October 16, 2024 • 1hr 1min

BTC204: Stablecoins vs Bitcoin w/ Allen Farrington (Bitcoin Podcast)

We Study Billionaires - The Investor’s Podcast Network

In this episode of We Study Billionaires, host Preston Pysh interviews Alan Farrington, author of "Bitcoin is Venice" and founder of Axiom BTC Capital. They discuss a wide range of topics related to Bitcoin, stablecoins, and the evolving cryptocurrency ecosystem. The conversation covers the recent debate between Michael Saylor and Saifedean Ammous on borrowing against Bitcoin, the role and future of stablecoins, technical risks in the crypto space, the potential of technologies like Nostr, and recent developments in institutional involvement with Bitcoin.

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Key Takeaways

Stablecoins have emerged as one of the only real product-market fits in crypto outside of Bitcoin, with over $100 billion in issued stablecoins and high transaction volumes rivaling traditional payment networks.
Tether and other stablecoins are effectively acting as unofficial brokers of US Treasuries, funneling dollar demand that wouldn't otherwise exist and potentially worsening dollar inflation, which is beneficial for Bitcoin.
The technical infrastructure underlying stablecoins (e.g. Tron, Solana) is largely irrelevant - they could function just as well on a simple database. The value proposition is in providing a more accessible and usable form of dollars, especially for emerging markets.
Stablecoins like Tether are tolerated by regulators despite operating in a legal grey area, likely because they are expanding dollarization globally and creating demand for US Treasuries.
Borrowing against Bitcoin as collateral may become a common corporate finance tool for companies looking to accumulate Bitcoin long-term while meeting short-term dollar liabilities.
Nostr's long-term potential lies in providing portable, standalone digital identities that can be used across different applications and platforms. Its viability depends on Bitcoin for censorship-resistant payments.
BNY Mellon's approval to provide Bitcoin custody services is significant, as it provides a trusted traditional banking option and may reduce reliance on crypto-native custodians like Coinbase.

Introduction

In this episode of We Study Billionaires, host Preston Pysh interviews Alan Farrington, author of "Bitcoin is Venice" and founder of Axiom BTC Capital. They discuss a wide range of topics related to Bitcoin, stablecoins, and the evolving cryptocurrency ecosystem.

The conversation covers the recent debate between Michael Saylor and Saifedean Ammous on borrowing against Bitcoin, the role and future of stablecoins, technical risks in the crypto space, the potential of technologies like Nostr, and recent developments in institutional involvement with Bitcoin.

Topics Discussed

Borrowing Against Bitcoin (1:26)

The discussion begins with Preston asking Alan about his perspective on the recent debate between Michael Saylor and Saifedean Ammous regarding borrowing against Bitcoin.

Alan suggests they may have been talking past each other, with Saifedean focused on a post-hyperbitcoinization scenario and Saylor on navigating the current monetization process.
The concept of "risk-free yield" in a sound money system is questioned, as true risk-free rates can only exist in a fiat system due to money printing.
"This whole 'risk-free rate' makes no sense at any level...you have to take risk [to get yield]." - Alan Farrington
Preston introduces the Kelly Criterion as a framework for considering position sizing when borrowing against Bitcoin, suggesting it indicates position sizes should be relatively small.

Stablecoins and Their Role (5:55)

The conversation shifts to discussing stablecoins, their current status, and potential future.

Stablecoins have achieved significant adoption, with over $100 billion issued and transaction volumes rivaling traditional payment networks.
Alan argues that stablecoins don't actually need blockchain technology to function - they could operate just as well on a simple database.
The value proposition of stablecoins is providing a more accessible and usable form of dollars, especially for users in emerging markets.
"Tether on Tron does more volume in dollar-denominated [transactions] than Visa." - Alan Farrington
Stablecoins like Tether are effectively acting as unofficial brokers of US Treasuries, creating dollar demand that wouldn't otherwise exist.

Expansion of Fiat Through Stablecoins (10:26)

Preston posits that stablecoins may be a key mechanism for expanding the fiat money supply globally.

Stablecoins could be a means for governments to push more dollars into the global financial system.
This expansion of fiat units is seen as necessary for Bitcoin to reach very high dollar valuations in the future.
Alan agrees this could have an inflationary effect on the dollar, which would be beneficial for Bitcoin's relative value.
"I personally think that all these stablecoins are a function of how the governments are just trying to get more and more dollars into the system." - Preston Pysh

Technical Risks in Crypto (14:46)

The discussion touches on potential technical risks associated with stablecoins and their underlying protocols.

Alan argues that the specific blockchain or protocol (e.g. Tron, Solana) used for stablecoins is largely irrelevant from a technical standpoint.
The real value and risk lie in the issuer's credibility and reserves, not the underlying tech infrastructure.
There's likely little technical risk in moving stablecoins between different protocols if needed.
"Solana or Tron or whatever it is, is basically just rails for this. The actual value of the asset that you allegedly own is Tether's goodwill." - Alan Farrington

Stablecoins and Underlying Protocols (27:19)

Further discussion on whether stablecoins truly require specific blockchain protocols to function.

Alan reiterates that stablecoins don't inherently need blockchain technology - a database would suffice.
The use of blockchain may be more about regulatory arbitrage and leveraging hype/confusion around crypto.
Tron's prominence in stablecoins is noted, possibly due to its more straightforward positioning as a database-like system.
"What you need for this is a database. You can do this even more cheaply than on-chain." - Alan Farrington

Institutional Involvement in Crypto (31:51)

The conversation turns to how institutional players are entering the crypto space.

Discussion of MicroStrategy's Bitcoin strategy and why other public companies haven't followed suit at scale.
Speculation on what types of companies might be next to adopt significant Bitcoin positions.
Alan suggests many private companies may already be accumulating Bitcoin but have strong incentives not to disclose this.
"I think if we could peer into private markets and see smaller companies where you have founders that are still controlling their equity, I bet you would see this being put on with a lot more vigor than what you do in the public markets." - Preston Pysh

Free Speech and Supporting Technologies (39:48)

Preston asks Alan about his views on Nostr and other technologies supporting Bitcoin and free speech.

Alan sees Nostr's potential more in providing portable digital identities rather than just as a Twitter alternative.
He argues Nostr's long-term viability depends on Bitcoin for truly censorship-resistant payments.
The relationship is seen as asymmetric - Nostr needs Bitcoin more than Bitcoin needs Nostr.
"I basically don't think Nostr is possible without Bitcoin, at least not in the long run." - Alan Farrington

BNY Mellon Custody and Bitcoin Derivatives (45:48)

The final topic covers recent developments in institutional Bitcoin services.

BNY Mellon has been approved to provide Bitcoin custody services, marking significant traditional banking entry.
The SEC has approved derivatives trading on top of the IBIT Bitcoin ETF.
Alan views the BNY Mellon news as particularly significant, potentially reducing reliance on crypto-native custodians like Coinbase.
"I think [BNY Mellon offering custody] is huge...it relieves a lot of anxiety around needing to associate with Coinbase basically." - Alan Farrington

Conclusion

This wide-ranging discussion touched on several key developments and trends in the Bitcoin and broader cryptocurrency ecosystem. Alan Farrington provided thoughtful analysis on the role of stablecoins in expanding global dollarization, the potential for Bitcoin-backed loans as a corporate finance tool, and the importance of censorship-resistant payments for emerging decentralized technologies like Nostr.

The conversation highlighted the complex interplay between traditional finance, regulators, and the crypto industry. While challenges and risks remain, the increasing institutional involvement and infrastructure development around Bitcoin point to its growing mainstream adoption and importance in the global financial system.