Crypto as a hedge against inflation with Alex Tapscott

November 2021

Bitcoin as the new gold? With the cost of living’s “transitory” COVID-related spike looking more long-term, Alex Tapscott tells Hainsworthtv that cryptocurrencies have a role in hedging against inflation.

Michael Hainsworth:

The cost of living in Canada is climbing at a rate north of 4%. Our American cousins are dealing with an inflation rate greater than 6%. And while central banks have said this is “transitory” in nature, the markets aren’t so sure. Even Bank of Canada governor Tiff Maclem is coming around to the idea that inflation may be around longer than anticipated. So are investors. The traditional store of value is gold – but the price of bullion is down 8% over the last year at a time when Bitcoin is soaring more than 400%. That’s not a surprise to billionaire investor Paul Tudor Jones who says it’s a better hedge against inflation than gold. And that’s not a surprise to Ninepoint Partners’ managing director of the Digital Assets Group, Alex Tapscott.

Alex Tapscott:

I like Goldman Sachs's line, which they say that gold is the poor man's crypto. Which to me is just perfect. So I think inflation narratives have been driving a lot of the discussion in a lot of different asset classes, then the last few months. We heard that inflation was temporary or transitory. That it was because of supply chain bottlenecks and the growing pains of getting back to work. It turns out that it's proven a lot more permanent than I think a lot of people thought. So that has, I believe caused the price of Bitcoin to rally significantly. We've seen it crest above all time highs in the past couple of weeks, but I wouldn't say that Bitcoin has proven itself to be the ultimate apex inflation hedge quite yet. Though I do believe that that is coming.

And the evidence that I have is that last week, the CPI numbers... So the basket of goods that the federal reserve tracks, came in well above expectations. And the inflation narratives have changed from the leaders in power that this is still transitory, but it could last a while. Which I don't know how you reconcile those things. Immediately after that happened, Bitcoin rallied and it looked like it was about to solidify itself as the inflation hedge for the next sort of decade. But since then, the trading has been a little less convincing. And ultimately today, we're about flat to where we were.

So it's held its value. It's proven itself to be an uncorrelated asset. It's a great addition to a portfolio but it's not quite yet that inversely correlated thing that we perhaps thought. But I do believe that over time that is going to change as more and more institutions and individuals own Bitcoin and more and more people believe that it serves this important function as a store of value, I believe in many respects, it will become a self-fulfilling prophecy.

Alex Tapscott:

10 years ago, not even 10 years ago, I would say. Because 10 years ago, Bitcoin wasn't around. One year ago, owning Bitcoin for an institutional investor advisor was a risk, right? Maybe the client says, "Hey, what do you own this thing for today?" Today, the risks are the other way around. Not owning Bitcoin is a risk. If you believe that there is a less than zero percent chance that Bitcoin is going to be around in a few years time, then your allocation to Bitcoin should be less or should be more than zero, right? So you shouldn't be on zero if you think there's a more than 0% chance.

Michael Hainsworth:

What role though, does the U.S. Securities and Exchange Commission's approval of crypto related investments play in using crypto as this hedge against inflation as we've seen recently?

Alex Tapscott:

Well, since the SEC rejected the first Bitcoin ETF application in 2013, Bitcoin is up 24 X in value. So I would say that it has no impact on Bitcoin's value long term. Though I do believe that it will still be an important catalyst to get certain kinds of investors on board. I think today, many Americans don't real realize that in Canada, on the Toronto stock exchange, one of the largest global exchanges in the world that is closely tied to the U.S. Market, there are already a handful of spot Bitcoin ETFs like the nine point Bitcoin ETF that give you exposure to the underlying asset in a cost effective, efficient, safe, and secure manner.

And in our case, it also happens to be carbon neutral. So to me, that's more about education than anything else. But for a lot of people, home bias is an important thing and until the SEC approves a U.S. version, they may not be taking the plunge anytime soon. So I think that in terms of what it means for Bitcoin as a store of value and the thesis as to why you should own it, I think it's immaterial, but I do believe that it would be a catalyst for the price, for sure.

Michael Hainsworth:

You mentioned that more and more are using Bitcoin and cryptocurrency as a hedge against inflation. Tell me about the more of the more. What's the critical mass that makes this an alternative to gold, generally speaking?

Alex Tapscott:

I think we're probably already there, Michael, to be honest. I think if we were having this conversation 18 months ago, I would've said, well, a few things need to happen. We need to see the launch of spot Bitcoin ETFs. We need to see the embrace of Bitcoin by large institutional investors and high net worth individuals. We would need to see Bitcoin performing well in an inflationary environment. And we need to see corporations getting on board and adding Bitcoin as a balance sheet asset. And then if I was feeling really ambitious, I would've said, and we need to see countries adopting Bitcoin as legal tender. That's what I would've said a year ago today.

Well, in the past year, every single one of those things has happened. All of the catalysts that helped to validate Bitcoin as an asset, that's here to stay, as something that's institutional grade, that every investor should be seriously considering for a portfolio. Those things have already happened. And so here we are today with all of that having occurred in the last year, looking at a future where the consensus, I think, is that Bitcoin is going to play some role as a store of value. And I would say that there is a high likelihood that in a year or two's time, Bitcoin will have displaced gold as the primary hedge asset against inflation.

I mean, I can't imagine what it feels like to be a gold investor today. You have a year and a half of massive fiscal stimulus, of huge government deficits, of high inflation and the price has barely budged, right? And so I'm not disparaging gold. I think that it does play a role for some people in their portfolio. But all of the things you would hope would help to spur gold on have only spurred Bitcoin on. And I think that's because on the margin, the marginal buyer for this non sovereign monetary asset. Some sort of version of money that isn't controlled by a government who can turn on the money printer, it's Bitcoin. That's where the marginal dollar is going and that's why the marginal value is increasing for Bitcoin and not for gold.

Michael Hainsworth:

Do you think the marginal dollar is leaving gold and going to Bitcoin exclusively? Like I'm looking at gold down 8% over the last year and Bitcoin is up 437% in the same period. What's with the disconnect?

Alex Tapscott:

Well, it's for all the reasons I described. I'm not sure if there are people who are selling their gold to buy Bitcoin. I think probably what's happening is that the dollars invest... Like people who invest in gold have a pretty longstanding and firm thesis. But there are lots of asset allocators who don't, are not gold bugs who are not ideologically driven by their investment in gold and instead are saying I have a portfolio. If I have a hundred dollars to invest, maybe one or two of those dollars should be in gold. Maybe some of those allocators are moving to Bitcoin, but I think what's happening is that the pie for of stores of value is increasing.

So if before... These are numbers I'm just making up. But before there was $10 trillion for this asset class, these kinds of assets. Well now there's $12 trillion and where is that extra $2 trillion. Maybe some of it's going to gold, but clearly a lot of it is moving into this other asset class. Those are just illustrative. Those are not actual numbers. I'm just explaining how I think probably what we're seeing is more people saying, in light of this environment if my S&P 500 allocation is up 8%, but my underlying inflation is 6.5%. Then my real rate of return is one and a half. So I think that there is a lot of interest in these kinds of non-correlated store value assets.

Michael Hainsworth:

Let's dig a little bit deeper then. Behind the scenes, what are the big brains at nine points saying about the current inflationary environment?

Alex Tapscott:

Well, I don't know that the firm has a firm wide view on this. Michael, I actually don't know. I don't know-

Michael Hainsworth:

We'll set that aside, don't worry about it.

Alex Tapscott:

Yeah. I don't want to speak out of turn on that.

Michael Hainsworth:

Nope, I totally get it. The $1.2 trillion U.S. infrastructure package, it's been passed with a crypto tax reporting requirement. What does requiring brokers to report trader information on transactions of more than $10,000 to the IRS really mean?

Alex Tapscott:

Well for brokers, companies like Coinbase and Gemini who are domiciled in the U.S. and regulated in the U.S., There's no issue whatsoever. They should report that. That's part of their regulatory requirement. The concern around the infrastructure bill's crypto provision is that it was worded in a way that could make it apply to things that are not brokers. So if you are involved in the transfer of value in a blockchain, you could be playing any number of roles. You don't have to be some intermediary. You could be a minor for example. Or you could be a software developer who's created a piece of software that allows people to move money, peer to peer. You created some free software and put it on the internet and all of a sudden, you've got the IRS knocking down your door saying that you're a broker of record.

So the problem is that a lot of the... this is an illustration of a bigger issue, which is that governments and regulators have an important role to play in the financial markets and in the economy, but they also often lack the resources or the knowledge base to effectively oversee it, or even understand a fast moving and new technology. And this is the central tension that I think is driving a lot of the debate in Washington and other halls of power around how to deal with this asset class. I'm not sure when we're going to publish this podcast, but on Tuesday, November 16th, I'm sitting down with Perianne Boring, who is the founder and head of the U.S. Chamber of digital commerce, which I believe is the largest industry advocacy group in the world. Has relationships with senators and Congress people, and others in the highest levels of government.

And she'll be shedding some light on the current regulatory debate. It's not all doom and gloom. There are a lot of people in government who recognize that it's better to take the optimistic view of a new technology, which is what kind of economic value can it create? What kind of jobs can it create? Can it broaden the tax base? Does it mean that U.S. and other countries can remain leaders versus the negative. Which is, well, is this a way for people to skip out of their taxes or something. If you take the positive view, you can see that this technology in this asset class is going to be really important. So I would encourage everyone, there will be a replay. I don't know when you're going to listen to this one, but you should also listen to that one, because we're going to talk about what I just said in one minute, in an hour, and it's going to be a great discussion.

Michael Hainsworth:

Well, and an extensive discussion, I'm sure. Because if I just look at how American politicians address the Facebook scandal when talking to Mark Zuckerberg and didn't understand the basics of social media, how confident are you that the political class, not just in the U.S., but anywhere in the world, really understands what's happening in the world of cryptocurrency.

Alex Tapscott:

Well, I don't want to paint the whole political class with one brush because I think that the political class sometimes paints certain industries like crypto with one brush. And I think that there's nuance to it. But I do that people in government are, in the U.S. in particular, have been around for a long time. I think they're very entrenched. I think that they've got legacy views. I think that they're used to an old paradigm and I think it's very difficult for them to change their minds about a lot of things. But I think there are also a lot of people and government who are really open-minded and I'm not ageist at all. I do believe that lots of older people can embrace new ideas. But there is a new generation of people, politicians in the U.S., who I think are being a lot more open minded about this.

One would be well, Andrew Wang, I think a lot of people know Andrew Wang very well but there are others. Eric Adams, who's going to be the new mayor of New York just announced that he wants to make New York a crypto city. And he's going to take the first three months of his salary in Bitcoin, which I thought was pretty cool. So I'm optimistic. Here in Canada, I'm based in Toronto. I know our audience is global in nature, but here in Canada, I think that probably it's not that they're taking, then a negative view, it's that they don't yet have a view. They haven't really formulated a perspective on this. And I think that's an opportunity for leaders in the industry to help educate policy makers on why this is important. And that's a role that I frankly take very seriously as someone who's been at this for a while.

Michael Hainsworth:

Well then let's take that to the next level. As Americans are going to be enjoying Thanksgiving and gathering as a family, I'm sure there's going to be a lot of conversations about a bunch of different topics around the dining room table. Tell me, how do you talk to your mom about crypto in the same way that I can imagine a lot of industry players have to talk to politicians and explain to them and teach them about the nature of this next generation technology?

Alex Tapscott:

Well, I'm probably a bad example because I've been talking to my mom about crypto for six years. So she's ready to run a crypto hedge fund at this point. I think, well, I don't know, how do you talk to anybody about anything? You have to make it relevant to their lives and help them understand why it's important. First of all, this new asset class is more than just a way to move money around the internet or a way to speculate and make a return on your investment. It is a new technology that is going to change how we live our lives in how we do business. If the first era of the internet was the internet of information, then this new era enabled by digital assets is an internet of value. It's a way to change every single part of the economy, whether it's how we engage with banks and get access to financial services.

There's an area of this sector called defi, or decentralized finance, which is revolutionizing that industry. Or more probably interesting to people is how this is changing culture in art and how we engage with our favorite musicians and creators. NFTs are non fungible tokens, or scarce digital assets that can represent art, collectibles songs and other IPs. So it's changing how we think about music and culture as well. I think that this whole, what happens at Thanksgiving framing often is... Well in years like 2021, it's a lot of chest pumping and hey, look at me, I made a lot of money. And then on the down years, it's why did you get me into Bitcoin?

So I try to avoid those discussions when I can and try to explain why this is so important. And of course if you're looking to get exposure to this technology and you're in the public markets and you're an investor, there aren't as many options as there are in other sectors, because most of the values being created in the world of digital assets, not necessarily at the public company level. Which is why I think ETFs like ours and others are so important. Both because they're people like me, get to educate the investing public on why this matters. But also because there's a safe, secure, and efficient way to get exposure to it.

Michael Hainsworth:

What's the big news in decentralized finance that you're watching today?

Alex Tapscott:

Well, I think we talked about this a little bit last time. One of the metrics that is used in decentralized finance is the total value. It's sort of roughly speaking, like the deposits that exist inside of these new software projects. They're not firms or banks in the traditional sense. That value's doubled since the last time we spoke. I think it was maybe $120 billion and it's now $250 billion. So this is an industry that continues to grow at an exponential rate. This, I think is something people understand probably better now than before because of the pandemic. We know what can happen when one becomes two becomes four becomes eight and you know what the doubling time factor is. I don't expect that defi is going to grow at this rate forever. It's something that if it did, we'd be, they'd be bigger than the financial system by the end of next year probably.

It's not going to get there quite so quickly, but it is something that we are looking at. There's lots of really incredible innovation going on. The areas I think people used to focus on were in decentralized exchanges. So how we basically trade assets, which had a lot of people saying, well, defi is just about speculation. But now we're seeing some really fascinating models for how to invest your money intelligently, how to get access to insurance or hedge against risk. And so it's those kinds of new areas that I think are really very exciting.

Michael Hainsworth:

Where does that go from here? As you point out, it's not going to continue at this pace, what's been driving it so far? And where does it go from here? Because it looks to me like a large portion of this crossing the $200 billion threshold in November has to do with Bitcoin specifically.

Alex Tapscott:

Well, it's true that when Bitcoin goes up, people are excited about crypto assets. But all defi projects are actually built on other platforms like Ethereum and Solana and avalanche and Cosmos. Without getting into too much detail Bitcoin is this excellent asset. It's a store of value and functions like cash for the internet. It's the settlement layer for the digital economy, but it does just one thing really well. Ethereum and these other platforms are meant for you to design and build other kinds of applications. And it's those applications that are gathering those assets, those $250 billion or so. So I think really what it speaks to is to the functionality, the growing maturity of these new blockchains, like Solana and avalanche and cosmos and Ethereums not new, but it's only five or six years old. And it's evidence that I think blockchain and digital assets have really hit an inflection for point, as you said, that $200 billion, but more importantly, that they're showing their maturity as well.

Michael Hainsworth:

You touched on NFTs. I just recently interviewed rain made of our lady piece about his new album being released as an NFT. He says, "It's the future of paying musicians for their work." But prices for digital collectibles have been dropping recently. Is the honeymoon period for non fungible tokens over?

Alex Tapscott:

It's such an interesting point. I'm really excited about what our lady piece is doing and he joins lots of other musicians who, who feel the same way. This is an early stage asset class so I think it'll go through ebbs and flows. What we have seen is the prices of certain high profile NFTs have declined, but the total transaction volumes and dollar values of NFTs that have changed hands during that time has actually gone up. So I think the... You don't want to have the tail wagging the dog, so to speak, focus on the headline values of the few NFTs and not see that there's actually broadening and sort of, I would say becoming more durable market for these things.

When it comes to music I don't profess to be an expert on music NFTs. But what I do know is that the first era of the internet was very bad for musicians. I think we know this. It used to be that you would create music and you would sell it on a physical medium, like an LP or a CD or something. And every time you sold a unit, you would get paid a royalty. And that's how, not just big rock stars got paid, but studio musicians and other people who were credits on lots of albums, including my father-in-law, who's a professional musician. And the internet kind of blew that model up because you could use the printing press of the internet to duplicate this thing that was supposed to be an asset, a song, and turn it into a free commodity.

So Napster and limewire and things like that. So that we now have to rely on huge aggregators like Spotify to try and add value back into the system. Except the problem is Spotify may help the industry make money, but it's not helping artists in the lot in many respects, make more money. You could have a million record sales and make $50,000 if you had a 5% royalty credit on that single. If the same song gets streamed a million times on Spotify, you might make $50. So it's not nearly the same kind of economics. So what NFTs allow for is scarcity and digital goods, including cultural things like music and art.

Music is a way bigger part of our lives than the value that it gets reflected in what Spotify's bottom line is. Music is foundational to human existence and creators deserve to get paid for that value. So for example, you can sell limited edition artwork. You can sell limited edition versions. Maybe you want to sell a studio version of a song that maybe wasn't the final cut, but includes some solo that you didn't hear in the final version. And you can own the NFT for that.

And it doesn't mean necessarily that somebody else can't listen to that, that you're the only one who gets to hear it. All it means is that at you've got something of value that the artist has created, that you can prove is scarce. That it's unique. And that's something a lot of people are willing to pay for. There are fans who would love to do more to support their artists and given COVID and the fact that most bands weren't touring during that time, it was very difficult. So to me, this is something that couldn't have come at a better moment to help the industry get back on its feet.

Michael Hainsworth:

I expressed [Maida 00:23:16] my reluctance to think this was the next big thing because who really wants to learn about NFTs and the process and your sing wallet and all this kind of stuff. And his response was at the end of the day, NFT is no different than wifi or the electricity running through your walls. You don't have to think about it if you don't want to think about it. The artist gets paid, that's all that matters.

Alex Tapscott:

I couldn't agree more. Can you explain to me how a record makes sound? Like how does a wire scratching on a piece of vinyl turn into music? Nobody knows the answer to that question. It doesn't mean you can't enjoy listening to a record. This is if you're really old and you listen to records, but a CD, like explain to me how a laser interprets edges on a disc into song. Give me a break. You don't have to know how the underlying technology works to know that this is something that you want to do. You want to own it. You want to listen to it, you want to enjoy it. You want to support the artist. That's what matters.

Michael Hainsworth:

So you're going to be buying your next tracks using an NFT?

Alex Tapscott:

I would love to, yeah. I think that I'll have to check out the latest, our lady peace album to see what kinds of NFTs they've made available. I'd love to find a way to support artists that I care about. Absolutely.

Michael Hainsworth:

Great speaking with you as usual. We'll do this again some sometime soon.

Alex Tapscott:

Can't wait. Thanks, Michael. Awesome.

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Part of Ninepoint’s Alt Thinking Podcast Series. Available at Google, Apple, and Spotify Podcasts.

 

 

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