#238 PlanB - Why Bitcoin’s Stock-To-Flow Model Is Becoming More Accurate Over Time

PlanB is one of the most notorious Bitcoin investors in the world. He has amassed a loyal and engaged following on Twitter and has popularized the stock-to-flow model that is widely cited throughout the Bitcoin community. In this conversation, Anthony and PlanB discuss his discovery of Bitcoin, what it took to feel comfortable enough to invest, how he came across the s2f model, why his team hasn't bought Bitcoin in their institutional funds, and why PlanB believes the s2f model is actually getting more accurate over time. CRYPTO. COM-----The only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users and download the Crypto.com app today to earn $50 USD using the code ‘pomp2020’ when you sign up for one of their MCO Visa Cards. TAXBIT-----Refund-maximizing, cryptocurrency tax software you can depend on. Visit taxbit.com/invite/pomp and receive 10% off your tax plan today by signing up for a free trial. TRAVALA. COM-----Travala.com is the world’s leading blockchain-based travel booking platform trusted by thousands of customers worldwide as their preferred online travel agency. Book over 2 Million hotels and accommodations and pay with 25 cryptocurrencies or credit and debit cards.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:10Anthony Pompliano?

  Plan B is one of the most notorious Bitcoin investors in the world. He has amassed a loyal and engaged following on Twitter and has popularized the stock to flow model that is widely cited throughout the Bitcoin community. During this episode, Plan B reveals more about himself, including the fact that he's a member of an institutional investment team that manages approximately $100 billion in assets. In this conversation, we discuss Plan B's discovery of Bitcoin, what it took to get him comfortable enough to invest, how he came across the stock to flow model, why his team hasn't bought Bitcoin in their institutional funds yet, and why Plan B believes the stock to flow model is actually getting more accurate over time. This was an

• 0:54Anthony Pompliano?

  incredible episode that I really enjoyed. But before we get into it, I want to talk about our three sponsors as well. The first is Crypto.com, a pioneering payment and cryptocurrency platform that seeks to accelerate the world's transition to cryptocurrency. They have a vision to put cryptocurrency in every wallet, which is frankly why we're all here. The Crypto.com app offers a full range of financial products with competitive pricing, well-designed user experience, and high security. It is the best place to buy, sell, and pay with crypto. They've been longtime supporters of this podcast, and they keep launching new product after new product. So do yourself a favor and go to Crypto.com to check them out. Crypto.com, the place where mass adoption is occurring.

• 1:34Anthony Pompliano?

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• 2:17Anthony Pompliano?

  Taxbit is the most trusted cryptocurrency tax solution. You can get 10% off your tax plan today with a free trial by going to www.Taxbit.com/invite/pomp. Again, Taxbit.com/invite/pomp. Get a free trial with 10% off. Get your taxes paid before tax day. Lastly, Travela. Travela is the world's leading blockchain-based travel booking platform trusted by thousands of customers worldwide as their preferred online travel agency. You can save up to 40% on travel bookings when you're using Travela.com. They've got over 2 million listings in 230 countries and territories. They've got a partnership with Booking.com.

• 2:59Anthony Pompliano?

  And you can use 25 different cryptocurrencies and fiat currencies, credit debit cards, and PayPal. The leading cryptocurrency-friendly hotel and accommodation booking service with 2 million-plus properties, 230 countries, and a champion of cryptocurrency adoption, accepting over 20 leading cryptocurrencies in addition to traditional payment methods. Travela.com. That's T-R-A-V-A-L-A.com. Travela.com. Use them for your next trip. All right, let's get into this episode with Plan B. My guy killed it. You guys are gonna love this one. I hope that you guys share it online after you listen to it.

• 3:37Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 4:04Anthony Pompliano?

  All right, guys. Bang, bang. A very special treat today. I have Plan B with us. You have become a legend on the Internet, sir. So thanks so much for coming on and doing this.

• 4:16Speaker 03

  Yeah, thank you, Anthony. Thanks for having me.

• 4:19Anthony Pompliano?

  Okay, so many people know you as the Twitter account that took the Internet by storm and just started dropping tons of graphs and charts and all of this kind of intelligent analysis of Bitcoin and Bitcoin price, etc. But you actually have a real job, like a day job. Maybe tell us a little bit about your background and then kind of what you do day to day today.

• 4:42Speaker 03

  Sure, I can go a little bit further than I've done in the past. So I'm a Dutchman, which you might hear. I'm mid-40s and I'm an institutional investor. So I have a day job. It's a full-time job. Twitter is an evening and weekend project for me.

• 5:03Speaker 03

  But yeah, the investing part is what I do. I have an economics degree and a law degree. Economics in quantitative finance and a law degree in bank and financial markets law. Actually, my first job was at a dealing room in Germany where we did Avex trading. And I got to know all the technical analysis indicators, which was really fun and there were a lot of them. So actually, that was also when I experienced my first crash in 1998. The Asian tigers went belly up, also Russia, I think, and some hedge fund, long-time capital management with all the Nobel Prize winners in it.

• 5:48Speaker 03

  So that was a frightening experience right then. And from there, I moved to banking and where I was responsible for asset liability management and capital management from a small bank. But it was a totally different game from a dealing room where you were responsible for, well, maybe a couple of million. At the bank, it was a couple of billion. And well, yeah, that's a couple of zeros, but it also changes the whole game. And yeah, there I experienced the 2000 crash, the dot-com bubble when it popped.

• 6:32Speaker 03

  And also the aftermath with regulation in Europe that was Basel, capital regulation, Basel II at the time. So we implemented that. And after that, I moved on to pension balance sheets, so life and pension balance sheet. And the fun thing there, it's even bigger than bank balance sheets. So this was tens and even hundreds of billions of assets to manage. A lot of mortgages in there. So that was one of my main assets on the balance sheets. Did a lot of securitization, especially with my legal background. I was quite drawn to

• 7:15Speaker 03

  structured finance. So basically, all the stuff that you see in the Big Short movie, that could be, that was literally my 2008 year. And yeah, I really learned a lot of that because, yeah, 2008, I think, everybody who worked in investment and was close to the fire sort of knew what was coming. Because spreads were widening and, yeah, it wasn't a total surprise. What was a total surprise was what the central banks did after that,

• 7:54Speaker 03

  the quantitative easing that started and the very low and even negative interest rates in Europe. So that, yeah, I experienced that from my job, on a day to day basis. But it also made me question the system. And it made me looking for hedges and alternatives, Plan Bs, if you will, for the assets that we had on the balance sheet. And that's how I came across Bitcoin.

• 8:30Speaker 03

  Actually read the white paper in 2013, it's a little late, but still it hooked me from the start, but the price was of course very high at the end of 2013, it just went 10x and I didn't buy, and a year later it was it was a hundred dollars again. So my first investment in Bitcoin, that was a private investment, not as an institutional investor, was in 2015. And that's also when I started lurking the Twitter accounts for information,

• 9:08Speaker 03

  just lurking information, not actively posting. My first post was actually the March 2019 article about stock to flow. And well, yeah, from then on, it's, it's, it's, yeah, crazy. Seventy thousand followers, yeah, it's, it's hard to do it next to a normal job. And but I manage still now. See where that goes.

• 9:36Anthony Pompliano?

  For sure. So one of the things I want to talk a little bit more about is you said that in 2008, the housing crisis, those who were kind of close to it saw it coming. Maybe explain that a little bit more and then talk through the things that those who saw it coming, what did they do, kind of how they weathered that storm, and then we can get into kind of what that might mean for potential situations, you know, today moving forward.

• 10:04Speaker 03

  Yeah, well, especially those close to the RMBS and the the housing investment, the mortgage investments, they saw it coming. Because yeah, what you do is you chop up mortgages and you structure them in a way that that results in mortgage bonds and you sell them and the spreads on those mortgage bonds and and what what goes in those mortgage bonds is it was changing over time. So it went from from very good quality to a little less quality to really, really bad quality, especially of course in the US. But as European investors, you could see sort of what what was in there.

• 10:51Speaker 03

  And also you saw spreads widening, so the credit default spreads of a lot of those companies. And if spreads widen, that means the risk is increasing and something is increasing. Yeah, something is going on and you don't know what, but you know there's volatility coming. And I sometimes compare it because it's really easy to say that with hindsight, oh, everybody saw it coming. That was close. But it's the feeling is a bit like today with the negative interest rates and very low interest rates in the US. Yeah, you somehow

• 11:36Speaker 03

  know this is not normal. You somehow know this can go forever. But well, yeah, you have to invest and you're part, that's part of your day to day job. And that was the same in 2008.

• 11:49Anthony Pompliano?

  Got it. And so when you came across Bitcoin, coming out of that situation, you described a little bit about reading the white paper, but was it a, hey, this is interesting, but no way it'll work? Or was there some other reaction that you had? Because I think that your experience, especially given kind of a very, you know, high degree of knowledge and expertise in finance and institutional investing, et cetera, there's a lot of people in your seat who had the same reaction. So maybe talk a little bit about that.

• 12:21Speaker 03

  Yeah, I was hooked from the start, just from reading the white paper. So I've read the white paper, I guess, 10 times. I couldn't believe what was there. So it was really the white paper only that got me into it. And I was amazed by the elegant way that Satoshi had to solve a very complex problem that many people have been going after for a long time, how to make a digital scars good. I have to say scarce. Yeah, so digital scarcity,

• 13:04Speaker 03

  the fact that he succeeded in making that with the computer program that he wrote and with the hashes and the cryptography and the proof of work. Yeah, that got me from the start. So that was the technical part. And immediately as an investor, you start looking, well, what's the return? What is something like that worth? And then even in 2013, you could see the major asymmetric risk return profile, which is just like heaven for investors. You don't see that very often. And I know

• 13:49Speaker 03

  the volatility and the wild swings might scare the less experienced investor, but especially the quant investors, they'll know how to deal with the volatility if the return is big enough. And well, if you're talking about Bitcoin, you're talking about an asset with a sharp ratio bigger than one. And actually, I don't know of any other asset with a sharp ratio that's bigger than one, meaning that the return percentage is bigger than the

• 14:31Speaker 03

  risk percentage. And to give an example, I mean Bitcoin can can crash once in a while, then it goes like 80 plus percent down. So that's the risk 80%. But you get rewarded for that risk with an average 200% return. Well, that's if you calculate that, and we'll talk about that later too, for sure. But that's that's an amazingly good risk return profile. So that, yeah. So you start thinking how to slice and dice that, how to structure that, how can we size investments that have less volatility, also less return, but keep

• 15:13Speaker 03

  this very juicy asymmetric risk return profile. So yeah, from a technical point of view, the invention of digital scarcity.

• 15:23Speaker 03

  As from an investor point of view, the asymmetric risk return, it was something I needed to know more about. And actually, that was, for me, that was a very easy route. I never touched things I shouldn't touch. I never got scammed or lost Bitcoins. I just followed the route that the white paper laid down. In the references, there is, of course, Adam Beck.

• 16:00Speaker 03

  He is very active on Twitter, so I started following him very fast. You can see who he is following and retweeting and stuff. So you got to Nick Zabo and Andreas Antonopoulos and, well, all the Bitcoiners. And so I took it from there. And yeah, I think I'm in it almost 24/7 as far as my job allows it, but almost 24/7 ever since.

• 16:31Anthony Pompliano?

  I love it. And so when you read the white paper in 2013, you didn't really do anything, you said, until 2015? What was kind of the logic behind waiting for two years, right? So you kind of intellectually got intrigued and curious. Was it a price thing? Was it something else? Why wait?

• 16:52Speaker 03

  Yeah, well, it isn't easy for someone to buy his first Bitcoin. Also for me, I had to figure out wallets and where to buy it and stuff. And it took me about a month to read and be ready to buy. It was, I think, November or December. But then the price was already up 10x, 10x, I think in a month it was, one or two months. It's exactly those one or two months that I needed to prepare myself. And yeah, well. My experience tells me that then you're a little late. And you might better wait for some better opportunity.

• 17:35Speaker 03

  Although I didn't have a stock to flow model or any other model at that time. My guts said, just wait a little and maybe this is, yeah, well, I'm too late. That was basically the feeling.

• 17:48Speaker 03

  Where of course, a year later in 2014, when it crashed again to $200. Then I thought, oh, whoa, yeah, well, not okay.

• 17:59Anthony Pompliano?

  A little bit more attractive then.

• 18:00Speaker 03

  Yeah, yeah, yeah, I'm glad I didn't do it because it's dead. And then it went from 100 to 200 and from 200 to 300. And then I started thinking, wow, it went two X from the bottom and it's rising again. This is the moment, boom. So I went in there. Yep.

• 18:19Anthony Pompliano?

  That's awesome. And so when you started to do that, obviously you've made an investment in whole Bitcoin personally. But for a day job, you worked at a fairly large institutional asset management firm or institutional investor. But you guys, along with pretty much, you know, 90 plus percent of institutions in the world, have not added exposure to Bitcoin. Maybe talk a little bit about, you know, that balance between your personal opinion and risk exposure or risk appetite, and then what you have to do professionally, you know, as a large institution and how you balance those two.

• 19:03Speaker 03

  Yeah, that's a very interesting topic. Just to say upfront, I'm not the only one who has Bitcoin in the company. I think my boss has Bitcoin. 90% of my colleagues have Bitcoin, especially the quants, but also the investors themselves.

• 19:24Speaker 03

  But there is a big difference between investing your own money and investing someone else's money, which is basically what we do professionally. If you manage someone's pension money,

• 19:39Speaker 03

  Bitcoin is not the first thing maybe you think about, although I think that could be a very nice fit. But the main classic assets that we invest in for pension money is, of course, fixed income assets like bonds, mortgages, consumer loans, everything with interest that you need for paying the pension. So things like, especially things like commodities, gold, and Bitcoin is like that. There is no dividend yield, there is no return in interest. It's not a very logical fit.

• 20:24Speaker 03

  And that's, I think, where a big difference is. And the other thing is the capital regime, the regulation. So you have a regulator as a bank, but also as a pension company. And regulators, A, they have a regulation that determines how much capital you have to hold for each asset class, and the more riskier the asset class, the more capital you have to hold. So, you know, Bitcoin isn't even on the list, so probably gets the highest capital charge that's there,

• 21:09Speaker 03

  which is okay, because there is a return against it, but it doesn't really fit that regulatory capital framework.

• 21:17Speaker 03

  And the other thing is regulators, of course, the central banks we're talking about, they're not all that fond of Bitcoin. I think there's more, there are central banks that are more open to Bitcoin and cryptocurrencies. And I think the Dutch central bank is one of them, by the way. So they're very open, they're congresses, and they talk with fintech companies and with pension funds and banks. They have a very large congress every year. No, it's not every year, but it's once every several years. And I went to one.

• 22:00Speaker 03

  So there's a very open discussion with the regulator, with the central bank. But it's not an easy fit, and it's also not something that is, yeah, how do I say that? A good topic to talk about in the meetings you have with the regulator. And that's also one of the reasons I'm anonymous, because I don't want my Bitcoin hobby to be of negative impact for my current employer. And yeah, the other reason, of course, is operational security. I think Satoshi gave the perfect example there.

• 22:40Speaker 03

  But yeah, it's, by the way, one of my dreams to be the bridge between the exotic Bitcoin world, as it is right now, and the more traditional finance world and investing world that I'm in with my other leg. Because yeah, I think I'm in a perfect position to be that bridge and to start those discussions. So I've already started those discussions, which resulted in some people buying Bitcoin themselves, just to look, just to try, just to see what the asymmetric risk return profile could do for them.

• 23:23Speaker 03

  And some are very happy, some are not so happy, but everybody's learning. And I think it's a matter of time before you see the first.

• 23:36Speaker 03

  Yeah, banks and pension companies that have a balance sheet that invests other people's money to go into Bitcoin. Although, I do think that the first, the more, the first and the more easy candidates will be funds. Just, uh, so, so the asset management part of the firm that we have, they have funds and people invest in those for their own risk. So it's not our general account that we bear the risk and that we have liabilities, pension liabilities on. That will be the second step. I guess the fund business will be first.

• 24:19Anthony Pompliano?

  Got it. And so when you think through some of these large institutions coming into this space, what are the arguments or kind of talking points that you find are most attractive to them or kind of resonate the most versus maybe some that don't actually pique their interest? And the reason why I say this, because I think the Bitcoin community in general, and this is more kind of the Twitterverse, etc., there's so many narratives, right? Is it digital gold? Is it electronic cash? Could it be both? All these things. What do you find that actually gets people to pay attention, especially in these institutional environments?

• 25:01Speaker 03

  Yeah, that's, that's a good question. I gave a presentation for the, the whole team, including our chief investment officer, at the end of last year about Bitcoin. It was about a two-hour presentation, one-hour presentation and one-hour questions. So, what, what, what, the main thing in the heads is, so the,

• 25:28Speaker 03

  The picture they have of Bitcoin is shaped by mainstream media and the big financial media firms like Bloomberg. And you and I know how Bloomberg talks about Bitcoin at the moment. It's not very good. So they have this point of view that it's for criminals, that the government will ban it, that it's polluting the environment. And so they have a very negative view. And I talked about, well, the things that we Bitcoiners talk about. Things like it's an asymmetric risk return profile.

• 26:12Speaker 03

  It is an uncorrelated asset, so not a safe haven asset or negatively correlated asset, but an uncorrelated asset, which is better in my view, because safe haven assets go down where the other things go up. And this thing goes up no matter what. So that. And also, and that surprised me a little bit. The futures market at the moment. If you look at the future market for gold, for example, they are in contango, meaning that the future gold price is higher than the current gold, the spot gold price.

• 26:52Speaker 03

  And this is actually something that we do, that we do the cash and carry trade with gold, where you buy the gold and sell it a month or a couple of months later for the premium. But if you do that with gold, you get 1%. And if you look at Bitcoin and the futures on Bitcoin, you can earn 1% to 2% per month. So that's actually, yes, well, somewhere between 10% and 20% lately. Cash and carry return, so with very little risks, because everything is collateralized.

• 27:32Speaker 03

  So 10% to 20% cash and carry return on your investment. And that got some ice pops and we had a lively discussion about that. Still having that discussion, by the way.

• 27:48Anthony Pompliano?

  Yeah, and so it's really interesting because when you mentioned gold, there's a lot of work that you specifically have done that I think people kind of point and say, oh, that applies to assets like gold as well. Maybe let's start with the stock to flow model. And you can kind of walk us through what is it? Why does it work? And really how it works so that people that have seen the charts really can kind of get the the explanation behind it.

• 28:20Speaker 03

  Yes, yeah, so what I'm trying to do is shape the Bitcoin world and the investment view in terms that we're familiar, that we as investors, institutional investors are familiar with. So the sharp ratio that I already mentioned.

• 28:41Speaker 03

  But the other thing that's really missing, I thought that was missing was a fundamental model. And well, that's true for gold as well a little bit because there is no fundamental valuation model for gold other than the cost of production of gold. And something similar was there for Bitcoin as well. But for me, that wasn't enough. So I started actively looking for fundamental models for Bitcoin. And I encountered only technical analysis models. And well, having worked at dealing rooms, technical analysis is nice and it's, yeah, it's kind of a language to talk in the trader community and it describes situations,

• 29:26Speaker 03

  et cetera, et cetera. But they don't really, well, maybe I shouldn't say that, but they don't really work well all the time. And it's very difficult to at least mathematically or statistically benchmark them and program them in a way that institutional investors understand. Because institutional investors like banks and pension asset managers, they don't really use the technical analysis.

• 30:03Speaker 03

  So stock to flow is, yeah, it's actually an attempt to quantify the scarcity, the scarcity, digital scarcity invention that Satoshi made. And gold was the nearest asset I could think of. And I'm following gold actively for years. Actually, I am an old gold bug before I was in Bitcoin. And so I knew about stock to flow as a ratio of the amount of gold that's there above ground right now and the amount that's produced every year. And in gold, that's 60, around 60.

• 30:46Speaker 03

  So there's 60 years of production above ground. And that's really high because for all the other assets, silver, palladium platinum, it's really low, even close to one. So not very much stock. So I was reading Sabine Mus's book, The Bitcoin Standard, and he is talking about stock to flow as well, but then in a Bitcoin context. So that made the click for me, like, hey, I could use the stock to flow concept. That's, well, a familiar thing in the gold community. I can use that for Bitcoin as well. And let's see how that calculates.

• 31:27Speaker 03

  So I made the model and calculated stock to flow for Bitcoin over the last years and, well, sort of correlated that, plotted that first against the price. And that was this very nice straight line in the logarithmic space. So, yeah, from there, it was a small step to go to the formula that is.

• 31:58Speaker 03

  Familiar now, and that's the stock to flow model that came out of there. And that is actually the first time I had some anchor, some fundamental

• 32:11Speaker 03

  statistical model that I could rely on to say something intelligent about the price. And I was very happy that this model was verified by others, by many others, I might say. And especially the addition of co-integration that Nick from Australia did was crucial. Because I talked about co-integration in very different terms. Because I noticed from the model that every year, the price of Bitcoin was below and above the model. It was very tied to the model.

• 32:55Speaker 03

  So every year it was above and below. And in mathematical terms, in statistical terms, you can quantify that by co-integration, which is what he added. And that was really, if you want to know more about that, he did a podcast with Stefan LeVera lately. Make sure you listen to that. And then later on, the model, when it was published, it got some real attention. And others verified it as well, like guys like Marcel Berger from Berger Capital. But also Manuel von Landesbank and Mark from the Gold Fund Incrementum.

• 33:37Speaker 03

  So it was really, I think, about 10 guys that checked the model and all came to the same conclusion, which gave real confidence. So yeah, it's...

• 33:49Speaker 03

  It was the thing I needed to take it seriously as a professional investor. And it was also something that could be replicated and checked by others. Yeah, well, that's another important thing.

• 34:05Speaker 03

  The only thing is that the outcome was rather, well, shocking. It was rather high because it predicted, like you all know,

• 34:17Speaker 03

  a fifty to a hundred thousand dollar Bitcoin price after the next halving. And that, of course, yeah, it makes you wonder why that is. Why it should be so easy to make a ten X on your investment? That's normally not, that actually can't be possible. And it also makes you wonder why the model fits as well as it does. So I think that's the interesting question. And a lot of the discussion on Twitter is going about that. So first of all, I think, why does stock to flow work? Yeah, because it measures scarcity directly, like gold.

• 34:59Speaker 03

  So you can sort of compare it with gold in stock to flow terms, but also in market cap terms. And the scarcer something is, the more valuable it should be. So that's one thing, that's the point I started with. But another reason it works very well could be the network effects that we talk about a lot within Bitcoin. So there is the network effects of developers, that more and more developers start working on Bitcoin and more and more merchants start buying stuff and selling stuff with Bitcoin.

• 35:43Speaker 03

  And investors, a number of investors keeps increasing. And then there is all sorts of network effects in markets where you have, in the beginning, you didn't have on-rimes and off-rimes. Now you have exchanges. Every country, um, and, and you have even derivatives markets, future markets and, and option markets and not, not very exotic ones, but, but in Chicago CME or in New York, the, uh, backed futures, those are very important and, and those build over time. So it could be that the stock to flow is, is, um, quantifying the underlying network effects in, in Bitcoin.

• 36:26Speaker 03

  Um, but, but another reason is, is quantitative easing is what, one of the reasons I started looking at Bitcoin in the first place. As lo- the, the, the central banks have, uh, printed trillions of dollars since the start of Bitcoin, which is also the, um, exact moment of the, of the global financial crisis, of course. So they have started to, to print trillions of dollars and euros and yens. And, uh, this money goes somewhere. I mean, I, I can see it in my day to day business. They, uh, that money is used for buying bonds. Uh, that helps states, of course, but it's also used for buying mortgages.

• 37:09Speaker 03

  And, um, yeah, so, so, so, uh, it could be that a little bit of that money is somehow finding its way into Bitcoin. And that Bitcoin measures the, uh, yeah, the, the, the, uh, increase in money supply, if you will, of all those fiat currencies. And, uh, yeah, I, I have tweeted once that as long as the central banks keep printing, the Bitcoin keeps rising. It, it could be some truth, uh, in that too. Um, and maybe a fourth point is why does stock to flow work? It only works if you have hotlers. So the, the hotling, of course, is, um,

• 37:48Speaker 03

  is a term in Bitcoin that everybody uses, but it's, it, it, it's, it means that there are people that really believe in Bitcoin. No matter what somehow, sometimes. So they, they stick to it. They, they, they keep the Bitcoin through, uh, crashes. And, uh, they're the real hotlers and you need the hotlers to create a, a high stock to flow, uh, value. Of course, it's like companies that prefer very loyal shareholders that that you know, if there's a crisis or something going on, they they don't immediately sell your stock and and and split up your company and but let you build that if they have the vision

• 38:27Speaker 03

  that you have, those are the ideal stockholders shareholders. And the same is true for for Bitcoin, I guess. I guess the holding, the holders and the holding, the act of holding is very important and might also be something that is quantified by by stock to flow.

• 38:46Anthony Pompliano?

  How much of the stock to flow model do you think that like the accuracy of it is derived from this programmatic scarcity? So scarcity is one component, obviously gold and Bitcoin share, but the idea that the scarcity is so programmatic and predictable, does that help that stock to flow model kind of hone in on the accuracy? Or does that not really play a part, you think?

• 39:14Speaker 03

  I don't know. I don't know. It certainly helps with the prediction, of course, because it helps if the the variable that you use to predict if is mathematical thing and it's deterministic. It's we know stock to flow for 100 years to come. So that really helps with predicting something that you don't have a stochastic variable there. So yeah, and what you also see is that the the relationship, the co-integration is getting stronger over time. So that's very interesting and a mere recent discovery, but the co-integration is getting stronger and stronger.

• 39:59Speaker 03

  So it will be very interesting to see how that holds after next half a week.

• 40:05Anthony Pompliano?

  Yeah. And describe that a little bit more for those that are unfamiliar with co-integration and kind of how that's calculated and why it's important, maybe just unpack that.

• 40:15Speaker 03

  Yeah, I think a lot of people don't understand what co-integration is. And I don't blame them because it's a very, it's one of the exotic things that even if you study econometrics, you get maybe in your last year if you're lucky. So co-integration, it's actually a technique from the mid 80s. So it's already 40 years old. It was invented by Granger and Engel. Mr. Granger and Engel got a Nobel Prize for it. And why did they, did they come up with this co-integration formula or technique?

• 40:55Speaker 03

  It was, it was a solution for an economic problem that they had in the mid 80s. And that was that there was a lot of spurious regressions. So in the 80s, when the computers, of course, went mainstream, everybody was, was running regression analysis on economic time series, macroeconomic, but also financial markets. And then, yeah, you could correlate those, those time series and then draw all kinds of conclusions from there. But the big problem from, with, with time series analysis, and especially with regression,

• 41:38Speaker 03

  is that there's, there could be spurious regression. So you, you find a correlation, a very high R squared, and, but it says nothing. It's just a spurious regression and, and they made a lot of mistakes with that. So Engel and Granger came up with this technique to test if the regression was spurious or not, which is very, very useful. And basically what they did is, is model the difference between two trending series. And by trending series, I mean time series that go up or down, that are non-stationary, as we like to say.

• 42:22Speaker 03

  So for example, stock to flow is something that goes up all the time. You know that. And, and so it's, it's trending up. And the same is true for, for the price of Bitcoins. So, so stock to flow and Bitcoin are both trending up. And if you run a regression on those series.

• 42:42Speaker 03

  You always find a very nice fit and a high correlation. But most of the time, that correlation is spurious. So what in fact you should do is test for co-integration. And if you find co-integration, then you know it's not spurious. So what is co-integration? Co-integration is the difference between two trending series. And if, so for example, the stock to flow model has this step function that we all know. And Bitcoin is moving around that.

• 43:26Speaker 03

  But it stays very close to the model value. And what you do is you analyze the difference between the model value and the actual Bitcoin value. And if that difference is stationary, which means it is sort of, it's normally this. Actually, if you look at the residuals of the stock to flow model. It's a normal, very nice, normal distribution of the errors of the residuals. And so, yeah, they stay together and that's what it is. The popular story that goes with it is the story of the drunk and the dog.

• 44:11Speaker 03

  So the drunk is walking in a random way because he's drunk. And his dog is also walking in a random way, but they're connected with a leash. So the difference between, although they're both walking a random walk, if you will. The difference between the drunk and the dog is stationary, is sometimes high, sometimes small. But there's a relation in the, so they are co-integrated. And yeah, how do you calculate it? You need a special statistic package for that. So that could be R or Stata or E-views. And, but you can also do it in Excel if you know what to do.

• 44:56Speaker 03

  And yeah, I have a tweet about that, but it's quite technical. But you can do it in Excel as well. You just have to. Measure the distance between the two, between the model values and the actual values and and and and run a regression on that one. So, yeah, obviously stock to flow and Bitcoin price are co-integrated and and and that means it is not spurious, it's real. And all other models that I know, all other time series that I know are not co-integrated. So that's that's a very important finding. I looked at hash rate, I looked at difficulty, at

• 45:39Speaker 03

  time, at at well, every the number of accounts, the number of active addresses, the number of Bitcoins. They all show a very nice regression. They all have a very nice R squared, but none of them are co-integrated. So they're all spurious, except stock to flow. And that is the real importance of stock to flow, of co-integrated stock to flow and Bitcoin price.

• 46:04Anthony Pompliano?

  Got it. And then when when you think about the stock to flow and co-integration, has this intersect with this efficient market that you've been kind of talking about recently and looking at?

• 46:18Speaker 03

  Yeah, yeah, yeah, that I got a lot of critique, of course. And that's good. That's why I put it out there and didn't keep it for myself and and trade on it or invest in it. So the critique was was, well, there's not demand in there and or it goes to infinity or there's only two or half things. It doesn't work for altcoins, etc., etc. Those critiques are not very strong. I think we we we argued about those a lot and and I think they're

• 46:55Speaker 03

  debunked all, but but I don't know if this is the time to to to to to talk about those. But the efficient market hypothesis is, I think, the steel man argument against the model. If I were to to argue against stock to flow, I would argue the efficient market hypothesis argument. What it says is that

• 47:22Speaker 03

  Free money doesn't exist, so there's no free lunch. And the fact that you use information that's out there in the public and a formula that is publicly known means that everybody knows it, or the market knows it at least. And that could not be a profitable thing, because it's out in the open. And there's theoretically actually three variants of the efficient market hypothesis. One is the weak variant that says you cannot use price data alone,

• 48:02Speaker 03

  so univariate data, to predict the price of anything. So you cannot use historical data of Bitcoin to predict Bitcoin. That's the weak form of efficient market hypothesis. And it basically says that technical analysis cannot add value. I think most investors, economists, agree that that's true. So the weak form of efficient market hypothesis is true. Then there's the strong form of efficient market hypothesis at the other end. And that says, yeah, if you have inside information, for example, about a merger of a company, that can be used for making money and making profits.

• 48:46Speaker 03

  And that's also why that is illegal to use inside information. And it's important to note that not everybody needs to know this inside information. Even if there's one or a couple of people knowing this information, they will buy or sell whatever that information implies, and they will move the price with that buying and selling. So most investors and economists also believe in the strong efficient market hypothesis. But where it gets fuzzy is in the third variant of the efficient market hypothesis. That is the semi-strong efficient market hypothesis.

• 49:30Speaker 03

  And that tells you that even, so not insider information, not...

• 49:36Speaker 03

  Price information, but fundamental information, multivariate models like the stock to flow model.

• 49:45Speaker 03

  It cannot be used to make a profit in the markets because all that information is already publicly known.

• 49:53Speaker 03

  So yeah, that's where the discussion is a little bit. Is stock to flow publicly known? Or is it known to very few people and is it sort of inside information?

• 50:07Speaker 03

  But to be honest, and of course, the discussion is then, is it priced in? Is, for example, the halving that we will have in May this year? And they predicted 10x increase in price by the stock to flow model. Is that priced in or not? And in my view, that is, that semantics, it's the efficient market hypothesis is a misnomer, actually. It's not a hypothesis. It's not testable. You cannot apply statistics to it. So if we're doing semantics, I would say, and I did in the article that I wrote, yes.

• 50:53Speaker 03

  I think the stock to flow model is priced in because it is built on stock to flow information that's publicly known. And the formula is also out there and like inside information, not everybody needs to know it. But if like 1% of my followers knows it, or some bigger investors know it.

• 51:14Speaker 03

  Well, you know it, and I know it. So we will use that information to move the market.

• 51:24Speaker 03

  So in that way, it's priced in.

• 51:28Speaker 03

  But again, I think it's semantics and I'd rather talk about something else that we also professionally talk about, and that's risk. We, actually, we never talk about the efficient market hypothesis when we invest professionally. We just assume it's there if it's a reasonably efficient and big market like I think Bitcoin is with 100 billion plus market cap, futures markets, et cetera, et cetera. I also showed that in the article that it's, it's, it's pretty efficient if you look at foreign exchange rates and Bitcoin. So if you assume an efficient market, then it's

• 52:08Speaker 03

  much better to just look at the risks and are those risks, are they priced in a right way? And there's a couple of models for that, capital asset pricing model, the Black and Scholes option pricing model that can be used. But basically, it means that, okay, the stock to flow model with its high prediction and its major opportunity is known and is priced in, but there's also all sorts of risks that people see, that the market sees, that investors see, that are also priced in. And some of those risks are, for example, the government ban that

• 52:49Speaker 03

  all my colleagues are afraid of, or the futures manipulation. That's something that a lot of people on Twitter talk about, or the Mt. Gox or plus token scam people selling pressure, that that's a big risk, or minor capitulation. It's a returning risk or narrative every time there's a halving. And right now, of course, there's the coronavirus risk that everybody is talking about. So what I did, it's actually quite, quite interesting. I did some polls

• 53:31Speaker 03

  the last month. I did three polls. The first poll was three months ago. I asked, what is the biggest risk you see? And more than 50% Said it's the futures. Uh, manipulation through futures and futures were introduced uh at the top of the market, the all time high in December two thousand seventeen. So futures, yeah, stock to flow, it might have worked in the past, but now we have futures and doesn't work anymore in the future. That's a real risk that some people see. Then a month later, I did the same uh poll. And another risk popped up at first, uh, and that was the US introducing draconical

• 54:17Speaker 03

  uh, regulation uh, and laws uh, on Bitcoin or the threat that they would do that. And that was the uh, um, that was Muñchín, uh, I think he, he, he threatened with, with draconical Bitcoin laws. So everybody was afraid of that. The futures were in the second place. And right now, if you, if you do the poll right now, everybody is afraid of the coronavirus. And um, the virus is of course a big risk. But uh, it shows you that uh, there is a, a recency bias in the risks. So whatever risk is, is, is recent and, and, and, uh, a big thing now, people overreact to that.

• 55:00Speaker 03

  So, so, so in the end, to, to wrap that up, I think the efficient, efficient market hypothesis um, is, is, yeah, it's semantics. You better look at risks and, and then if we look at the risk, I think the stock to flow model might be a little bit under um, estimated or there might be an underreaction to stock to flow and there might be a little overreaction to the risk that we see around us uh, like futures and, and laws and uh, and the coronavirus.

• 55:37Anthony Pompliano?

  Got it. And so I recently had Raul Paul come on the podcast and he really broke down a situation where, you know, at a minimum, there's a global recession and slowdown at a maximum, something that looks more like a depression. And maybe let's not spend time debating the merits of, you know, what happens, but just in a scenario where there is some sort of slowdown in the economy on a global scale. Bitcoin has really existed in the longest bull market in history. How do you look at kind of that macro environment and any changes

• 56:17Anthony Pompliano?

  there impacting stock to flow, the price of Bitcoin, or any of the things that you've been looking at that have kind of continued to line up, but could they change in the, in those scenarios where there's an economic slowdown?

• 56:32Speaker 03

  Yeah, that's a big question, what Bitcoin will do in an economic slowdown, because we didn't have that last 10 years. So Bitcoin was, of course, created at the height of the global financial crisis as a result of the global financial crisis. And, and yeah, so we haven't had a crisis to test it on. But I think that it will be a bit, it might be a bit similar to the internet. So that the internet, of course, was built as a protocol,

• 57:10Speaker 03

  a communications protocol that, that kept working under enormous, in wars, in nuclear wars. So if a whole continent was, was taken out, then how does the message go, go from A to B? And it was this peer to peer decentralized network and, and the protocol that, that reroutes the messages around nodes that, that have been taken out. And, but that was messages. And Bitcoin is a bit like that. At least that's, that's how I see it. It's very decentralized. There's, there's 100,000 nodes, 10,000 relaying nodes.

• 57:54Speaker 03

  Around the world. So even if there's really big crisis where people die like a nuclear war or where something else happens that people cannot go to work or cannot go to, yeah, leave their house, then who is who is going to maintain the the central bank systems? Who is who is going to print the money, if you will, create the money, because it's all digital. But who's who's going to operate SWIFT network? Who's who's going to make the ATMs running and put money in the ATMs and and all that stuff? So so there

• 58:36Speaker 03

  is a whole network of companies and people and costs as well related to the current financial system. And I guess in a situation like that, it doesn't matter what happens, Bitcoin will relay transactions, it will keep working, even even if all the nodes on earth are gone, because there is also nodes in space. There's satellites with Bitcoin, with the whole bit with all the Bitcoin transactions and that can relay transactions. So I, yeah, if you ask me, I think Bitcoin is made for a situation like that.

• 59:15Anthony Pompliano?

  Yeah, it it's super interesting, because it's one of these things when we go and talk to the institutional investors, particularly in the United States, the non-correlation to other assets and kind of this belief that it can be that chaos hedge has been something that has resonated. But to your point, you know, there's been this bull market that has kind of raged on. And obviously, we see now the central banks are going to do everything they can to keep that going. But but it's definitely an interesting thought process, I think. But ultimately, we're going to see what happens at some point.

• 59:53Speaker 03

  You know what's also very interesting and maybe that's a question for you because it must be very difficult for Americans to understand, to really understand what it is to live in a country where there's negative interest rates. For example, in my country and in Germany, the whole yield curve from one month to 30 years is below zero. There is no interest. You pay money if you invest. That's a real situation. And in America, you read about it, but you don't feel it. It's the only country where the yield curve is still positive.

• 1:00:34Speaker 03

  And yeah, you see that turning south rapidly, of course, recently. But what if the US is going sub-zero with their interest rates and there will not be any country with positive interest rates left? What I see around me is that people get personally very interested in Bitcoin if they see that they get negative interest rates on their money at the bank, which happens in Germany and happened in the Netherlands. It's actually the day after the press release that the banks go negative interest rates,

• 1:01:17Speaker 03

  I get calls from people how to invest in Bitcoin. So that will be very, very interesting if that situation will sooner or later be also true for the US.

• 1:01:31Anthony Pompliano?

  For sure. And it seems like, I think I was reading earlier today that the market's now pricing 100% probability that the Federal Reserve is going to cut rates in about two weeks here. There was an over 80% probability they would cut rates again at the next rate cut. And so you get two rate cuts here. It's Highly likely that the US will be at or near zero, um, you know, the next six weeks or so. And then from there, uh, I think you get in this really interesting world with, um, it is unlikely that they will, uh, want to go negative, but they may have to join the rest of the world.

• 1:02:13Anthony Pompliano?

  Right. And, and kind of what happens there in the United States is kind of defended zero to some degree. Um, yeah, I think it's a weird, weird place to be.

• 1:02:23Speaker 03

  Yeah, absolutely. And, and especially your president, Donald Trump has of course, uh, made some, some nice statements about that, that he wants some of that, uh, juicy and negative interest rate money. It looks like he's going to, to get it.

• 1:02:39Anthony Pompliano?

  Yeah, it, it's, um, it's pretty crazy. So let, let me ask this, what, what is, um, in your opinion, uh, as we look at Bitcoin and a lot of these statistical models, um, I, I think you and I are very similar in our belief, uh, in kind of Bitcoin as a system and how it's designed, uh, and what the potential for it is. But what would you say the biggest risk is right now, um, for Bitcoin, you know, so if it didn't work, uh, or didn't succeed, what would you say was the most likely reason that would be the outcome?

• 1:03:13Speaker 03

  Oh, that's a difficult question. Um, yeah, I, I do think that, that, um, as, as states, uh, nation states, especially the US, um, is a big risk because, um, other countries and, and actually today, uh, India, for example, and South Korea and Germany simultaneously, um, uh, got, got a little bit, um, more, uh, positive, uh, legally, uh, with, with, with Bitcoin. Um, but the US is not moving in that direction. So very drastic tax laws,

• 1:03:53Speaker 03

  very aggressive anti-money laundering and, and, and terror financing, uh, checks. So I, I guess it will be most difficult for the US to give up the reserve currency status. Uh, in the end, that will be, that might be come a, a very nasty, uh, fight. Uh, so, so I think that's, that's, that's a very big risk, but you see. At the same time, other countries maybe taking advantage of that situation and opening their markets and be very clear legally about Bitcoin and giving it a place as a regular asset. So that's a risk.

• 1:04:37Speaker 03

  The future markets I don't really see as a risk. I mean, I see it as an opportunity and as a network effect that strengthens Bitcoin. Because, yeah, well, you know, as a miner, you're very happy with future markets because you can take the volatility out of your revenue stream. You can sell the Bitcoins that you expect to mine for the next, well, six months at least, and you can sell them on the future markets and don't have that exchange risk if you convert it to dollars. And so you can do that with futures and the buyers of those futures are, of course,

• 1:05:17Speaker 03

  the funds that don't want to hassle with the keys and the storage and insurance. So there is a bit of a premium. As you can see, the future markets are in contango, and I think they're a very natural place where miners and trackers and funds meet each other. Of course, there is room for governments, that same governments that don't like Bitcoin to suppress the price, to manipulate the price, like, well, I think it's now a fact that they did that with gold. But on the other hand, that's a very manipulation with derivatives, like futures is, in my

• 1:06:01Speaker 03

  view, it's like pushing a ball under the water. You can do that temporarily, but not all the time. And you can do it long, but you get tired and then it goes up. And you see, for example, with futures, with the spoofing, of course, they hit the price down, but... But it made an opportunity for real believers in gold to buy the the the actual uh physical gold and and you've seen for years and years that all the physical gold is going to the east is going to China and India etc etc and that's where it is right now so so yeah

• 1:06:40Speaker 03

  in in the end you'll you'll lose if you if you manipulate uh the markets you can do that temporarily but not all the time so I don't think that is a big big risk coronavirus of course yeah is a big risk now but we well yeah uh we we've had viruses last last 10 years like the the swine flu and and and MERS and and and and there was another one I'm not a doctor I cannot assess the risk really well uh for sure will have an economic impact but um uh yeah if you look at it from an investment point of view it it it's also very probable that we overestimate overreact to do

• 1:07:24Speaker 03

  to this this risk uh so I think in the end what what the question that you have to answer as an investor or a potential investor in in in Bitcoin is okay there's all those risks on the one hand and there is a well sort of fundamental model or value uh on the other hand stock to flow or whatever um and and what is the chance what what do you really think the the the valuation model the stock to flow model has a 90% of failure so even if it if there's 10% chance that it that

• 1:08:05Speaker 03

  it that it's right uh regardless of all the risks there are but if there's a 10% chance that the the Bitcoin value will go to 10 to 200,000 then it it might be an interesting bet already and and I think those are the numbers that we uh we have to uh uh weigh everybody has to do that in in context of his own risk preference but 10% success can uh chance I think that's I think chances are higher than that.

• 1:08:39Anthony Pompliano?

  I tend to agree. I definitely tend to agree.

• 1:08:44Anthony Pompliano?

  I really appreciate you taking the time to do this. You have some of the most clarity in your thought process that I've seen in the space. And then obviously, given your background, it's super cool to kind of see you balancing the personal, you know, interest and frankly, belief with the institutional and kind of professional work that you do. So first of all, just from everyone, I think, in the Bitcoin community, thank you. The work you've done with the stock to flow and stuff has been incredible. And then, you know, if people can want to get in contact with you or find you, is Twitter the best way to do that?

• 1:09:23Speaker 03

  Yeah, Twitter, I'm on Twitter, so that's Plan B at 100 trillion US dollars.

• 1:09:30Speaker 03

  And I'm on, what is it, GitHub? So there are all the data and the articles and also the models, the formula, they're all open source. So if people like to play with them themselves, please be my guest. And if you have questions, please reach out.

• 1:09:49Anthony Pompliano?

  Hey, everyone, Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the apple, Spotify and other podcast charts, please do us a favor and rate, review and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.