BTC256: Bitcoin Market Sentiment and Liquidity Cycles w/ Andy Edstrom (Bitcoin Podcast)

27:51So that's risk for the shareholder. And then of course, you got the concentrated coin risk, which is if you're a believer in the long-term potential of Bitcoin, then you have to ask yourself, well, what happens with a big enough pile of coins when governments get very interested, right? When governments need to get some coins and they look for, you've talked about this in the past on other episodes, and they look for the biggest tiny pots, is there a risk associated with expropriation there? So yeah, there's numerous risks in addition just to the levered outcome on the price of underlying Bitcoin.

28:27What about companies that, you mentioned Berkshire, you mentioned Markel, holding companies that are acquiring fully owned operational subsidiaries and that are generating free cash flows. What about businesses that would be then taking the free cash flows and putting those retained earnings into Bitcoin, but also entertaining more acquisitions depending on whether the price is a lucrative return profile? You haven't seen that. What you've seen is this Bitcoin treasury play where you're basically tokenizing dollars through the issues of preferred stock and you're over collateralized. That seems to be the playbook that everybody's taken and not more of a Berkshire model.

29:11Do you see that coming to market? Do you see that being something that would work? Just in general, what are your thoughts? Yeah. I think my biggest overarching thought is everything takes longer in Bitcoin than we think it will, right? Amen to that. Yes. Game theory, government spying, Omega candles, moon bags. Yes, much or all of it will happen in time. And it always takes longer than we think it will. Is it just an education burden? Is that why? Why does it take longer for more people to kind of come to this conclusion? Yeah. I definitely think education is a major factor. It's so hard to understand Bitcoin.

29:53I imagine I had some significant understanding of Bitcoin and more than 99 % of the population. Also, there are people that know much more about it, orders of magnitude more. So it's all a distribution. But yeah, it takes a ton of work to climb the curve on the game theory, the math, the network topography, the history of money, the geopolitics, all that stuff, as you know, it's a pretty heavy lift. It takes a lot of work. So most people don't have the time. Many are too lazy. Many just are living hand to mouth day to day. They don't have time to research this stuff. Others were taught the wrong thing.

30:33They got to unlearn the wrong thing and learn the right thing. Sorry, go ahead. No, no. To that last point, I think this is also a huge factor of it is a lot of people, I think if you would look at just from a percentage standpoint, at least half the population is just living paycheck to paycheck. And if there's one thing that I've learned is people just can't go and put money that they're not even earning because they're living paycheck to paycheck. If you can't put anything into savings, that in and of itself is a non-starter. And then for the people that do have just a small amount of retained earnings or cash flows, they want to put it into something that they know is going to be their almost like a rainy day fund kind of thing, and they don't want a lot of volatility in it.

31:16So they're being constrained by their lack of desire for having any type of volatility. And then for the ones that are the huge earners that I would say are ripe for owning Bitcoin because they have free cash flows and they can deal with intense volatility, a lot of them are looking at things that for all intents and purposes, and Bitcoiners would probably hate me for saying this, but that are sexier. They're looking at AI or they're looking at things like that, that I guess is easier to understand. It's as crazy as that sounds. It's easier to understand AI because they can go on their computer and they can type one question in there and it pops out this fantastic answer.

31:58And they're saying, oh my God, I don't know what this is, but I need to own who's ever making this. And then they put investments into that because it's just, it's very quick to understand. There's no big education burden or you can use it one time and you're like, okay, this is pretty cool. and this is going to be revolutionary. And that's the end of the thesis and that's where they're throwing their extra cash. So - 100%. There's all these, Bitcoin is arguably irrelevant, as you're pointing out, to a huge swath of the population that doesn't save. And then I agree completely that the AI narrative has sucked a lot of the wind out of Bitcoin in terms of US dollar price in the last year or two.

32:35By the way, I'll go a little bit further. Here comes some heresy. When I published Why Buy Bitcoin in 2019, my view at the time was that Bitcoin was the best risk-adjusted investment I'd probably ever see in my lifetime. Granted, I think I started writing, it was 3K. And when it went to press, it was like 8K. So we're 10X higher in price now. And yes, a lot of the risks have been removed. But now I have to ask myself, is this still risk-adjusted the best investment opportunity available to me? And I can still answer yes, but also I can say, but not to the point that I want to put substantially all my portfolio in it.

33:15In other words, there are other opportunities, investment opportunities that are also attractive. And if I think about risk, and I acknowledge the fact that Bitcoin could still go to zero, God forbid, it might be worth owning some other assets as well. And so when I think about the opportunity that Bitcoin offers, it was crazy attractive when I first started buying it and made a big bet on it. It was even more crazy attractive when you made your first buy, which I'd been around at that time. And now it's very attractive, but are there other assets I want to own out there? Yeah. What are some of these other things?

33:54I mean, it's an investing show. Let's talk about some these other ideas you got. I love it. Let's hear it. Yeah. Yeah. I mean, God help me. I'm probably going to be buying some real estate soon. That's one thing that I think it's okay to own. I like monetary metals. I don't think Peter Schiff is right, but I do think that gold and silver and platinum and various other lesser monetary metals are probably going to continue to be good investments over at least the medium term. I kind of like commodities in general. I think that when oil and gas is kind of washed out, I think that if we're going to build out all this electricity capacity and general power capacity, there's going to be a huge role for Nat Gas because it takes a long time to get the nuclear online and solar is not going to fill the void.

34:45And yeah, I had this argument with my brother-in-law is in the solar install business and he's like, solar is going to eat everything. And I say, no, it's just going to be more, this is Lynn Alden's view too. It's very rare in history that some form of energy generation just goes away. You generally just get more of all of the above as humanity finds new and more interesting ways to consume energy. I mean, there's parts of AI that I like. I mean, I'm a Google shareholder. Preston Pysh What did you think about, Elon recently did an interview and was asked, what are some of the investable things in the space.

35:23I'm paraphrasing the thing. And he named one company and only one company, and it was Google, which I found noteworthy as a competitor. That reminds me of an interview he did probably 10 years ago. And this was maybe before OpenAI was founded. I don't remember exactly when OpenAI was founded, but it might've been in the early days of OpenAI. And someone was asking him his concerns about AI in general and the threat of AI to humanity. And they asked him, well, what companies are you worried about? And at that time, he said, there's only one. He didn't say which one it was, but it was pretty clear already at that time that it was Google.

36:02Yeah. It is really noteworthy because the whole reason that he initially funded OpenAI with Sam was because of his conversation with, I think it was Sergey from Google that he had that conversation and the species comment came out and it scared the living bejesus out of him. And then he went and funded OpenAI to compete with Google. And so I guess I found it really interesting that just, I think the interview came out just this week where the one company that he named as a viable competitor to what he's doing with XAI was Google. And when Google first came out with some of their AI models, they were not impressive.

36:46And I would just say just in the past month, it really seems like they're giving OpenAI a real run for their money. I know I've been playing around with their model, with their Gemini model. And some of the things that I'm getting back are very impressive and completely on par with OpenAI's model. 100%. And if you, the classic trope of lock-in and having a platform and offering multiple products. Look, it affects me. I still have a Gmail account. God help me. I use Google Calendar. So is it convenient to use Gemini all on the same login? Yeah. You bet it is. Yeah. Bundling. Yeah. There is massive lock in there.

37:26Okay. What about you, Preston? I mean, what else do you like in terms of investments? I mean, I know over the years, and by the way, I'm sympathetic to your view, which is like, if the world reprices on Bitcoin, then companies probably aren't going to be worth 30 times earnings. They might be worth eight times or 10 times. But is there nowhere else that interests you right now? I mean, yeah, where I get frustrated with all of this is for the companies that I am finding that I think are going to have a huge impact in the future, the risk-adjusted return is really kind of the real question. And it's like, should I be paying these crazy multiples to own the company when the execution risk and the competition risk and all of the risks that you just start listing, right, are in competition with, I look at Bitcoin and although I'm not real thrilled with the past year's performance, to be quite honest, I find that Bitcoin seems to do really quite well, especially after those times when you're most frustrated with it.

38:30So until I kind of see a real clean break that the network adoption rate that we've seen growing at a power law type pace is broken or doesn't seem to be fulfilling what many would say is mathematical certainty or just kind of a global network rate of adoption, if I ever felt like that was breaking down, which I don't, I'm having trouble finding things in the market that I think are going to outperform. It's really hard. I'm sympathetic to that view. And by the way, God helped me six years ago, I published a price target for Bitcoin, right? I had three scenarios. And this is obviously simplistic, right?

39:11But it's what I decided on, which was back then scenario one for me was fails, it dies. Okay. And I put a one third probability on that, which was probably too high, but I was still learning, cut me some slack. And then the second scenario was, okay, it's already reached its potential. Remember, this was a publication of 8K Bitcoin. And then the third scenario, which has a one third probability to was the success case. And I didn't look ahead decades and decades, but I picked a 10-year price target. And the 10-year price target was 8 trillion of network value, which would be about 400K per coin.

39:50Okay. And remember, price was eight. So eight to 400, that would be a 50X, right? Pretty attractive for a 10-year return. And how's it gone? Well, that was six years ago, and it's gone 10X, right? Which leaves another 5X for the next four years. I still kind of like that price target. It's kind of in the ballpark. I could definitely be wrong, but do I want to hold an asset that I expect to go 5X in the next four years? Yeah, you bet I do. Do I want to hold it in size? Sure. Yeah. So everyone always says, why so bearish, Andy? I think I'm sticking with that target, at least for now. I guess I'm more bullish in when I look at what a lot of this technology is going to bring, especially in the form of robotics and AI.

40:35I'm just looking at how are the governments going to respond to so much dislocation that's going to happen from all these advanced technologies. And they're going to have to print. They're going to have to print just like they've been printing, maybe even more. And when I look at Bitcoin and the fact that you can't, it's immutable. I can send it straight over any type of internet connection where gold, you can't do that. I don't know. The use case is there times 10 for me in the face of everything that's transpired since 2019. The timeline that you're throwing out when you were writing the book.

41:11I'm looking at back then, we weren't talking about AI as being like, it was a fiction novel back then. It was more of like, oh yeah, we're tinkering with these neural nets and they can do things. And there was no chat bot that you could talk to and it would give you some super advanced answer. The humanoid robots, just in the past year, when I look at the numbers and the quantities that Elon alone is saying he's going to be pumping out in the coming five years, like this thing's moving out like a freight train. And when you look at the gigafactories that he was building for the cars and all these battery plants and how many cars, the projections of what he was saying he was going to do around now and in the coming couple of years, when they were building that and the size of some of those factories, and when it was first getting announced, I was like, come on, the size of this is crazy.

42:03Is there really going to be this kind of demand? And now in 2025, when I'm hearing and seeing the cost reduction to the end user with the driverless technology and what it's going to do to Uber as far as the robo taxis, and I just kind of pull on that thread a little bit, I can quickly see how they're just going to be such a dominant player, like absolute dominant player. And so then I'm just hitting copy paste on the humanoid robot side, which I think is not seen by, I think very few people, everyday people are looking at the humanoid robots and thinking that it's going to be a viable thing. Just like we were looking back in 2020 or 2019 with the robo taxis and saying, I don't know, man, like, will it now it's getting very real.

42:51I think you're going to have the same thing with the humanoid robots in about five years from now. And I think that's when it's going to really set in where the printing press is going to get super hot, maybe starting to catch on fire because of the pace that it's going to have to be moving at. And do I think what Elon's doing is going to be a market leader? Yeah, I absolutely do. But like all things, it comes down to how much are you going to pay to participate? What's the markup on owning that equity versus just betting on the printing press continuing to fire off, you know,$100 bills all day long, all day and all night.

43:29So we're going to get a lot more shrewd bucks. You're right about that. I have, I have almost no doubt about that conclusion. And yeah, we're still at a point, you know, Bitcoin is now fraction, still less than 10 % of gold, you know, in terms of market cap. I mean, if gold's 20 something trillion at current prices and Bitcoin's at 2 trillion or a little under. I think gold is just so easy for the market to understand. I think people are finally understanding the debasement trade. They're finally understanding that nothing stops this train. I think that that has finally hit a Wall Street. And I'm sure you still have tons of friends that work on Wall Street.

44:11It seems everybody understands that and everybody agrees that the printing press is never turning off and the math don't work for fixed income anymore. I think everybody understands that. And so then the question is, okay, well then how does that get resolved? And what do I want to own as that's resolving itself? And it just seems like everybody's like, yeah, Bitcoin's a lot to wrap your head around. There's all this encryption stuff. And do I trust the people that wrote it? And I think it's a lot of work where gold is just this easy button that they can push and it just answers the mail on the thesis, the debasement thesis.

44:48And so I think you have a lot of people just hitting the easy button because they just don't want to do the work to understand it. 100%. And reminder, there was a very, very long time where wealth managers wouldn't even own gold, right? Like forget about Bitcoin, which is, you know, if your thesis is hard money, at least you ought to get your head around gold. But I would say until very recently, most of my wealth management brethren were not willing to buy gold for their clients. Yeah. And so if Bitcoin is like a bridge farther than that, this stuff, I guess, just takes time. And then of course you got the factor, which is central banks are actually buying gold.

45:28It's not clear that they're actually buying Bitcoin with rare exceptions, right? And so, yeah, my belief is that there is Bitcoin accumulation going on behind the scenes at the sovereign level, probably in size, but we haven't heard about it yet. And that's the smart strategy, to be honest, right? It's not smart to say, yes, I'm going to buy a bunch of this thing before you actually buy it because that bids up the price. You might as well accumulate quietly over time, even if your long-term goal is to turn it into a significant part of your overall reserve portfolio. So stuff takes time. It's still early days.

46:07And I guess that's just where we are. Let's take a quick break and hear from today's sponsors.

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50:00Well, first of all, someday the four-year cycle will end. Nevertheless, it remains undefeated. And where we sit today, I'm 60 % or 60 plus percent of the belief that it's another four-year cycle and we're in a bear market, which is also to say that I think there's a 40 % chance that it's not a bear market and that we'll recover from this current downturn. And probably there'll be significant upside. I'm thinking in terms of like 200K, let's say next year or within 18 months or roughly that timeline. So you're saying it's a baby cycle. It's a baby cycle. A baby cycle. Sure. It's just a mini sell-off.

50:39Yeah. In that scenario, exactly. Or just a market correction like we routinely get in Bitcoin. coin. We've suffered through many of them over the years or celebrated them, right? If you've got cash in your stack and you're buying cheap, it's a huge, huge opportunity, right? And so, but yeah, look, my base case, my 60 % case is the four-year cycle remains undefeated and we're living through a bear market right now. And I'll tell you why. The history, of course, of the four-year cycle was at the beginning in the first epoch, if you were a miner and you found a block, you got 50 coins. That was the block subsidy.

51:18Yes, you also got transaction fees, but they didn't amount to hardly anything. But basically, you got 50 coins per block. And the software was written such that four years hence, or whatever, 200 ,000 blocks, I don't remember the exact number, the reward would get cut by half in terms of coins. So you go from 50 to 20. 210 ,000 blocks. Thank you. 210 ,000. And so there was some doubt in the community about whether the miners would actually do that, right? What was to stop them from just continuing to mine with a 50 coin reward? And so, yeah, so there was doubt in the early days, hence when they actually did the right thing and cut the reward by half, that was a catalyst for a bull market.

51:58And then by the second epoch, or I should say the coming to the third epoch, there was arguably some doubt. I mean, I guess you actually were around in that time. I was not, you would know better than I. Let's say maybe some members of the community had some doubt, and then others didn't. Anyway, it worked out. So the cycle became more muted. I would say the factor that still was a factor in the last halving was, there's still the game theory fact that if you were to attack the network, do a 51 % attack, the best time to do it is right after the halving. And the reason is that if you're a miner, and you're doing your capital expenditures and you're investing in mining equipment in ASICs, you are making some assumptions about the return on investment you're going to get.

52:42And you're assuming that you're going to mine the current block subsidy until the next halving. And by the way, you probably have at least a four-year outlook. You're not buying brand new machines with the expectation that they're going to be obsolete in less than four years. So you're budgeting for, oh, I'm going to make good money until the halving. And then maybe after the halving, I'm close to break even. I'm making a modest profit. Well, of course, if that's the set of circumstances, then the most miners are likely to be at or near break even on the most amount of their equipment right after the halving.

53:16So if someone were to, someone, I don't know, governments, who the heck knows, were to implement a 51 % attack, they would probably do it right after the halving. And so if you get past the halving and you don't have a 51 % attack, right, well, then you're probably say for the next four years. So that's, I think, been an ongoing factor. Now, today, at this point, the block subsidy is so small as a percent of the total number of coins that I think it's reasonable to say, okay, it shouldn't be a major factor. However, we still live in a world where a lot of the coins are concentrated in a few hands.

53:49People probably know that the literal top that this year price-wise was when one single individual, according to Galaxy Digital, used them to sell 8 ,000 coins, I think it was. One guy. 80 ,000. Oh, excuse me. Thank you, Preston. Off by an order of magnitude, 80 ,000 coins. And that was one guy. And that was the literal top of the market. By the way, you may object, oh no, that was the 124K top. We subsequently hit 126. Well, one of my other non-consensus views perhaps is that I measure in inflation adjusted terms, roughly speaking. So I would suggest that purchasing power of 124 was either higher or about the same as 126 six months later.

54:33Yeah. Related concept. In my view, we did not get an all-time high right after the ETFs when we hit 72K, I guess early last year, was it early last year that we hit 72 and the prior high was 69. To me, that was not an all-time high because it was years after the fact. So 72K several years after 69K at actually less purchasing power than 69K years ago. Anyway. So yeah. So look, individual whales can put a ceiling on the market, period, full stop. This will not be the case someday. Someday more coins will be distributed. There'll be fewer and fewer very large holders who are OGs who acquired their coins either by mining or by accumulating at very low prices a decade plus ago, those guys will eventually be gone, or at least their ranks will be reduced.

55:23But unless and until that happens, these guys dumping can basically cause the bear market. And they've lived through several of the same pattern in the past. And I got to believe, don't get me wrong, as far as I know, I don't have any personal relationships with anyone who owns 80 ,000 coins. But I got to believe that there's some percentage of OG whales out there who say, I've seen this movie before. I do want to lighten my load. I do want to buy other assets. I do have other life goals. There's other things I want to do with my time. And so I'm going to sell some coins here. And it can be self-fulfilling.

56:00And again, I look forward to the cycle where it ceases to be a cycle and I'm wrong. And I'm quite confident that that will happen someday. And it may happen, this may be it. And that's why I assign a 40 % chance to it as opposed to the 60 % that no, it's just another normal cycle. Any other highlights or things that when you look across the market right now that you think are super important that the audience should know, or that you think warrants a final call out? Yeah. Yeah. Maybe I should just keep the bearish trend going here. Here's a scenario. Okay. Preston, where - I'm not that bearish.

56:39I'm not that bearish. I'm just kind of like - Oh, I'm bearish. No, I know. But I think the audience, The audience has heard a couple conversations that I've had, and a lot of the people that I've had on are pretty bearish these days. I don't know that I'm that bearish. I'm just more confused than I think I've ever been in that the S &P 500, Andy, is 1.5 % off of its high, and Bitcoin is down 30%. And historically, the correlation between risk-on indices and Bitcoin has been way more correlated. if Bitcoin was down 30%, the S &P would probably be down 15 % right now. And everybody from a market sentiment would be, hey, risk off is happening.

57:21And I'm just not seeing it in the indices. So although we're talking a lot about this, it seems to be a bearish sentiment specifically to Bitcoin, but it's just like, everything's just not adding up for me right now. And go ahead. I interrupted to your point, but I'm not bearish. If anything, I'm just kind of confused, I think is more where I'm at. So first thing to say, did I predict that we'd touch 80K in the month of November this year? No, I did not predict that. I'm surprised also. Second thing I'll say is, yeah, the correlation data has definitely been more pronounced in recent years. And if I were to explain it, I would suggest, yeah, it's because Bitcoin has sort of financialized and entered the mainstream rate.

58:04And if you can buy a Bitcoin ETF in your brokerage account, then when you get scared about risk and you're looking at things to sell, you can sell some of that in addition to your NASDAQ or whatever else. So that's undoubtedly true in recent years, the correlation has been higher. And so, yeah, we have a decoupling now and that's supposed to be good. We're supposed to like it when Bitcoin doesn't correlate to risk assets, except for when it's to the downside. That's not Not so fun. I'm not aware of any fundamental problems, like anything actually breaking as we speak or in recent months here. So there could be some explanation we just haven't heard about and don't know about.

58:47But yeah, I don't have any insight there. When I think about short to medium returns, I look at Bitcoin and I say, well, if it's a bear market, what's my expected downside. I kind of assume like, I don't know, something like 68K, or sorry, 60K. Maybe the 58K gang gets to ride again. We'll see. But the upside, if this is not a bear market and the money printer comes back, which there's a very good chance of even in the near term, we see 200K next year. The expected value, I multiply out those probabilities. I say, look, I think we're back to 100, what's the number, 116K or something, well into six figures next year.

59:25And on a percentage basis, that's pretty good. And then again, long-term, nothing's changed for me. I still expect multi-hundred thousand dollar Bitcoin before the end of this decade. And if it reaches its potential, obviously, it goes into the millions and beyond. So that's all good. And yeah, look, the bare scenario that I was about to lay out was with debt levels this high and with inflation this much of a threat, and with uncertainty about return on investment in hot areas like, okay, in AI, buying AI stocks broadly defined at current valuations, is that likely to yield an attractive rate of return?

1:00:02You might say no, because everything's kind of bubbly looking, or many things are. B, the CapEx burden is huge for these guys, and they may not earn a return on investment on that CapEx anytime soon. In fact, they may be vastly overinvesting. And it may be that it's like electricity or other sort of general technologies where actually most of the value accrues to the users, they capture the surplus rather than the producers. We don't know. But I can envision a scenario, which I'm not saying is high probability, where ROI at current prices on quote unquote, AI stocks is not that attractive. Maybe it's if you buy a basket, maybe you make low single digit returns or something, because a bunch go to zero and then a few survive, but they don't go up enough to make the basket do really well.

1:00:52And then maybe the Preston Pitch thesis of stocks are on average, 25 times earnings, and they're going to go to 10 times, but it might take a decade. And earnings grow through all that. So you get whatever, 10 % earnings growth, which are multiple contracts by more than half. And so you make a modest return. Maybe you beat inflation. And Bitcoin heroically makes 15 % a year, and it's the best performer in your portfolio among major asset classes. I don't know. Or maybe it makes 20 % to 25 % a year, which by normal standards is very, very attractive. Very, very. So that's the way it could go. And we could be in an era where the returns on Bitcoin are very attractive compared to other assets, but we're not in a world where you're going to make 40 % annualized and you're doubling every couple of years on average.

1:01:47Those days may be behind us. And Bitcoin has other benefits we discussed earlier, and that's fine. So we may be in the get rich slower time period rather than the get rich quick era of Bitcoin. Not what people want to hear. We're going to get rich slower than you thought. Exactly. We're back to saving and patiently investing. Really sexy stuff. I mean, Andy, these are unprecedented times. I don't care what anybody says. When you look at history and you look at the rate of change that happens throughout history and you look at right now relative to any other point in time and this is wild man like the stuff we're seeing rolling out the pace that it's rolling out i'm covering tech now on the show and it's just like it's unbelievable the amount of things that are coming up on the radar it's wild but oh it's obvious you were smart to pivot into that area because A, it's fascinating, endlessly fascinating.

1:02:50I know your mind appreciates exploring the frontier. I'm glad you're still doing some Bitcoin content as well. Of course. Yeah. Because it's relevant to the future. But yeah, you're going to have lots to do. There's going to be no shortage of topics for you to cover in future. And it's all interconnected. I mean, it's going to have so much dislocation when it comes to just the employment market and things like that as we go further down the timeline and the offset that the governments are going to have to print for all of that. All of it's interconnected. And what a time to be alive. And what a pleasure to talk to you, sir.

1:03:25And I really appreciate you always making time and coming on the show. Give people a handoff, Andy, if they want to learn more about you or they want to check out your book. Sure. Why Buy Bitcoin is the book. I'm still on Twitter, notwithstanding the degraded experience. Ed's from Andrew is the handle. Someday I'll make it onto Nostra with you, Preston, but it took me, I don't know how many years to adopt Bitcoin. And so maybe if it took me seven years to adopt Bitcoin, I'll be on Nostra in a few years from now, after it's proven its value in terms of risk return to a Luddite, to a knucklehead like me.

1:04:01Well, we'll have links to that in the show notes. And Andy, thanks for always making time, sir. Thank you, Preston. Keep up the great work.

1:04:33before syndication or rebroadcasting.