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Emergency physician and financial planner Noah Kaufman gives a general cryptocurrency market update. He discusses the state of Bitcoin and the impact of fiscal tightening by the Federal Reserve and also comments on Paul Krugman’s recent New York Times column comparing cryptocurrency to the subprime mortgage crisis. Finally, we talk about Crypto Pulse, a free newsletter he runs with Chris Palmer, MD, educating clinicians about Bitcoin and cryptocurrency.
Noah Kaufman is an emergency physician, financial planner, and can be reached on Twitter @noahkaufmanmd. He is co-founder of the free newsletter, Crypto Pulse, an educational and actionable bi-weekly newsletter written by passionate crypto investors/traders (and medical doctors) for health care professionals.
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Transcript
Kevin Pho: Hi, and welcome to the show, where we share the stories of the many who intersect with our health care system but are rarely heard from. My name is Kevin Pho, founder and editor of KevinMD. Today we welcome back on the show Noah Kaufman. He’s an emergency physician and financial planner. He is founder and CEO of the Kaufman Medical Group. He came on the show approximately one year ago and told us everything physicians need to know about Bitcoin. He’s back on the show today to give a general cryptocurrency market update. Noah, welcome back on the show.
Noah Kaufman: Kevin, great to be here. Good to see you, my man.
Kevin Pho: So we’ll talk about crypto in a little bit, but for those who didn’t get a chance to listen to our first episode together, just briefly share your story and journey to where you are today.
Noah Kaufman: Absolutely. Well, I’m 46 years old. I went to medical school at Tulane, did my residency in Ohio for emergency medicine, and I’ve been a full-time practicing EP since 2006, when I graduated residency. I’ve always had an interest in finance, and as with a lot of ER docs, I’ve always had quite a bit of passions outside the emergency room, and of course titrated my exposure to medicine to try and keep burnout low. So I’ve been a competitive rock climber. I’ve been on TV; I did American Ninja Warrior, a show on NBC, for seven seasons, and was not talented enough to win the million dollars. I do have a Series 65. I’ve always loved finance, like I said, and I’ve managed money, and I’ve learned everything that I could about the financial system and money itself. I love philosophy, I love chess, I play guitar, and I have a 10-year-old son named Zahn, who I’m extremely proud of. So that’s me in a nutshell.
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Kevin Pho: So before we talk about the current state of cryptocurrency, just tell us: What role does cryptocurrency currently play in your life?
Noah Kaufman: Yeah, absolutely. Well, I would say that currently, cryptocurrency in general, as a nascent asset class, just fills me with philosophical wonder. It’s not very often that a whole new asset class is created. I mean, we have precious metals, we have bonds, we have equities, we have real estate, and of course we have precious metals, like I said, but these have been around for eons. To have a whole new asset class now that money can be allocated to is really mind-blowing. Most people don’t realize that to have a new pool that capital can escape to, or speculate in, or otherwise utilize, that’s very, very powerful. Generally, these types of trends play out over decades, and so we’re at the very infancy of something that is probably bigger than the internet itself, and came about because of the internet.
I’ve always loved history. I’ve always been a student of the human condition. And as a practicing physician, I think all of us can identify with the problems in the world, not only from a health perspective but from a financial perspective, and our role in the medical-industrial complex, which unfortunately does quite a bit of financial harm to people. So I want the world to be a better place for my son, for everyone. I also have done very well investing. I love investing, and it’s something that I was always very good at. Of course, I’ve made mistakes, and I’m just as human as everyone else. But right now, cryptocurrency plays that central role of the thing that I want to learn the most about. As Wayne Gretzky said, skate to where the puck is going.
Kevin Pho: Let’s expand on that metaphor, where you compared cryptocurrency to the nascent phase of the internet. Speaking today, at the beginning of February, where do you see cryptocurrency when you relate it to the internet?
Noah Kaufman: We’re at the very, very early stages of adoption. Adoption of networks is a very interesting phenomenon. It actually is mathematically described. There’s a law called Metcalfe’s law that states that every additional participant in a network, a social network, a monetary network, a retail network, a mobile network, whatever it is, adds an exponential value to that network. Usually networks are adopted along an S-curve. It starts out in the beginning very, very slow, and there are the extremely early adopters, and they come in. It takes a long time to kind of catch on, and it’s that tipping-point phenomenon where all the early adopters turn into mainstream adoption, and then saturation of a market or the network.
So we’re in the very, very early parts. Cryptocurrencies are probably about 1 percent adopted, despite their kind of popularity in mainstream culture now and the constant talk about them. Very few people are allocating capital to these nascent asset classes, and when they are, it’s very speculative. It’s with a lot of trepidation and a lot of respect for volatility. So we’re at the extremely early phases of cryptocurrency adoption.
Kevin Pho: Like I said, we’re speaking at the beginning of February, and I want to get your take on the general cryptocurrency marketplace. Bitcoin has decreased about 30 to 40 percent since its all-time highs, close to $69,000. I think it’s currently something like $38,000 or $39,000. So what’s your general take on the cryptocurrency market today, at the beginning of February?
Noah Kaufman: Yeah, absolutely. Well, the cryptocurrency market can actually be separated into two new asset classes. There’s Bitcoin, which stands alone as digital property, a decentralized distributed ledger that is incorruptible, immutable, and it’s the most perfect money that the world has ever known. In fact, history will most likely show that money was invented in 2008 or 2009, and that everything before that was a proxy and a simulation for money. So there’s Bitcoin, and then there’s the rest of the cryptocurrency complex, which is all the altcoins, every project, all the L1s, the layer ones, like Ethereum and Solana and Polkadot and Cardano, and all these things you hear about. All of that stuff gets lumped together, and there are like 10,000 coins, OK? And then there’s Bitcoin.
The market cap of these when you combine them is about $1.6 trillion or $1.7 trillion right now. Bitcoin alone is about $800 billion. It has obviously passed the trillion-dollar mark. But the complex itself is very, very healthy. It’s so small right now in terms of an asset class that it just gets whipsawed; it’s taken violently from side to side by traders, by institutions. The price is very easily manipulated, and it’s extremely volatile. This is what happens with all new asset classes and all small-market-cap assets that institutional players, nation-states, sovereign wealth funds, and family offices want a piece of and want exposure to.
So when we look at the cryptocurrency complex, the asset class as a whole, what we have to look at is adoption rates and hash rate, like computer usage, and participation in the networks, because these are networks. Just like Facebook was a network, we are in the Facebook of money, or the Amazon of money, because Bitcoin is a monetary network. The rest of the cryptocurrencies are a little bit different; we can get into that. But the whole thing, when viewed together, is growing at an enormous rate. The price really doesn’t matter. It’s extremely volatile. It has sold off 50 percent numerous times in the last decade, and that hasn’t stopped it from having a CAGR of over 200 percent a year. So it’s extremely healthy. All the on-chain analysis shows that long-term holders are accumulating.
Now, we’re in a very interesting time from a macroeconomic standpoint. What is the 24/7, most liquid, most speculative asset class? That’s Bitcoin. So when there are margin calls, or when the equity markets are selling, Bitcoin is going to be the first risk-on asset to start getting decimated, and that’s going to continue. As it grows and matures as an asset class, and goes from a trillion dollars to gold’s market cap, which is $10 trillion, and when Bitcoin is $500,000 a coin, it will be a little bit more stable. And then when it goes 20 times that, or even 10 times that, when it’s $100 trillion as a market cap and it’s considered a true store of value and reserve currency, then it’ll be very, very stable, because then traders and hedge funds can’t come in and put $50 billion in to move the market, or spoof orders, or do what they need to do.
So if you’re a long-term holder, which is really the only, I think, correct way to invest in this new technology, then it’s a fleeting concern, and it’s something that really needs to be mitigated in the same way that we mitigate all volatility and all risk in any portfolio, and that’s through position sizing.
Kevin Pho: So let’s talk about some of the macroeconomic trends. The Federal Reserve is likely going to tighten their monetary policy. Some are saying three to four interest rate increases this year. How are these macroeconomic trends going to affect the growth of cryptocurrency?
Noah Kaufman: Great question. There are a lot of different takes from a lot of smart people. It doesn’t matter how smart I am or how not smart I am. I’ve listened to all these takes. I have a good fundamental understanding of economics and what the Fed does, of the repo program, of quantitative easing and tightening, of interest rates and their relationships to equity markets and other markets, and of the eurodollar system and the dollar’s reserve currency status. I will tell you, nobody really knows. But the Fed is jawboning, and they’re clearly jawboning. What jawboning means is they’re saying things for psychological effect and then doing something else, OK? So we know this factually.
We know that inflation has a large psychological component. When higher prices are anticipated, people stack up on goods and services because their dollars are going to go less far in the future. We just had a 7 percent CPI print, which means real inflation is probably 10 to 15 percent or more, but that’s the highest CPI print, by the way the government measures it, in 40 years. We know that the Fed is saying one thing and doing another thing, because they’ve been talking about tapering, and they’re supposed to be tapering since November or December. Instead, what they’ve done is they’ve continued to purchase assets at an alarming and record rate. I don’t have the numbers in front of me, but the estimate was that they were going to continue to purchase assets behind the scenes through their special vehicles to the tune of about $470 billion in January. That was their estimate. Instead, they were up in the $750 billion range. So there is no tapering.
When they say they’re going to raise interest rates, from my perspective, that’s not possible. When Volcker raised interest rates in the ’80s, you have to remember that debt to GDP was in a lot different place than it is now. We’re at 130 percent debt to GDP. I’ve gone back and I’ve looked at every historical case in every country, as a matter of fact. In the last 100 years, 51 out of 52 countries that have had a debt to GDP of over 130 percent have defaulted on their liabilities, on their debt. Japan is the only one that hasn’t, and that’s beyond the scope of this conversation. But suffice it to say, if the Fed were to try and actually raise rates like they’re saying they want to, they wouldn’t be able to service the debt. We cannot service the debt that we have with our tax revenues.
Because of that, we’re in a very tricky spot, and the Fed is stuck between two horrible choices. They either default and cause a massive depression, or a great recession, a very horrible recession, because unemployment will go up and stock markets will crash as they raise interest rates. And by the way, one of their primary mandates is to keep unemployment low. So they either do that and destroy the economy, or they inflate out of the debt that we have, which is a much more politically palatable option, especially with midterms coming up in this next year. So I personally believe that it’s jawboning. They may make one rate increase, they may, and what’s going to happen is at some point the market is going to have a tantrum, and they’ll need to step in and ease more, and they will print infinitely. What that means is asset holders will inflate faster than everyone else, and you will watch this kind of everything bubble continue to grow.
These are factual and very, very horrific times that we’re living in. Forty percent of the dollars that were ever created were created over this last year. That is a fact. M2 has increased by 40 percent. That is nuts. And so now that the velocity of money, which is how fast money is moved around the economy, has been improving, and people are spending, and the economy is getting hot again, and CPI and inflation are rising, you would think they would have to tighten. But we’re in a unique situation where they can’t. For anybody who wants to read more about these types of situations where fiat currency systems collapse on themselves, I recommend reading Ray Dalio’s work. He’s a Harvard-trained guy who’s the leader and owner of the largest private hedge fund in the world.
Kevin Pho: So let’s talk about some of the criticism leveled against cryptocurrency. You read editorials, say, in The New York Times, saying there are not a lot of use cases for Bitcoin as a store of value because it’s so volatile. Paul Krugman recently wrote an editorial last week, and I quote him: “I’m seeing uncomfortable parallels with the subprime crisis of the 2000s. There’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.” So from that last criticism by Paul Krugman, what’s your response to something like that?
Noah Kaufman: I mean, I think he’s right in a way, which is probably going to surprise most people, that I would say that. But look, we have to go back to the fact that there’s Bitcoin, which is a pristine asset. It’s pristine mathematical collateral. It’s the first store of value that holds its value over time. You can transport the value of your money between time and space without any loss of its fidelity. And then there’s the rest of the cryptocurrency complex, which is every single coin under the sun, 10,000 coins, and it’s very dot-com-y, right? Most of these projects, some of them are outright scams. They’re probably all securities. Bitcoin, by the way, has been deemed digital property protected under the First Amendment as code. It has no CEO; it has no team. With cryptocurrencies, there are 10,000, and each one has a company behind it, and they’re trying to make money. These are probably securities and probably need increased regulation.
So I think he’s right. This is like the dot-com era. I’m not sure I would say the subprime era, because the subprime era was different in that we got out over our ski tips, and banks started becoming very creative with how they packaged and sold debt, with collateralized debt obligations. Again, that’s outside the scope of this conversation, but I’m happy to have that conversation. I think he’s right that there are going to be a lot of people who are going to get decimated and annihilated, and that worries me quite a bit. That’s why you need to be educated in this space.
It’s like the dot-com era. You had the biggest companies in the world, the most incredible new companies made. You had Amazon, Facebook, Apple, all these new networks that thrived in the internet land, grew, and went on to become the world’s largest companies. But what happened to most companies, the Pets.coms and all these? They collapsed, obviously. Many of them were just, believe it or not, way ahead of their time. So I think he’s right. But then we also have to remember that really smart guys like Paul Krugman, a Nobel laureate, are wrong. They can be wrong. Paul Krugman famously said at the end of the ’90s that the internet would be nothing more than a memory in the 2000s, that it had no real use case, and that it was just a fad, that it would be like a fax machine. So I take it with a grain of salt.
I do think he’s right, and I think he’s a brilliant guy who obviously cares about people’s welfare. I do think a lot of people have exposure and are going all in because they’re feeling the pain of inflation, and they’re seeing prices go up a lot faster than their wages, and that’s difficult, and that pushes people out the risk curve. The whole bond market now is negative-yielding. If that doesn’t prove to really be transient, guess where that $400 trillion of debt is going to start going? It’s looking for risk. It’s looking for return instead of a negative 5 percent return every year. So it’s going to go into equities, it’s going to go into real estate. That’s why BlackRock is buying up real estate. It’s why China and Russia are hoarding precious metals and commodities. Well, Bitcoin has also, and the whole cryptocurrency complex has also, inflated along with those other asset classes as people are forced out the risk curve. So I digress, but he is not wrong. He’s a brilliant guy. We have to separate Bitcoin from the rest of the cryptocurrencies, and I think it’s a more nuanced discussion than the blanket statement that he’s saying.
Kevin Pho: We’re talking to Noah Kaufman. He’s an emergency physician and a financial planner. He is the founder and CEO of the Kaufman Medical Group. Noah, as you mentioned, one of the things that you wanted to do was educate physicians on cryptocurrency, and I understand you have a Substack that can do just that. Tell us more about that.
Noah Kaufman: Yeah, thanks, Kevin. Well, we actually just launched in November. Myself and several other finance-savvy, computer-programming, actually other ER docs, enthusiasts of this, have started a Substack called Crypto Pulse. It’s free, and we educate. We’re talking about Bitcoin primarily, but also about altcoins, about how to store your cryptocurrencies, about the history of money. I mean, it’s all over the place. There are GIFs. It’s very educational, and it will always be something that we want to bring free to our colleagues, because I think there’s a lot of misinformation. There’s a lot of perhaps disinformation out there. And a lot of the financial communities in the physician world, in our colleagues’ world, are very conservative and don’t spend a lot of time talking about this new asset class, or if they do, don’t spend enough time really thinking about it and educating so that people can make their own decisions.
So Crypto Pulse is the Substack. It’s free. You can find it through my Twitter. I’m Noah Kaufman MD, one F, one N in Kaufman, K-A-U-F-M-A-N, so Noah Kaufman MD, and I’m on Twitter Spaces quite a bit, educating there. Yeah, sign up for Crypto Pulse. It’s literally just a free cryptocurrency newsletter to get people educated so they can make their best decisions for themselves. And of course, we have upcoming sponsors and whatnot. We already have five or six hundred doctors who have joined us since November.
So it’s a way to kind of pay back. I’ve personally kind of reached a point in my investing and trading where I don’t care about the money. Luckily, I have enough. I’ve been fortunate that it’s not something I need to worry about any longer. So now what drives me is educating, and also philanthropic opportunities. I love helping other physicians, because I remember what it was like slaving away and working extra shifts and stressing myself out to try and pay off my six figures of student debt. So I’d like to move beyond that. And then Dr. Palmer and I also do lectures to groups, and we’re hired out for consulting, so we do that sort of thing as well.
Kevin Pho: I’ll include a link to your Substack in the show notes. What role should cryptocurrency play in a typical physician’s financial portfolio?
Noah Kaufman: Well, it depends. It depends on risk tolerance, and it depends on a whole bunch of things. If you’re allocating to Bitcoin, which should be the majority allocation, it’s something that you would want to buy and leave and let sit there, and sleep well at night and not even think about it. Just as I recommended to you, and I think you actually acted on this back when Bitcoin was $15,000 or whatever it was: Put 1 percent in, or just dabble in it. The only wrong position in Bitcoin is to be at zero, to have zero exposure to it. But if you have 1 percent of your portfolio, and heaven forbid Bitcoin goes to zero, which I think we’re beyond as a risk, you’ve lost 1 percent. But this is an asymmetric trade, where Bitcoin can still, to this day, go 100x, OK? So a 10,000 percent return. If you have a 1 percent allocation and you can tolerate that level of risk, then that can grow to be 50 percent of your net worth or portfolio in a very short amount of time. Every portfolio should have such asymmetric bets. So that’s Bitcoin.
The rest of the cryptocurrencies are extremely speculative. You really need to know what you’re doing. I would be very, very careful and allocate extremely small amounts. You’re in Vegas, you’re in the casino, and at this point, Paul Krugman is correct, and you need to be careful. You’re acting like a venture capitalist in those types of situations. I think to have zero exposure to Bitcoin would be just as silly as having a 100 percent allocation to Bitcoin. I think it’s still important to be diversified through asset classes, to have protection from all sorts of risks, which include currency risk, because we’re at that point where currency risk, although we’ve never experienced it in our lifetime, is a real thing. I think the debasement of the dollar is going to continue.
So Bitcoin is not a store of value yet. It’s volatile, but it’s appreciating at 200 percent a year, plus, for the last 12 years. That is probably not going to stop. That’s going to continue. So it’s still very early. I think we’re very lucky to have such a big pullback, although we’ll get more. It’s going to fall from $500,000 a coin down to $200,000 a coin, and people are going to say it’s dead and it’s over, before it shoots up to $2 million a coin. This is the adoption of a monetary network. This isn’t a stock that we’re buying. This isn’t a company that has a CEO who could have a heart attack or something like that. This is a whole new asset class that nation-states are starting to adopt, that institutional money is flooding into, and that is growing in a very healthy manner.
So that would be my final statement about where cryptocurrencies should have a role in your investment portfolio. But of course, everyone is different, and risk tolerances are different. If you can’t sleep well at night owning some Bitcoin, and you’re constantly checking the price because it’s such a volatile asset, it’s not worth the stress. At some point, there are things that are much more important than money, including your sanity and your happiness. So that’s what I would say.
Kevin Pho: And my final question: Any take-home messages that you want to leave with the KevinMD audience?
Noah Kaufman: Yeah, absolutely. I think if we zoom out to a 30,000-foot level, we all get so kind of zoned in and interested in these things, and we’re always so focused on making that next dollar and putting the kids through school, and what we need to do from a work perspective. As physicians, we all suffer from overachieving and working really hard. I would say that philosophically, more than anything, more than investing, find what your passion is. Step back a little bit from whatever is stressing you out, and take some time and really enjoy your passion, because you only live once, as far as we know. It’s really important to enjoy the people you love. So that would be my final recommendation: Try and enjoy life as much as you possibly can, because it’s a gift.
Kevin Pho: Noah, thank you so much for coming back on the show and sharing your time and insight.
Noah Kaufman: Thank you, Kevin. It was great being here and sharing with your audience.
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