January 2025
Here are some key takeaways from their conversation:
Watch previous episodes here:
Ep. 121 Investments that Produce Cash Flow
Ep. 120 California Fires 2025: Next Steps to Take
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski joined by Nik Bhatia. Nik has been studying Bitcoin for many, many years. He has a podcast called The Bitcoin Layer. He's written a book called Layered Money. He's also a professor of finance and business economics at the University of Southern California, Marshall School of Business where you teach applied finance and fixed income securities. I'm excited to have a conversation around Bitcoin. I feel like every year or two we have you come on and Bitcoin becomes more and more of a thing, but a lot of people still don't really understand it. So I'm excited to have this conversation today.
Great to see you, Chris.
And so you wrote that book Layered Money. What's that? Two and a half almost three years ago. Is that about right?
Four years ago, if you can believe it. Yes. Wow.
Incredible. And very thought provoking. Especially around such a new asset class. You have a new book coming out. Tell us a little bit more about the new book.
The book is called Bitcoin Age. I've been writing it, researching it for a couple of years. Layered Money was a book that I wrote for my fixed income students. I had to find a way to explain money to them. And money is, of course, a tricky concept. And I became a student of the science of money and going into monetary history and trying to understand how it became what it is today, because we all think about gold.
I know that you guys think about gold a lot at Morton. We think about gold and what it has meant as money and where it exists, in contrast to a credit system. And so that's a that's a juxtaposition that's easy for people to understand. I think they know that gold is a metal and credit is issued and the two are not very alike, but they're both considered money today or at different points in history.
So Layered Money. I tried to explain where it came from and then introduced Bitcoin as a new type of commodity, where it's not a type of credit. Bitcoin Age is a story about Bitcoin now. So I'm past telling the story about money. I'm ready to tell the full story of Bitcoin. Where did it really come from? It came from two places.
It came from internet protocols. But it also came from a response to the never-ending expansion of the credit system. So I tell both stories in Bitcoin Age and then really get into Bitcoin's place today and where money is going in the future, because I believe the credit system will continue to exist and continue to expand, but that national currencies in the future might even look different from banking currencies.
And Bitcoin has a role in all of that.
And as you mentioned, like the credit cycle. Right. One of the pain points that people have had over the years, and maybe that's why they've liked gold as a store of value, is because inflation creeps up on them. The purchasing power of their dollar becomes less and less over time. And it's largely out of their control. It's because governments around the world print more money, which increases the money supply, which devalues the current dollars you have.
And so that's why Bitcoin sort of became very popular or sort of started 15 years ago, but it's become more popular in the last few years because it has a finite supply. And so that's where you're talking about the transition going from the credit era to more of a Bitcoin era and what money could look like going forward.
Is that right?
Yes. So it's not just governments, Chris. It's banks also. So banks issue loans and that expands the money supply. Governments borrow and spend. And actually when banks end up absorbing that debt, whether it's the central bank or banks themselves, the money supply expands. So it's really a two-pronged expansion of the credit system. And so the dollar gets diluted from avenues that, like you said, we cannot control.
Even if you vote in a certain way. That doesn't change anything to banking, lending policies. So in that credit expansion, people are looking for a way to keep up, basically keep pace with increase prices. And that's why Morton exists. And that's why this whole industry exists to seek investment returns, because we have to outpace we have to find a way to outpace the growth of the credit system.
And if you are investing correctly, you can. But if you're not, you not only can't, but you're going to be punished for it. And so that is a difficult situation for people broadly. And I think that frustration is with a lot of people, different parts of the world in all parts of the world. And Bitcoin for the first time gives people an asset, simple way to outpace.
And part of that formula is the scarcity of Bitcoin, the limited supply which directly contrasts with the credit, the supply of credit, which is always expanding. It's actually policy to keep it expanding because if inflation goes down and we actually border on deflation, banks get threatened because customers default, it brings the whole system down. We know that credit contraction is the cause of recessions.
We know that from history. So it's policy to avoid that. Meaning we are locked into credit expanding at all times. That's why people have to invest because they have to outpace that. Bitcoin just gives them a different way to seek a way to outpace that credit expansion. So it's a type of investment.
You know Bitcoin's been interesting. And it sort of makes me think back on my life. And you know, I'm 45 years old, so I grew up a decent part of my childhood without technology. Then technology, you know, existed. And I had my own personal computer. Video games, learned how to do stuff with email and online and, you know, Google the search engine.
So anybody that's, you know, younger than me, they lived most of their lives with technology. Bitcoin's kind of similar. It's something that was kind of introduced 15 years ago. You kind of heard about it, it was easy to brush it off, it is not really a thing. But then you fast forward 15, 16 years and, you know, price gives it value and, you know, sort of validity in some respects.
You've seen a lot of adoption in the last few years by large institutions and people saying, hey, you know, Bitcoin is is part of the future and it should be a new asset class. I still think that we have a lot of clients and people that don't really understand Bitcoin. So like let's start there. What is Bitcoin?
Sure. So Bitcoin is an internet protocol and it's software. And that software which is called Bitcoin has a coin within it which unfortunately is also called Bitcoin to the public. So that's one area of confusion that when you, you know, when you hear the price of Bitcoin today is $100,000, what they're talking about is the price of one coin within the software that has currently 20 million coins in it.
And so what happens on the software?
Yeah. So the software is basically a database of property title. And that database is run by computers all over the world. So you have a database that keeps Bitcoin balances and it doesn't exist in one place. It exists on thousands of computers around the world.
And so that's where you get that transparency. So it's decentralized. So it's not custody anywhere. But then you have you have visibility into all of the transactions to help give it validity and transparency. And nothing's hiding behind a curtain like a bank.
That's right. And so what what really stands out about Bitcoin is that it's backed by crypto cryptography. That's why it's called cryptocurrency or crypto. It comes from the word cryptography. Cryptography is encryption. So you we all use encryption every day. We use encrypted messaging encrypted emails. It's basically password protection. Fancy way of thinking about that. Bitcoin is a complex system of cryptography that was set with a certain rule set basically when it was started in 2009.
And in that rule set, there's a rule about the supply of the coins. And that rule, if you want to put it in our modern terms, we have the FOMC, we have central bankers, we have bankers that issue money, and they sit in boardrooms and they decide how much to issue. We have one supply rule that was set in 2009.
It's been there forever. It's never changed. And it is it is unlikely to ever change. And that is so unique. That is something that doesn't exist anywhere else in the world. This software rule that is unchangeable and it's backed by cryptography. Right. So that's, I think, a hurdle that people can't get past that I can't own something totally virtual that is backed by nothing but encryption.
And for those people, it might not be possible to ever wrap their head around buying Bitcoin. And that's that's okay. But it's not backed by anything other than the encryption and the rules. That is what Bitcoin is. And so you said that the price gives it value. So I'll change that. I'll say that the demand brings the price up and the price going up is a reflection of the value.
So Bitcoin's price where it is today is a reflection of all of the demand. So basically the belief. So the belief in these cryptographic rules, the belief in Bitcoin as a protocol and the system that it operates within right now, which is there are, you know, a few hundred developers that have, I would say, a an influence over the rules of the product that maybe the direction of the rules of the protocol.
And you've had that type of dynamic since the last, you know, 15 years where you do have some programmers that have influenced the direction of the protocol. But what we can observe is that there the core rules around supply and scarcity have never been touched, and that is what is being recognized. That is the intrinsic value.
And you've always looked at Bitcoin from my understanding as an asset class in and of itself, not an everyday currency that you're going to go use and buy, buy, you know, milk and eggs at the store. I mean, eventually you probably could if more people will take bitcoin as a currency and that's likely to change and adopt and grow.
But you've always viewed it as an asset class. And like, what's the problem that that you feel like Bitcoin is truly solved.
Yes, Bitcoin has solved decentralized electronic cash, which was a problem that was being worked on since 1981. And so we we know about a crypto conference. This is before cryptocurrency. This is a cryptography conference in UC Santa Barbara in 1981. It was an assembly of all the cryptographers, the finest cryptographers not working for the NSA. And out of that conference and the follow up conference in 1982, also in Santa Barbara, we understood that these cryptographers were searching for the Holy grail of decentralized digital cash.
So it took them 27 years. We don't know if Satoshi was one of them or a group of them or none of them. We know that there was a group working on this problem for 27 years. At at least they they solved the problem. And I think that the 21 million supply was the key rule to kind of hold the solution together, that if you can figure out a way to not only decentralize the cash, but also fix the rules around the supply, that that would fix the problem.
And it did. So there's no way to do it, right. We can't live in this. And you know, the negative, right. I'm I'm blanking on the name, but the fallacy where you have, you can't look at the other side and say, oh, what? What if he didn't put 21 million, right? What would it have been? We don't know.
What we know is that it's work. We also know, and this is so important for people, we also know that Bitcoin is 16 years old. So that for 15 years people have been trying to improve it. But because it solved one problem, you can't resolve it. And there might be other problems to solve, but you can't resolve decentralized electronic cash.
It has been solved. The market is recognizing that no competitor is coming close, and every competitor that even inches toward maybe falls back in the market is recognizing what Bitcoin is, which is it's it's money. It is digital gold. It's an asset class by itself. And it is a lifeline.
I've always been fascinated just by the ability to, you know, transfer value across the table to somebody electronically without having to go through an intermediary. And just that concept alone always sort of sparked my interest. Like, wow, that's a big problem that's trying to solve. And you think about that technology that could disrupt many industries, whether it's, you know, buying a car or house or just about any transaction where you need to verify things on, on a, on the other end.
And so that blockchain is extremely valuable and it's something that's brought in people in. If you look at Bitcoin as an asset class and a digital gold, what allocation do you think is appropriate for somebody to potentially, you know, have personally invested in this asset class?
It's a great question. I think the starting point is going to depend on, you know, everyone's circumstance. But what I'm trying to put forth, and I'm not giving investment advice, of course, but from my own research. Holding Bitcoin over a three and a half time year, over a three and a half year time horizon has has brought everybody with it.
And so if you can hold for three and a half years on, this asset class has brought everyone with if you can hold it for 5 to 7 years, you'll ten. And if you can hold it for nine years, you can have 100 x your return. This is looking in the in the rearview mirror. Of course.
So. If Bitcoin follows its current power law, which is a way to, you know, associate growth over time if it fits its power law and continues to grow, but at a decreasing pace, then it should reach several million dollars per coin over the next decade or so. And in that process, if you start with a 2% allocation and it grows to ten, or it grows to 15 or 25, it doesn't seem prudent to to rebalance.
That's my general now approach to this question, is that anybody can start at and I think the starting position is much higher than it ever has been. We can talk about what's happened with the US government of late. Yeah. And legitimacy. So the starting point is much higher than anybody could have recommended two years ago. Even.
Yeah, I think a couple of years ago we had we had brushed around the idea of maybe a couple percent allocation, but obviously it, it determined it depends on somebody like risk appetite or what their allocation is to stocks versus real estate to other fixed income securities to really determine like, hey, what what's the percentage that I can hold on to for a long period of time, ten plus years, and maybe that's, you know, a higher percentage than 2% than it was today.
But, you know, going into the legitimacy obviously trumps now president. He's been sort of pro crypto and even some stuff in the news over the last week that there's been rumblings about Bitcoin reserve either here in the U.S or even by states. Talk to me a little bit more about the legitimacy going forward because of this new administration.
Yes, I was just talking to my team this morning about it. Price, price leads I know, you know, we were talking about why hasn't the price responded to the the pro crypto stuff of late? Well, it actually has. It happens a little bit in advance right. So we we saw the market move up basically right after the election.
The market still wasn't sure if who was going to win. Well, once the result came, we saw the pricing in because we had an idea of some of the policies. So the where Bitcoin is today from a risk perspective, hat has, has or let's just say this the risk. The risk measurement for bitcoin has has changed significantly in the last year.
And in the last week. The risk of Bitcoin has collapsed. And so that also has to do with position size. That position size is driven in traditional portfolio theory by standard deviation of return. So you look at the history and if the price moves by x amount you can only have y amount in your portfolio. Otherwise you might, you know, jeopardize the whole thing.
So risky positions have to be scaled down. Bitcoin. Now a bunch of the risks that existed a few weeks ago no longer exist. And so all basically all of the regulatory risk in the United States is gone for the asset class. That doesn't mean for people necessarily, but for the asset class, it then triggers the rest of the world to do the same.
So overnight Bitcoin has de-risked as an asset class. And so you ask about the legitimacy, the legitimacy of the cryptography hasn't changed. The 21 million hasn't changed. So Bitcoin has always had the same risk profile. I would I would even argue that Bitcoin in its first four years went through, intense cryptography optimization itself. But by about 2013, it became what it was.
And the risk, you know, had gone away for the most part, for Bitcoin cryptography to the risk otherwise is really to investors volatility, judicial risk, regulatory risk and all that kind of stuff. It's actually kind of all disappeared. It's surreal to talk about it, but it sets a very high floor. I would argue that the election day price is probably the lowest Bitcoin will ever go.
Famous last words. Right.
Well because Bitcoin has a history of kind of... and other crypto currencies I shouldn't just you know pick on Bitcoin for this one. But you know it has a history of declining by 70 or 80% during its cycles to new highs and so you think that the the floor of what bitcoin was around the election, what was it 67,000 or so give or take a few thousand there.
You think that that's likely a new floor because of how things have evolved.
Yeah. So I mean we have a we have a metric that we use. It's called Bitcoin's realized price. Right now it's around $42,000. That would be our technical floor right now. So obviously that's a 60% decline from where we are today. So I mean it's that's always you have to expect the unexpected in Bitcoin. And so I wouldn't say that.
I wouldn't say quantitatively that 70,000 is the fourth floor. But I am approaching it like that qualitatively because of this de-risking that we've talked about. And so I'm actually now, for the first time ever, starting to think that we leave this cyclicality that we've seen in Bitcoin and see much more muted volatility, which means maybe not 70% declines, but 40% once and still in a price discovery phase, because most people don't understand Bitcoin yet.
Do you feel like the ability to access Bitcoin in different ways, besides just self-custody, is helping increase that floor as well? I mean, there's a number of Bitcoin ETFs that make it easier for people to, sort of get exposure to the asset class as opposed to having to go through all the loopholes that they had to prior.
So that was already in the works. And what's interesting about the new administrator version is it legitimately legitimizes and unlocks all of the activity and the rails that have already been built. So ETFs were already ready to go years ago, but it took the SEC losing in a federal appellate court for the for them to approve it a couple months later, which was the ruling was October 23rd.
The approval and the go live was January, February 24th. So we're 12 months into the ETFs that is the core. So it's not just you're allowed to do it. It's you built it. Now go use it. So yes the the ETFs and the the rails are much more important than Trump saying go ahead. Right. The actually the Trump saying go ahead is the people saying we've built this.
Now you let us do it right. That's how republicanism works right? I mean, it is self-government. So the people of the United States went to one of the leaders that they felt would be more likely, and they said, hey, this is our industry, that we are building it. We're not committing any crimes. And we're just we're just we're law abiding citizens pursuing technological innovation.
Stop limiting our activity. So the Trump thing is great, but ETFs and not just ETFs but the accounting ruling that just got reversed. Now banks can hold Bitcoin for their clients. With as an asset.
As opposed to being a liability. It's a massive shift. The SEC rolling back some of its restrictions. And the. The credit markets now going to tap bond issuance to go accumulate Bitcoin and all of it is now smiled upon as opposed to, you know, potentially threatened by regulation. So the answer to your question is yes, it's and it's much more important than, than the politics.
Actually, I just think politics is the echo from what is really important, which is technology, people pursuing solutions to problems. You ask, what problem is Bitcoin solve? In the beginning it solved decentralized Bitcoin cash. But guess what else it solves? It solves credit expansion for for people. Now it it solves cost of living increases. That's an incredible prospect right.
And so who is the U.S government to stop that pursuit. And I think the people found a way to allow Bitcoin to go forward stripping out left versus right. This was just people saying this is this is what the avenue that we want right. And then they got a leader that it looks like some of the promises to that industry are are being kept in the early days.
So do you have a preference between, you know, owning the ETF versus self-custody.
So you know, you mentioned using the blockchain, I think one of the most magical moments for any Bitcoin person is to use the blockchain for the first time. And often that comes when you buy on the exchange and you send it to yourself in whatever self-custody. Solution that you choose. So that is a special moment. I would recommend that anybody try that in for ten, you know, $10 worth of Bitcoin if they're ever going to buy it.
If it's not for you, it's not for you. If you don't want the responsibility, that's okay. But there are many people that the self-custody aspect of it is more important than anything else, that they don't want an asset that's custody by somebody else. They just want to put cash in the mattress, actually cut open the mattress and stuff it inside and resell it and those types of people.
And it might be different for young people, too, that there might be young people that say, oh, a smartphone wallet is something that I can understand self-custody over. I'm okay with that. I have a device or it's going to be different for everyone. Chris, the ETFs are a fine choice for people that want to participate without using cryptography, which can be intimidating to a lot of people.
And so I think you touched on a little bit, you know, is it gambling or is it a store of value? I don't need to go into too much detail here, but I think a lot of the points that you just brought up earlier bring it into why it's not gambling and why it is, in your view, sort of this store of value or that digital gold going forward.
And that's, we've seen that competitive balance between the two over the last few years, if you want to any any other comments you have around that.
Value is subjective, Chris. Right. And so, you know, art is not going to be for everyone, for example. And even certain asset class like gold is not for everyone, right? Doesn't have a cash flow. Bitcoin also doesn't have a cash flow. There are asset classes that just don't necessarily fit people's. I you know, I would argue that a company like Nvidia, which is making enormous profits by taking advantage of an opportunity in chips, could tomorrow be threatened by another chip maker that's figured out something and destroy a lot of the accrued value in Nvidia's equity?
So. There are certain people that look at tech stocks and say, I actually can't get behind owning equity in companies that their whole game is to keep trying to disrupt and drive the price down. Right. And, you know, I philosophically, I'm starting to more to that side. And so what is the point in owning technology companies when you can own something like Bitcoin.
So that's a subjective choice. It's a relative choice. Also, I know it's not a great answer, but its value is subjective. It's relative also.
But it's interesting though I mean, even just this last weekend with Deep State coming out sort of challenging the validity of and the future of ChatGPT, you know, this, revolution in AI, is there a change in technology AG or something that could disrupt Bitcoin, in the way that technology tends to disrupt over time and replace one another?
I think that technology is fast moving, so we have to be conscious of that. And I do think the price will tell us I really do. And, you know, it might not go down 80% overnight and just give you that signal that it's over. But we got stories about quantum computing over the last few weeks from Google.
And I did a show with a physicist that I interview about these sort of mathematical issues that are beyond me. And what he was explaining to me is that there are certain addresses that might be at risk in the next decade. If quantum computing progresses the way it is going, we'll need quantum encryption to secure Bitcoin going forward.
So Bitcoin has a path in that world, I don't think anybody can reinvent decentralized electronic cash in the way Bitcoin has done. So I think that it's position right now in our society is set. And I'm not a future teller. So I don't know. But I like the price as the signal.
Nik I could end up talking to you for several hours around this. You know, one topic. I know that you produce a lot of content and information and education for people around this. Like how can people best find you? And more information about Bitcoin.
Sure. So they can go to theBitcoinlayer.com. And what we offer at the Bitcoin layer is a research product. It's a premium research product that's focused on Bitcoin and global macroeconomics. Because Bitcoin responds a lot to global macro. It's also its own new technology. We combine both of these concepts in one. We also have a fantastic proprietary metric called TBL liquidity, which gives us a guide and a 70% correlation with risk markets.
So we're really doing the macro science. You know my background is in rates and trading treasuries. So and fed watching so all of that is brought into the Bitcoin layer. And what we do not research products is something we're really proud of. And then I have my own channel and show.
New book, I'm not going to put a date, but it is coming really soon. It's it's in editing so we can take that to the bank and it'll be out very very soon. Bitcoin age. And people can actually preorder the e-book on Amazon right now. But the book will be delivered on on its release date.
Nik, thank you so much for joining us. Anything that we left out that you wanted to make sure we hit on today?
No, I think people are curious about Bitcoin and that is that is the first step. And you know, don't shut your don't shut your mind off to something that is now 16 years old and growing and now gaining legitimacy even from the oldest institutions in the world.
Yeah. Thanks so much.
The information presented herein is for discussion and illustrative purposes only and is not intended to constitute financial advice or investment recommendation. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation and should not be relied on as financial, tax or legal advice. The views and opinions expressed in the recording are those of the interviewees and may not necessarily reflect the views of Morton Wealth. Although the information contained in this report is from sources deemed to be reliable, Morton makes no representation as to the adequacy, accuracy or completeness of such information and it has accepted the information without further verification. It should not be assumed that Morton will make recommendations in the future that are consistent with the views expressed herein. Morton makes no representations as to the actual composition or performance of any asset class. Past performance is no guarantee of future results. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
