‘First US election where a stance on Bitcoin and crypto has an impact on election outcomes’ – Lyn Alden exclusive interview

Kicking off our series of interviews is Lyn Alden: macroeconomist, engineer, founder of Lyn Alden Investment Strategy, and author of Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better.

Although her reputation as a macro rockstar and Bitcoin proponent precedes her, many will be surprised to learn that her advocacy comes from a deeply ethical place, namely financial freedom.

Her work has been featured in publications such as the Financial Times and Wall Street Journal, and she regularly appears on CNBC and Fox Business programs as a trusted analyst. Her appearances on podcasts like What Bitcoin Did, Blockworks Macro have amassed hundreds of thousands of views, and I wholeheartedly recommend you check them out.

We asked Lyn a variety of questions, ranging from the Fed aggressively cutting rates to the influence of crypto on the US election, the macro crypto lifecycle, and more. She was gracious enough to answer them all.

‘[…] fiscal dominance can lead to periods of mild or significant stagflation’
➡️In the timespan of six years, you went from Finance & Technical lead with the FAA and investing on the side to a full-time stock & market researcher, and now a veritable macro-finance and crypto rockstar. How does it feel?

I’m an introvert, so I never really expected my audience to be very large. I started my work as a long-term, passionate side hobby, and it grew into a business large enough that I had to leave my other roles. But I’m very appreciative of people who have enjoyed the work, and it has certainly led to a ton of enjoyment.

If there’s one downside, it’s that, ironically, it can be kind of lonely work. My prior work setting was very much in-person, whereas now, my work is mostly remote. And so, while my personal brand reaches more people, my number of daily in-person connections has decreased. But that touches on the broader topic of remote work in general.

➡️In a recent X post, you asked readers what tropes in books, movies, and shows annoy them the most. Also, what they’d change to ‘fix’ them. What would your answer to this be? — Question by Alpa Somaiya

Source: Blue Eye Samurai (Netflix, 2023)
Mary Sue characters still kind of annoy me. Hollywood and creators, in general, seem to have trouble fine-tuning this. On the one hand, it can be kind of lame to have a popular series of films, shows, or books without strong female leads, but on the other hand, sometimes creators will overcompensate, and so we’ll get a series of pieces where the female lead is just overpowered and uninteresting.

The first season of Arcane nailed this really well, in my view; they had strong female leads that were deeply interesting and appropriately balanced, in addition to plenty of great male characters. I don’t know how season 2 will hold up, but we’ll see.

Blue Eye Samurai also handled this pretty well. As she goes through the show, she really earns her skills and struggles along the way.

➡️Does the 50 bps rate cut confirm your thesis that stagflation is slowly grinding the US economy to a halt?

Not particularly. As inflation has gradually come down while rates remained high, the Fed’s thesis is that without some cutting, they would gradually get more hawkish over time (i.e. higher real rates via no action).

However, periods of fiscal dominance can lead to periods of mild or significant stagflation. A rising unemployment rate while inflation is still ‘sticky’ is kind of directionally stagflationary, even if not outright stagflationary (which would entail falling real GDP).

➡️Some might say (Jeffrey Snider, for instance) that SOFR futures were pricing in a 50 bps rate cut (there’s still some discussion as to whether the market was expecting 25 or 50) from as far back as July ‘24 – were you ascribing a high probability to the 50 bps scenario? Will we see another round of cuts?

I didn’t have a strong view either way on the 25 vs 50 bps rate cut question. There are periods where the market really overshot or undershot how many rate cuts will occur in the months ahead. This was the first FOMC meeting in a while where the market wasn’t practically sure going into it what the number would be.

My base case for the rest of the year is two more 25 bps rate cuts, but this can change with incoming data.

➡️In your September newsletter, you note that the US was on the verge of a recession in 2020 but showed unexpected resilience. You further break down the factors that could have contributed to it, but could there be another one – inflation spillover? Numerous studies* address the effect of US inflation export on the global economy, particularly emerging markets. Do you think the US inflation export increased during or post-pandemic, and to what extent has it contributed to that resilience to recession? — Question by Lora Pance

We did have a recession in 2020. I noted that the US was on the verge of recession in 2022 but showed unexpected resilience.

I do think that US inflation export on the global economy contributed to it, but I’d note that I think the majority of that inflation came from monetized fiscal deficits. There was no persistent uptick in the rate of bank lending like there was in the 1970s. Instead, it was a permanent increase in the amount of broad money at an above-normal rate, combined with temporary supply chain bottlenecks.

Source: BEA GDP data 2017-2020
‘I think crypto-securities laws will be highly influenced by the election outcome’
➡️It could be construed that recent decisions made by US financial regulators (Fed, FDIC, & OCC) are ‘anti-crypto.’ What’s your take on this, especially considering the US’s competition with China?

I think they are mostly anti-crypto. They’re generally supportive of the existing capital market and banking structure, are explicitly against privacy, and favor control over the movement of money.

There are some competing interests in the US government. Some, for example, find stablecoins useful for soaking up a lot of government debt issuance. So, there are plenty of politicians or other members of government who are positive toward the industry. But the financial regulatory side, in general, I’d classify as mostly against it.

The first US crypto election
➡️Republicans and Democrats in the US seem to be more polarized than ever (other than the biggest areas of spending). Much has been made of each party’s stance on crypto. How significant do you think this will be on the election’s outcome and the fate of digital assets in the US? — Question by Alpa

I think this is the first US election where a politician’s stance on Bitcoin and crypto has a non-trivial impact on their election outcomes. The scale of lobbying from the industry is large and beneficial for those who support it. There’s very little votes or money to be had from explicitly not supporting it, but plenty of votes and money to be had from supporting it.

I don’t expect particularly good privacy-related laws in the next four years, regardless of the election outcome. However, I think crypto-securities laws will be highly influenced by the election outcome.

➡️Is there a way for the US to wind down its massive fiscal deficit without inflicting a lot of pain in local and/or international markets? If not, it seems like the monetary policy target of 2% inflation might be an inherently flawed assumption, at least from the perspective of value creation for the average person who can’t rely on capital working for them.

My opinion is no, which is where my ‘nothing stops this train’ meme comes from.

And so, I do think that the 2% inflation target will be challenging to remain under.

Walter White providing meme material for generations
➡️The increase in M2 money supply seems to be closely correlated with stock market capitalization: do you see these two as directly correlated? If so, should this impact the way we define and perceive value from a financial perspective?

They’re not directly correlated, but they’re quite correlated. Broad money supply basically represents the denominator from which we measure everything else, and so periods where it’s going up more rapidly than normal tend to elevate the prices of other things, assuming that those other things didn’t start the period in a valuation bubble.

➡️What likelihood would you ascribe to the possibility of us seeing more social unrest as a result of rapidly growing inequality, both in the West, but also in developing countries?

I think social unrest is likely to remain elevated and potentially go higher in the West unless or until certain structural changes happen.

A weaker dollar could be a positive catalyst for developing countries in the years ahead because it would ease their USD-denominated debts and potentially give them a positive liquidity cycle. If we don’t get that weaker dollar cycle amid rate cuts, then I would expect more developing market unrest as well. But overall, I might be a bit more favorable on developing market economies with a 3–5 year view.

➡️Kamala Harris has only recently spoken publicly about crypto, pledging support for the industry. What are your thoughts on Kamala’s pledge? Do you believe a Kamala presidency will be good for crypto? — Question by Liam Solomon

Kamala Harris sketch
I think a Harris administration could be marginally better than the Biden administration for the industry, but that’s yet to be determined.

As I mentioned before, there aren’t many votes to be had from being against it, but there are single-policy voters to be gained from embracing it.

I don’t expect either of the potential upcoming administrations to be good for crypto privacy, although a Trump administration would likely be significantly better for crypto securities.

➡️Do you have any thoughts on Trump courting votes from crypto enthusiasts & starting his new World Liberty Financial token? — Question by Liam

Since there are a lot more votes and donor dollars to be gained from embracing the industry, I think it’s rational that the campaign embraced it more this time than they have previously. It’s a clear differentiator for them and seems like low-hanging fruit.

I’m not generally supportive of tokens such as the World Liberty Financial token.

➡️What do you make of the SEC’s approval of BlackRock’s Bitcoin options? How will this impact the investment market? Has this news changed your investment plan? — Question by Liam

Bitcoin options already exist elsewhere, but this can bring them to a large variety of traditional brokerages. It should be beneficial to the liquidity.

I think the main benefit is to BlackRock in the sense that having the most liquid ETF and then the most liquid options market on an ETF supports the network effect. Because options have so many different strike prices and expiration dates, liquidity is fractured, and thus, it’s hard to build a lot of total liquidity. The ETF that can build a liquid options market around itself will entrench itself for a long time to come, and BlackRock is in a strong position to do that.

➡️What was the biggest challenge you faced while writing Broken Money? What are the odds of a second edition anytime soon?

Lyn Alden’s Broken Money is a must-read
The challenge was the sheer scale of the project. The book was over 500 pages, including references, which made it one of the biggest books on the subject.

There was no shortage of high-quality short books on the subject, but I felt that a comprehensive book is what a lot of people needed, and that thesis turned out to be correct.

And for me, this was a part-time project done in the span of a year since I was still running my core research business and participating in other business pursuits.

Second editions of books, if they come out, usually come out several years after publication. I would personally wait 5+ years before considering a second edition.

➡️In light of your book giving quite a bit of space to Bitcoin, some have described you as a ‘Bitcoin evangelist.’ Would you say they’re right in their assessment?

I think that can be partially accurate in the sense that I think Bitcoin is a good thing to exist and grow. I generally use the word proponent rather than evangelist. But this came about from years of studying it. My earlier work was more neutral on the topic, and over time, I became more positive toward it.

A scenario where I have no ethical opinion on the asset and just predict price changes would put me more in the pure analyst camp. But because, for example, I’m a proponent of the Human Rights Foundation and other groups that support financial freedom and use Bitcoin and stablecoins as a tool for that, I’d say I go a step beyond analyst toward being a proponent.

I do, however, try to separate my investment analysis from my ethical analysis. In other words, I’m an analyst when it comes to giving my thoughts on the next 12–18 months of price movements or when making venture investments. But when it comes to putting out educational material, I’m a proponent because I view it as a good thing for the public to be knowledgeable about so that they can create decent legal support for it.

➡️Bitcoin’s (and crypto in general) reputation is still very negative, with some of the most powerful leaders saying it has no use cases and is a breeding ground for illicit activities. However, we know that it can be transformative and effectively change people’s lives globally. It’s altering our relationship with freedom, commerce, and electric power (just look at Gridless as an example). How do we change that? — Question by Alpa Somaiya

I think it has to be changed topic by topic over years. Just pure hard work, consistently.

An area where there’s been significant progress is Bitcoin mining. Five years ago, major media and studies on Bitcoin mining were almost universally negative and low quality. But due to years of analysis and positive examples, the raw facts have become so obvious that studies and major media started to become more split on it, with continued negative examples but also plenty of positive ones.

And it built on itself. Early advocates build material that I could draw from. Some of my articles then further amplified it. And then others drew from my content and built up on that. It takes a pretty strong snowball effect.

Over time, the products themselves and those who are writing about and researching them can chip away at negative reputations and turn them positive, but it’s a long-term process.

➡️Given that you advocate for Bitcoin self-custody, do you believe it’s still reasonable for investors to use indirect exposure through securities like MSTR or spot Bitcoin ETFs in certain cases? What are the specific circumstances under which you recommend these indirect methods? — Question by Lora

I advocate for Bitcoin self-custody for those who want it. People should be allowed to do so and should be educated on the benefits of doing so.

Those with both larger amounts and a more self-reliant nature will generally gravitate more toward self-custody than those who are dabbling or who are happy to trust someone else and their government. Many people are more trustful of the system, have more money in retirement accounts, and so ETFs and MSTR are reasonable proxies for them to bet on the continued adoption of the network regardless of whether they want to hold it directly themselves. I think they’re certainly better than not having any exposure.

MSTR price on 08.10.2024, source: eToro
‘I’d place the [crypto] industry closer to Wright Flyer than the Concorde’
➡️Despite their best efforts, many people still don’t get crypto and blockchain technology, particularly the ‘value’ part. What do you think are the biggest barriers to widespread adoption? Lack of institutional education, TradFi pushing back, media bias (which tends to skew quite negatively in crypto matters), or something else? — Question by Mark O’Neill

I think it’s all of the above. The space has high volatility, which drives people out, and there are a ton of scams in the space. Things that take 100+ hours of study to understand and build a conviction in aren’t particularly viral. It requires an understanding of the technology and then also an understanding of money and the financial system.

I think people underestimate the size of the network effects that the incumbents have. This isn’t like email replacing physical mail. This is a current system worth hundreds of trillions of dollars, with self-reinforcing network effects, and supported in its monopoly by all major governments, being chipped away at by a bottom-up industry worth a few trillion dollars. That kind of adoption takes a generation or two, not a decade.

➡️Where would you say we are in the crypto lifecycle? If it was an airplane, are we closer to the Kitty Hawk Flyer or the Concorde? — Question by Aaron Walker

It took over 60 years to go from the Wright Flyer to the Concorde, and then aviation started to kind of flatline from there, with most of the improvements coming from the electronic elements rather than the aerospace elements. Bitcoin and the broader ecosystem are about 15 years in, and I think the overall adoption curve could take a similar amount of time due to the incumbent network effects they’re up against.

So, I’d place the industry closer to the Wright Flyer than the Concorde.

➡️Do you think the Lightning Network could bring renewed interest in Bitcoin and make it competitive against networks like Solana and Ethereum? The Bitcoin 2024 Conference was pretty optimistic about the Lightning Network. Could it possibly compete with SWIFT and VISA at some point? — Question by Alex Popa

I think the Lightning Network is pretty different than Solana and Ethereum.

Visual representation of the BTC Lightning Network. Source: lightning.network
In the broad space, we don’t see much medium-of-exchange usage outside of stablecoins. Stablecoins have been the killer app for that. The vast majority of the value in the Bitcoin and crypto space is in the store-of-value and trading/speculation/leveraging areas, with medium-of-exchange being important but smaller, except for stablecoins.

For the next 5+ years, I continue to see a lot of this happening on stablecoins. There are now more ways to get stablecoins on the Lightning Network, so we’ll see what happens there. I’m reasonably optimistic about that.

➡️Some countries, for instance, Denmark, Sweden, and the UK, in particular, have said ‘no thank you’ to the Euro currency and continue to do well (Brexit notwithstanding). This lends credibility to the idea that monetary & fiscal sovereignty is better than the alternative, but how would we ever be able to convince the major political players of the world to give up the power that comes with controlling the ledger and the exorbitant privilege that comes with it in favor of an open & distributed one that nobody controls?

I don’t think there are any realistic scenarios where they are convinced to give them up. It just gets gradually taken from them over decades, if it happens at all.

In developing countries, the dollar just keeps creeping in there from the bottom up. Local authorities do their best to use capital controls and other things to slow that process down, but they have inferior money and so their systems are inherently leaky. And stablecoins are a new avenue to keep getting in there.

I think bitcoin, in the long arc of time, can pose a similar challenge to the dollar, euro, yuan, pound, yen, and other major currencies. If it grows 10x or 20x the size that it is now, becomes less volatile due to being widely held, it really starts to challenge the thesis of why anyone would own significant amounts of currencies or government bonds.

People put less of their cash balance into them, only use them for brief working capital (higher velocity money), which reduces the government’s seigniorage over time.

➡️Do you see CBDCs part of the crypto revolution or more of the same? A revamped version of the same financial systems we’ve seen for the past century?

Ever since the dawn of the printing press and the telegraph, technology has generally led to the centralization of finance. We solved most frictions in finance via more layers of centralization. CBDCs are kind of the capstone on that idea. The final centralized forms of fiat currencies.

So CBDCs are part of the information revolution, but I would place them at odds with bottom-up decentralized cypherpunk money.

De-financialization vs more financialization in the Bitcoin/crypto space
➡️What emerging finance and technology trends do you think will have the biggest impact on the investment landscape in the next 5-10 years? — Question by Amy Clark

It’s not original, but I do think AI is going to change the way a lot of white-collar employees work over the next 5–10 years, including in the finance space.

And I’d say there’s kind of two competing theses in the bitcoin/crypto space that are both partially right on different timeframes.

The first thesis is de-financialization. Basically, when money is weak, we tend to financialize everything else. We turn property and large-cap stocks into default savings assets. If money becomes strong again because a global decentralized asset gains tens of trillions of dollars worth of market cap over time, it can de-financialize a lot of other areas.

Rather than Chinese investors buying Vancouver property as a long-term savings asset, they could buy Bitcoin, for example. The hurdle rate gets harder when a really good money exists and is widely held, and so that can lead to the de-financialization of things that we have financialized out of necessity, like second or third homes or stock portfolios.

Governments around the world are discussing and trialing CBDCs
The second competing thesis is more financialization. In other words, real-world asset tokenization. People can tokenize art, less liquid property, etc. More regions can get access to global financial markets. The overhead costs are lower. Stablecoins already did this for dollars; they basically compressed the overhead costs of offshore dollar accounts and thus made them available to the middle class.

As these theses grow together, I think we’ll see a mix of both. The cost to securitize things will keep decreasing, but also the hurdle rate of why an investor would want to own a lot of these assets vs good money will get harder and harder.

➡️It wouldn’t be an interview without the most often-asked interview question: Where do you see crypto’s future in the next 5 years? — Question by Alpa

I think it’ll likely be double or more the size compared to what it is now and will become an increasingly political topic, both positively and negatively.

➡️How have you positioned your portfolio in response to geopolitical tensions (e.g., Ukraine-Russia conflict, China-US relations)? — Question by Polina Bila

Russia had a variety of high-quality, inexpensive companies, but they became uninvestable to citizens of many countries as a result of the war. This also brought a shadow on ownership of Chinese assets because an investor must consider the tail risk of asset seizure or other disruptions on those assets during their investment time horizon, in addition to their core fundamental nature.

➡️What advice would you give to someone new to investing? (I want to, but I’m scared and literally don’t know where to begin!) — Question by Amy

To start with diversification. Save in assets that are more scarce than fiat currencies, and educate yourself from there.

➡️In some of your social posts, you mention how good Netflix’s Arcane is. Are you looking forward to any upcoming shows?

I’m looking forward to seeing if the second season of Arcane is as good as the first season was, although I doubt it will be. We’ll see!

The first US crypto election
From me and the entire TechReport team, we’d like to thank you so much for this opportunity, Lyn!

It’s been a treat, and while we tried to keep our wits about us, I think you could tell from some of the questions that some of us are fans.

References

How the U.S. ‘Exports Inflation’ Through a Strong Dollar (Kenan Institute)
The Global Role of the U.S. Economy (World Bank)
Federal Reserve recalibrates monetary policy as inflation recedes (U.S. Bank)
Does the U.S. export inflation? Evidence from the dynamic inflation spillover between the U.S. and EAGLEs (Nguyen et al, International Review of Economics & Finance)