Each month in the Crypto is Easy newsletter, I publish my thoughts on big-picture, global events and trends that affect the cryptocurrency markets. I am reposting this month’s piece below. If you like it, you may want to subscribe to the newsletter directly. That way, you will get everything delivered directly to your inbox. Go to Crypto is Easy and sign up.
When I worked in politics, it was my first exposure to wealth. As the son of a public attorney and an ESOL teacher, I had no concept of money—let alone a world where money seemed endless.
A lobbyist could pay $3,000 to eat breakfast with a member of Congress, and it was considered an incidental expense on the monthly financial report. Candidates could raise hundreds of millions of dollars for campaigns that were almost destined to fail, and it was considered normal.
At H&R Block, we paid a lobbyist $20,000 each month to play an occasional round of golf with members and their staffs . . . and the SVP asked my boss to spend more money because we weren’t getting enough results.
Often, I’d read bills with line items that spanned the width of a page. Budget tables would include four- or five-digit numbers, with a header “in billions of dollars.”
Yes, billions. Numbers so big, nobody could fit them on a piece of paper.
Take a look at this budget report:
That top left number isn’t actually -$693. It’s -$693,000,000,000.
Our “big” is not so big
Sometimes we look at crypto and see big numbers. For example, $170 billion in bitcoin, $12 billion in stablecoins, $3.5 billion market cap for Cardano, $3 billion in Graystone Bitcoin Trust, $1.5 billion assets on DeFi lending platforms, 75 million bitcoin wallets, 15 million active daily users of Brave browser, and so on.
Those numbers are big—but the world is so much bigger.
On top of hundreds of trillions of dollars locked up in real assets like property, cars, land, buildings, clothes, and collectibles, the world has at least $100 trillion in government debt, $200 trillion in corporate and household debt, and $400 trillion in financial products like derivatives and collateralized loan obligations.
Those numbers exceed $1 quadrillion.
All of that wealth can get recorded on a blockchain and exchanged using cryptocurrency. Every single penny.
So many ways to capture wealth
Think about all the ways cryptocurrency will capture this wealth.
For example, I just reported to premium subscribers about a decentralized exchange about to revamp its platform.
As part of the revamp, the team will create decentralized margin accounts for traders and stakers, plus liquidity pools for exchange assets and derivatives. In one sentence, a half-dozen ways to capture wealth—with almost all of the benefits going to token holders.
Two more ways to capture wealth?
Token sets and PIES offer non-custodial access to diversified investment portfolios.
And what about non-financial markets?
Look at energy. The world wastes a lot of energy. Some places produce more than they need while other places face chronic shortages. That’s a hard problem to solve with traditional technology, but cryptocurrency offers a potentially easier solution.
Once you tokenize energy consumption as a cryptocurrency, you can more easily create secondary markets and efficient distribution channels. You can embed carbon emissions credits, rebates, and incentives into the tokens. Power plants and distributors can mint their own tokens when they create energy and burn those tokens as people consume it.
Five more ways to capture wealth.
What about DAOs for corporate and community assets? Security tokens for real estate development?
With cryptocurrency, the possibilities are infinite. It’s just a matter of building the right platforms.
Fortunately, we have a lot of people building those platforms. They toil in the shadow of bitcoin and DeFi, but their work will get its proper recognition. They’ve barely scratched the surface of what they can do.
Slowly, then all at once
As bitcoin’s price continues moving sideways and DeFi tokens seem like the only altcoins going up, you may feel like crypto is stagnant. Or, if you missed the DeFi pumps, you may feel like you’re too late.
That’s how it goes. Take DeFi, for example. Until June, you probably didn’t think much of it. Now, it’s all everybody talks about.
Some of these projects spent three or more years in development. When I started working on Consensusland, I consulted with a few projects, including Aave. At that time, they called themselves ETHLend and had barely finished setting up their team.
Who would have known they’d emerge as a top DeFi project two years later?
It takes a long time to become an overnight sensation.
While it’s hard to wait, it’s important. Everybody wants the moonshot NOW, not next year or the year after.
But we need momentum and a strong narrative. The vast majority of people do not understand what’s going on in this space. Frankly, a lot of people in this space don’t know what’s going on, they just want fast money.
But fast money is hard money—hard to find, hard to get, hard to keep. Slow money is easy money—you put in all the effort upfront, then let time and markets do the work for you.
For me, this boredom is progress. It means people are committed to results, not money. They’re pouring time, effort, and labor into building new products and services.
That’s real passion and conviction, not dreams of Lambos.
We only benefit if these projects succeed, and they will only succeed if they have enough time and space to do so.
Rest assured, Lambos will come. As technology sticks and networks grow, prices will follow.
We’ll get Lambos when the time’s right.
Thank you central banks
But passion doesn’t move markets. Money does.
With a global recession and pandemic disease, with so many sectors of the world’s economies struggling or non-functional . . . where does that market-moving money come from?
The banks, of course.
In the U.S., money in bank deposits and money market accounts, generally considered household wealth or “M2” by economists, rose $3 trillion from March to June to its all-time high. That money is collecting almost zero interest (and for some accounts, costing monthly maintenance fees).
Over the same time period, the stock market fell slightly. (A big drop in March followed by recovery). Obviously, relatively little of that new money went into equities.
Some, yes, but people can only buy so many junk bonds and businesses with no profits before they realize there’s not enough economic activity to give them a decent return on their investments.
Besides, millions of people have no jobs and most don’t know when they’ll go back to work.
As a result, we have trillions of dollars sitting on the sidelines, locked away in bank vaults. From January to May, the average U.S. household savings rate went from 8% to 33%. That’s insane, by far the highest rate on record.
Many other developed countries see the same phenomenon.
More money, more problems
Many people think all that new money will cause inflation. BRRRR, they say.
Maybe, maybe not.
I’ve seen people point to rising food prices as evidence of inflation, but even before massive government stimulus, we had a global wheat shortage and trade barriers pushing up prices going back to 2019, long before BRRRR. COVID-19 brought supply chain disruptions and mass-destruction of food inputs. Maybe higher prices reflect market conditions, not BRRRR money printing?
(Neither of us have enough evidence to know.)
Also, despite Twitter’s insistence, lots of U.S. investors did not spend their stimulus checks on cryptocurrency. Worldwide, hardly any new money went into crypto—the total market cap has gone up only about $100 billion since BRRRR started.
Why is that?
Because money can’t cause inflation if it’s not circulating around the economy. And right now, it’s not circulating.
Instead of lending out money, banks have cut off loans for commercial real estate, residential investment properties, and small businesses. They expect the economy will get worse. They won’t take on the risks.
In response, the Fed is basically paying banks to lend, setting up facilities to swap their debt for cash, offering banks up to 7% premiums (pure profits), and back-stopping up to 95% of the loan amounts.
And still the banks can’t find enough people to lend money to.
Bailouts, handouts, and quantitative easing have pumped trillions of dollars in new money into the world’s financial system, but that money has nowhere to go.
Yield, where are ye?
Thanks to the pandemic, you can’t invest in the real economy anymore. Nobody’s making movies. Nobody’s going on cruises. Nobody’s playing sports. Nobody knows when (or if) building starts and big infrastructure projects will get off the ground.
Thanks to central banks, you can’t invest in debt markets or equities, either. Bonds yield almost nothing (sometimes, less than nothing). Cash and cash equivalents offer even worse returns.
Stock markets are full of businesses that have no profits or customers. Many corporations stopped buying back shares. High P/E ratios suggest poor future returns and nobody knows whether the economy will rebound. Profits have dried up, making it hard for companies to pay dividends.
People like to say bitcoin doesn’t offer dividends, but what happens when your stocks don’t either?
Bonds don’t offer a decent shot at making money, either.
Most major economies offer negative-yielding debt and US treasury notes rates remain effectively zero. Corporate debt is almost worthless, outside of a few bankrupt businesses waiting for vulture capitalists to take them over.
Private equity, perhaps? Perhaps not. Start-ups are strapped for cash and struggling to conquer COVID-19.
You can’t even invest in banks anymore. European banks are barely solvent and the U.S. Federal Reserve barred banks from buying back stock and raising dividends, two of the biggest incentives for investors.
China and U.S. trade relations have fallen apart, so you can’t invest in China. The E.U. might fall apart, so you can’t invest in Europe.
A new investing paradigm
As an investor, you want to find ways to maximize opportunities and minimize risks. In this new investment landscape, that means making unusual choices.
For example, money has started flowing to emerging markets, despite an ever-growing list of countries defaulting or restructuring their debt. Why do investors feel compelled to buy investments in countries that probably will never repay them?
As always, you have speculators looking to flip bonds, but mostly, it’s just investors looking for yields. Unlike junk bonds and penny stocks, emerging markets have special financial instruments that protect investors from some of the downside risks.
Plus, these countries have many ways to raise cash, unlike corporations, which have few. Meanwhile, massive QE suggests the value of the dollar will fall, making emerging market debts easier to repay over time.
Why buy junk bonds and penny stocks when you can get a higher return with less risk in emerging market debt?
Return of the liquidity trap
This problem exists because of the so-called liquidity trap—lots of money, little yield, and people too scared to spend.
When you have no incentive to invest, you don’t invest. Why give up cash and property when your expected risk-adjusted returns are basically zero?
For a more detailed explanation of this phenomenon, read this 2014 Report from the U.S. Federal Reserve.
Some people think that this liquidity trap has created a massive “everything” bubble, where equities, businesses, bonds, property, and everything else gets pumped up beyond their “real” values.
Surely something has to give, right?
Economist Robert Shiller won a Nobel prize for his work on assets and how assets acquire value. He discovered that there is no intrinsic value to anything. Production and consumption costs, dividends and P/E ratios, and other metrics do not reflect the actual price of an asset at any given time.
Price is a function of people’s actions and behaviors. Markets are not rational. Asset bubbles only pop when people stop believing in them. Until then, they generally go up, sometimes forever.
Shiller would say “it’s more nuanced than that,” which is true, but I don’t publish Crypto is Nuanced, I publish Crypto is Easy. I’m summarizing decades of research into a paragraph. That’s the easiest way I can explain it.
In other words, the bubble may never pop—if it’s even a bubble in the first place. It will just persist, skewing people’s economic decisions, until people decide to change their behaviors.
Money now, crypto later
Those behaviors will have to change eventually.
Money tends to flow into the hands of whoever can do the most with it. As asset prices rise, investments no longer produce as much yield as they did before. You need to spend more to make less.
Humans will adapt. Money always finds another opportunity.
With $3 trillion new money in bank accounts, $22 trillion in U.S.-registered investment funds, and at least $40 trillion private wealth held offshore, plus trillions more in cash and real estate, there’s plenty of money searching for opportunities.
Recently, banks and large investment institutions got U.S. regulators to change the rules keeping them from investing in private equity, one of the riskiest markets on earth. You can expect the search for yield will push their boundaries even further.
At what point do money managers decide their fiduciary duties compel them to put some money into the best performing asset of the past ten years? To place a small wager on a small altcoin project?
When do financial advisors tell their clients to put a little money into a bitcoin fund, “just in case” it goes up?
How low do bond yields and stock dividends go before casual investors rebalance into bitcoin, “the fastest horse” as investment legend Paul Tudor Jones calls it?
They just need to see prices go up long enough to trust the market will continue moving up. Once we get past that psychological hurdle, everything will change.
With cryptocurrency, people will escape the liquidity trap.
As you may have read in Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency, I expect traditional financial institutions to start talking about crypto to their clients.
If that seems odd, remember how JP Morgan blasted crypto as a scam, then created its own crypto and, later, brought on Coinbase and Gemini as customers.
These conversations will start as discussions about portfolio diversification and inflation hedges.
Advisors and money managers will note “it’s the way everything’s going” or remark about a weakening dollar as a reason to have a small allocation of crypto (or at least, bitcoin).
Or, some rich people will hear about crypto from their kids or friends and ask their financial advisors to “throw a few shekels” at it.
Your parents’ friends will mention putting a little money into a bitcoin fund “just in case it goes up.” People in suits will cite research that a little crypto boosts returns while reducing volatility (which is true).
Crypto funds and exchanges will take out ads shilling their products and platforms. Fidelity will offer bitcoin. Coinbase will go public.
At the same time, several emerging trends will bolster their message:
- People starting to get so fed up with governments they’re choosing to opt-out of “the system,” with cryptocurrency as a peaceful, easy way to do so.
- Old people and business leaders finally realizing the value and inevitability of digital technology. Some will join the early adopters as the technology grows, making it seem safer for everybody else.
- Developers creating useful products that use cryptocurrency. DeFi is just the start—and these products go way beyond the tentative experiments of IBM, Microsoft, Ernst & Young, MoneyGram, JP Morgan, and everybody doing business with VeChain.
- Prices starting to rise. We’re on the cusp of a new bull market.
- Generation Z making money. At least, if the economy turns around. Already, 30% of them say they plan to buy crypto—enough to double the total number of crypto users and send DOGE to the moon.
These trends will take time to play out, but they will result in something far bigger than a 10x pump in LEND’s price.
What does that mean for us?
That means we don’t need to stress about today’s prices.
We don’t need to try to play the markets, trade in and out, or worry we’ve missed out on any coin that has already gone up 400% in two weeks.
We’re so early, we have the luxury of time. When you depend on other people to make your crypto valuable, you have to give them time to do so. Markets move fast. People do not.
This is a time-tested, can’t miss approach to building wealth.
Robert Kiyosaki calls it seeing with your mind. Others have called it skating to the puck.
Most people focus only on what’s in front of them. We focus on what’s beyond, stake our claims, and wait for everybody else to follow.
If you’re big on bitcoin, follow my plan. You will catch every big dip and avoid the inevitable crash that will eventually come.
If you want to speculate on altcoins, consider the projects that I recommend on my altcoin reports. They all address a market far bigger than their current value, with legit teams and strong use cases.
Also, participate in airdrops. If an opportunity comes from me, it will be low-risk and ask for very little time or effort. For the few projects that require KYC, you can sometimes skip that step using Bloom or another identity app. There’s nothing wrong with free crypto.
Because of our good timing and dumb luck, we have a chance to catch all the dips, get free crypto, and buy stakes in the financial networks of the future with fairly little risk.
Meanwhile, we have more than enough upside to make up for any “bad” choices we make now.
The mainstream does not see this yet. They’re seeing with their eyes, not their minds.
Don’t stress the dips, don’t worry about the crashes, and don’t dismiss new projects simply because they seem amateur or esoteric.
The world is struggling with pandemic disease and financial crises. Savings rates are going up in every country, even countries experiencing true inflation like Turkey and Lebanon.
Yields on traditional investments have plummeted while yields on crypto have boomed.
Traditional financial systems are increasingly unable to serve the needs of too many people. Political systems don’t seem to be doing anything about it.
Yet, there is more money in the world economy than ever before.
Where will the money go?
If you’re reading this, you already know the answer.
Relax and enjoy the ride.
Check out some other articles I’ve published recently:
- Want Bitcoin’s Price to go up? Bet on People, Not Inflation
- Goldman Sachs Can Say Whatever it Wants. Wall Street is Still Buying Your Bitcoin
- It’s Official: Facebook’s Libra is Boring
- Why Cryptocurrency Doesn’t Need to Compete With Government Money
- Prepare for Crypto’s Early Adopters (They’re Not Who You Expect)