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I am referring to my thesis on the intrinsic value of bitcoin in this article, originally published in BItcoin magazine in April 2021. This represents my take on the value of BTC as anti fiat, fiat is Ponzi, and how everyone needs Ponzi collapse insurance. As Voltaire said, “paper money eventually regains its intrinsic value – zero”.
As Charlie Munger said, bitcoin “is squared rat poison”. Well, Charlie, take your pill, because fiat is the rat.
The basis of my article is that BTC is an insurance against the deterioration of the credit quality of sovereign countries issuing decrees. As such, it is credit protection on a basket of fiats. When you have insurance, you have volatility. Likewise, when you are long credit, you are short volatility. Most investment assets / mandates are short volatile. As a result, the investment world is strapped for volatility, and it desperately needs to offset that risk with insurance (or being long volatility).
In my article, I calculated the intrinsic value of BTC at the then current credit default swap rates (CDS) and total liabilities of the G-20 countries. This dynamic calculation will increase in value as the price of insurance increases. An increase in the price of insurance results in a widening of CDS spreads. Well, the spreads have widened for a number of reasons. For example, the Chinese CDS has widened due to the fallout contagion of Evergrande. Canada’s CDS has grown because we have irresponsible politicians who have just been re-elected, and yet they “don’t care about monetary policy.” And the US CDS has widened because, well … there are four or five reasons, but the most concerning is that the political elite are playing puns with the potential to failing.
Wake up people, this is not a drill. The risks of contagion are increasing due to potential global stagflation (see the excellent article by Dylan LeClair and Sam Rule, published in Deep Dive # 072). The intrinsic value of BTC has increased since the start of this year, when I initially calculated the value to be over $ 150,000 per coin.
I’ll take another turn this time. I will go through the calculation of the value of BTC on the US financial position alone. You will see that BTC’s market cap is expected to be well over $ 1,000 billion. What that says is that you are effectively getting default insurance in the US for less than intrinsic value, and you get protection on all other decrees for free.
Is it any wonder why I think BTC is the best asymmetric investment opportunity I’ve seen in my 32 years of trading risk? Hue.
Methodology
The five-year CDS for the US just traded at 17 basis points (bps). For ordinary people, this esoteric measure means that it costs $ 17,000 to insure $ 10 million in US Treasury debt (UST) against default. Remember that in 2006, it cost $ 9,000 to insure $ 10 million of Lehman Brothers (LEH) debt against default.
This insurance contract became very valuable since when LEH finally defaulted, the contract was worth over $ 6 million. LEH protection vendors were picking up nickels in front of a steamroller. Are current US CDS sellers doing the same?
I don’t believe there will be a short-term default from the United States. The costs would be astronomical. However, the children play games. Yellen is dangerous in her lack of understanding of real risk markets. Powell is a well-meaning lawyer who has never sat in a chair of risk. These are our leaders, and their pristine origins do not cut him in the trade pits.
Remember, you don’t have to default to make money on the variation in spreads of a CDS contract. The mark-to-market feature will allow for wider spreads and you will be able to close the contract before the five-year expiry and make a profit.
Adjustment of the CDS contract for a period of 20 years
If the five-year CDS is at 17 basis points, what would the 20-year CDS trade with if it were a freely traded contract? (Note: In my article I used a CDS term of 15 years, but have since reconsidered the need for longer term insurance. The value of small incremental annual term changes would attract buyers to longer term. smart, it would dramatically increase its average debt issuance duration. If the ducks quack, you should feed the ducks, and it sure looks like there are a lot of stupid bond investors picking up nickels in front of the steamroller).
To get this number, you need to perform a tenor calculation. It’s a bit of a “finger in the air†exercise, but there you go. Five-year CDSs cost 17 bps or 3.5 bps per year. If we actually do a linear regression on the extension of the CDS to the 20-year term, the cost would be 70 basis points per year. My gut tells me it would be larger because of all the variables that the United States and the world will be facing over the next 20 years. In fact, I’m pretty sure I would get lifted on a 20-year CDS offer on the US at 100bp per year (if someone would take Foss as a counterparty risk, which is unlikely). So, for the sake of argument, let’s say that the 20-year US CDS is between 70 and 100 bps per year.
Current United States Funded and Unfunded Bonds
According to the excellent website USDebtClock.org, the US’s total funded and unfunded liabilities equate to $ 29 trillion plus $ 158 trillion. That monumental total of nearly $ 190 trillion must be multiplied by the 20-year CDS premium to calculate an intrinsic value of insurance in the United States.
$ 190 trillion x 70 basis points = $ 1.33 trillion
$ 190 trillion x 100 basis points = $ 1.9 trillion
Now what?
Bitcoin’s current market capitalization
Using my favorite BTC dashboard, bitbo.io (created by two really strong Canadians: Chris Gimmer and Marc Chouinard), BTC’s market cap at the time of this writing has exceeded $ 1,000 billion (at the price of $ 54,7000 per piece).
How to interpret the results
If you compare BTC’s current market cap to the value of insurance on total US liabilities ($ 1.33 trillion to $ 1.9 trillion), BTC is clearly cheap to provide protection for states alone. -United. And you get protection on all other failed fiats for free.
Damn it, Miss Molly. Markets can be irrational and in my opinion BTC is way too cheap. Yes, the current prices are rounding off my long term target price, but this methodology reassures me that we are still too early.
How are your hedges, Charlie? And hedges aren’t just for gardeners. Buckle up. Volatility gurgles. Buy your insurance when it’s cheap.
BTC is fiat credit quality erosion assurance with no counterparty risk. The United States will likely be the last executive order to fail, but ultimately all executive orders fail. Hat tip, Voltaire.
This is a guest article by Greg Foss. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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