Preston Pysh and Andy Edstrom: Swan Signal Live E25

Founder of The Investors Podcast Network, Preston Pysh, and author of Why Buy Bitcoin, Andy Edstrom, discuss a range of Bitcoin topics. They cover Fidelity rolling out a new Bitcoin invest­ment product, Micros­trategy adding Bitcoin to their balance sheet, debt cycles, rumors of wealthy individ­uals buying Bitcoin, and their own personal concerns about Bitcoin. As always Brady Swenson, Swan Bitcoin’s Head of Educa­tion, hosts the lively discussion.

Subscribe to the Swan Signal YouTube channel and Swan Signal podcast.

Summary

0:00 Introductions 

3:41 Predic­tions for the Fed’s policy announcements

8:46 How infla­tion and debt cycles work 

16:59 Remem­bering Matt D’Souza

18:36 What metrics do you watch closely? 

34:57 Fideli­ty’s new invest­ment product 

46:54 Wealthy individ­uals buying Bitcoin 

52:21 What is the effect of Bitcoin deriv­a­tives and IOUs? 

1:05:34 What is your biggest concern about Bitcoin? 

1:16:34 Wrap up and thank you

1/ Bitcoin poised for explo­sive movement upward, based on a favor­able macro­eco­nomic backdrop.

A Recap of @edstromandrew & @PrestonPysh on this week’s Swan Signal Live.

Watch: https://t.co/jfNDD2XCee
Listen: https://t.co/JErNPTLTGZ

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— Swan 🦢 SwanBitcoin.com 🚀 (@SwanBitcoin) August 28, 2020

Transcript

Brady Swenson:

All right. Hey everyone, welcome back to Swan Signal Live. We’ve got a prime time edition tonight. I love doing these things at night­time and it’s just a good mood. It’s a good night to talk about bitcoin. Every night is a good night to talk about bitcoin. I’m partic­u­larly bullish for this partic­ular episode. We’ve got Preston Pysh and Andy Edstrom with you.

Brady Swenson:

Before we dive in, let me talk to you a little bit about what we do at Swan. We have built the easiest and best way for you to accumu­late bitcoin with automatic recur­ring buys, it’s super simple. Think about bitcoin, like a 401(k) or a payment on your mortgage, regularly, consis­tently buying some bitcoin, saving it up as an invest­ment in your future and our collec­tive future.

Brady Swenson:

The process is super simple, you just connect your bank account, will auto pull money from your bank account and buy the bitcoin and then you can automat­i­cally draw it. That’s it, 1, 2, 3. We have super low fees. We are up to 80% lower on fees than Coinbase which is just crushing Coinbase. We have up to 57% lower fees than cash app as well for recur­ring buys so I don’t think there’s any reason to be stacking anywhere else with your auto recur­ring buys than Swan in the United States.

Brady Swenson:

And in case you missed it we are launching daily buys, we’ve had massive demand or daily buys since we launched the service. Right now the most often or the fastest or most often you can buy bitcoin is weekly. With daily should be able to catch those dips even better. That’s launching soon to get into the first cohort, the first group, the beta group of daily buys go to swanbitcoin.com/daily buys and sign up there.

Brady Swenson:

Let’s dive into this one with these two fine gentlemen we have here today, Preston Pysh of the Investors Podcast Network. How’s it going man?

Preston Pysh:

What’s going on? Good to be here.

Brady Swenson:

Just ready to chill and talk some bitcoin Andy, author of Why Buy Bitcoin finan­cial advisor. Welcome to the show, man.

Andy Edstrom:

Yeah, hell yeah. Thanks for having me. I’m still jacked up on Preston’s last Tip episode by the way, which was an all-star cast Luke Gromen and Lyn Alden and Jeff Booth. I’m still coming down from that one.

Preston Pysh:

I’ll tell you, when I was done recording that, I went into the kitchen and my wife was there and I said, “I feel like I just talked to like three of the smartest people on the planet right now.” And I also shot Jeff Booth a text. And I said, “Lyn Alden, she’s kind of at a different level man, she is really intel­li­gent.” I feel like I’ve inter­viewed a lot of people through the years and I’m telling you she is insanely intelligent.

Andy Edstrom:

Yes, all of your guests and the host too, of course, so I’m excited to get into it with you. And I’m almost celebrating also just FYI a week from today will be the one-year anniver­sary of this guy, so I couldn’t help myself.

Preston Pysh:

Congrats.

Brady Swenson:

That’s awesome.

Preston Pysh:

People don’t know how much work it is to put a book together, it is a lot of work, man.

Andy Edstrom:

Yeah, you’re working on one?

Preston Pysh:

No. Not only no, but hell no.

Andy Edstrom:

You’re too smart for that.

Preston Pysh:

Dude, it’s just so much work. And I don’t like to be honest with you. I don’t enjoy writing. So it’s a chore for me.

Andy Edstrom:

We each do what works for us. And we try to contribute our two cents to the whole process. So it’s great to be out with you.

Preston Pysh:

Yeah. Great to be here with you as well Andy.

Brady Swenson:

I am like Preston, a talker as well, I like to talk about stuff. Let’s talk about it. So let’s get into it, then. That’s what we’re here for. Let’s talk about the Jerome Powell speech that’s coming up tomorrow morning 9AM Eastern time. It said that we’re expected to hear some historic changes in, an outlook, a policy from the Fed. Of course, the language that we’re going to hear tomorrow and the speech is not going to be so arresting as the titles, the headlines we’ve been reading about this speech, it’s said to be expected that we’ll get a moderate infla­tion overshoot during this recovery phase of this cycle. Andy, what are you expecting to hear tomorrow, man? And if we hear that, how do you think it’s going to affect the markets and bitcoin?

Andy Edstrom:

A couple things. So the first thing is as part of my business, as you mentioned, I’m a wealth manager, we subscribe to a few sources of research, including some macro ones, and I don’t want to throw anyone under the bus. But let’s say that I got a note in recently from one of our research providers, talking about how… They probably won’t announce yield curve control explic­itly, but they may announce a new policy which is symmetry in the infla­tion target, which is to say for every year they under­shot on their stated target of 2% of infla­tion, they overshoot.

Andy Edstrom:

Now, I haven’t got my head around this because one of the things I included in my book was the Fed has been going on record already in the FOMC minutes in the reports talking about how the target is symmetric, which they don’t state it explic­itly, but the impli­ca­tion is that they’ve been under shooting on PCE or CPI for a while, according to their measure­ments, then they ought to overshoot for a while.

Andy Edstrom:

So I think that’s what some people are expecting is they’ll maybe talk about symmetry of the target. And to me, that’s not news. Because they’ve already been publishing that in their notes. But that’s one idea or one angle. The second perspec­tive I take is, zoom out, right? Who cares what Powell says, at this meeting, or in this speech, the next meeting a few meetings from now. We know, Preston knows where this thing is going, because we know what the debt levels are. And so what happens week to week, month to month, it’ll matter that short term in terms of where gold goes, where treasuries go. There’ll be some noise and fluctuations.

Andy Edstrom:

I’m not as focused on those. I’m focused on the big picture in the long term, and where it’s likely to play out over a series of years. So I’ll leave it there.

Preston Pysh:

My only comment is they’re saying that they’re going to let infla­tion go. But at the end of the day, they can’t allow for rates to go up. Like they just cannot, from a fiscal stand­point, especially at the rate that we’re issuing money right now is they can’t afford for debt yields to go up. And so whenever I think of somebody saying, we want infla­tion to come in, well, if infla­tion is 3%, the price of debt is a premium above whatever that is. So they’re saying one thing. And then on the fiscal side the elected officials are spending at rates that are accel­er­a­tive and actually require yields to go signif­i­cantly lower than where they’re at, in order to keep this thing. I don’t even know what to call this anymore as far as what the economy is on a global scale of going and rolling.

Preston Pysh:

It’s an inter­esting narra­tive that he’s saying. If I was going to summa­rize what he’s trying to say is, we’re conducting an exper­i­ment, we’re going to print as much as we can to see if we can actually even get infla­tion to occur. This is kind of how I guess I’m reading this announce­ment tomorrow. And when you go back to Paul Volcker and his big moment back in the early 80s, when he’s basically saying, “I’m going to get infla­tion under control. And I’m going to do every­thing I can to do that.” It seems like Jerome Powell is trying to do the exact same thing. But in the inverse like a 180 of that.

Andy Edstrom:

He’s the anti-Volker?

Preston Pysh:

It’s like the anti-Volcker speech. And what’s crazy is history is not going to judge this moment in time like Paul Volcker was judged, because you talk to any central banker, you talk to any person in finance, they’ll tell you that Paul Volcker was basically the savior of infla­tion and got the economy functioning normally again, and all these things. And I think Jerome Powell is trying to have that moment right now. And I just don’t think that he realizes that once infla­tion shows up, it’s not going to just show up a little bit, it’s going to show up in a way that they just can’t even imagine. It’s going to be interesting.

Andy Edstrom:

Agreed.

Brady Swenson:

I am learning about money and about finance along with a lot of other bitcoiners, as we are being taught what money really is, coming from our Keyne­sian roots, which is all that most of us know about money. So I’m kind of piecing together how this all works. So the Fed will basically when we say print money, they will basically put assets on the books of banks and then banks have to lend it out for it to get into the real economy. Or you can just give money, UBI style, but point being you’ve got to get money out into the real economy, the M2 supply as it’s called, I guess, in order for you to eventu­ally see infla­tion, is that a correct understatement?

Andy Edstrom:

I don’t know if you want to take that or you want me to take a shot at it.

Preston Pysh:

This is the best way I can explain it is to give you a hand off to something that’s going to explain it way better than I can verbally. You have to go and watch Ray Dalio’s video. It’s titled How The Economic Machine Works. People that are listening, don’t know who the guy is. Anyone in finance will tell you that this guy he runs the biggest hedge fund in the world. During the 2008, 2009 crash Ray was up double digits in the green when the rest of the market was down 50, 60%. He under­stands how all this functions. Go watch this video, it’s a 30-minute video. I tell you, it’s probably the best lesson you will ever get on how the economic machine works.

Preston Pysh:

And it will do a fantastic job of explaining a lot of things. If I was going to summa­rize that, this video for you real quickly, you got to think about what that credit and real baseline dollars spend exactly the same. So if you pull $1 bill out of your pocket, that will spend the exact same way as if I went to a bar and I said “Hey, let’s start a tab. Give me the beer. And I promise to pay you at the end of the night.” I just effec­tively created money when I did that, even though there was no money exchange at that moment in time, there was money creation that occurred.

Preston Pysh:

So when you look at the credit that was in the system at the end of the 2008, 2009 time, a majority of that was a promise that I will pay you at the end of the night kind of thing. A majority, if you were going to take all the promises, and you’d add them with the monetary baseline like hard money/ currency that was in the system, and you’d slap those two things together, the promises were way more plentiful than the baseline money.

Preston Pysh:

And so what has effec­tively happened since 2008, is that all the central banks have done is they’ve come in with QE and they’ve swapped monetary baseline money for currency because you can get into a debate on what is quote unquote, money. But let’s just say they swap the currency for the promises. And they did this in a major way. But the problem is when you do that, you’re funneling all that money into the people who owned the promises.

Preston Pysh:

If you owned a bond, you’re now getting this first cut of this freshly printed money. And they’re basically saying, “I’ll buy that at pretty much any price.” They kept bidding it, bidding it, bidding it that’s why the yields went down, down, down. And now you’re at a point where the rates are getting poorer. They’ve swapped so many freshly printed money for these promises that they’ve pushed the yields down to nothing. And now you’re at this end game. And now that’s why every­one’s saying, “What we’re going to do MMT,” which is just basically saying, “Hey, we’re going to try this crazy science exper­i­ment and push rates below zero, and we’re going to go in the negative territory.”

Preston Pysh:

So that’s the best way I can explain it. But I promise you this Ray Dalio video that you can watch for 30 minutes is going to graph­i­cally show some of this to you. It’s going to explain it way better than I ever could. And Andy, I’m sure you have some key additions to some of those comments.

Andy Edstrom:

I love that you mentioned the Dalio video, How The Economic Machine Works because true story, we’re reaching over to my wayback machine here and turning the crank, 2016 I sent a memo to all my clients. And it was a couple of messages. The first was watch this video. And I included a link and I said, watch it, and then watch it again. And when you’re ready, talk with me about it. So hundred percent. I agree with you. We turned our clients onto that about four years ago now. And it is spot on. Second thing we told them was because interest rates are so low already. And they can’t go up as Preston pointed out, because if they did, you’d have a depression.

Andy Edstrom:

Because of that future invest­ment returns in general are going to be lower than they’d been in a very, very long time. Like in probably your entire lifetime dear client. The double digit annual returns in the stock market globally are a thing of the past. By the way, we’ve basically seen that in US stocks or specif­i­cally in the internet giants, that’s another topic of conver­sa­tion. But so far it’s played out lower returns. That’s one thing.

Andy Edstrom:

Spot on. I agree about the idea of creating credit. Dalio talks a lot about this, it is crucial. I actually remember specif­i­cally from that video, if you watch that video, one of the things you’ll see he’s got a graphic, he’s got base money in the US. And the number used in the video, I think, is about 3 trillion. And then it zooms out, there’s three stacks of dollar bills, and the video zooms out. And there’s 50 stacks of dollar bills in the background.

Andy Edstrom:

And I think the ratio at the time in the video is about 50 to three. And what he said was, there’s $3 trillion of base money. And on top of that, there’s $50 trillion of credit. And that was just in the US. So Preston’s spot on, the multiple of credit on top of base money is enormous. And that notion of creating credit, this is what Jim grant, James Grant, he’s been around Wall Street forever. He’s been a gadfly, he’s been a gold bug for longer than I’ve been alive. He talks about credit being, quote, money of the mind. It’s this idea that if you transact in money, that’s the endowed asset.

Andy Edstrom:

As soon as you create credit like Preston described, now you’ve fine shifted that trans­ac­tion or the settle­ment of it from the present in terms of money to the future, and created that debt that you promised to settle in the future. And so this is crucial to under­stand the money supply.

Andy Edstrom:

Now, when you’re talking about printing the money and pushing it into the banking system. So far the story of the last few years has been that creating the dollars and trying to push them into the system, it hasn’t really created a lot. It hasn’t created excess credit incre­men­tally. Now, I think it’ll be inter­esting to see what happens now that some of the rules have changed. Okay. It used to be that banks, when they bought treasuries had to reserve some capital against those assets, right? Guess what, they don’t have to anymore, at least as of a few months ago.

Andy Edstrom:

So that require­ment is gone. And the second thing that’s gone away is interest on excess reserves. It used to be that the banks could park money at the Fed, enter it 2%, no risk, free return. You put money at the Fed as a bank, you get 2% annual­ized, and there is liter­ally zero credit risk associ­ated with that. So why wouldn’t you do that? Well now the interest on excess reserves has been taken in almost at zero.

Andy Edstrom:

And so it will be inter­esting to see how the banks deal with that. Will they push out more loans to the corpo­rate sector? Will they push out more loans to the housing sector? I can tell you the housing sector is pretty hot right now. I refinance my mortgage. I got a lot of clients who’ve done the same. So the ground is moving and shifting with respect to the credit creation on top of the base of money, that’s how I see it these days.

Preston Pysh:

Hey Brady. I just want to just say a moment for Matt D’Souza who passed away, he was a close friend of mine, I’m pretty sure anybody that’s been in the space for any amount of time knows Matt and I was crushed seeing that because I didn’t know that he was strug­gling right now. And what a great guy. I feel bad that I couldn’t do more. The way I found out was just kind of crushing to be honest with you. I feel terrible.

Brady Swenson:

Yeah, man, I appre­ciate that. It’s terribly sad news today, the loss of Matt D’Souza, he was CEO of a couple of compa­nies in the space most recently of impor­tant bitcoin mining company. Very smart, rising star in the industry. So definitely will be missed. Thanks for taking a moment.

Andy Edstrom:

I want to add the two cents. The lens that I really appre­ci­ated that he brought to the industry was what you just mentioned Ray was inside into the mining space, which is notori­ously sort of the most opaque. We all sort of wave our hands… Many of us wave our hands about what’s going on in that part of the ecosystem. It’s so criti­cally impor­tant to the whole picture. And so I didn’t know him person­ally, but his intel­lec­tual contri­bu­tions will be missed.

Brady Swenson:

Yep, absolutely. So, getting back to this discus­sion about just how money works and what we can expect in the future with these changes. I want to talk a little bit about indica­tors that you guys are watching. Something that a bitcoiners listening could keep an eye on the kind of guide or give us a little insight into what’s going to happen in the nearest future.

Brady Swenson:

A couple that have caught my eye just from watching like charts on the St. Louis Fed website and stuff. One is the velocity of money which is falling off a cliff. It’s been going down quite a bit steadily since 2008. But it’s completely fallen off a cliff now, it’s down below 1.1 for Q2 this year, which should be expected by some of the things that’s going on, but this is alarm­ingly low. Going back to 1960. So far the data goes back in the St. Louis Fed, it’s by far like lower than it’s ever been.

Brady Swenson:

And David Lawrence on Twitter brought up another good one, the debt to GDP ratio. So he says that a study by Hershman Capital shows that out of 51 cases of govern­ment debt breaking above 130% of GDP since 1800, 50 have defaulted. The only excep­tion so far is Japan. First of all, comment on either of those indica­tors please and also what other indica­tors are you guys watching to keep a finger on the pulse of what’s happening.

Andy Edstrom:

So I guess I’ll start with Hershman. Coinci­den­tally, I went to grade school with him, with Brian Hershman. And in fact, I hadn’t seen him in, I don’t know, 25 years probably, but I ran into him at a CFA drinks event. I think it was two years ago, yeah I think it was two years ago, when the book was still a glimmer in my eye. And back then I hadn’t quite found true north on bitcoin. I was still kind of dabbling in a couple other things. And I had conver­sa­tion with him and it sort of surprises me that he’s relatively dismis­sive about bitcoin, at least as it relates to gold. I hope he’ll come around.

Andy Edstrom:

But I haven’t validated his research or done anything like that, but I have to agree that the history of fiat monies is it’s not great. Basically, they all fail eventu­ally. And the debt to GDP ratio, it matters. Second thing I’ll say is it’s true we’re basically at record levels of debt to GDP, excluding the unfunded entitle­ments. In other words, if US debt to GDP is approaching what is it, total, if you’ve got govern­ment plus corpo­rate plus house­hold, it’s 350% of GDP roughly.

Andy Edstrom:

And then the unfunded entitle­ments are about another thousand percent. So it’s pretty mind boggling. And when you add… Because of the demographics of the devel­oped world of the Western world. We’ve never faced this kind of entitle­ment funding problem, nothing in history I don’t think even comes close. So my guess is that he’s focused, again I haven’t delved into the research, a lot of people do focus on sort of outright debt to GDP, they talk about govern­ment debt to GDP, over 100%, then you talk about layering the corpo­rate and house­hold, you get to 300 plus percent, depending on the country. But that’s where we are in the US as well as much of the Western world. And then you look at the entitle­ments and make some headspin. So I don’t know, I’ll leave it off there.

Preston Pysh:

One of the metrics that I look at a lot is the total assets of major central banks. And I’m just kind of watching that the explo­sive trend that we’ve seen over the last 10 years is contin­uing, just confirm that every­thing that we talk about most of the time, which is all this printing is going to start manifesting itself in some way or some fashion. And we already are seeing it manifest itself and I can get into some of what those things are. So I look at that chart, I see that trend, and I look at all of the central banks combined, the Yardeni research puts out a report on a daily basis.

Preston Pysh:

I think it’s automated. But all they’re doing is they’re basically summing up all of those central bank reports, and then dropping them onto a chart. It’s a wonderful chart, you can just search Yardeni Global Central bank balance sheet, and it’s the first thing that will come up on Google. So I’m looking at that a lot just to confirm that there’s no change in that trend, in fact, it’s demon­strating that the trend is accel­er­ating. And then the other thing that I would tell you I pay even more atten­tion to is just really kind of bitcoin and the hashing, I pay very close atten­tion to the fact that you’re not seeing miners taking their processing power to a different blockchain or a different protocol.

Preston Pysh:

I think that’s very bullish for the idea that… I have the opinion that the minors set the floor of the price curve. And there’s people that disagree with that opinion. I think that whenever you’re seeing that price floor get set, I think what you’re seeing is a struc­tural limita­tion on the amount of bitcoin that there is to be sold at that time. And I think that the miners play an impor­tant part in that. And I think as long as you have bitcoin as a commodity, and you have the demand flow for the use of that protocol, I think that you’re going to continue to see the miner set the floor and I think that, that’s one of the reasons why I have such a bullish argument in the coming 12 months is because based on that reduc­tion in the flow, the whole stock to flow model I find valid, but I think it only continues to be valid as long as miners continue to bring their hashing power and all of their processing power to the bitcoin protocol.

Preston Pysh:

And so if I would see a change in that, that for me would be something to pay close atten­tion to. And we’re seeing the exact opposite of that, we’re seeing more and more hashing power. In fact, we just hit an all time high. So from my vantage point, all those funda­mental indica­tors that I’m using to continue to have faith in the protocol and the direc­tion that this is all going are all in the green. And the thing that I’m paying close atten­tion to as well is when you look at the stock, the flow chart. And I person­ally like the 463 day moving average I can get into that if you guys have an interest in talking a bit. I like using that as kind of the stick or the measuring stick for the speed at which this coming 12 months is probably going to play out from a price stand­point. When you look at that 463 moving average during the last having to the next, I call it price orbit, right?

Preston Pysh:

Typically, the price didn’t get below 20 to 25% below that 463 day moving average. And so what I found inter­esting is this price after the having went sideways for a quarter, which is what we pretty much all expected. And then once the price was almost exactly 20% below that 463 day moving average that was moving out, that’s when you saw the price just ramp up and take a run, we’re seeing a price correc­tion, 20% below that 463 right now is around 10700, 10800, somewhere around in there.

Preston Pysh:

So I would suspect that, that would probably be the price floor that we’d see for this little dip that we’re seeing right now. And I would expect the next run to jump up into the 14 or even maybe even the 15,000 ranges. Because it’s moving forward. So I’m just watching those metrics. I’m looking for that thesis to continue to play out. And so far it’s been right on cue. I mean, it really has not deviated too far from what I expected, from some of those metrics. And those are the things I’m looking at from a day-to-day basis just to kind of make sure that every­thing’s playing out as expected.

Andy Edstrom:

Yeah, that’s well said, I just want to augment that. Credit so far too. 100 trillion, the nim who put out the model, but credit to you Preston for focusing on it and supporting it. And so far, it’s playing out. There’s definitely been some skeptics. I’ve kind of gone back and forth to be honest with you, I recog­nize it as it’s been right so far. And it’s a decent number of data points, and we’ll see what happens but guess what, it seems to be playing out, it seems to be playing along the four-year having cycle. We’re not too far off the quote unquote, target, as you pointed out. And we’re above the likely floor.

Andy Edstrom:

So it seems to be happening. The other thing I’d highlight too, which has nothing to do with sort of the endoge­nous metrics of the bitcoin network itself is the narra­tive and gold. So it’s partly a story of the dollar. It’s a partly a story of, I guess the world recog­nizing that the Fed will print as much as it takes. And that’s the expec­ta­tions piece and then also the literal, the actual quantity of dollars that are getting shoveled out the door to buy govern­ment debt.

Andy Edstrom:

There’s hardcore goldbugs, and there’s bitcoin enthu­si­asts and then there’s tweeners. A lot of the bitcoin enthu­si­asts, I don’t know, they have a little bit of beef with the gold guys. I love seeing gold rally because every dollar per ounce that gold goes up is market share that the bitcoins going to take later. So when I speak to my clients these days, I keep it really simple, digital gold. And right now that is more than enough with respect to the narra­tive, with respect to the value propo­si­tion whether it’s insti­tu­tional money coming in, Paul Tudor Jones retail clients coming in, all that stuff. It’s a very strong narra­tive, let’s say, that augments or echoes or reflects the funda­men­tals that Preston talked about.

Preston Pysh:

Nothing drives psychology more than if people feel like their neigh­bor’s getting ahead in front of them. And that’s my concern for the gold piece is, I think by Christmas based on the stock, the flow model and the stuff we were talking about earlier, as far as the expec­ta­tions where we should be at certain points in time. I mean, you should be making a new all time high around that time frame, it’s Christmas of 2020. And so if that’s true, that means we’ve got 80, 90% upside from here which is insane because there’s not that many more months between now and Christmas.

Preston Pysh:

So to think that, that much of a jump could occur between now and then is going to be a dramatic, dramatic narra­tive that I think very few are ready for because there’s no way in the world gold with its market cap and I’m just going to use a generic figure, let’s just say it’s $10 trillion, which is 50 times higher than bitcoins market cap today. There’s no way you’re going to see anything remotely close to that on Gold’s movement. So it’s going to create a marketing buzz in finan­cial news.

Preston Pysh:

And then you combine that with the backdrop of all this printing, and I mean, I don’t care who you are in the market right now, you could know nothing about finance, you could be the world’s worst finan­cial student. And you know what’s on that person’s mind right now? They’re walking around and they’re saying, they just can’t keep printing money like this, can they?

Preston Pysh:

That’s what they’re telling themselves. And they don’t know anything. But they’re asking themselves that question. And I think that when you got people asking that kind of question, you have something that’s been around for more than a decade, you have something that has done over 200% on the year or whatever it is. It’s going to attract a lot of interest. It’s going to attract a lot of discus­sion. And it’s marketing that you just can’t even, if you had to put $1 figure on how much marketing that would cost on a global scale to put out that much discus­sion. Dude, you can’t even imagine what the price would be.

Andy Edstrom:

It’s going to be great. It’s going to be a very Merry Christmas. You heard it here, Preston Pysh called All Time High by Christmas time, I can promise you that if we forget an all time high in bitcoin by Christmas, it’s going to be a giant beef roast in the Edstrom house­hold. And if we don’t get all time high, it’s still going to be a giant beef roast for Christmas in the Edstrom house­hold. There you go.

Preston Pysh:

There’s not any magic to what I’m saying. It’s the math, it’s the stock to flow model that is showing some of these timelines associ­ated with the price. And when you look at the 463 day moving average on the stock to flow and then you look 20% below that you’re pretty much at 20,000, at December 25^th. So that’s kind of why I’m saying that timeframe. And I think that it might even be conservative.

Andy Edstrom:

Hope, you’re right.

Preston Pysh:

Based on the stock to flow model. We’ll see. This is like nothing I’ve ever seen in finance, where somebody can say something like that, which just sounds totally ludicrous for somebody that’s not doubt into why that might be playing out. But at the end of the day, it comes down to math, and the math of the reduced flow of issuance of coins, combined with the people that have been in this space for this long, and are not selling their coins for nothing. I’ve been in this space since 2015.

Preston Pysh:

And there are tons of people out there just like me, and let me tell you, after they’ve been riding this Bronco for as long as we’ve been riding it and seen what we’ve seen, like these volatility moves that we’re seeing right now are a total joke. A total joke. This is nothing. I mean, if you were riding this Bronco in December of 2017, or earlier and let’s not kid ourselves the people with big positions they were. So they’re not selling their supply, I hate tell you. I know I’m not. And so that reduc­tion in the amount of flow that’s being issued through the rewards is going to have a dramatic impact in the coming 12 months in my humble opinion.

Andy Edstrom:

Agreed.

Brady Swenson:

Damn. Stack those sets everyone. This is another reason why I love Swan, why I love you automatic recur­ring buys and just getting as many hodlers as possible, buying on a regular basis, smash buy when you want to. When you’re listening to Preston Pysh talk. But that regular stack is impor­tant too, think of it like a floor. It’s like the huddle floor is what I like to call it and every additional stacker just kind of raises that up a little bit more.

Brady Swenson:

So I think that’s an impor­tant phenom­enon that is going to be more impactful as the auto stack gets more and more popular.

Preston Pysh:

Brady can I just double down really fast? I don’t even know if you were going to bring this up, Fidelity, the big announce­ment that hit the news. So like $8.3 trillion in their customer funds. Let’s just say they get 0.01% of that. They’re now saying they’re going to do a bitcoin fund only I think that’s how it was printed in the article. I mean, this is nuts. We’re not talking about something that some nerds go into some little affair in exchanging tokens on their smart­phones. We’re talking about the biggest banks on the planet, dedicating all their resources in a very trying time to this thing called bitcoin. I mean if people are ignoring this, they’re not paying attention.

Preston Pysh:

And if you think you can put this genie back in the bottle at this point is as you got compa­nies dropping $250 million of their current assets on their balance sheet straight into bitcoin instead of anything else. I mean, you’re just totally kidding yourself.

Andy Edstrom:

I want to augment that too. Preston’s right to focus on Fidelity. One of the magical things about Fidelity is Fidelity has huge market share in the 401(k) business, in the retire­ment plan business. And the thing about the retire­ment plan business is a lot of that is self directed, which means it’s basically people working in compa­nies, ordinary people, they’re stocking away some savings, some retire­ment money, they’re stalking, today they’re stalking Stongs. But it’s one thing for us to talk about the insti­tu­tional demand is coming, when is the pension money going to buy bitcoin? Well, that could take a while, the hedge funds. The family office is already in, the hedge funds are in to some degree, like the macro guys. I’m doing my best to bring in wealth managers, but it’s still really a retail driven phenomenon.

Andy Edstrom:

And as soon as a couple or a few trillion dollars of custodied 401(k) assets have a way to buy bitcoin. And it may not be this partic­ular product that Fidelity just made the filing for, but it’ll be something. Fidelity they haven’t put in years and years of work on this thing, as Preston pointed out to not basically win, to not win market share, they know that there is, pick a number. Tens of billions, hundreds of billions of demand, nascent embedded pent up in that 401(k) channel, and it’s just waiting for the product. It’s just waiting for that propri­etary Fidelity product to be slotted into that shoot for millions of Ameri­cans, 10s of millions of Ameri­cans poten­tially, to buy, to save for retirement.

Preston Pysh:

I think the thing that’s kind of exciting is the entrench­ment that the compa­nies are going to bring to it. So like the MicroS­trategy thing, I think this is just the tip of the iceberg and the conver­sa­tion you were talking about earlier, Andy, where Jeff Booth and the others, we were talking and Jeff was saying, “This is a board­room discus­sion at this point.” And Jeff’s a guy who sits on a lot of boards, and I’ll tell you, he knows a lot of people way more than I know, especially out in Silicon Valley, which, in my opinion are going to be the compa­nies that figure this out first. Apple, what is it $200 billion of quote unquote, fairly liquid assets on their balance sheet.

Preston Pysh:

I mean, you don’t need much of anything going into bitcoin? I mean, even if they did 1% or even 0.1%. I think the narra­tive that’s associ­ated with Apple, buying bitcoin and sticking it on their balance sheet is going to send a shot around the world to every other tech company in Silicon Valley that has any type of free cash flows. And let me tell you, the Googles, the Amazons, they’re not going to just sit back and say, “Let me think about this.”

Preston Pysh:

We’ve got the smartest software engineers on the planet that work for these compa­nies. And they’re now allowing this to flow onto the balance sheet. They’re saying that there’s something here, come on, man, get out of here. Them starting to put that on their balance sheet is just going to start something that I don’t think anybody is prepared for or that can fully under­stand the depth that it’s going to bring.

Preston Pysh:

And from a legal frame­work you talk about deep seated entrench­ment into the finan­cial rails at that point, how in the world are you possibly going to start telling compa­nies or anybody that there’s restric­tions on owning this and this and that, because then it’s going to turn into, give it one quarter. And you look at MicroS­trat­e­gy’s market cap after one quarter of this. And let me tell you, it’s going to be a major discus­sion point as to how much exposure. The question has to be, how much exposure should we allocate into this to remain compet­i­tive to certain compa­nies? Because they’re going to have the ability to go do acqui­si­tions and all sorts of things that they just didn’t have that flexi­bility to do before.

Andy Edstrom:

Absolutely. So the MicroS­trategy news came out, and again, your amazing episode that just came out, as you say, Jeff Booth said the boards are talking about this. In my prior life before I was a wealth manager, and I worked at a hedge fund and I worked in private equity. I was involved with a bunch of boards actually, went to a lot of board meetings. And I was thinking about this a little more. And what I realized was MicroS­trategy took it all the way, they allocated, you probably remember the number Preston, something like-

Preston Pysh:

250 million.

Andy Edstrom:

There you go. It’s like a third of their cash something.

Brady Swenson:

21,000,749 bitcoins. 21,000 sorry.

Andy Edstrom:

That’s a big move. That’s a board level decision. But the inter­esting thing to think about is what’s not a board level decision. You got the board. You got the CFO, CFO either reports to the board directly or to the CEO. And then usually sitting under the CFO is the treasurer. Well, there are sort of materi­ality limits. In other words, you probably got to go to the board if you’re going to put a third of your Treasury bitcoin, but what if you just want to put one or two percent of your Treasury in bitcoin. That doesn’t have to go to the board. That’s probably a CFO level decision or even a treasurer level decision.

Andy Edstrom:

The Treasurer may have delega­tion authority from the CFO, his delega­tion authority from the board, you want to put one to two percent of our Treasury in some other form of money then dollars along with the euros and the Yen, and whatever else we’re holding, sure, go for it.

Andy Edstrom:

Now, those things won’t get announced neces­sarily because they’re not material at the share­holder level. But you may see, basically, unannounced buying doesn’t even require board autho­riza­tion. So that’s incre­mental demand, potentially.

Preston Pysh:

This is the part that so few, in my personal opinion get with this MicroS­trategy deal. So it was a publicly traded company and that’s why I think it was so weird to see what we saw play out that they stuck so much of this in the bitcoin. Well, when you start digging into the voting rights of the equity, Michael Saylor had a complete control of the company, he can make whatever decision he wants, and all the other share­holders can do nothing about it because he has majority voting rights.

Preston Pysh:

So that’s why you saw him take such a drastic position. All these other publicly traded compa­nies are going to be tied down into these audit boards, they’re going to be way more conser­v­a­tive, they’re just not going to be able to do that most likely because when you’re dealing with publicly traded compa­nies, having a share­holder like Michael Saylor, where he has a control­ling share of the entire business is very rare.

Preston Pysh:

Now, when you get into the private equity market, guess what? It’s not like that. And guess what? They don’t have to report what’s on their flipping finan­cials to the public. I have my own business. Why do you think I’ve been talking about this for the last six months. I mean, come on, because I’m doing it. So here’s the other thing that people don’t realize. So let’s just say that this stock, the flow models right, let’s just run down this path. And Michael Saylor dropped 250 million in the bitcoin. That means that his company could 10X… The balance sheet for that bitcoin that he’s holding 10X within 12 months, based on the stock to flow model, 10X.

Preston Pysh:

Now for a company like his that’s banging out $30 million on an annual basis, bottom line, net income they’re making $30 million a year. How long does it take MicroS­trategy to make that much money that he just made through his bitcoin invest­ment? How many years does he have to sweep that net income into his retained earnings onto his balance sheet, how many years? You’re not going to believe the number because I’ve done the math?

Andy Edstrom:

I think I can do the mental math. Yeah, go ahead.

Preston Pysh:

83 years, is how long it would take that company to collect that much in retained earnings, they’d have to do 83 years of business to make that much money. Okay, so now when you think about what that allows his company from a strategy stand­point to do, dude, he’s in a completely different category from a business stand­point, he can go out and buy like a majority of his competi­tors in the space. He can go into whole different avenues, he can start going upstream downstream into their product mix.

Preston Pysh:

And this is a company that has very stagnant net income, they have for the last 10 years, their net income has not really changed at all. So to capture 83 years worth of retained earnings in a year is for a company of this size, this a billion dollar company is mind blowing. I mean you can’t even fathom something like that. The war chest that, that gives you is unimaginable.

Preston Pysh:

Now, for somebody listening to this that’s skeptical. They’re obviously saying, all that stock to flow stuff has to come true. You’re 100% right. But in my opinion that’s a way higher proba­bility than people realize and obviously Michael Saylor thinks the same.

Preston Pysh:

(silence)

Brady Swenson:

We’ve also got, there’s a bunch of buzz. So we’ve got Fidelity and insti­tu­tional like on ramps coming in, contin­uing to come in. We’ve got reserve assets on corpo­rate balance sheets. Obviously Microsoft’s biggest news but a couple of small businesses that come out and say that they’re doing the same thing if we do get continued price appre­ci­a­tion over the next 6, 7, 8 months, like that’s just going to continue, self reinforcing loop price goes up more than businesses start to invest or diverse their cash supply into bitcoin.

Brady Swenson:

We had George Gammon on a couple of episodes ago, and he’s down in St-Barth’s right now, which is an island full of hedge fund managers basically, he’s like, when we go to parties we talk about the markets and whatever. People really want to talk is about bitcoin, like the night kind of settles into talking about bitcoin. And here’s a tweet from this guy JP, danger is freedom on Twitter.

Brady Swenson:

There was a thread about high net worth individ­uals into bitcoin. This guy says yes, I can confirm I’m in Silicon Valley LA, ultra high net worth space and we just got the green light to start selling clients bitcoin, we have around 50 million in total commit­ments thus far, ranging from 100,000 to 5 million in size. Some of the names buying bitcoin would definitely make the news in public. So there’s all these rumors around high net worth individ­uals as well piling in. What do you guys hear? I mean, you guys both have your ear to the ground in different ways in the finance world. Is this something that you guys have caught wind up as well?

Andy Edstrom:

Yeah, I mean, it’s definitely around and there’s definitely conver­sa­tions being had. In one respect, I’m tainted, right? Because I’m like one of these rare guys in the wealth manage­ment business who’s been pounding the table when I show my book, and so people have already heard it for me if they’re talking to me. So that may mute the signal. But I will say that for me again, I returned to that hard money thesis. I’ll say one thing that’s new for me and my business. Well, somewhat new, which was we started buying gold in 2016.

Andy Edstrom:

And then obviously, we discov­ered bitcoin and started buying bitcoin, but the asset alloca­tion, we have asset classes. We have US stocks and foreign devel­oped stocks and emerging market stocks and various classes of bonds and fixed income. And for the first time, in the history of our firm, which is 32 years old, we have an alloca­tion to what I call hard money assets. And hard money assets are the monetary asset that’s hard to make more of, it’s hard to produce, it’s hard to print.

Andy Edstrom:

Now for us, well sorry for the world that’s histor­i­cally been gold. But as we see bitcoin’s just going to eat away market share from gold. It’s going to be inexorable. And it’ll be cyclical and there’ll be accel­er­ating rates and I’m on Preston’s team with respect to, this is probably going to be a monster… The next 12 months, 18 months for bitcoin I’ll be surprised if it’s not a monster year, year and a half for bitcoin.

Andy Edstrom:

But yeah the hard money asset thesis is what I found resonates the most. I mean, this is going to sound crazy to a lot of listeners on this call. But there’s plenty of investors, there’s plenty of wealth managers who don’t even own gold. Now, listeners will say Gold’s obsolete, okay, fine.

Andy Edstrom:

I happen to believe that gold’s going to do fine probably in the next five years. But what I’m trying to tell you is there’s many investors, Preston knows this well who under­stand buying cash flowing assets like Warren Buffett, they don’t under­stand buying non-cash flowing assets, like that’s anathema to them. There are some people who are so far behind that they couldn’t even get their heads around sort of the Austrian School concept of monetary asset that will survive the coming infla­tion and they’re just getting over that hump.

Andy Edstrom:

And now they’re trying to get over the bitcoin hump. It’s coming from all angles, you’ve got guys who just got into gold who are now sniffing around bitcoin, you’ve got people who really have actually done their homework now on bitcoin and are allocating. It’s usually fuzzy numbers. I mean, you don’t get hard number disclo­sures gener­ally of what people are doing, but yeah, I’m seeing it all around me. And I’m hearing it that people are keying into hard money assets, and they’ve started to figure out that bitcoin is the hardest and the best of the hard money assets.

Preston Pysh:

Brady, like you, I’ve heard some pretty big names out in the valley. And I’m not at a position to be able to name who these people are in a public forum. But the rumors going around are people that everyone knows that are taking positions. And from what I under­stand they’re taking positions privately. I have not heard anything, obviously on the corpo­rate side. But I mean, come on, if you’re if you’re running a big multi-billion dollar company, and you’re taking private positions, you know darn well they’re talking to whoever they are at their company to say, “All right, well, what do we got to do to put this on the books?”

Preston Pysh:

We’ll see, it’s all rumors at this point, but I think in the coming quarter, I think in the coming three months, we’re going to have a much better idea as to whether these rumors are true.

Andy Edstrom:

We’ll see it in the price.

Preston Pysh:

Yeah.

Brady Swenson:

Let’s talk about that because a lot of these people are getting in through, not with the base asset, like through Futures or something like that. I know Luke Grohmann talks about this and I think maybe even did on the episode you did last week, or wait maybe was earlier this week. But that episode was amazing, every­body’s got to go and listen to it. The Investors Podcast with Lynn and Luke and Jeff was incred­ible So anyway, Luke, thinks that these paper instru­ments hamper the true price of gold. Should we have the same concerns that about bitcoin basically that this can happen that it’s too-

Preston Pysh:

I love this question. I really want to bite on this one. Here’s the differ­ence. So you can play the game. For people that aren’t familiar with deriv­a­tives, if you’re a govern­ment entity or whoever and you got deep pockets, this is how you can under­stand how you can manip­u­late a market through deriv­a­tives. Every­one’s played a game of poker. You’ve played a game of poker. And when you play a game of poker and somebody says, “Hey, unlim­ited buy-ins, unlim­ited buy-ins, if you run out of money you can buy back in and you can keep on playing.” That’s what the deriv­a­tives market can do to the price of something.

Preston Pysh:

So if you have really deep pockets, if you’re playing poker with a billion­aire, and you have an unlim­ited buy-in, are you going to win? That person could be the world’s worst poker player, they’re going to beat you, because they can keep buying in, they can keep adjusting and doing it. That’s what the deriv­a­tives market can do to something. Now, where I think that bitcoin is very different from normal markets, is that it can be settled in bitcoin digitally. What other asset or a commodity on the planet can you do this where you can settle, you can deliver the item at hand, digitally. That’s where I don’t think this plays out anymore it’s because you do have bitcoin settled derivatives.

Preston Pysh:

I think it blows the lid off of that situa­tion now, because if I say, “Hey, give me my bitcoin I want it deliv­ered right now and here’s the address to deliver it. It’s not like I have to have some port open in New York City in order to receive so many bushels of whatever. That is gone. So that changes the whole dynamic of and I said that to Luke one time, this was not on that conver­sa­tion. He brought his narra­tive to that conver­sa­tion and I didn’t bring it up. But I said that to Luke one time and he kind of looked at me, he goes, “Odd to think about that.” But that’s my comeback to anybody that’s saying, “Hey, you got physi­cally settled bitcoin deriv­a­tives, which I think changes the game man in a major way.

Andy Edstrom:

I think that’s a very inter­esting perspec­tive. I shouldn’t say gone are the days but yeah, having to take delivery of those barrels of oil or having to force someone to deliver physical, there’s not a lot of barrier between deliv­ering quote unquote, deliv­ering physical. It’s like, login, sign the trans­ac­tion, send me the bitcoins. It’s pretty simple. I think the second thing I’ll say is hear bitcoins volatility, price volatility is our friend, so to speak, and I’ll explain why.

Andy Edstrom:

So when the Futures first came out, and I don’t remember if it was Cboe or CME, and it’s been, I don’t know, Preston you probably remember, it’s been 18 months now or two. Maybe it was late 2017 that the first Futures contracts came out on bitcoin.

Preston Pysh:

It was like November I want to say of 2017. And you saw a lot of people attribute the crash to the deriv­a­tives and I’m thinking that is not what… You just ran out of more partic­i­pants on the network. In my opinion what happened there.

Andy Edstrom:

That’s right. So it was late 2017 and then it was the ICE, Inter­con­ti­nental Exchange came out with their Futures products or they announced it in the summer of 18. But it took them I don’t know 16 months to roll it out. Took a while. I don’t think it’s gone too far. So what happened was inter­ac­tive brokers. $22 billion publicly traded big brokerage firm, one of the majors, founded and run by this guy, Thomas I think Peterffy is how you pronounce the last name. I’ll never forget an inter­view he gave. Someone was asking him, “Hey, are you going to support Bitcoin Futures?” And he said yeah, and they published a letter on it too.

Andy Edstrom:

But we are going to require 100% cash collat­er­al­iza­tion, why? Because bitcoin is, as Preston might say flipping volatile. The price can move a lot. So what does that mean? Well, if you are on the long side, you’ve got unlim­ited upside and on the downside you can lose all your money so to speak, but you can’t lose more unless you’re using leverage. But if you’re on the short side of the contract, man, you can get our EKT wrecked.

Andy Edstrom:

And so what that means is, partic­i­pants in the market, brokers, custo­dians, counter­par­ties they’re not inclined to allow high leverage on these things. Sure certain unnamed exchanges possibly domiciled in the Seychelles may allow leverage trading on bitcoin but when you talk about the larger entities and the insti­tu­tions or let’s say the powers that might be assumed to quote unquote, manip­u­late the market downward using deriv­a­tives and specif­i­cally Futures. Those guys are scared, they’re scared of the vol in this thing, and so those counter­par­ties are less likely to allow signif­i­cant leverage.

Andy Edstrom:

And moreover, anybody who’s inter­ested in manip­u­lating the market knows that bitcoin can go up two, three X in a very short period of time. And if you’re on the short side of that trade, you’re toast. So the very nature of bitcoin, as it relates to its volatility, as well as what Preston pointed out the poten­tially more or less instant settle­ment makes bitcoin a different animal as it relates to powers, shadowy power’s behind the scene trying to manip­u­late price downward in my opinion.

Preston Pysh:

So here’s what I love about deriv­a­tives and bitcoin is like Andy just described. I own some call options, not a big position relative to how I, just owning outright bitcoin for many reasons, mostly the custody risks and things like that. But I own some call options, long term call options, maturing in December of 2021.

Preston Pysh:

So, for the person who wrote that contract that I purchased, they had to cough up a full bitcoin to write the contract for one bitcoin having that call for however many calls you buy. So now think about what that does. So let’s say Brady wrote the contract, he has to take a bitcoin, he has to put it into their custody, lock it up behind key until that contract matures in December of 21.

Preston Pysh:

So when we’re thinking about supply, what does that do to the supply of bitcoins that can now be traded on exchanges? It’s not there anymore. It’s sitting in some locker until December of 21. You got people buying the living hell out of these things. And they’re doing it on the short end too. And I love the deriv­a­tives market, it’s just locking up coins because you’re talking about the volatility. Well, what do people want? They want a whole coin in there if they’re buying a contract for a whole coin and so it’s exciting.

Andy Edstrom:

It is and that’s right, that’s how the prime brokerage, the way the prime brokerage business works at insti­tu­tional scale is on normal quote unquote normal assets, regular way assets. What Preston described is either writing a covered call. Some counter­party owns a bitcoin and says, “I don’t think it’s going to make it to 100k by the end of next year. So I’m happy to write Preston this contract, he’ll pay me the premium. And on the off chance that he’s right, he takes my bitcoin and makes profit, but I don’t think he’s likely to be right. Because of the huge poten­tial volatility in bitcoin anyone who’s involved in this trade is going to do what Preston described, they’re not going to write an uncov­ered contract.

Andy Edstrom:

And moreover whoev­er’s the custo­dian or prime broker sitting in between isn’t likely to let them do that. This isn’t true in equities or the Treasury market or other major markets. You have hedge funds especially, some individ­uals as well, it’s harder to get as much leeway let’s say from your broker, if you’re an individual, you got to have a lot of assets. But if a hedge fund wants to basically right an uncov­ered auction and some asset, the SMP, what have you, the prime broker will look at the risk assess­ment and they’ll look at the expected volatility of the under­lying asset. And they’ll say, “If you post X amount of collat­eral, chances are you’re going to be fine even if the under­lying goes up by 20% or goes up in a signif­i­cant way in the meantime.” But man you can’t… I agree with Preston, I doubt that there’s much uncov­ered call writing in the bitcoin space or will be anytime soon.

Preston Pysh:

Yeah, because there’s no way I would buy that contract unless it was. Because there’s too much oppor­tu­nity cost of just owning the under­lying because now you got to… Because the other consid­er­a­tion to these that I’m obviously doing is the tax piece to it. So if I’m not holding the call for more than a year, well, then I’m getting into a short term capital gains tax, and then I’ve got to be exactly right based on the strike and like all those dynamics and this is why I tell, if you don’t under­stand this stuff like you should not be doing any of that stuff, you should be setting up an account at Swan and doing your monthly buys.

Preston Pysh:

This is more graduate level stuff that when you’re talking about the upside that we’re talking about here, you’re just getting greedy. And that’s why I would tell you, the position size that I’m talking about is very small compared to the position that I have just in the under­lying bitcoins that you take your own private keys for it. But the reason I guess we’re talking about is because we’re talking about the supply of the coins, we’re talking about how the rest of the finance industry is looking at this and how are they going out and providing interest rates at five and six percent.

Preston Pysh:

Well, they’re doing it by buying bitcoin, stepping into the market, writing that contract that I’m then buying and then they’re buying a put position at the same strike to protect their interest or maybe capturing 10%, or whatever it is. They’re giving you 5% and they’re keeping 5% for themselves. That’s what’s playing out. And people just don’t under­stand all those dynamics, but your financiers. That’s how they’re playing it. And that’s what they’re doing and their risk exposure, even though they’re giving you 5% is liter­ally nothing because they wrote the contract and they bought the put. So they’re there covering themselves. There’s just that spread dynamic that’s playing out that they can capture that and offer that yield.

Andy Edstrom:

And just to augment, well, first of all Preston I’m sort of jealous of you for putting on the long term call. That’s the trade that… There was an oppor­tu­nity a few months ago, I mean, obviously when bitcoin really tanked, there was oppor­tu­nity, but there’s oppor­tu­nity in the summer when those calls were quite cheap and nice sort of, I kicked myself for not making that trade myself, but your advice is good, which is for most listeners, you can make plenty money stacking your SATs plus buying the dips. There’s no real need to get greedy if it plays out as we think it will.

Brady Swenson:

So I’m going to work in a question here from YouTube, this is from jack and it’s a good one, we’ve spent this episode being pretty damn bullish about bitcoin and we’re out on Twitter all the time talking about all this big news and it feels like all the stars are aligning the way the bitcoiners had antic­i­pated that they would but Jacque­line Snow, what is your biggest concern when it comes to holding Bitcoin long term? What’s the downside? Preston you want to start with that one?

Preston Pysh:

I’m sorry, I was responding to somebody who-

Brady Swenson:

No worries.

Preston Pysh:

… had a contact.

Andy Edstrom:

Are there comments I should be responding to.

Brady Swenson:

Are you in the YouTube Preston?

Preston Pysh:

Yeah.

Brady Swenson:

The question on the table then is what’s your biggest concern when it comes to holding bitcoin long term? I’ll let Andy start.

Andy Edstrom:

Yeah, biggest concern about holding bitcoin long term? The longer term we talk about, probably the less concerned I am. We can go through the whole laundry list of risks and how could it die. Someone discovers a bug in the code or someone somehow manages to bootstrap and even better, harder money, internet-money based system.

Andy Edstrom:

These are all possi­bil­i­ties, the one thing I looked… Why should you ask Brady, I think earlier, what are the sort of the current indica­tors we’re looking or ad or things we’re monitoring. Obviously, I’m monitoring govern­ment recti­tude. What would be bad news for bitcoin? They stopped printing too many Schrute Bucks.

Preston Pysh:

I like that.

Andy Edstrom:

If they actually stopped running deficits and stopped monetizing deficits and pull the supply of money in such that the dollar becomes harder than gold, the infla­tion and the supply becomes lower than that of gold or even goes negative then I’m worried about bitcoin but absence, something like that. As you like to say it, others like to say Brady, tick tock, next block, if the thing keeps cranking on blocks. And as Preston points out if the hash rate basically keeps going up over time, and they keep printing the money and the debt is still high and rising. It’s hard to see what the major risks are and in the long term other than the esoteric, we don’t… There’s quantum computing and we don’t get to a quantum hard system. I don’t want to spend 20 minutes talking about all those possi­bil­i­ties. So I’ll leave it there.

Preston Pysh:

I think that’s the big biggest risk Brady is if elected officials start becoming very fiscally respon­sible, it’s not going to be good for bitcoin. So if you’re concerned about that, then bitcoin probably isn’t the place to be. I will answer it a little bit more seriously. It goes back to what I was saying earlier, which is if I see that the hashing rate start to shift, or it looks like miners are not profitable, and you start to see them shift, that’s whenever I have a lot of concern for the protocol and we’re not near anything like that.

Preston Pysh:

And I want to read this quote, this is Satoshi Nakamoto quote from 2010. The quote says, the price of any commodity tends to gravi­tate towards the produc­tion cost. If the price is below cost, then produc­tion slows. If the price is above cost, profit can be made by gener­ating and selling more. At the same time, the increased produc­tion would increase the diffi­culty pushing the cost of gener­ating towards the price. And that quote for me sums up why stock to flow is valid.

Preston Pysh:

Because what you have is you have this quantum leap that happens every four years, it reduces that flow. The miners are mining that, they’re taking their Fiat dollars that they’re expanding, they’re getting reward, they’re receiving payment onto their balance sheet of bitcoins, which they then have to sell in order to pay those Fiat bills. So all they’re doing is they’re effec­tively executing killing Fiat dollars through this mecha­nism of proof of work. And the price is getting polar­ized to that produc­tion cost.

Preston Pysh:

And I’m not saying that when the stock to flow for this next orbit is 100K but that’s the produc­tion cost, the produc­tion costs will be slightly under­neath that. But for simplicity, you can just think of those levels that the stock to flow is pumping out as being those produc­tion costs of the miners, going to what that quote is, and so you can see when you look at that quote and the vision that he had for how this was all going to play out, and how this is effec­tively a time fuse for entrench­ment into the existing finan­cial rails.

Preston Pysh:

And I think that’s why you see the four year cycles, that’s why you see the thing playing out the way it is, is because he knew the only way something like this, I say he, she whoever group of people, whatever it is, they knew they needed entrench­ment. They knew that it had to happen over a decade or whatever that would be. I fully believe that based on some of this stuff. I think this person was a total savant, whoever they were in under­standing scarcity and under­standing commodity prices and under­standing a lot of these things that are totally built into this incen­tive structure.

Preston Pysh:

Now, what would cause that to unravel itself? What would cause that to unravel itself is if there was not demand for the service in the product, that or the commodity that’s being pumped out? So what would cause an organi­za­tion to move to something else? Well, if there was something that provided better decen­tral­iza­tion, you might see the move to that coin, if something provided better security for the trans­ac­tion, for the storage that you’re putting into this, so like, if I’m storing one bitcoin, how much security is associ­ated with that?

Preston Pysh:

Okay, so if another protocol comes along and provides better security and storage capacity for the value I’m storing. Well that protocol could take off. So when I look at those metrics of why demand would go somewhere else that would prove that quote wrong, because then this is getting into the labor theory of value is that quote, and people say, well the labor theory of value is invalid. That’s Adam Smith thing.

Preston Pysh:

I would counter that, I would say that it is valid as long as there’s demand for the work that’s being performed. And as long as you’re dealing with something that is commodity like, which Bitcoin is. As long as those things are valid, I think that, that quote remains true. And I think that’s what we’re seeing. And I think that’s why we’re seeing the stock to flow valua­tion continue to play out exactly like it was published.

Andy Edstrom:

I think that’s a very insightful view. One other thing just occurred to me and this gets back to Preston, who’s rightly laser focused on the key perfor­mance indica­tors of the network itself. One thing that would concern me is if you saw node count fall precip­i­tously or contin­u­ously over time, and I guess I’d have to say visible node count plus… We make some assump­tions, or we have some indica­tion that, Tor nodes, or hidden nodes for whatever reason, also in decline. How or why that would occur I don’t know. Every­thing about computer science and things like Moore’s law tells us that as compute gets better, faster, cheaper, they’ll be easier and easier to run a node.

Andy Edstrom:

Eventu­ally, we’ll all have them on these things. And so that eventu­ality is sort of hard to fathom, it seems extremely unlikely. But if I had to imagine a scenario or key perfor­mance indicator that would sort of give me concern and might actually feed back into demand as Preston’s talking about, in other words, people start to look at the thing and they say, “It’s a couple trillion or a few trillion dollars of value on the network now,” and then people see the node count reverse, and then they say, “I’m not as sure about the decen­tral­iza­tion now, or not that I’m not sure about it, but I’m not like, maybe over $3 trillion sure, but I’m not $50 trillion sure but that seems highly unlikely to me.

Preston Pysh:

And I agree, but those are the risks, we got repre­sen­ta­tives become fiscally respon­sible. We have some of the things we just talked about. Those are the risks. People want to hear Preston how could you be wrong? That’s how I think I could be wrong. Now you tell me what else I’m missing. Because I can’t pin down anything else.

Brady Swenson:

This is not allowed downside. We’ve been thinking about this for years and years and debating this. Obviously all the fun comes at you, from the skeptics, and we’ve spent a long time looking at it from every direc­tion and just bitcoiners in general, especially devel­opers and cypher­punks, they think in adver­sary ways. They put themselves in your adver­sary shoes and cut off the attack wherever possible. There’s a famous thing about even Dan Kaminsky is a famous hacker. And he was asked to audit the bitcoin protocol, the code. And he said that every time that he thought of a way to attack the protocol, he would go to that spot in the code and there would liter­ally be comments like, remove this poten­tial attack vector. Stuff like that.

Brady Swenson:

So, Satoshi is all over it and it’s only improved since then, leaps and bounds. Well we’re at time, that was a lot of fun. I really appre­ciate you guys coming in and hanging out and talking some bitcoin. It’s super exciting times. And I hope you guys come back relatively regularly, and we’ll just kind of keep checking in on all of our predic­tions and hopes and dreams for this new money, this wild ride that we call bitcoin.

Preston Pysh:

Brady I appre­ciate the oppor­tu­nity, Andy, such a pleasure. I’ve been following your Twitter for quite a while now so it’s nice to chat with you and really appre­ciate the engage­ment with the audience and the questions in there. This is always so much fun for me to learn, to see the questions, the impor­tant questions that I think, we got to continue to troubleshoot, how could we be wrong. What is it that we’re missing? What aspects can we add to the idea forum of all the technical people that are truly the ones making all of this happen from a program­ming stand­point and it’s really exciting to be a part of this community?

Andy Edstrom:

Well, Preston, and Brady, I really appre­ciate you guys spending some time with me here. Preston, yours is basically the goto Twitter account plus podcast for me on general investing. Brady always a pleasure, man. You’re doing great work, how many pod’s are you running now, by the way, at least two.

Brady Swenson:

At least two and I think you made another one for me recently.

Andy Edstrom:

We can talk about that one offline. So I really appre­ciate you guys coming on and I’m still learning and I learned something today and I hope our listeners, the viewers got something useful out of it.

Brady Swenson:

Listen to the Investors Podcast, buy Andy’s book, Why Buy Bitcoin, go to swanbitcoin.com and start stacking daily buys again, so on bitcoin.com/dailybuys, get it on that group. We’re going to be rolling that out soon and would love to have your input as one of the first adopters of daily buys. And one more show, this cool little pin, thanks to btcpins.com for making these. They’ve got several others. They just kind of launched their business but really cool designers. There’s a couple other designs out there too really cool, open dime pin that looks pretty rad just like a real thing. So check those out btcpins.com. All right thanks everyone. Appre­ciate it. See you guys next week.

Past Episodes

Episode 8 –Andy Edstrom and Ansel Linder

Episode 9 –Rockstar Devel­oper and Jeremy Rubin

Episode 10 – Bitcoin TINA and CK Snarks

Episode 11– Gigi and Knut Svanholm

Episode 12 –Adam Back and Preston Pysh

Episode 13 –Alex Gladstein and Matt Odell

Episode 14 –Robert Breedlove and Tuur Demeester

Episode 15 –Isaiah Jackson and Max Keiser

Episode 16 –Gigi and Udi Wertheimer

Episode 17 –Aleks Svetski and Jimmy Song

Episode 18 –Stephan Livera and Marty Bent

Episode 19 –Mark Moss and Ben Prentice

Episode 20 –Samson Mow and Parker Lewis

Episode 21–Lyn Alden and Jeff Booth

Episode 22– Robert Breedlove and Cory Klippsten

Episode 23 — Saifedean Ammous and George Gammon

Episode 24 –Jameson Lopp and Eric Martindale

Links

Swan Bitcoin

• Swan Bitcoin — the best place to buy and invest in Bitcoin
• Swan Bitcoin on Twitter
• Swan Signal on YouTube
• Swan Signal on Facebook
• Swan Signal on Twitch
• Swan Signal Podcast
• Swan Signal Telegram Chat Room

Preston Pysh

The Investor’s Podcast

Preston Pysh on Twitter

Preston Pysh on Linkedin

Andy Edstrom

Andy’s Personal Website

Andy’s Twitter

Andy’s Linkedin

Why Buy Bitcoin –Andy’s Book