I wanted to share my fundamental take on a consequence of "mass adoption" among institutions. Bitcoin is being bought on debt financed by a low interest rate world. Trading cryptocurrency no longer means that traders and investors are immune from the wider economy. Unfortunately I think that cryptocurrencies may become influenced by interest rates...
Thanks for recording this video. The replies and comments are already interesting to read. You've sparked some thought! It's been featured on Editors' Picks.
ich1baN
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The low interest rate component is because it's a convertible. The holder of the convert has an option to convert into shares of Microstrategy and participate in upside of the equity, therefore they are paid a lower coupon rate to supplement them in the meantime UNTIL they do convert; usually a set time period that has to elapse "expiry date" and is agreed upon by both parties. I've raised a convert as part of my normal job in M&A.
I'd be careful on drawing conclusions about interest rates and bitcoin. There really isn't a relation other than the more casual one that as dollar weakens - not necessarily the DXY - a remember DXY is ONLY a measurement tool against other fiat currencies and NOT bitcoin or any other asset. So many traders on TV get this completely wrong and measure BTC relative to DXY. So as bonds weaken or as rates rise, then yes just like Gold's value decreases due to the higher yield on risk-free assets, then bitcoin's value would be negatively impacted to some degree. However, we live in a world where rates are only going to go (or stay) one direction in the next 5-10 years due to MMT.
Anyways, in reality the convert raised by microstrategy is NOT ...again I repeat, is NOT debt ... it is indeed equity and this is how everyone views converts b/c they WILL be converted into equity one day. Even if it were debt, it wouldn't be a big deal in my view. Regardless, gold goes higher as debt yields decrease- it's the same relationship with bitcoin and I doubt this relationship will ever change as Bitcoin's scarcity value is 1,000,000x more influential on its overall price than interest rate sensitivity.
norok
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@ich1baN, Thank you for the detailed info. My point was to draw attention to the fact that Bitcoin is being bought on financed debt one way or another and this adds structural risk to the market. I think traders need to be careful with the stories they tell themselves.
ich1baN
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@norok, In my view there isn't that much leverage currently in crypto markets being used b/c it's nearly impossible to get a bank to give a loan for crypto (of course one can lie and then buy crypto) but Michael Saylor makes an excellent point why one should begin using leverage to buy bitcoin. Yes there are other forms of leverage such as exchange leverage but still, when we add up aggregate leverage in crypto relative to other traditional markets, it pales in comparison.
But back to the debt example and why Michael Saylor thinks one can Finance at low rate and then buy bitcoin. For example, your home - it was financed with what? Debt! Everything you see around you in the living world was financed with debt. Real Estate has been one of the most reliable and stable stores of value and continues to gain in value every year and part of that is due to the inherent value of a yield generating hard asset like real estate. Saylor's point is more nuanced than I am making it but I implore everyone to watch this video b/c it's perhaps 100x return on your time:
@ich1baN, Financing your home to buy crypto is a very YOLO move. Micheal Saylor and Cathy Wood have been in the news lately because they have done so well, but that doesn't mean that we should all jump on the bandwagon to borrow money and just buy crypto and TSLA. There's a correction coming who knows when, maybe not even for another 3 years but a clear level head is needed in times like this. Just because there isn't much "leverage" in crypto doesn't mean that more leverage is going to be good for it.
ich1baN
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@hupionut, I never advocate taking out a mortgage on your home to buy crypto. My point is that we finance our homes with 100% debt. Everything around you is financed with debt, including your education, your car, your home.... everything. It doesn't actually increase the risk of the underlying asset when that asset is scarce. Eventually that mortgage debt does get paid off but there is a rollover of financing from newer generations to finance their first homes, so on and so forth.
My point is that there is no leverage in bitcoin and leverage doesn't make it inherently worse off like real estate itself where it is mostly financed with debt... yet real estate continues higher as it is a scarce hard asset.
There's a difference b/w low interest debt and exchange leverage as well - low interest debt which is what Real Estate is based off of and is the point that Saylor makes is actually the most cost effective form of capital allocation - assuming one actually has capacity to take on that low interest loan in the first place and has the ability to fund the coupon payment.
Exchange leverage where one has a margin call b/c they levered up 10x on a trade is not even remotely the same thing and not even close to what Saylor or I are speaking about. This assumes you have capacity to make the loan and payment in the first place. Don't get these confused as it's easy to conflate them and the ability to take a loan out in the first place but an asset that grows 40% compounded annually is more than enough to warrant the risk of paying a monthly payment that you can cover by other income sources. It's really a no brainer.. it takes time to understand this nuance but once you do you will see Saylor's point.
hupionut
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@ich1baN, You are saying that you not advocating people take out a loan to buy crypto, but then say " an asset that grows 40% compounded annually is more than enough to warrant the risk of paying a monthly payment that you can cover by other income sources." suggest something different. I get it, I am a crypto nut, and believe in crypto, but just say that's what your advocating when you are advocating it...
I am not trying to troll you I promise. I think that most investment gurus have praise Real Estate as a effective for of capital allocation even Buffet.
I do believe that crypto will moon, but you never know what is going to happen. Remember when we all thought that Yahoo was going to take over everything? Altavista? Lycos? maps.com? Real networks, Netscape? Pets.com? Alot of things can happen and not even BTC is bulletproof IMO.
ich1baN
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@hupionut, you misread my post. I said I never advocate taking out a home loan to buy crypto... much different than what I actually said and the subsequent conclusion. Also, you're skipping over about 95% of my points made.... starting to come off troll like lol. Going to make this the last comment to you - it would massively behoove you to understand Saylor's point - hope you try to. It's more nuanced than you're making it out to be.
hupionut
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@ich1baN, Maybe I am dumb, whats the nuance? Besides its cheap money and crypto has a lot of gains so lets buy crypto...? Isn't that the nuance?