I referenced my thesis on the intrinsic value of Bitcoin in this article, which was originally published at NSBitcoin Magazine Its April 2021. It represents my view on the value of BTC as an anti-stock, fiat is Ponzi, and how everyone needs insurance against a Ponzi meltdown. As Voltaire famously said, “Paper money eventually returns to its intrinsic value – zero.”
As Charlie Munger said, Bitcoin “is a rat poison box.” Well, Charlie, take a pill, because it’s about a rat.
The paper basis is that BTC is an insurance of deteriorating credit quality for the sovereign nations that issue securities. As such, they are credit protection on a basket of fiat currencies. When you own insurance, you own the volatility. Likewise, when you have long credit, you are short on volatility. Most asset/investment mandates are short volatile. Accordingly, the investment world has short volatility, and it badly needs to offset this risk with insurance (or Long volatility).
In my research, I calculated the intrinsic value of BTC at current CDS rates and the total liabilities of the G20 countries. This dynamic calculation will increase in value as the insurance rate increases. The increase in the insurance rate is reflected in the widening of the spreads for default swaps. Well, the distinctions have widened for several reasons. For example, China’s default swaps widened due to contagion from the Evergrande fallout. Canadian debt default swaps have expanded because we have irresponsible politicians who have just been re-elected, but who “don’t care about monetary policy”. And the default swaps have expanded in the US because, well…there are four or five reasons, but the most worrisome is that the political elite is playing word games with potential default.
Wake up people, that’s it Not exercise. Contagion risks are increasing due to inflation associated with a possible global recession (see the excellent article by Dylan Leclerc and Sam Roll, published in Deep Dive #072). The intrinsic value of BTC has increased since the beginning of this year when the value was originally calculated to be over $150,000 per coin.
I will take a different path this time. I will calculate the value of BTC on the US financial position only. You will see that the market capitalization of BTC should be well over a trillion dollars. What this says is that you are actually getting virtual insurance in the US at a discount from the intrinsic value, And You get protection everyone Other Viats for Free.
Is it no wonder why I think Bitcoin is the best uneven investment opportunity I’ve seen in my 32 years of risk trading? giddy.
methodology
The US 5-Year Offshore Debt Swaps swaps just traded at 17 basis points. For ordinary people, this esoteric measure means that it costs $17,000 to insure $10 million in US Treasury (UST) debt against default. Remember, in 2006, you cost $9,000 to insure $10 million of Lehman Brothers (LEH) debt against default.
The insurance contract has become so valuable since LEH finally defaulted on more than $6 million in default on the contract. LEH protection sellers were picking up nickels in front of the steam iron. Are existing sellers of debt swap swaps in the US doing the same?
I don’t think there will be a short-term default by the United States. The costs will be enormous. However, the children play games. Yellen is serious in her lack of understanding of real risk markets. Powell is a bona fide lawyer who has never sat in a dangerous chair. These are our leaders, and their pristine backgrounds don’t cut it into the trading hole.
Remember, you don’t have to experience default in order to make money from the change in spreads in a credit swap contract. The mark-to-market function will calculate the wider spreads, and you can terminate the contract in advance before the five-year maturity and make a profit.
CDS Contract Amendment for 20 Years
If the five-year credit-swap swaps are at 17 basis points, what would a 20-year credit-swap swap if it was a freely-traded contract? (Note: I used the term 15-year debt repayment swaps in my paper, but have since reconsidered the necessity of having long-term insurance. The value of additional small changes in the annual term will bring in long-term buyers. Moreover, if the US is smart You’ll drastically increase their average debt issue.If the ducks are roaming, you have to feed the ducks, and it certainly seems like there are plenty of goofy bond investors picking up nickels in front of the steam controller).
In order to get this number, you have to do a duration calculation. This is somewhat of a “finger in the air” exercise, but here it goes. The cost of a five-year CDS is 17 basis points, or 3.5 basis points per year. If we effectively linear regression to extend the default swaps to 20 years, the cost would be 70 basis points per year. My intuition tells me that it will be broader because of all the variables that the United States and the world will face over the next 20 years. In fact, I’m sure I’d get offered a 20-year US debt repayment swap at a rate of 100 basis points per year (if anyone were to treat Foss as a counterparty risk, which is unlikely). Thus, for the sake of argument, suppose that the US 20-year default swaps are between 70 and 100 basis points per year.
Current Funded and Unfunded Obligations of the United States
According to the excellent website, USDebtClock.org, the total funded plus unfunded liabilities of the United States is $29 trillion plus $158 trillion. This whopping total of nearly $190 trillion would need a 20-year CDS premium to be doubled to calculate the 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
What now?
The current market value of Bitcoin
Using my favorite BTC dashboard, bitbo.io (created by two really well-established Canadians: Chris Geimer and Mark Chouinard), the BTC trading market cap as of this writing has crossed $1 trillion (at $54,7000 per coin).
How do you interpret the results?
If you compare the current market value of BTC to the insurance value of total US liabilities ($1.33 trillion to $1.9 trillion), it is clear that BTC is cheap to provide protection in the United States alone. And you’ll get protection on all other failed securities of Free.
Good Lean Miss Molly. The markets can be irrational, and in my opinion, BTC is very cheap. Yes, the current prices are an approximation error compared to the long-term target price, but this methodology gives me comfort because we are still too early.
How’s your hedging, Charlie? And hedges aren’t just for gardening. Fasten seat belts. gurgle swings; Buy your insurance when it is cheap.
BTC is a collapsing paper credit quality insurance with No counterparty risk. The United States will likely be the last order to fail, but in the end, all legal orders will fail. Hat tip, Voltaire.
This is a guest post by Greg Voss. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
