MI Rewind: Bitcoin, Cryptocurrencies, and Blockchain Part 1 w/ Preston Pysh

24:21So you get into this debate of causation versus correlation. And so to remedy that, you can do what's called a co-integration test. And so in the co-integration test, it came back as being confirmed that it is co-integrated, which proves that the stock to flow ratio to price is correlated. You have a correlation there. And so this has been completely modeled and has been right within that variance. And when you plot all this out, you get Metcalf's law. And so what's really fascinating about the stock to flow model is we're really going to see whether it holds true because here in May, you go through the next four you're having on Bitcoin specifically, and the stock to flow price is$100 ,000.

25:03So is it going to go straight to$100 ,000 in May? Absolutely not. Typically, it's taken about a year to a year and a half after the halving event for price to reach that projected stock to flow price of$100 ,000. So we're going to see probably by, I would tell you by December of 2021, whether that model continues to be valid. It appears like it will be, but time will tell. Robert Leonard I'll definitely put links to Trace Mayer's work in the show notes. I think we're probably going to have a lot of different resources in the show notes from this episode. So that'll be one of them. I'll also put a link to Plan B's Twitter profile in the show notes.

25:43You guys can go check that out as well. And I think a network effect that the audience would probably be most familiar with is social media. Because if you have a social media platform that your friends aren't on, nobody's going to use it. But if you have all your friends start joining a new platform, like when Instagram first started, seeing all your friends post on there, all these great photos. So then you wanted to join and then more people saw that and kept joining in. And I think today's social media is one of the best examples of network effect for the millennial generation to consider.

26:13It's way better than the example I gave. Well, hey, everyone knows iPhone too. So I think that works. So we're talking about all these different coins, right? And so you mentioned coinmarketcap.com. And so I pulled that up and I'm looking at the list of the coins and I see three that kind of stood out to me really quick, and that was Bitcoin, Bitcoin Cash, and Bitcoin SV. And again, I am not an expert by any means, but what is the difference between these three coins? Are they related or is someone just kind of using the Bitcoin name and creating another coin? Or what is going on with those three different coins, if you will?

26:47So what's really fascinating is you'll find people that, remember how I was talking about level one thinking, level two thinking, and level three thinking and digging way deep into something. So what you'll have is you'll have people that'll say, there's no way on the planet this is ever going to work on a global scale because just look, I just pulled up coin market cap and there's like five coins listed with Bitcoin in the title. I have no clue which one to buy. How in the world is my mother and father going to be able to buy this? This is nuts, right? That's your level one thinking, unfortunately.

27:17And why I say that is because, and I can't say this is by design, but I would tell you that the greatest strength for Bitcoin is that so many people have that opinion. Because what happens is that I've been dealing with Bitcoin since 2015, and I've been hearing these arguments for five years now. And what happens is because your main finance people that work on Wall Street and manage money professionally would look at that and say, this is ridiculous. What has happened is you've had total entrenchment of Bitcoin into the existing financial rails, payment rails. So whenever I first bought my first Bitcoin back in 2015 for $220, there were no derivative markets for Bitcoin.

28:04There's none of that stuff. I mean, this was like, you talk to anybody about this stuff, they thought you were nuts. In fact, Stig and I recorded a conversation from 2015 of us talking about Bitcoin and we thought it was nuts, But at the end of the episode, I said, I bought some, right? But this is where it's really interesting is people would say that's the biggest liability where I would flip that on its head and I'd say, I think that might actually be one of the strongest assets about it is it has totally duped so many people for so long that now you have all these engineers that have done...

28:38I mean, And you can do atomic swaps from a USD tethered coin that tracks the price of the dollar down to a T straight into Bitcoin, okay? In the blink of an eye, get immediate clearance of payments. And if you took cash from Bank of America and routed it over to some exchange, it might take you three days. It's totally crazy what's happening as far as the engineering that's going on to allow exchanges to integrate into this protocol. And I would argue that all that was possible because the adoption rate is, in my humble opinion, a timed Trojan horse. And we can talk about that later if you've got questions about why I think that I can get into all the details why from an engineering standpoint of how the protocol was constructed.

29:24But the naming and the forks that have happened off of Bitcoin and all these other coins are just confusion to the masses that have allowed the entrenchment into the financial rails. To answer your question more specifically, you said Bitcoin Cash, Bitcoin SV, all these other things. What has happened is other people said, oh, I think that we should have bigger blocks. I don't think that they should be one megabit blocks. I think they should be eight megabit blocks, meaning the blocks that are being mined should be able to handle larger transactions. And so one group of people said, that's going to be really bad for security because not everybody can run a full node off of their home computer.

30:04And then you had another group that says, well, that doesn't matter. There should just be big nodes that download the full blockchain and run this. And there's security implications associated with that. So no one could agree. And the people that had the opinion that you should go to eight megabit blocks, they forked the protocol, meaning they took that source code and they started running it right next to the other source code, but they changed it to eight megabit blocks. And then what you had were all the people that are mining it, which are most importantly, the people that are running full nodes.

30:36This gets into a little bit of a technical conversation. You have people running full nodes and then you have miners that are mining it. They started taking sides as to which one of those two protocols that they wanted to participate on. And lo and behold, look at the price and the price tells you who won. So you got Bitcoin Cash, which is at$472. You got the regular Bitcoin that's at$10 ,211. So what you have happening, and the reason why this is so different than what we saw before, like when the internet was stood up and you had the internet protocol, and you had transfer control protocol, TCP, that rides on top of the internet protocol as a second layer.

31:15Robert Leonard Leonard These protocols were designed just like Bitcoin, and they were adopted just like Bitcoin. And they're now being used globally. I mean, if you're on the internet, you're using the internet protocol. You're using TCP. You're using transmission control protocol. You're using the hypertext markup language. You're using all of these things. These are universal, and the markup language is more for the code, but the protocols that I was discussing before are being universally adopted by everybody because of a network effect. And so in my humble opinion, you have the exact same thing happening, but you're having it for money now.

31:50And you're having this big giant fight at a protocol level as to what is money. And so far, your winner by quite a bit is Bitcoin. Preston Pysh So we've talked about how the network effect is driving this, and you were just talking about the different prices. And I want to talk about that a little bit more. And of course, like you said, the network effect is a huge component of this. But outside of that, why would someone pay, say,$10 ,000 US for a Bitcoin when they could just pay maybe 25 cents, 30 cents for a Ripple? Robert Leonard So this all goes back to the scarcity of the units. So when you look at Ripple, for example, these were all pre-mined coins, meaning you didn't have to do any work in order to create them.

32:31And this is a, oh, I'm going to say this word and I'm going to make some people mad. But for me, this as a scam because the person who created can say, oh, well, I'm going to create, and they got 43 billion ripples. And if they wanted to add more because it was, well, let me just start off with creating it. So they're pre-mined. So they literally created all 43 billion units. And if they wanted to keep 10 billion of them and then put the rest of them onto the market, they could do that. And they did do something like that. And so now that the remaining units are on there, what they can do is they can put more of that supply on the market when they want, and they can take some of that off of the market if they want.

33:06And so when you have that many units, 43 billion units versus Bitcoin at 18 million units, one's way more scarce than the other, and one is used way more than the other, and therefore the value is extremely higher than the other. And this is just, I mean, fiat currencies would be like this if the central banks actually managed the monetary baseline and didn't inflate the currencies. You'd have the exact same thing happen if they take money. And you see this in the markets. I mean, you're seeing this right now, where they're conducting quantitative easing, which is I take cash, I drop it into the bond market, and I basically buy those bonds off the market, and I pump all this liquidity into the system.

33:45And when I add that liquidity into the system, it has this effect of supply and demand and scarcity. And so that drives the value of it and whether it goes up or down. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows. We Study Billionaires is our flagship podcast, and we've made a name for ourselves over the years by interviewing the best investors in the world, including Ray Dalio, Howard Marks, Joel Greenblatt, and many, many more.

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37:13That's theinvestorspodcast.com slash tip-finance. All right, back to the show. In your explanation, you said, quote, they a couple of times. Who is they? When I'm referring to what? Ripple. They released these coins. So who is they? So for that one, it's pretty, for Ripple specifically, there's a Ripple foundation. There's people I don't know the gentleman's name who's like the CEO of Ripple, which full disclosure, not something that I personally own or would recommend somebody own because I think it's very centralized. I think it's absolutely manipulated because they have that amount of units they collected from the start.

37:58More importantly, they're not using a proof of work mechanism, which is driving the price higher, which in effect causes a network effect. And that's a whole big, long technical conversation. But they is actually a group of people and a foundation that's actually managing that protocol. They'll tell you that they're completely decentralized from the protocol at this point, but whenever they first founded it, it was not. They'll probably argue that extensively, but everyone can argue something as much as they want. But the reality of it is that they are absolutely manipulating the monetary baseline of that protocol.

38:32So that's not something that I would recommend anybody participate in. You want something, the whole issue with fiat right now is the manipulation of the monetary baseline. So in my humble opinion, the protocol that's going to win in the long run is the protocol that never manipulates their monetary baseline and demonstrates a super hard, easily transferable, immutable ledger like Bitcoin. Preston Pyshko And so based on what you just said, I'm assuming there's no Bitcoin foundation with the CEO running it, right? Preston Pyshko Bingo. Preston Pyshko So all of this conversation leads to an even bigger question.

39:06Why do we even need a new form of money? Why do we need a new currency? What's wrong with what we have or just the US dollar? You wouldn't believe how many people do not ask that question or understand that question. And so I am thrilled you asked that because at the heart of everything, it all comes down to that question. Why in the world do we need to have Bitcoin when I can go to Starbucks and spend and they spend very easy. This is not about going to Starbucks and having an easier transaction by using Bitcoin. This is not about that. What this is about is globally, no currency is paid anything.

39:48Okay. So this is going to turn into a little bit of a history lesson. So when you go back to 1944, there was a thing called Bretton Woods. And what Bretton Woods was is it was taking the US dollar and it was pegging it to gold. So if you went to the bank and you said, here's my$1, give me however many ounces of gold that are associated with that, you should be able to collect that many ounces of gold. The reason you use gold as a peg is because it's a scarce commodity. It's a scarce rock. It's not something that can be created in a lab, and that's why it's held the test of time of being money for eons.

40:25And so when they went through the Bretton Woods, the US said, we're going to peg the dollar to gold. Not only did that happen, but all these other nations that participated in Bretton Woods back in 1944, they also pegged their currencies to the dollar. So as they pegged themselves to the dollar and the dollar was pegged to gold, you had what was a fixed monetary baseline or what we thought was a fixed monetary baseline that couldn't be manipulated. So where this really comes into play is when you're conducting trade with another nation, you have this balance of payments event that occurs whenever you do not live up to your monetary baseline.

41:04So if you're printing at will, what you're doing is you're basically devaluing your currency and the country that has the peg currency is going to take advantage of that situation. So if you wanted to do a thought experiment, I would tell you to do it like this. This is the best example I can give you. Imagine you and I are playing and there's four of us were playing a game of Monopoly. And the banker, and it's just the four of us playing on our Monopoly table, and the banker is adding more and more money into the game. They just keep adding more and more. Every time we go around Go, they just keep adding more and more money into the game.

41:40What's going to happen to the price of everything in that game as we play it and as we trade properties? As I go over and say, hey, I want to buy that property from me. Well, you're going to bid the price because there's more money in the game. Now, if you had a deflationary currency, they're taking money off the board. Every time you go around Go, the banker is clawing money back out of the game. This is how the real economy works, where the central banker is adding money in and then they're taking money out. Now, I want to do another thought experiment with you. Imagine that there's two other tables with four people sitting at those two other tables in addition to our table, and they're also playing a monopoly game.

42:17There's 12 people total playing monopoly on three different tables, and we can now trade amongst those tables. So I can go over to table, so you got X, Y, and Z table. I can go from X table where I'm playing, and I can go over to Y table, and I can buy properties with my currency. Now, what I want you to imagine is one of those tables, let's say the table you and I are playing on, we have a banker that we're in cahoots with, and that banker is adding money into our game. And all the other players, all the other tables are keeping their money sound and fixed. But you and I, our table and the banker we're playing with, he just keeps slipping us hundreds.

42:58Well, guess what happens? We have an advantage. We have a huge advantage to go over to those other tables and start buying up all their properties. And if we do it slow enough, we do it super slow, those other tables aren't going to realize what in the world's going on? Well, this is exactly what happened, whether people want to believe it or not, this is exactly what happened from 1944 up until 1971 in the United States. And I have a chart that I can send you that shows the way it was done was through the money multiplier. So that's another thing that you can put in the show notes is what is the money multiplier?

43:32And people can learn what that is and how banking is. Basically, it's a multiple that banks have to have so much money on hand based on the exchange rate back in the gold. So what happened was, is the US kept adjusting their money multiplier from 1944 to 1971. The banker was adding more cash into the game until it got to a point where there was so much cash into the game that if the players went back to the banker and started demanding the gold, guess what? There wasn't enough gold there to swap with the currency that supposedly it was backed by. So 71, the US comes off the gold standard. So if we come off the gold standard and we had this Bretton Woods system that everything was basically tied to the dollar, well, everyone else comes off the gold standard altogether.

44:18And so now you have this global event where money is not tied to anything. So what you've had effectively, and I've heard Ray Dalio call this, the US basically defaulted back in 71 when they came off the gold standard. What you've had is this slow motion default, because when you look at interest rates back in, and interest rates even went further after 71. And when you got to 1981, you had the 10-year treasury at like 16.1 or 16.2 % on the 10-year treasury by 1981, because there was so much interest in the country where all this manipulation of the baseline currency had been taking place for literally decades, that the inflation was skyrocketing because there was so much demand for this booming economy that was happening.

45:04How does the central bankers deal with this over the clear up until right now? Well, they keep adjusting the interest rates and they do that through the bond market. They do this through the supply of money. Well, originally they did that through the federal funds rate, which is your short-term money. And as that came clear down and it eventually hit zero after the 2008 crisis, the federal funds rate was pegged at zero. Now they have to start going into the long tail of the bond market where they're doing longer duration bonds and they're now buying that up. And what you're having since, well, really 1971 period of time is you've had a slow motion default.

45:39Where currencies fail in the end is when the interest rates go to 0 % and they can't go any lower. You're not there yet in the US. Well, you are on some portions of the bond yield curve. When you go to Europe, when you go to Japan, they are in negative interest rates, especially when you look at it from a real basis instead of a nominal basis. They are in negative interest rate territory. And here in the US, on a real interest rate scale, you're in negative interest rates. And so when you start getting into that dynamic, now you have citizens that, and this is a really, really long answer to your original question, but I think you have to understand all this to understand why Bitcoin, right?

46:19So back to where I was. So if you have negative interest rates, what you actually have is a deal, a contract between two parties that guarantees the loss of capital. So if I go up to you and I say, hey, let's do a deal, Robert. You buy this negative yielding bond. Give me$100 today. And then next year, I guarantee you, I will give you back$99. Promise. I swear to God, I will do it. I will give you$99 back. And today, believe it or not, in the entire world, there is$15 trillion of negative yielding bonds that are that exact contract structure of people guaranteeing themselves, signing up for a guaranteed loss,$15 trillion worth today.

47:06So when you start getting into that situation, the incentive structure changes to people saying, hey, you know what? I'm just going to take the cash. I'm going to put it in a safety deposit box. And then next year, instead of getting$99, I'll still have my$100. That's where you're at. And so you're at this point where the bond market's going to break because no one wants to sign up for these deals. The only reason I would argue that you're seeing these deals is because states or central banks and states are mandating that they have a buyer of these deals in the issuance of these deals. So it's getting crazy.

47:40And that dynamic is not going to last. And what you're now seeing are central bankers are printing at unstoppable levels. And as they continue to use quantitative easing as their insertion point, which I would describe as inserting the liquidity into the top of the economy and the top earners and the one percenters that own those billion-dollar bond tranches, when you know you have somebody that is guaranteed to buy that billion-dollar bond tranche, well, guess what? Price is going to go up and it's going to go up and it's going to go up and you're going to continue to get the liquidity. Then you're going to buy stocks and you're going to buy back your shares and you're going to bid the price of equities even higher and higher because equities function as a scarce somewhat.

48:21They operate very similar to gold where there's a scarce amount of shares that you can buy for that same amount of equity that you own in the operating business. So that's why you're seeing the stock market getting bid like hyperinflation right now because of the fact that the liquidity insertion point continues to be at the top and they're not doing something like universal basic income. And I'm not promoting either one of these courses of action because both of them lead to the same road, which is inflation at a ridiculous scale and why Bitcoin that has a fixed monetary baseline, in my humble opinion, is going to do extraordinarily well against something like this.

48:58It's equivalent to going back into the 1922 Germany-Weimar Republic. And when you look at what happened there and you saw gold just hold its value, its buying power, it held its buying power, and they couldn't print the money fast enough. You're seeing that digitally now. Back then, they didn't have digital money. So what would that look like today? Well, it looks like what you're seeing in the stock market. It's going bananas. So that was going to be my exact next question. Is Bitcoin today's gold? So when people were back then adding a portion of their portfolio into gold to hedge some of their risk.

49:31Are people now, should they be doing that in Bitcoin rather than gold? Robert Leonard My opinion, absolutely. You could get somebody else on here. You could get some academic. They'll tell you, oh, it's crazy. It'll never replace gold. Gold's been around for 10 ,000 years. They're going to use these really top level, in my opinion, surface level deep arguments. But when you get into the fact that I can send you a Bitcoin right now and we could settle a billion-dollar transaction right now if you just put a QRC code up on your screen. I could scan it. And if I had a billion dollars in my account, I could send it to you right now and my fees would be$3.

50:06And we could settle that right now. How is that worse than gold where you need a freaking truck and 40 armed guards, and then a transport plane, depending on where you're at, and a delay of 15 days for coordination, and then a high-end security structure in order to house it and keep it and maintain it, it's flipping laughable. Then you get into this. So here's another argument is how do you know that the gold bars are pure? You'd have to melt them down and do a analysis on the chemical composition of all the gold. With Bitcoin, you can just run a full node and test the purity of the billion dollars I just sent you in a second, which is nuts.

50:51All right, guys. So that's it for part one of my conversation with Preston, all about Bitcoin, blockchain, and cryptocurrencies. Now that you've heard the first half of the conversation, I hope you can see how all the things I mentioned in the intro are true. It's very heavy in technical information, so you might need to go back and listen to it a couple times. I know I did, but it's incredibly fascinating and is going to be a lot of fun to watch play out over the next few years. If you know anyone that wants to learn more about Bitcoin from a beginner's perspective, be sure to share this completely free episode with them.

51:23And next week, Preston and I will pick up right where we left off and continue our conversation in part two of this episode. I'll talk to you all then.

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