Wiser Financial Advisor – Understanding Crypto Currency with Bill Barhydt
Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly: firstname.lastname@example.org . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service.
Let the financial fun begin!
Recently I had the opportunity to sit down with Bill Barhydt, the founder and CEO of Abra, a leading cryptocurrency platform. Bill is an expert on cryptocurrency and also has a lot of experience in the world of finance and technology. Over the course of his career, he has been considered an exponential technologies expert, and these days he’s working on crypto and Bitcoin. We talked a lot about how these fit into our current world, not only in individuals’ finances, but also how it’s going to be impacting the overall economy, regulation, government control, and all kinds of questions we’re getting from our clients these days. I think you’re going to find it very interesting.
Before we get there, this show is brought to you by Keystone Financial Services, a wealth management firm based in the land of Love, Loveland, Colorado. At Keystone Financial Services, our mission is to bridge the gap between knowing and doing in the financial lives of our clients. We are here to provide unbiased advice and guidance. We are an independent fiduciary and all of our wealth advisors are Certified Financial Planners, the gold standard in the financial planning industry. Our goal is to replace uncertainty with confidence and clarity in your financial life by planning with somebody who has experience and has your best interests at heart. That is hard to come by these days with so much information out there and so much uncertainty in today’s world. Take the guesswork out of your financial future and contact us today by visiting www.keystonefinancial.com .
And now for the interview–
Josh: What would be the best way you can explain to people what cryptocurrency is and why it’s important? Why do they need to know about it?
Bill: Cryptocurrency, starting with Bitcoin originally, addresses two problems, and then I think if you layer on what’s happening with Ethereum, there’s another kind of problem that it addresses on top of that. So, the first thing about Bitcoin is that it’s a solution to human-based monetary policy. What do I mean by that? Well, when you have a monetary system where governments can basically print as much paper on dead trees as they want and then say, “This has a store of value to it,” that has to become suspect over time, right?
My favorite analogy relates to this story: I collected baseball cards as a kid. Comic books, too. Maybe some of the people in the audience have other collectibles. If you have a Mickey Mantle rookie card and you know what its value is, that value is mostly driven by demand plus the fact that it’s very scarce. There aren’t many of them in existence. So if you go to a collector show and you try to sell it, the price is basically based on those two factors. If, the day after you get a price you find out there are a million more of them in existence than you thought when you were at that show, it stands to reason that the value of that Mickey Mantle card is going to be a lot less than it was.
Today, that’s exactly what we do with money everywhere in the world, meaning the government arbitrarily creates more of it—and we don’t get the idea that because it’s creating more of it, the value of what we had yesterday is actually less today. So people like Ray Dalio are out there saying cash is trash, and this is basically why—because we can make more of it arbitarily, which results in price inflation. If there are more dollars competing for the same goods, the value of those goods in dollar terms should go up if the number of dollars is going up. There are simply too many dollars in circulation. We call this price inflation, but it’s basically another fancy phrase for destroying the value of your currency. Nobody really complains about inflation for the most part, because we don’t call it destroying the value of your currency. If we did, maybe people would think about it differently.
So now, Bitcoin solves this problem by introducing a monetary policy that cannot be changed—or not easily changed. It’s pretty much not changeable by humans. You may have heard this idea that there will only ever be 21 million Bitcoin in existence. Bitcoin is inflationary right now because it’s still being created, but at some point in the future it won’t be creatable anymore and that’s why we refer to Bitcoin as a deflationary asset, which means that it’s almost a better than gold. It really is a better than gold, because we find more gold in the universe every year at a pretty steady rate, but we know exactly when we won’t be able to “find” any more Bitcoin. So that’s the first problem it solves. It’s very easy to understand its monetary structure and monetary rules in terms of creating more Bitcoin versus the Fed, which can arbitrarily create more dollars anytime it wants. That’s exactly what it did during COVID, right? They increased the money supply by more over the last 10 years than during all of United States history for the prior 100 plus years of the current Federal Reserve-based system.
The second opportunity for Bitcoin is having a digital asset that can work without a trusted third party in the middle of a transaction, meaning you can move Bitcoin between two parties with no financial intermediary. This is the equivalent of me taking cash out of my pocket and handing it to you, but without you and I having to be physically present in the same place. This was never possible before Bitcoin. We always had this idea of digital money movement, but it was always done via banks. Now, in theory, if you have a private key for Bitcoin and I have a private key for Bitcoin, I can send you Bitcoin without having to have any other trusted third party in the middle. So effectively what you have now is a fixed monetary policy that can’t be changed. That is way better than what the government can do. And you have the ability to move money between two parties in a way that 1) the government can’t stop, and 2) requires no trusted third party in the middle. So, it is almost the perfect monetary system. I say almost perfect because anything can be improved. But it is truly the best financial system in my opinion ever created.
Now, back to your question. We have this third thing on top where you’re starting to see things like stable-coins, NFTs, defi (decentralized finance systems), that have been created using the original technology from Bitcoin, but in a way that goes way beyond just money. So what do NFT’s have to do with Bitcoin? Well, actually a lot. They use the core technology of Bitcoin combined with a whole bunch of new software technology to create new things. So that’s where we’re going next. Bitcoin basically fixed money and now Ethereum is trying to fix banking. It’s super interesting, but those are the basics.
Josh: The government side of things has been interesting. Certainly, the central banks are not big fans of this, simply because it’s a competitor, right? And you said before that the government can’t stop it. I think some have tried, though, in China, India, and other places. Maybe also in the US in terms of regulation. What do you think is going to happen? What do you see in the current state of things?
Bill: Yeah, so, so let’s talk about China, India and Russia. China actually banned Bitcoin mining and the way you do that is you have access to everybody’s Internet connection, and in some way you can determine at least at a high level, what that Internet connection is trying to do. It’s untenable with a billion people to literally filter every single message in real time, but they come pretty close. It’s pretty scary. And between that and their ability to tell the electricity producers, “Hey, mining is not allowed,” a lot of these people I think were being paid off at hydroelectric power plants for example, to run big mining stations. It’s pretty easy to tell where these things are. It’s not a little computer being plugged in over in the corner of an office. It is a massive warehouse or set of warehouses running hundreds of thousands of CPU’s drawing massive amounts of electricity. So, it’s pretty easy to shut it off. It’s like a massive submarine in the water. Once it gets pretty close to the surface, it’s hard to hide. But Bitcoin is just a bunch of ones and zeros on a hard disk or smartphone or some sort of storage device. And so you can’t ban that. What you can do is to tell the banks, “Hey, you’re not allowed to facilitate transactions that allow people to buy and sell Bitcoin.” But people are going to find ways of getting Bitcoin and tens of millions of Chinese people today are holding Bitcoin and holding Ethereum and other crypto assets. However, the government makes it very hard to access them via the traditional banking system. So that’s China.
Now, India has tried to outright ban Bitcoin many times, and India is the largest democracy in the world. Theoretically, you have free speech or their version of it, and as many times as they’ve tried to ban Bitcoin, that’s how many times the Supreme Court equivalent in India has said, “Stop it, you can’t ban something that is effectively protected free speech—and ones and streams of ones and zeros are effectively protected free speech.” (Here in the United States, our Supreme Court has opined on digital messages as being protected free speech as well.) So India has gone back to the drawing board several times via the RBI (Reserve Bank of India) which is also incentivized not to like Bitcoin–because they have the same ridiculous monetary policy problems as the United States government. They’ve been unable to ban it. So now what they’re doing is going as far as they can to embrace it, regulate it, and create a framework for companies like Abra to operate legally in India.
Russia is probably the most interesting of the three because they have the most to lose via the existing system, because of all the sanctions that are in place. When a financial sanction happens, one of the most important things that happens is: some country, some group of people, some named entities, some company—lose access to international wires via the SWIFT network. If you send a wire between two banks cross-border, generally they settle via this SWIFT network, which is a messaging system for bank wires. When you lose access to that, your ability to conduct cross-border commerce is effectively shut off—unless you’re able to barter in some other way. So Russia has been suffering from cross-border sanctions for years. And their entire economy is put at risk because of their dependency on dollars settling via the SWIFT system. So at first they looked at Bitcoin and said, “Hey, this is a problem because we’re a totalitarian regime and we can’t easily block this.” But when they thought it through, (and this is, by the way, a new revelation just in the last couple of weeks) Putin realized, “Well, wait a minute, this whole thing with Bitcoin actually bypasses SWIFT.” As I said, it allows for person-to-person or entity-to-entity transactions that you can’t block, and it’s got a monetary system that’s not controllable by the Fed or any other government. So Russia did a 180 and are now embracing mining and making Bitcoin viable tender and holdable, and basically they are totally embracing Bitcoin—which is what the people want right now. You can opine on whether sanctions are good or bad, and you know, I love my country like most Americans. I don’t want war in Russia, Ukraine. But the sanctions aren’t going to prevent that. The point being, you can see that in all three cases—in China, India, and Russia, that the public is still able to hold Bitcoin. Each country has come to different conclusions as to how they should deal with Bitcoin. In the US, it’s different because we already have lots of regulation in place on how to deal with what effectively is a digital currency, whether it’s decentralized like Bitcoin or centralized, like in the case of some prepaid card. We’ve had these rules around stored value in the United States for decades.
Abra, for example, is probably overseen by about 60 regulators just in the US—between state money transmitters, lenders, federal regulators, et cetera, et cetera. So in the US, while a lot of people think the rules are unclear, they’re actually fairly clear. It’s just complicated. Not for the consumer or for the business that wants to get into crypto, but for the companies that facilitate those businesses. And that’s my problem. Because as a result, we have lots of law firms or in-house counsel and house compliance folks that deal with that complexity and hopefully hide most of that complexity from our users.
Josh: You’ve got a new SEC chair that taught classes on cryptocurrency. What are you seeing there? Have you been happy with what they’ve been talking about or disappointed with the increased regulation that’s been spoken of?
Bill: Look, luckily it’s mostly hyperbole because the SEC doesn’t make laws. They can only interpret existing law to make regulation, thank goodness. However, the overreach in terms of their ability to make regulations has been largely unchecked and unchallenged. So for example, with accredited investor rules, they literally made them up. There are no laws saying that an average retail investor can’t access a hedge fund—they literally made it up. So somebody who makes $100,000 a year and reads 20 books a month on investing can’t invest in a hedge fund, but some kid who inherited $5 million from his parents and has never worked a day in his life can invest in a hedge fund. It makes no sense. And yet, we can all walk into a casino in Vegas and invest or lose exactly the same amount of money.
So I get the point of investor protection. I’m not naive. But the rules don’t align with their mission in my opinion. And this just extends to crypto. This week, the head of the CFTC (Commodities Futures Trading Commission), which is the commodities regulator, testified in front of his House committee that there are lots and lots of cryptos that are commodities. And yet, the head of the SEC (Securities and Exchange Commission) testifies that most of these things are securities. Well, they can’t both be true. It’s not possible. So, there’s a lot of politicking going on now. Fortunately, the checks and balances in the US system prevent them from doing too much damage, but there is potential for incremental damage to be done, and it hasn’t really happened yet. But it is worrisome when you get a lot of politics at play as opposed to people just trying to do what’s right to allow the US to become a hotbed for what is effectively a new, exciting and unstoppable technology. That is really what the focus should be on. How do we become the center of the universe for what is effectively the next generation of the Internet? That’s what we should be focused on.
Josh: There’s a perception of a need for safety as far as how to keep from getting screwed and losing my crypto. What would you say to those folks who are concerned about that?
Bill: Normally, losing crypto comes down to a couple of things: People trying to do things on their own, and they download this metamask app, whatever the hell that is, and they try to go it alone. They lose keys. They don’t know what a seed phrase is. I mean, I have a login and password in my bank. I don’t have a seed phrase from my bank. Well, when you try to manage private keys on your own, it’s like having a key to your house, but with no ability to change the locks. If you lose the key, you’re screwed. I mean really screwed and no windows by the way. So, in crypto you can’t lose that key if you’re managing it yourself. Now, if you trust another third party like Abra to help you get into crypto, it’s now on us to help you store and maintain those keys, and now you know it’s all about our practices around safety and soundness and making sure that we’re unhackable. And the question you should be asking is, “Do they use two-factor authentication to enable a withdrawal or deposit, something like that?” And at Abra, we do. And I’m shocked that there are companies that still don’t offer that.
If you do a little bit of homework, you’ll realize that most companies, certainly in the US, every company that operates in the space on behalf of a consumer is highly regulated. It’s just not possible to be unregulated operating crypto in the US. Also, unless you’re a computer scientist or a programmer, it’s very hard to operate your own keys in crypto, and you should probably be using a wallet—like an Abra or one of our competitors to store and manage and buy and trade your crypto. And then in the future, we’ll be offering things like NFTs and other things, and that’s our job, to help people make it super easy. We still give you the right to take your crypto offline and hold it yourself if you get to the point where you’re comfortable and know how to do that. But for people who don’t, which is most people, they can trust a company like us that’s highly regulated and audited by the IRS and other companies who regulate and audit for Bank Security Act compliance and things like that. It’s safer to do that, versus just installing metamask and doing it on your own.
Josh: How did you get into this biz?
Bill: I worked for the government for a few years—I guess ironically, which really served me well. Now all the things that I learned there really help us run our lending business, which is how we generate yield. It looks a lot like a fixed income business, but it’s crypto specific. I mean, it’s incredible. There are a couple hundred million people now that use crypto in some way, and it’s growing faster than the Internet was in the 90s. It’s now evolving not only faster than I had predicted, but in a manner that’s probably different than what I had expected, but it’s still awesome.
Josh: Well, ten years ago you gave a Ted talk and mentioned that eventually cryptocurrency is setting the stage to become the world global reserve currency. What are your thoughts on that now?
Bill: I mean look, it was a pipe dream that we could have a digital currency as a global reserve currency, which was the premise of the talk that I gave ten years ago. I mean, it was worth nothing at the time—the entire network. It’s scary how much Bitcoin I’ve given away based upon what it was worth at the time. But it’s happening, right?–the asset class is worth a couple trillion dollars now. You’ve got countries adopting Bitcoin that are buying the dip. You’ve got a president of El Salvador saying their Treasury just bought the dip. And I think you’re going to have more countries making a transition to at least a partially Bitcoin-based balance sheet. The United States holds a massive amount of Bitcoin.
Now you have defi—decentralized finance systems—which use Ethereum to replicate banking and lending services with no financial intermediary, trying to do an end run on traditional banking while Bitcoin is doing an end run on traditional monetary policy. And both are working. The total value locked in defi systems today is now $200 billion if not more. And it’s a space that didn’t exist five years ago. Bitcoin’s market cap is over a trillion, and didn’t exist ten or twelve years ago. It’s working. It’s not a pipe dream anymore. These things are happening in real time. Bitcoin is becoming for a lot of people a personal monetary standard. I have friends who are Bitcoin-centric in terms of their personal accounting. And obviously we talked about governments that are Bitcoin-centric. There are companies now like MicroStrategy, Square, and Tesla that put Bitcoin in their balance sheets because it’s a better long-term store of value. Obviously, the price is volatile today, but that’s just because it’s so early and we’re undergoing this kind of exponential migration to a new asset class. Over time, it will become an inflation hedge in my opinion.
Josh: So let’s talk about volatility. That’s a big part of where things are. Dotcoms in the late 90s saw a lot of volatility and you know most of those companies don’t even exist anymore, but some will survive. Do you think that’s kind of the same thing with crypto, with the number of different cryptocurrencies out there; that most will go away and it’ll just be a few left—like Bitcoin; that the legitimate ones will survive?
Bill: That’s a good analogy. Yeah, most Dotcoms disappeared, but there was still a massive amount of wealth created because the companies that ultimately did achieve the network effects—and Amazon was probably the first big one, then Google, then Facebook, and Apple kind of had a rebirth with the iPhone via the Internet—all those companies achieved and are still achieving unbelievable network effects. And if you look at those networks effects overlaid with price, they mirror fairly well, minus some macroeconomic shocks that affect everyone, such as the Dotcom crash, the housing crisis in 2008, the start of COVID—all these basically represented shocks to the system. In the same way, the China ban represented a short-term shock to the Bitcoin network effects. So if you overlay what happens with Amazon stock on a log chart from like 1997 all the way through today, it actually looks like a straight line up to the right. The Dotcom bubble, the post-nine-eleven crash, the 2008 housing market are all basically noise. And if you do the same thing from 2011 through today with the Bitcoin price on a log chart, it is a straight line up to the right. The China ban, the 2017 ICO (Initial Coin Offering) crash is all noise. and I’ve seen some charts done by GMI (Global Macro Investor), which is Raoul Pal’s company, that show network effects overlaid with Bitcoin price, and they correlate.
That’s what’s happened. People focus on volatility from a linear growth perspective. When you have an exponential network effect growth model, which is what Bitcoin has and what Amazon has had, then that volatility is actually noise. That’s very hard to accept because we’re not really good at exponential thinking as human beings. We’re barely good at compound interest thinking, right? Never mind exponential growth thinking.
Josh: Regarding correlations to the stock market, recently there have been a lot of stories about that and how especially Bitcoin has shown a lot of correlation to growth stocks that there hadn’t been before. So, when we’re trying to build a portfolio, of course, we’re trying to find correlated things. Any thoughts on that, as far as whether you think those tech market to growth stocks correlations will continue?
Bill: I’m skeptical that the correlations are what people think they are. As I just mentioned, I think there’s noise in those log charts, and some of that noise is driven by these macro shocks. For example, the Fed implying that interest rates are going to go up significantly. Significantly is relative to zero! Or the housing crisis or the start of COVID—those were shocks that affect everything. Now, historically, what’s happened when the Fed has hinted at interest rate hikes is risk on assets tend to have an initial shock. But then there’s the realization that interest rates are going to go up because the economy is booming and they need to hold it down. It’s still booming. We’re still in a zero interest rate environment. It’s very high inflation and historically what happens is those stocks recover very, very quickly, which means that cash is moving back into the market. I think Bitcoin will be a big beneficiary of that. And the network effects I mentioned before are still there. Ethereum usage is booming. It’s being used for stable-coins. It’s being used for defi. It’s being used for NFTs. People are hoarding Bitcoin, right? There’s this massive supply shock with Bitcoin. Right now, there’s very little Bitcoin available. The question is how many buyers are there for that little piece that’s available and so those things are driving the network effects I talked about. There are blips in those network effects, such as the Fed announcing it might raise rates, the lockdown in March of 2020 for COVID… Those shocks in a long-term chart look like blips.
I have not changed my investment thesis at all because I’m looking at it with a long-term horizon via logarithmic growth, exponential growth, network effects. I filter out the noise and go about my day and until my investment thesis changes, that’s how I’ll continue to look at it.
Josh: Any thoughts about inflation and crypto going forward?
Bill: Yeah, I think real inflation for the wealthy is probably 20% right now. Real inflation for the lower middle class is probably like 8 to 12% and you can interpolate it between anecdotal evidence I’ve seen on housing prices, staples, travel, all the way down to the basics of food and whatnot. So the question is, do you raise interest rates to 2%, which I doubt is going to happen this year. I think we’re going to see significant growth-slowing in the second quarter. That’s my gut based on all the data I’ve seen. You’ve got high inflation, which is going to crash. You’ve got full employment, and you’ve got a slowing economy, which starts to sound a little bit like stagflation.
It’s a real problem. We simply printed infinitely too much money during COVID because we didn’t know any better. It’s easy in hindsight to explain what the problem is, but how do you get out of this mess?
I don’t know how you get out of this mess. Well, actually I do: the way you get out of this mess is shared collective pain for a decade, which no one is going to be willing to accept. Japan did it because they have an ability to accept shared blame for their own problems, something that Americans are completely incapable of. We’re always looking to blame someone else for our woes. So the bottom line is, I think crypto will continue to be seen as the future of both money and banking. The network effects are not going anywhere. Fed policy is really not changeable, and at this point they’ve created a big problem for themselves. We are going to end up with a recession at some point. So what that tells me is, it’s going to be more of the same for a while.
Josh: So let’s shift gears to Abra. With Abra, you created it to be a crypto bank effectively, and of course it’s evolved. Abra has been out for a number of years, but how would you contrast that against Coinbase or other services out there?
Bill: We really wanted a service that was more about wealth management. It’s a much more investor-friendly approach. Yes, we allow you to buy and hold, trade across 125 or 140 cryptocurrencies depending on which country you’re in, but it’s a very simple user experience. A lot of the complexities of a trading experience are just taken out, and that’s by design.
Josh: What advice are you giving young people that are coming in right now?
Bill: Being an uneducated, unskilled worker in the West, that’s a risk. I want young people to try to change the world with conviction and be willing to do things in their 20s and 30s that they might not be able to do in their 40s and 50s and 60s because they’re going to be in a different phase of life. As a result, hopefully they can embrace the idea of risk in a way that historically most people don’t.
Josh: Absolutely all right, we’ll leave it at that. But really, the focus of what we talk about is wealth building and trying to go out there and get as many different pieces of wisdom as possible because there’s so much competing information out there. People are drowning in information and not sure what to do.
Bill: Sure, look, as it relates to my day job, I mean we’re in the middle of one of the biggest transitions in the history of technology. Our role at Abra is to make this space accessible. If you’re interested in understanding the space and how you can participate in it, we have a team of folks that do nothing but help people navigate the space from an investment perspective, and we have a ton of content on www.abra.com . People can read and start to learn more about what’s going on and decide for themselves what their conviction is for where this is going and not just take my word for it. I believe it is the future, but people should decide for themselves.
Josh: All right, thank you so much for being on the show, Bill. I did want to note that this has actually been one of the most requested topics from my listeners: cryptocurrency and understanding how it works. So we’re not recommending that you go out and buy cryptocurrency or invest in anything in particular because of the discussion today. Really, this is just for your information. It’s something you should be talking to your financial professionals and your tax and legal advisors about before you invest in anything like this. Bottom line is, it’s really important to understand, because cryptocurrency is having an impact on the markets, the world, the overall economy. It is important, even if you don’t invest in it directly for you to note that it’s out there and we are paying attention to it and it’s having a profound impact on the world.
With that being said, I hope that was helpful for today. Have a great week and God bless you.
Advisory services offered through Keystone Financial Services, an SEC registered investment advisor. Keystone Financial Services and Bill Barhydt with Abra are separate and unaffiliated parties. Keystone Financial does not endorse or receive compensation from Bill Barhydt or Abra. The views expressed represent the opinion of Bill Barhydt. Views are subject to change and not intended as a forecast or guarantee of future results. This material is for informational purposes and does not constitute investment advice and is not intended as an endorsement of any specific investment. Past performance is not indicative of future results.