Why Bitcoin Is Tanking Despite Gold Reaching High After High

Transcript

I am executive editor Steve Erlick and I'm here with a special guest Steve Sausnik, the chief strategist at Interactive Brokers. Hi, Steve. >> Uh, great to see you, Steve. >> So, yeah, Steve, one of the things I really like about you is that you sort of um straddle the line between crypto and macro. You're you're you're fluent in both. Um, so why don't you just briefly before we get started talk about what you do at Interactive Brokers, especially when it comes to crypto? >> My role at Interactive Brokers is is as you could see, chief strategist. I I primarily come to this from an options trading background. uh my original role which you know when I was hired and then you know expanded upon for I've been here now 30 years uh was as an options market making options market maker and

um what we were what you know what I was doing was basically making sure that that our portfolio we we traded um literally we made markets on hundreds if not thousands of different options um equity options and related um and made sure basically that our model kept working and that we didn't lose lose money. Our model worked really well. Um, and I was involved in a wide range. Basically, anything that would new would come on, you know, when new products, new, you know, think about like when we started making markets in Netscape, you know, back in the 90s kind of idea. Um, and so as a result, it's forced me to think very generally and very broadly about markets. And as we phased out marketmaking, I got into um you know,

writing and talking about the markets and I've now sort of morphed into a full-time uh talking head, for lack of a better word. Um but as a result, by needing to stay current and on top of a wide range of markets, markets and activities, I'd like to think that I I at least kept some fluent got some fluency along the way in uh in crypto. >> Yeah, that's great. So, let's dive right in. It's been a tough week for markets. I think that the sell-off started last weekend. Uh seemed like there was a little bit of guess uh poor enthusiasm following following the the FOMC meeting. Uh we saw over a billion dollars in crypto long liquidations on around Monday or so. And as we're talking right now, the market's bleeding a little bit. I mean, Bitcoin is

threatening to fall below 111,000, 110,000. ETH has fallen below 4,000. What are you seeing? Um, I think that's commensurate with what we've seen. I think there was a lot of enthusiasm for the idea that the Fed was going to cut rates and begin a new aggressive rate cutting cycle. I think what we ended up getting was a little bit of sell the news. Buy the rumor, sell the news. We the Fed did cut rates. I think they there was almost no no reason to believe that they wouldn't. Uh I think there was some hope that they would do 50 basis points but those were pretty minor to call it you know somewhere between five and 10% likelihood. So the Fed did what it was going to do. I think what then came out was there was some

more enthusiasm about the dot plot you know the summary of economic projections where where you know the median uh is for two rate cuts. But as as we looked a little closer at it as the world looked a little closer at it we realized that you know one of the dots was uh doc the new the new governor Dr. Myron um who is way below everybody else and as with any median half the points are below half the points are above. So uh it's not clear that we're getting the level of rate cuts and the pace of rate cuts uh that I think some had hoped for. Um, and obviously easy money uh benefits um risky assets and and I you know we can have this debate but I I I still do put crypto on the risky asset side of the of

the equation which by the way I put most stocks on that side too. So that's not that's not me picking on crypto. It's just let's say fixed income visav everything else. >> Yeah. I I don't think even for this audience anyone would debate that Bitcoin's not a risky uh a risky asset. you're you're in safe territory here, but I am curious. I mean, the difference between a 25 and a 50 um basis point reduction. Um especially in the context of I guess many people are expecting further rate cuts down the line even if there's some uh divergence in what the end the terminal rate will be. Uh like would it have led to a real qualitative difference in how investors uh interpreted the Fed? Like do do you

think if they went 50 would have made a big difference in the prices that we're seeing today? >> I actually think 50 would have been a mistake because I think then the the mentality would have been oh my god what's wrong >> because the mark the Fed doesn't love surprising markets unless it needs to. And so when you had call it 100% certainty that they were going to cut and maybe an additional call it 5 to 10% expectation that they might do it a little bit more. Um, I think that would have had they done anything other than 25 that would have led to the questions as to why didn't they and why didn't they guide us in one direction or another? The Fed is good at that. And so, um, I I I think, you know, 50 would

have had people raising the questions, wait, what do they see that we don't necessarily? I think as we've started to parse through this, two things have happened and and they're not necessarily unrelated, although that they're they're coming from different places. Number one, um, is I think the the reminder and and and Powell did touch upon this in his press conference, but he made it more explicit this week, which is, oh, by the way, we haven't really won the war on inflation, you know, and and one of the questions in the press conference, which I thought was great, I forget who asked it. and I wish I could quote him uh by name was, you know, the the Fed has always had this 2% target.

Inflation hasn't run 2% in in years, but yet you're always expecting it to be 2%. How do you intend to get there? Well, you're not going to get there by cutting rates aggressively. So, I think he did push back on it because as we noted in in in in something that that we've written, which by the way, all my stuff is available at ibkrcampus.com and just search for my name and you could sign up for free. It's all there. Um, you know, we don't charge for. So, please please feel free to sign up >> and we can probably even link that link to that as well.

>> Yep, that would be great. Um but in general you know you know I'd noted there that that inflation has been steadily but very slowly rising for each of the past four months whether you measure it by core PCE or core CPI. PPI has been a bit more volatile. Um but you take those measures and it's very hard for the Fed to be aggressive under that scenario. So while um you know as I think we define the role of crypto as let's say a store of wealth visav a speculative asset um I think a little inflation is good if if you have you know if you want to view it

as a store of wealth because it's it's not it's something other than dollar denominator or fiat currency denominator it's a diff it's something else entirely but it is still driven so much by speculation and So the raw material for speculation is the availability of money and if you make money more expensive the the price of speculation increases whether that's for stocks or for crypto. >> Yeah. So that kind of leads into the the next question I had. I mean there anyone looking at price charts can see a pretty drastic divergence in the um in the performance of gold versus Bitcoin that started pretty much exactly on September 18th. Uh what do you make of that? I mean, Bitcoin has tried to have this

chameleon like quality where it can be a risk asset when it wants to be and it's a store of value when that's more appropriate, but it doesn't seem like it's able to make that transformation right now. >> Well, remember one thing. I I I think of gold as being a chameleon in a similar way. It it's sometimes an inflation hedge. It's sometimes the anti-dollar because um it's just a way of of having money in in something other than dollars. With any commodity, the weaker the dollar, the more the more of them it takes for it to buy set amount of commodities, whether that's oil, whether that's gold, whether it's pork bellies, fill in the blank. It doesn't make a difference. Um so gold is classically thought of in

those terms. I actually on a day-to-day basis, gold tends to act a bit more like the anti-doll, but I think the divergence the divergence I wouldn't say the divergence has been in place. Gold has actually been the better performer for let's say for recent weeks. Obviously, crypto's had a a hell of a run. Um, but I think a lot of that is central banks moving out of dollar reserves and into gold reserves. um which is not something I think they're really prepar prepared to do in terms of adding crypto as a reserve currency.

They're okay with gold because they've been doing that for however many thousands of years. They're okay with the dollar because they've been doing it for call it a hundred years. Um but I think they're not ready to do it yet with crypto which if that's one of the rationes then that would be why um you'd see some of the outperformance in gold. Secondly, crypto has a correlation with the stock market and and we can go into to the various reasons because I because you know I could be more more explicit about it. I think you're you're going to ask me about it anyway. So, we'll we'll get to it. But, um but in the short term, you know, you know, there there's definitely a a bit of a correlation between, let's say, NASDAQ and Bitcoin, just to be very

simplistic. And as NASDAQ sort of moved sideways, it makes sense why crypto might move sideways whereas gold is is a bit more of a decorrelating asset which is is of is of a lot of value to a lot of uh institutional investors as well. >> Yeah. And we will get into that. Um but but first I just want to ask to kind of tie ribbon on some of the Bitcoin and gold stuff. What types of questions are you getting from your clients right now uh in light of the FOMC meeting and and just sort of this choppiness in the markets this week?

>> Well, I think um the main questions have been, you know, can gold continue is a is a big question and you know with commodities especially um go you know they they tend to be very uh focused upon trends. I mean in general I think mo I've said mo many times momo and FOMO have been the two big market drivers. Um and so I think you know you're seeing that in gold and and I think in commodities in general momentum where you know I've used Momo as the shortand um moment commodities are always very momentum driven. The stock market has been very momentum driven. Um so I think it's a lot of that. Um, and I think sort of is the next question is, you know, all this money that's being thrown at AI,

is it is it just good to continue throwing money at this or ultimately where is the where's the endgame? And I think that's partially why you're seeing stocks um you know I wouldn't say even have major hiccups but I think you're starting to see a little bit of a reassessment of you know can is it good just you know for companies to endlessly announce that they're uh spending more ever more money on AI and you know I think as I I I wrote today it should just be up on the web is that you know this whole ecosystem at some point right now as it's defined with with the big oracle deal and the big uh deal between Open AI and Nvidia.

>> Where's the money going to come from for this? Because OpenAI doesn't doesn't generate that kind of they their annualized revenues in the first seven months were 12 billion a were 12 billion for the year which created a cash flow burn of $8 billion. How are they going to buy $60 billion a year worth of data center power from Oracle on that? So that's going to require an immense amount of outside capital or an immense generation profitability which by which by the way if if you've doubled your revenue year-over-year they doubled their revenues on an annualized basis but they also um increased their cash burn eight-fold. It's pretty expensive way to

grow. Somebody's got to pay for this. And so I do think the market is kind of starting to reckon with, you know, does is this reminiscent, and this is something I introduced on Monday, is this somewhat reminiscent of the rush to build bandwidth in the internet era, which by the way, if you remember names like Global Crossing, Northern Telecom didn't didn't end well for them, let alone Enron and Worldcom, which were outright frauds. But these were the companies racing to build the data, uh, racing to build the bandwidth. So I I I think this is the market sort of saying wait a minute you know we're spending a lot of money we'll stipulate that this technology is indeed uh life-changing on so many levels uh but you know is the

path from point A to point B um you know might there be some potholes along the way >> yeah and that and frankly I think that topic is worthy of its own separate discussion >> absolutely I didn't want to get too deep into it but I couldn't I couldn't I couldn't distill it into like 30 seconds. Sorry. >> But here's one thing I know this particular audience will be interested in. Uh Bitcoin mining stocks have been um sort of buttressed I guess even over the last couple years now by trying to promote themselves as a hybrid HPC mining uh uh that dual type of offering. Uh they have a lot of comput power. they're already plugged into electricity grids and like you said there's this insatiable demand

for computing power and electricity. Um what do you make of of their prospects at least as long as this sort of like debtfueled boom uh is set to continue for imagine at least a couple more years? >> Well, I think it depends on the individual companies. As a business concept, it actually makes a lot of sense. As you say, they've already they've already made the investment in data centers. You know, they they they've already been buying, you know, the high-end Nvidia chips. I think a lot of the market, not necessarily this audience, but a lot of the market forgets that Nvidia four years ago was the crypto chip company, not the AI chip chip company >> to their srin. They they tried to shake that label and >> but they but they they talk about a

pivot, right? I mean, you know, they they they moved very they pivoted very quickly and it's worked. But so these companies already know how to deploy these type of chips. They already have the expertise. It's individual case. I don't I I don't do individual stocks, so I can't get into the granular nature of of of company A versus company B, but I would imagine that some of them are in a situation where number one, if they're mining, if they're mining their crypto profit profitably, they do have some cash flow. Presumably, they can build out some excess capacity, do it responsibly, um, and position themselves well. But it's not but it's it's tough to build. you're you're not going to build out the scale that an Oracle can

build out. They just raised $18 billion um pretty seamlessly um in the bond market to to to build out their their data center capacity. So um while while I have no doubt that there will be individual um miners that have a compelling story to tell you part of the whole nature of this AI buildout is it it is the topheavy nature that that you know this is the battle of the titans really. >> Yeah. So let's talk about a couple of stocks that I know you follow a little more closely just from a a trading activity point of view. um some of the digital treasury stocks uh Micro Strategy and and in particular Bitine Immersion who uh I I know in your um most recently released set of top 25

most actively traded stocks Bit Miner was number 10 and actually don't believe Micro Strategy was in it even though I think most most weeks it is. So can you talk a little bit about like like those two and to the extent that you follow other DAT stocks because uh I mean it seems to be like getting into a list like what you publish is sort of the the critical mass that you that these companies need to sort of get that options turning going and getting like the the volatility traders excited. >> Yeah. I mean, you know, I at this point MSTR is sort of a an animal unto itself because, you know, it's it's the giant among it's the giant among industries. Now, as with any industry, as with any profitable

business, if you do something and do it well enough, you're going to invite competition. And there was, you know, what I'm going to call it almost financial alchemy going on. Um, with with I'm going to keep calling micro strategy because it's just too hard to say. I >> I always do too. I I still >> Yeah, it's it's it's too hard to say to use strategy as a noun and a verb in the same sentence. Uh, in that sense, a proper noun and a verb. Um, so you know what M so what what Michael Sailor did was he built it out so quickly and and so rapidly and rode this this this runup. Um, and I think, you know, it it inspired a lot of imitators, um, saying, "All right, wait a minute.

You know, this guy can he can he can basically raise $2, you know, for every dollar worth of of Bitcoin he buys. This is this is like financial magic." Um, you know, and and and it it actually got above it got above that. So, if you think about it, and it I'm going to get some argument here because I it's not strictly the case, but I think the simplest way to think about some of these things is a closed-end fund that invests in a crypto in whatever crypto it is. There's other stuff going on, and I'll stipulate that yes, we could do that.

But at its simplest form, they're issuing they're issuing stock or bonds to buy a cryptocurrency that they carry on their books at book value. and they're able and as long as you can issue stock or stock related uh products at some multiple to book value, it's essentially a money machine, right? I mean, if I can if I can go get, you know, if I can go get $2 from that guy, um, and then, you know, turn it around and buy a dollars worth of stuff from you and just sort of keep the extra, you know, valuation or use, you you know, use it and it gets carried on the book, you're of course people are going to want to keep doing that. And so, you invited you, you

didn't invite, but they got a lot of competition. And whether it was, you know, something like GameStop always look, you know, which is always looking for the next buzzword to keep the meme status or or, you know, the or the companies related to the president or or whatever, you started to see companies gravitate to this because there is sort of it was almost like a you know, magic money machine and those don't last. And you know, in the case of uh BMNR, in the case of APO, which which had the huge run up in flame, you know, they right there. That's it in a nutshell, right? Because you know, BMNR piv pivoted to being, you know, an ether company as a while everybody well most of people were focusing on Bitcoin. They

went they went to they went to Ethereum and you know they did get a very prominent um Wall Street bull talking head with a you know with a long track record >> Tom Lee to you know who whom I met I don't know him but well but we have met um you know and he he gave it sort of the proper um impromaturur for lack of a you know I'm trying to think of the right word but um which then was what at tried to do with Dan Ies who's another famous Wall Street hyperbull behind all these tech you know behind a lot of his own tech uh bullishness and you know that stock ran up and so that stuff became unsustainable.

You can't you can't have a situation where where just people will continually pay some you know some amount some you know basically this premium for something that that they're just you know that that just sits on the books. Again, it doesn't necessarily just sit on the books. We can Yeah. >> lending it out, etc. But it's one thing if you're doing it for a for a company that has, you know, you know, where they're, let's say, in Nvidia where where it deserves a price to book multiple because they are doing something that others can't. In these in these treasury companies, most of them are doing something that everybody else is doing. So most closedend investment funds tend to trade

plus or minus 20% around their net asset value. In this case, they don't do net asset value. They do book. We're starting to see that fade. Um Micro Strategy is somewhere closer to about a 50% premium, which you could argue given their heft. It's high, but not necessarily a screaming short. Some of the other ones are screaming short, some of the other ones flamed out. Um, but I do think that's a sign of that's a sign of froth. It's it it's also, you know, it's analogous to what we saw with the spaxs in in 2021, which was, you know, give me money and I'll figure out something to do with it. In this case, it's give me money, I'll go out and I'll go out and buy crypto, which I'm assuming most of the people who are listening to this can

really know where to just go out and buy crypto, right? I mean, you know, >> so why pay why pay someone for the privilege? Yes, of rap basically is what it was. >> And and one of the trends that we're seeing are people pivoting to assets that maybe aren't like like longer tail assets that maybe aren't as readily available to people, but that that's obviously more of a niche market than Bitcoin, Salana, Ether. Uh just just just quickly, um one last question to wrap up. I'm interested in what markers or or signs uh what types of data you're looking at in the next week or two that'll really sort of drive the market.

I know we get a new PCE reading tomorrow. Um, what do you expect out of that and and and what could be coming next week? >> Well, the core PCE uh not the well the P the PCE number that came out today was a little bit higher than expectations. It was 2.6, not 2.5. That's usually a pretty good clue. Um, you know, I don't have I don't have the expectation right in front of me, but I'm expecting, you know, I'm expecting no no major improvement in that number. Um, considering how much consu you know, consider considering how much consumption went on. Consumption is a little bit fluky at this point. I've written about, you know, the K-shaped recovery. And if you think about the the vertical line and a K being the Y axis, where do the points meet? And, you know, I think we went from having sort of a

small K to a capital K to now we're probably an upside down K. Um, but so, you know, so it's an uneven level. Um, and then as we get into next week, we get into employment reports and, you know, this market is hyperfocused now on labor. Um, we got weekly jobless claims today, which were surprisingly good. Um, you know, I we're at a point now where everybody's hyperfocused on weekly jobless claims. You know, there's a lot of noise in those numbers, but you know, I think that's if everybody's focused on labor. So these are the things you know basically it comes back down to the Fed's dual mandate inflation um inflation uh you know P core PCE being their preferred measure labor market which is next Friday a week from Friday being uh

non-farm payrolls um unemployment rate and oh by the way um it's looking increasingly likely that we're going to have a government shutdown um sometime sometime next week um September 30th into October 1st on our on our the IBKR platform, we have event contracts and when I last looked earlier today, um we're, you know, that's predicting about a 60% chance of a government shutdown and that's up pretty dramatically from where it was last week. So that's a non, you know, that's a sort of exogenous factor uh that you have to keep your eye on because that's going to have implications for the bond market.

Another thing I'm watching very closely is this is the the shape of the interest rate curve. Whether we start to see a real steepening, which will tell us that um there's a little bit more of a cost being being placed on longer term assets, whether that's bonds, stocks, crypto etc. >> Awesome. Great. Well, Steve, thanks for for joining us. We'll we'll have to have you back. Thanks again, everybody. Thank you.