December 21, 2022

Preston Pysh interviews Pierre and Morgen Rochard about a wide range of topics that include, Taro, the GBTC Discount, why stable coins should probably stay off the Bitcoin Lightning network, and much more.

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  • What are some of the most important things happening in the Bitcoin space right now?
  • Thoughts on paper Bitcoin and the impacts moving forward.
  • Pierre’s thoughts on the Taro protocol from Lightning Labs.
  • Why moving stable coins onto the Bitcoin Lightning Network might not be the best use of time.
  • Tax Loss Harvesting.
  • FASB update to the treatment of Bitcoin on the balance sheet.
  • Thoughts on GBTC discount to NAV.
  • Is ETH a regulatory capture at this point?
  • Why are so many people using other network for stable coins right now?
  • Transaction fees in the future.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Preston Pysh: Hey everyone. Welcome to this Wednesday’s release of the Bitcoin Fundamentals Podcast. This week I have a special show because I’m interviewing Pierre and Morgan Rochard. Pierre comes with a wealth of experience as he’s been in the Bitcoin space since the early days when he was at the Kraken Exchange.

[00:00:14] Preston Pysh: He was the program manager that brought immediate lightning payments and withdrawals to the platform. He now works in the mining sector as a VP for Riot Blockchain. Morgan is a financial planner and has our own firm Origin Wealth Advisors. We get into a wide ranging conversation during the show from current events in the market to technical aspects of Bitcoin versus other less or non decentralized protocols, the GBTC discount and plenty more.

[00:00:39] Preston Pysh: So without further delay, here’s my chat with Pierre and Morgen.

[00:00:47] Intro: You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston.

[00:01:05] Preston Pysh: Hey everyone, welcome to the show. I’m here with Morgan and Pierre. Guys, great to have you together on the show. I’m kind of excited about this.

[00:01:14] Pierre Rochard: Well, I know we’ve both been here individually, but happy to be here as a couple. I love it. Fun one, both of Rochard are together.

[00:01:24] Preston Pysh: So the impetus for this was we were having dinner together out in LA at the Pacific Bitcoin Conference and I’m just sitting there listening to you two and I’m like, you all gotta do an interview together because this is gold.

[00:01:36] Preston Pysh: This is Bitcoin. So guys, I guess where I want to start is what’s something that has caught your eye recently or what do you think’s important noteworthy that just is hot and heavy in, in the Bitcoin space?

[00:01:49] Pierre Rochard: I don’t think this is important and it’s not in the Bitcoin space, but SBF just got arrested before we hopped on to this podcast.

[00:01:57] Pierre Rochard: So I feel like we should bring it up. I have lots of mixed feelings about it. I think there’s lots of different angles to the story, but overall, I just feel like we were warning about SBF being a charlatan frankly, long before he ever had his company explode or be under suspicion of crimes. But in any case, I think that there’s this long track record of people who are in the crypto space and who are anti Bitcoin and they generally turn out to be criminals or just incompetent.

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[00:02:32] Pierre Rochard: So continuing the pattern there.

[00:02:35] Preston Pysh: You know, the thing that never made sense for me with him was he’s raising more money. He’s doing round whatever, round C, round D, and we’re not talking like small amounts. We’re talking like billion dollar rounds and he’s just going out and he’s saying he’s going to buy, the media was saying that he was the next JP Morgan, right?

[00:02:54] Preston Pysh: Like that was the branding shtick that they were all running. And it was like, how can this guy go out here and keep buying all these things when his company’s clearly not profitable? because he just keeps raising more money. None of it added up.

[00:03:05] Pierre Rochard: That didn’t make any sense to me as well. Mergers and acquisitions are extremely high risk, under the best of conditions.

[00:03:12] Pierre Rochard: And you know, they don’t always work out, but in a situation where you have a financial panic happening and he’s out there making uneconomical decisions, right? He explicitly said that, oh, he’s doing this so that he can make the whole, instead of them getting a haircut through the bankruptcy process or from another acquirer.

[00:03:33] Pierre Rochard: And that just doesn’t make sense, right? The, yeah, the assets are worth less than the liabilities. It is irrational to just assume all the liabilities at face value.

[00:03:43] Preston Pysh: How about the the arrest? So he’s, he’s getting ready to testify in Congress tomorrow and all of a sudden the down in The Bahamas, they go and arrest him the day before.

[00:03:56] Morgen Rochard: I guess they didn’t like his, I’m sorry, tweets, they weren’t enough. He’s going to have to do a little better

[00:04:01] Pierre Rochard: than that. You gotta say sorry. A lot more than that, but I have to wonder on the timing of it, right. It seems very odd that it’s right before, presumably he was going to incriminate himself uh, publicly, because Yeah, otherwise he’ll be saying a whole lot during that testimony.

[00:04:18] Pierre Rochard: But I, I think that there was growing public pressure and also that I think there’s very little coordination between an entity like the Southern District of New York’s Attorney General and Congress and the House Financial Services Committee. Like I, I think those are two different worlds. And if anything, maybe the legal world wanted to kind of front run the legislative world on this mm-hmm.

[00:04:42] Pierre Rochard: and they are kind of adversarial in a sense, not somehow conspiring together.

[00:04:49] Preston Pysh: Do you think that Bahamas are just going to extradite ’em back to the US immediately, or do you think that there’s going to be a battle there?

[00:04:56] Pierre Rochard: I think they’re going to send him right away. I don’t think they want anything.

[00:04:58] Morgen Rochard: Don’t see any reason why they would keep him. Yeah. It’s not like worth trading over. I don’t know.

[00:05:05] Preston Pysh: When I said I just read something that I guess the SEC going to come out with something tomorrow. Yeah. I don’t know.

[00:05:12] Pierre Rochard: Well, there, there, there were a lot of securities related potential violations at ftx, whether it’s one outright just trading of equity derivatives and right.

[00:05:24] Pierre Rochard: They had, you could trade like Apple shares or a synthetic version of Apple shares at FTX two. Really ft. Yeah. Yeah. I didn’t know that with leverage, you know, short, it was a pure, you know, casino with everything on the floor.

[00:05:41] Preston Pysh: It’s just, it’s kind of mind blowing that it got to where it’s at. And then I, I also read today with Binance, I guess they’re going to be criminally in investigated as well, or the Justice Department has, has been in a, what, a three year investigation on them.

[00:05:57] Preston Pysh: And where do you think that one goes?

[00:06:01] Pierre Rochard: I think without insider knowledge, it could be a very wide range, right? Yeah. It could be anything from them harassing Binance, and it is just like a little violation or there are serious issues of Binance and we just don’t have a way of knowing, because Binance is not publicly traded, so they don’t have to disclose anything.

[00:06:21] Pierre Rochard: There’s no, you don’t even know where they’re. Right? Yeah. CZI says, we’re not from China, so stop saying, there’re from China. It’s like, ok, where are you from? Like Malta I guess is,

[00:06:33] Preston Pysh: Tell us where you are from.

[00:06:38] Pierre Rochard: But I, in any case, I think that, so I feel very torn on this. On one hand it would be good to have lots of trustworthy exchanges that are competing against each other and driving down fees, essentially for people who want to buy and hold Bitcoin.

[00:06:53] Pierre Rochard: On the other hand, having exchanges kind of be a little bit shady, encourages people to hold their own keys, and so it encourages people to withdraw their Bitcoin after they’ve purchased them, rather than leaving them at the sort of, kind of shady exchange that seems to be under criminal investigation. I have mixed feelings about the reputation and, and what’s going on there with exchanges.

[00:07:17] Morgen Rochard: I would say that there’s still plenty of reasons, even if the exchange is on the up and up, right, there are exchanges here that are, I would say, more on the up and up and let’s say a finance and Sirius, of course an ftx, but that exchange can still misallocate capital and they still live in the fiat world where interest rates are, you know, we’re close to zero, where cash is just sloshing around in the system where people at higher levels in the top are, may not necessarily making the right decisions as far as what the business should be investing in, especially if you know they have sort of crypto brain rather than having, you know, Bitcoin on their mind and how they can actually improve their core product.

[00:07:54] Morgen Rochard: Rather than adding all these ancillary crypto style services. I think from that perspective, yeah, it does. It’s more of a jump though, right? Than okay. The shady exchange, I probably shouldn’t leave my coins here, but meanwhile, an exchange that’s on the up and up can still make bad investments, which could then still lead them to a place where they could potentially want to take customer deposits or be tempted to do so, and then therefore find a way to do so.

[00:08:15] Morgen Rochard: So if you’re leaving your coins at these places, you’re still at risk.

[00:08:18] Preston Pysh: 80,000 Bitcoin, like not negative, 80,000 Bitcoin on the balance sheet. At least that’s what we are, were told. I mean, that is some significant amount of Bitcoin that are missing, that were paper Bitcoins. What are your thoughts on the other potential paper, Bitcoins that still exist that haven’t blown up?

[00:08:40] Preston Pysh: How about moving forward? How do, how do we guard against things like this? What are some of your thoughts in this area?

[00:08:47] Pierre Rochard: First of all, it’s impossible to know, you know, with any level of certainty of third party custodians, whether they are a hundred percent backing their, their Bitcoin liabilities with Bitcoin assets.

[00:08:59] Pierre Rochard: Second, there are entities where we can have more confidence, or we can, if we’re thinking about it on a spectrum of just total bozos like FTX or Celsius, and then a little bit more certainty was like the block fives, right? Where people were presumably managing their risk a little better. Although with what has come out about these unsecured loans and all this, I now, you know, block five clearly is under question of whether it was legit or not.

[00:09:30] Morgen Rochard: They were making questionable international loans as.

[00:09:34] Pierre Rochard: Yeah, but then you’ve got companies like Coinbase that are publicly traded and they disclose all of their information and they have auditors walking around the building and then entities like GBTC and and Gray Scale, where if anything, I would actually argue GBTC is kind of a reverse of paper Bitcoin in the sense that they seem to have more real Bitcoin in terms of value than the value of the shares that are trading in a discount relative to that.

[00:10:03] Pierre Rochard: But the only way to have any confidence in you actually owning Bitcoin is to withdraw the Bitcoin to your own private keys, whether it’s in the form of a single signature hardware wallet, a software wallet on your phone, or a multisig with hardware hand software, and then verifying that withdrawal with your own Bitcoin node.

[00:10:25] Pierre Rochard: Anything less than that, you are trusting a third party. Like that’s just how the system operates.

[00:10:32] Preston Pysh: I want to read a quote. So Bergum, I’m assuming you guys are familiar with Berg. He recently wrote something on GBTC. Here’s the quote at the end of the article. He says, in my opinion, there are two likely possibilities.

[00:10:45] Preston Pysh: First, they have been loaning out GBTC Bitcoin, so if they show the addresses, people will be able to see Bitcoin leaving and entering the trust when they should only be entering the trust. Alternatively, they have accepted stolen dirty Bitcoin from money launderers and gave them clean GBTC to liquidate.

[00:11:02] Preston Pysh: There’s literally no security risk in GBTC showing where the Bitcoin R on the blockchain, unless they’ve been doing something that they shouldn’t have been doing in that case, releasing the wallet addresses would expose them. What are your thoughts on those two conclusions?

[00:11:17] Pierre Rochard: It’s hard to take the security argument super seriously.

[00:11:21] Pierre Rochard: I would say here would be the steel man for the security argument. When they were talking about the security, they were referring to this proof of reserve’s idea of them signing a, some kind of message using the same private key that they are holding the Bitcoin with, right? That generated the addresses that were receiving the Bitcoin.

[00:11:40] Pierre Rochard: And there is arguably a security risk anytime that you are accessing the private keys, especially if you are feeding in arbitrary data that is kind of unrelated to signing a transaction. I would imagine that Coinbase custody has a very well established security protocol that they’ve been relying on for years and that they have a lot of confidence.

[00:12:08] Pierre Rochard: And that if somebody’s asking them to modify that, it’s not something that they would take lightly. And it’s it, I think in this situation, they’re just weighing the fact that they would have to update all of these Sarbanes Oxley internal controls documents in order to accommodate the proof of reserves, which is a headache.

[00:12:29] Pierre Rochard: And I’m familiar with that from the world of auditing that you’re a public company and somebody’s, this is really the most sensitive part of Coinbase, is signing things with the private keys. I can understand them saying, Hey, look like we’re not going to bother with this. We know the Bitcoin are there and if you guys don’t believe us, then like

[00:12:48] Preston Pysh: Why not have some type of third party come in and validate it for them?

[00:12:53] Preston Pysh: Like some court rep?

[00:12:54] Morgen Rochard: Don’t they have Bank of New York Mellon and one other auditor on there?

[00:12:58] Pierre Rochard: BNY Mellon’s, not an auditor. So I don’t know what the relationship is there.

[00:13:01] Morgen Rochard: They have, they have a custodial relationship though with both Coinbase and Bank of New York Mellon. Was my understanding of the product.

[00:13:07] Morgen Rochard: So it’s not just that things are at Coinbase, it’s also that Bank of New York Mellon is in like a trustee capacity.

[00:13:14] Pierre Rochard: I don’t want to defend GBTC. Yeah, we’re not. Yeah, yeah, yeah.

[00:13:17] Preston Pysh: No, I know, I know, I know. ,

[00:13:20] Pierre Rochard: You know, cause

[00:13:21] Preston Pysh: The discount stinks. I mean the discount is, is screaming that there’s something wrong.

[00:13:25] Pierre Rochard: Well, me the discount is Yeah. I’ll let you Okay, well, sorry,

[00:13:31] Preston Pysh: I, I, this is why I loved our dinner. This is exactly why I loved our dinner. Go ahead, Pierre. And then I want to hear Morgan’s.

[00:13:37] Pierre Rochard: There’s a structural problem with the product. Yeah. And so the problem is that this product was one that was really easy for people to buy during the bull market, and it consistently traded a premium for a very long.

[00:13:52] Pierre Rochard: And there were a lot of arbitrages who put on this trade of essentially believing that they can buy GBTC at par, right at the real Bitcoin price because they are institutional investors who have the ability to do that, but then they have to hold it for a year, and then after a year they can sell it at a premium.

[00:14:14] Pierre Rochard: And so in their minds, this is a risk-free return, and they put on a tremendous amount of leverage to execute this trade with the bear market, the trade reversed, and with the reflexivity of it, that’s why we now have a, I think it’s a 50% discount because you had all of these leverage traders essentially be you put into a position of forth selling on a really bad, bad.

[00:14:40] Preston Pysh: And so because they have to wait for that full year is why you just continue to see them getting out of that trade. Not all at once, but maybe gradually. Is that why the discount continues to persist for so long?

[00:14:53] Pierre Rochard: I think there’s the cascading liquidations that they carrying interest. I think

[00:14:57] Morgen Rochard: if you back up though about what the product actually is than it makes a little bit more sense.

[00:15:01] Morgen Rochard: So I think when people see GBTC, they automatically assume that it’s an ETF and how an ETF structure works. But really it’s more like a closed end fund. And it’s even worse than a closed end fund. Because what they set up basically was they set up a private placement because it wasn’t going to get approved by the SEC to create the ETF at the, especially at the time that it was created.

[00:15:20] Morgen Rochard: And even more so now, I mean, we’re still waiting for a Bitcoin ETF here in the United States, so they created this private placement whereby they could skirt the rules of what an ETF would. And they allowed accredited investors essentially to come in and be the only people to buy this. But then what they did is they listed it on the OTC pink sheets market and they allowed it to trade as a closed end fund, essentially closed end funds.

[00:15:42] Morgen Rochard: Typically when, when they operate like this where they allow investors to get in an at NAV, they actually do persist at a discount rather than a premium. And what PI is talking about it makes sense about it having the premium rather than the discount is because it, it was an asset back in, I think it was in 2014 that they first listed this.

[00:15:59] Morgen Rochard: Mm-hmm. or even 2013 is maybe when the product came out. I mean, it was so early, it really weren’t that many places for people to buy Bitcoin. If you kind of look back on time, that’s when like Mount Gox had issues was when this product came out. There were other exchanges that I, Charlie Shrems Exchange went under for money laundering and other violations of money transmission at that time.

[00:16:18] Morgen Rochard: Coinbase is one of the only ones who sort of made it through. I think Circle might have like first came out at that time as well. So there really weren’t a lot of places for people to go and buy Bitcoin. and they weren’t able to do it in a way where they could easily get money from point A, their bank account into the exchange.

[00:16:33] Morgen Rochard: Mm-hmm. . So it was a much easier way for them to just say, Hey, I can buy this thing on the pink sheets and it’s okay if it has a premium because who cares? I just want to have access to Bitcoin. Basically if you were an accredited investor, you were able to get in at N A V and then you had the holding period, which I guess I thought was six months, but maybe it’s a year, and then you could basically sell it at a premium in the market.

[00:16:54] Morgen Rochard: So people started piling in on this arbitrage, which of course started to unwind for multiple reasons, I would say, one being the leverage that was included in these arbitrage trades. Two, the bear market for sure. And three, actually just the proliferation of the ability to buy Bitcoin in so many other places.

[00:17:09] Morgen Rochard: You don’t need GBTC now. Yeah. You just don’t, the fact that people think that this is going to go back to a premium is probably unlikely given that closed down funds typically do trade at discounts because they’re not as marketable. They just aren’t given what the product itself is.

[00:17:23] Preston Pysh: How much of a discount do they normally trade?

[00:17:25] Preston Pysh: Are you like 10%, 5%?

[00:17:27] Morgen Rochard: Yeah. I’m usually talking like 15 to 30% depending on what the closed fund fund is really. And then the other thing to take into account regarding what I think Al Magoos who we were talking about, he said their withdrawals coming out of, they’ve been selling assets this entire time to pay their 2% fee along the way.

[00:17:43] Morgen Rochard: So that’s what the sales are are basically to cover that fee and they pass that through to the investor. Anyone who holds this gets a 10 99. With that basically says that they sold small amounts of bi bitcoin on a monthly basis, or small amounts of gbtc, actually I should say not Bitcoin. The fund itself is, is selling the Bitcoin to pay their fee.

[00:18:00] Morgen Rochard: So there’s that too that’s going to get embedded in the discount is the fact that yeah, maybe at one point in time they had the amount of Bitcoin for the nav value, but as they’re paying, as they’re paying themself over time, that discount is going to increase just based on the amount of fee. And that’s 2% a year.

[00:18:15] Morgen Rochard: That’s been now going on for almost a, I mean, eight years now, I guess. Going back to

[00:18:20] Preston Pysh: The paper Bitcoin discussion where we were saying that FTX had 80,000 paper bitcoins that went poof and were already sold into the market. Whether people realized it or not, do you find ment and some of these technical solutions may be assisting in self custody and and making it more accessible.

[00:18:40] Preston Pysh: As we kind of move to the right in the timeline here,

[00:18:44] Pierre Rochard: My perception of FE’S strength is kind of for the low value payments related custody and mm-hmm for high value. I think that you’ll always want to have something very simple with just your single signature or your multisig, and I think that you see it more so you see


[00:19:07] Preston Pysh: more of from an adoption standpoint in low income markets and things like that, where it’s really going to have the most impact as far as user adoption rates.

[00:19:17] Preston Pysh: Is that correctly?

[00:19:19] Pierre Rochard: Yeah, although not just low income, I, I think that even in developed economies, there’s a place in the market for ment kind of just your checking account in a sense. It’s arguably, it has interesting trade-offs with regards to a lightning wallet. Maybe you wouldn’t have to worry about inbound and outbound capacity and channel management with ment and you’re just trading for frankly having to trust a third party a little bit more, but far less than, for example, a custodial wallet at an exchange or anything like that.

[00:19:55] Pierre Rochard: These are really granular trade-offs, and I think that it’s just going to take the market process to see where people end up, but I don’t think that there’s a trade off where it’s like easier to understand or easier to use the, I think that if we look at the ux, my friend Skylar had a tweet yesterday of the UX of writing a check.

[00:20:17] Pierre Rochard: And he was like, there’s no way people are going to write checks. It’s you know, it’s just crazy that you have to write the number twice. Like what, this doesn’t make any sense and whose handwriting is perfect. Like I think that every new technology has a learning curve to it and there’s a lot of hand ringing in Bitcoin about, oh, is this technology simple enough for people to learn?

[00:20:40] Pierre Rochard: Or do we have to figure out something that, a smoother learning curve? And part of it, I think it comes up a lot more during the bear market where people are just really desiring to increase adoption so that the price starts going up and they are looking for all sorts of creative solutions there.

[00:21:00] Preston Pysh: Morgan, what are your thoughts on the broader markets? Just kind of stepping away from Bitcoin a little bit. How are you viewing the ? I mean, this, this year’s been pretty brutal, but we did have a balance here recently, but more on, on like long-term looking at it. Like, what are your thoughts?

[00:21:18] Morgen Rochard: I wish I could be optimistic.

[00:21:20] Morgen Rochard: Honestly. I think it’s one of the, the greatest gifts that God ever gave me was to be married to because you one of the most optimistic people I know and it keeps me from being like negative Nancy, I guess . But it’s a hard backdrop, right? I mean, we’re in, we’re still in an inflationary environment, which I think is being sort of controlled by sales of oil which at some point we’re going to run outta the ability to do so.

[00:21:45] Morgen Rochard: The Fed does need to hike interest rates, but I mean, we’ve got so much government debt relative to any other period in time that it seems simply impossible that they will actually be able to raise interest rates. My Accelerationist husband over here thinks that it would be great because then we’ll get to live in our Bitcoin world much faster, if we don’t have interest rates arise.

[00:22:05] Morgen Rochard: But it also just seems like we’re in an environment where they’re sort of dead set on raising them despite consequences and therefore seems like maybe they’ll crash markets and the real estate market as well in order to achieve ends or maybe start doing so and then push forward and then have to pull back is probably more likely a scenario that happens.

[00:22:26] Morgen Rochard: But in the meantime, I mean, it seems to me like volatility is probably around to stay for a while, that like the real estate market is certainly cooled off. Housing is unaffordable now for people. Yeah.

[00:22:37] Pierre Rochard: Yeah. Isn’t it, it’s gotten crazy.

[00:22:39] Morgen Rochard: Yeah, it’s done. I mean, just based on the fact that prices really haven’t come down all that much.

[00:22:44] Morgen Rochard: They’ve come down a little bit. It’s cooled off. It’s definitely not a seller’s market anymore. But with where interest rates are, I mean, people’s housing costs are, are basically doubling if they want to go move. So you have a bunch of people who are basically stuck in their houses, so hopefully they like them, and if they don’t right, then they really can’t move.

[00:22:58] Morgen Rochard: And then people who, you know, for life reasons or anything else are going to be forced to move and take these new interest rates, right? It’s going to be unaffordable. So I think that it does lead to more consumer debt, unfortunately. But I guess in an inflationary environment, that’s not necessarily the worst thing.

[00:23:13] Morgen Rochard: But I mean, people really should be saving, right? That at the end of the day, that would be ideal. And that’s just, it’s much more difficult to do with eight plus percent inflation per year. So I’m not super optimistic. But then again, markets seem to do what they’re going to do regardless of my thoughts about them.

[00:23:30] Morgen Rochard: So I could be totally off base and things could just, you know, go up a hundred percent between now , well, I think now and next year, right?

[00:23:37] Preston Pysh: I mean, yeah, to that point is so much of it is a manipulated market. And essential bankers could reverse course because Bank X, Y, Z blows up and it could create this total contagion in credit markets.

[00:23:51] Preston Pysh: And so now here we are in an easing environment, kind of at the snap of a finger that nobody saw coming because you got three people in a room deciding how many, you know, fiat units are in the system and. I think that’s, I’m with you. Like I hate sitting down and saying, oh, well it’s going to be doom and gloom, because if we’re looking at it right now, everything points, the math all points towards that.

[00:24:14] Preston Pysh: But if they come and they drop another 5 trillion units into the system because of credit contagion that pops up next week or whenever. It can just change everything on, on a dime.

[00:24:25] Morgen Rochard: So, yeah, it’s crazy. I think, yeah, it’s definitely hard to have price predictions right now for sure. I also, I mean, I think that it’s all the more reason showing us why something like Bitcoin is incredibly important, and if people aren’t getting it this time, then you know, I don’t know how many times you have to be bashed over the head to see that you don’t want a group of people making decisions about where money goes, what interest rates should be like, I mean, they’re just as human infallible as the rest of us.

[00:24:50] Morgen Rochard: So it’s, I’d say they’re more fallible. Yeah, they’re more fallible also because they think that they know, I think , whereas, you know, if you have a little bit of humility and you accept the fact that you don’t know, you’re not going to try to make these decisions. And so it’s better to have a stable monetary policy that you can know and rely on to make economic decisions, both for your household and your business and for everything else around you that’s going to help people more.

[00:25:11] Morgen Rochard: Even with price volatility. That’s going to help people more than wondering what a group of people in some FOMC meeting are going to decide.

[00:25:19] Preston Pysh: I wanted to talk to you, Pierre, about Taro. This is something that keeps coming up quite a bit right now, and I think a lot of the people were talking about it because there’s talk of issuing stablecoin on Bitcoin Lightning.

[00:25:34] Preston Pysh: Can you explain what Taro is, and then also kind of your thoughts on how technically sound something like this is, there’s people saying that this is going to cause problems for lightning. Just kind of walk us through all your thoughts

[00:25:49] Pierre Rochard: on it. The concept is that basically you would be able to issue any kind of asset using an on chain Bitcoin transaction that is creating a special kind of output, and then you would be able to transfer that asset in a lightning channel.

[00:26:07] Pierre Rochard: As far as I can tell from a technical perspective, it, it works fine to me. The, the real questions are on an economic and kind of almost legal level and and utility. Utility? Well, I would put utility under economic, but Whoa. Sorry. You go . Yeah, there’s a lot. There’s a lot to unpack on this topic. First of all, just in terms of asset issuance, there has been asset issuance, quote unquote, on Bitcoin before point to like counterparty, for example.

[00:26:37] Pierre Rochard: And I find asset issuance to not be interesting because I think that it distracts from btc, from Bitcoin, the money. Anytime people talk about asset issuance on top of Bitcoin, I kinda roll my eyes because to me it’s just, it’s neither here nor there in terms of how important it is for the world because, you know, fix the money, fix the world.

[00:26:58] Pierre Rochard: The other part, I don’t know if you wanted to respond to that question.

[00:27:02] Preston Pysh: Well, yeah. So when we look at stablecoin to date, there’s obviously a huge amount of demand for stable coins, especially if you go into, we’ll just use the terminology, third World Nation states that just want access to some type of sound currency relative to their local currency, which is a disaster.

[00:27:21] Preston Pysh: They want to hold something that can protect their buying power as they’re paying expenses each month. And so when we look at stablecoin across all these other protocols, whether you’re talking about Ethereum, Toronto, whatever they are, right? I don’t know what the number is, but we’re probably talking 60 to a hundred billion in stablecoin issuance.

[00:27:43] Preston Pysh: When I talked with you out in la. I didn’t know the, the answer to this question, but I asked you is I, I said how much, if I wanted to send you $1 as a stablecoin on the Ethereum network, I said, how much would the fees be for that? And you laughed at me and you said it’d be about $5. And then I just, I was aghast.

[00:28:01] Preston Pysh: I couldn’t believe that to send a small transaction in a stablecoin would have such enormous fees to do something like that. So when I look at this, I suspect the fees are extremely low on lightning to send a $1 stablecoin over the Tarot protocol. Is that correct? And, and do you see value there?

[00:28:25] Pierre Rochard: Let me just clarify that that high fee was in reference to on the Ethereum network, and it turns out there’s a lot of tether stablecoin activity on Tron because Tron is the low fee network and it’s kind of, you call it the B cash of Ethereum and just as centralized on both of ’em.

[00:28:48] Preston Pysh: Currently centralized.

[00:28:49] Pierre Rochard: Yeah, yeah, yeah. Become more centralized and it’s a knockoff of, of Ethereum, right? It’s all the same kind of underlying engineering, which is really convenient for folks. But the fascinating thing is that I get dms on Twitter from people who have gotten scams by an impersonator of mine or of my employer.

[00:29:09] Pierre Rochard: And they got scammed out of a stablecoin on Tron, right? They, it wasn’t out of Bitcoin that they got scammed. And also people just like asking me for, for money and you know, that’s, they always send me a tron address and ask for a stablecoin. So without a doubt there is demand. I’d characterize it as there is demand for dollars everywhere in the world.

[00:29:34] Pierre Rochard: It is a known brand. Well for now, and the convenience of having this e digital is tremendous and especially having it be permissionless. So you don’t have to have KYC AML bank account. Instead you just generate a private key and you can receive dollars. Now I think that it’s important to recognize the regulatory arbitrage happening here, which is that normally when you’re looking at ach H or wire transfers, or swift, there’s KYC AML involved, right?

[00:30:04] Pierre Rochard: Where both the recipients and the senders are known to the banking system and the stable coins on blockchains. Somehow, someone somewhere decided that there’s an exception for this rule, and there doesn’t need to be any K Y C for sending a stablecoin from one wallet to another. Hmm. Now that is a reversible decision, right?

[00:30:30] Pierre Rochard: So tomorrow the authorities, the regulators, whoever could shut down the bank account of any stablecoin issuer and say, Hey, look like you guys are operating this network, and you’re not complying with AML KYC, so you’re shut down. So that’s the centralized stablecoin. And then you have the decentralized, stable coins like Terra.

[00:30:52] Preston Pysh: You still have those dependencies that you’re referring to.

[00:30:54] Preston Pysh: Right? So you’re saying no matter what, it’s going to be centralized at at some point. So whether you’re using a decentralized protocol alongside with the centralized stablecoin issuer, you’re still centralized.

[00:31:07] Pierre Rochard: Right? We regularly see stablecoin get frozen on chain. Mm-hmm. Right? Mm-hmm. . So it’s not like it’s a free for all.

[00:31:16] Pierre Rochard: At the end of the day, the stablecoin issuer is the one who decides who is actually holding the asset or not. For example, when Ethereum had its hard fork with the merge, USDC came out and said, Hey, look, all of the USDC that is on the proof of work chain is no longer valid, and we won’t honor that.

[00:31:38] Pierre Rochard: Only the USDC on the proof of stake chain is real USDC. It is a hundred percent centralized. There are the algorithmic stable coins and the problem with those is that they just blow up like Tara did with Luna. Those, those just are perpetual motion machines that don’t work. And then you have folks like Maker and when you look under the hood, basically it’s, they have 70% of their portfolio is USDC, so it’s a centralized stablecoin and then 30% of it is some variety of other crypto assets and then it’s worth a dollar.

[00:32:15] Pierre Rochard: This is basically repackaging centralized stablecoin into decentralized graphing paper. But that would not work out very well if USDC was to be frozen by the regulators or whatever. It’s so fun. The other point,

[00:32:29] Preston Pysh: I’m sorry, I was, I was just laughing because like anytime I feel like I might have a different opinion than Pierre and then I hear his rationale why I always then revert to, to his same opinion. Go ahead and work. And what do you got?

[00:32:42] Morgen Rochard: The point you made to me that I really liked when I was asking you about Toro was the ripple argument that basically Ripple’s argument a long, long time ago about why they were valuable was that they could take fiat, roll it over the Ripple rails. So you go from Fiat to Ripple and then back to Fiat, and your fiat gets there very quickly and we’ll be the rails that get your Fi out there.

[00:33:03] Morgen Rochard: When you brought that up, I mean it’s just so, it’s exactly, it literally is what Elizabeth Stark was saying in her interview about Toro is that we could be the rails for fiat. And so you’re just thinking to yourself, okay, why do I want to go from Fiat to Bitcoin to Bitcoin to Bitcoin to fiat? Like why? Why are we doing this to ourselves?

[00:33:21] Morgen Rochard: Truly, and, and Ripple didn’t have a use case back then. It doesn’t have a use case now. And so I see the same fate for Tara. Really,

[00:33:30] Pierre Rochard: I want to preface this though with, I have a tremendous amount of respect for Lightning Labs. Yeah. They have been a key part of my, my Bitcoin journey. I’ve, I’ve really only ever used l and d their lightning node implementation, and there is a case for asset issuance.

[00:33:49] Pierre Rochard: I just don’t think that it’s one that I’m interested in today. I think that the focus should be a hundred percent on Bitcoin. The other point on the X R P Ripple parallel is the cost, as you mentioned. Shouldn’t the cost be lower with lightning? Well, not necessarily if you’re having to flip in and out of btc, whereas on Tron, you just send the stablecoin along at a very low fee.

[00:34:16] Pierre Rochard: You don’t have to ever convert it into the native tron currency or anything like. I think that what’s missing in this equation is the regulatory arbitrage piece, which is that the reason why stablecoin issuers don’t just operate a SQL database with a rest API and a website where you can just transfer dollars, you know, synonymously, is that they need to externalize the data onto the blockchain onto some kind of public ledger so that they can point to it and say, Hey, look, we’re different than a bank.

[00:34:50] Morgen Rochard: It’s the aura of decentralization.

[00:34:52] Pierre Rochard: Yeah. We’re not a money market fund. We, we have a blockchain here. My understanding with the, the lightning, and this is I think Mr. McGoo is pointing out, which is that you’re lacking the regulatory arbitrage if the issuance is only at the edges, like what is being proposed with Taro.

[00:35:10] Pierre Rochard: And so the issuer has none of the, it doesn’t have the benefit of just having this public blockchain that they can essentially dump their externality onto. But they also have a clearer liability of, Hey, look, this is your asset that you’ve issued here. Now, I don’t know that that part really matters. I think the bigger issue is kind of how long are regulators going to allow dollars to move around without any KYC AML when argument would be forever?

[00:35:41] Pierre Rochard: Because this allows the dollar to maintain its position globally. Mm. And so essentially, this is a CBDC that is private, right? So it’s a private company that issues it, but ultimately in that bank account that is backing the centralized stablecoin, they are holding us treasuries. And so this is creating demand for US treasuries.

[00:36:03] Pierre Rochard: And as we’ve discussed, there is a lack of demand for US treasuries currently. So the argument here would be that these stable coins are, even though there is regulatory arbitrage, the regulators are in no hurry to crack down on it because from their perspective, this is actually beneficial to the overall financial system.

[00:36:23] Preston Pysh: And for people that might not be dialed into what you’re describing there. So the idea is as inflation continues to run hot, or at least that’s what what many of us expect to happen, what happens in the treasury market is you have continued sell off trying to chase after the in order to get the yields up to where these inflation prints are.

[00:36:46] Preston Pysh: So if that continues to play out, there needs to be a buyer of all these treasuries. And what Pierre is saying is these stablecoin operators become those buyers. They are the ones that have to have something in a treasury that represents the, the digital token that they’re issuing. And so they become a natural buyer, which is very ironic.

[00:37:05] Preston Pysh: And I think what many might not ever suspect being the scenario, becomes a convenient relationship for the fed, for stablecoin issuers, and for just buyers of, of treasuries worldwide, for any large currency. Pierre, when I’m looking at this, and you describe it as basically like two centralizations, one is happening at the stablecoin issuer, they’re centralized, and then also at the protocol layer, they’re also centralized.

[00:37:34] Preston Pysh: So when you look at that double whammy, and we look at, and I’m not trying to just focus on Ethereum, but when I’m looking at how they’re now quote unquote OFAC compliant because they have a majority of their validators that are OFAC compliant. And they have the highest fees. It almost seems like that would be the worst scenario for somebody to be dabbling in stable coins or if you were receiving a stable coin, that that would be the absolute worst scenario because it’s so centralized because you got to OAC compliance and because you have the highest fees relative to everything else.

[00:38:08] Preston Pysh: Would you agree with that or do you think that that’s over the top?

[00:38:13] Pierre Rochard: I think the OFAC compliance part is probably overstated. It needs to be tested, right? We need to see OFAC make a big move and then see things get censored. Now, the other part of it too is that there’s a question of …

[00:38:28] Preston Pysh: So you’re suspect of whether that can actually be censored.

[00:38:32] Pierre Rochard: I think that it could be routed around. And so for example, even if it’s like 90% OFAC compliant, all that means is that the OFAC violating transactions take longer to get into the blockchain because they’ve gotta wait for somebody who’s not OFAC compliant to pick it up. I don’t think that the stress test scenario has been played out.

[00:38:53] Pierre Rochard: There in my mind, Ethereum’s centralization always has to do with the issuance of eth. And so they’re always going to have pressure to issue more eth to increase staking yields, and that’s where all the interests are aligned except for the people who are not staking, but they’re not part of the governance process either.

[00:39:12] Pierre Rochard: Who cares about. For the Stablecoin. I think that Tron is going to continue to be the premier blockchain. But the other part of it too is that there are significant network effects. And so the Lightning folks will say, Hey, wouldn’t it be nice if we built these network effects on Lightning? And so Stablecoin are essentially a Trojan horse that allows us to have adoption of the Lightning Network.

[00:39:37] Pierre Rochard: And today they are adopting it for Stablecoin, but then tomorrow Lightning Network will, you know, be used with btc. And so this is just a way of introducing people to Lightning, which is a plausible theory. The problem is that these people have already been introduced to Tron. There’s already an incumbent network here, and maybe they would switch over to Lightning, but they would have to have a value proposition where I don’t see the value proposition yet.

[00:40:06] Pierre Rochard: Maybe it it’ll evolve and, and we’ll have a different conversation. I would also point out, I was skeptical of lightning when the Lightning White paper came out in 2014. I read through it and I thought to myself, this is just far too complicated. I don’t think it’s going to work out. I have a terrible track record and of judgment on this.

[00:40:23] Preston Pysh: I think it’s important for people hearing all this, because you know, if people are joining us and they don’t have a, a lot of depth in, in a lot of this stuff, they might be hearing this and saying, oh my God. Like, there’s, so, there’s the competitor to Bitcoin and I think for people that are in that scenario, you gotta understand what Pierre’s talking about here is he does not see Tron or any of these other things as a competition to Bitcoin.

[00:40:46] Preston Pysh: And don’t, and don’t let me take words outta your mouth, Pierre, if you want to state this differently than how I’m kind of summarizing for the audience, Bitcoin is a completely different value proposition of sound money versus what a lot of these centralized protocols are trying to just make it easy for people to basically create equity tokens is what they’re effectively doing.

[00:41:08] Pierre Rochard: That’s right, and the Bitcoin could have asset issuance on a native level inside the ledger. The reason it doesn’t is that it’s very resource intensive for running a Bitcoin node, and so we want to minimize the cost of running a Bitcoin node and that means that we have to put on resource constraints, which means that we want the Bitcoin network, Bitcoin nodes, the Bitcoin blockchain to be a ledger for BTC and not a ledger for any other asset As an accountant, this makes a lot of sense to me because if, if somebody came to me and was like, Hey, we’re going to have 10 companies using the same QuickBooks file, like that’s insane.

[00:41:47] Morgen Rochard: Like why would you not create 10 files, one for each company? I can attest that even having two companies using the same QuickBook file is no good given it. I have two companies and I tried that one year and that was a disaster, , and one of my businesses literally only had like five or six expenses for the year.

[00:42:03] Pierre Rochard: So I can tell you firsthand that’s not a good idea. Yeah, you want to have a separation of concerns. And so the reason that that Tron and Ethereum are doing those things is because they need to have an angle for competing with Bitcoin. They need to have features, quote unquote, things that differentiate them from Bitcoin.

[00:42:22] Pierre Rochard: But from Bitcoin’s perspective, their differentiation is actually undermining the long term decentralization of their network because they’re making the cost of running a node too high. Let’s talk through that.

[00:42:35] Preston Pysh: So if I’m running my node and people will start using Taro, I don’t have to run that, I don’t have to store that data on my node, but the few people that maybe are running it, let’s say that five people want to issue token X, y, z on Taro, now they have to have extra memory on their, on their full node.

[00:42:55] Preston Pysh: And what is it? Those five people are basically keeping the ledger of whatever token X, y, Z is doing.

[00:43:01] Pierre Rochard: Is that how that works? Yeah, so there’s a kind of an overlay network of the Taro network that is, it’s still anchored in the Bitcoin blockchain in the sense that there are still outputs that have kind of, you could call it hidden data that is in, that you could verify, but the data ultimately resides outside of the Bitcoin blockchain.

[00:43:24] Pierre Rochard: It’s on this secondary network. And this is really, this goes back to the, the regulatory arbitrage is that if, if you’re doing any kind of defi type stuff, you want to put as much data onto the blockchain as possible because then you can say, Hey look, this is all decentralized. And so I don’t have any liability as a centralized entity.

[00:43:47] Pierre Rochard: You know, we, yeah, sure we deployed the smart contract, you know, unis swap or whatever, decks or compound and whatever defi protocol. But ultimately they want to not have any kind of regulatory concerns with these SEC or the CFTC.

[00:44:01] Morgen Rochard: And the way they want, quote unquote transparency because people love that.

[00:44:05] Pierre Rochard: Right. Well, I’m glad you put air quotes around that. Cause I don’t think anybody , I mean, if anything it’s like, okay, it’s bad for privacy and now you know, people are going to front run you.

[00:44:14] Morgen Rochard: I, yeah. I don’t know why people want transparency, but Yeah.

[00:44:17] Pierre Rochard: They, they don’t, they don’t,

[00:44:19] Morgen Rochard: No. It’s, they think they want transparency.

[00:44:20] Morgen Rochard: I, I, I really think that it’s a way of rationalizing why this is all on chain. Mm-hmm. is, oh, it’s for transparency, but really it’s about, we want to avoid legal liability for unregistered securities and also unregistered derivatives in the case of CFTC regulations, you know, with Bitcoin saying, Hey, look, you can’t put any of this on chain.

[00:44:41] Morgen Rochard: You can only put a very compact signature proof on chain, and everything else has to be off chain. Whether it’s the business logic of the computation of the contract, or keeping track of the asset issuance and all this, well, that means that, that, let’s call it toxic waste. It has to reside on centralized third parties that now have legal liability.

[00:45:06] Morgen Rochard: Mm-hmm. with regulators. That I think is the challenge of building on Bitcoin is that you don’t have as many opportunities to dump your toxic waste onto the blockchain as you do on Ethereum or try.

[00:45:20] Preston Pysh: So there’s some serious nuance take on what I think many in the community get all excited about. They share on Twitter.

[00:45:26] Preston Pysh: I know I share a lot of this stuff on Twitter because it’s exciting news, but I think when you really do dig into it, and going back to what your original comment was, is I see it as, as a lot of noise and it, and it maybe is a distraction away from sound money and, and all the incredible things that we, that we all know that Bitcoin can bring to the world if, if we get enough people focused in on it.

[00:45:49] Morgen Rochard: There’s a reason they call Pierre the Orthodox Bitcoin . I’d like that. It’s because he stands by first principles.

[00:45:56] Preston Pysh: Yeah, and that’s important, but that was really good. Pierre Morgan, we had a question from the audience in reference to tax lost harvesting this year. Bitcoin’s down. I know that it’s changed from the previous years with the way that this is treated, or at least how long you have to have the cell complete before you’re able to buy it back.

[00:46:19] Preston Pysh: Talk to us a little bit about this and maybe some ideas that you have on tax harvesting in general, because I, I know the broader markets are down as well for people.

[00:46:27] Morgen Rochard: The way tax loss harvesting works is that you are allowed to take a loss in your asset, provided that you actually take a step back from that asset and really come away from that asset.

[00:46:38] Morgen Rochard: So originally the way that the loss rule was written was that you can’t just sell your GE shares at a loss and then buy them back a second later. That would be considered that you were still holding it the whole time. And then it would be a disallowed wash. It would ba, it would be a disallowed tax loss, and it would be, it would be subject to the wash sale rule, which would basically mean that you wouldn’t be allowed to take that loss against your tax return.

[00:47:01] Morgen Rochard: And so in order to not have the wash sale rule apply to you, you have to be out of an asset for 30 whole days and you can on the 31st day, go back in and buy the asset. And so removing yourself from the market for 30 days shows that you are no longer in that asset, that you’ve actually taken a loss, that you took a step back from the asset, and then you have taken some time to get your head back together before you go back into that asset.

[00:47:23] Morgen Rochard: There are ways around this rule in standard markets. So what people like to do is, let’s say, I don’t know, they own some semiconductor stock, right? So they decide they have a loss on the semiconductor stock, they sell that semiconductor stock and they buy a different semiconductor stock. So that way they’re still in the semiconductor market, quote unquote, but they are not out of the market for 30 days.

[00:47:44] Morgen Rochard: And then people took that even broader to indexes. I’m in the s and p 500. I have a loss on s and p 500. Instead of buying back the s and p 500, I still want to be invested in US stocks. I’ll buy the Russell 3000 instead. And so thereby, I’m not buying the same group of stocks, I’m buying a different group of stocks.

[00:48:01] Morgen Rochard: I’m still invested, and I don’t have to be out of the market in 30 days. And should I want to sell that asset in 30 days and go buy the s and p 500 backed, I can do so, in which case I can take a loss on my tax return. The losses that the government allows you to take, I mean, they’re, they’re not great , I’ll put it that way.

[00:48:17] Morgen Rochard: The government allows you to take up to $3,000 per year. If, let’s say you have a $50,000 loss, you don’t get to take the whole $50,000 loss in one year. You can use that $50,000 loss to offset any other gains in that year, and anything that you have left over, you can then use as a tax loss, and then you can carry forward anything in excess of the $3,000.

[00:48:36] Morgen Rochard: So let’s say on this $50,000 loss example, you also had 10 K worth of gains. Now you have a $40,000 loss. You deduct $3,000 on your tax return, whether or not you’re married or single, you only get $3,000, and then the next year you would have a $37,000 loss carry forward. I should have used smaller numbers, huh?

[00:48:52] Morgen Rochard: That’s how it works with Bitcoin though, because Bitcoin is not an gbtc. Like the same rules would apply with the wash sale, but Bitcoin, you can actually sell your Bitcoin and immediately buy it back. So the wash sale rules don’t apply. Currently they’re trying to change that. They haven’t yet actually changed the rule on it.

[00:49:09] Morgen Rochard: So you can still do this before year end where you literally go to your favorite exchange, you go and sell your Bitcoin, you immediately buy back that Bitcoin. And the cost to you is basically the transaction fee for selling that Bitcoin and then buying it back. There are other costs I would say that are associated with doing this too.

[00:49:26] Morgen Rochard: If you’re going to wash sale your, or sorry, not wash sale, but take a tax loss on your Bitcoin, you also get to conveniently check that box on your 10 40 that says that you have disposed of cryptocurrency. And so if you’re a private Bitcoin, it might not be worth the risk of checking that box, right?

[00:49:43] Morgen Rochard: Because then all eyes are on you potentially with the IRS about what Bitcoin you do or don’t have in excess of what you’ve tax law sold. So that’s something that’s a consider. These transaction fees are not nothing. If you have one Bitcoin, right, and you, and you sell it, maybe you pay 50 bips, right?

[00:49:58] Morgen Rochard: You’ve got 0.995 Bitcoin, and then you have to go and buy that back. You’re going to have even less, right? You might want to replace that Bitcoin with by adding to your Bitcoin stack. So you can keep it whole if you like, whole numbers or if you don’t care. But I would try to maybe replace those transaction fees because if like Bitcoin does become, let’s say, a hundred trillion asset class and you did some tax loss harvesting when it was 300 billion, that tax loss that you took $3,000 per year is going to look very expensive in the future, potentially if you didn’t replace the transaction fees.

[00:50:28] Morgen Rochard: So I would say that that’s probably the biggest trade off there as well. But it’s a legal loophole right now that people should take advantage of if it’s something that they want to do. And the other thing is that because you get that lost carry forward, you can use it to offset gains in the future on your.

[00:50:43] Morgen Rochard: I know there are some Bitcoiners out there who think that the government’s not going to exist, so why do any of this stuff anyways? And maybe that’s fair, but in the meantime, , maybe you want to play by the rules or not, but at least know what they are.

[00:50:54] Preston Pysh: Earlier this year, the FAST B adjusted their treatment of Bitcoin on the balance sheet and gap accounting.

[00:51:00] Preston Pysh: There was a lot of people saying that this was a, a pretty big deal. I’m kind of curious how you two viewed it and do you see this as something that could lead to broader adoption, especially from institutions moving forward?

[00:51:14] Pierre Rochard: I would say any competent financial analyst who is doing a valuation of a company would mark to market the Bitcoin on the balance sheet so that they remove any kind of effect from that gap treatment.

[00:51:29] Pierre Rochard: Now look, there are lots of, there’s a wide spectrum of financial analysts out there. Not all of them are carefully doing all of that. Furthermore, there are investors who just look at kind of, okay, what’s, what’s the earnings per share? And they don’t go in and make any kind of adjustments to anything.

[00:51:50] Pierre Rochard: They don’t have an Excel model, right? They are just looking on Yahoo Finance. And so I think that it’s certainly makes it more palatable for CFOs out there to have it on the balance sheet if it is going up as well as down, because right now it only goes down, right? It can only get impaired.

[00:52:11] Preston Pysh: So Pierre, as much as any person with an accounting degree, just got a kick out of, out of your comment.

[00:52:16] Preston Pysh: People who don’t have an accounting degree or maybe a, a CFA probably maybe missed the nuance of, of how funny that was. But I’m just going to break it down for people real fast, what Pierre said here, he is basically saying that like, if you’re not an idiot and you can go in there and kind of read the financials and you can mark the market to Bitcoin, you can realize real fast that it wasn’t a loss on the income statement because of the way that it was treated according to the old gap accounting rules, and that the company didn’t lose a billion dollars, that they were just forced to mark their their books differently.

[00:52:49] Preston Pysh: With that said, there are tons of retail investors that if they see micro strategies, a perfect example, that had to mark their earnings per share deeply into the negative prior to this rule. Do you think that that had an impact on the, on the market price or do you think in general the market pretty much understands the nuances of what was happening?

[00:53:13] Preston Pysh: I’m assuming you’re saying the sa the latter.

[00:53:16] Pierre Rochard: Yeah, there is kind of a redistribution effect where that means that MicroStrategy shares got redistributed from unsophisticated retail investors who panic sold into the hands of folks who are running the numbers.

[00:53:30] Preston Pysh: So you like the old rule, you like the old rules, what you’re saying.

[00:53:34] Pierre Rochard: Now because I don’t trade.

[00:53:36] Pierre Rochard: So I think that the new rule is good because ultimately it does legitimize and it drives adoption. But I also don’t think that it is a massive bull catalyst of okay, now has changed.

[00:53:49] Morgen Rochard: I’m with you. I think it also speaks to the fact that when you start to involve like products like A GBTC like we talked about earlier, or companies like a MicroStrategy or minors, not to knock the company that you work for, but the average person can’t really take into account all of the factors that affect a business and including, right.

[00:54:09] Morgen Rochard: Just changing in accounting roles. These are things that analysts are looking at all the time that they’re up on that even the best of analysts get wrong, unfortunately. Yeah, and so for the average person who’s just going to go look at Yahoo Finance and look what earnings per share is, right, you’re not going to really get a good indicator of whether or not the business you’re looking at is really a good business to be purchasing, in which case Bitcoin is there for you to just go buy Bitcoin.

[00:54:32] Morgen Rochard: Right? I think that it’s so hard for people to just look at Bitcoin and say, okay, I’m just going to go buy Bitcoin and I’m not going to worry about the rest of this stuff. But every single signal points people to that direction of, this is the only thing that you need to do. This will make your life more simple.

[00:54:44] Morgen Rochard: This will take a lot of the angst and other issues out of investing and make it easier for you to just save money the way we were meant to save and leave investing for the people who want to take extra risk. It just seems like time and time again, we’re being pointed in this direction, but people just have blinders on and they can’t see it.

[00:55:01] Preston Pysh: I think from, if you’re filtering, if you’re using tools and you’re saying, let me filter all the unprofitable companies out of this filter, and you’re, and you’re using it that way. I think the new accounting rules are are going to be very helpful for people that are maybe looking at things that way. But great points, guys.

[00:55:17] Preston Pysh: Last one I have for you, believe it or not, we’ve already been talking for more than an hour here, so that went fast, . Okay, so transaction fees. This one seems to be coming up a lot. I don’t know if this is FUD or what’s driving this, but there’s a lot of people that just keep bringing up this idea that in the long term, Bitcoin’s reward for mining blocks continues to go down and it’s not going to be enough of an incentive to continue to secure the network long term or that there’s going to be these issues that materialize in decades from now.

[00:55:52] Preston Pysh: Pierre, you wrote a comprehensive response to this question. It was a 23 page report. We’ll have a link to that in the show notes for people that want to really kind of dig into the granularity of this, but give us the down and dirty on, on your response to people that are bringing up this argument.

[00:56:10] Pierre Rochard: I think the place to start would be kind of, okay.

[00:56:13] Pierre Rochard: What’s the extreme outcome here? The extreme outcome is that what we call the subsidy, which is the new Bitcoin being added to the ledger. That’s what gets cut in half every four years worth of blocks. And so by the year, I think it’s 2130 or 2140, the goes to zero, but it’s already immaterial long before that.

[00:56:33] Pierre Rochard: I think in the 2040s it’ll just be very few Bitcoin or Satoshis. And so if we take the extreme of, okay, that goes to zero, and let’s assume for a second the transaction fees grind down to very little as well. So little that there’s only enough revenue for one person to be mining on their laptop. And the outside observer looking at this would say, Hey, look, Bitcoin is a hundred percent centralized.

[00:57:04] Pierre Rochard: You got one person who is mining Bitcoin on their laptop and the entire global economy, all their, what we would use as trillions of dollars of transactions. But you know, at that time, the dollar no longer exists. The entire global economy runs on Bitcoin and there’s one guy with his laptop who is settling all these transactions every 10 minutes.

[00:57:25] Pierre Rochard: So the outside observer would say, Hey, this is, this is clown world stuff, right? This doesn’t make any sense. Here’s why it makes sense though. If that one guy decided that he’s going to start censoring transactions or doing deep reorgs, then what happens is that you have transactions start accumulating in the med pool, in the backlog of transactions that want to get into the next block, but are unable to cause this guy is censoring them.

[00:57:50] Pierre Rochard: And they start bidding up their transaction fees. And this attracts other people to start mining. And so now suddenly the revenue for Bitcoin mining has grown, and now there’s enough revenue to justify there being competition from other mins. And the thing about Bitcoin mining is that it’s permissionless.

[00:58:11] Pierre Rochard: Even when there’s only one person mining, it’s still permissionless. Anybody can start mining and start competing with that one person. It’s not a monopoly in the sense that they have a closed legal way of excluding competitors. Rather, it’s really the most open possible market. That’s I think, the crux of the argument.

[00:58:31] Pierre Rochard: But that’s not the only reason why transaction fees go up of censor. The other reason transaction fees go up is when there’s more demand for block space than there is supply. When you’ve got lots of people trying to use Bitcoin. People call it network congestion, but really what it is, is it’s transactions that are competing to get into the next block.

[00:58:52] Pierre Rochard: There’s a limited amount of space in each block so that we can keep Bitcoin decentralized by keeping the costs of running a Bitcoin node low. And so when you have network congestion, the transactors are competing with each other by bidding up transaction fees, as we saw in 2017, but also in 2019 as well, transaction fees did significantly go up.

[00:59:13] Pierre Rochard: That to me is why long term I would expect transaction fees to to continue to oscillate. They’re going to continue to be volatile because I think that the coin adoption waves are going to continue to happen. Eventually we’ll reach a hundred percent adoption, and at that point we can have some idea of, okay, here’s what the equilibrium is for transaction fees on Bitcoin.

[00:59:37] Pierre Rochard: But it’s not just a demand story either. There’s also a supply story on the technology side. For example, SegWit increase the amount of block space supply significantly. Taproot increased the efficiency of multisig. So now Multisig looks like single sig going forward. There’s lots of, and then of course, lightning layer two type scaling improvements that really compress the amount of transactional data that you can put in onto the blockchain.

[01:00:04] Pierre Rochard: There’s technology improvements that we don’t know about yet that will be invented in 10, 20 years and 30 years. And so that’s where on the supply side there’s uncertainty. But in any case, I think that it will be to the benefit of the users of the system and that there’s nothing wrong with low fees.

[01:00:24] Pierre Rochard: There’s nothing wrong with high fees. It’s just a market equilibrium that is constantly emerging, but there’s not like a situation we would have where fees are too low. There’s no such thing.

[01:00:36] Preston Pysh: You hear Michael Saylor talk a lot about this idea of not changing things and trying to, almost like the laws of gravity and, and the, the laws that we deal with with nature.

[01:00:48] Preston Pysh: And he, he talks a lot about the conservation of energy and I think you’re talking a little bit about some of those ideas and, and what you’re saying there. Do you see it that way? That by not changing it, that you, that the incentives of mining and for people to have uncensored blocks and all of these, all the game theory works itself out if you continue to keep your hands off the controls and allow the laws that have been put in place at a very early point in the protocol to naturally.

[01:01:16] Preston Pysh: Come to a remedy and, and market equilibrium amongst all the key players. Is that what you’re really describing,

[01:01:23] Pierre Rochard: Pierre? Yes, I do see it that way. I think what the critics would say is that Bitcoin is changing every four years with the having. And so the economic incentives are changing because you’re, you’re cutting the subsidy in half.

[01:01:36] Pierre Rochard: But I think what they miss is that this subsidy has no effect on transaction finality. And it also has its purpose is purely about preventing Senior Ridge that we need to add units to the ledger. You need to do it in a way that is costly so that there’s no free money being handed out. Right? That the, the minors are having to expend real resources in order to add the units to the ledger.

[01:02:01] Pierre Rochard: And it’s a competitive process. It’s not Monopoly senior edge like you have, for example, with dollars.

[01:02:07] Preston Pysh: The fittest participants receive the rewards like what you see in nature. Awesome stuff. Morgan, you are working on a book right now. We’re wrapping things up. Tell people about what you do. Also tell them about your book.

[01:02:22] Preston Pysh: If you have anything that you want to highlight, please highlight it. Same for you, Pierre. And give people a handoff where they can learn more about you too.

[01:02:30] Morgen Rochard: I wrote a book called The Personal Finance Quickstart Guide, and it had a small section about Bitcoin, and I started marketing it on Twitter because I felt like there was a dearth of financial planning content that both combined the, the psychological aspects of what happens to us with our money, with also the fundamental principles of what you need to do with your money and to give people a framework to make those decisions with or without the help of a financial planner.

[01:02:56] Morgen Rochard: And in doing so, and in marketing and on Twitter, I found that it’s not. I mean it, it’s great and it adds to the market, but there’s a plethora of financial planning books obviously out there. But there are actually zero financial planning books out there about Bitcoin specifically, and I get Bitcoiners asking me questions all the time.

[01:03:15] Morgen Rochard: My practice, I have a registered investment advisor that’s been around eight years now. We predominantly deal with Bitcoiners actually now over the last few years, we only have Bitcoiners coming through. And so we’re dealing with issues that have really, that nobody has really laid the groundwork force.

[01:03:30] Morgen Rochard: I’m feeling really excited about writing content that will hopefully enable many Bitcoiners to not only save lots of Bitcoin, but to also work out all of the financial planning issues that may arise as they grow and build wealth. So that’s the purpose of the book. There’s also going to be sections on concentration issues that should come up, hopefully for people who own a lot of Bitcoin, right?

[01:03:51] Morgen Rochard: Or own a little bit about a bit of Bitcoin that grows over time and dealing with how to approach retirement and other aspects of financial planning. So it should hopefully be a comprehensive guide to Bitcoin personal finance. If you want to hear about the book or be interviewed for the book, I’m going to have a I will send a link to Preston that you can find in the show notes for a landing page.

[01:04:12] Morgen Rochard: For that, you can also DM me on Twitter. I’m at @MorgenRochard

[01:04:17] Pierre Rochard: And I’m on Twitter at @BitcoinPierre. And if you’re interested in industrial scale mining go follow riot blockchain as well on Twitter.

[01:04:26] Morgen Rochard: Awesome. We have a podcast too called Bitcoin for advisors. Oh, awesome, awesome. We try to put those out monthly, but we missed one last month, but otherwise , we’re on a good scale.

[01:04:35] Pierre Rochard: It’s a grind.

[01:04:36] Preston Pysh: It’s a grind. Okay. We’ll have links to all of those things. I got a bunch of things written down here. We’ll have those in the show notes. Guys, thank you so much for making time and coming on the show. We need to do this more often. I thoroughly enjoyed these conversations, but thank you guys.

[01:04:53] Pierre Rochard: We had a blast, right? Thanks for having us on. We enjoyed it as well and I think our son enjoyed it as well too. I hear him playing. Yeah, I hear him playing.

[01:05:02] Morgen Rochard: I heard him playing for at least the last 20 minutes.

[01:05:04] Pierre Rochard: Yeah, dad are podcast singing. Time to go play Dulo .

[01:05:08] Preston Pysh: I love it. Alright guys, I won’t hold you any longer and thanks for, for joining me tonight.

[01:05:14] Pierre Rochard: Thanks Preston.

[01:05:16] Preston Pysh: 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.

[01:05:33] Preston Pysh: 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. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

[01:05:49] Outro: Thank you for listening to TIP.

[01:05:51] Outro: To access our show notes, courses or forums, go to the investors This show is for entertainment purposes only. Before making any decisions, consult a professional, this show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.


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