Preston Pysh (00:03:34):

Dylan?

Dylan LeClair (00:03:35):

I agree with, and I relate to almost all of what Will just said. I honestly, in 2018, my first… I was always a math guy. I tried science out, just wasn’t a big fan and was like, all right, I’ll I guess I’ll use my love for numbers to crunch some numbers in the business world, whatever that means. So, I should probably learn about investing and all this.

Dylan LeClair (00:03:56):

One of my first things I did was I literally went into the podcast app and looked up investing podcasts, and there you guys were-

Preston Pysh (00:04:04):

There’s a little bit of SEO to that, as far as naming conventions, yes.

Dylan LeClair (00:04:11):

You nailed it there. I was learning about, I guess the fiat world and the central bank monetary system and all of that as I was at the same time in parallel, just… I had a Twitter account earlier, I wasn’t active on it, but crypto Twitter, Bitcoin Twitter, I found the Bitcoin quarter, not specifically, but, they were very active and passionate.

Dylan LeClair (00:04:35):

I first stumbled upon this at 3,000, at the bottom of the bear market. You had this group that had drawn down 85%, and they’re just loud, obnoxious, but they were convicted. I was like, these people, maybe they’re not crazy, maybe there’s something more to it.

Dylan LeClair (00:04:53):

I just passively learned about Bitcoin and the legacy system in tandem, up and through my freshman year of college, 2020, the second semester of that was COVID and they basically kicked us all out and sent us home. Then I was right at the tip of going down the whole rabbit hole of Bitcoin, and then COVID comes, they print a bunch of money. I have so much spare time on my hands, and my Zoom classes that are taught by boomer professors about investing and economics were awful, and I was paying for this.

Dylan LeClair (00:05:29):

So, I dropped out and just decided, I needed certs. I viewed the opportunity cost in Bitcoin, especially after I read Jeff Booth’s thesis about technology dematerializing everything. I was like, okay, well… I all put it together. I was like, okay, I think the opportunity cost of everything is Bitcoin and information is free and abundant. So, what am I doing?

Dylan LeClair (00:05:52):

I guess 18 months later, we’re here just talking about Bitcoin and we just hang out on Twitter all day. But really, I think just Internet’s the arena of ideas is the most awesome thing. It’s credentials don’t matter here, it’s just what you can bring to the conversation.

Preston Pysh (00:06:08):

Amen to that.

Will Clemente (00:06:10):

To add onto that, I think too, Dylan and I’s platform which has grown more than I think either of us could have ever imagined-

Preston Pysh (00:06:19):

I want you to hit on this because learning through this many people, Will, you’ve had… I don’t even know what your follower account now is, but I know it’s a lot. You’re over 350,000 or 400,000 or something like 400,000 people following you specifically. The learning threshold that has gone up because you have so many people that are cuing you in different directions. Some of it’s just people just… I see all different types, I know you guys see all different types. But there are people that will throw things your way that you would never have learned or seen if you didn’t have such a massive platform of people following you. Talk to us about some of the things that you’ve learned through that.

Will Clemente (00:07:00):

First of all, just being able to reach out to people and ask questions is the first benefit of that. I’m grateful to be in a position now I can just reach out to pretty much anybody on Twitter and they’ll most likely respond because they get the notification now just because I have the large follower base or I can tweet at somebody.

Will Clemente (00:07:18):

But just in terms of posting things and the feedback, I can put out a chart or a metric or an opinion on something and I have hundreds or thousands of people that are criticizing it. Sometimes not in the nicest or most respectful way, but I think part of it is being able to pull the, maybe disrespect or rudeness out of a comment and being able to say, okay, well maybe they didn’t deliver this in the best way, but what they’re actually saying has some merit to it. Or aside from the bad apples, just in general, you get people that will give you their feedback.

Will Clemente (00:07:55):

A lot of this stuff I’m posting is like market related content to Bitcoin. I put out an opinion and people say, “Well, you’re not looking at this, this or this, or with this metric, what you also need to consider is that this might be skewing the data.” Sometimes just putting out an idea or framing something in an open-end way is the best way to learn.

Will Clemente (00:08:16):

I posted something last week and I said, “Do you think over time, Bitcoin’s volatility increases or decreases?” I got fricking Saylor commenting on it and giving me his opinion. Without that platform that I have now, there’s no way I would be able to get some of these insights. That to me has been the coolest thing is… When we’re talking about just being able to learn, asking questions is huge.

Will Clemente (00:08:39):

That’s been my biggest asset is over the last couple of months, I’ve evolved my learning just from a pure market standpoint. I did not at all predict the May crash. I got into on-chain analytics a couple of weeks before that. I was a complete noob. Over the summer, I got really upset at myself because I missed that whole move. Really grinded out my understanding of all that stuff.

Will Clemente (00:09:01):

Through that, I really built a community, if you will, of different people that were interested in it through Telegram, also just in DMS. But now I’m in some of these Telegram groups. I remember early on you talked about the book, The Seven Habits of Highly Successful People. You talk about masterminds. These groups that I’m in are essentially that, where it’s like, all these people that are specialized in this one thing, and we’re all putting our heads together to come to the best conclusion.

Will Clemente (00:09:30):

It’s like 15 or 20 of us, different fund managers, or just independent on-chain reach searchers. We all are just bouncing ideas off of each other. I think people, more than anything… Books are amazing and books can help you understand a lot of things, but bouncing ideas off of people and just asking questions, I’ve learned so much through that, early on just reaching out… That’s how I got originally noticed by you, was I tweeted out to you, I put out this article when I had like 300 followers, and it was like Bitcoin’s role in the financial system. I tagged you, I tagged Dylan actually-

Preston Pysh (00:10:06):

You crushed it, you crushed the article.

Will Clemente (00:10:09):

I appreciate it. I didn’t really think anyone was going to respond, but then you retweeted it. I was like, “Oh my God, Preston Pysh retweeted my article.” I was freaking out. Then from there, I was like, okay, well this is how you reach out to people.

Will Clemente (00:10:23):

I just started tagging people and everything. Whenever I have questions now, I just reach out to fund managers or different… I’ll reach out to Lyn Alden if I have a question about macro or different crypto fund managers about some of their opinion on the market over the next couple months. It’s just like, people are the biggest alpha, not just in markets, but just in understanding things in general.

Preston Pysh (00:10:46):

If you can handle the trolls, because there’s trolls, especially at the level of followers that both of you guys have. If the individual can handle it and they can ask the right questions, it’s just insane. It’s insane what you can learn. You mentioned the idea of a mastermind, people in the past might have a mastermind of five people and some of them might not even be experts really in what you’re interested in learning about, but with Twitter, if you got 400,000 followers or whatever it is you guys got, you can uncover just anything. You can ask questions like, “All right, I’m interested in learning about this. What’s the best book on the planet for that.” You’ll get 100 different book recommendations from wherever. It’s just crazy.

Will Clemente (00:11:32):

We’re not the best app for learning and doing this stuff. Especially being a Bitcoiner on Twitter, I started actively using my Twitter account in May of 2020, posting about Bitcoin and following plebs on Twitter, just hardcore Bitcoin maximalists, interacting with them. Half these people are pseudonyms, with a cartoon character as their name-

Preston Pysh (00:11:52):

Yeah, that are brilliant.

Will Clemente (00:11:54):

Yeah, because you have people… It’s so funny when you see Janet Yelen, and she’ll tweet out something or some credentialed check mark, and I say that now just recently getting a check mark, but they’re getting ratioed by a pleb with 300 followers who’s destroying their argument with just first principle’s reasoning.

Preston Pysh (00:12:15):

Now that we got high bandwidth spaces, I get onto these spaces-

Dylan LeClair (00:12:20):

Spaces are amazing.

Preston Pysh (00:12:21):

You’re talking to somebody who doesn’t even have a picture on their profile with five followers, and they’re like some of the most intelligently crafted arguments and points and critical thinking that you’ve ever heard. It’s just mind blowing how much talent is out there, if you’re willing to ask the question, and just make yourself vulnerable, I guess to, hey, I don’t know what this is, but help me understand what different ideas there are around it.

Preston Pysh (00:12:48):

I guess, going back to the original question, how are you guys able to catapult yourself to such a high level of understanding and influence in the market in a constructive way? You guys have been asking amazing questions. You guys have been posting awesome content, but you’ve also been open to the criticism to adjust it, to update it.

Preston Pysh (00:13:10):

Dylan, you and I were having a DM about this… This was actually my next question, I think, about this metric, this long term holder versus short term holder, and how I just love, absolutely love this chart. I know both of you guys have coordinated different ideas around this chart, but Dylan, explain this chart to people, what it is, and the performance on this. We’ll post this out after we’re done with this interview, or one of you guys can post it in the comments or something when this interview airs. But talk to us about what this is, this idea.

Dylan LeClair (00:13:43):

The core thing about Bitcoin on-chain analytics and what makes it so different than anything we’ve seen before. I guess, public blockchain ledgers. There are other ledgers, other cryptos, but Bitcoin on-chain specifically, Bitcoin on the UTXO set, Satoshi air dropping this thing onto the world in 2009. Basically, you can see, you have a real time property rights for this global monetary system that’s growing organically.

Dylan LeClair (00:14:10):

You can see basically, Bitcoin’s market price is $10. Well, you can see the average Bitcoin was traded for $3. We’re not talking about $10, but when you’re looking at say price today at $60,000. Well, the realized price basically the on-chain cost basis for everybody on the network is like $24,000. A $1.2 trillion market cap realized cap is like $450 billion, something around there.

Dylan LeClair (00:14:37):

You can see transparently, these things with on-chain. The chart I showed you was the short term holder cost basis versus the long term holder cost basis, and Glassnodes’ quantification of that. There’s some statistical threshold that is 155 days, but it’s essentially the longer a UTXO or a longer a Bitcoin is held, the less likely it’s going to be spent into the future. That’s true when analyzing the entire UTXO set over the course of Bitcoin’s history.

Dylan LeClair (00:15:05):

While it seems arbitrary, it’s not, and we can do some pretty cool things with analyzing the trends of these long and short term holders. What you see is during bull markets, the short term holder cost basis, basically new money, new capital, coins that are being transferred over short time spans on the network, the cost basis of those coins is getting bigger, while the long term holder cost basis is flat.

Dylan LeClair (00:15:29):

Essentially it’s because, hoarders, stackers set the floor in bear markets. The Satoshi accumulators of last resort is what puts a bottom on this Bitcoin price. Because of its absolute scarcity, as people discover that Bitcoin is the best monetary asset the world has ever seen, because that’s a fact. Basically, they want to secure an allocation and they have to bid up the price of this asset in dollars to acquire it.

Dylan LeClair (00:15:57):

You see that bull market trend is essentially short term holders increasing against long term holders. Eventually, Bitcoin’s price action going parabolic incentivizes some of the network participants to take some chips off the table. You see that in the UTXO set with all these coins that haven’t moved in a long time hitting the market or making an on-chain transaction.

Dylan LeClair (00:16:20):

While some of those may not be economic sells in the sense that, hey, I just transferred some of my funds from one wallet to the next. But what you see at the top of bull markets is a lot of these coins coming on to the market, moving on-chain all in once, especially old coins. From there, you see that trend start to change where you see a lot of long term holders, their coins are moving into the short term holder cohort they just spent. That long term cost basis starts to appreciate in a really, really fast manner, at the same time where the price action just went up 20X, 100X, whatever the multiple is, that marginal buyer just gets exhausted.

Dylan LeClair (00:17:00):

That’s when you see the cyclicality, the reflexivity working the other way, and you see these seemingly random boom and busts over the course of Bitcoin’s history, that aren’t actually all that random. It’s just, the natural cyclical volatility of the monetization of this asset.

Will Clemente (00:17:17):

If we could just back up for a second. Realized cap is essentially the market capitalization of Bitcoin based off of when a coin was last moved. The way to think of this is like Roger Ver who bought Bitcoin, at a dollar. Let’s say he bought $100,000 of Bitcoin at $1, and he hasn’t moved those coins whatsoever. That’s now like-

Dylan LeClair (00:17:40):

He moved them in 2017, but keep going.

Will Clemente (00:17:43):

Now, in market cap terms, that takes up, whatever, 6.1 or whatever Bitcoins, that’s $6.2 billion chunk of market cap. But if he hasn’t moved those coins, in realized cap, he’s still only adding $100,000 to that. It’s essentially, you’re looking at the amount of value that is stored in Bitcoin, or in other words, for people who are familiar with technical analysis, you’re looking at an on-chain VWAP, so a volume weighted average price of Bitcoin.

Will Clemente (00:18:13):

This was originally conceptualized by Pierre Rochard, and then Nick Carter actually created the metric. Pierre Rochard came up with the idea way back in Bitcoin’s early days. Nick Carter actually presented it, created the metric at a conference. That was where realized cap was born. Realized cap itself is useful, aside from looking at it in more granularity, because in bear markets, whenever the market cap goes below realized cap, by definition, the market’s in capitulation, because it’s below the average cost basis of all the investors in the market.

Will Clemente (00:18:48):

Then what Dylan did, like he said, was take this a step further and then using Glassnode’s heuristics of the short term and long term holders, comparing the two. Then if you actually run the ratio between the two of those as well, you get an interesting cyclical oscillator.

Will Clemente (00:19:05):

But one other thing that Dylan didn’t hit on that I think is important to understand is that there’s this natural dynamic between short term and long term holders. What you see is that the long term guys scale into the bear market, they don’t perfectly time the bottom. They don’t bottom tick perfectly, but they scale into the bottom of the bear, and then they scale out into the major bull rallies that we have.

Will Clemente (00:19:29):

So, they buy into weakness, or scale into weakness and they scale out into strength. You see this natural dynamic where into the bear, all the short term guys leave, all the speculators get out of the market, or they age into long-term holders, if they stay on, if they stay in the market. Over time, obviously, you have more and more are people that come in, because number go up is basically the best form of marketing for Bitcoin.

Will Clemente (00:19:56):

You have, over time, more short-term holders come in the bear market, become long-term holders into the bear… They come into the bull market and then turn into long-term holders into the bear. But you also see the long-term guys, as Dylan touched on, come in, stepped in and set that floor into the bear market.

Will Clemente (00:20:12):

You see this natural dynamic where if you look at the two of the charts, they go the complete opposite directions; they converge, and then they disperse into the bull market. Dylan took that a step further by looking at their cost basis, and then the behavior of the two of those, and there is a lot of signal in that.

Will Clemente (00:20:31):

Short term holder cost basis itself is actually another really interesting metric. The short term holder realized price has been a really interesting level that Bitcoin prices historically reacted with. Right now that’s at $53,000, which is interestingly right around that trillion dollar market cap, which you also see has been aligned in the sand for investors, when you look at transactional activity and on-chain volume, you see that’s aligned in the sand there. So, there’s some confluence there.

Will Clemente (00:21:02):

But in bull markets, what you see is that price tends to bounce off of short term holder realized price, which is another interesting variant of that. But yeah, that was an awesome metric created by Dylan, that takes two of those concepts, realized price, which is the on-chain cost basis, or average cost basis of investors on-chain, with that cyclical behavior that you see between those as short and long term holders.

Preston Pysh (00:21:29):

Dylan, I’m curious, if you’ve run the numbers. When you sent the chart back to me, I said, can you just put this in a green and a red status of like, I own it, or I sold it, and I’m out of the market scenario, very binary scenario. I’m curious what the out performance is. Have you calculated that?

Dylan LeClair (00:21:48):

I actually haven’t, I should back test-

Preston Pysh (00:21:51):

You need to figure that out. Then when we air this, I want to be able to tell people what it… I know it’s better than Bitcoin itself, significantly better.

Dylan LeClair (00:22:01):

Well, on-chain is so fascinating because, you have this… I’m just repeating myself, but you have this transparent ledger of ownership, for an asset that’s monetizing on every single balance sheet. Whether someone likes it or not, you’re not insulated against Bitcoin’s monetization. Eventually, you’re going to need to denominate your balance sheet in Bitcoin terms. It’s just whether you’ve realized that and accepted it yet.

Dylan LeClair (00:22:28):

Being able to track this live and see every single Bitcoin owned on the network in full transparency, it’s pretty fascinating. I think we’re just scratching the surface on all this stuff

Preston Pysh (00:22:42):

The Glassnode metric for long term holder versus short term holder, help us understand what that cutoff is. What timeframe are we talking here?

Will Clemente (00:22:52):

It’s 155 days. The reasoning is, as Dylan touched on, what you see is that, as a coin is held in a wallet, the longer it’s held in a wallet, the less likely it is to be spent. Then Glassnode’s run some statistical studies to look and say, okay, where is that cutoff that the likelihood of them spending those coins really cuts off the most? That’s right at 155 days, which is also five months.

Will Clemente (00:23:19):

I know for a lot of the hardcore Bitcoin maximalists, they’re going to be like, five months, these guys are wimps. That’s nothing. But it’s just, when you back test the behavior, that’s where you see the likelihood of those coins being spent cuts off the most.

Preston Pysh (00:23:33):

This is one of the reasons I like that chart so much. My opinion… We’re in a little bit of a sell off right now. I think the price went up to close to $68,000, it’s down there $60,000 right now. There’s whale out there and these whales can move that price more than I think a lot of people realize. Not only can they move the price, but they can move the price at times when you’re maybe least expecting it, or you don’t know what their reason for a sell or a buy necessarily is.

Preston Pysh (00:24:03):

Then the leverage it’s in the market just accentuates whatever it was that they were doing, or just pushes it in the up or down direction, even more. My personal opinion is somebody who’s trading this thing in a day for day way, or in a very short time horizon, I don’t have the metrics. I guess I’m speaking more for myself, I don’t have enough confidence in being able to trade that, especially in a way where I would be able to outperform the tax burden that’s associated with every one of those sell orders.

Preston Pysh (00:24:35):

Preston Pysh, I am a much longer time horizon looking type person, and this goes back to probably my Buffett days and just how I invest in equities. When I buy something, I’m really looking for something that I can own for a year plus, at a minimum.

Preston Pysh (00:24:53):

When I looked at the chart that the two of you have put out there and Dylan has really refined. When I’m looking at that chart, I’m saying, this is something that meets that time horizon, where the whales in the market, aren’t going to be able to bump me around and mess up whatever it is I’m trying to do, because it’s just too big of a macro theme, and the market’s moving in hundreds of billion dollar type waves.

Preston Pysh (00:25:19):

When I’m looking at that and I’m saying, hey, if I’m going to… I’m not on the sell, but if I’m going to stockpile Fiat or cash to buy at an opportune time, this past event would’ve been a great scenario where this metric that we’re talking about right now, you would’ve been stockpiling cash. You would’ve not been buying more Bitcoin and you would’ve probably nailed, literally nailed the living hell out of the bottom of this recent six month downturn that we had. If you would’ve stockpiled your free cash list for six months and inserted it into the market right then, I see this metric as being just extremely valuable for that type of investor. That’s how I am. That’s how I’m going about it, at least.

Dylan LeClair (00:25:59):

Preston, the most fascinating thing is you have this, the on-chain stuff, it’s like these large macro trends. Then at the same time overlaid on top of it and it definitely impacts the price a lot over the short term, it matters far more is this derivatives market.

Dylan LeClair (00:26:16):

Essentially, what you have are these completely free and open and Wild West public capital markets that are being built out all over the world. They’re on-chain settled monetary asset, this free and open decentralized, absolutely scarce monetary asset is being traded with fully functional derivatives that are settling billions of dollars a day.

Dylan LeClair (00:26:42):

What if I told you, when this metric flipped and you started to see all these long term holders selling at once and at the same time, you could have just gone 1X short on these derivatives, where you’re basically holding… If you’re 1X short with Bitcoin as collateral, you’re basically holding a synthetic dollar. If you’re 1X on a derivatives exchange-

Preston Pysh (00:27:07):

You’re talking like perps, putting the Bitcoin-

Dylan LeClair (00:27:09):

Yeah. At the same time as the market is convinced we’re in this new paradigm. I get it, when Bitcoin rips, when Bitcoin passes 100K, we’re all going to be for, because that’s been this eye in the sky target for a while, and it’s going to feel good. But at the same time, everyone’s euphoric and sentiments at all time highs and all these coins are coming out of the market, you can get like 50%, 100% annualized at times, just going short on the perps.

Dylan LeClair (00:27:38):

It’s because the euphoria, the sentiment, everybody’s levered long on the derivative side of things. The way that these say, the perpetual swaps work, is it’s Tethered to the spot index. It’s Tethered to the spot price with that funding rate.

Dylan LeClair (00:27:51):

If the derivative bulls want to bid up that price all they want, that’s great. But that funding rate is going to go so high, that it’s going to basically cost them 100% APR on an annualized basis, which was where it hit sometimes at the top on Bybit, Binance, these exchanges that were all using Bitcoin as collateral to long Bitcoin, and they were paying 75%, 100% annualized rates to do it.

Dylan LeClair (00:28:17):

But the problem with longing Bitcoin with Bitcoin is that if the price goes down, well, your position goes down at the same time as your collateral value. That’s why you saw that, especially harsh draw down to 30K. We went from 40 to 30 in about two hours. That’s why you see those dislocations and those major volatility kind of blowups is because it’s free and open and you have all these derivatives layered on top of it. But that’s what makes it so fun.

Will Clemente (00:28:46):

I think what Dylan just touched on is really important to understand. One of the more bullish setups for Bitcoin is, the percentage of futures contracts that are currently margined with crypto, which I know that a lot of people don’t like that word, but crypto versus USD or stable coins. The reasoning is, what Dylan just alluded to, was the convexity that these contracts have.

Will Clemente (00:29:11):

Essentially if you’re longing Bitcoin with Bitcoin as collateral, that’s awesome when the market’s going up, because not only is your P&L decreasing, but your collateral’s increasing in value as well. Well, as soon as the market starts to turn against you, it goes the complete opposite direction. Because not only is your P&L decreasing, but your collateral is also decreasing in value. You’re even more likely to get stopped out or liquidated or freak out and sell for that matter.

Will Clemente (00:29:35):

Then conversely, when more of the market is margined with stable coins or USD, those contracts are more likely to be squeezed to the upside. The reasoning is because, if you’re short with Bitcoin as collateral, and let’s say the market starts going against you, not only is your P&L decreasing because you’re short, but you also don’t have this inadvertent hedge that you do when you’re margined with Bitcoin, because if you are, and it’s short and it starts going against you, well, yeah, your P&L is going against you, but your collateral’s increasing in value.

Will Clemente (00:30:06):

When you see a larger portion of the market being collateralized with stables or USD versus crypto, that puts us in a more healthy state. It means that A, we’re less likely to have this convexity to the downside and B, shorts are more likely to be squeezed.

Will Clemente (00:30:23):

Currently, the percentage of total futures open interest that’s margined with crypto is down from like 70% in April, now, it’s down to like, I think the mid-40s, Dylan, maybe you could correct me if I’m wrong, or something like that, but almost half of what it was earlier this year. To also touch on what you mentioned a second ago, on the short term timeframes price is very much driven by A, the derivatives and then B, price levels.

Will Clemente (00:30:50):

If I’m analyzing the market and I don’t day trade and Dylan doesn’t either, but when we’re trying to understand what’s going on in the market, because we both have market intelligence newsletters, and we need to understand what’s going on. What you can look for is these dislocations between the derivatives market and price, and then as well as you can look at order books are another thing. Then just straight up price level.

Will Clemente (00:31:13):

Some people live and die by just looking at price levels, and they just look at price action. Where funding really comes into play is, as Dylan mentioned, it’s the peg for perps to the spot index price, which is essentially just this weighted average of all the major spot exchanges, weighted by their volume. Whenever funding is positive, what it means is that the perpetual contract is trading above the average spot price.

Will Clemente (00:31:41):

Usually, what that means is that perp traders are more aggressive relative to spot. It can also mean that the spot is selling off stronger than perps. Then conversely, if you have negative funding, it can mean A, that spot is buying while perps are shorting. But it can also mean, let’s say you have this big leverage cascade, and you get a bunch of longs that are liquidated… Well, by definition, that’s going to drive the perp price lower than the spot price.

Will Clemente (00:32:11):

There’s a bit of nuance there, but generally whenever you have prolonged [tie 00:32:15] funding, that means that traders have been greedy for a while in the market. Where this really has signal and where this is really actionable because we had high funding earlier this year for months, for two or three months, we had to get reset one time. Everyone’s like, oh, this is a new paradigm, funding can just be positive forever. Obviously, that wasn’t the case. When you look on the intra day timeframes, where this really is actionable is when there’s a dislocation between the direction of funding and the direction of price.

Will Clemente (00:32:47):

An example would be, if you start to see… This actually happened… Not to show myself, but I posted about this, when we came off of the summer lows, remember when we had this really big short squeeze and price drove up to like 48K on Binance, but we came off-

Preston Pysh (00:33:00):

Yeah.

Will Clemente (00:33:01):

It drove up, I think it was the first week of August or something like this. What happened was, is price was grinding up. Meanwhile, you had funding driving down. Essentially what that was saying is that, the spot market was buying and perps were so used to fading every single rally, they were raking in money fading every rally for the last three months. But they’re like, okay, this is the last three fake out rallies that we’ve had. They were just fading it, they got squeezed.

Will Clemente (00:33:28):

That’s one way that it can have a signal. The other way would be the complete opposite. Instead, if you see funding increasing while price is decreasing. What that means is that traders are essentially leveraged long in the dip. If you’re seeing price continue to grind down while the perpetual swap funding is increasing, that means that essentially the spot market is driving price down and perp traders are leveraged longing the dip.

Will Clemente (00:33:56):

Whenever you see these dislocations, that’s when you tend to see things get resolved in the direction of price. Then you can also look at that with a bit more granularity in terms of specific exchanges. Our rule of thumb is like whenever Buybit is doing something, that generally gets faded, because Buybit is primarily like retail driven exchange.

Will Clemente (00:34:18):

Going back to that short squeeze from the end of summer, you saw Buybit was fading the rally really aggressively. I forget it was like negative 70% or 80% APR. Then meanwhile, you had like FTX and Deribit, which tends to be where smarter capital is, they had positive funding. You can look at these dislocations as well to get a good picture on what perhaps is going to occur.

Will Clemente (00:34:43):

Then last thing would just be going back to what we touched on with the convexity or the higher likelihood of stable coin USD contracts being squeezed. You can look at, are the contracts that are being opened coin or stable margin? Ideal scenario for the bears would be prices grinding down, and meanwhile, you have a bunch of coin margined, open interests and funding is mooning. That’s like, okay, you have all these perp traders that are leveraged longing the dip, trying to catch a falling knife. Meanwhile, the spot market is just fading this.

Will Clemente (00:35:18):

This is what happened also on that move down in May. I remember when we had a massive flush to 30K. The night before, and I’m not saying I called the initial move down, but I remember the night before we had that last capitulation leg down to 30K, I remember looking at my phone and seeing that funding was rising. I was like, oh God, this is not good because price was just absolutely nuking, and everyone was trying to catch a falling knife.

Will Clemente (00:35:47):

Usually, the way it goes is that you have to see these guys completely get wiped out, these traders completely give up on trying to leverage long on the dip. Then, usually you start to see funding stay negative and that’s when price then begins to grind or consolidate out of that capitulation area.

Preston Pysh (00:36:04):

As you guys are describing this, I’m sure most people who are hearing this are saying, this sounds really complicated, this sounds really involved. But as I’m listening to this, it sounds like… Will, you talked about this a little bit, that what happens on the upside is almost identical on the downside, as far as how the leverage is forcing the price action to stabilize-

Dylan LeClair (00:36:27):

They become forced buyers or sellers essentially.

Preston Pysh (00:36:29):

That’s right. When you think about this leverage, all these leveraged markets that now exist, the perps, I still don’t think they’re available here in the US, but everywhere else in the world they are. When we think about that, is this causing the price to become more volatile, or is it causing the price to normalize to whatever the actual price action was going to be in the first place, with less volatility? How do you guys see that taking place?

Dylan LeClair (00:36:58):

I think it’s option one. Basically it’s a whip zone. Bitcoin has some collective, intrinsic value. Maybe intrinsic value is… It has some sort of subjective value for everyone around the world. That value is basically going up for… It has been going up in a straight line. More and more people come to understand Bitcoin and subjectively value it.

Dylan LeClair (00:37:20):

But, underneath the surface, you have all the volatility enhancing things like leverage, coin margin, all the stuff that Will dug into. It’s just layering on directional bets, which causes the market… It just whips all around.

Dylan LeClair (00:37:35):

I think the most exciting thing about this is that… It’s a thing, Preston, that I’ve seen you, especially the last month just nail into is I’m done with centrally planned, cost of capital academics that are just clueless bureaucrats that have some sort of power in this incumbent system. These 20th century institutions-

Preston Pysh (00:37:58):

Do done with them.

Dylan LeClair (00:37:59):

… that are just completely incompetent. Here we just have this open source, decentralized software that’s just TikTok next block in a completely just-

Preston Pysh (00:38:11):

Yeah, unemotional kind of way. Yeah.

Dylan LeClair (00:38:13):

It’s mechanical. Some time in the next 10 minutes, there’s going to be a block and there’s going to be property ownership transferred on an immutable ledger. You can do all this stuff on top of it, the BTC USD price, I think it’s going to be increasingly volatile actually over the next decade, as a result of this incumbent system, basically eating itself as it continues to just deliver and then have to get bailed out and pumped up with more stimulus.

Dylan LeClair (00:38:39):

But Bitcoin’s just doing its own thing. You don’t really have to care about all these bureaucrats and everyone else, if you’re just passively allocating to Bitcoin, so, it’s solving for itself. The cost of capital now, with these Bitcoin derivative, yes, it’s volatile. It’s variable. The APR, the cost of capital in Bitcoin markets, but it’s free. If you want to long Bitcoin, if you want to get stable Bitcoin liquidity in Bitcoin markets and crypto markets, do you want to borrow against your Bitcoin? Well, you can do that sometimes, you can do that 20%. Sometimes you can do that at 5%, but the cost of capital is not set by the Fed funds rate anymore, and that’s the most exciting thing. Increasingly, more and more people are realizing

Will Clemente (00:39:21):

Nobody gets bailed out. This is another thing too. It’s like, if you get liquidated, no one’s coming to save you.

Preston Pysh (00:39:28):

In fact, the people on Twitter, they’re just tap dancing on your grave, Will.

Will Clemente (00:39:32):

They’re buying your long liquidation.

Preston Pysh (00:39:34):

Yeah.

Will Clemente (00:39:35):

I think this is a bit more philosophical, but I think the long liquidations are a beautiful thing because it reinforces this concept that we now have in this free and open market that you have personal responsibility. If you make this decision to leverage and take a directional bed and think that you have some kind of edge in the market, and that you can outsmart the market, well, you’re going to be held accountable for that, no matter which way that resolves.

Will Clemente (00:40:02):

I think that’s a beautiful thing. You have all this stuff going on in the derivatives market, and the way I view it is like the Ray Dalio, long term debt cycle thing. The visual he has where it’s you have this long term thing that moves up into the right, it fluctuates. But then you have these short term cycles that move around the major long term thing.

Will Clemente (00:40:23):

I think, first of all, you have this real hardcore base of hobblers that are in this asset. You can see that non-chain data. If you look at the entities with 0.1 to one BTC, their holdings are literally up into the right, no matter what. They uptake a little more in the bull markets, but even in the bear, they don’t even budge, they just go up into the right.

Will Clemente (00:40:44):

You take the portion of supply held by entities with less than 10 BTC, over time, that’s only increasing. That’s talking about a whole another discussion about the supply distribution, and we can talk later about, that’s a bunch of nonsense about people saying like a bunch of Bitcoin is held by a small portion of people. But over time you have this hardcore base of people that are just stacking Bitcoin, no matter what.

Will Clemente (00:41:07):

You have that paired with the long and short term holder behavior that we talked about, and that’s Bitcoin’s longer term cyclical behavior that you see as outlines the behavior of Bitcoin’s price action. Then meanwhile, on the short term timeframes, you have all these apes that are coming in on leverage and driving the pricing. It’s like we’re on this rocket ship, and then you have these apes coming in and we have to shake off the apes through the liquidations.

Will Clemente (00:41:34):

That’s the mental framework I have for it is that, at the end of the day, adoption for Bitcoin is only increasing, and that’s only going up into the right. We have fluctuations between some of the behaviors we touched on earlier, and then on the very short term timeframes, we have all the stuff that’s generally driven by the derivative’s behavior.

Will Clemente (00:41:53):

For long term holders, none of this stuff matters. You just keep buying, and that goes to the very broad cyclical behavior that we talk about Bitcoin, is that adoption is up into the right. All these different metrics we talk about, even just the number of entities on the network, all this stuff is up into the right.

Will Clemente (00:42:11):

But when you zoom in on these shorter term timeframes, that’s what’s really driving a lot of this stuff. I’ve seen a couple of these posters or memes on Twitter, where it’s showing you like, this is Bitcoin, zoomed in, and it’s really choppy. This is Bitcoin zoomed in a year out, and it’s kind of cyclical. Then this is Bitcoin on a 50 year time horizon, and then you see this FS curve. For the long term holder guys, this stuff might be interesting. You might want to understand what’s driving the price action, but at the end of the day, none of it really matters because adoption for Bitcoin is only increasing, and you can see that as well in the data.

Preston Pysh (00:42:49):

I love that point. The point about the number of users is just up into the right, is the part that I think is just insanely important for people that are maybe looking at this from the outside and just saying, “I don’t get it. I don’t understand why anybody would pay attention to this, it’s just imaginary magic money.” That’s the thing that I think is, you just can’t unsee what that chart looks like. Well, I love those points. I’m curious what you guys think about the ETF, specifically, the spot ETF that was just declined by the SEC.

Will Clemente (00:43:21):

I don’t really think that anyone was surprised by that, and you saw that through the market on the intra day reaction to it. Where the spot ETF rejection actually marked the intra day bottom on that day. Because I don’t think anyone was really surprised or any sophisticated investors, at least, we’re surprised by seeing that get rejected. I think that’s something that most of the market probably isn’t expecting to see for at least another year out or so.

Will Clemente (00:43:44):

I’m not really surprised to see that. Obviously, we would love to have a spot Bitcoin ETF, and I think you’ll see massive inflows to it whenever it is approved. But I don’t think it was surprising to see that get declined. I think Barry’s definitely up to something. I think Barry’s watching these ETF rejections and taking notes and tweaking his approach for converting Grayscale to an ETF. I guess time will tell with that.

Preston Pysh (00:44:11):

I noticed your frog meme of Barry the other night, just so you know.

Will Clemente (00:44:15):

Big week.

Preston Pysh (00:44:16):

I almost shot my drink out of my nose when I saw that.

Dylan LeClair (00:44:20):

I guess the question is why are they waiting? What are they protecting… They’re not protecting anyone from anything, I guess. I guess Gary Gensler wants you to hold your own keys is what I gather.

Preston Pysh (00:44:31):

You could make the argument that for the people that don’t maybe have access to buying spot, they’re actually doing a disservice and they’re actually adding… Because they’re forcing them into an ETF product that is futures based and doesn’t have good tracking error or has very bad tracking error.

Will Clemente (00:44:50):

I think the futures ETF is a terrible product for anyone who’s looking to-

Preston Pysh (00:44:54):

Terrible.

Will Clemente (00:44:54):

… invest in Bitcoin long term. Because for anybody who isn’t really familiar with futures and futures isn’t my expertise. But essentially what happens is, is every time it gets the month in, they have to roll the contract to the next month. Over time, whenever the futures curve is in Contango, what’s happening is they’re selling the current one and buying the next month’s contract. You’re basically taking the hit on the difference between those every time they roll it over each month.

Will Clemente (00:45:23):

The only people that are really benefiting for that are the people that are coming in, in this market neutral way in buying spot, selling the future, and they can capture the difference between the two because the curve is, is getting bit out into Contango, Preston, I know you love that word, Contango.

Preston Pysh (00:45:41):

I think that’s going to apply much later in the cycle, but I think it’s going to be the thing that ultimately just takes the thing to an unprecedented level [inaudible 00:45:50]

Dylan LeClair (00:45:51):

Is there any merit to the US holding off on it because they just know how much capital is going to flow in, and they know the state of… Maybe that’s just little too out there, in terms of-

Preston Pysh (00:46:02):

Dude, I don’t think that’s out there at all, but I don’t think you’re ever going to hear anybody, especially from the SEC come out and say something like that. So, no, I don’t think that’s out there at all, Dylan.

Dylan LeClair (00:46:14):

Yeah. I guess, just in a world where, Preston, you’ve hugged on the bond market more than anyone, but how do you keep the thing glued together if they, on the same rails have the escape valve? The escape valve’s been out there for a decade, but there has been a lot of trouble to access it and it’s been more of a niche retail thing.

Dylan LeClair (00:46:35):

Now, just recently over the last year or two, has become more institutionalized and accepted. For the trillion dollar, 10 trillion pools of capital, they still can’t buy it. As a retail individual, selfishly great. I think it’s more than just investor protection, if Gary Gensler, whoever else is parroting that.

Will Clemente (00:46:59):

I actually have a question for the two of you. I’m trying to think of in the next five or 10 years, do you see Bitcoin’s volatility increase or decrease? I tend to think that it decreases because you have just this new market participant here that they’re not going to chase the price up. I think you saw that over summer, that’s why we had this prolonged rounded bottom, where they had these bids set at the bottom of 30K, 32K and they didn’t chase the price up to the top of the range. They just slowly waited for price to come back down and hit those bids. You saw that whale accumulation on-chain.

Will Clemente (00:47:33):

Then conversely, earlier this year, we had these patient sellers that formed this rounded distribution top. Moving forward, I think there’s a really strong case that we see decreased volatility, but conversely, there’s this chart, and Dylan, you posted it a couple of months ago, and Preston, I remember seeing you retweet, it’s the German mark measured in gold, the chart that we’ve all seen that it just absolutely goes parabolic, but you’re actually looking at the volatility that occurred during that period of time, and it’s really aggressive.

Will Clemente (00:48:05):

You saw these massive 50% to 80% whip saw moves, which is essentially just the collapse of the currency getting reflected in the pricing of that asset, which in that case was gold. I actually tweeted this out to Saylor. Saylor said that he didn’t see it playing out that way. But I’m curious-

Preston Pysh (00:48:22):

Why do you think he said that? I ask that question for a reason. So, love Michael. Michael has a stupidly massive position. Not stupid in the sense of like he’s being… I think he’s being extremely smart, but his size of his position is just astronomical. If you had a position that size, what would you be publicly saying, knowing that every politician in the United States or wherever is listening to you? Are you going to go say, “Yeah, you know what, I think this could bring down the whole financial system. I think this could turn into a Weimar Germany chart. I know I wouldn’t be saying that, if I was him.

Dylan LeClair (00:48:59):

Michael keeps talking about the dollar, and I completely agree with you, Preston. He’s saying Bitcoin is not an attack on the dollar, while literally conducting the largest speculative attack on the dollar in Bitcoin terms, maybe I think we’ve ever seen publicly, and it’s completely the right decision to do it. He’s calling the capital markets bluff.

Dylan LeClair (00:49:19):

But I think in terms of volatility in purchasing power terms, Bitcoin’s volatility is going to continue to decrease. It’s going to appreciate in the upside by orders of magnitude, but in terms of the day-to-day, week-to-week, month-to-month volatility and purchasing power terms, I think in 2030, it’s essentially… Maybe 2035, whatever the timeline is, it’s essentially going to be appreciating by a few percentage points a year based on human productivity gains. But in terms of BTC, USD volatility for the next decade, I think you’re basically going to see this everything bubble continue to unwind and rehyperinflate, on the asset side of things, and now it’s happening in just broad money supply. It’s hitting the CPI gauge now. You’re going to see that volatility expressed as Bitcoin goes from a $60,000 asset, it’s going to go to a $500,000 and a million.

Dylan LeClair (00:50:11):

Eventually, that volatility in the Bitcoin derivatives market, when the Bitcoin derivative longs get liquidated, the equity market index will draw down in tandem, because it’s basically going to be the most pure form of the Fiat everything bubble that we’ve ever seen. I think we’re still in the price discovery mode of Bitcoin, where its monetization, it’s still a very small percentage of the population and the global capital market assets, but as it increasingly consumes all of it, it’s basically the Fiat… The Bitcoin price will be like just a measure of how much the Fed and other central banks are going to print. They’re going to continue printing for as long as they can, maybe in fits and starts. But I think the volatility will only increase in that sense.

Will Clemente (00:50:54):

I saw this article earlier today that was sent to me and I think it was saying like, ECB was basically inadvertently blaming crypto for some of the inflation or something like that. I was just thinking like, this is just the start of these kind of narratives. As we start to see Bitcoin’s monetization really accelerate, you’re going to start to see these people that are hanging onto the ship as it’s sinking. They’re going to come out and say everything under the sun, including, oh, well these Bitcoin guys, they’re the reason why the system is collapsing. That’s going to be, I think, the last narrative that we see before the demise of the dollar.

Preston Pysh (00:51:33):

As far as volatility going up in the next five, I really think the timeframe here of this thing really starting to just literally go to the moon is probably five years. People that are saying that it’s going to take 15 or 20 years, I’m just like, you obviously don’t understand where the bond market is today. I find that the timeline, I think is way more based off of the macro backdrop than necessarily the having cycle of Bitcoin. I think that that’s just keeping it plugging away and it’s just… Every time that having event happens, what it’s really doing is it’s locking in more trust, it’s locking in more people that trust it more than the old system.

Preston Pysh (00:52:15):

But where the old system… Looking at Bitcoin versus the older system, where that’s going to really just totally break down is when the old system gets so mutilated that nobody wants to participate in it, because they just know it’s just a total fantasy land farce manipulated to the nth degree type system. I think you’re already getting there right now.

Preston Pysh (00:52:39):

When I look at the bond yield curve in Europe, dude, it’s done, it’s toast, the whole thing, all durations, it’s just totally toast. Now, you’re watching like the 30 year to their 15 or 10 year is starting to penetrate the resistance line that you’ve had for literally decades. That’s insane. It’s totally insane. You’re not quite there in the US with the government issue debt here in the US. But when I model out where I think those yields are moving, this coming summer, the summer of ’22, into the fall of ’22, is where I’m seeing the US bond yield curve is going to get quite interesting.

Preston Pysh (00:53:20):

Five years from now, and where do they go from there? They can’t go anywhere from there. The free and open markets are already selling off in the bond market on those longer durations, it’s selling off like crazy, and the Fed hasn’t even moved, they’re still stuck at zero. Now, the market’s totally wagging their tail and it used to always be the exact opposite, before they had their forward guidance, they’d do it for months and months, half a year, whatever. Then they’d finally move it 25 basis points and everything would gyrate around and then they’d wait for the next big forward guidance.

Preston Pysh (00:53:54):

But this is way different. This is way different. The supply chains are jacked. I suspect that as these things really get into the final phase where they really start to die, it’s in the supply chains, because all those price signals, the cost the capital, like you had mentioned, Will, it’s just totally mutilated, it’s toast.

Preston Pysh (00:54:11):

These companies that have all these contracts for commodities, that in a lot of cases are firm fixed price terms that are three year contracts for $50 million worth of this part, $100 million worth of that part. Then they have to assemble it and then they have to… You keep going up that supply chain, any little disruption downstream wrecks havoc on everything that has that part that opens up as you go further up the supply chain, we’re there. We’re seeing it, you’re seeing all the reports now that nobody expects this thing to remedy itself in ’22. I expect it to actually… I don’t want to sound like a pessimist here or an alarmist, but I expect this to get way worse. I think it’s going to get way worse.

Dylan LeClair (00:54:55):

The craziest thing is seeing… I agree, Preston, the craziest thing is seeing White House officials or some senators, and they’ll say, there’s a new stimulus, there’s a new $2 trillion stimulus that it’ll fix the supply chain issues, which were caused by Kantianism, to hey, we’re going to go stimulate and throw a bunch of new money at goods to “stimulate the economy”.

Dylan LeClair (00:55:18):

It’s the solution to increasing the money supply by 30%, and seeing all of this crazy inflation is to print more money. It feels like I’m like I’m having a matrix.

Preston Pysh (00:55:28):

You’re in crazy town.

Dylan LeClair (00:55:30):

It feels like everyone’s still plugged in, I’m just like, “How do you measure inflation?” It’s like, how is no one else seeing this? Increasingly, people are, but there’s still the Wall Street guys that have been in the system for 20, 30 years, there’s a lot of people that have an irrational amount of trust and in the incumbent institutions, I guess I would say, and thank God that we have this thing that doesn’t require any trust and we can verify ourselves and run our own nodes and hold our own keys and move anywhere in the world with all our wealth in our head. In a time like this without Bitcoin, I would be quite pessimistic, I can’t lie.

Will Clemente (00:56:11):

All I have to say is, our purchasing power is increasing though.

Preston Pysh (00:56:14):

It is. I had a buddy send me a message. He’s like, “Hey, I’m talking with this hardcore value investor. What would you ask him?” I said, “Oh, that’s easy.” I said, “How in the world is he doing an IRR calculation when we just had a CPI print of 6.2%?” Because any stock, I don’t care what it is that you pull up, you’re getting IRRs of 3%, 2%, and you just had a CPI print of 6.2 and it doesn’t look like any of that’s going to change.

Preston Pysh (00:56:40):

My question to these people doing these equity valuations is like, okay, what do you do when you got a negative 400 basis point spread between which you are finding the value of what it’s trading for on the open market versus just inflation alone? I’m not even talking about operational risk or anything else that’s associated with… It’s crazy. I just don’t know how people can walk around and have their blinders on that strong and not start asking a whole lot of questions. Hey, is there a metric that you two disagree on? Because I know you guys talk all the time.

Will Clemente (00:57:15):

Yeah. I don’t really think there’s too much that we disagree on, just because we’re texting pretty much every day. We’re pretty much always bouncing ideas off each other. If there is anything like that, we pretty much flatten out that kink whenever it occurs. I don’t really think there’s anything, to be honest.

Preston Pysh (00:57:33):

All right. How about this, what is the most misunderstood aspect of on-chain analysis that you think the mainstream Bitcoin, Twitter folks don’t understand or misunderstand? I know what my answer is, I want to hear what you guys got.

Will Clemente (00:57:49):

I think it’s the fact that it should not be used on the very short term timeframes. I think whenever we have a short term draw down, I usually get people mentioning. “Oh, but that supply shock though, what happened to the… ” It’s like, when we’re talking about a supply shock, we’re talking about the amount of available supply to be bought is decreasing. That doesn’t necessarily mean that we have the other side of the equation, which is the demand.

Will Clemente (00:58:17):

The way I think of this is that, we have the fuel laid out via the supply side. We had this through the end of the summer, but you also have the other side of the equation, which is the demand that has to step in. Oftentimes, there can be these discrepancies or divergencies between what happens with the price and what’s going on with the supply dynamics.

Will Clemente (00:58:41):

One example would be over the summer, you had, through a metric that I created with Willy Woo called illiquid supply shock, which compares the highly liquid in liquid entities. These are, in layman’s terms, just entities that sell a lot of the coins that they’ve taken and comparing that to the illiquid entities. People that take in and hold at least 75% of the coins they take in. They take in four coins, they hold at least three out of the four.

Will Clemente (00:59:10):

You had this really strong divergence between the two. Seeing that, it didn’t necessarily mean that we were going to see price appreciation within days, It just meant that in a broader sense over the next couple months, as demand stepped in, as long as you don’t have more supply becoming liquid, then eventually you’re going to see the marginal bidder having to bid the price up because there’s not as much available circulating supply.

Will Clemente (00:59:38):

For example, this metric, it seems counterintuitive, but when you see supply becoming illiquid, it doesn’t always translate to price action immediately. But when you see supply becoming liquid, it does. Because if you just think from first principles, what that means is that supply that was previously held by entities who don’t sell are now moving their coins, usually onto exchanges to be sold, versus if you’re seeing supply get locked up, that doesn’t necessarily mean that the marginal bid is stepping in aggressively to bid the price up.

Will Clemente (01:00:09):

That’s just one example, but I think, in general, on-chain analytics, we have some shorter term metrics that we look at. But generally, when I think of what’s the sweet spot for this type of analysis, it’s really three to six months out. That’s where I think we have the best hit rate. When you back test some of these things, for example, like the illiquid supply shock ratio, I mentioned. Since 2018, that has about a 91% correlation between price on a week-to-week interval.

Will Clemente (01:00:38):

I was like, these things don’t always translate immediately to price because as we mentioned, I look at it as on-chain is this underlying, broader behavioral cycle where you have the derivative stuff, that’s really key, and also we talk about price levels while watching the order books. All these kinds of things really impact the price on the very short term timeframe. That’d be my answer.

Dylan LeClair (01:01:03):

I would agree on that. I think one of the things that… As someone that wants to accumulate more Bitcoin, I would consider myself basically to be a Bitcoin maximalist. I prefer honestly monetary rationalist, maybe, in the sense… Or monetary maxismalism in the sense that I think money is a winner take all dynamic and Bitcoin has already won in the sense, from a gain theoretic perspective.

Dylan LeClair (01:01:29):

But I think the fascinating thing with on-chain is, I’m looking to increase my stack as much as possible. There’s times in the Bitcoin cycle where, at the top of say 2017 or 2018, there could still be capital flooding into the network to buy Bitcoin, allocate to Bitcoin, where price could be drawing down a lot. Where at the same time you could have price bidding up to insane levels, going parabolic with the same amount of capital flowing in.

Dylan LeClair (01:01:59):

It’s just because of what on-chain quantifies is the other side of the equation, like Will touched on, is the supply and what it’s moving. The characterization of a Bitcoin bull market or a flexive one, is that there’s this huge wave of demand crashing into a tiny pinhole of available supply. It’s like the movie theater’s on fire and everyone’s trying to run out. I guess maybe the movie theater on fire is Fiat, but everybody’s trying to run into the available free float of Bitcoin, that’s basically ever decreasing, but it’s variable in the sense of one to three to six month timeframe where you have alt coins maybe taking profits and what not. We can see that from an on-chain side of things, which makes it really fascinating.

Preston Pysh (01:02:44):

Both of you guys, I agree with you 100%. My frustration when I’m on Twitter is the timeframe that I operate is just these really long timeframes. I’m looking for… Short term for me is a year. If I’m posting on something, and I’m saying, “Hey, Bitcoin’s about to make a run.” I’m saying like, in the coming months. I’m saying like the next three months.

Dylan LeClair (01:03:08):

You drew that parabola with the upper and lower bands. I don’t even know, it was middle of summer and you posted it-

Preston Pysh (01:03:15):

Back in ’20 or whatever. Yeah.

Dylan LeClair (01:03:18):

You posted it in linear terms, the parabola. It just looked so stupidly-

Preston Pysh (01:03:23):

So stupid. Yes.

Dylan LeClair (01:03:26):

… you looked like the biggest moon boy permeable. You were like, listen, this having mechanic it’s happening. Whether you like it or not, quantitative tightening, look at past cycles, we’re going up in lock terms. Here’s what I’m thinking. For months on end, as Bitcoin was ripping past 20,000 all time highs, it was-

Preston Pysh (01:03:45):

It was on the money, yeah.

Dylan LeClair (01:03:46):

You nailed it. That sort of stuff in Bitcoin, it feels like people have already figured this out. It feels like, oh, the halving’s coming, everybody knows what’s going to happen. But no one knew what was going to happen side of the internet nerds that are paying attention to this thing.

Preston Pysh (01:04:06):

But I can’t imagine what it’s going to be on the next halving event. Can you imagine, how many more… I just look at how many people have come into the space just in the last two years that they were nowhere to be found back in the 2017 run. It’s-

Will Clemente (01:04:20):

Me and Dylan were in diapers.

Preston Pysh (01:04:23):

No, I’m serious. There’s just so many people that have come on in the last year and a half that have added so much tremendous value. I just can’t imagine how many more people they’re going to tell, how many more people are going to show up when we get to the next halving event. Assuming the bond market doesn’t literal just explode. This thing is gaining steam and it goes back to Will’s comment he had, look at the user adoption rate. Up to the right, has been for a decade, hasn’t slown down.

Preston Pysh (01:04:57):

If you were looking at a company and you’re looking at their top line, or you’re looking at how many more user are signing up for “Facebook or Twitter” or whatever it was. Everyone would be like, “Well, I’ve got to own that.” But for some reason, because this thing’s “competing with government money”, it’s almost like, oh, well, yeah, I understand all those metrics, but there’s just no way. Because they’re coming to it with the opinion that there’s just no way, and they’re like, that’s their argument. It’s like, you might want to pull on that thread, a touch more.

Will Clemente (01:05:25):

I think one other thing is, the barrier to entry to understand Bitcoin now is way lower than it was years ago. We have so many podcasts now-

Preston Pysh (01:05:36):

You can’t even listen to them.

Will Clemente (01:05:40):

… There’s no way. You have to pick and choose now what you want to listen to-

Dylan LeClair (01:05:44):

It’s about your own ego. That’s what it’s about, it’s about your own ego.

Preston Pysh (01:05:47):

Oh my God, amen to that. It’s amazing how Bitcoin, it will expose that so fast. I’ve seen it so many times over just the last five, six years of just these people come into the space, and just if you have an ego, this thing just rips you apart instantly.

Will Clemente (01:06:07):

Then they double down.

Preston Pysh (01:06:09):

Then they double down and it’s just like, there’s too many people that know too much about all the different arguments around this that… yeah, it’s crazy. I got a couple questions on this one for you guys. Taproot, with the impact on on-chain data and analytics.

Will Clemente (01:06:27):

I think there’s a bit of a misconception here. The only way it really affects us is in the sense that… When I say us, it’s the people actually doing the heuristics at Glassnode. Me and Dylan are really just reading charts. But it affects the ability to identify the difference between a multisig transaction and a normal transaction, as well as a Lightning transaction and a regular transaction.

Will Clemente (01:06:49):

It doesn’t actually affect our ability to analyze a lot of these metrics we’re talking about. But in terms of distinguishing between those multisig and Lightning transaction, it does. For some of the Lightning data, it affects it a bit, but also it’s not going to affect things when you’re looking at capacity or number of channels or number of nodes and all those [inaudible 01:07:10] metrics.

Preston Pysh (01:07:11):

Do you guys have any channels that you’ve opened up?

Dylan LeClair (01:07:15):

Yeah. I got about 55 Lightning channels.

Preston Pysh (01:07:17):

That’s right, Dylan. Yeah. I think we have a channel, right?

Dylan LeClair (01:07:21):

We have a channel. I think it’s like 3 million [inaudible 01:07:23]

Preston Pysh (01:07:24):

What am I asking here? Did I open it or did you open it? No, we both opened one.

Dylan LeClair (01:07:29):

Yeah, I think so. Yeah.

Preston Pysh (01:07:31):

Yeah, we did.

Dylan LeClair (01:07:32):

That’s a whole nother rabbit hole and it’s pretty fascinating to go down about this intermediation of not only, central bank, but all these rent seeking payment processors, like Visa, Amex, all of that.

Preston Pysh (01:07:45):

I had a chat with Pierre Rochard, probably two days ago. I said, “Pierre, what if I open a channel with somebody else, and that person decides to close the channel three months later. But the Bitcoin that I used to open that channel was purchased, let’s just say, to use an exaggeration, let’s say it was Bitcoin that was purchased at $10, and the price now is $60,000. Let’s say I opened the channel for a full Bitcoin with this other node. I don’t even know who they are, but then they closed the channel. They forced closed the channel.”

Preston Pysh (01:08:16):

I said, “Now, I’ve got other channels with other people. So, my balance, if I was routing payments through my node and let’s say one full Bitcoin was on my side, on my node side. But through routing transactions, it all got pushed to this other person, and then they closed the channel.” I said, “What’s my tax responsibility, because the on-chain layer one looks like I sold my one Bitcoin to that person.”

Preston Pysh (01:08:43):

Pierre started laughing and he’s like, “Did you have no tax burden?” I said, “Hold on a second. If somebody was doing analytics on layer one and they saw when that one coin was purchased and they saw that the coin is now in the ownership of another address that I don’t control. It looks like there was a sale, where there would be a $59,800 gain for that transaction. Even though my net balance on my node is still one Bitcoin, because if it flowed through my node and out to the other person, I still have a Bitcoin on my node. But for… ”

Dylan LeClair (01:09:24):

What are you implying, Preston?

Preston Pysh (01:09:28):

No, and I’m not trying to raise something that… I don’t think anybody’s considering the ramifications of that as maybe we go into laws, restrictions to tax responsibilities for people that are just running a node, and opening channels. But yet my net balance hasn’t changed whatsoever. Now, when I’m looking at it from just an intuitive standpoint, I don’t feel like I have any type of tax burden because my net balance hasn’t changed at all. But if you’re using layer one transactions to make decisions as to whether you need to ping somebody for a payment of a capital gains, you can see where the confusion would arise.

Will Clemente (01:10:15):

Yeah. I just don’t think the current system, in terms of like the regulatory structures set up for this new system that we’re heading into. I think there’s a lot of discrepancies and we just need more Bitcoin friendly people in the regulatory landscape.

Preston Pysh (01:10:29):

I raise it more for… I know there are senators and representatives that follow my accounts, I’m sure maybe they listen to some of the shows, and I think this is a really important thing for people to think about when they hear that’s one heck of a quandary to be in. It’s like, I didn’t sell anything. Using the one Bitcoin example, I still got the one Bitcoin on the note, but somebody else has the original one that I purchased from whenever.

Preston Pysh (01:10:56):

It might look like there’s a capital gains, but there isn’t. People who want to come in and try to regulate this space aggressively and quickly are totally misunderstanding how important it is to not get that wrong. Because if you do get it wrong here, there’s going to be other countries that get it very right, and they’re not going to be stifling, what eventually you’re going to have to go back to anyway, they’re just not going to trip and fall in the process.

Dylan LeClair (01:11:24):

It goes back to the sovereign individual with the whole regulatory arbitrage thing.

Preston Pysh (01:11:28):

Yep. That’s exactly right.

Dylan LeClair (01:11:31):

The game theory kicks in, in all of that.

Preston Pysh (01:11:33):

Sorry to go off in that direction.

Dylan LeClair (01:11:35):

No, that’s interesting. I’ve never thought about that before.

Preston Pysh (01:11:37):

It’s an interesting thing that just popped up this week. I was talking… Pierre, he is very involved in Lightning development with Kraken. I was just asking him, I was like, “Hey, how do you think about this?” He’s just like-

Dylan LeClair (01:11:50):

Preston, did you see the news that… I’m 99% sure this was released that Tether will be coming to Lightning. I think about-

Preston Pysh (01:12:02):

Hold on. Explain this. I don’t understand what you mean.

Dylan LeClair (01:12:07):

There was a new Bitcoin company, I think… Oh God, off the top of my head, I forget. It was John Carvalho, he had that infamous interview with Roger Ver when Roger was flipping off the camera. John, I’m going to fumble this whole company. Check it out. But the Tether CTO, Paolo… Gosh, I’m bad with names at the moment. But the guy that basically runs Tether and Bitfinex’s technical side of things, been around the space for a while.

Dylan LeClair (01:12:34):

I think they announced that they’re going to bring… Because Tether, USDC, they’re using all these different blockchains. USDC has Ethereum ERC-20 rails. It has TRX rails. Try sending a stable coin on the Ethereum blockchain the other day, it cost me $25, but that’s a different topic,

Dylan LeClair (01:12:58):

But basically, I think, you’re going to see… Eventually, you’re going to see either… It’s going to be some sort of synthetic stable coin, USD value that’s pegged, and there’s going to be counterparties on both sides of this, almost like in a derivative type way, and you’re going to see synthetic dollar settlement on Lightning rails. Because again, Jack Mallers hammers this point home all the time, he’s like, we settle basically free. It’s not free, but we settle basically free-

Preston Pysh (01:13:25):

Relative to everything else it is, yeah.

Dylan LeClair (01:13:28):

Preston, if me and you are sending payments to each other every day, well, we can set up a public lighting channel, but we can set up a private Lightning channel. No one can see this, it’s routed over [inaudible 01:13:37] and we’re just streaming value to each other, and we can do it a million times a second if we have the bandwidth to do it.

Dylan LeClair (01:13:45):

Something, whether it’s Tether or whether it’s another kind of stable coin or someone that comes down the line and then settles synthetic dollars, Euros, Yen, whatever it is, it’s all going to come to Lightning rails. I think this is an intermediation of all that, and the Lexi financial system where I send funds to go buy Bitcoin on Coinbase, if I want to do that, and it takes five days for me to be able to withdraw that Bitcoin, because my bank transfer is slow. That’s all coming to an end, faster than most can imagine.

Preston Pysh (01:14:16):

If you have an article on that, I would love to read it and share it for people, if you can find one, we’ll have that in the show notes. This is the hardest question I got for you guys, Will, were you expecting the rap video from me?

Will Clemente (01:14:31):

Man, I was dying when I saw that.

Preston Pysh (01:14:35):

You have no idea how hard I worked on that.

Will Clemente (01:14:40):

That’s what I was going to say. The real funny part of that is just when I was thinking, like, he must have put like 45 minutes or an hour into this video.

Preston Pysh (01:14:50):

It was more than that. It was more. It was-

Will Clemente (01:14:51):

He edited it and everything.

Preston Pysh (01:14:55):

I think it was a Sunday night and you had your post and I was just laughing. I was like, I can bang something out. I was looking at the time and I don’t know, it was like seven o’clock or something like that. I was like, I don’t have anything… Rare night where I don’t have anything on my plate to knock out. I was like, you know what, I’m just going to have a little fun tonight. Let me see what I can do here. I think it was like 11 o’clock when I finished up, and I was like, oh, here we go. I just posted it, and I got no response from you. I was like, how is he not responding to my rap video?

Will Clemente (01:15:29):

I saw it the next morning, I was like, how did I not see this? I retweeted it, and then people were like, oh my gosh, this is hilarious. I think I laughed for a good two or three minutes straight. The editing was on point too. The lyrics itself were pretty funny, but you edited it in the car… Yeah, it was hilarious, man.

Preston Pysh (01:15:56):

I had so much fun. Guys, this has been so much fun for me. Will, I remember the first text message you sent, the first time we chatted, the first article. You were like, “Hey, can you read this, and if you like, it retweet it.”

Preston Pysh (01:16:09):

It is just so exciting for me to see you two add so much value to the space and get recognized for it. Then just take it to a whole new level. It is just so much fun to be an observer of this. If there was any type of small part that I played, I’m just-

Dylan LeClair (01:16:29):

It played a big part, Preston. It played a big part.

Preston Pysh (01:16:30):

… I’m just thrilled. I’m thrilled to be a part of it. I just cannot even imagine where you two will be when you’re 30, 40 years old. I just cannot imagine where you guys are going to be. Thank you for making time to come on.

Dylan LeClair (01:16:45):

Appreciate you having us on, man. It’s pretty surreal. We talked before, I think, we were interacting with you like in February, March and like, yo, what was your story [inaudible 01:16:58] I listen to this guy, Preston, a lot. I was like, “Oh my God, same.” It’s pretty cool being here late 2021 talking to you on the infamous Investor’s Podcast

Will Clemente (01:17:11):

Before we got on here, me and Dylan were chatting for 20 minutes, where we were just like, this is nuts, man. I can’t believe we’re about to get on this podcast with Preston. This is so crazy.

Preston Pysh (01:17:21):

Well, we need to do it more often. You guys, your comments, your knowledge, how in the hell do you have this knowledge at 20? I can’t even understand how you would have this knowledge at 20, but we need to keep doing it. Thank you, guys.

Will Clemente (01:17:34):

When we’re legal to drink, we got to get a drink.

Preston Pysh (01:17:35):

Hey. Yeah. I should have had a drink here tonight and just been showing off in front of you too.

Will Clemente (01:17:42):

Thank you so much, Preston. I really enjoyed this. This is amazing.

Preston Pysh (01:17:46):

It’s a blast. We definitely need to do it again-

Dylan LeClair (01:17:47):

Had a blast, yes.

Preston Pysh (01:17:48):

Are you guys going to Miami?

Will Clemente (01:17:50):

Yeah. I’ll be there.

Dylan LeClair (01:17:50):

100%.

Preston Pysh (01:17:51):

There you go. We’re going to hang out in Miami. Are you 21 in April?

Will Clemente (01:17:55):

Yeah.

Dylan LeClair (01:17:56):

I can be.

Preston Pysh (01:17:57):

Does it matter? All right, guys. Thank you so much. I want you guys to be able to provide a handoff. Will, you’re working on a podcast. You just interviewed Plan B and Willy. Woo. Tell of people what you have going on, and then, Dylan, you follow it up.

Will Clemente (01:18:13):

Thanks for the plug. I head all the content stuff at Blockware, through a little branch we call the Blockware intelligence. We have, A, a newsletter which I send out to about… I think we just passed 53,000 subscribers. That’s like a weekly market overview based on, on-chain, as well as, we have some Bitcoin related equity content.

Will Clemente (01:18:33):

We just hired on Joe Burnett, who is like I, I, I capital on Twitter to do some mining content as well. Then we have a podcast that I interview different people in the space every week. Preston, we got to get you on there, maybe some time in the next month-

Preston Pysh (01:18:46):

I’d love to.

Will Clemente (01:18:47):

Awesome. Then as well, we do a weekly market overview in video version as well. Feel free to check any of that stuff out if you’re interested in any market related stuff. Then I’m on Twitter @WClementeIII.

Preston Pysh (01:19:03):

Dylan.

Dylan LeClair (01:19:05):

Yeah. I’m working with Bitcoin Magazine. Joined there in about March. Right now I’m heading the deep dive. We can also put out Bitcoin content, legacy finance stuff on-chain, derivative markets. We can do that on a daily basis and we have pre and paid tier. We send out an email, a market update a week to just everybody. We’re also just doing stuff with Bitcoin Magazine, like popping on spaces, podcasts, all that. Just recently joined a Bitcoin fund where we try to implement some of the stuff we talked about today.

Dylan LeClair (01:19:41):

Started to work with them a little bit. But appreciate you having me on. I guess, give me a follow on Twitter, hit my DMs, which are flooded, but I’ll try to get back to you, to give back a little bit, if you have any questions or whatnot, reach out. But again, really appreciate you having us on, Preston. This was a blast.

Preston Pysh (01:20:02):

Absolutely. All right, guys, until next time.

Preston Pysh (01:20:06):

If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use, just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that, and it’s something that helps others find the interview in the search algorithm. Anything you can do to help out with a review, we would just greatly appreciate. With that, thanks for listening, and I’ll catch you again next week.

Outro (01:20:38):

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