Preston Pysh - From Value to BTC
In this episode Preston Pysh joins The Business Brew. Preston needs no introduction in the financial podcast world. But just in case... Preston Pysh is an authority in business, investing, and leadership. His business podcast is globally ranked #1 on iTunes for stock investing and numerous other categories. On Amazon, Preston is globally ranked as a top 100 business author. His work has been translated into numerous languages and he writes about international finance and central banking. His podcast, We Study Billionaires, has been downloaded millions of times per year. Preston has interviewed billionaire NBA sports team owners, Hedge Fund Managers, and global authorities in finance. His work has been featured on shows like The Colbert Report on Comedy Central, The History Channel, and many others. Preston is the founder of the Pylon Holding Company and he is a graduate of West Point and Johns Hopkins University. He was an AH-64D Attack Helicopter pilot and Company Commander with the 101st Airborne Division During Operation Enduring Freedom and he was awarded the Bronze Star Medal."
Bill used to listen to Preston when Preston co-hosted the Saturday "show" on The Investor's Podcast Network; We Study Billionaires (see https://www.theinvestorspodcast.com/we-study-billionaires/). Bill has a habit of being late to ideas, so he was closed minded to Bitcoin while Preston made the case for Bitcoin. Fortunately for Bill, he does usually realize when he might be wrong/stupid. So, he invited Preston on The Business Brew to discuss Preston's transition from a "traditional value" investor to a Bitcoin bull.
Regardless of whether you, as a listener, agree with Preston's thesis, we hope you can learn a little about:
(a) how Preston thinks,
(b) what it took for him to make a macro/currency call, and
(c) the courage it took for him to make a call on something Buffett and Munger dismiss as silly.
We are grateful for him saying yes to coming on The Brew. Props on the BTC call Preston.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I am your host, Bill Brewster, with someone that needs no introduction in the podcast circles of finance, the one and only Preston Pysh. I don't even know how to introduce you except you're one of the biggest names in finance podcasting, and who am I to introduce you?
Preston: I’m humbled with that introduction because I definitely don't see myself in that light for sure.
Bill: Well, I think it's undeniable that the Saturday show that you guys put together, how long did you run that for?
Preston: Oh, I think we started in late 2014, may-- I think 2014 is when we started it.
Bill: Yeah. That was what a five-year, six-year run that-
Preston: Six years-- [crosstalk]
Bill: -you were on that show?
Preston: Yes. We're in 2021, almost seven years or whatever-- [crosstalk] [laughs]
Bill: That's amazing. Good for you guys. Early adopters on the new platform, and it crushed. For those that can't put two and two together, we're talking about We Study Billionaires, The Investors Podcast, and now it's The Investor’s Podcast Network, right?
Preston: Yep, we’ve got a couple different shows now.
Bill: Yeah, so anyway, we'll get into it, because I don't think anybody needs to hear who you or I are. As always, this is not investment advice, and it's for entertainment purposes only. Do your own work, and don't blame us if something goes wrong in your investments. That's not on us. I wanted to give a little bit of context for people that don't know how you and I got connected. Do you want to go through a little bit about how you decided to start a bitcoin spinoff in The Investors Podcast Network? Or, what's a good way to frame what happened--
Preston: Oh, I see where you're going. I've owned bitcoin for a long time. I bought my first bitcoins back in 2015, and I've always had a bitcoin bug from probably much longer than what people might realize. They know that we've stood up the show recently, I've been doing the show for not even a year, that's had a bitcoin focus. For a long time, I know Stig and I, first covered it on our show in 2015. After covering it on the show, I bought some bitcoin. We talked about it on the show very sporadically up until this past year, and then we started talking about it a lot, and then in the last six to nine months or whatever it was, we decided that it would probably be better for us to do a show that's fully dedicated to that while still doing the other type of content that we were doing. I just had a passion for talking about it, so it was just a natural fit for me to really do that as a full-time show. Here we are. I know where you're going to pick up--
Bill: [laughs]
Preston: [crosstalk] -your comments, so-
Bill: Yeah.
Preston: -I'll leave it there.
Bill: Both of us came up through investing studying at the Church of Berkshire, right?
Preston: Absolutely.
Bill: It's fair to say we both revere Buffett and Munger.
Preston: Still do.
Bill: That's right. You and I actually first met at one of The Investors Podcast bar crawls at Berkshire.
Preston: [laughs]
Bill: I hung out with your dad that night for almost the entire night. He's a great guy. I followed you for a while, and then to be perfectly candid, when you started talking about bitcoin a lot, I churned a little bit off the show and focused a little bit more on the media that I'm doing. I had an experience last year with a call on an equity that was not loved, and I realized how much when you're public on something like that, there's just a lot of emotions that I had tied up in it because I had reputational risk. As it worked and as this show has gotten bigger, and my profile has gotten bigger, I've even felt more and more of that pressure.
I was sitting there thinking one day, looking at a bitcoin chart, and I was like, “Man, Preston Pysh killed it.” Then, I look at what you're doing, because I started to go through the Saturday shows, and I realized that you're not a regular host on that anymore. You do come back for some mastermind ideas or groups.
Preston: Yeah.
Bill: Then, I saw you’ve got this Wednesday show, and God forbid, I think to myself, “Boy, somebody really went out there and thought for themselves, made a major call, took a lot of career risk in my view, and crushed it.” So, I send out a tweet that says, “Props to Preston Pysh for thinking on his own. This is a guy that studied at the Church of Buffett and Munger. Munger calls this stuff rat poison or snake oil, or whatever, and Preston’s still not afraid to go out and make this call.” I'll tell you what, man, the vitriol that I got for complimenting you-
Preston: [laughs]
Bill: -makes me want to tell other people that they need to look in the mirror and do some therapy, man, because I don't know why anyone cares that much. I just couldn't imagine what that was like for you. I was like, “I want to highlight Preston on my show now,” so thank you to the trolls that talked shit about my complimenting Preston, because otherwise, this may not have happened.
Preston: The thing you got to ask yourself is, why are they so upset?
Bill: I don't know, man, I really don't. You and I are two guys that love finance. We both do finance podcasts, at least in the start, because we both really were on an investing and learning journey. Podcasting seems to be the thing that you and I both enjoy. We both have certain ideas. You happen to have one that I think is not one that the traditional value school enables them to see in a similar way. I think people felt a little bit betrayed by you going off on your own idea or something. They probably imputed something on you doing that that they didn't like either in themselves or why they were coming to you, which I would argue neither one of those things is particularly healthy to impute on you.
Preston: I found that whenever you get a huge emotional response out of somebody, you're dealing with a party that is speaking absolute truth, and the other party doesn't want anything to do with it. Or, you're dealing with somebody who is speaking an absolute lie and the other party is so upset and so frustrated that they want to scream. What's unique about this situation is from my vantage point, and the future will determine whether this is right or wrong, but from my vantage point, I look at this as just being a really obvious position. People who, in my opinion, have not put in an enormous amount of work to understand it, see it as a total scam. So, when you combine those two things together, you get fireworks.
Bill: Yeah.
Preston: I think that's what's playing out here. Let's be very forthright with this. If I'm right about bitcoin, it is going to be insanely inconvenient for people who have the opposite opinion. Insanely inconvenient.
Bill: Why is that?
Preston: Because it's going to pretty much eat everything. If you're in equities, especially if you're in fixed income, this is going to be a devastating event, what my opinion is on what it's doing is right.
Bill: Do you view bitcoin as almost like the software is eating the world? Do you view sort of what bitcoin is becoming as this-- I don't want to say just bitcoin, because I'm not as well versed at all in this as obviously you are, but blockchain technology, in general, is just the new software is eating the world in your mind. Is that a fair statement, or no?
Preston: When people say the word ‘blockchain,’ what I think they're talking about is something that's completely decentralized, and that there's a reason for needing something that's completely decentralized. You need a blockchain protocol in order to supply it. When we say that, what we're talking about is a database that requires an immutable ledger that no entity, individual, or a large sovereign nation can step in and stop. That's why you have a blockchain. When I look at this whole movement, and why a blockchain was selected, the reason a blockchain was selected is because no country, irregardless of the power that it wields, can ever shut it down. There's an incentive structure that's built based on the game theory that creates this incentive structure that will continue to propagate further adoption within the network effect of that protocol.
When we're using terminology, that one's a really important one that I think most people in finance just throw around the word ‘blockchain,’ but they really don't even understand what the implications of what they're saying is, and it's a huge, huge delineation between when you start talking about other, “decentralized protocols,” I think what you'll find is none of them are relative to bitcoin which is, and so--
Bill: For somebody that doesn't even know what a protocol is, do you mind defining that term?
Preston: Yeah. When you look at the Internet, and you're talking about the internet protocol, this is a consensus that, everybody agrees is the software that we're going to use in order to transmit and exchange data packets with each other. Right now, you and I are exchanging data packets, right now, and we're doing it in the literal sense with just our language. Our language that we're using is the English protocol. If you were French and I was French, we would be conversing through a French protocol, and then we could switch protocols and we could speak English if we were both bilingual. That is a protocol. You don't have to agree to speak this kind of English. In fact, the people living over in the UK have a slightly different protocol, but it's really easy for us to understand what it is that they're saying. They just say it a little bit differently, but our ability to interpret those digital packets as they arrive into our brain, it can comprehend it.
When we talk about protocols, we're talking about consensus. We agree to this protocol that we're using to converse right now. When you talk about bitcoin or any other type of protocol there, so you have the transmission control protocol that rides on top of the internet protocol, TCP rides on top of the IP, these are protocols that the global computers are saying, “We're going to use in order to exchange data packets.” Bitcoin is just another one of those it's writing on top of the IP, the internet protocol, and it's a protocol that says, “This is how we're going to define a fixed set of units, which will eventually get to 21 million,” and the consensus mechanism or the full nodes that are running-- I run a full node here at my house, it pretty much takes no electricity to run a full node, but those full nodes are saying, “This is the consensus. These are the rules that everybody is going to play by who wants to participate in bitcoin.”
If you were going to put it into the back into the language example, any person could say, “Nope, this is the dictionary that we're going to use, and these are the set of words that we're going to use.” It's obviously not a perfect example, but it correlates. If you want to fork, and this is a popular term that you'll hear in this space, if you want to fork the English language and you want to start coming up with your own Bill kind of terms, you can do that, but that doesn't mean that the consensus of all the other people that are operating off the dictionary are going to go along with you. When you start talking about money, and you start talking about a group of people that are saying, “I agree. There's going to be 21 million units, no more, and this is the supply schedule that they're going to get issued at,” you can see how there's an incentive structure for me to never change the consensus rules of the full node that I run and the 100,000 other people that run their full nodes, geographically distributed all over the planet, and onion wrapped in a Tor way so that you don't understand who's running them or how they're running them, but that they are being run, you can understand real quickly how, I have no incentive to debase the number of units that are operating inside of that protocol that will eventually get to 21 million. If you come along and say, “I want there to be 40 million units instead of 21 million units,” I'm going to say, “Good luck with that. Good luck convincing somebody else to start running that too, especially at this point when you got this many participants involved.”
Bill: You would need a critical mass to agree to change what they're doing in order-- It's logically-- or, it's practically impossible. You need so many people to go against their own self-interest--
Preston: That's right.
Bill: --that it makes no sense to say that that's probably going to end up happening.
Preston: I don't know how many are mined right now. I think it's around 18 million of the 21 million coins are already mined, and you look at people who have owned it since 2015, and they're up over 10,000% from the time they started buying it. It's a little hard to convince somebody who has that to-- [crosstalk]
Bill: [chuckles] You want to give it all back, so we can have a couple more coins?
Preston: Good luck.
Bill: No, I'm not interested in that. [laughs]
Preston: That's right.
Bill: Yeah. How long did it take you-- You said you got interested in, what, 2015?
Preston: Yeah.
Bill: What happens? You buy a couple in 2015, what's your learning journey when you got in this-- [crosstalk]
Preston: Well, when I was buying them, they were $220.
Bill: Yeah.
Preston: It’s pretty easy to buy a couple.
Bill: Yeah.
Preston: My journey started off, we just heard about it, and like you, you're creating content, so we're just trying to come up with creative ideas for shows and whatnot so, “Hey, let's cover bitcoin. What the heck, let's see what it is.” In preparation for covering it, I read a book called The Age of Cryptocurrency, that had just come out at the beginning of 2015, maybe late 2014 is when the book came out. I read this book, and you’ve got to remember, this is at the same time that I'm learning about macro and learning about Ray Dalio, his 80-year credit cycle stuff. I never shook the feeling from the 2008 crisis that anything was fixed. Following 2008 and looking at the quantitative easing that was happening, I was saying, “There is no fix that's happening to any of this.” This is a band-aid on a massive wound to the body that's bleeding out. There's no way this ends well, that they're stepping in and manipulating the cost of capital. I understood that stuff back in 2015, and I was saying, “How is this going to end? How is this going to be resolved?”
When I started reading this book, The Age of Cryptocurrency, and started hearing, well, this is a movement by cypherpunks that have been trying to figure out a way to create a fixed number of digital units that operates over a network via protocol for decades-- I think they've been trying to crack this-- people like Adam Back and some of the key programmers in the space, I think they've been trying to crack this from the early 90s, maybe even the late 80s, to create sound money over a protocol on the internet. It's not something that's new at all. The solution that was supplied in 2008 was, which was use a blockchain to force something in the digital space to have a scarce finite amount of units.
I read this book, and I say, “This is the solution, potentially, to this disaster of competitive global devaluation of fiat currencies that have no peg,” because when we get to the root of the issues that we're seeing in the global economy, I'll even go as far as saying why we see social unrest happening globally, for me, it's the money. It's the fact that no currency is pegged to anything. There's a financial incentive for domestic nations to continue to devalue their currency so that they can attract higher demand for the goods and services that that nation is producing.
If everyone's operating off of this idea of a floating fiat currency between nation states, answer this one for me. What's their incentive to not to base their currency at a slow enough pace that the other nation states can't fully step in and try to stop the flows that they're trying to attract domestically into their country? That's the game. That's the game since we've come off the gold standard back in 1971, and when we came off the gold standard, guess what? Every other country came off the gold standard simultaneously, because of the Bretton Woods agreement. This incentive has been in place, I would argue that the reason it's been able to play out for so long is because there's been so much interest rates to play with. When we came off the gold standard, interest rates were going up. They peaked in 1981 at 16% on the 10-year treasury, and they've been able to play around with the federal funds rate ever since. Now, they've stepped into the longer duration of the curve and they've continued to manipulate that. As long as they had interest rates to play with, they've been able to manage this money supply with a swap for monetary baseline dollars for credit. Now, they're at an endgame because now you're getting down, especially in other parts of the world, not necessarily in the United States, where in nominal terms, you're in negative rates. Now, how in the world do you incentivize anybody to possibly sign up for a contract that guarantees the loss of their capital?
Bill: Yeah, that one's tough.
Preston: Yeah, that one’s tough. I went off on a little bit of a tangent.
Bill: No, I appreciate it, because it frames how you're seeing the world, and-
Preston: Yes.
Bill: -how you came to your conclusion.
Preston: That's right.
Bill: Yeah.
Preston: I read this in 2015, and I had all of those opinions back in 2015. I'm reading this book, and I'm saying, “My God, if this thing could actually work,” which was a huge, huge ‘if’ back in 2015, because they had major scaling problems. When you look at how many transactions, I don't know what the number is, but it's like 20 transactions per second that can happen on the base layer of the blockchain. Meanwhile, you’ve got Visa and MasterCard that were doing-- I don't know what the number is, but I guess-
Bill: Yeah. Probably amounts at every second.
Preston: 20,000, 50,000 every second.
Bill: Yeah.
Preston: People are looking at this and saying, “Well, how in the hell will that ever scale?” That's what we were dealing with back in 2015, and so I saw it much more as a niche position to like, “Hey, the upside on this could be absolutely massive to the point where it would literally replace fiat currency, totally.” When I was looking at what it was valued at the time, which was-- I don't remember, but I think it was under $10 billion at the time. I just remember looking at the upside and saying, “Hey, this could be $10 trillion to $50 trillion maybe or something crazy,” like those numbers, and I was like, “When I look at this from an asymmetrical trade, why in the world wouldn't I take a 1% position in my portfolio at a minimum?” That was just it, and so it's a little hard to not dig deeper and study this thing like a fiend when you start seeing a 10x or 100x return.
When you start seeing that, then it's like, “Okay, I don't want to sell a winner, especially when my initial base case was, “Hey, this thing could be worth $10 trillion or a number even higher than that. Let me dig deeper and try to understand how the scaling could potentially be solved.” Then, the rabbit hole just got deeper and deeper and deeper. Dude, it's never ending. We could sit here and have a conversation about all the nuances of this for six hours, and we wouldn't even begin to cover it all.
Bill: Well, and I want to recommend people that do want to listen to you have those levels of conversation. You have a Wednesday show, every week on The Investors Podcast, the main feed, right?
Preston: Yeah.
Bill: Drops your show every Wednesday that's got it. I was listening to some of them to prepare. I don't understand half of what you guys are saying, but what I do understand is one of the fun things about the podcast is I've been able to have some conversations that I otherwise wouldn't. One of those conversations was with Naufal Sanaullah, who currently I think, I don't want to put words in his mouth, and anyone can go listen to two and a half hours of us talking if they want to know exactly what he thinks. He started out like a sound money, he was more Austrian in his thought, and now he's leaning towards an MMT-type thought, at least a temporary one. He's not dogmatic, which is one of the things I really respect about him.
Personally, I voted for Ron Paul in back in the primaries when I could, and I supported his campaign. There's definitely a part of me that identifies with the Austrian school of thought. I have since left some of that behind as an investor because I've tried to deal with the world as it is, not as I want it to be. But what I can respect about the idea of bitcoin is it gives people the ability to opt into a system where they are-- I don't know what the right word is, but maybe empowered to opt into a system that they choose to want to play in.
The other thing that's really easy for me to get my head around, and I know that gold bugs are going to hate me for saying this, because all the gold bugs are going to say, “Well, gold's got industrial value.” Gold doesn't trade for its industrial value. To me, the flaw in the gold argument has always been like, okay, well, let's say I have all my bars, and the world takes a complete dump, I'm going to carry around gold bars? The strongest guy on my blocks going to end up with all my gold. Whereas bitcoin, I understand the transportability of it. I understand-- I know that it's not necessarily anonymous, but I do understand that it's a lot more anonymous than carrying around a huge sack of gold bars one day if you need to flee the country or something like that, or if you just want to go to a different state or whatever. [crosstalk]
Preston: More importantly than that, Bill, the trust to use gold, especially at a sovereign level, is still there. You still are required to trust a third party when you're dealing with gold. In bitcoin, that's not the case. Why has gold always failed at a sovereign level?
Bill: I don't know the answer to that, outside of incentives.
Preston: Let's look what happened with the United States on the gold standard. The US goes on the gold standard, 1944, Bretton Woods, but what did the US do? Everybody else followed, they pegged their currency to the dollar, and then the dollar was pegged to gold, 1944. If you pull up a chart of the money multiplier from 1944 up until coming off the gold standard, that's how they debased it, is because the banks have a money multiplier that they're pegging it to gold. It starts off as a promise of, “Hey, for every $20, you get one ounce of gold, and if you come in and you bring it in, we will honor that, and we'll give it back to you.” Then, that turns into “$30 per ounce of gold, and we'll redeem it.” This money multiplier kept adjusting and kept adjusting for decades, but they were doing it just slow enough that no one really noticed. Then you get to 1971, and it's like, “Hey, about that gold, we just don't even think that it's really required--” [crosstalk]
Bill: Yeah. “We’re not interested in that anymore.” [laughs]
Preston: We're not really interested and no one else should be either. Currencies are just-- it's dollars now and the world doesn't necessarily need that, which is a true statement in the short term, but in the long term, all of a sudden, things are starting to fall apart, and people are like, “Why is everything in the world falling apart right now?” Well, maybe because they printed $30 trillion since 2008 globally and stuffed it straight into the hands of everyone who was holding fixed income, manipulating the rates lower, which put a flood of money straight into the top that never trickled down, and they're wondering, “Where's the inflation? Where's the inflation?” Well, maybe it went straight into the hands of people that had fixed income, and then as the rates went down, the capitalization rates of all the equity went sky high. It's the easiest-- When I hear people say that, “Oh, we don't have any inflation,” well, yeah, you don't, not in that gauge you're looking at, but if you think that gauge is accurately measuring the money supply, you are totally kidding yourself. That’s elementary-- [crosstalk]
Bill: Yeah, and asset inflation, especially, has been crazy.
Preston: It's elementary-level stuff. This is stuff that if you told your kids that are in elementary school. They would ask these questions, and they would arrive at the conclusion, because it's that simple. If you and I were playing a game of Monopoly, and the banker wanted to keep increasing the money supply, but the way they did it was they bought the assets off the board. Well, who's holding all the assets? The person who's collecting all the income right now, that's winning the game. Now, you're going to add more money into the mix, and you're going to stuff it straight into that person's hands that hold the assets? Well, what are they going to do? They're going to look at the remaining assets on the board and say, “Hey, I know that that you bought that for $100, and I'm clocking you right now every time you go around the board, but I'll pay $300 for that remaining asset that you hold on your balance sheet because I can,” because the bank just stepped in and bid the hell out of the assets that I was just holding, and now I’ve got to buy some more. It's a decapitation of the middle and lower class, if you continue to do QE.
Everyone's looking at it like, “Why is UBI happening? Oh, I just don't understand.” Well, because you just obliterated the middle and lower class and they can barely make it from day to day. Of course, you're going to have to step in and do UBI. Well, guess what? Now if you're going to manipulate the board by giving everybody instead of $200 going around go, you're going to give them $500 or $1,000, what are you going to do for the person who holds the assets? Well, you're going to bid up the prices of every time they land on your property. Since you own all the properties, you can bid the prices of their rent as high as you want it. It's just so freaking basic. But if you talk to anybody in finance or any type of academic economics genius, they make it seem like this is normal, and that this is really complex stuff. It's so straightforward.
Bill: I follow a lot of what you're saying and agree with a lot of it. My answer has been to own assets like Disney, because I say like, “Well, they're going to raise prices over time,” and that got a little bit easier to stomach paying the price when March came around, and I actually waited a little bit. I didn't buy in March or anything, I think it was June, whatever. Long story short, I tend to continue to agree with the idea of, if you own assets that are productive, whatever happens to the currency, the equity holder will probably end up earning more, I don't know that the equity holder loses wealth, because the funds will end up getting diverted back into the productive asset. That said, until you get really taxed, that's the major flaw in my thinking. It can always be taken from you or whatever. How do you think through that?
Preston: Equity holders are going to continue to dominate those who don't hold equity. The people who are going to get crushed, and this continues to work, as long as some alternative currency does not step into the market and supply itself as a better alternative, and trust doesn't break down in the form of currency that's currently being used. That game will continue to persist, and the equity owners are going to continue to dominate. If that changes, and there's a new unit of account that businesses preferred to deal in, in order to preserve their buying power, well, things start to get really interesting, really fast. Here's how.
The first thing that becomes an absolute disaster is fixed income because all of those contracts are denominated in that currency that's losing trust. Who in the world is going to lend in fiat terms, if trust is breaking down in that unit of account? Because they're going to be paid back, especially at longer duration, they're going to be paid back with that erosion of trust currency, that breakneck debasement currency that they wrote the contract in.
Bill: Right now, to follow on to what you're thinking, a lot of the companies that can afford to issue debt have been pushing maturities further and further out.
Preston: Because they're smart. [laughs]
Bill: Yeah, that's what I tell some people about enterprise values. I'm like, “Yeah, I get that an enterprise value shows up the same on a screen, but if you don't know debt until 2060, and the other guy owns it in 2026, that's a completely--
Preston: At 1%.
Bill: Yeah, that's a completely different enterprise value.” I don't want to have that conversation. You need to have nuance in the discussion.
Preston: What you just described is the biggest mistake that value investors are making today, is because they're treating these risk-free “rates” as if they're real. As if they are real free and open, settled interest rate. Me, as a hardcore value investor-- it might not sound like it, but let me tell you, it deep down inside at my core, I am a value investor. I also know how the equations work because I'm an engineer first. Whenever I'm looking at this, and I find it as no coincidence that Michael Saylor is also an aerospace engineer, his undergrad degree, because when I look at the equations, and I start saying, “What if one of these variables that I'm using as an input is wrong?” When I think about the manipulation that's happening in the fixed income market, not only do I think it's wrong, but I think it's grossly misunderstood, and out of this universe wrong.
Let's go back to our monopoly example. If we want to really actually understand what the debasement rate is, how would we figure that out from just a first-principles level of thinking, assuming there's no credit in the system? Well, you just look at the expansion of the money supply. If there was $100 in the system before, and after one hurt frequency occurs, there's $110 in the system, well, you had 10% debasement in that system. If we debase it by another $100, well, then you have 50% debasement rate. When I look at the M2 money supply and its growth rate in our economy last year, we’re at double-digit debasement. If that's nesting itself into asset prices, is that the real inflation rate, or is this thing over here that I'm being told is the real interest rate, risk-free rate of the 10-year treasury that's getting bid, and it's probably going to have yield curve control smacked on top of it, which effectively means, we’ll print whatever amount of money is required to peg the yield at X percent as yield curve control.
I just have a very different opinion on what inflation is. When I'm talking about risk-free rates and discount rates for equities, and it's a premium above this “risk-free rate,” I can't do the calculations with any type of confidence that they're free and open. My opinion is that the market is completely manipulated to the Nth degree because everyone's using these rates as if they're real. As you well know, and any other type of Buffett person, they know it all comes down to the discount rates, that inflation is setting the basis for any type of premium that's built on top of that for discount rates, for everything on the planet, for every asset or equity-based thing on the planet and fixed income. That's why I'm a bitcoiner, is because of all those things. I'm saying, “I'm going to start using this as my unit of account, because it's a fixed supply thing. Not only that, but it has an adoption rate, a network effect that's playing out that's somewhat unlike--" It is such a massive network effect that's playing out right now, that, I mean, just look at the hash rate. This is all-- [crosstalk]
Bill: What’s the hash rate for somebody that doesn't know?
Preston: When you're talking about the hash rate, you're talking about processors that are coming on, that are securing the network. The people that are securing the network with the hash rate are doing this because they're financially incentivized to secure it. You know how I told you there's 18 million coins approximately right now, and it's going to 21 million? Those remaining coins are supplied to these miners that are securing the network, that are doing these complex guessing mathematics. It's all about encryption. It's all about one-way functions that they're trying to solve, and as they're solving these things, they're getting rewards that come under their balance sheet because they're businesses. They're doing these complex problems, they're rewarded in bitcoin, and then if they need to pay their electrical expenses in order to continue to secure the network, they're selling their bitcoin for fiat to pay their electrical expenses today, but I suspect that energy companies are going to start accepting bitcoin here probably in the coming three years.
Bill: I think the thing that I find so offensive when people say something to me, “How can you congratulate Preston?” It's like this guy has just talked for 37 minutes about a thesis. By the way, a lot of what you said, as I've scrolled through your past comments and some of your old episodes, is correct, if for no other reason than you pitched pretty early, that there would be an incremental adoption curve-- If you just break it down to the very, very core of funds flow thesis that to your point when it was $220, you were the asymmetric upside on here is crazy. I think that a lot of people-- it's almost part of the value disease, but I think that a lot of people hear Buffett and Munger talk, and if when I really listened to Buffett and Munger, the takeaway that I have gotten from them is always think for yourself, no matter what.
Preston: Amen.
Bill: Then people hear them say one thing, and their brain turns off, and they're like, “Well, Buffett and Munger said this, so this has got to be it.” You people aren't even listening to what these guys are preaching.
Preston: I remember reading The Snowball back in 2008 when it first came out. One of the biggest lessons I got from that book, Buffett talks about going to Geico and meeting the CEO of the company. The gentleman asked Buffett like, “Why did you buy this” or something like that. Buffett's response was, “Well, because you did,” because some famous investor did was his response. [laughs] That guy said, “Let me tell you,” I'm obviously paraphrasing, I have no idea how it was actually said to him, but the way I remember the story, my takeaway was, “If that's how you're investing, kid, you are going to be in a world of hurt. You need to learn how to think for yourself, and just because I do something does not mean you should do it.” That goes for anybody listening to this right now. Because I'm buying bitcoin, you're buying? That's the dumbest thing I've ever heard anybody ever say, is what you should be thinking in your brain, when somebody says I bought it because so and so bought it.
Bill: Yeah, that's right. Especially when you're talking about your money, you're talking about something that you own it to secure your financial future. However, you choose to express that is fine. If you're betting on your financial future, because I'm betting mine in a certain way, and you don't know all the questions like, what are my upcoming obligations? What's my duration on the bet? Why do I have it sighs the way I have it sized? What are my other investments? You don't have any idea what I'm doing. If you're signing on and reading 13Fs and a hedge fund’s doing something, and you don't understand that there are some funds out there that have huge incentives to take big swings because they're going to get huge carry, yes, the guy's got some reputational risk if he goes under, but a lot of people release more funds. A lot of people have different iterations of strategies, and then they market one strategy and then people look at the 13F of the strategy that's hot. So yeah, you're going to get waxed.
Preston: Well, the biggest piece if you don't have your own investment thesis, you're going to have no conviction in the trade.
Bill: Yeah.
Preston: You're going to buy it because you saw so and so bought it, you're not going to have any clue why you own it, and then when the price action goes in the opposite direction, you're going to be questioning yourself like, “Oh, my God, did they get out? I don't know. They only file every quarter. I don't understand what's going on. I'm down. 20%. I better sell this.” Especially, oh, my God, in bitcoin, look at the volatility. You buy that, because somebody else did it, and you don't even understand what the heck you're doing, you're going to get murdered, because you don't have any conviction.
Bill: The one thesis that I've been watching a little bit is the pot stock thesis, and part of the reason that I'm intrigued by it is, my understanding is that Pershing doesn't even allow people to custody assets. Pershing won't allow US pot stocks to be held there. There's just a ton of reasons that are structural that people are precluded from buying it right now. This is obviously the pitch that the bulls are making, so you’ve got to understand that they have motivated reasoning to see this. I do think that there's validity to that, and I do think that there's validity to saying like Wall Street is going to try to make money on weed one day when it's actually legal.
The volatility in that reminds me a lot-- it's nothing near bitcoin, but it reminds me, it's something similar. It's a nascent idea that there's a lot of disparate opinion on where it may go, where it may not go, and if you don't-- I just watched the Twitter feed sometimes when stuff’s crashing. Some people have no idea what's going on out there, and they're looking to other people on Twitter for conviction. That's not going to work. You're going to get murdered.
Preston: Yeah.
Bill: It’s the best way to sell at the bottom.
Preston: Yeah.
Bill: I'm confident that right now, you could outtrade me on bitcoin.
Preston: [laughs]
Bill: [laughs] I have no doubt in my mind, but I'm intrigued man. I'm intrigued because I find it interesting that people still dismiss it as just an idea or just a scam because I've got-- [crosstalk]
Preston: It’s a trillion dollars.
Bill: Yeah, well, let's say it is just an idea. Isn't gold? Isn't the minority interest in a lot of equities? Unless you're getting cold hard cash back, the idea that you have a claim on the assets that's going to come to you eventually is just an idea. I know that it's a different type of idea, and I understand that some people get their conviction in cash flow, and their belief in value investing philosophy, but I would argue that you get your conviction in your version of bitcoin fundamentals, which is not that much different than what some people gain their conviction in equities from. I don't understand this idea of like, “Well, it's just a thought,” because thoughts-- Art is just a thought. There's no inherent value in Monet paintings, just society values them. I don't understand why that criticism makes people say therefore, this isn't worth exploring.
Preston: I think it all goes back to what we originally said, which is, if you're approaching it from the lens that this is a scam and anybody involved in it is a scammer, and then you're looking at the price chart, and it's up 800% in the last 12 months, something like that, not only are you looking at that and saying that person deserves to lose all their money, because they're a scammer but you're also just saying their luck is going to end, and it doesn't seem to ever happen.
Bill: Yeah, and that makes you more angry-
Preston: That makes a person more angry.
Bill: -because this guy doesn't know what he's doing, he's a scammer, this is fraud, and here he is, making more than I am.
Preston: They're looking at the price chart, and every price chart they've ever looked at in linear terms, which is a really important piece. Any chart that they've looked at in linear terms that looks like that is a tulip mania chart, where the person's about to lose everything. They're saying, “Why isn't it happening, and why are they saying these mean things to me online? I don't like this group of people.” You know why they're saying mean things-- and I don't like to participate in being rude to people, I really don't.
Bill: Yeah, I know. That's one of the things I admire about you. We've met now twice, and I watch how you interact with people. You have always been-- you strike me as polite, except one time I heard you get a little bit angry at one point.
Preston: [laughs] It happens.
Bill: Yeah.
Preston: Yeah, this is what I'm getting at is, when somebody's saying you're going to lose it all, I'm looking at that person and saying, “You don't even understand a 10-second piece of a counterargument to something I could talk about for literally eight hours straight without stopping,” the technicalities. I'm looking at you and I'm just saying, “You're a joke.”
Bill: Yeah.
Preston: “You're a joke. You're not even worth my time to respond to, because you know nothing about this.” Then, you compound it with, if you've been in the space for a while, and you've had a 10x return, or 100x return, because there's a lot of us out there with those returns. We're looking at it even more, and it doesn't mean that I'm going to have more of them. I'm not saying that in a braggart way. I'm saying it from the lens of somebody saying, “You're going to lose it all,” that you know has no counterargument whatsoever, and here you have this history of six years of owning this thing, you're saying, “Thanks a lot for your opinion, have a nice day.”
Bill: Yeah. Well, that's the thing. It's always like, “Well, it's Tulip Mania 2.0. It's Tulip Mania 2.0. It's going to crack, it's going to crack.”
Preston: Yeah.
Bill: I guess where I've gotten in finance, and I really do attribute a lot of it to doing media, which is why I am sometimes conflicted because I have these conflicting thoughts of when you're talking, you're not listening, and if I'm doing media, then I'm not reading these 10-Ks and I was told that I'm supposed to be reading 10-Ks, media and Twitter have accelerated my learning so much faster than any amount of 10K's ever possibly could have. This has just been by far the most efficient use of my time, and I happen to enjoy it. I have realized that there are a lot of people that are doing things that I don't understand. So, rather than saying now, “That's stupid,” what I try to ask myself is like, “What don't I understand about this?”
Preston: Yes.
Bill: I just am open enough to understand that I may not know the answers, even though it may not make sense to me, that's because I probably have work that I have to do on my end, not because the world is irrational.
Preston: Perfect example of what you're saying for me, personally, I could never bring myself to own Tesla stock. I'll tell you there's a lot of people, especially in the bitcoin community, love Tesla. They see it very similarly to bitcoin. I don't see it anywhere near being similar to bitcoin, but there's people out there, and if you told me last year that Tesla was going to hit a peak with the price action, I would have said, “Yeah, you're probably right.” I don't own it, obviously.
Bill: What do you mean when you say a peak with the price action? I'm just trying to understand what you are saying.
Preston: Yeah, that the price action on Tesla was looking like a bitcoin--
Bill: Yeah, right, a parabolic.
Preston: Yeah, it was looking like a bitcoin chart and I'm thinking, “That thing's going to melt down.” But I would never go out on Twitter and say that, because I'm pretty sure I'm just dead wrong about the trade.
Bill: [laughs] Yeah.
Preston: Honestly.
Bill: That happens when you start to talk to really smart people, like, “Oh, shit, there's actually thoughtful people on the other side of this.”
Preston: I have enough recognition of myself to just say, “Hey, this is my opinion. This is the reasons I have it,” but based on what the market’s telling me, I'm just dead wrong. I don't know why I'm dead wrong, but I am. At least so far. My guess is that I'm going to continue to be wrong about it, but I have no position, and so it doesn't matter.
Bill: Yeah.
Preston: It's an example of what you're saying, and I'll tell you doing the show-- This is what I encourage people to do, on Twitter especially. Go find somebody that has the opposite opinion in a very constructive way, in a nice way. Say, “Hey, I disagree with you on this. Help me understand your point of view.” Because when you go into an argument, there's two things-- it's a binary thing, when you go into an argument. You can approach the argument from the frame of reference in the intention of learning from the other person, or you can step into an argument with the intention to protect your ego and force the other person to think that they're wrong by spouting what your opinion is.
Anytime you engage in a constructive argument with somebody, you have to ask yourself, “Am I doing this for number one or am I doing this for number two?” from your intention. “Am I trying to learn from somebody or am I trying to tell somebody that they're wrong, and that I got to protect my ego?” For bitcoiners-- or for people that don't believe in bitcoin, I can tell you, the bitcoin community is absolutely ruthless. But if you approach it, and you're nice, and you're just like, “Hey, help me understand this, I just cannot understand why somebody would own this because of X, Y, and Z,” and you frame it up that way, people are going to come in there and they're going to answer your question. In fact, they might actually go way out of their way, and respond to things and hand off articles that go into a ton of depth in responding to certain things. I would tell you one of the main reasons I think most bitcoiners are so active on Twitter is because they're desperately trying to find somebody that can prove them wrong. They're desperately trying to find somebody that-- [crosstalk]
Bill: A cynic would tell you they're doing it to pump their own book. I’m just telling you what the cynics would say.
Preston: Yeah, that's fine. They can say that. I can just tell you why I'm doing it personally. I really want to find somebody that can actually come up with an argument on how it could fail at this point because I’ve heard a lot.
Bill: If somebody's listening, and you hear this, then go to Preston in a constructive way, and have a conversation if you think you can do it.
Preston: Yeah.
Bill: When you said that people are ruthless, my interpretation, because I've actually interacted with a couple bitcoin people since I've said that I'm intrigued by it--
Preston: Yeah.
Bill: --I have found that they're far from ruthless. I have found that they're much more like you said, where they've sent me articles, and they've been really thoughtful. One guy, Brad, who is a great guy, was helping me on an energy idea, like a Midstream idea, and then we got talking about bitcoin, because it just happened in the conversation. This is a guy that’s just like, “This is what I think. This is why I think it. Tell me what you think after reading this stuff.” To your point, I believe that I benefit a lot, because I don't care about fighting with people. I don't care if I'm right or wrong. I just want to figure stuff out. I'm not the smartest guy in the room, almost ever. On this show, all of my guests, I think, are smarter than me. But you become your peers.
Preston: Yeah.
Bill: If you can approach things in a way that you're genuinely curious, and you're willing to try to add value where you can, I have found it to just be an immense benefit to my life, and I don't understand why people don't embrace it.
Preston: Yeah, well, it's an ego thing.
Bill: Yeah.
Preston: You don't have the ego that you feel you have to defend yourself or you're not insecure because that's what drives it. It's a fear of insecurity that drives a person to feel like they have to defend everything because they feel like the public is going to view them as not being smart, or being the stupid person, or somebody who just has a dumb opinion about something. They don't want to look that way. They feel vulnerable. They feel they always have to defend themselves. So, it's their ego that's driving that behavior. Just to correct maybe my comment about them being ruthless, they're ruthless if you're rude. They're ruthless, if they feel like you're coming to the discussion from the position of, “I'm going to prove you wrong, because you're an idiot.” They're going to eat you alive. I've heard a lot of counterarguments. When you're in the space for that many years, you hear a lot of counterarguments on how this thing could fail. I have yet to be surprised with new counterarguments in quite a long time, but bring it my way, maybe you’ve got something.
Bill: What happened to me and your show, is I connected with you guys because I was trying to figure out my way, and I always liked how you guys approach the show from a learn-first mentality. Then, there was a lot of macro stuff, and then I was trying to focus more on the micro, and digging through stocks. Then, you started talking bitcoin, and then I was like, “Okay,” and I churned off. Maybe I am saying this, because the price ran, but I don't know what it is. I think that there was an adoption cycle that you clearly identified and were right. That was an idea when you were pitching it, and it was that nascent that if I was further along in my development cycle, I probably could have joined you at that time. Here, as always with price, you need to have different questions as the price goes higher. I don't have the answers at these prices, or whatever.
I do think that I probably would have benefited from embracing the learning side a little bit more, as you did, because I still had-- I said people hear Munger and turn their brain off, I still had Munger in my head saying like this is snake oil or whatever. I don't blame those guys for anything because they didn't do anything to me, but what I allowed myself to hear with Buffett saying tech is too hard, and what I've allowed myself to hear, I think, with the Munger/bitcoin thing, but more generally their macro stuff, a lot of people crap on macro a lot, and I'm not going to sit there and become a macro specialist or whatever, but I do acknowledge that being curious about it leaves you less blind.
Preston: This is one of my biggest frustrations with Buffett. One of my biggest complaints about Buffett, is when he says, “We just put that in the too hard bin. We're not smart with tech, so we just stay away from it.” I've studied the brain, I love reading books about how the brain works, and I really enjoy studying artificial intelligence, and one of the things that I feel that is really important to a person's understanding of how their brain operates is just cognitive conditioning, and how your subconscious dominates so much of who you are, and what you do, and you don't have conscious access to any of it. When you program yourself, that you tell yourself-- and I think what started as just them being overly humble in a joking way that had been propagated and said to themselves for 40 years, actually materialized and produced the outcome of them actually being tech idiots. Their Apple position obviously has worked out very well for them.
Bill: Yeah. You know what would be interesting about that? They would be a victim of exactly what Charlie talks about, when he's like, “Don't hammer things into your own head.”
Preston: That's right.
Bill: If that's true--
Preston: Now, maybe they're just saying it on the stage, but behind closed doors, we see a whole different side of them that I obviously don't have access to, and they're like, “Oh, yeah.” You know what's interesting? I would argue with myself on this. When you hear them on the stage actually talk about some of this tech stuff, they actually are pretty well informed.
Bill: Yeah.
Preston: I would argue with myself as to that, but the problem is, you have so many disciples of these two, that then go and tell themselves that same thing like, “Ah, I'm just going to put that one in the too hard bin. Yeah, tech’s really hard, so I just stay away from it. I'm looking for the next See’s Candy.” You have these people that follow them that just keep saying this narrative to themselves, and they then actually realize it.
Bill: Yeah, and then the other thing that happened to me that curiosity killed, thankfully, is I started to look for the next See's Candy by studying what See's Candy actually did. Increase store count, better throughput, price increases. That doesn't mean it's got to be a freaking candy store.
Preston: That's right.
Bill: Or something in confectionery, or anything and CPG, or any of that stuff. It just means that's the playbook that they were looking for, that's where they understood that playbook playing out, and that's the bet they laid.
Preston: I agree with everything you just said. Where my frustration really comes from with them, is because I used to tell myself, “You can't understand macro, just ignore it. Just focus on micro,” I can tell you right now, my best trade, hands down, not even close, is bitcoin.
Bill: Yeah, it's been a macro one.
Preston: It's been a macro trade to epic proportions probably bigger than--
Bill: Yeah, [crosstalk] life.
Preston: Yeah. Exactly. If I kept telling myself macro is too hard, let's put it in the too hard bin, there's no way you can actually understand that, boy-- and I used to tell myself, “Ah, you can't understand currencies.” I think that those things are something that I've learned from Buffett and Munger, but not like I've learned everything else, which was in a favorable way, or in a way that was constructively demonstrated to me. It was actually their faults and their mistakes that they taught me.
Bill: Yeah, or maybe said slightly less inflammatorily, is-- we were talking about why do people have emotional responses? I think my emotional response to the people that I don't think any more when they talk is really because I'm mad at myself that I didn't think more back in the day. When that first iPod came out, the one that had the wheel that spun, I didn't need to be a genius to know that Apple was a decent trade at that time. It was actually even cheap. Instead of even being curious enough, I said to myself, “Well, tech’s too hard.” Imagine how stupid that decision was.
Preston: Yeah.
Bill: I have a nice life, but that would have been a game-changer.
Preston: That's right.
Bill: Now, could I have held it this long? Probably not, but I would have made a fair amount.
Preston: Yeah, the point for me is really, be careful what you tell yourself because you might just realize it.
Bill: Yeah. Where did you get so interested in the brain?
Preston: Investing.
Bill: Yeah.
Preston: You look at Dalio, you look at Stan Druckenmiller, you look at some of these folks, and they pay very close attention to how they think. Where are their biases? I think a lot of investors will go and say, “What are my biases?” That's the classic like, “Oh, let me read the book, Thinking Fast and Slow,” like the classic. This is what everybody says to do, so they go and do it. I would challenge you to go even a layer deeper than that. How does your brain actually work? How does it wire itself? How does your neurons condition themselves? Which ones actually have consciousness access versus ones that just automatically fire that are completely out of your conscious access? What does that mean? What is your environment that's actually conditioning these things? I think when a person really digs deep on how all that stuff works, they understand that there is a hidden force that is so insanely powerful, that they can harness for accomplishing and achieving pretty much anything they want in their life.
Bill: I talk about Tony Robbins a decent amount, it's not because I'm like some super big fanboy. I just think he's really good at packaging psychological concepts for the masses, and he was for me. One thing that he said that totally changed the way that I live is, “The quality of your questions determines the quality of your outcome.”
Preston: Wow, absolutely.
Bill: If you want better answers, ask yourself better questions.
Preston: Questions, yes.
Bill: When I started to reframe some of the questions that I asked-- I don't know all the questions I asked myself, but I've figured out more now than I had in the past. It’s like rather than saying, that doesn't make sense, saying, “Well, what might I not understand about that?” Even just planting that seed in my brain has really benefited me. Funny enough, I got an email from somebody today, and he was like, “Hey, man, do you want to be happy or do you want to be rich? You're doing all this media, and I hear how open-minded you are, and some of the times you get really passionate. Do you think you're doing the best thing for you?” I just wrote him back, and I said, like, “To the extent you're worried about me, I really appreciate that. Thank you.”
On the other hand, things are working out pretty well for me, and I'm not trying to say that in a “don't bring this stuff to me” way. What I am trying to say is, just because I have a different approach doesn't mean that I am wrong. Just because I'm a value guy that's trying to figure out what people are seeing in these tech companies, doesn't mean that I'm going to abandon everything that-- My biggest money was made-- TransDigm was basically trading on liquidity concerns, Colony was completely bombed out, Qurate was completely bombed out. I'm still a value guy. I just don't think I need to circle mining companies trading at depressed price to books to express that I'm a value person.
Preston: Yeah.
Bill: But I have found that-- most people are super, super helpful, and I think even the ones that push back a little bit are trying to help, but if you're hearing this and feel like I'm talking about you, ask better questions and maybe realize that people are doing things different ways doesn't mean that one way is right or wrong. Nor do I think other people's ways are wrong.
Preston: Yeah. I love the binary choice that the guy wrote. Do you want to be happy or rich? Who says I can't be both?
Bill: [laughs] Yeah.
Preston: Have you told yourself that so many times that you have now cognitively programmed yourself to believe that you can only be one of the two?
Bill: Yeah.
Preston: That is a program that's running in that dude's head, that he has told himself so many times, that he is now going to realize unconsciously, that he has to be one of those two things.
Bill: Yeah, the other thing that's funny, man, is I'll be open about-- I'm pretty insecure. The reason that I'm able to do a lot of this stuff is I've inherited what I have, and that created-- For a long time, I ran from, “I'm not worthy” thing and whatever. People have reached out, and they're like, “I hope that you feel worthy.” It's like, “Dude, I appreciate it. The only reason I'm able to say this stuff out loud is I have done the work to be comfortable, commenting on my insecurities.”
Preston: Yes.
Bill: I get who I am. I get my demons. It took a lot of fucking time to be able to say a lot of this stuff out loud.
Preston: Yeah.
Bill: Sometimes, I have to--
Preston: It's liberating.
Bill: Yeah, man, and I kept a lot of it in because I was really afraid like, “Oh, well, I don't know if I can make it. What if I need to go get a job from somewhere else? I can't actually be myself because people may not like me.” Once I just said, “I'm done with all this stuff,” it was completely freeing.
Preston: Yeah.
Bill: The other thing is everybody's got stuff. Who cares?
Preston: That’s right. The irony of all of it is that the fear that people have, irregardless of what it is, each person's got their own fears, but the more that they feed on that, the more that they actually realize it. It goes back to everything that we were just saying about programming yourself, programming your subconscious, you're telling yourself, “I'm not worthy, I'm not this.” Guess what? You're realizing. You're making that happen.
Bill: Yeah.
Preston: When people make the decision, they're like, “No, you know what, I am worthy, and I'm not worried about talking about this particular topic, and I don't care what anyone believes or thinks because it doesn't matter.” At the end of the day, it doesn’t matter. When you shed those fears out of your life, at the root of it, when you ask why five times, you get down to the core of what's driving it, it's a fear that’s driving it. Anytime you see somebody acting strange, if you dig deep enough, there's a fear down there driving it.
Bill: Yeah. This is a perfect time to ask you, what was it like to do the bitcoin spinoff and be full-blown public about being such a bitcoin advocate? Is there a lot of fear there, because that was a big show when you-- I'm not trying to frame it like you left the show, but I also do think that not acknowledging that you did leave the main Saturday show to do the Wednesday show--
Preston: Yeah.
Bill: --to me, that was a big career risk that you took.
Preston: Yeah. If I was really going to do the ballsy call, I would have done it back before the halving event. That would have been a real risky decision. I talked about it on the show, I said, “Hey, I think this is a really important trade for people to pay attention to.” I made a very bold-- this was at the start of 2020, I said, “By the end of this year, it's going to be $20,000.” That was obviously a very bold call. The halving event happened. Everything that I suspected was going to play out from an adoption rate due to the scarcity of the protocol, basically delivering less bitcoin into the market. It all played out, and here, lo and behold, by the end of the year, it was at $26,000 or $28,000-- [crosstalk]
Bill: People still think you're wrong.
Preston: People still think I'm wrong.
Bill: That’s crazy to me, man. That's crazy. What aren't people listening to?
Preston: Going to the show, in the fall timeframe, I was like, “All right, Stig--" Stig’s a bitcoiner. He's just not as head over heels as I am, but he definitely has a position. He's had a position for a very long time, and so he understands it. He understands the narrative. He's definitely more cautious, which I think is just his personality than I am. When I told him, I said, “Hey, man, I truly think that by the end of 2021, this could be at $100,000 or more. I think that if we're not creating content around this, we're crazy,” because at the end of the day, we're a business. I really don't think that I'm wrong about it at this point, because I was starting to get confirmation that everything that I was saying up to that point was actually playing out. He was like, “Let's do it.” I was like, “All right, I'm going to break off. I'll do this full time.”
Bill: That’s dope, man. That's what’s up.
Preston: Yeah, and so I broke off. I did the bitcoin piece. He's like, “All right, I'll continue to do the traditional show. We're going to look at maybe bringing somebody else in,” because Stig runs the operations of everything. Stig is the guy who gets everything done. I am not.
Bill: Well, that’s because you got other stuff going on, man. Thank you for your service.
Preston: [laughs] I've got other things going on. We started trying to look for another host to come in to replace me on the Saturday show, because Stig is extremely busy, and it's a lot of work as you well know.
Bill: Yeah.
Preston: It's worked out just amazing, and I have such a passion for the subject. Just the investment thesis aside, I'm an engineer at heart. I am much more interested in engineering and building things than I am finance, to be quite honest with you. I love the math of finance. I think that's one of the reasons I like bitcoin so much. When I'm looking at how the protocol functions, the encryption functions, and all that stuff, dude, I'm just a pig in mud. Then you wrap it on to the whole macro backdrop, and the funds flow, and all this stuff, this public ledger that you can get all this data from. For me, I look forward to every conversation. So, it's a perfect fit. Was I taking backlash from people? Absolutely. Am I still taking back--? Absolutely. Does it hurt my feelings? It's really easy to just laugh at people when you're crushing the hell out of the trade.
Bill: [laughs] Yeah.
Preston: That doesn't mean it's going to keep going that way, but all indications from just a fundamental level, going back to the adoption rates, the network effects, and all those things that are playing out, come on, this is a very big deal. If people aren't paying attention to it, I would tell you, you might want to take a closer look because from my vantage point, this thing's about to eat the world.
Bill: I guess to circle back to some of the things that you had said about your interest in the brain, do you worry at all that being an engineer and finding such an elegant answer to a problem that bothered you in monetary policy, combined with your love of macro and at paying you a lot, do you worry that sometimes you're like a little bit too involved to take a step back to see the field for what it actually is?
Preston: Absolutely. I'm a person who is, “Hey, you have an argument, you have a counterargument, I really want to hear it. Let's have that discussion.” If I see a person who's coming to have that discussion, and it's all about me personally, I already know I'm dealing with somebody who has major fundamental flaws in their thinking. I might just write them off and say, “Get out of my face.”
Bill: Yeah.
Preston: Because if you're coming at me personally, that tells me that it's not about the argument or the topic or achieving a deeper understanding of the truth. It's about, “I'm upset that you used to do this Buffett style investing, and you don't do it anymore, and you made a lot of money last year, and I don't like it.” [laughs]
Bill: [laughs]
Preston: It’s like you and I are probably not going to have the level of conversation that you think we're going to have.
Bill: You know what's funny about it though, man, you said that when you first got interested in it, you were creative enough to have the venture capital type, long timeframe and seeing how the asymmetry actually plays out. That to me is a Buffett-type bet.
Preston: Oh, this is a huge-- Yeah.
Bill: When he bought Coke, he was thinking way far out. Meanwhile, I see some people have turned value investing into, “I going to buy a 50-cent dollar, flip it for 80 cents, and go out and find another 50-cent dollar,” and it's like, “Yo, you're paying a lot of tax,” and I find it hard to believe that you really understand the business risk that you're taking if you're going on a valuation-first basis. I think it can work in the right wrapper. If you have an ETF that is systematically exploiting the inefficiency of behavior in the market, I can buy that argument. I cannot get myself to think that I have the capability to repeatedly outplay the market in a psychological game when I'm fundamentally saying the market has a bias, why would I not be subject to a similar bias?
Preston: Yeah. No, I don't sell it. I just keep buying more. Back whenever the halving event happened, I went out and bought calls on bitcoin, physically settled calls. I didn't buy calls that mature three months later. I bought calls that were a year and a half out. Because I wanted to be in a long-term tax bracket, I was buying these calls for $3,000 with a 10-K strike that matured in December of 2021.
Bill: Oh, you thought that it could be up to $100,000, right?
Preston: Yeah.
Bill: Yes, so you thought you legitimately had at least 15:1 risk-reward, or probably higher.
Preston: Ah, no, 30.
Bill: Yeah. That's what I'm saying, if you were wrong on the $100,000--
Preston: Yeah, by my calculations of where I thought it was going, I thought I was going to have a 30x return on that position, and so far, I'm very right about that. We'll see how it ends up. I'm still holding. I'm saying this because I'm confirming what you're saying is, I'm treating this in a very Buffett way, this is a very long hold for me. In fact, now that you have a borrowing and lending market that's being stood up around this, I might not even ever have to sell it, I might be able to lend it.
Bill: Can we talk about this a little bit, because I heard you talk about how you can lend it out for 8%, and it was framed as risk free. When you say that it's risk-free, the reason that you're able to use that conclusion that you think that the probability of a long-term impairment from these levels is so low that-- because someone to me, I hear 8%, I would say, “Okay, well, your risk is that the bitcoin price drops 10, now you've got paid 8, but you lost 10, you're down 2,” so I was curious to hear you think through, why you're so amped up about this particular lending market.
Preston: I'm more interested in the lending market because it actually brings about real free and open interest rates to the world, but we'll put that aside. When we're talking about lending in this space, A, everything's over collateralized. B, everything is immediately settled. When you're dealing with-- think of it like this. Let's say, your house, you took out a loan against your house, the house is completely paid off. Let's say the value of the house is $500,000 and you take out-- an equivalent would be a $250,000 loan against your house which is completely paid off. Not only that, but the house is settling in a liquid market that trades 24/7 every single holiday, and it can be immediately settled if the valuation of your house would start to approach the parity of the loan that you took out of $250,000. That's what's happening in bitcoin.
Bill: Okay, when you say overcollateralized, you're saying the loan to value ratio is, call it, 50%.
Preston: 50%.
Bill: Yeah.
Preston: Yep, [crosstalk] which is confusing for-- You understand that, but many of your listeners will hear 50%, and think that it's undercollateralized at 50%
Bill: Yeah.
Preston: It is not.
Bill: Yeah, because you have an asset value that's 2x what you're borrowing.
Preston: Exactly.
Bill: Yeah, what your loan rate is.
Preston: Exactly.
Bill: Okay.
Preston: If you want to take out a loan against your bitcoin, you can borrow $250,000 of fiat cash, but you're going to have to make a deposit of $500,000 of bitcoin, which would be about 10 bitcoins that you'd have to deposit, it would be locked in escrow. Then, if the price comes down and starts reaching the parity the loan, it'll be immediately settled, it'll be immediately liquidated, and you'll be given the remainder back. You'll be given your five bitcoins back.
Bill: That's interesting. Huh. All right, in our example, as your house declines to the loan value, it can settle immediately. So, your collateral covers-- you would still have the risk of bitcoin, though, wouldn’t you?
Preston: Well, you have the risk of--
Bill: Like the decline of the bitcoin transaction. You still have currency risk, for lack of a better term.
Preston: Absolutely. You have currency risk of your deposit changing in value relative to everything else, and you will never remove that risk from anything that you ever put on deposit.
Bill: Can you start to enter swaps on that?
Preston: Can you enter swaps on if I want to-- [crosstalk]
Bill: On the currency risk? Because you could start to hedge your currency risk.
Preston: You would have to do that in some other type of market. Now, what's really fascinating in this particular space is you're getting into peer-to-peer lending. I would make the argument that your peer-to-peer lending is going to be lower risk than some entity putting your deposit into some black box that you can't see the public address for the deposit of the escrow. This is really going to flip people on their head, because it's the polar opposite of what anyone thinks, especially in a fractional reserve system. If I go on to-- there's a platform called Hodl Hodl. You can go on there, you’ve got your coins, you make your deposit, you can see the escrow address so you know it's actually sitting there. You hold one of the three keys to unlock the escrow, the platform owner holds one of the keys, and then the person on the other side of-- your counterparty holds one of the keys. If they don't want to release the escrow, then you go to the platform owner, and they'll release the escrow. You can always see that you're overcollateralized, and good luck finding that anywhere in traditional markets.
Bill: The rates are still quite a bit north--[crosstalk]
Preston: For US dollars, 20%.
Bill: No way.
Preston: Way. Now, you understand why I'm looking at--[crosstalk]
Bill: Why is it set so high? Is it because the person that's lending the bitcoin so doesn't want to let go of the bitcoin?
Preston: Yeah, that's right. Bill, 6% to 10% for bitcoin, if you're going peer to peer, 20% for US dollars. Now, what does that tell you about the risk profile of everybody who's operating in this economy for the bitcoin space, how they view the dollar? It speaks volume [crosstalk].
Bill: Yeah, they don’t want them.
Preston: What happens if the rest of the world starts to look at this market and say, “Hold on a second, maybe this thing over here is an accurate representation of the premium of the risk-free rate that's being built and constructed on top of inflation.” What if that is the real risk-free rate? What the heck does that do to valuations?
Bill: All right, here's the only thing that I'll push back on you here. One, I don't disagree with the what if. I would say to you is, I think that someone like me at this point, who would say, “I don't know that that's an accurate place to price the risk, because that community is biased negatively against fiat. So, they're going to set a higher rate than what a normal rate would be in a pure market.”
Preston: Well, the thing that's driving the rate is what you can capture in the derivatives market. When you look at the spread, just go into a futures market, and you look at the long tail, the bitcoin price is in contango, physically settled bitcoin derivatives markets, there's a massive contango that has a risk-free spread that people can capture at around 20%. That's what's driving the interest rates.
Bill: All right, can you explain contango because I always mess that up with backwardation unless I'm actually looking at a--
Preston: Your spot’s $10, your future six months from now is $15--[crosstalk]
Bill: It’s going to be higher.
Preston: Yep, your contango. Your backwardation is the other way around--[crosstalk]
Bill: [crosstalk] When it is lower, yeah.
Preston: Here's the thing that will really make your mind spin. When we talk about a contango, we're typically talking about the cost of storage being bid into the future price, because there's a supply shortage of storage. The cost is going up, the store, and it's getting bid into the future price because if it's oil, you don't have the capacity to store it, and so you have to push that delivery further out into the future, and the price of storage is getting bid into that price. Bitcoin doesn't have that problem. It doesn't have any cost for the most part. It's so minuscule, it's not even worth mentioning, to store physical bitcoin in a hardware wallet.
Bill: What's this I hear about all these people say that the energy that it takes though is crazy?
Preston: That's not my cost.
Bill: Yeah, so that's an externality.
Preston: Yeah, that's not my cost. Those are miners that are trying to capture new flow of the remaining coins that are going to be dropped in the market, or they're trying to capture the fees that are associated with transactions on the blockchain. That's not my cost at all. If I put my bitcoins into my hardware wallet, I got a small transaction fee to get them there that goes to the miners and the electrical expense that you're talking about. Once they're there, they sit there, and they continue to be there until I want to use them again. So, there's no cost there. When you look at how easy it is to physically settle, let's say, you and I were moving gold bars from Switzerland to LA, the cost of transportation is enormous to get physically settled. With bitcoin, you could literally hold up your phone with a QR code on your phone, I could scan it through this video chat, in fact, I did this with a guy the other night when we were talking about the layer 2, I could scan it and immediately pay you, immediately settle on the layer 2 Lightning Network at any size of a transaction.
Bill: Yeah, I had a conversation with this guy. Do you know Tyrone V. Ross from the Twitter machine?
Preston: No, I don’t know.
Bill: He's a great guy, man. I am convinced if he wants a career in politics, he's slam dunk. Slam dunk. But he comes at bitcoin--[crosstalk]
Preston: I don't like him already.
[laughter]
Bill: Well, no. I say it because you would like him. I don't say it because he's a hack. He comes at bitcoin from a-- His underlying thesis in the conversation that we had is it is really expensive to be poor in this country, and access to financial services and the underbanked is a real, real problem. Then, he has a second problem that he's identified, cross-border payments that go through MoneyGram and how much you lose in the transaction. He sort of got me interested in bitcoin because he pitched it as a potential solution to those issues.
Preston: Huge.
Bill: Yeah, I was like, “Okay, so here's a use case that I can wrap my head around,” because I don't like to, “Well, you're not going to buy your coffee in bitcoin.” I don't love that argument.
Preston: The only one holding that one up is taxes right now.
Bill: Yeah, because it's got to be a realized event, right?
Preston: Yeah, exactly.
Bill: Yeah. That would suck. Your coffee would cost a fair-- Well, I don't know.
Preston: I was talking to a guy, Ryan Gentry. He works at Lightning Labs. This is a company that's building things on top of the second layer of bitcoin called the Lightning Network. It immediately settles it. You're dealing with bitcoin. We were talking about transaction size, and what I can send. I said, “Could I send you five Satoshis right now?” For anybody who doesn't know what a Satoshi is, it's 10 to the negative eighth. If you go one bitcoin decimal point, 10 to the negative eighth, you move the decimal point that many times over. That's one Satoshi. That's the lowest number of unit that you can transact in with bitcoin. I said, “Can I send you five Satoshis?” which is worth a third of a penny. “Can I send that to you right now?” He goes, “Yeah.” He held up his QR code. I sent, immediately got it, one-third of a penny, and I could have sent him one-fifth of a penny. I could have sent him five Satoshis. I could have sent him one Satoshi or two Satoshis, and it would have cleared. No cost, immediately over the internet completely secure, and if I want to send him $10 million, I could have done that.
Bill: Yeah.
Preston: Think about what the implications of that are in the developing world that are unbanked, and they're taking possession of these units that just seem to keep going up in buying power. Think about the implications of that. It's insane.
Bill: Yeah, I thought when Tesla purchased-- However much they did, what was it, a billion dollars is that--? [crosstalk]
Preston: I think they did 1.5 for their principal, yeah.
Bill: Yeah, I have bashed the stock in the past. I'm sorry if people are listening, and obviously, you have a bitcoin crew-
Preston: Me, too. [laughs]
Bill: -and here I am, and I'm talking negatively about Tesla and the Venn diagram, I don't mean to offend people that are listening. Thank you for listening. But it's really hard to look at that transaction, and still be like, “Eh, this isn't an incremental big step.” I don't know-- I'll just talk about me. When that happened. I was like, okay, it's getting a little bit clear, where this could go. Well, maybe not where it will go, and maybe Elon is a hack and the bears are right and whatever. But the probability of it hitting critical mass when a guy like him does something like that, and he's viewed as somebody that thinks forward a long time, and society works on social signaling, and you understand the power of reflexivity, it's definitely incrementally a big positive. How big of a positive? We'll see in the future.
Preston: This is the thinking that [crosstalk] you want.
Bill: It was a moment that even I got.
Preston: People need to think, this is a guy who's trying to have energy independence around the world. It's one of his prime mission statements is this, harnessing energy and applying it into cars and whatnot. Why would a guy like him be involved in bitcoin if there's this big concern about energy? It doesn't make any sense, does it? That's worth five whys right there. When you start digging, [laughs] you're going to find some really, really interesting things that pop out of that specific question.
Bill: You want [crosstalk] like a couple of these interesting nuggets?
Preston: Let's think about it. He wants to put a battery into your garage that stores solar energy that's being harnessed off of your house, so that you can charge your car, and you can use it during the nighttime when you don't have. It's a load thing. Here enters bitcoin. There's people already doing crazy things like trying to set up a mining rig off of anything that generates heat in your house, because it's powering something else.
Bill: Hmm.
Preston: You wouldn't believe the things that people were trying to hook mining rigs up to, to capture just even the smallest amount of energy, because what they do is these mining rigs are then plugged into pools of other people that are providing processing power that's securing the bitcoin blockchain, and they're getting a cut of whatever reward is actually mined out of that pool. When you start looking at things from this frame of reference, you're saying, “Well, instead of putting up-- my demand for my house based off of solar energy and putting panels on there, I need to have the demand of 10 for my peak during the day, but generally, I'm really only using about 5 on any given period of the time, but I needed a peak of 10.” Well, what in the world are you going to do with the overcapacity of 5 for the rest of the day? You can charge your battery, but then once that gets full, what are you doing with that 5? Well, maybe you can just start mining bitcoin with it.
Bill: Yeah. You divert it to another activity.
Preston: There's a guy named Marty Bent. There's some mining companies, I forget which states are doing this. They have to flare off methane for their mining operat-- I'm talking about real mining operations, not bitcoin mining.
Bill: Oh, I was like, “Oh, my goodness.” [laughs]
Preston: It’s a little confusing. They're doing mining, and they've got methane, that they've got a flare off because they're out in some remote location. Well, they have aircraft, the state has aircraft that comes in, actually looks and monitors how much flaring is taking place, and if they're exceeding it, they get hit with these huge fines, and they can only actually do their mining operations, I don't know what the numbers are, but let's just say half of the-- They can only do it for 12 hours out of a 24-hour day, because of the flaring that they're doing, they have to actually stand down operations, because of the amount of the methane flaring they're doing. Marty and his company go and they're like, “Hey, let's put some mining rigs into a travel a shipment container, let's put it out there on the remote location, let's hook it up to a generator that can convert the methane into energy, we’ll power these mining--” Now, I'm talking about bitcoin mining.
Bill: Yeah, what a beast. This is smart dude.
Preston: “We’ll power these mining rigs and these containers, we’ll mine some bitcoin. Not only that, but now that we're not flaring anymore, we can continue to run 24-hour operations of the real mining that we're doing.” In that example, we'd be doubling our revenues, and each one of his containers are kicking off anywhere from $500 to a million dollars a year in bitcoin revenue.
Bill: Wow. That's smart.
Preston: Dude, it's out of control. Dude, this is the tip of the iceberg of the infrastructure that's being built around this, and when you think about things from a network effect, and you think about, “Okay, well, he's doing that on bitcoin, and then these derivatives markets are being stood up, and you got all this--" Dude, the rabbit hole never ends.
Bill: Yeah. Well, that is where I have gotten curious, and I have started to say like, “Even if it is just an idea, it's an idea that's hitting critical mass,” or has hit.
Preston: Yeah. [crosstalk]
Bill: Once that happens, that's not really a valid criticism anymore in my head. That might have been a valid criticism when it was starting to get off the ground.
Preston: Well, here's the thing that I think is probably one of the most important things about bitcoin that is probably the most misunderstood things about bitcoin. You cannot pull the supply to the left when you're mining it.
Bill: What do you mean?
Preston: If gold provides such a perfect example of what's happening in physical reality versus what bitcoins doing in the digital space. If the price of gold would run $500 from where it is right now, you'd have every miner on the planet-
Bill: Yeah, turn on all their capacity.
Preston: -hire as many people as they could, open as many mining shafts as they could to try to get this stuff out of the ground at a faster pace, and they would, and they would supply more gold into the market, which would then provide a homeostasis for the price action to calm it down.
Bill: Or you end up in an oversupplied market, because there's too much capital deployed. Then, you have a price problem.
Preston: That's right. This is why when you talk to people in bitcoin, and they keep saying stock to flow, stock to flow, stock to flow. What they're getting at is an idea that's actually been around for a very long time anybody that trades commodities is well aware of stock-to-flow model, where you're talking about the existing stock of gold that is in existence in the world, compared to the amount of flow that's being dropped into the market that's actually being mined today, is two of the biggest driving factors of the price action if you assume that the demand for the thing that's being dropped into the market, in this case, it's gold, remains relatively the same. If we could go and we could say-- if we could play God for the day, and we could wave a wand and make all the gold nuggets that are in the Earth's crust right now, half as much as they are one second ago, what would happen to the price of gold as these miners go in there, and they're finding half as much as they used to with the same number of workers?
Bill: Should go--[crosstalk]
Preston: What happened to the price? That's right.
Bill: Should go up now.
Preston: It would go up, and then it would reach some type of new homeostasis level of price action, assuming the world still values gold in the way that it was valuing it for whatever reasons those are.
Bill: I'm not trying to cut you short, but I do think that's a really interesting and important thing that you just said, “assuming that the world continues to value gold in the way that it does.”
Preston: Yes.
Bill: I would argue-- Part of your thesis as I understand it, is you have a halving cycle, combined with the idea that assuming the world will continue to value it actually could be turned into, and what if the world materially rerates, how it does value it?
Preston: You can see the smirk on my face because what you're actually talking about is doubling down on the narrative.
Bill: That's correct.
Preston: Yeah.
Bill: Yeah.
Preston: Not only do you have this playing out, but you actually have layer 2s being built on top of it, you have the adoption rate, you look at the number of wallets and addresses that keep getting opened up, you look at the number of hash rate that's coming online, you look at all these things, and you're saying, my God, not only are you waving the magic wand every four years, and cutting the supply in half, but you also have this insane network effect of people that are trusting this, and adopting it as their new unit of account or using it, or playing around with it, or creating mining rigs, and putting them on-site, and shooting them up to a bitcoin satellite that's dedicated to go to remote locations for such things. Yes, that's a real thing.
Bill: It sounds out there to me.
Preston: It's not. It's a company called Blockstream. Now, there's another magic wand event here, that so few, so, so few understand. Not only do you have the halving event that happens every four years, but back to my original comment that you can't pull the supply to the left. How is that possible? Here's how it's possible. Every two weeks, this protocol does what's called a difficulty adjustment, every two weeks. The two-week difficulty adjustment and the four-year halving cycle work hand in hand like a team of twins, that just goes around beaten up everybody. The difficulty adjustment says, it senses the activity on the network, and the way that it can sense the activity on the network-- and this is all protocol, this is all code that's doing this, decentralized consensus code. What it's doing is, it's sensing how fast the miners are solving the puzzle, the mathematical puzzle. If I said, “Hey, Bill, factor the number four for me.” You'll say, “Okay, it's two and two,” or it's four and one. That's your guess. One of those two guesses is right. You just got a block reward.
Now, if we had another four people come here, and I give you another puzzle, and I give a puzzle of a similar magnitude that's really simple, now, of those four people, somebody might solve that a little faster than you did. As I'm providing these puzzles to you, as if I'm the protocol, I can sense that there's more people-- If I was giving these puzzles and my eyes were closed, and I couldn't distinguish between the voices, I could sense that there's more people in the room, because y'all are solving these puzzles really fast. If everyone walked out the door, and I was giving a more difficult puzzle, I would also sense that there's some people that have left, so I better make the puzzles easier. That's what the difficulty adjustment is doing is-- [crosstalk]
Bill: Hmm. That’s cool. It's very elegant.
Preston: It's very elegant. What happens through this, is by me adjusting or by the protocol adjusting this difficulty, what I'm effectively doing is saying, “I'm only going to give you a reward every 10 minutes” statistically speaking over a long period of time. You might solve the puzzle in one second, but statistically speaking, based on the difficulty of this puzzle, because it's a one-way function, that's being guessed at, that the only way you can solve it is through guessing, I know that it's going to take about this many guesses before somebody gets it right. Mathematically speaking. That difficulty is being adjusted in order to peg and keep the issuance rate of the reward at 10-minute blocks.
Now, going back to our gold example, why is this important? If we go back to our gold example and remember how we waved the magic wand, and we said, “Now there's half as much gold nuggets in the crust of the earth that can be found.” The example of the two-week difficulty adjustment would be is go ahead and bring an army of new people to mine this. If you had 10 people before, and now you're going to show up with a million, you're still going to only find a gold nugget every 10 minutes and no more. So, what in the world does that do to the price action when those laws that can't actually happen in physical reality, but can happen in the digital space, what happens to the price action when those are the rules that everyone has a financial incentive to participate in and have a consensus of, if those are the rules?
Bill: It could present a nice upside opportunity for you. Now, real quick. I don’t want-- Okay, sorry.
Preston: Bill, when people listen to my show, and they hear me say, “I think bitcoin is going to go up and I think it's going to go up to maybe this price point in the next nine months right before the halving event happens--”
Bill: Okay.
Preston: --These are some of the reasons why I say those things, and it's not because I'm just willy-nilly picking a number out of the sky.
Bill: Yeah.
Preston: I love mathematics, and I love engineering. For me, this is some really exciting stuff.
Bill: That would be a short-term run in a longer-term-- or a medium-term issue within a longer-term trend of getting to your ultimate number of coins that are going to be ultimately issued. Do you view that as the-- When you're seeing that setup, are you adding tactically into a longer-term thesis? Is that how you treat those events. Because it seems to me-- I don't want to say temporary, because it's not the right word, but it's not part of the long term. That's a setup issue.
Preston: It's the perfect term for what probably anybody who's listening to this that skeptical of bitcoin is thinking, is they're saying, “Well, that's a short-term thing, and you're going to eventually run out of coins, and then that whole incentive structure that you're describing is going to go away.” The reason that's not true is because you have the bitcoin reward that's paid out to the miner that guesses, that's ultimately securing each block that gets built. They're paid through the block reward that keeps getting cut in half, and they're also paid by people that are paying a fee to get their transaction included in that base block.
Bill: Hmm.
Preston: What we're finding is those fees that people are willing to pay in order to-- if I was going to send you something on the base layer right now, I would guess and I don't know what it is, I could look it up. I would guess that to transaction fee would probably be about $3 for me to send that to you, if I wanted to include it in the next block.
Bill: Any amount, right?
Preston: Yeah, any amount. I could send--[crosstalk]
Bill: $1, $10,000,000, 3 bucks is what you're paying.
Preston: Billion dollars.
Bill: Yeah.
Preston: I can send you a billion dollars, and the transaction fee would be $3 if I want it in the next block. If I'm willing to wait an hour, the price is probably half as much, something like that. This is important, we're talking about the base layer because when you go into the Lightning Network, it doesn't offer the same level of security as the first layer. I have no idea how in the world you'd ever hack the second layer, but if you’ve got somebody that's really smart on encryption, maybe they could tell you how a person could have stranded coins or something in some really way out there on the bell curve type scenario. But if you're sending somebody 100 bucks, [laughs] no one's going to ever try to do that on the second layer where you have immediate clearance with no fees.
To answer your question, as you get further and further out into the adoption cycle of this thing, let's say, we warp ourselves 30 years into the future, the fees are becoming a primary means of rewarding the miners that are continuing to provide the security to the network and mine each block.
Bill: Huh. Okay, because that was one of my questions, was once all the coins are issued, what's the incentive for the miners to continue to participate?
Preston: There's a massive incentive there. There's people that have written just amazing articles that go way into depth on this exact scenario. One of the people I tell you is Dan Held, has a great article on this crossover and changeover period, that gets into all the financial incentives, and why it's going to offer enough security to the blockchain over time. It's a fascinating read.
Bill: Do you worry-- well, you don't worry. I'm sure you have a good answer for this. I have read people that have said like, “Well, 90% of the bitcoins are held by a small percentage of people, so there's going to be an eventual flood of supply on the market, and that's going to crash the price.” Is that a concern that--
Preston: You’ll see the exact opposite of that.
Bill: Yeah.
Preston: People that have been in the game for a long time, their buying power is so massive that their spending of it-- [laughs]
Bill: Yeah, nothing. [crosstalk]
Preston: They don't need to use too much of it. Then the argument, I had Mark Cuban throw this one at me. His big argument was, ‘Well, if you weren't one of the lucky few that bought it early on, then how in the world are they ever going to get redistributed to everybody?” I think it's a good question. I don't think a lot of people will like the answer. Because the answer is that everything is going to get repriced in bitcoin terms, and it's not going to be at an advantageous price point for the people that are holding the equity but there's going to eventually be a point where the yields that that equity will provide will eventually be higher than the yields that one can capture in lending. When that happens, I know, me personally, will happily step back as the value investor that I am, and buy the living hell out of that equity.
Bill: Yeah.
Preston: There's a redistribution of the coins.
Bill: Hmm. Well, that is super interesting, man. People said that I would enjoy talking to you-
Preston: [laughs]
Bill: -and they underestimated how much I would. This has been really fascinating.
Preston: Yeah.
Bill: To anyone that doesn't know where you are all the time, how can people find you, and start down the rabbit hole with you, or some resources that you might recommend?
Preston: I'm active on Twitter, and I truly, really enjoy interacting with people if you're kind, and you're approaching the discussion from a point of view of learning, and you're approaching it from an incentive of trying to discover the truth. If that's how you arrive, boy, we're going to get along really well. If you're arriving, because you've got some deep-seated insecurity or some fears of your own that are being expressed through the interaction, I'll probably block you immediately.
Bill: [laughs] There you have it, folks.
Preston: I don’t have time--[crosstalk]
Bill: That's why he and I actually like each other.
Preston: I don't have time for it.
Bill: That's right. Well, I really appreciate you stopping by the show, man. I've admired what you've done in financial entertainment, and this is great to be able to talk to you about this stuff. So, I sincerely thank the trolls for making this happen.
Preston: [laughs] Exactly. Harness the salt.
Bill: That's right. All right. Well, take care of yourself and have a good evening.
Preston: Thank you, Bill.
