodian to handle it) has added an allocation of “crypto” to their flagship, “All-In-One Conservative ETF” – self professed as, “A one-ticket solution diversified across regions, market caps and investment styles/factors, with the attractions of professional management.”

The one percent allocation goes back years – in fact the first time I saw it was in a Central Bank of Barbados working paper from a pair of  economists there, recommending that country’s central bank hold 1% of it’s foreign reserves in Bitcoin – that was in 2015.

By 2022, even the Basel Committee on Banking Supervision was setting guidelines on “crypto” allocations for Tier 1 reserve assets:

“Group 2 exposure limit: A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%”

(That BIS paper didn’t differentiate between Bitcoin and “crypto”, although it should…)

And this recent Motley Fool article, which is mostly about Cathy Woods’ upping her allocation in ARK Funds to 19% cites the 1% allocation as rather matter-of-fact conventional wisdom now:

“Until this year, the consensus view had been that Bitcoin should account for only a tiny portion of your overall portfolio. As a general rule of thumb, 1% was the norm, and any percentage over 5% was considered ultra-aggressive.”

The new 1% Rule: Buy Bitcoin

We all know the old adage, “Nobody got fired for buying IBM”, which was a mantra back in the “Nifty Fifty” days (which was before my time, but there have always been later iterations: substitute IBM for Microsoft, Google, Apple, etc.)

Here’s what I think happens now: while today nobody may get fired for buying, say, The Magnificent Seven, tomorrow you may very well get fired for not plunking 1% into Bitcoin. Yes, really.

What will a 1% allocation across the institutional wealth spectrum do to the value of Bitcoin? My mental model going back to The Crypto Capitalist Manifesto has always been to look at the total size of the bond market, compared to Bitcoin and precious metals.

Basically, this: pic.twitter.com/FhwvjUxYOq

— Mark Jeftovic, The ₿itcoin Capitalist (@StuntPope) February 11, 2024

From there I posit what would happen if just 1% of that “return-free risk” (bonds), walks on over to Bitcoin. Considering Bitcoin only recently recaptured the $1 trillion market cap, and there’s anywhere between $150T and $300T in global bonds (depending on what you include), a mere 1% exiting fiat-backed bonds and stacking sats would more than double Bitcoin’s market cap, at a minimum.

We’re just over a month into this new era of Bitcoin being available as an institutional allocation strategy and early indications are already there that capital allocators are even choosing Bitcoin over gold – which was something that admittedly, surprised me:

Can someone do a wellness check on @PeterSchiff? pic.twitter.com/mUc2xGwK2j

— Jameson Lopp (@lopp) February 14, 2024

I thought those who had already allocated to gold would stay there, and add Bitcoin, but it is now looking like institutional fund managers who had allocated to gold as an anti-fiat hedge have lost patience with gold’s repeated breakdowns from all-time-highs.

Gold did print a new all-time high in December, but as I’ve observed, since the prior high in 2020, a new ATH in gold may mean a multi-year pullback rather than an impending higher high.

Bitcoin, by contrast, looks poised to put up a new string of them, for the next couple years at least.

So I now humbly present you with “The Theme” of this cycle:

The Theme is: The Institutions are Coming.

The core driver is: The Bitcoin Spot ETFs.

The mantra will be: Allocate 1% to Bitcoin.

This is an excerpt from The Bitcoin Capitalist – Mid-Month Portfolio Review, we’re halting access soon: learn more here ».

My forthcoming ebook The CBDC Survival Guide will give you the tools and the knowledge to navigate coming era of Monetary Apartheid. Bombthrower subscribers will get free when it drops (and The Crypto Capitalist Manifesto while you wait), sign up today. Follow me on Nostr, or Twitter.

(Read on Medium)

“Any corporation, private or governmental, that wishes to provide for a sound and equitable continuity of its business must take steps towards the systematic retirement of debt immediately after it has been incurred. Postponement of all payment for property or privileges by those who presently enjoy their benefits is calculated to bring uncomfortable consequences to them or those who succeed them.”

— Engineering Economics, by  C.R Young. 1949

We frequently hear pundits and talking heads talking about how short-sighted government policies and unfunded entitlements are in essence “stealing from the future” or at best “borrowing from the future” and I found myself thinking about the difference between the two ideas.

Normally when we think about “the two kinds of debt” we think productive versus unproductive debt. Exemplified in the Richard Kiyosaki “Rich Dad / Poor Dad” series, we learn that productive is that which you incur and then use in a way that will help pay itself off.

Examples include vendor or bank financing for buying a business that you would then pay back with the earnings from said acquisition, something I’ve done a couple times over my career; or taking out a mortgage to buy an investment property. From there  you would use the rent to pay off  the mortgage.

I emphasize paying off the mortgage here as opposed to simply servicing the debt with minimum payments or interest only, and we’ll see why shortly. Contrast this with unproductive debt, which is borrowing money to go on vacation or buy consumer goods, or do anything else with it that leaves you with the bill afterward. As Kiyosoki frequently stresses, it’s the difference between debt that makes you money vs debt that costs  you money.

Now, what is the difference between borrowing from the future and stealing from the future? Debt is aptly described as pulling future demand or future productivity into the present. Government entitlement programs and ballooning deficits do this with abandon. So do companies, like the high flying Netflix which is a FAANG favorite but is carrying about $10 billion in bonds on the books, having recently issued another $2 billion in junk bonds just to fund their content development for the next six months.

What’s the big question?

It’s this: is there a realistic plan that this debt will be paid off in the future? Or is the plan to simply roll it over, in perpetuity?

We know Big Governments the world over have incurred debt that cannot, ever, be paid off. Maybe they’ll be liquidated via default, or hyper-inflated away, but that’s not the same as paying them down. I call that stealing from the future. If there is actually a plan to pay the debt down, then that’s a borrowing from the future.

At the governmental level, in the US at least, that hasn’t happened since Eisenhower, who was the last president to actually reduce the national debt. The last president who actually paid off the national debt was Andrew Jackson (those fabled “Clinton-era surpluses” were somewhat of a sleight-of-hand fiction, take a look at the chart here to see them in context).

If we take the two kinds of two kinds of debt, then we get ourselves a nice matrix or grid:

The two sides are Why vs How. Why are you borrowing money? vs How will you structure it, as borrowings or theft against the future?

The examples in each quadrant are just that, examples. Will Netflix ever pay down those bonds? Maybe the CFO thinks they will, someday. Or maybe they plan to just keep rolling it, in which case it should be over with share buybacks in the bottom-right quadrant.

The more I thought of it, the more I couldn’t come up with a legitimate use case that would put productive debt into the stealing (perpetual debt) quadrant. All justifications aside, it will wind up in the unproductive quadrant because time is the enemy of debt, at any price.

But wait, what? Share buybacks are unproductive? Most of the time, yes. Especially lately, when companies are borrowing money at artificially low interest rates to buyback their shares trading near all-time highs. As I observed in The Transition Overview, “the value investor in me finds that kind of stupid”.

The poster child for all this lately is GE, who spent $40 billion on stock buybacks between 2015 through 2017 on shares that have declined in value 75% since. The company is now has a tangible net worth at negative $48 Billion. My mom’s pension is with GE, as my dad worked on the shop floor there for 30 years.

I remember assuring her a few years back that no matter how badly GE messed themselves up, there was no chance they would bankrupt themselves …along with their pension liabilities, in her lifetime. She was around 86 at the time and it’s now looking like she’s the one who’s going to outlive General Electric.

After the last financial crisis I came across a web hosting company that had attempted to grow via leveraged acquisitions, borrowing more and more money to buy up ostensibly “accretive” companies but when everything blew up, they were offside on all of their covenants and couldn’t possibly repay the debt. I wound up in talks to acquire them from a hedge fund who had somehow inherited the debt and with it the entire company after some sort of Bear Sterns style shotgun wedding with another hedge fund in order to survive.

They showed me the CEOs plan to fix the situation should the hedge fund (or me, if I bought the company) accept his proposal to restructure the debt.

The plan was to take out another loan to do some more acquisitions!

I took one look at that and said “no thanks”. A few years later I bought some other business as part of a carve-out. I financed that with a vendor take-back and paid down the loan in full a year later. That unit has produced a minimum of 100% of the total purchase price in earnings every year since. That would be a Quadrant A style investment.

More recently, today in fact, which is what got me thinking about all this, I just walked away from a deal I’d been working on for a little over a year. It involved taking a significant ownership stake in a very small publicly traded company (I never accrued more than 1% of the equity, had I gone through with it I would have been a full-on insider with 12.77%). Anyway – same story. They had levered up a few years ago to do an acquisition. This was also Quad A investment – productive and they planned to pay off the debt in 3 years. Only the market conditions changed. Now they can’t pay off the debt and they had to dilute all the shareholders by half to restructure the debt last year. That’s the problem with debt, even when you plan to pay it off, if you’re too levered, it can still kill you.

With the latest, even relatively benign, rise in interest rates, all sorts of these fissures have begun to appear throughout the system.

The permabulls are betting on a new Powell Put so that interest rates can’t climb too high but that is another problem in itself. No matter what happens, the stairway to heaven stock market rally, and the leveraged buyback orgy of the last 10 years is for all intents and purposes, over.

So now the bills come due. I’ve said it before, when these kinds of shifts happen or cycles turn, it’s the debt load that separates the survivors from the statistics.

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