Latest / The Income Show / Is the Bitcoin 4 Year Cycle Still Intact? | The Income Show | Ep. 8

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Is the Bitcoin 4 Year Cycle Still Intact? | The Income Show | Ep. 8 · The Income Show

0:00
Stretch and SATA, I think, are anti-fragile in their design because they're not promising to use resources to defend a peg the way that Terra Luna did.
0:09
That obviously blew up in spring 2022, but that was unsustainable.
0:12
They had a Bitcoin stockpile that they were prepared to and did sell in order to try to maintain a price peg.
0:19
As you do that, you deplete the resources that you have available to do that, and it turns into a vicious cycle.
0:24
And then the peg disappears and the price goes to zero.
0:27
That's what happened with Terra Luna, but what Saylor did by designing Stretch was the total opposite.
0:32
Over time, we're going to see the market share of Stretch shares held by Bitcoiners shrink,
0:37
and it will become increasingly held by fixed income investors who probably don't care about Bitcoin,
0:43
but they are very much interested in 11.5% or 13% yields.
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You know, I think about Rockefeller and Standard Oil, and there were other oil entrepreneurs,
0:51
but that guy got it the most right in the biggest way
0:54
and created the standards by which the industry still operates today.
0:58
I think Michael Saylor is going to be treated in the same way.
1:10
Hey, everybody. Welcome back to The Income Show.
1:13
This week I have on Jesse Myers. Jesse, welcome.
1:16
Thanks for having me, Joe. Good to talk again.
1:19
Yeah, absolutely. This is going to be a great conversation.
1:22
Jesse, I guess I want to start out with what's going on in the world of digital credit.
1:27
You know, it's been all of the talk recently, especially with the extreme volatility that
1:31
we've seen.
1:32
What do you make of this extreme volatility in digital credit?
1:37
Yeah, it's been the most dramatic period of the short life of digital credit to date.
1:46
You know, the last week, Stretch traded down briefly to $82, so an 18% discount from, you know, quote-unquote par value.
2:00
And, you know, Stretch is really only 9, 10 months old, and it has had several dislocations, price drops that were short-lived, all of them.
2:16
But this has been the biggest one, certainly in the last six months.
2:22
And, you know, the narrative over the last six months was increasingly
2:25
the stretch is going to continue trading in the $99 to $100 range.
2:33
And that has now been sort of shown to be true until it's not true.
2:40
So we've seen some serious volatility in digital credit in SATA as well.
2:46
last week. But I think it is just part of what these instruments are. And I think it's totally
2:53
normal. And, you know, we can talk about why that's the case and why I think the future for
2:59
digital credit is still completely the same, incredibly bright. Can you maybe, I know you did
3:07
a very interesting post kind of like doing some analysis on the drawdown that we saw in digital
3:13
can you kind of go into detail there was it like was it a liquidation type event or how did you see
3:19
it kind of playing out yeah you know watching the chart uh and how stretch kept trading faster and
3:28
faster uh down uh the the sell-off accelerated it it sure looked to me like a a liquidation cascade
3:36
that you sometimes see with Bitcoin or other crypto
3:41
where traders have gotten themselves into leveraged positions
3:48
and when the price, you know, in the expectation
3:52
that the price won't go below a certain level.
3:55
And I think the sort of setup for Stretch,
3:58
SATA to a lesser extent, but certainly for Stretch
4:01
in the last six months, has been that this thing
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is trading closer and closer to par
4:06
and it may never trade below $95 ever again.
4:11
And so if you're a trader
4:12
and you are hearing that kind of narrative,
4:15
you might take on leverage.
4:18
Maybe you even go 10x leverage with your stretch portfolio
4:21
because you don't think it'll ever go to $90.
4:26
And there's some amount of people
4:29
who got themselves in that kind of position.
4:32
And then there's some amount of people
4:34
who had more ordinary leverage or, you know, margin positions.
4:43
And as this, as stretch sold off,
4:47
some of those would have triggered liquidations,
4:50
which would have meant automatic selling of those levered long positions,
4:54
which accelerates the, you know, the sell-off
4:58
and does so in a pretty rapid fashion.
5:00
And so that might have been why the price sort of spiked all the way down to $82, you know, along with the sort of portfolios where suddenly people were delevering or just shrinking their position because they now suddenly stretch was volatile and it hadn't been previously.
5:22
and they needed to sort of right-size their position
5:26
for that level of volatility that was now introduced into their portfolios.
5:31
So all that to say, you know, I think that the setup was
5:36
what has built up in, you know, the young life of digital credit here
5:43
is this narrative of these instruments are going to trade closer and closer to par
5:49
and spend all their time there.
5:52
And then created the conditions for people to take on leverage and the expectation that it would never trade below 90 or 95 or whatever it is for an individual investor.
6:02
only for the sort of wobble of confidence or enthusiasm for stretch
6:10
to cause it to trade off the par value and then start triggering liquidations,
6:20
but also just sort of rebalancing selling from traders who thought,
6:29
wait a second, this isn't the zero volatility asset I thought it was.
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I should trim some of this position.
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And that all adds up to what was effectively, I think,
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a leverage wipeout for Stretch.
6:44
And the important part of that is that the mechanics of Stretch
6:49
and SATA are completely unchanged.
6:52
The fundamentals are unaffected by a leverage wipeout repricing
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of the market price of that instrument
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because the health of these instruments
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is entirely based on the strength of the balance sheet
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for the issuer.
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And the issuer balance sheets are unchanged.
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They're holding Bitcoin.
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And Bitcoin's price may have gone down a couple of percent,
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but didn't crater.
7:23
and that means that the issuers are in the same sort of condition they were a couple weeks ago
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and have the same capacity to continue paying the dividend payments for a stretch or for SATA
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and that means that the dividends will keep rolling in and and now the effective yield
7:48
is higher because if you're buying stretch at say $85, call it $90, you're buying stretch at $90,
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you're getting 11% better yield than you would have if you bought it at $100.
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So folks who are taking advantage of that now by taking stock of the fundamentals of stretch,
8:14
the fundamentals of strategy's balance sheet and saying they're still there their ability to pay
8:20
these dividends is unchanged they're going to keep paying the dividends at 11.5 percent
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notional which you know when you when you're trading at 90 cents on the dollar is is actually
8:32
11 percent higher than than 11 so you know whatever that comes out to um 12 or like that 12 effective yield That a great bargain if you understand the fundamentals
8:48
And so that's where I think we are at right now.
8:52
And I think the market will increasingly come to terms with the fact that what happened last week was disconnected with the fundamentals of these issuers and instruments.
9:05
And it just created a higher effective yield for those who step in as buyers now.
9:11
Yeah, I really liked your analysis on that.
9:15
Were you surprised to see this liquidation-like event occur?
9:20
Or did you kind of maybe see it coming?
9:24
You know, I think like everyone, I was surprised to see it happen.
9:28
But now in hindsight, I think it makes perfect sense why it happened.
9:33
And I think the market dynamics of these instruments make more sense now.
9:40
And I think it's very instructive for the future for digital credit in general.
9:48
Basically, you know, these instruments will trade at par until people get too accustomed to them trading at par and get greedy and pile on leverage and create the conditions for...
10:03
leverage wipe out like we saw last week just logically that you know you you're gonna see
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the same sort of cycle repeat where stretch because its fundamentals are sound
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should trade at par and and will increasingly do that but that will invite leverage and that will
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invite people to rely on it trading at par and that will create incentive for
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short selling hedge funds or any sort of traders out there to push the price below
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you know whatever liquidation levels are out there in order to trigger a liquidation cascade
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and profit from other people's greed and assumption that it will always trade at par
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And so I think that's the reality of these instruments is that they rely on free market price discovery to set their market price.
11:13
And there's nothing defending the peg.
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The PEG, the par value trading level is just based on, you know, variable rate, dividend rate being adjusted such that the instrument trades around, you know, the 100% because the market thinks that that amount of yield is appropriate for it to trade at that price.
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But there's nothing defending that price level.
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And so there's opportunities for people to push the price down
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if there's an opportunity to trigger liquidation cascades.
12:00
And certain short-term confidence shocks can also do the same thing
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just organically, and that I think played into last week.
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so we're going to see this same cycle repeating but that's what an anti-fragile asset does
12:20
right like stretch and sata i think are anti-fragile in their design because they're not promising to
12:29
use resources to defend a peg the way that tara luna um did and and that obviously blew up in
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in spring 2022 but that was unsustainable that was they had a bitcoin stockpile that they were
12:44
prepared to and did sell in order to try to maintain a price peg um but that you know as
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you do that you deplete the resources that you have available to do that and it turns into a
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vicious cycle and and then and then the peg disappears and the price goes to zero that's
13:04
what happened with Terra Luna, but what Saylor did by designing Stretch was the polar opposite.
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His idea here is to just have it trade like a bond, where the market sets the appropriate price
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based on the inputs, namely, how much notional yield is this thing going to generate from
13:28
from regular dividends and then the market decides what's the appropriate price for that to trade at
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um and you know so that's a that's a typical bond uh and i think that
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because it has that design the and it's brand new this market the digital credit market will learn
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from the events that happen as they happen over time.
13:58
This is the biggest learning event yet for, you know, in the one year that digital credit
14:04
has been around.
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And I think the market will come away from this expecting that occasionally there will
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be a price dislocation away from par.
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So you can, you know, up until now, the narrative has been these things are trading increasingly
14:19
at par.
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Volatility is going to zero.
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sharp rates going to infinity.
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I think now the expectation will be
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these things will trade at par until they don't.
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And you should expect that every so often that'll happen.
14:37
Yeah, that definitely makes a lot of sense.
14:40
How do you think about segmenting the risk
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between like the price risk
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of the digital credit instrument,
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you know, trading below par,
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but then the risk also of just simply will the dividend get paid?
14:54
Like, is it important to think about those two separately or no?
15:00
That's an interesting question.
15:02
I guess I think about them as two inputs to the same equation, two variables.
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I think that the market price of these instruments is based on the market's expectation of continued dividend payment and the effective yield of those dividends.
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and that combined sort of probability-weighted effective yield
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is what the market is intrinsically solving
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and then price is downstream of that unconscious market consensus.
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Do you see, you know, this is kind of a hot topic more recently,
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Do you see digital credit competing with Bitcoin itself?
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Or is it just like a simply a completely different like financial instrument?
16:10
Yeah, this is exciting.
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I think that many Bitcoiners have misunderstood who digital credit is for.
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And it's understandable because in this first year of digital credit,
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you know strategy has said that 80 percent of stretch shares are held by retail investors
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and most of those people are bitcoiners or at least that's the sort of assumption there
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and so it's easy for bitcoiners to jump to the conclusion of well if they weren't
16:50
investing in stretch they'd be investing in bitcoin and so it's sort of cannibalizing
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investment from Bitcoin. But I think that's the wrong way to think about it. Because this is the
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first inning of digital credit. And these instruments are not really designed for Bitcoiners.
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It just happens to be that Bitcoiners can wrap their head around it quicker because they paying attention to strategy and they have confidence in a balance sheet built on Bitcoin But you know eventually over time we going to see the market share of stretch shares held by Bitcoiners shrink
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And it will become increasingly held by fixed income investors who probably don't care about Bitcoin,
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but they are very much interested in 11.5% or 13% yields.
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And that's kind of a Lindy effect thing in a marketing thing
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where these instruments are too young to attract serious consideration by and large
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from non-Bitcoin investors who don't understand Bitcoin
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or maybe don't have high trust in a Bitcoin balance sheet.
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so they're on the sidelines still but it's easy to forget about the scale of how much capital is
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in that category that's that's like 500 trillion dollars of fiat asset value between fixed income
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assets and and and money m2 money uh that's a lot of asset value in the world that's like half the
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asset value in the world sitting in those two buckets.
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And those two buckets are inherently interested in cash equivalent adjacent
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investments that can deliver fiat yields that are higher than CPI.
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That's what you're looking for if you're sitting in those buckets.
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And there's a huge amount of capital in those buckets.
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So I think that as digital credit continues to prove itself as these dividend payments continue to be made and Wall Street analysts get more comfortable with Bitcoin as collateral and the strength of these balance sheets as a result of being over collateralized with Bitcoin,
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you're going to see an incremental march of these instruments being seriously considered for fixed income portfolios by wealth managers, by the types of people that Matt Cole himself was.
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He was running a fixed income fund for CalPERS.
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That's my understanding.
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and looking for instruments like this
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where he could have an edge in terms of returns
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versus his competitors or his peers.
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And if you can understand the alpha in a model like this,
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that can create the edge that you're looking for
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as a fixed income portfolio manager.
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So I think that the next decade or two is going to be digital credit going from 0% penetration effectively in that $500 trillion reservoir of fiat asset value to maybe it's 1% or maybe it's 10% of that reservoir being enticed to redeploy.
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redeploy, reallocate capital from government bonds yielding 4% or 5% to, you know,
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Stretch or SATA or others that are offering 11%, 13%.
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And, you know, so what does that amount to?
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Well, 1% of that would be $5 trillion of inflow to instruments like this
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over the coming probably decade or two.
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If it's 10%, and that would take two or three decades probably, that'd be $50 trillion of inflows into digital credit instruments, which really means going into Bitcoin by way of digital credit instruments.
21:39
so you know while right now these things are held by bitcoiners
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in their fixed income portion of their portfolio
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and some bitcoiners could be upset about well you know they'd invest in bitcoin otherwise
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but they really wouldn't because that's their fixed income portion of their portfolio
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that's a that argument is all a moot point you know when we zoom out and we look at the next
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decade or two where these instruments will really matter to fixed income investors, many
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of whom will not care about Bitcoin at all, but are just looking to pick up 11 or 13%
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yield and can trust an over-collateralized balance sheet.
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So that's where this is going.
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That's why it's myopic to focus on that consideration based on the big picture of what these things
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can do.
22:36
So I guess on that point, how do you like, does digital credit accelerate the monetization of Bitcoin? And is it doing so via, you know, bringing in capital that otherwise would not have acquired Bitcoin? And is there any other way that like digital credit might be accelerating the monetization of Bitcoin? Or like, is there a kind of argument that it doesn't accelerate the monetization of Bitcoin?
23:03
Yeah, you know, I guess many Bitcoiners are sort of operating on the default that this doesn't do anything for Bitcoin.
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This is some sort of sideshow for Bitcoin.
23:18
But for me, this is central to how Bitcoin monetizes.
23:23
You know, I think to date, it's been 17 years where Bitcoin has been adopted, you know, the bell curve of technology adopters.
23:36
It sort of made its way through the very first segment of technology adopters because it required people to do their homework, build conviction, jump through hoops to, you know, redeploy some of their portfolio into Bitcoin by setting up an account on Coinbase or whatever.
24:01
and then hold through all the volatility.
24:07
And that's a slow process, right?
24:10
Like that's a, it's Bitcoin,
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like waiting for capital to come to it.
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And I guess I've described it as an osmotic flow of capital,
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which is always happening in the world.
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Capital is always seeking better returns, risk adjusted.
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And Bitcoin represents, in my opinion,
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the best thing out there for risk-adjusted returns,
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but you have to understand it,
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and you have to build conviction in it,
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and then you have to go through the hassle
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of setting things up.
24:44
So that's a slow osmotic flow of capital to Bitcoin.
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But what digital credit does is it creates the plumbing
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of hyper-Bitcoinization,
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By which I mean, Bitcoin treasury companies are these pumps, capital pumps that have stuck pipes into this fiat asset reservoir now and are pulling capital out of the 4% yielding government bonds and into the 11, 13% yielding.
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Bitcoin-powered fixed-income instruments, and that capital is used to buy Bitcoin.
25:35
So whereas previously we've relied on individuals doing their homework,
25:41
waking up, deciding they want to sell some of their bonds and then go and buy Bitcoin,
25:45
now it's about digital credit instruments enticing a reallocation of some of the fixed income
25:57
capital in the world into these instruments that offer better fixed income returns you know in meeting the capital on its own where it meeting the capital where it at
26:08
offering a better version of what it's already looking for.
26:11
Here, you want yield in dollars? Here's more yield in dollars. And that will, I think, inevitably
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win market share and what that looks like is a huge amount of fiat asset value being
26:30
sucked into these bitcoin treasury companies by way of the stretch and sata and similar instruments
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and then that asset value is used to buy bitcoin which means it's pumped into
26:47
into Bitcoin.
26:50
And that will monetize Bitcoin.
26:53
That, you know, monetization is a game of supply and demand.
26:58
And we know that Bitcoin has finite supply,
27:02
increasing scarcity of new supply issuance,
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terminating in absolute scarcity.
27:07
There's only ever going to be 21 million.
27:11
But you also need demand, right?
27:13
And I think we have that, a slow and steady trickle of osmotic capital flowing to Bitcoin.
27:23
But digital credit instruments greatly accelerate that flow of capital by actively pumping it into Bitcoin.
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And that will, you know, monetize Bitcoin tremendously over the next two decades.
27:37
hmm another part of this acceleration of you know hyper bitcoinization or into hyper bitcoinization
27:45
like do you think about the idea of okay as digital credit issuers that hold a large bitcoin
27:52
treasury issue these digital credit you know instruments which are dollar denominated credit
27:59
instruments that behave you know obviously not like pure dollars but they are like dollar
28:05
denominated assets you know michael saylor talks about building digital money on top of digital
28:10
credit like an even lower volatility asset in a way is it creating more usd credit supply and
28:19
sucking up more bitcoin supply completely off the market and like is that in of itself
28:26
accelerating you know hyper bitcoinization
28:28
that's an interesting thought uh
28:35
I guess I haven't really thought a ton about that angle of it.
28:40
I do think that going back to, I hate to say first principles here,
28:48
but we think that Bitcoin is a better form of capital.
28:57
You and I share that view.
28:59
and that can only be the basis of an economy
29:09
if it is sufficiently large
29:12
that more and more people start to incorporate it
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into how they're saving,
29:21
how they're managing their treasuries,
29:24
how they're settling trade
29:27
so that it starts to become increasingly used
29:31
and increasingly a part of global finance.
29:37
And I think that Bitcoin's properties means
29:40
that if it gets sufficiently large,
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it will become self-evident
29:47
that it is a better form of capital than USD.
29:54
And that's mostly because of the supply schedule
29:56
and then partly because of the natively digital characteristics of Bitcoin.
30:04
But you have to get there.
30:06
You have to get to a sufficient amount of store of value size
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and adoption as a store of value instrument
30:14
that it starts to win in other sort of uses
30:20
and becomes medium of exchange
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and then unit of account for more people,
30:26
more entities more and then and more governments too i think that's a long long long long process
30:33
but it it starts by being the best capital being the best store of value asset and then that that
30:43
lends itself to allowing bitcoin to compete for other use cases and will it will inevitably win
30:50
because of its properties there too. Jesse, I also want to ask you about just kind of what's
30:57
going on with Bitcoin price action in particular. You know, like over the years, the four-year cycle
31:03
has been a great meme in the Bitcoin space. And it felt like, you know, last year, many of us,
31:10
you know, thought the four-year cycle is dead. But at this rate, it almost seems to be right on track.
31:16
Like, you know, how do you think about, you know, equities doing quite well?
31:21
Historically, Bitcoin was correlated equities, but now Bitcoin is kind of decoupled from equities in a not so great way for Bitcoin.
31:28
And the four-year cycle seems to be intact.
31:31
How are you thinking about that?
31:33
Yeah, you and I were joking about this before that I was, I've been an advocate of the four-year cycle
31:43
until Q3 of last year when it started to really look like,
31:50
okay, we haven't had like a full bull market
31:53
and the top should be right around now.
31:56
So I guess the four-year cycle is now thrown off
32:00
because this thing has reached a level of maturity
32:03
and sort of structured institutional bid
32:07
that it's going to trade on its own terms now
32:10
and maybe digital credit's a part of that.
32:12
Yeah.
32:13
And so right at the top, I thought that we weren't at the top and that that meant that the four-year cycle was no longer applicable.
32:23
But it turned out that that was the top, right on schedule for a sort of four-year cycle, which is, you know, a year and a half after the halving.
32:34
Historically, it's been the top for Bitcoin for a cycle.
32:39
And then a year after that is the bottom.
32:43
So it seems that that has been self-fulfilling to an extent.
32:50
I think the subtext here is that enough large holders, the OGs, believed in the four-year cycle and acted accordingly,
33:05
meaning they sort of sold a year and a half after the halving and I think precipitated a top.
33:13
and precipitated a bear market as everyone else started to pattern recognize,
33:19
okay, that's what's happening.
33:20
Now it's the time to sell.
33:21
It becomes self-fulfilling.
33:24
And so I think that the four-year cycle still matters.
33:28
It may not matter from a structural supply-demand point of view,
33:37
by which I mean that the impact of the halving might be marginal at this point
33:43
in terms of how much supply issuance is reduced.
33:48
But it may be memetic.
33:53
It may be self-fulfilling because the largest holders have lived and died by that
33:58
for a decade and a half and it's worked for them,
34:01
so they're going to keep doing it, frankly,
34:05
until they distribute their supply sufficiently enough
34:09
that the OGs are no longer holding 50% of the supply,
34:14
which will happen over the next few decades.
34:18
So we might be in for more four-year cycles.
34:21
Whether or not the halving is really driving it,
34:25
the narrative seems to be.
34:28
Yeah, it's been fascinating to watch.
34:31
I mean, I feel like the biggest disconnect
34:33
for a lot of people was thinking that
34:36
Global liquidity and myself included like global liquidity and and the strength in US equity
34:42
with this AI boom, you know, many of us probably thought that Bitcoin would have done, you know,
34:48
better than the S&P 500 with this, you know, expansion of liquidity.
34:52
But I guess if the OGs, you know, are selling enough Bitcoin that they clearly were possibly able to override that.
35:00
Yeah, I saw a tweet that observed, and I don't know if this is accurate,
35:06
but that OG wallets have sold one and a quarter million Bitcoin over the last two years.
35:15
Collectively, they've decreased their ownership by that much.
35:19
Meanwhile, digital credit and ETFs have sort of filled the gap.
35:25
So I think in many ways we might have the OGs to thank for setting the top and the current bear market.
35:36
And I guess you also, like if I'm going to blame things, which I seem to be doing, I guess I would, I think that AI has taken the oxygen out of the room for the last several years in terms of speculative investment.
35:51
And, you know, if we weren't in the midst of a rush to point investment dollars towards AI, maybe we would have gotten to $200,000 per coin last year.
36:06
But given the context, the backdrop, we didn't because all those incremental dollars were going towards AI instead of towards Bitcoin.
36:16
yeah it definitely seems like ai sucked a lot of liquidity out of the room uh that's for sure
36:23
what do you think about you know so as hyper bitcoinization progresses and bitcoin adoption
36:29
grows and hopefully you know digital credit succeeds over time how does humanity transitioning
36:36
toward bitcoin as this like base monetary asset like change the base layer of human of civilization
36:44
itself that's fun uh yeah i think you know it's it's the it's the bright orange future
36:54
that uh i think all bitcoin maximalists see as possible um i think that
37:02
you know the the value proposition of bitcoin is a better version of gold
37:09
absolute scarcity, which means that your savings grows in purchasing power over time
37:17
because you can't print any more of it. And even if nobody loses any, the economy grows.
37:26
So your purchasing power would ostensibly grow at a rate of the economic growth
37:35
plus whatever percentage of Bitcoin is lost per year.
37:41
So, you know, meaningful.
37:45
I think end state, you're talking about
37:48
3% a year growth of your purchasing power,
37:53
which has never existed before.
37:55
You know, the closest we've had was gold.
38:00
You know, we talk about the gold standard era,
38:03
which was in the U.S., the American Revolution,
38:08
to the advent of the Federal Reserve in 1913.
38:13
So about 150 years.
38:15
And think about what humanity achieved
38:19
and certainly the U.S. achieved in that 150-year span,
38:24
unprecedented technological innovation and capitalism and economic growth.
38:31
You literally went from whale oil lamps to, you know, to Rockefeller and Standard Oil in that time frame.
38:44
And, you know, railroads and combustion engines and automobiles.
38:51
and and i think the the ultimate promise of bitcoin is as a deflationary savings technology
39:01
meaning that your purchasing power grows uh every year just by you holding it that that
39:10
will, I hope,
39:13
return
39:14
civilization to a gold
39:16
standard
39:17
era, but
39:20
even more so. You know, with the
39:22
gold standard,
39:24
about 1.5
39:26
to 2%
39:27
more gold is added to
39:30
above-ground supply every
39:32
year from global gold
39:34
mining, and that's been true for
39:36
over a century.
39:38
and so your you know gold supply is growing at slightly less than economic growth over the
39:48
period so you have a net modestly deflationary um asset and i think that's where the sort of
39:56
truisms of you know one ounce of gold is is a fine men's suit it was true today was was true
40:03
150 years ago.
40:07
But that's the extra potential of Bitcoin
40:11
is that it can be like the gold standard era,
40:16
but even more so where it shifts the value to the savers.
40:23
And if your opportunity cost of your savings
40:30
is flipped from what it is today.
40:34
Today, everyone inherently knows
40:38
that the value of the dollar a year from now
40:41
is going to be less than it is today.
40:42
So you're mildly incentivized to spend it now
40:47
because you're going to get more for it now
40:48
than you would a year from now.
40:51
And the panacea for that is to put it into the S&P 500
40:56
or some index and try to outpace, mildly outpace that true inflation rate,
41:03
which is M2 growth at like 7% a year.
41:08
And Bitcoin flips that value proposition and says,
41:12
if you hold end state, assuming we have full adoption of Bitcoin as an asset,
41:18
as a store of value asset, and you get to a place where you're still rewarded
41:23
by your purchasing power growing 3% a year,
41:26
every year you hold that Bitcoin and don't spend it.
41:32
And so that will incentivize the savers And I think reshape culture to prioritize saving and long thinking and having a low
41:49
time preference which is the inverse of what we've had for the last 50 years since 1971 in particular
41:56
where we went off the gold the gold standard and the U.S. dollar is no longer backed by gold
42:03
and inflation started to accelerate.
42:07
And ever since then, you know,
42:09
culture has increasingly shifted to fast money,
42:17
fast spending, short time horizon thinking
42:21
because that's the optimum way to think about
42:29
how to allocate your dollars
42:30
if the reality is they're going to be worth less next year.
42:35
So it's the nearest and dearest topic for Bitcoin,
42:42
but that's what's at stake with Bitcoin as an asset
42:46
is if we're right about its properties
42:50
and where this inevitably goes,
42:52
then the world gets better
42:54
and better and better and better and better
42:57
because you have a flywheel of craftsmanship.
43:02
By which I mean that right now, every year,
43:06
to maintain the same cost, the same price for your product,
43:11
you have to make the product worse.
43:14
Because inflation means that if you're going to offer
43:18
the same jar of peanut butter for $3 next year,
43:23
but all your inputs cost 7% more,
43:28
you need to find a way to cut your costs by 7%.
43:31
And that's shrinkflation
43:34
where they literally cut a hole into the bottom,
43:38
you know, carve out a portion of the bottom
43:40
of the peanut butter jar so you get less.
43:42
Or maybe they make the inputs lower quality.
43:47
Anyway, it's a negative flywheel of,
43:51
in shitification, everything gets worse.
43:53
And Bitcoin can create, and I think will create, the opposite, where everything gets better every year.
44:01
Because if you want to command the same price point, you have to make your product better and better and better every year.
44:09
And we've never seen that.
44:11
We had a taste of that with the gold standard, but it was tiny.
44:15
And that's the promise of Bitcoin.
44:17
As we progress towards this Bitcoin-based world, people like Michael Saylor have referred to
44:28
Bitcoin as digital capital in the meantime, rather than money itself as a day-to-day currency.
44:36
How do you see that evolving? Is it wrong to say that Bitcoin today is digital capital?
44:42
And is there a possibility that Bitcoin always remains digital capital? And on top of that,
44:47
It's like, will Bitcoin become money like most people think of money?
44:54
Yeah, I'll take the last bit first.
44:57
I think the last bit might be no.
45:02
We'll see.
45:03
We'll see how that goes.
45:04
But I think Saylor is very cleverly drawing attention to what matters and taking attention away from what Bitcoiners have historically advocated for, which is, you know, digital cash sort of spirit of Bitcoin, the circular economy concept of Bitcoin of you don't need to use dollars.
45:32
you can use Bitcoin as a medium of exchange and treat it as money,
45:38
which you can do, but 99.9% of the value proposition of Bitcoin
45:48
is its function as capital.
45:52
It is a savings technology, to use Pierre Richard's term,
45:58
where by its design, it grows in purchasing power over time.
46:02
and nothing else in the world can offer savers that value proposition.
46:09
And who's a saver? Everyone. Individuals, companies, governments, everyone is a saver of some kind or another.
46:20
And so this technology applies to everybody.
46:23
A savings technology that grows your purchasing power over time should appeal to everyone on Earth.
46:27
And that's a better form of capital.
46:31
uh you know and i think sailor would add to that that you know in the digital age a kind of savings
46:38
that you can transmit over the internet in a permissionless fashion has you know obvious
46:47
utility and appeal and is better than a form of capital that you can't do that with like
46:52
For example, parking value in real estate, in dirt, has been the sort of tried and true method for hundreds of years.
47:05
And it works well because of the scarcity of real estate.
47:10
It's hard to make more real estate.
47:12
but there's a lot of friction involved in tying up capital in land
47:19
because it's hard to sell it's not fungible it's not you know each unit of land is not the same as
47:26
every other unit of land and then you end up with you know whole industries built on top of it for
47:33
how you transact in the thing that isn't easy to send to somebody.
47:40
So I think that Saylor is semantically making a distinction that how you should think about
47:47
Bitcoin is as capital, which is a fancier way to say the best form of savings or the
47:55
best treasury asset.
47:57
But it's true.
47:58
It's the broadest umbrella term for what it is.
48:00
It is digital capital. It's an excellent kind of capital, and people should view it as capital.
48:09
I'm going a little bit further in saying the thing that sounds controversial or sounds inappropriate maybe to make this claim,
48:19
but I believe that because of its properties, it's a savings technology that grows your purchasing power over time.
48:26
that's what
48:27
Saylor is not
48:28
going out on a limb
48:29
to say
48:30
but I think it's sort of
48:31
embedded
48:31
in how he's framing
48:33
Bitcoin as digital capital and the best the best kind of capital out there um in addition to it you know it it uh lossless fidelity um of of value transmission through time
48:50
which he does focus on uh so yeah and then you know money is is then sort of a sideshow it's
48:59
harsh to say that but um money is what you do to transact with capital uh or at least that's how
49:08
i think of it and medium of exchange is how do i how do i transfer the thing that i'm going to save
49:15
uh and i can go through another medium to do that or i can do it in the unit itself
49:22
I need so so that's that's money as I think of it and that matters to an extent but the real thing
49:31
that people should care about and the reason people will adopt bitcoin and put it on their
49:34
balance sheet and park value in it and you know redeploy some of their dollars into bitcoin is
49:39
because it is a savings technology that grows your value over time and and and so therefore it's the
49:45
capital part of the story that actually truly matters and everything else comes later uh
49:52
once enough of the world has adopted bitcoin as a store of value then medium of exchange comes and
49:59
then eventually once everybody's using bitcoin uh to transact in it becomes unit of account but
50:07
I can see a world where you have currencies that exist, and most likely government currencies, that are backed by a combination of the full faith and confidence of the U.S. government and our Bitcoin stockpile, or something to that effect.
50:32
And so, you know, I don't know that Bitcoin will be the only thing that people transact in.
50:38
And I kind of think it doesn't matter.
50:41
What I think matters is where people park their value for long-term store of value savings.
50:49
Yeah, it's interesting.
50:50
I mean, related to this, thinking back to the 2017 cycle, you know, altcoins, like their argument was like faster transaction fees
50:58
and being like this media of exchange that's possibly more viable.
51:02
And then Bitcoin, obviously, like slower, more transparent,
51:07
smaller block sizes, auditable, and, you know,
51:11
more immutable monetary policy, obviously, like was important.
51:14
So it's like, it's almost back to that argument.
51:16
And similar, like payment networks, like comparing the value of Bitcoin to like PayPal.
51:22
Like, obviously, Bitcoin is worth more than PayPal.
51:24
and PayPal is a big company,
51:26
but it's not like a multi-hundred trillion dollar company.
51:30
It's not like gold where it's $30 trillion.
51:32
It's almost like two different things.
51:34
I guess like the optionality of being able to use Bitcoin
51:37
as a payment is very important.
51:40
Having it as censorship resistant money is important,
51:43
but it doesn't necessarily mean like every transaction
51:46
that you ever do needs to be censorship resistant.
51:51
Yeah, agreed.
51:52
And I think that's where this is all headed with layer two solutions like Lightning.
51:58
Like, you know, I don't need to use Bitcoin to buy a cup of coffee because one, it would cost significant fees and it would take 10 minutes.
52:09
But, you know, so I'm not going to do that because that just doesn't make sense.
52:17
But I'm happy to trust a layer two solution that doesn't have perfect censorship resistance in it and has some very tiny other risks as well.
52:37
But it's going to get there instantaneously.
52:40
And I don't care about my $4 coffee payment, you know, how censorship resistant it is.
52:48
I just want it to get there immediately.
52:50
And so, you know, we're going to transact, I think, with layer two solutions that plug into Bitcoin like Lightning does.
52:58
And that solves the medium of exchange concern.
53:03
And, you know, I guess I speak with conviction about what matters in Bitcoin being store of value in large part because I fell for and lost a good bit of money in 2018 learning this lesson the hard way, right?
53:21
Like there's always a race for higher transactions per second, but it doesn't matter at all because at the end of the day, the value in any crypto asset is how much people store value in that asset.
53:41
And there's only one game in town for that, and that's Bitcoin.
53:43
another question i want to ask you is like how much does any individual person or company or
53:53
government like play a role in bitcoin adoption like sometimes in my mind like i i think of
53:59
certain people and i'm like okay these people have certainly accelerated bitcoin adoption
54:03
but then i also think that like you know there's just natural economic incentives to do certain
54:10
things and it's kind of just going to happen regardless like an example is digital credit
54:14
you know people criticize digital credit they say certain things about it but if it's you know
54:20
profitable activity to provide that you know financial instrument to the market then doesn't
54:25
you know it doesn't matter if michael saylor is doing it someone's probably going to figure out
54:28
how to to make those profits if those profits exist like how do you think about that in the
54:33
context of bitcoin adoption in general yeah uh i think about you know i think you're right that
54:44
somebody would do it with with any big invention the circumstances exist for some period of time
54:52
and then somebody comes along and puts it all together that was true of bitcoin right like you
54:58
You needed the internet to exist and you needed certain cryptography to exist to make the system work.
55:07
And then somebody did.
55:09
Somebody made a functioning, decentralized, uncensorable monetary network.
55:18
After several failures, right?
55:20
Like that's the other part of it.
55:22
People tried things and they failed.
55:23
you know i think about uh rockefeller and standard oil and some you know there were other oil entrepreneurs but but that guy got it the most right most right in the biggest way and created the standards by which the industry still operates today
55:44
Same with Henry Ford.
55:46
The automobile existed, but he got it right in a bigger way and mass produced it and had a whole bunch of innovations that the industry still operates by today.
55:59
I think Michael Saylor is going to be treated in the same way in the hindsight of history because Bitcoin existed and he has found a way to create a fixed income product that is powered by Bitcoin that uses Bitcoin's supply schedule.
56:28
it's finite supply
56:30
and it's increasing scarcity of new supply issuance
56:34
it inherently is built on top of that
56:37
and knows that Bitcoin will appreciate in value
56:42
because of those properties
56:43
and is therefore able to offer a cost of capital
56:48
that's higher than what any fiat instrument can offer
56:51
because fiat doesn't enjoy those same tailwinds.
56:55
So it's a structural advantage
56:58
for digital credit when competing head-to-head with fiat fixed income.
57:05
And that will, I think, cause the ingestion,
57:11
the siphoning off of $10 trillion, $50 trillion worth of fiat asset value
57:20
over the next several decades, which will all be pumped into,
57:23
all be used to bid for available supply in an asset that's currently one and a half trillion
57:31
dollars in total value so that inflow you know we'll see uh how much that magnifies the value of
57:42
of bitcoin but i think it's quite reasonable to think that if we have 50 trillion dollars of
57:48
inflow into Bitcoin into an asset that's one and a half trillion now,
57:53
that could create a $200 trillion asset.
57:58
And it will be because of digital credit.
58:01
And that was made possible by Michael Saylor.
58:05
Somebody else would have come up with it at some point, but they didn't.
58:08
It was Michael Saylor who invented it.
58:12
And I think that this is the big demarcation point.
58:15
This is the, you know, 100 years from now, if you zoom out on Bitcoin history, I think there's before digital credit.
58:24
And then the hockey stick monetization period, you know, follows in the couple decades after digital credit was invented.
58:34
And we're, you know, one year into that period.
58:40
And this is our first bear market and nobody's having a lot of fun with it.
58:45
But that's how it goes. And then I'd say further that, you know, to your original question there of, you know, is it individuals that matter or companies that matter?
58:57
You know, in the UK, I work for SmarterWeb.
59:03
We are actively deploying the strategy playbook that Michael Saylor has created in the UK capital market.
59:17
and that's entirely based on my ceo andrew webley seeing the opportunity to do that
59:25
taking his small public small company public and that creating the vehicle for
59:32
running this strategy in a similar way to how strive is doing it uh in the u.s but you know
59:41
If digital credit ends up being as big as I think it will be, and SmarterWeb ends up being the issuer of choice of digital credit in the UK, then Andrew Webley will be, you know, one of the great success stories of entrepreneurship and finance in 21st century Britain.
1:00:08
And so it takes the individual to seize the opportunity. And Bitcoin creates a lot of opportunities because of its endogenous properties. And Saylor's seen what's possible, created the playbook.
1:00:24
Andrew Webley has seen what's possible by deploying that playbook in what I think is, you know, historically the second most important financial center in the world.
1:00:37
I think probably the third most attractive market to run the amplified Bitcoin strategy in after the U.S. and probably Japan.
1:00:47
and I think yeah I think we'll see what what what's achievable with digital credit but I
1:00:56
you know it in a bear market you you lose some of the giddy enthusiasm about it but
1:01:05
if you zoom back out enough to take stock of it then the fundamentals are still there
1:01:09
Bitcoin still I believe will appreciate because of its supply schedule
1:01:15
And if you're using sort of fiat debt to purchase an asset that's appreciating, that's a trade that's going to work and is attractive to the company doing that and the shareholders that own that company.
1:01:36
And that's true in the U.S. and in every capital market in the world.
1:01:40
And I think we're just at the precipice of digital credit accelerating Bitcoin's monetization as an asset and cementing its integration into global finance.
1:01:53
I love it. Yeah, I think that was very well said.
1:01:56
I, for one, would definitely love to see a digital credit instrument issued by, you know, SmarterWeb.
1:02:02
I think that'd be great for Bitcoin.
1:02:04
But yeah, this has been an incredible conversation.
1:02:07
conversation. Jesse, thanks so much for taking the time to do this. Any additional final closing
1:02:13
thoughts you want to leave the audience with? No, I think I got it all out there. I guess in
1:02:20
reaction to your comment right there, maybe we'll have more to talk about. But, you know, so I might
1:02:26
have to come back on the show. Sounds like a good idea to me. But thanks, Jesse. This was great.
1:02:33
Thanks, Joe. Always good talking.