MI Rewind: Why Buy Bitcoin w/ Andy Edstrom

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29:33And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. All right, back to the show. Like we mentioned, Bitcoin is up significantly in the past 12 to 18 months. And I think many investors are like, I missed the boat. I need to move on to something else. And earlier, you mentioned that you have a model you use for Bitcoin's price, which I think is pretty interesting. And with how volatile Bitcoin is, how do you value it? And how do investors prevent buying the top, so to speak? Like previous bear market, it dropped over 80%. So I'm sure investors want to make sure they aren't buying the top again and seeing another significant drawdown.

30:18So how do you see the value and how can investors prevent losing money in this spectacular asset that's performed very well? First of all, everyone thinks they're late to Bitcoin. There are guys who watched it go from$1 to$30 and thought they were late and watched it go from a couple hundred dollars to$1 ,200. That was in 2013. There's actually a great video. I can't remember how to find it or what it's called on YouTube, but it's this guy talking about never buy Bitcoin because you know it's going to crash, right? And he talks about Bitcoin went from$1 to$30, and then it crashed to$2. And then it went from$100 to$1 ,200, and it crashed to$300.

30:59And he's going through the history of the cycles and you're thinking, yeah, but if I just bought it and held it, I would have made insane multiples of my investment. And if the market potential is, as I suggested, potentially in excess of$100 trillion someday, then at a trillion dollars of change today, you could still make 100 times your investment. Now, as far as the valuation is concerned, I mentioned earlier five or six categories of value, whether it's gold, whether it's fiat money, whether it's offshore assets, whether it's taking share and demonetizing other major asset classes like the bond market, and whether it's new applications.

31:39I'm actually in the process of updating my valuation model. Literally, as we speak, I was working on it yesterday for a purpose we'll probably discuss later in the conversation, but my target had been about$8 trillion total. I had laid out in the book, 2 trillion of market share from gold, 2 trillion from fiat money, 2 trillion from offshore assets. By the way, the offshore asset market, nobody really knows how big it is, but somewhere in the$10 to$30 trillion range. I was rather conservative with the category of taking share from other assets, demonetizing other assets. I just assumed a trillion dollars of value there.

32:23If real estate alone is$300 trillion and stocks and bonds are another several hundred trillion there. I actually think that there's much more significant, potentially higher share that can be taken from those various assets. But like I said, I had used a trillion dollars there, and then I assigned a trillion dollars of upside for new applications that we just haven't even thought of yet. So the total value was$8 trillion, and that'd be$400 ,000 per Bitcoin. Now, like I said, I'm revising this target upward. My latest target is about 20 trillion within a decade, and 20 trillion is roughly$1 million per Bitcoin, or call it 18 times the current price.

33:07And what's changed between then and now, right? What changed between my$8 trillion target and my$20 trillion target? And there's a couple of things that have changed in the two, two and a half years that have gone by. So the first is just the thesis has played out, right? I mean, Obviously, back then we were at 8 ,500 per Bitcoin, now we're at 58 ,000. So it's already made a multiple. But that's just a price move. That says nothing about the underlying fundamentals. Well, another thing that happened was one of the major risks, which is that somehow China or the Chinese government manages to take over and control a majority of the mining capacity.

33:47That risk has been removed because China earlier this year kicked out most of the miners, which meant that now most of the mining capacity is not located in any one single country, which removes this big risk of one government basically taking action to try and destroy Bitcoin. So that risk is basically gone now. So that's one. And then the second thing I would say is just ongoing stimulus. I mean, I published the book with the$8 trillion target before COVID. And so we had several trillion dollars worth of new money printed, trillions of dollars in deficits. And it appears not only that we had that sort of one-time stimulus expense, but also we've got ongoing new government policy.

34:39We had a regime shift, Democratic Party took power in the United States. And it looks like the Democratic Party is happy to run even larger deficits than had been the case under the prior administration. And so every deficit dollar that gets spent has to be paid for somehow. And it gets paid for either by outright borrowing, where investors are lending the government money. I'm talking about mom and pop investors or fund managers who have institutional money or foreign central governments who are buying US treasury bonds. But the reality is demand is falling. Foreign central banks, especially China, are not buying as many US treasury bonds.

35:24And so who's had to step into the breach? Well, that's the Federal Reserve. And how does the Federal Reserve pay for the bonds that they buy to fund these deficits? They print money. And so we're seeing actual outright monetization of government debt. And historically, that has been significantly inflationary. It actually gets to one of the more interesting pieces of analysis that I found in my studies of Bitcoin, which is everybody talks about Milton Friedman, free market monetarist economist. And what he said about inflation was, it's always and everywhere a monetary phenomenon. And that's true as far as it goes, but which isn't very far.

36:08When you look at the historical record, and there's some work done by another economist, Steve Hanke, who by the way is not pro-Bitcoin, but he does have some things right. And one of the things he has right is he's done a historical survey of major inflations through history, especially in the last century. And what he found was that it isn't until governments are really running large structural fiscal deficits, it's not until you reach that point that you tend to get large inflations. So yes, it's monetary, but really it's about the government is way overspending and therefore the central bank comes in and starts monetizing the debt and printing the money.

36:51And that's when you tend to get higher inflation in modern history. So anyway, all that's to say that if I already thought that the way out of the excess debt problem, not only in the United States, but in the Western world and the rest of the world, if I already thought that the easiest way out was printing money and inflation. Well, now that thesis is all the more clear. And by the way, if it's of interest, we can talk about some of the theoretical alternatives for getting our way out of this excess debt problem or even what the magnitude of that debt problem is, but I'll leave it up to you.

37:32And to follow up on my second part of my question, how can investors prevent buying the top? First of all, there's no way to be sure. Like I said, everyone thinks they're late. And yet, if you hold Bitcoin for any five-year period throughout its history, you make a multiple of your investment, right? So there's that historical fact. So if you can hold for five years, history tells you you'll make a nice return. And of course, the future past performance is no guarantee of the future. signs that I look for regarding a top. I look for that telltale blow-off top, which is a rapid price movement in a short period of time.

38:14And what that looks like is you had blow-off tops in 2017, as well as 2013. And the one in 2013 was extremely dramatic, but even the one in 2017 was pretty noticeable. Basically, you had the price double in like a month, right? And so I'm looking for that telltale sign of price doubling in roughly a month, sitting today at a little under 60K per Bitcoin. If by Christmas, it's almost Thanksgiving where we're recording here. If by Christmas we're over 100K, then yeah, maybe I'm getting a little nervous about buying a top. The other measurement that's actually somewhat useful is the 200-day moving average.

39:03Basically, when the price to the 200-day moving average price, when that ratio goes above two or even goes above two and a half, that's when by historical standards, you're really in pretty thin air. It means that the price has moved very rapidly overall, compared to recent history, and the chances are high that you're going to suffer a downturn or a correction. So yeah, blow off top or current price to 200-day moving average of over two and a half times, those are some telltale signs of a top for me. Robert Leonard That reminds me, TIP put together a similar tool to look at Bitcoin's current valuation relative to historical data.

39:48Preston Pysh put this together with Trace Mayer, I believe, and they called the statistic, the Mayer multiple, which is the current price over the 200-day moving average. I'll be sure to link the info we have on TIP's Mayer multiple in the show notes for those interested. It's funny you mentioned it. I think I actually remember the Twitter handle, maybe like TIP Mayer multiple or something. Yep, that's right. Yeah, it's a useful tool. Hats off to Preston, who's a friend and who's been on top of this Bitcoin situation for a number of years now. One thing I find fascinating about Bitcoin is how much emphasis the people in this space put on things other than Bitcoin.

40:30So your book, for example, the name of chapter one is Why is Money? Number two is What is Money? And then we've already talked a little bit about just the global economy and current environment in which Bitcoin operates, which is, in my opinion, is very important. So why is it important to first understand money and what is good money versus what is bad money? Maybe compare Bitcoin to gold and the US dollar or fiat currencies if you'd like. So Clay, this was maybe the most important and the hardest pieces of analysis or pieces of learning for me, which is exactly what you said, what makes something good money.

41:11And nobody teaches us this stuff. I took an economics degree from a good college. And the extent of the discussion of what is money is, oh yeah, it's a medium of exchange and a store of value in a unit of account. And there was no discussion of, well, what makes something a good medium of exchange or store of value or unit of account? So I researched it and I came up with a framework of characteristics that underlie good money. And I am sorry to say that I found 14 of them. I wish it was a short answer, but it's just not. And so the 14 characteristics I identify are that a good form of money should be identifiable, transferable, durable, divisible, dense in value, scarce, that's really important, short-term stable and long-term stable.

42:04I differentiate between those two. Fungible, unseizable, censorship resistant, private, required for some purpose, and backed by a powerful agent. And we can talk about those various characteristics if you'd like, but suffice to say that no form of money scores well on all those characteristics. So it's not like you can say, oh yeah, the world's best money checks all those boxes and not only checks the box, but scores really well. Because each of those characteristics is itself some spectrum, right? It's not binary of, oh, it's scarce or no, it's not scarce. It's how scarce is it? And likewise, transferable, fungible, all those characteristics.

42:49So they're each a continuum. them. So what I do is I equal weight them, which is certainly wrong, but it's also the best thing I can think of because deciding, oh, scarcity is whatever twice as important, let's say, as divisibility or durability is one and a half times as important as identifiability, these are impossible things to quantify. But I think it's useful as an exercise to think about, oh, if I equal weight these characteristics, how does the dollar score? How does gold score? How does Bitcoin score? And not only how does Bitcoin score today, but how might it score in the future? And so that's one of the things I do.

43:32And the dollar for me at the moment scores better than gold, except for the more and faster they print those dollars, the lower the score, because that scarcity and also that long-term value stability is hampered or is impaired as more dollars are printed. Gold is kind of static, right? Gold ain't changed much in the last couple of millennia. Bitcoin already, to me, outscores gold slightly overall. But Bitcoin is improving because Bitcoin is only 13 years old, and there are more smart people who are coming to work on the base protocol, as well as are building exchanges, borrowing and lending systems, wallets for transferring value, financial services and companies that are basically integrating with the existing financial system.

44:30So the Bitcoin network is continuously improving not only at the base protocol layer, but in terms of the overall ecosystem that's being built on top of it. And I see, therefore, Bitcoin's overall score, such as it is, going up in the future, whereas gold's is static and the dollar's, frankly, is going down. And by the way, I'll just say, is the dollar becoming worse money over time? Yes, as they print it faster. However, the dollar is still the cleanest dirty shirt among the fiat currencies. And when I look ahead to the future, I think about, okay, what does the monetary world look like five years from now or 10 years from now?

45:15I don't see Bitcoin killing the dollar. If anything, I see Bitcoin taking share from some of the much weaker currencies in the world today. And perhaps ironically, I see stable coins, which are a manifestation of dollars on a crypto-based blockchain system, I see those getting adopted more. And I see actually stable coins, which are digital dollars, more likely stealing share from weaker foreign currencies, and then perhaps Bitcoin taking share from the dollar ultimately years from now. Robert Leonard Robert Leonard You talked about fiat money, gold, and Bitcoin and how they kind of relate. And you mentioned the 14 characteristics of money.

46:03Where is Bitcoin superior in these 14 characteristics and where is it inferior? Robert Leonard Maybe we'll start with, first of all, scarcity. So gold is quite scarce. And the way that gold's scarcity is commonly measured is with this concept called stock to flow. And it's the ratio of how much gold is there above ground in the world versus how much gets created in a given year. And today, the stock to flow ratio of gold is in excess of 50, which is to say for every 100 tons of gold that exists above ground in the world, two tons get pulled out of the ground every year. The dollar has no real scarcity other than how quickly the Federal Reserve Board decides to print base money, plus how quickly the banking system on top of those reserves multiplies out the money supply.

47:03And so suffice to say that the level of M2 monetary supply increase over the last year or year and a half, I can't remember. It's like 30 or 40%. It's a really big number. So it's growing. The number of dollars is growing much more rapidly than the 2 % growth in the quantity of gold. Now we look at Bitcoin. Bitcoin's stock to flow ratio, and therefore its scarcity changes over time. And it's all algorithmic. It was set in the code from day one. And it has this characteristic, what we call this event, which is called the halving. It's a 50 % or a halving of the amount of new supply that gets printed every day with every block of transactions, every 10 minutes, in fact.

47:55And we've already been through, what, three halvings because it used to be 50 Bitcoins per block. And then four years later, it was 25 per block, and then 12.5, and now we're at 6.25. And at that rate, Bitcoin is already scarcer. That is to say, the rate of production annually is a lower percentage than gold. And then of course, in a couple more years from now, it'll be even further reduced. So already Bitcoin is scarcer than gold, and gold is considered effectively the scarcest major form of money or monetary asset. in the world. So clearly that has an advantage on scarcity. Let's talk about identifiability, which is a little bit like talking about counterfeiting.

48:42So as we know, dollars can be counterfeited. They frequently are. There are certain governments even out there that counterfeit dollars, other governments, not the US government. Gold can be counterfeited. I've heard tell of tungsten bars wrapped in gold, right? Where the core is much less expensive of tungsten. I don't believe there's been an audit of Fort Knox and the gold holdings there. I'm not sure there've been audits of the gold holdings in London in recent history. So we don't really know whether all the gold is there. One of the beauties of the Bitcoin network is it's impossible to fake a Bitcoin.

49:20Either your private key can be used to sign a transaction to access an unspent transaction output on the Bitcoin network, or it can't. There's really no faking it. So Bitcoin has essentially perfect identifiability, provided that you're running your node right and you're running your software correctly. The divisibility of Bitcoin is very strong. People talk about, oh, a Bitcoin's$58 ,000. I missed the boat. It's too expensive. Well, okay, but each Bitcoin is divisible into 100 million pieces called satoshis. And needless to say, 58 ,000 divided by 100 million is a pretty small number per sat, as we like to say.

50:05So it's extremely divisible. Let's talk about seasibility. One of the problems with gold, and it's true as well of physical dollars, cash, is that you can get stolen by a man with a gun. And one of the beauties of Bitcoin is it's actually securable. It gives you a lot of flexibility with how you secure it. So for example, you can write down your key on a piece of paper, not advisable. Better than that is writing it down on a piece of paper and cutting it into pieces and putting those in different places such that no single piece gives you access to the full key in there for the money. Can't do that with cash or with gold, right?

50:48Yes, you can divide your gold pile into three pieces, but each of those is worth stealing on its own. Same with cash. Better than what I described is setting up a multi-signature scheme, which is something that is native to the Bitcoin blockchain. It's part of the code. And you can set it up so that you have to have three keys to access the money. And each of those keys is useless on its own, truly useless. At least if you split a key into three pieces, then you have two of the pieces, well, then maybe you can brute force and guess the third piece, right? But not so with multisig. Each of those pieces gives you no information.

51:25There's interesting ways in which you can secure Bitcoin. Of course, the most interesting we like to talk about is the brain wallet, which is if you can memorize 12 words, you can walk across a border with any amount of Bitcoin in your brain. And And that's a pretty useful trick for people who have to relocate, leave war zones, et cetera, et cetera. The seizability piece you talk about and the potential implications of it are just mind-blowing. Just like from a personal level to the sovereign level, it's just incredible what that could potentially lead to. The mind goes to interesting places, right?

52:04What happens if Bitcoin reaches its potential, turns into a$100 trillion or$200 trillion asset. And therefore, a significant portion of the world's wealth is stored in this asset that you can store in your brain, where the only way they can take it from you is if they literally beat it out of you. And the criticism to that is, well, governments will beat it out of you if they have to, or thieves, kidnappers, what have you. But you still have the advantage or the holder, the user still has the advantage that, Yes, they can be coerced, but they still at some point have to cough it up. They have to comply.

52:42And if the victim is killed, tortured to death, let's say, the aggressor doesn't get any value out of that. That's different than if someone kills you for your gold or someone kills you for your real estate, for that nice piece of land you've got on a hill. Once you're gone and once you fail to defend it, well, then the aggressor gets the asset. Not so with Bitcoin. You can take it to the grave. And that really reduces actually the incentive to violence because you can either set it up very, very securely, like I described, so that you don't have outright control. Or if you do have outright control, yeah, there's not an incentive to steal it because the aggressor not guaranteed that they'll get any value out of it, even if they perpetrate violence against you.

53:32Robert Leonard Now you mentioned a few of the pieces where Bitcoin is, it seems to be superior, the scarcity, the feasibility, and you mentioned a couple others. The ones for me that come to mind are the volatility. I'm not sure which one exactly that falls into, but are there any others where Bitcoin today is inferior? Robert Leonard There are a couple categories where it is inferior. So two that I identify are, and maybe I'll get into three actually. So one is powerful backing or backing by some powerful agent. So the classic case, of course, is the dollar is effectively backed by the US military machine.

54:12Bitcoin doesn't have that today. On the other hand, there are already significant constituents, whether they're commercial organizations. There's an entire Bitcoin industry that has sprouted up, or whether it's even governments, right? We've got our first government that's outright backing Bitcoin. That's El Salvador, where it was declared legal tender. So we're starting to see inklings of powerful organizations basically backing Bitcoin, but nothing yet that compares to the US military. So that's a deficiency, I guess you could argue. Another one is basically requirement for some purpose. So again, the classic case, you got to have dollars to pay taxes if you're a US citizen, or whatever jurisdiction you're in, you got to pay taxes in the local fiat currency.

55:01So that provides, call it artificial demand for that money that Bitcoin doesn't have, and gold doesn't have, frankly. I think eventually we may see a world where Bitcoin is the preferred form of money. It is the form of money that people prefer to receive. And whether or not that's a government that's sort of forcing people to hold some amount of the money to make a specific kind of payment, I don't think it's going to matter in the long run, but I think in the short run, that is a factor. And the third one I think I'll highlight is privacy. This is a major misconception in the general public is people think that Bitcoin is private money.

55:40It's like the secret transaction money. If you want to buy your illicit good or service, use Bitcoin. Please, people, if you're going to buy illicit goods or services, use cash dollars. Much more effective. Because one of the things that's interesting about Bitcoin is the entire transaction history is all embedded in that blockchain data structure. And so all you have to do is tie someone's identity to some point in that history, in that chain, and it becomes relatively clear, who transacted. Now, there's an entire industry devoted to this. It's called chain analysis. There are several companies with multi-billion dollar valuations.

56:22Some of their best customers are government agencies, by the way, no surprise. And so, yeah, the Bitcoin blockchain is actually pretty well surveilled. And so the privacy in Bitcoin is actually not very good, which is somewhat of a disappointment to me in general, because I do believe free people should have the right to transact privately. It's possible that upgrades, there was actually a recent upgrade that happened to the Bitcoin blockchain Taproot, which implements new signature schemes and new ways of aggregating transactions that could be helpful for privacy in the future. And there are some techniques like coin joins, basically pooling different quantities of Bitcoins of unspent transaction outputs, and then directing them at different locations, provide arguably some measure of privacy.

57:24I personally don't really trust the privacy level of those systems. Will they improve over time? Perhaps, maybe, probably. I think it may take years and years to get better privacy on Bitcoin. But for the moment, if you want privacy when transacting, physical cash dollars are your best bet. Let's take a quick break and hear from today's sponsors.

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1:01:03That's theinvestorspodcast.com slash tip-finance. All right, back to the show. You mentioned El Salvador there, and I don't know if I could talk about Bitcoin without at least bringing up what is happening in that country. Now, before we get into this, I just want to say, I'm sure Andy and I, or anyone we're associated with, we don't endorse anything that the government is doing in El Salvador. We're just analyzing what they're doing with Bitcoin specifically. And just this year, we've seen El Salvador adopt Bitcoin as legal tender. And in other news this week, they announced a potential bond issuance of$1 billion.

1:01:50dollars. I'm not sure if you saw this, but I just read the details on this just recently. And I believe they're going to use half of that money to just straight up buy Bitcoin and the other half to invest in Bitcoin mining rigs. So I'm curious what your thoughts are, just some of the things El Salvador is doing, and is there potential for other countries to start following suit? Absolutely, there is. And this has been one of the great, exciting surprises of the year 2021. Not the only surprise, but one of the biggest ones. I did not anticipate a country declaring Bitcoin to be legal tender by 2021.

1:02:30That is something that I thought might happen farther into the future. Surprise, surprise, it happened this year. So there's a lot of different elements to this. So the first question to ask is, what kind of country would have an incentive to try and adopt Bitcoin in large scale in a widespread manner? And there's a few factors that I consider. One is, do you have a weak currency? Does your currency inflate at a rapid rate or is it not widely accepted or do people just not really want to use it? Or as in the case of El Salvador and other countries, are you already on dollar standard. So do you already not control your own monetary policy such that if you switch to Bitcoin, you're not giving up some monetary policy control that you had to begin with?

1:03:21So that was the case with El Salvador. There are other dollarized countries in the world. Ecuador comes to mind. I think Panama as well. Panama may have a dollar peg. I can't remember off the top of my head. Another major factor is remittances. And this is a huge story for El Salvador, which is something like a quarter or a third of the entire GDP, the entire annual output or production of the country comes in the form of money sent from abroad. A lot of El Salvadorans living in the United States, they work jobs that pay better here than they do in El Salvador, and then they remit money back to their families in the country.

1:04:05So if you're on a dollar system or you don't have a strong currency and you have huge remittance flows, then you've got a good incentive basically to go to Bitcoin. Likewise, arguably, if you have significant energy resources and you can effectively compete in the global market for Bitcoin mining, I think that's another factor. So I would not be surprised to see other Latin American countries, Central American or Caribbean or South American. I thought of Haiti as an example. And there have been stories. It's mostly stories. I don't know how much traction there is, but things going on in the Congress in Panama.

1:04:46I think there was a proposal maybe in Uruguay. Argentina has chronically had a problem with inflation and defaults. Wouldn't surprise me if they came on board at some point. So yeah, will there be others? I am pretty confident there will be. I don't know necessarily whether they'll just outright adopt Bitcoin, you definitely could see some hybrid models where, okay, the country has a fiat currency, and maybe they start to buy back Bitcoin as partial backing for their fiat currency. So they hold Bitcoin as a reserve asset. Maybe it's not the only reserve asset they hold. Maybe they hold some Bitcoin, maybe they hold some gold, some kind of a hybrid structure like that.

1:05:29But it's a really interesting case study of a country that didn't have that much to lose with respect to their existing monetary system and had a lot to gain in terms of savings on remittances, as well as press, right? Let's be frank. President Naib Bukele, who has a very high approval rating still in El Salvador, is a master of social media. And he's created a perception, which is El Salvador, which is a relatively poor country, is forward-looking, is forward-thinking, and it's open for business. And if you are someone who is positive on Bitcoin, maybe you hold a lot of Bitcoin, or maybe you work in the industry, you see now a jurisdiction that's friendly to you because you are a big believer in Bitcoin.

1:06:19There's a potential to attract a decent amount of talent, talented people that otherwise would not have been interested in moving to El Salvador. So there may be an opportunity basically to raise the economic game of this relatively small, impoverished country in Central America. And if it works out, and we'll be watching carefully, that could be a huge win for the country overall, as well as for his presidency. Just getting to the bond issue, I did see that headline in the story. I don't know if we know that much detail about how it'll shape up. But yeah, they had already bought some Bitcoin for their treasury.

1:07:04And now they're planning on buying more, as you said, half a billion dollars. And there was relatively soon or early in the process of El Salvador adopting Bitcoin, there was this meme, which is, let's basically put the volcanoes to work, right? Let's harness the geothermal energy from the, I don't want to say active volcanoes, but yeah, I guess that's effectively what it is in El Salvador and use it to mine Bitcoin. And they've already started implementing it. And look, it's a pretty interesting idea. Geothermal energy, by the way, is very clean from a carbon and greenhouse gas emission perspective.

1:07:42And also it's frequently located far from population centers. And so it's an opportunity basically to monetize an otherwise stranded clean energy asset. And it's a smart move. We'll see how they actually implement it and build it out. And no doubt it'll take a while to actually build out the data centers, get the mining rigs, get it all plugged in and mining Bitcoin, but pretty interesting financial transaction there. And it's also a source of funding in general for the economy. I mean, the El Salvador economy is not that big. So a billion dollar inflow of capital actually moves the needle. It's insane to think about how El Salvador is literally harnessing the energy of volcanoes to mine Bitcoin and is taking on cheap US dollar debt to do it.

1:08:36And you brought up the environmental piece of that. I'd love to touch on some of the common misconceptions around Bitcoin and get your thoughts because it seems like we hear the same concerns over and over again. To get us kicked off, let's start with the environmental concern. Many people will state that Bitcoin is bad for the environment because of the amount of energy that is required to run the protocol. So my question to you is, is Bitcoin bad for the environment? So this is a really subtle question, and there's several factors at play here. So the The first response to that question is, compared to what?

1:09:13So as an example, Bitcoin, as we talked about, is competing to be the world's premier hard money asset, and it's taking market share from gold. Well, the data I've seen indicate that total energy usage to extract gold, right, to mine gold and keep that monetary system running, something like three times the energy usage of the Bitcoin network. So Bitcoin is currently more efficient in terms of energy usage than gold. By the way, the total cost of running the dollar network, who knows? I mean, it's bank branches and armored trucks to move the cash. Arguably, it's some percentage of the US military to keep the peace in the Middle East to support the petrodollar, and that's a whole other story.

1:09:59So the first question is compared to what? The second thing to consider is actually Bitcoin... is accelerating, I believe, the adoption and the installation of carbon neutral energy capacity, electricity capacity. So why is that? Bitcoin is the first global market for electricity. What I mean by that is electricity doesn't travel that far. In other words, if you've got a power plant, you have to locate it within a couple hundred miles of the population center where you're using the electricity because too much is lost in transit if it's farther than that. So there's all this renewable energy that's located nowhere near people, right?

1:10:48Whether that's hydropower in the inland areas of China, or whether that's geothermal in remote areas of Central America or Iceland or what have you, or it's deserts where the sun shines very brightly, where you'd like to put a lot of solar panels, but there's no people there. And likewise, it's very windy locations that aren't located near cities. And so now those assets can be monetized. I happen to know specifically of several projects. There's one going on in the deserts of Morocco, which is both wind and solar-based, and they're going to set up a bunch of Bitcoin mining capacity. And so what that is, is it's generating incremental demand for wind and solar and other renewable installed capacity, which means more sales for those companies, which funds their research and development budgets, which brings down the average cost of those renewable energy assets.

1:11:45And that's the situation we're in right now, especially for most of the developing world. And I just imagine the conversation with some, I don't know, regional governor in India, where some person, some representative from the UN is saying, don't you install that coal capacity, right? Install renewable capacity, same with China. And the guy's like, look, I got people living on a couple dollars a day. I got to just install the cheapest energy source that's available to me. So I'm going to install what's cheapest right now. And so if Bitcoin is increasing the installed capacity of renewables, then it's bringing those sources down the cost curve faster, which means that when there are decisions about new projects getting installed a few years from now, those energy sources will be all the more competitive.

1:12:35There's another factor here, which is baseload capacity and basically Bitcoin providing a buffer on existing functional grids. So one of the things that's happening in Texas is there's a bunch of new Bitcoin mining that's been installed and also being installed. Texas had this sad case last year of large parts of the grid just basically losing power. It was very cold. People died. My aunt and uncle, they were fine, but it was a pretty unpleasant experience for them living through that for several days with basically no access to energy. And one of the things that Bitcoin does is Bitcoin is the easiest user of energy to take offline.

1:13:20And so what that means is Bitcoin provides demand for energy. So you get installation of capacity. And then whenever, God forbid, there's some outage and there isn't enough energy to feed both the Bitcoin miners and households and factories, et cetera, well, then the Bitcoin miners say, no problem, we'll go offline. It's okay if we're offline for a day or a week, we can still be profitable with 95 plus percent uptime over the long run. And so grid operators, utilities essentially, are contracting with Bitcoin miners saying, hey, we're happy for you to be on the grid and consume the power as long as you guys are willing to go offline when the rest of the grid, when households most need that energy.

1:14:06And so it's this swing consumer of energy that actually makes the overall grid more robust because it incentivizes extra capacity and you can pull the Bitcoin demand off the market when necessary, basically in an emergency to feed the rest of the critical users of energy. So there's a lot of ways to look at Bitcoin's energy use. The final factor is, think about fiat money in general. Is printing more money and reducing interest rates and stimulating demand and spending on goods and services, is that good for the environment overall, or is that bad for the environment overall? I believe it results in excess consumption.

1:14:53It results in us buying more stuff that we don't really need. And I think that if we were on a hard money standard, equilibrium interest rates would be higher, but people would think harder about spending on frivolous stuff that they don't need. And the environmental benefit of that on a hard money standard like Bitcoin could be truly enormous. And that will take years to get to, but if we get there, I think it'll be a huge net positive for the environment overall. So essentially that last point there, an inflationary system, essentially, it needs to grow in order to continue to function. So that means it needs to grow forever.

1:15:32Is that right? Yes. And perhaps even at an accelerating rate. And this is the statistic, I think, Jeff Booth put in his great book, which is, and I can't remember the timeframe. I don't know if it's a decade or a decade and a half, but it's something on the order of global GDP has grown. I want to say, well, I can't remember the number. Maybe it's like$50 trillion. I think it's$30 trillion is the number. Maybe it was$30 trillion of economic growth in 20 years or something. But the amount of debt in the economy to fuel that growth is$150 trillion. It's like five times as much debt issuance for a given level of economic growth.

1:16:15And that is pretty clearly unsustainable. That debt-fueled system has lasted longer than many people thought it would, but it appears to be accelerating and not decelerating. And that's likely to end badly unless and until we can transition to a better hard money system. I personally believe that Bitcoin is the best shot we've got at making a peaceful transition from this long-term disastrous debt-based economy onto a hard money standard, which is going to be much more functional for civilization in the long run. And the book you referenced there is The Price of Tomorrow by Jeff Booth. It's a fantastic book and relates to the environmental piece.

1:17:05Square and ARK Invest did research on this exact topic of how Bitcoin potentially incentivizes the transition to renewable and clean and green energy. And I'll be sure to link all of that in the show notes for those interested. Now, let's talk about the scarcity of Bitcoin. Some might argue that Bitcoin is not scarce because there are thousands of cryptocurrencies and there are new ones added all the time. So what makes Bitcoin special and why is Bitcoin better or different than all these other coins? So to my mind, Bitcoin is the only cryptocurrency or digital asset that has a credible, scarce monetary policy.

1:17:50And what that means is it's one thing to write the monetary policy into the code, which is the case for Bitcoin. But there also has to be a social consensus around that monetary policy, because it is ultimately people that run the network. They run the nodes, they run the miners. Now, the history of Bitcoin is truly unique. First of all, the founder disappeared. This is a feature, not a bug. It means that there's no central figurehead or monarch, basically, that runs things. There's no leader. That's a good thing because you want the network to be broadly distributed. The second thing is the Bitcoin community essentially, well, in a figurative sense, fought a civil war culminating in 2017.

1:18:37There was a fight between two factions, one of which wanted to increase the block size, which would have increased the potential number of transactions that can clear through the network in each 10-minute block. And it got really ugly. It ultimately ended up culminating in a hard fork. Bitcoin cash split off of the Bitcoin network. And there were a few important things that came out of that. The first is the hard fork essentially failed. When you look at the market capitalization of Bitcoin today versus the faction that forked off into Bitcoin cash, first of all, that faction forked again. And secondly, the market value is a tiny fraction of Bitcoin core, or let's just say a Bitcoin.

1:19:22So there's a historical record there of an attempt by a faction to change the consensus mechanism failing. What does that mean? It tells you that that group within Bitcoin that resisted this change in the code and this change in the consensus mechanism won. And it gives us high confidence as Bitcoin holders that if someone were to suggest, maybe we should just print a few more of these things. Maybe we should have a little bit of inflation or a little more inflation in Bitcoin. It gives us high confidence that anybody suggests that's going to be rejected out of hand. So I have very high confidence in not only the code, but the social consensus around Bitcoin's monetary policy.

1:20:10And I don't have that kind of confidence in any of the other assets out there. And by the way, another reason that I have confidence in Bitcoin's monetary policy and consensus is that it's really pretty easy to run a Bitcoin node. So one of the problems with these more feature-rich cryptocurrencies is that if they are Turing complete or they can essentially do anything, it takes more data storage and it takes more bandwidth. So I can, and I do run a Bitcoin node on a not too fancy desktop computer that I have sitting on my right. And the Bitcoin blockchain is about 500 gigs or half a terabyte of data.

1:20:58So that's like half of a not too fantastic solid state hard drive. And if Moore's law continues, or if we keep seeing increases in the computational ability and storage capacity in these guys, smartphones, we're probably not too far, maybe a couple years or a few years from being able to run a Bitcoin node on a smartphone. This is not the case with some of these whizzier, fancier cryptocurrencies where it takes a lot more bandwidth and a lot more storage to run a node. What that means is few people run those nodes. Those nodes tend to be less distributed. They're sitting in data centers. Frequently, they're operated by centralized, basically, data center operating companies rather than random people, individuals like me running their Bitcoin node.

1:21:51And so it's a lot easier to run a node, which means there are a lot more of them, which means the system is that much more resistant to change or to capture from some faction that basically wants to change the rules. So those are the reasons that I have much higher confidence in the monetary policy of Bitcoin. And so for me, there's really no substitute in the world of cryptos. I'll add one more factor, which is what we call the Lindy effect, right? This is this factor which was observed. It's named for Lindy's Eatery, which is now closed as of, I think, five or six years ago. It's this place that actors used to hang out off Broadway.

1:22:33And they would talk about and speculate on how long would a Broadway show likely run. And the finding was that the longer a show had been running, the longer it was likely to run. You get things like cats running for 50 years or whatnot. And so this is actually a mathematical finding in nature and in human history and sociology and anthropology, which is, yeah, if something works securely or does its job over a long period of time, chances are it will continue in the future. Okay. Well, this is especially true of security. And so the fact that the Bitcoin blockchain really hasn't failed or hasn't been hacked or funds haven't been stolen at the blockchain database level, it's one thing when people have failed to secure their private keys and those private keys get stolen because they're stored on a computer and some hacker gets into the computer, that's a different thing.

1:23:27But Bitcoin has been chugging away unmolested in that regard and successful for longer than any other blockchain. And it always will be longer than any other blockchain because Bitcoin was first. So I have high confidence in the security of Bitcoin because the Bitcoin blockchain hasn't been hacked in 13 years. And it's hard for other competitive cryptocurrencies to catch up in that regard. And crucial to that, by the way, is the size of the bounty. So said a different way, if Bitcoin is a trillion dollar plus asset, then figuring out how to compromise it means you could potentially steal a trillion dollars.

1:24:07And so Bitcoin has had longer time in the field with more value over that time in the field than any other cryptocurrency. And as long as Bitcoin stays ahead of the pack in terms of its total network value, which it has done since it was incepted 13 years ago, as long as that's the case, then I'm going to have likely higher confidence in Bitcoin. And by the way, even if another one of these digital assets, cryptocurrencies, eclipses Bitcoin in total value at some point or for some period of time, I'm still going to be able to rely on the fact that the Bitcoin code changes and evolves very, very slowly.

1:24:49So some of these other projects, they regularly go through hard forks intentionally. They update the code. They make it such that the new code does not comply with earlier versions of the software, which means anyone who is running a node on the network is out of luck. You better upgrade your software. If you don't upgrade your software, you're kicked out of the system. Not so with Bitcoin. Bitcoin progresses by soft forks, which means that new versions of the software can be implemented and run, while old versions of the software, old versions of the node, people running the nodes can still continue to run the old software.

1:25:28This makes the network much more robust and resistant to either malicious attacks by developers of new versions, or just from accidental errors, bugs, basically, in the new versions of the software. It's a very different ethos. It's a very different way to run a distributed network. To my mind, it's far more secure than many of these other systems that continuously go through rapid change and hard forks. And so I still have more confidence in Bitcoin, even if some other digital asset becomes more valuable in terms of network value in dollar terms for some period of time. Many people will bring up, if Bitcoin's so great and it's really going to do all these things that people say it's going to do, then the US government's going to feel threatened by it, and they're just going to ban it, and this thing is just going to fizzle off.

1:26:21So maybe talk about that risk and what that potentially might mean for Bitcoin. Clay, I'm glad you brought that one up because it's my favorite risk, or it's my favorite piece of FUD, where FUD is fear, uncertainty, and doubt. And the reason it's my favorite is because I think the biggest gap exists between people's perception of the risk and the reality of the risk. And what does that mean? Well, a big gap between perception and reality is an investment opportunity. Yes, people say that governments want to be in the business of issuing the money, and therefore any new non-government form of money will be quashed by governments.

1:27:02I think that there's a couple of major errors in this logic. The first is, can they actually kill it? And five years ago, maybe if all the governments of the world had united to kill Bitcoin, maybe they could have. We're past that point. The network is so valuable and so distributed and has so much economic activity built on top of it, whether it's the wallet providers, whether it's the exchanges, whether it's the lending platforms, the peer-to-peer payment providers. There's just too much at stake. And of course, there's lots of rabid Bitcoiners like me who will defend the network to the death, because not only do we have wealth stored in it, but we actually believe that it's good for the world and that it's worth fighting for.

1:27:46So I don't think governments can kill it. The second issue is, why would a government even want to try to prohibit it? Because you're talking about prohibition. And the thing about prohibition, at least in the United States, is it has a pretty ugly history. You think of alcohol prohibition, which directly fueled the organized crime business. Likewise, the war on drugs, which is still with us today, right? I mean, how much smaller and less powerful and influential would the drug cartels, would organized crime be throughout the Americas if we hadn't been fighting, fighting militarily fighting this industry for decades on end.

1:28:27I think there'd be a lot less violence throughout large portions of Central and South America. What we know is that prohibition doesn't work. And by the way, if you think that people get excited and riled up about defending their right to drink or smoke pot or what have you, or snort Coke, imagine how fired up they're going to get about the right to hold their own money in an environment when the government is printing and debasing the currency at a faster and faster rate. Oh, and by the way, try confiscating Bitcoin, right? At least with something like illicit drugs, it's a physical object in the real world.

1:29:08You can get your hands on it. You can take it. Not so with Bitcoin, if properly secured. So I think governments are going to recognize that they can't prohibit it. And by the way, again, at least in the US, I don't mind mentioning holding a fundraiser for Congress person, or let's say candidate running for Congress, Erica Rhodes, who is running to unseat Brad Sherman, who is the incumbent, probably most anti-Bitcoin member of Congress out there. But there are people like me who are willing to spend dollars and effort in the political process, defending Bitcoin's right to exist, while simultaneously educating members of Congress and other people in power about the manifold benefits of Bitcoin overall to the US economy and to other economies throughout the world.

1:30:03So yeah, I just don't see it happening. I mean, is there a greater than zero chance of prohibition for Bitcoin in the Western world, in the United States? Any risk is greater than zero. I see that risk as less than 1 % at this point in the United States over the next decade. By the way, even if it happens, Bitcoin's still probably going to win. In other words, by far the most likely outcome is prohibition never happens. Bitcoin continues to grow and flourish. Even in a scenario where prohibition does occur for some period of time, by the way, think back to alcohol prohibition, that didn't last.

1:30:44Even drug prohibition in the modern age is getting reversed slowly with time. So I think Bitcoin still wins in the long run. It's just a question of whether we take the easy path or the hard path. I'm doing my part to help put us on the easy path, but we'll see how it goes. Very interesting. Andy, thank you so much for coming onto the show. If anyone wants to learn more about Bitcoin, I highly recommend Andy's book, Why Buy Bitcoin. Before we close out the episode, Andy, tell us a little bit about what you're doing at Swan and where the audience can go to connect with you and learn more about your work.

1:31:24I am still a professional wealth manager. I've been at this for almost a decade. Prior, I was a buy-side investor. And I couldn't miss the opportunity here to help bring Bitcoin to my fellow financial advisors. So as of very recently, I am also helping Swan Bitcoin launch Swan Advisor Services. And what we're doing is we're providing a service which is outright Bitcoin ownership for clients. And we're going to set it up as a product that is as seamless as possible with financial advisors, software, whether it's portfolio reporting, buying and selling the asset, billing for assets under management.

1:32:11And it's different from a paper-wrapped security type of Bitcoin instrument like the Bitcoin Trust, ticker GBTC that everyone knows. In this case, with this product, it is third-party custody, but if the client wants to take custody of their own keys, of their own coins, they can do that. They had the ability to do that. So Swan is the only provider that I know of that's giving outright coin ownership, implemented for financial advisors that's focused only on Bitcoin. We're leading with education and we're leading with the focus on Bitcoin, which we think is the clear leader among the hard money assets out there in the world today.

1:32:54To any listeners out there who either are financial advisors or know financial advisors or have a financial advisor that you think would benefit not only from getting Bitcoin into clients' portfolios, but also just learning more about Bitcoin. I mean, we've got multiple people on the team who have published books. I'm not the only one. Jan Pritzker is another good example. We've got a whole team of really smart Bitcoiners that have written extensively in article format, as well as podcasters. And we're here to help educate both financial advisors and their clients if they want. If you want to pull us into a meeting with a client who asks about whatever risk, whether it's prohibition or quantum computing, or the environmental impact or anything like that, we're available to help.

1:33:41So anyway, contact us at swanbitcoin.com forward slash advisor. If you want to keep up with me on Twitter, my handle is Edstrom Andrew, and my personal website is andyedstrom.com. And as you mentioned, the book because why buy Bitcoin? Awesome. Thank you so much, Andy. You guys are doing fantastic things at Swan, and I highly recommend everyone check them out. Check out Andy's book. Thanks again, Andy. It was really a pleasure chatting with you. I really, really appreciate it. Pleasure was mine, Clay. Thanks for the chat. All right, everybody. I hope you enjoyed today's episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically.

1:34:23And if you haven't already done so, be sure to check out our website, theinvestorspodcast.com. There you'll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only.

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