This episode delves into the market's volatile reaction to Trump's tariff strategies and the accelerating trend of corporate Bitcoin accumulation, exploring how these forces collide and reshape opportunities for Crypto AI investors and researchers.
Episode Introduction & Guest Welcome
- James Safert introduces the show and hosts Steve Erlick and Rahm Alawalia, welcoming special guest Charles Edwards, founder of Capriel Investments, a quant hedge fund focused on Bitcoin.
- Charles briefly introduces himself and his firm, highlighting their work on Bitcoin strategies, on-chain indicators (Capriole.com), and his Twitter handle (@caprioleio) for market insights.
- Note: Noel Aerson was unable to join due to power outages in Spain.
Trump's Market Influence and Tariff Uncertainty
- The discussion kicks off exploring whether markets, particularly bond and equity markets, still constrain President Trump's policy decisions, specifically regarding tariffs.
- Rahm Alawalia observes a correlation: "The higher markets are, the more aggressive Trump is on tariffs. The lower markets are, the more Trump takes a back seat." He notes Trump's recent suggestion of using tariff income (which he terms a consumption tax) to potentially eliminate income tax, raising questions about the ultimate tariff rate.
- Rahm highlights the perceived market influence on Trump, citing a pivot after a negative Wall Street Journal article and the strategic deployment of speakers like Bessant (seen as market-positive) versus Lutnik or Navaro (seen as market-negative). He points to Trump's low approval rating as a potential constraint leading into midterms.
Analyzing Market Constraints on Trump's Policies
- Charles Edwards agrees that the worst of the tariff announcements might be behind us, referencing the "Liberation Day" reversal where high proposed tariffs were significantly reduced following market volatility. He introduces the concept of a "triple put" involving Trump, Bessant, and the Fed, suggesting they've revealed their pain threshold for market drawdowns.
- Steve Erlick provides historical context, noting Trump's quick reversals on tariffs (April 2nd announcement followed by a 90-day pause) and threats against the Fed chair after market downturns. He argues that despite rhetoric, Trump consistently reverts to market-sensitive behavior. Steve emphasizes the market's dependence on Trump's statements, making it difficult to predict when this topic won't dominate discussions.
- The consensus suggests a "Trump put" is effectively back in play – while tough talk may continue, significant market distress likely triggers policy moderation. The lack of finalized major trade deals remains a key uncertainty.
Earnings Season Amidst Tariff Concerns
- Rahm points out potential market support from resuming corporate buybacks (expected to exceed $1 trillion) and upcoming Big Tech earnings (Meta, etc.), following Google's positive report.
- However, uncertainty persists. Rahm shares an anecdote about Trump meeting retail CEOs (Costco, Walmart) and the subsequent increase in new orders from China, suggesting retailers received some reassurance about future tariff levels (perhaps 25-50%). This contrasts sharply with a 60% drop in container cargo rates, signaling potential future inventory issues, and price increases from platforms like Temu and Shein.
- Rahm anticipates no major US-China deal progress before the G20 meeting in late June, warning of potential "narrative whipsaw risk" based on daily headlines.
- Steve questions how earnings season will play out, wondering if strong results might be misleading given lagging indicators like shipping volume declines. He notes the complexity for investors interpreting results amidst the 90-day tariff pause.
The Digital Economy Blind Spot in Tariff Strategy
- James Safert references Joe Weisenthal's point: "The stock market is not the economy, but it's also not *not* the economy," highlighting the interconnectedness, especially for larger companies potentially weathering tariffs better than smaller ones. He also notes the strategic use of Bessant as a market-calming voice for the administration.
- Rahm provides a critical insight using an Apollo statistic: S&P 500 revenue from China is 6x US exports to China. He uses Meta earning billions from Temu/Shein ads as an example – this revenue isn't captured in traditional trade balances (goods-focused) but is significantly impacted by tariffs cutting ad spend. "It's a very clear example around how the current approach is very old school mercantilistic... It doesn't reflect the digital economy where the United States has an advantage."
- Steve adds perspective on the US economy's financialization, where stock market performance heavily influences consumer spending ("wealth effect"), especially given high retail equity ownership, making market downturns impactful. Rahm agrees, noting the record-high market cap to GDP ratio.
The Rise of Bitcoin Treasury Companies: The MicroStrategy Effect
- The conversation shifts to the announcement of "21," a new company structured similarly to MicroStrategy, aiming to accumulate Bitcoin on its balance sheet. This venture involves prominent names like Cantor Fitzgerald (via a spa - a Special Purpose Acquisition Company, essentially a shell company created to raise capital through an IPO to acquire an existing company), Bitfinex/Tether, SoftBank, and will be led by Jack Mallers (Strike CEO, known for El Salvador Bitcoin adoption).
- Charles Edwards sees this as part of a "flywheel effect," where MicroStrategy's success in using debt to acquire Bitcoin and benefit from its growth is being replicated globally (citing MetaPlanet in Japan, SMLR). He views 21, with its high-profile backers (SoftBank, Lutnik), as a significant development potentially signaling a more crypto-friendly US administration stance.
- Charles predicts these Bitcoin treasury companies will be a major price driver over the next 12 months, absorbing supply and ratcheting prices upward.
Evaluating the Bitcoin Treasury Model and Market Impact
- Rahm analyzes 21's initial structure: ~42,000 BTC contributed in-kind (not open market purchases) by SoftBank, Tether, etc., with an estimated $600M in incremental buying power from debt financing. He notes the immediate benefit for contributors as the spa structure allows trading at a premium to Net Asset Value (NAV - the total value of a fund's assets minus its liabilities), similar to MicroStrategy. "If your market value is in excess of the net asset value, then you should issue shares, issue debt, and then go buy Bitcoin."
- Charles believes the buying power could be much larger, given the involved entities' ability to raise capital aggressively, potentially reaching tens of billions if market conditions remain favorable. He compares it to MetaPlanet rapidly increasing its Bitcoin holdings.
- Steve Erlick reflects on underestimating MicroStrategy's resilience post-Bitcoin ETFs, acknowledging its stock outperformed Bitcoin and ETFs significantly. He describes the model as a "magic money machine" reliant on maintaining high trading multiples to issue cheap debt, noting 21's initial 3x multiple seems unsustainable. He questions the long-term endgame and whether a "pure play" model (21) is better than one with a legacy business (MicroStrategy, though its software business is now minor; SMLR has a potentially viable medical device business).
Challenges and Strategies for Bitcoin Miners
- Steve highlights the negative impact on Bitcoin miners, whose stocks have been underperforming despite Bitcoin's strength. He attributes this partly to tariff impacts on importing mining hardware (ASICs - Application-Specific Integrated Circuits, specialized chips for mining) and challenging mining economics post-halving.
- Investors seeking Bitcoin exposure might now prefer treasury companies like 21 over miners facing economic headwinds. Steve notes miners' reluctance to commit to hardware shipments post-July 9th due to tariff uncertainty.
- Rahm expresses confidence that political pressure (e.g., via David Sacks) would lead to tariff exemptions for miners if it became a significant issue, given Trump's pro-crypto stance and family involvement in mining.
- Charles concurs that mining is inherently difficult due to rising competition, hardware depreciation, and increasing hash rates (a measure of the network's total computational power). He believes miners were attractive equity proxies before MicroStrategy, but the treasury model is now dominant, with some miners even adopting it.
The Flywheel Effect and Saturation Concerns
- James Safert displays MicroStrategy's debt maturity schedule, highlighting significant amounts due starting 2028. He raises the concern that the "flywheel" driving prices up could reverse if Bitcoin's price falls or market appetite for these companies wanes, drawing parallels to the past GBTC premium evaporation. "If Bitcoin price goes down, which we know it can, it could definitely spin the other direction."
- Steve agrees premiums are likely unsustainable long-term, expecting convergence towards NAV based on efficient market principles. The question is timing and how investors navigate the potential end of the premium phase.
- Rahm offers a technical reason for the premium: convertible debt investors gain equity-like Bitcoin exposure through a debt instrument fitting their mandate. However, he acknowledges the possibility of trading below NAV, citing Grayscale's past discounts. He questions how many new players can successfully deploy this strategy, suggesting it might be limited to established names or perhaps failing companies seeking a lifeline.
- Charles notes MicroStrategy did trade below NAV in 2022. He believes there's still room for growth, especially internationally, where local versions of MicroStrategy could cater to investors restricted from US markets. He feels saturation is distant as long as capital raises remain oversubscribed.
Expanding the Treasury Model: Solana and Altcoins
- Steve raises a crucial governance point: unlike MicroStrategy's largely unencumbered Bitcoin holdings, future treasury companies might be tempted to generate yield by lending out their Bitcoin, introducing counterparty risk reminiscent of the 2022 collapses. "At some point the temptation is going to be there to try to generate yield and that's going to lead to a lot of governance issues..."
- James asks if the model will expand to other assets like Solana (where two companies are already doing it) and potentially Ethereum, leading to market saturation across multiple assets and regions.
- Rahm humorously predicts infinite replication until saturation and a market washout: "Isn't that what crypto does? It multiplies and expands and fills out every possible niche and then the storm comes and washes away all the barnacles."
- Charles views altcoin treasury models as a sideshow to Bitcoin this cycle, arguing the dominant narrative is corporate/government adoption of Bitcoin as hard money security. He notes altcoins' significant underperformance relative to Bitcoin.
- Steve questions the timing and narrative for Solana holding companies, suggesting the prime time was last year during the memecoin peak. He notes they face imminent competition from potential Solana ETFs (unlike early MicroStrategy) and lack founders with the same brand recognition as Saylor or Mallers. He asks what Solana's next growth narrative is beyond memecoins.
Altcoin ETFs and Market Demand
- James clarifies that Bitcoin ETFs boosted demand for MicroStrategy rather than hindering it, suggesting the same could happen with Solana ETFs and holding companies. He notes Solana ETFs with staking recently launched in Canada but saw modest initial interest.
- Intriguingly, a 2x leveraged XRP derivatives ETF launched later in Canada has garnered significantly more assets and volume than the Solana ETFs, indicating potentially different demand profiles across altcoins. James anticipates US spot altcoin ETF approvals likely later this year (potentially summer, confidently by October), though staking inclusion at launch is uncertain.
- Charles attributes XRP's recent strength and ETF interest partly to the "Trump presidency" narrative and its perception (accurate or not) as a more "legitimate" TradFi-linked altcoin.
The Trump Memecoin Phenomenon
- The discussion turns to Trump promoting his memecoin by offering dinner access to top holders, coinciding with token unlocks.
- Rahm analyzes this from multiple angles: a sitting US President holding significant crypto wealth and selling access via tokens is novel, contrasting with traditional post-presidency library donations. He frames memecoin trading as embracing volatility as a feature, seeking high short-term gains even with negative long-term expected value, reflecting a "post-QE... gamification of everything" environment. "For crypto natives, volatility is a feature, not a bug. That's the point."
- Steve expresses strong ethical concerns, viewing selling access as problematic and the memecoin venture as unnecessary and cheapening potentially positive crypto initiatives (like supporting mining or regulatory clarity). He sees it as a savvy, if cynical, move to support the token price during unlocks.
- Charles acknowledges the ethical issues and likely negative outcome for retail holders but also sees a "mind-blowing and progressive" aspect: a US President launching a token validates the industry, regardless of the token's merit. He predicts it will eventually fail as Trump's relevance fades, like Biden's memecoin.
- Rahm posits memecoins like Trump's might be the first "product-market fit" for monetizing clout and reputation directly, bypassing intermediaries – a potentially novel concept for creator economies, though fraught with issues when tied to political power.
Broader Market Analysis: Bitcoin Decoupling and Bullish Signals
- With Bitcoin trading above $94k while broader indices lag, Steve highlights Bitcoin's recent decoupling from traditional markets during the tariff volatility. He sees this as Bitcoin acting more like digital gold and proving resilience it lacked previously, potentially attracting more serious attention. "This is really I think the first time where we've seen Bitcoin decouple from indices act more like the gold that it's supposed to be and it's staying there."
- Charles expresses strong bullishness on Bitcoin, citing several factors: his firm's macro index turning positive, favorable on-chain data (long-term holders buying), attractive valuation relative to energy value/production cost (rare at this cycle stage), and relative strength compared to gold (expecting Bitcoin to follow gold's recent rally). He also sees the technical break back above $91k as bullish.
- He anticipates a strong rally, driven by the Bitcoin treasury flywheel effect and supportive macro factors (expected Fed cuts), potentially peaking later in the year or into 2025, following typical post-halving cycle patterns (referring to the programmed reduction in Bitcoin's new supply issuance rate).
Macro Disconnect: Soft vs. Hard Data and Future Outlook
- Rahm introduces Apollo slides highlighting the disconnect between poor "soft data" (sentiment surveys like consumer confidence) and relatively stable "hard data" (actual economic activity like earnings, initial claims). He warns of risks like potential layoffs in logistics if tariffs aren't resolved, citing falling freight volumes and collapsing new orders (hard data points).
- He anticipates a potential multi-month rally (earnings, buybacks) but stresses uncertainty hinges on the final tariff rates. Higher rates could derail markets despite tech resilience. He notes the VIX (volatility index) compression provides a bid for equities, but international markets (Germany, UK) are hitting highs despite local recessions, possibly due to capital repatriation.
- James notes the persistence of this soft/hard data disconnect, referencing the "vibecession" concept, and questions if convergence will ever truly happen. Rahm believes multiples are likely to compress regardless due to higher rates and uncertainty.
- Charles offers a more optimistic take, believing the worst of the tariff impact and fear might be priced in. He points to softening tariff rhetoric, the "triple put," expected Fed cuts (now pricing over four by early 2026), rising global liquidity (M2), and extreme fear sentiment as potential catalysts for a stronger-than-expected market performance in 2025, assuming policies don't drastically worsen.
Reflective and Strategic Conclusion
The interplay between political tariff decisions and the corporate Bitcoin accumulation trend defines current market dynamics. Crypto AI investors and researchers must closely monitor tariff negotiations for volatility signals and track the adoption and sustainability of Bitcoin treasury models for strategic allocation insights and potential systemic risks.
