02 June 2021

On today’s show, Preston Pysh is joined by Plan B and Dr. Adam Back. They talk about the current market conditions, the Chinese mining migration to the West, the global macro implications of a trillion-dollar Bitcoin market drop of 50%, and much more.



  • When will Bitcoin’s volatility potentially impact the broader global economy?
  • The current on-chain analytics.
  • China Mining update.
  • Bitcoin derivatives and how they impacted the sell-off.
  • Proof of Work versus Proof of Stake.
  • Security tradeoffs.
  • Are institutional investors still putting Bitcoin on the balance sheet?


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  • Adam Back’s Bitcoin company Blockstream.
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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.

Preston Pysh (00:00:02):
Hey everyone. Welcome to our Wednesday release of the podcast, where I’m talking about Bitcoin. On today’s show, we bring back by popular demand Dr. Adam Back who’s the CEO and founder of Blockstream. And we also have Plan B who’s the creator of The Stock-To-Flow model. On the show, we talk about the broader macro implications of Bitcoin reaching a market cap in excess of a trillion dollars, but still having market corrections of $500 billion. We talk about Chinese mining news. We talk about energy concerns and highlights. Additionally, we talk about the derivatives market and how it had an impact on the recent sell off. So if you’re looking for a good update from two of the smartest guys in the space, hang on tight, because here we go.

Intro (00:00:46):
You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston Pysh.

Preston Pysh (00:01:05):
Hey everyone, welcome to the show. Like we said in the introduction, I’m here with Adam Back and Plan B. Gentlemen, welcome to the show.

Plan B (00:01:12):
Thank you.

Adam Back (00:01:13):
Thank you.

Preston Pysh (00:01:14):
All right. So where I want to start this off, I’ve done a lot of thinking as this price has just gotten punished over the last two months, a month and a half, or whatever it is. And one of the things at the top of the list is just systematic risk. A few months back, we saw WallStreetBets do the whole GME thing, and it had just a small kind of pittance of a market cap, but the implications of that were massive. So you had Melvin Capital, the Citadel had to come up with $2 billion. You had Point72 Asset Management. All of them were just… It created a mess in the financial markets.

Preston Pysh (00:01:58):
You saw the broader market selling off through some of this and it was only a $6 billion loss all around, but the implications of what you saw that this created in the overall market was kind of crazy. So when I think about Bitcoin having a market cap, it was well over a trillion dollars and it has a 50% drop in price. And so we’re talking $500 billion and that’s just Bitcoin alone. What in the world does this mean long-term when we think about the implications of the price potentially being higher? Maybe a Bitcoin price of 100,000, what would that mean for systematic risk? At what point is Bitcoin potentially wagging the tail of the regular market and how they’re going to have to respond with further liquidity? Is this something you guys have given much thought to?

Plan B (00:02:52):
Well, I think the Bitcoin market has some very high volatility and it’s just part of the market. And I find it really funny that we all knew at the beginning of the bull market, that we would not go up in a straight line and that there would be multiple minus 35 or minus 50% drops along the way, like it did in the 2017 and 2013 bull run. So now we have one, our first minus 35% dip month to month. And it feels like this is new and upsetting everything and changing everything, but it’s not. At least, in my opinion, it’s just a normal thing that is present in a market like Bitcoin that has also the returns that go with those high volatility. And we should expect those drops and not be afraid of them, make use of them.

Plan B (00:04:00):
Psychology is different because it feels like Bitcoin is dead every time. But you know there will be another minus 50% drop and a minus 35% drop. So I don’t think that structurally anything has changed. It’s just part of the growth of this market and part of the charm of this market as well, because you cannot have 200% annualized returns without volatility. And to be honest, minus 35% versus a plus 200% annualized return is still a bargain deal.

Preston Pysh (00:04:40):
Yeah. I guess where I’m getting at is, once we achieve a certain market cap in size, it’s almost like Bitcoin starts to become this thing that’s going to drive central banking policy because it’s so substantially large and has so much volatility, because I don’t think if we go to… Let’s just say the market cap goes to something like five trillion and it’s starting to become competitive with gold. I still think the volatility is going to be there. I don’t think the volatility is going to wane at that point. I think you’re still going to have aggressive volatility. And if true, and the market cap would be something of that magnitude, doesn’t this create a situation where central bankers are now having to respond because of the impairment that such volatility would cause to the overall market participants. You see where I’m going with that?

Plan B (00:05:41):
Yeah. Maybe. Yeah. And I agree that volatility will not go away. It will stay here. It’s part of what Bitcoin is. And let’s not forget that the stock market and especially the bond markets and a lot of other markets are less volatile because of the Central Bank, right? They step in, they rescue it, and they take out the volatility. And with it, they take out the returns. So Bitcoins feels like the only place in the world where capitalism or normal market behavior is still allowed. And yeah, there will be a point when the market steps in, but it doesn’t feel like this is now, it doesn’t feel like the central bank will rescue Bitcoin. Right?

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Preston Pysh (00:06:24):
Yeah. No, and I completely agree with that. I guess I’m just looking at the size when we hit a trillion and it’s dropped 50% and you look at it just in the nominal terms of how much capital just disappeared and you think about, all right, so the people that had these positions, and the implications of their counterparty risk of their other positions, when does that start to become a factor, that that’s going to have a much broader impact to the market? This is my concern as I’m looking at this, and then more importantly, how is that going to be received? Right? How’s the rest of the market going to think about that?

Plan B (00:07:09):
I think there will at a much higher market cap than 1 trillion. I think 1 trillion is still very, very small compared to the gold market, the bond market, stock markets. It’s near to nothing. So yeah, we’ll have to grow, I guess, beyond the $10 trillion mark to really make a dent.

Adam Back (00:07:31):
I saw an interesting statistic. One of the big brand name, fund manager who has been recently interested in Bitcoin made the comment that, in the 2017 run-up and then the price falling back in 2018, 2019, that the on-chain data was suggesting that 86% of the people just held right through it. They didn’t sell any coins.

Preston Pysh (00:08:02):
Yes, this was Stanley Druckenmiller’s comments.

Adam Back (00:08:05):
Exactly. Yeah. And so, I mean, you’d think, well, he was saying he was surprised by that. Right? But I think people had a reason to fear being out of market. Going back a few years, I had come to the realization, maybe 2014, something like that. So it wasn’t that good an idea to day trade this thing. I was trying to think, oh, I’ll sell some now I’ll buy it back later because, you’re looking at something very highly volatile, most of that time. And plus a minus on some kind of exponential of an S curve and otherwise a random variable. So if you sell and buy back, the odds are stacked against you. And another statistic which highlights this, if you eliminate the 12-single day largest gains in a year, Bitcoin loses money year on year. So your biggest risk is being out of market for any of those 12 days.

Adam Back (00:09:09):
And so, simply buying more when it goes down, if you can afford that or just hold, put excess income if you have a job into it, that tends to work out very well over a long period of time. And certainly for myself from 2017, I had come to the heuristic of buying anytime the price dropped by at least 20%. Below that, I didn’t consider a dip. And so I bought my first post 20,000, 16,000 and just kept buying down to 3,500. And I was low on cash at that point. But obviously if you’re still holding those today, that looks pretty good, right? So I think the other thing is, you’re talking about if as the market gets bigger how will it adapt to this? And I think the way it adapts is kind of biological evolutionary, that people who can’t handle it, leave. They put money in, the price drops, they sell at a loss and panic sell.

Adam Back (00:10:12):
Maybe they’ll learn not to do that in future when they see it come back or maybe they don’t, because they leave. In any case, the bitcoins just organically change hands to people who inclined to hold them or who are better at managing risk. If they’re doing leverage or selling a bit and buying back. Another rule of thumb I use is, if you are inclined to day trade, at least restrict yourself to 10% of claims that way, if it all comes horribly unstuck, you’ll still have 90% of the claims cold stored. So I think a lot of what happened in the last month is down to over leverage and that we can talk about. But it creeps up on people faster than they think. So as Bitcoin gets bigger, higher market cap, I do wonder if you would start to see more value investors.

Adam Back (00:11:07):
I mean, I tend to view it as value investor, so the price falls, I try to buy more. And you see that with stocks, right? There are analysts who are looking at it and saying, well, this is overweight or underweight based on quarterly reports expectations. And if it falls a bit, they will start to buy it with a fund or something. Right? And so we might see some of that coming into Bitcoin in the longer term as more people gain confidence in the long-term trajectory, the long-term viewpoint, then the volatility is normal, it’s fine. It’s necessary even, right? Otherwise the price would already be much higher.

Preston Pysh (00:11:47):
You know Adam, you’re hitting on a point that I think is so vital for people that are maybe getting into for the first time, is they don’t understand the conviction that’s associated with people who hold a majority of the coins. It’s not like that you have these fringe people that have a small position size that have this insane level of conviction. It’s the people that have enormous stakes in it, that have this level of conviction that as the price goes down 50%, they didn’t even think about selling it. In fact, they were doing everything that they could to buy more. And so if you look at the amount of coins that have been issued through the protocol, and you take a percentage of those coins, what percent of it is held by people with this deep, ridiculous conviction that are deep in the money, and really aren’t even phased by a 50% drop? I would argue that that number is really high, like 80% or something of that magnitude.

Adam Back (00:12:57):
Yeah, I mean, the interesting thing is it doesn’t have to even be the natural makeup of the average investor. It’s just that those people are the survivors, because if you don’t take that attitude, you tend to get washed out, right? Or you would be inclined to sell in a dip or not buy in the first place because you’re worried about volatility or something. So the people that either start out with this attitude or develop it over time, I think most people develop over time. I think if basically your investment portfolio denomination changes, that’s been my view for a long time now, that I want to increase the number of coins I have. And if the price is plus or minus 50%, I don’t even account for it. Like one Bitcoin is one Bitcoin, the question is how do we get more Bitcoin without increasing risk that I might lose some of the Bitcoin I have got.

Adam Back (00:13:55):
And so that’s where the leverage trading gets potentially dangerous if you overdo it, because it can… There was another saying which is, “Leverage can’t make a bad investment good, but it can make a good investment bad”, which is to say that you have something you long-term want to buy and hold, but if you over leverage a price pull back that you would like to buy, kind of forces a sale to protect so that liquidation is partial and not full or something, because some people are doing quite high leverage and that can completely liquidate portfolio basically, or whatever’s on exchange.

Plan B (00:14:35):
Yeah. Maybe to add on the… I totally agree with the points you made earlier about the holders with vision and great conviction. They’re great holders. They are the holders you like to see in Bitcoin. And it’s funny, I tweeted that the other day and got a lot of hate for that. That people who cannot afford or cannot stand the volatility, they shouldn’t be there. They shouldn’t position themselves into a position that they can be shaken out against their will or… And we all know those people. Let’s look at last two months, when the price was 57,000, 60,000, I know personally a lot of people who entered the market, but who I could tell couldn’t stand the minus 35, minus 50% drops. And yeah, well, so when it happened, they chickened out within two months. And that was really a lot of people. From on-chain, I guess about $20 billion was lost by people who bought the month before.

Plan B (00:15:58):
So that shows us that I guess the people with vision the really long-term holders, they were okay until last month. And I would say March and April because in those months, we got so much people with high leverage, I guess, with no vision that did not really understand Bitcoin, or at least not the low time preference that should go with it, and they sold. I have never seen it on-chain by the way, in any other month or year. So the holders that bought last two months, are the weakest holders ever that couldn’t stand the volatility. And yeah, I agree. The volatility is part of the market. It’s part of what makes Bitcoin great. And if you can’t handle it, you will hurt yourself. So be careful.

Preston Pysh (00:16:55):
And here’s the other thing on top of that is, how many people did you talk to two months ago that said I’m going to wait until I get a better buying opportunity because it’s just so overheated. I’ll buy it when there’s the next dip. Well, now here’s the dip and you know exactly what they’re doing is they’re not buying because they’re saying, well, it’s probably the top happened, and now it’s going to keep going lower and they’ll just never get off their hands. And so what we’re really talking about here, at least in my opinion, is what is the advice to somebody who wants to own Bitcoin, but is just emotionally psyching themselves out. And I’m curious to hear your thoughts, but the only conclusion that I have come to is that people need to dollar cost the average.

Preston Pysh (00:17:46):
They need to start off with smaller position sizes so that this insane volatility that you just naturally experienced with Bitcoin, isn’t really a factor if it’s 1% or 2% position in your portfolio, it’s not a big deal. And so if you’re slowly just doing dollar-cost averaging into Bitcoin over a year’s period of time like if you’ve been buying it slowly every month for the last year, you’re way up, right? Even through this 50% drop that just happened. But I think most people just want to do their full position size all at once, and they want to get that perfect price, or they want to get a deal. And that’s the thing that presents a really tough situation for people to be able to handle emotionally, especially if they don’t have the knowledge or the conviction behind what’s all going on behind the scenes with the protocol.

Plan B (00:18:43):
Yeah. Not to give any financial advice of course, but in my opinion, the institutional investor mindset is great also for retail. And that is if you decide upon vision and strategic analysis, some longer-term thing that you want exposure in a asset say it’s Bitcoin, then, by all means, acquire that exposure. Acquire that position regardless of the price. Yes. Dollar-cost averaging, great way or do it small, say, okay, I want a position, I want to be part of Bitcoin because I like the vision. I like where it’s going in five or 10 years. And then you buy a really small stake. For one person that’s $1,000, for another, that’s a million, but something that you’re happy to lose, that you can afford to lose. And then don’t look back.

Plan B (00:19:40):
Give yourself the time to at least hold it for four years, because nobody who held Bitcoin for four years had any loss at all. So yeah, if you decided to take a position, that you want to have the exposure because you read the Bitcoin Standard and read the white paper, and did your research, by all means, don’t look at the price. It doesn’t matter. Just get the position. And really, if Bitcoin goes five X or 10 X, what does it matter if you bought for 30,000 or 60,000? It doesn’t matter.

Preston Pysh (00:20:16):
So, I want to just throw this out there, because I think a lot of people don’t understand necessarily how the derivatives market works. At least maybe people that are new to the space and what we’ve seen over the last month and a half was just a cascading event of selling that was induced by people that had long positions, which is ironic when you take a step back and you think about it is these people that were selling were the ones that had an opinion that Bitcoin’s going way higher. And they’re the ones that supplied a large portion of the sell-off that happened. So I’m going to throw it over to you Plan B to explain simply for people what causes this and what does it mean right now, as we’re going through a consolidation as well.

Plan B (00:21:11):
Yes. So derivatives markets are a phenomenon that is associated with mature markets. So only a spot market it’s not much. So you need futures markets, option markets, swap markets to… And what does derivatives markets do is they divide the risk return profiles that are available in the spot market into two different risk return or more different risk return packages. So for example, with futures, you can do leverage on the one hand. And there were a lot of leverage longs of people that thought Bitcoin would would go to 100,000 or more this month or next month. And you can do that with futures. And then there’s the other side of the trade of people that say, well, I can provide you that leverage for a certain 30% or even 40% annualized return.

Plan B (00:22:10):
And we were laughing about that the other day at the podcast with the three of us, like how can it be that there’s 30, 40% Bitcoin neutral returns available in dollar terms? Well, that was because there was a lot of people that wanted to go leverage long positions. So, yeah. And that of course can go wrong. It’s very interesting to see the dynamics of that spread of the 30% being totally eliminated right now. It’s zero and almost in backwardation to future markets. But then in the option markets, you see the volatility coming back. So those are very attractive right now. Option prices are based on volatility. And another derivative that split the market in two parties, two or more parties. People don’t want to bet that Bitcoin goes up or down, but don’t want to have the other side of the trade, and the option provider sellers that take the premium and yeah, make a very calculated bet.

Plan B (00:23:24):
So I think derivatives markets are great, as long as people that play on those markets know what they’re doing. And obviously in a maturing market like Bitcoin, I guess the leverage is a problem at the moment because 100 X leverage is like a certain loss. I mean, if you go 1% into the wrong direction, you’re wiped out. And the odds of being wrong are 99.99%. So it’s a certain win for the exchanges that provide 100 X leverage and it’s a certain win for the people who provide the other side of the trade. And I think that went horribly wrong last month.

Preston Pysh (00:24:10):
Now where we’re at right now with the price being low, and you have a ton of short sellers that are now entering into the market and taking their positions. And it’s almost like you see the exact opposite of what we saw a month and a half ago with everybody going long. Now you have a pile of people going short, but these derivative products are not controlled… Like the underlying price is going to do what it does. And then the derivatives are going to react based on that underlying price.

Preston Pysh (00:24:41):
And so, when people see these big massive green bars that explode up in what feels like minutes, and they’re wondering where did all these buyers come from? And the buyers came from the people that had an opinion that Bitcoin was going lower, and they basically have margin called and they become forced buyers at that point. So right now, as we’re seeing this price consolidation, are you seeing that Plan B, with the short sellers stepping into the market at scale, that could potentially be the ones that provide the big green bars if the underlying starts to move upward?

Plan B (00:25:27):
Yeah. I see more the liquidation of the leverage longs, more than the buildup of a leverage shorts position, but I’m sure there will be leverage shorts at the moment and yeah, they will be liquidated too, when we go up as you say. And it’s exactly what Adam said, because the money will go to the strongest hands and not to the gamblers that hit the 10 X or 100 X leverage button. Because an asset like Bitcoin to trade that with leverage is as close to stupidity as one can come. And so you can see, I personally joke about it with friends, especially the institutional investor friends, it’s like a tax on stupidity.

Plan B (00:26:23):
So yeah, the good news then is that a lot of that money flows into the market to the strong hands. It sounds horrible when I say that, but that’s just how it goes, right? All those people lose their money, especially the 100 X traders and that money will be available for the other side of the trade and will be a nice step up for another bull run or leg up if you will. So, yeah, I guess it’s part of a ferociously capitalistic market without much interference of the governments. And yeah, I like it to see this market in it’s primitive and most pure form there is.

Preston Pysh (00:27:08):
Yeah, I think many would even say it’s extremely healthy, that this is allowed to happen. So just for some numbers here on all the exchanges, the open interest for futures only was around $20 billion prior to like at the beginning of May, and now you’re down to $11 billion. So it’s almost been cut in half the amount of futures open interest that’s out there. Adam, I’m curious if you have any thoughts on some of these ideas with the derivatives.

Adam Back (00:27:42):
Yeah, I mean, it’s curious that probably people think the market fall is driven by panic sellers. So people are trying to hold onto dollar value who didn’t have to sell versus fall sellers, people who actually were just desperately trying to accumulate more Bitcoin, but pushed it too hard on the leverage. And I’m thinking it may be more the latter than the former. So certainly some people will instinctively sell to preserve some dollar value, maybe they’ll think, this is too much for me and they’ll leave, or they’ll have to time it and buy back later, which is also dangerous, right? It can turn around in a heartbeat, too.

Adam Back (00:28:27):
So certainly the statistic about the 20 billion down to 11 billion, I presume that’s the perpetual future, open interest is time. And just for some illustration of how the perpetual future is quite a quadratic instrument, if you’re trying to buy more Bitcoin using Bitcoin, you’ve got a risk from the price falling when you’re hoping it’s going to go up, but you’ve got another compounding risk that makes it a squared loss, which is the value of the collateral either Bitcoin is also falling. So you’ve got… So basically, if you had 100 Bitcoins or 100 million Bitcoins, you had 0.1 Bitcoin, same thing, just the ratio, right?

Adam Back (00:29:21):
So 100 units, and you go two times long, and the price starts at 50,000, by the time the price falls to 33,000, which is only a 33% fall, you’d be 100% liquidated on that position. Right? So you think, well, two times, and if you look at the upside, it’s not as great as you think, because you make a profit on the price increase, right? And then you want to convert that price increase into Bitcoin, and then you have to divide it by a new higher price. So the asymmetry is not in your favor and it’s not that shorting is particularly safer. I mean, shorting Bitcoin is probably even more dangerous if anything, because you have the same quadratic kind of effects in a way.

Adam Back (00:30:12):
If you are shorting with dollars then your dollars are shrinking in relation to Bitcoin. So you have the quadratic effect. So I think actually most of the short interest in the market is not really short. It’s the long short, it’s a Bitcoin neutral way to collect yield, to lend money to people who are trying to get along. And as Plan B was just saying. And so I think most of the short market is made up by that. So it’s not actually exposed, and that is stable because you’re betting the price will go down, but if it goes up the collateral increases and vice versa. So that’s completely stable and actually won’t get liquidated generally speaking in a 10 X increase or a 10 X pullback. It’s pretty stable. Go ahead.

Preston Pysh (00:31:01):
So, do you think that… Because these derivatives market was not mature during the last bull run. Now we’re seeing all sorts of these perpetual futures contracts that you’re talking about. This is something that’s very unique to Bitcoin and the crypto economy that doesn’t exist in your normal traditional markets. And you’re able to do these perpetual futures contract because of the 24/7 immediate clearing aspects that are inherently part of this type of asset. And I guess my question is this, are we seeing the price perform differently where there’s a little bit less volatility in the momentum of the price action with systematic cascades either up or down, that happened more sporadically, is that what’s going to pop out of all these derivatives that are there now, or do you think that, that’s just what we’ve seen in the past year?

Preston Pysh (00:32:07):
Because to me, it seems like the price was way less volatile until we got just this super saturated long position. And then it was just this massive cascade of selling which feels very different and even as percentage-wise, is very different than the last cycle, because the last cycle, the biggest drop you had was 38%. And now we’ve had one that was over 50. Is that the derivatives?

Adam Back (00:32:37):
I mean, I don’t know the full data, but it seems like it’s a big factor because you hear of people who’ve got liquidated. Probably everybody knows somebody who’s had either long position or multiple positions, some of them liquidated. And that’s typically it, right? They were holding and trying to increase the Bitcoin returns. And of course, since people who put on a long and got away with it without liquidation when the price was $10,000 are probably looking pretty good even today. Right? And so there’s some people who put these positions on and leave them for a long time, hope to catch a wave, price doubling that gives them a lot of insulation where they can put a stop-loss, which is still in the money somewhere in the market.

Adam Back (00:33:20):
So I think in terms of how this works going forward, I think that it’s educational, like in a painful way, obviously for many people. But they won’t do that again. Right? Or they’ll start more cautiously if they are using leverage, they’ll use less of it or they’ll put stop losses, or paradoxically maybe they will make high leverage bets, but smaller ones that they can afford to liquidate. I mean, if you put on a 10 X and it falls 10%, it’s gone, right? It’s liquidated. So at least then… I think professional traders in let’s say Forex, leverage products Forex trading, things like that. They’re going to look at the news flow, make predictions, hope to be right maybe 60% of the time, and make small bets. Right? Lots of them.

Adam Back (00:34:10):
And so I think one of the mistakes is that people made large bets that became larger than they anticipated because there’s quadratic effect, which people don’t think about because when there are small movements, it’s more linear. It’s getting more quadratic as you get further down or further up. So yeah, I think that there are people who stepped in to buy coins, certainly when the market hit 31,000, the around about there. I happened to be looking at the market when that was going on and it was insane. The price was jumping one or 2,000 every few seconds, just jumping around as people were getting liquidated and other people were buying. So I think there’s going to be some coin transfer, every sale has a matching buyer and some of those buyers won’t be as leveraged or won’t be leveraged, or will be start better or become better at managing risk and having stop-losses and smaller position sizes and things like that.

Preston Pysh (00:35:11):
So Plan B, my question for you is just when you’re looking at the on-chain data, what kind of indicators are you seeing right now, as far as where we might be heading moving forward? What we just saw, give us a snapshot of how you’re reading the data right now.

Plan B (00:35:31):
Sure. To go one step back to your previous question about derivatives markets didn’t change the price, I honestly don’t think it did change that much in the price dynamics. Because if I look at for example April 2013, the price in the 2013 bull run hit $140, $140 at that time. And then four months later in July, 2013, it hit at the lowest points, 63. 140 to 63. So it went down more than 50%. So we also had that in the early days, those big price jumps and maybe derivatives markets exaggerated and increased those swings, I don’t know. Just looking at the data, it looks like the same thing, so nothing abnormal there. If I look at the on-chain, the on-chain data is very interesting at the moment, and there’s lots of people doing it, like Clement, Willy Woo and the Glassnode guys.

Plan B (00:36:46):
It’s really a growing space, and that’s very interesting. What I see is two things, basically. First of all, we don’t see a lot of volume, a lot of transactions that are normally there at the end of the bull market, like the 2017 and 2013 bull market. And without being specific about what kind of transactions those are, but just picture the volume. Some volume of transactions is just not at that level. We’re about halfway. So that gives me an indication that we’re not in the upper part of the bull market yet, more like half way. And then if we look at the coins that are spent on-chain and of course we know the complete UTXO that is there to be analyzed for us.

Plan B (00:37:53):
So we know every UTXO when it was created, what the price was at the moment, et cetera, et cetera. So you know how much is sold or bought, especially sold with a loss and how much you sold at a profit. And this month was the first month in quite some time that the net effect of all the UTXOs that were sold is a loss, a big loss. That was not present in 2017. There were no loss months in 2017, but there was a big loss month in 2013. So the plateau and the jump from 140 to 64 that I just described in that same period, a lot of UTXOs were sold at a loss on-chain. So that leads me to the conclusion that either, we are half way like 2013.

Plan B (00:38:57):
And the biggest jump is still to come because in 2013 it jumped all the way from 62 to 1,000, right? Or even 1,100 even? Or this was it, this was the bull run. We’re now entering more months of selling at a loss. And that will be the end of Stock-To-Flow model for one, but then we will have to wait till another bull market, which probably would be there, but after the next half thing. But I guess you know which scenario I prefer, I don’t believe at all that 60,000 was the top, and that this was the bull market, because I think we’re in a 2013 kind of scenario and the best is yet to come.

Adam Back (00:39:52):
I wonder if the asymmetry of buying power is part of it, because the market is generally very net long and people don’t like to be net short Bitcoin. The sort of buying power left on platforms is that there’s not that much reserve dollars to buy coins and buying coins using leverage is itself risky. And people who are interested in Bitcoin tend to end up very exposed. They don’t have cash reserves because they’d sooner re-dominate in Bitcoin. So you don’t have that kind of market maker value investor phenomena, where there are, let’s say mutual funds and so on that are looking at analyst reports and buying unvalued stocks that they think have long-term value.

Adam Back (00:40:54):
So you do have some new parts of that, which is the institutional investors coming in. And you would expect them to be less phased, the more long-term looking to be accumulating at this point, but that remains to be seen, I guess. And otherwise I just think that generally some people use leverage to buy lower down so that the leverage hasn’t gone away, right? It’s just shrunk. So probably some of that bought the 30,000, 35,000 range on level leverage or something. So I assume that now that some of that risk is being moved from the system and coins transferred hamster, things will gradually get more solid and pullbacks less rare, as they’re more rare.

Plan B (00:41:52):
Yeah, I completely agree with that. If we look at the last couple of months, it was basically Elon Musk and Tesla buying Bitcoin, and then a lot of people copied that behavior. They also thought, well, if Elon is doing it and Tesla is doing it, then well, we go in as well. And then Elon quit and did the energy FUD thing and he quit. And then those people stepped off the train again. So I guess the whole reason to buy Bitcoin because Elon Musk did it, or that was some sign that other companies would buy and follow Tesla as well. That story came up and went down, we left it behind us. And now I totally agree with you that the army of holders that held through this event, again, this energy FUD Tesla event and held through so much more of these events, they will be the strong base of the next leg up because they don’t sell.

Plan B (00:43:01):
They don’t even like yourself don’t count in dollars anymore. They want to have more Bitcoins. So they make use of this dip like a real value investor, and they say, “Thank you very much Elon Musk and Elon Musk copycats, we’re here for a long run and not for a quick buck in a one or two months.” So yeah, Bitcoin for sure is stronger now than it was four months ago.

Adam Back (00:43:28):
Elon apparently didn’t necessarily sell the coins or at least the ones that are on the balance sheet of Tesla, I guess, right? Because public market company, he commented himself. But I’m not sure the institutional buying is… People form opinions based on little snippets of news and the media likes to amplify negative news or make up or recycle it. And there’s a lot of confusion, like the assumptions that people make about news are wrong and for example, the mining thing that we talked about last time that the hash rate was down a large amount and it wasn’t. They were looking at the effective extrapolate there. And that, that would hurt miners outside China and actually help them.

Adam Back (00:44:23):
And so, the inferences are very confused and wrong, so if people trade them that’s giving value to people who understand the market structure better. And I think that negative news sells. So news organizations will recycle old information that isn’t even new or… China is a good one for it because of the language barrier. Sometimes people mistranslate things or amplify things. And then there’s nobody really stepping up to explain what really happened. But the institutional buyers, I think they are still there coming because people may be not familiar with how long it takes these entities to get to a position.

Adam Back (00:45:06):
And they go through lots of tax planning, legal planning, and get external advice from auditors and regulatory lawyers and figure out how best to hold it. And maybe that involves board approvals for public market company. And in the case of MicroStrategy, right, he went to quite elaborate lengths to protect the company from adverse reactions by offering a share buyback for anybody who didn’t like the strategy. So all those things take months and months, maybe six months or a year to set up. And if you recall going back a while ago, MicroStrategy organized institutional buyers going to private conferences or something, and there were hundreds and hundreds of company participants.

Adam Back (00:46:01):
So we’ll see, I mean, certainly companies can tend not to have weekends too but they’re at least operated on a five-year time horizon plus. And the other thing that was kind of surprising about time horizons is, if you would buy stock market, just stocks like stock index or individual stocks in sectors, any financial advisor would tell you, well, don’t buy that if you need the cash for three years plus, right? You should expect to hold it because the market has cycles. It can be volatile. It does well in the long-term, but in a short-term it may go down, that kind of advice that people give out and yet it’s Bitcoin and they’re selling barely a month after they bought it. So I don’t know what they were thinking really. I mean, in the Bitcoin space, it’s similar to the stock situation in having cycles, but just much a higher sharpe ratio and a volatility to go with it.

Adam Back (00:47:14):
So if you adapt for that, divide the sharpe ratio by 10, volatility by 10, it’s something very similar, right? So I don’t see… People should catch up and learn that it just takes a while to adapt to this kind of volatility and understand that actually is something that is storing value for you over the longterm. Right? I guess it seems counterintuitive.

Plan B (00:47:38):
I can confirm the institutional buying behavior, by the way, it takes ages before you get past compliance and accounting and legal, et cetera. And then for sure, when they did the whole process and they made the strategic decision to acquire an exposure, they they will do it. So they will not be influenced by news or something else FUD or whatever. They just made the decision and execute the decision. And that will take probably also days or at least weeks to acquire say billion dollar chunk of Bitcoin without moving the price. And that, by the way is also a very interesting fact that if, for example, MicroStrategy bought, what is it two billion? And he was very detailed, Michael Saylor, about how he did it.

Plan B (00:48:33):
He acquired that position without moving the price very much, and it can be done, right? By buying very small parts over a long period of time so you don’t influence the price. The price action that we saw last months and especially this month, the down action was always into the illiquid hours of the market. So it was deliberately destructive. It was not sold by someone who wanted the most dollars for his Bitcoin. It was sold at illiquid times in the markets, with far too big of a chunks to get a good price. So it was destructive selling, and that is very interesting for me.

Plan B (00:49:22):
And actually, if you to look at the price charts, for example, the daily chart for the last couple of months, you see that all this destructive selling, all this selling which by the way, took place at the end of each month strangely. All that selling was bought within one or two weeks. So it was like a V-shaped recovery within two weeks. And that also is for me a bit of a hallmark of institutional selling that they scare people out of their positions, even liquidate-

Preston Pysh (00:50:02):
Institutional selling or buying?

Plan B (00:50:04):
Buying, sorry. Yeah, buying. Buying. Because they together with their OTC desks scare retail and normal people out of their positions, even liquidate people out of their positions and then buy the scraps in the weeks after it. And that is especially effective if you sell and push the price down in illiquid hours and then buy the stuff at liquid hours in small chunks. And that is basically what I’m seeing since January. So last five months. And that’s very bullish in my eyes. So I wouldn’t be surprised if this leg down in May, would be brought up in June again. And especially since it’s now the beginning of the month again, which is a pattern that has been present for five months already. Very interesting. Maybe random, but yeah.

Preston Pysh (00:51:07):
Are they going to do that strategy? Would they have to do it when they’re buying, would they have to buy in the derivatives market long in order to offset the selling that they’re having to do in the underlying?

Plan B (00:51:18):
No. No, no. They just buy spot, but small amounts, like Michael Saylor explained. So a lot of-

Preston Pysh (00:51:26):
Okay, I’m with you now. So they’re leveraging the lack of liquidity to drive the price lower in that short term, and then they’re trying to scoop up in the morning hours in New York or whatever?

Plan B (00:51:37):
Right. Right.

Preston Pysh (00:51:37):
I got you.

Plan B (00:51:38):
And they combine the pushing down of price with big orders and illiquid times, they combine it with FUD. So new stories that the mainstream media will talk about the day after. And this is not conspiracy. I’ve seen it with my own eyes, whenever a large party buys something or wants to buy something, does a whole playbook of how they’re going to buy it, how they’re going to acquire that exposure. And it goes with a communication plan. So the FUD, if you buy something, you want to buy it cheap, so you want to have FUD in the market when you buy it.

Plan B (00:52:17):
And that’s I think nothing secret, or I saw a lot of people talk about this especially the last couple of weeks people from the same, they recognize it. I mean, Goldman Sachs, Morgan Stanley everybody is doing this. That’s why you buy those banks, right? That’s what they do. They create FUD and they acquire the position for you. And I guess the Bitcoin OTC desks are very professional ex-investment bankers that know the play.

Preston Pysh (00:52:52):
Adam, I want to ask you about some of the information about China mining and how a lot of it’s migrating here to North America. What kind of inside info do you have on some of the mining rigs leaving China? I know the China news story that came out was absolutely recycled FUD, but is there anything that is happening over there that’s suggesting that the Chinese are putting a kibosh on a lot of this stuff?

Adam Back (00:53:24):
I mean, it’s happened multiple times before, so it’s always difficult to take it seriously because we’ll have the China bans Bitcoin, or China bans mining, or China bans, I don’t know, exchange trading or something. And I think maybe some of it is context related. So people look at it from the point of view of the regulatory environment they’re used to living in, and they think, well, if our regulator said that we would have to do something, take it seriously. But in China, the sort of regulations are handled differently. So effectively, you need permissions to do many things but you can’t get the permissions. So everything is kind of in a gray zone. And then they make announcements to soft tune what’s happening on the ground. So if they think that something is getting too big, that they’ve seen a shrink, they’ll say something negative.

Adam Back (00:54:26):
So generally speaking things just flow around it like water, like they will… So it’s definitely a bit of news about people trying to look for hosting in power outside of China. I recall in a previous version of this a few years ago, the story was that some miners had secured power in Russia and driven equipment and trucks over the Russian border and set up shop over the border. But it seems like nevertheless a lot of hashrate continues in China. So I wouldn’t be surprised if that plays out this time. Some may relocate, and generally there has been a bit of a trend towards North America and Europe for the last few years without much fanfare, just because I guess institutional investors doing mining are a bit more savvy about geopolitical risks, so they will say okay, but $0.70 per kilowatt hour but under what conditions, right?

Adam Back (00:55:29):
Are you using air filtration? What’s the electrical safety like? What’s the chances that the mine will catch fire? And what’s the political overhang? Is there a chance that the local or national regulator could change the power price without noise or ask you to leave? And ask you to stop mining jurisdictions. So those sort of more sophisticated investors look at the non-pure price factor, right? So they look at the quality and the political risk. And so that I think drove… organically meant that hashrate grew faster outside of China. So that’s changed the balance of it. And there just seems to be people looking to move equipment, but I don’t know how much spare capacity is just kicking around.

Adam Back (00:56:16):
Somebody says they want tens of per hash of… or hundreds even extra hash of miners to move. People are building just in time because it’s capital intensive. So it can’t move that quickly. It takes time to build infrastructure and they would be talking about moving it within a few months. So I guess between the lines, it won’t actually moved instantly. We’ll certainly get a view on it, right? If you look at the hashrate and if it goes down and stays down, that’s because people can either mine it or move it, relocate it fast enough. So we’ll see how it plays out.

Plan B (00:56:57):
It doesn’t matter. I mean, I guess they look the point because people hear this and they sound alarming, but I mean, ultimately, Bitcoin doesn’t care, sounds callous, but it really doesn’t. Difficulty will go down. Money will become more profitable for people outside of the jurisdiction that’s affected. And there was already a shortage of minus, so if some of it sold, that alleviates some of that shortage because it’s difficult to buy used equipment because you don’t know how it’s being treated, right? If it’s been air filtered or over heated, overclocked, et cetera. So that’s tricky.

Preston Pysh (00:57:36):
Speaking of another topic that I don’t think Bitcoin cares, let’s talk about the energy discussion because I mean, this is getting a lot of attention in the media. I’m just curious to hear both of your thoughts on it and kind of where you stand.

Adam Back (00:57:56):
Well, I mean, I think there is… People are not so familiar with the energy sector in general, but the total amount of power in the world that is consumed by Bitcoin is quite small, and Bitcoin miners tend to want cheaper power. And so that tends to be renewable just because there’s no extraction, refining, and transport costs for the fossil fuels that are the alternative. And the other thing that really favors that green or renewable energy for mining is that it’s very location independent. So for general power infrastructure, it’s going to be around population centers, around heavy industries, and Bitcoin can be anywhere, right? So that’s probably how it ended up being in these remote areas of China. Because due to the efficiencies of central planning, they massively built out hydro dams where there are no humans and no industry.

Adam Back (00:59:03):
And so they were just sitting there with the water pouring downstream, right? Because you can’t just generate electricity and not use it. You have to send it somewhere else. They were just underused massively. And people are engaging in extremely bad data science when they throw out metrics. They’ll take the amount of hashrate that they estimate is from the country using crude methods and then they’ll multiply it by that whole country’s average source of energy, even though it’s predominantly green because it’s cheaper and unused. So they’ll just throw out bad data. Another interesting data point, which we know firsthand is in the Quebec province of Canada, we have a data center in Montreal, in the Quebec province. There’s 37 gigawatts of hydropower, most of which is unused.

Adam Back (00:59:59):
And so, that one province in one country could fully power the Bitcoin network, that’s a multiple of the entire Bitcoin network. So just a bit of context, another thing about power is there’s an enormous amount of wastage. So power that doesn’t end up getting used, power stations take a time like a delay to power up and power down in response to demand. The access is just people are paid negative energy rates to get rid of the excess power because they can’t balance it fast enough. So in aggregate, it’s a very inefficient thing and improving over time as people get more renewables and nuclear actually power infrastructure online.

Adam Back (01:00:44):
So I generally view that Bitcoin is actually a net positive for development of green infrastructure, because it gives a steady base load that can be turned off on demand, which is excellent for funding infrastructure projects, because they have to make it… I mean people have a political will, it’s a hazy green power in a world, but you have to convert that into finance, right? Somebody has to come up with billions of dollars to build new dams and so on, and those are done using project financing. And the project financing wants a business case to say, “Well, okay, we’ll finance this billion dollar dam, but how are you going to pay it back?” And if the way they’re going to pay it back is heavy industry and there’s no industry and there’s no population there, they’re going to say no.

Adam Back (01:01:32):
But if you have a long-term contract for Bitcoin mining, and that can supplement or subsidize the infrastructure. And then the industrial and residential demand is variable. Now you get a heat wave and the power use goes up. This is what happened in Texas earlier this year, they had rolling blackouts because I guess there was a heat wave and everybody turned up their air conditioners and overloaded the grid. And so, if you saw more Bitcoin-funded grid infrastructure in Texas, residential prices are usually much higher than Bitcoin prices. So people would turn off some percentage of the Bitcoin mining and there’d be no power blackouts.

Adam Back (01:02:18):
So I think that’s the future. The other thing is that in my opinion, civilization has followed a long arc of becoming… It’s basically driven by energy, right? So I think the future ultimately will involve more infrastructure. There’s kind of a metric called the Kardashev type one metric, which is some kind of civilization metric, which we haven’t reached yet, which is extracting a decent proportion of the energy that lands on the planet via solar radiation and other sources. And there’s an enormous amount of untouched, even just not built, but even use of existing as Quebec Province case shows.

Adam Back (01:03:10):
And actually the Quebec province is an interesting one because there is an interest from miners to mine in that province, but politics got in the way. So actually, sometimes politicians become active in proposing a positive social agenda, but often they get in the way, they’re grit in the gears and they prevent industry from solving problems. And this is one of them, right? So suddenly we as a company, were intending to expand in that region, but ended not being able to, because the politicians kind of… It was election year and they made a mess of it, basically.

Plan B (01:03:49):
Yeah, well, I’m not an energy expert, but it reminds me very much about the energy FUD that was used against the internet back in the day 20 years ago. There was a lot of energy FUD about the internet and how much coal and carbon dioxide it would use, et cetera. But it’s like today, the people that use that energy FUD are mostly people that don’t understand or don’t see any value in Bitcoin at all. So any energy that is used on Bitcoin it’s too much. And they just don’t see the added value on the other side. And I think that’s where to the biggest problem is.

Plan B (01:04:37):
But the energy FUD currently that it’s used against Bitcoin is a bit dangerous, I think because it very quickly leads into the discussion that we should go from proof of work to proof of stake. And that is a very dangerous, well, attack factor, that’s how I see it because proof of work is essential in Bitcoin. It’s one of the essential ingredients and everybody who understands Bitcoin knows that. But if you don’t… I mean, most people cannot even read the white paper. So those people are very vulnerable for falling for this FUD. And also, the altcoin FUD that there is coins that are green and that use proof of stake instead of proof of work. So the whole proof of work, proof of stake thing is a nasty side effect. I guess we’re not done with the energy FUD discussion because it will be kept alive.

Preston Pysh (01:05:54):
Explain real fast for people from your point of view, why the proof of work versus proof of stake is so important.

Plan B (01:06:02):
Yeah, I’ll do that very quickly because Adam Back can do this 10 times better than I of course. But me as a ordinary investor and I’m not a programmer nor a cryptographer, I understand that Bitcoin, the peer-to-peer network needs something to make sure that every peer to peer decentralized node like my own node, knows which block it can add to the database because we have a synchronized database peer-to-peer. But everybody can shoot in blocks and transactions. But how do I know that it’s a right block without a central party, like a bank or a server or some company like with Ethereum or Ripple? How do I know that the block that I got FUD is okay, and I can add it to my blockchain and that’s the proof of work, the hash that is valid and also has a correct number of leading zeros.

Plan B (01:07:07):
And proof of stake doesn’t have that. You cannot validate the block and add the block to your blockchain just by getting the block. You have to have additional information from validator nodes or, well, some kind of server that the biggest stakeholders, proof of stake, that tell you, “Okay, this one is correct and this one is not.” So yeah, that’s how I see. I see it as an essential part of Bitcoin and without it, I couldn’t build my blockchain peer-to-peer.

Adam Back (01:07:41):
Yeah. I mean, I think in some ways I find the argument to be more economic than technical. Which is, it may be a fundamental need for hard money to have a cost of production. Things which don’t have a cost of production end up being politically sought after. And then, resources are expended carrying political favor. So basically, the Cantillon effect, bribery, corruption, wars, and lobbying. So all of those things can consume resources too, but in an ugly unproductive way. So if a Bitcoin is valued at 30,000, 50,000, whatever the value is, then people can economically spend up to that marginal value in chasing, receiving an additional coins.

Adam Back (01:08:45):
So they will spend it on equipment and power infrastructure and electricity. And if it were just handed out to a federation, I’m going to think of the proof of stake as basically a federation, just a group of businesses or something, which is an okay structure, but you don’t really need a stake. I think stake makes it worse because then it’s vulnerable to somebody amassing more money and gaining more influence and control over the allocation of new money that enters the system.

Adam Back (01:09:23):
So it ends up looking similar to the current system. Either the fiat system with central banks and quantitative easing, all this kind of stuff. And I think that’s how you end up with these very unpredictable supply curves for various coins. So I think monetary economists will tend to view predictability as an important factor. Like the supply curve is very predictable, in the case of gold it’s reactive to price. People will ramp up production if the price is high, and Bitcoin that doesn’t happen because of difficulty adjustment.

Adam Back (01:10:05):
So yeah, I think it’s fundamental. And the other thing is it doesn’t… Incrementally, it costs less because coins were mined faster at the beginning when the price was low. And that factor is continuing due to the stock-to-flow ratio. The number of new coins per halving is shrinking. So ultimately, when most of the coins are in circulation, it wouldn’t have cost a very big portion of the value to extract them. And I think, curiously people don’t demand gold production costs very much, but that’s a very industrial process in itself.

Adam Back (01:10:56):
And yet is the value of having hard money is very useful. And the other thing is I think that Bitcoin is a savings technology, it has pushed people towards paying more attention to saving who would otherwise be inclined to spend. Many people are very consumerist, right? They spend plus or minus everything they receive. They spend, or they take credit and then they spend. And so some societies are heavier on saving or they’ll save 90% of their income. Others they spend 90% of their income. And so Bitcoin tends to push people more towards savings because they can in a much stronger sense than with compound investing in bonds or stock markets, they can see that the saving will have a high value later in this time preference overview.

Plan B (01:11:45):
And so the argument there is if money comes from somewhere, so the money spent on buying Bitcoin and indirectly on Bitcoin mining, in the alternative would have gone in buying consumer goods that don’t last very long and end up in landfills. And so, the industrial production cost of all those goods that filled up landfills and now to the extent that Bitcoin is make-up part of the world’s economy, the world has become less throw away consumerists and filling up landfill. And many consumer goods are made from petrochemicals plastics and industrial processes and so on. So I think for that reason also, Bitcoin is probably already a net positive just from that factor.

Preston Pysh (01:12:36):
Adam, I’ve tried to make the argument that when you look at the lightning network, it’s automatically providing a proof of stake type system, but where it’s a little bit different is anybody can run a full node and you don’t have to actually stake coins in order to provide a node into that network of the consensus that’s happening on the lightning network. That’s where it’s a little bit different then call it Etherium’s proof of stake kind of model. So you get the added energy benefits or the reduction of energy expense in order to confirm transactions between individuals that really don’t need the level of security that you have on the layer one, but you’re getting it at a significant reduction in energy.

Preston Pysh (01:13:31):
And I think when we would warp ourselves 10, 15, 20 years into the future, and you look at where most of your transactions are going to be occurring, I would suspect a significant portion of the transactions are going to be actually conducted on the lightning network and not on-chain. Only a large substantial transactions would be on-chain. So are we effectively getting proof-of-stake in a way that it doesn’t come with the setbacks that are associated with proof-of-stake by having the Lightning Network?

Adam Back (01:14:05):
Well, I mean, certainly Bitcoin layer twos, they don’t produce coins, right? They are just layer twos. I saw that somebody from, I think it was PayPal commented the difference between in the Elon’s thread, they came out and said, well, the current chief architect at PayPal or something said, “Well at PayPal, we know the difference between some miners networks and payment networks.” So I think you could make that argument for Bitcoin. The different layers are not resulting in new coins being created. I think another confusion because the media likes to sensationalize is the cost per transaction, which is actually close to zero in effect like an empty block, okay, the miners don’t get the transaction fees, but most of the value is actually the freshly mined coins and people have a choice of layer twos.

Adam Back (01:15:16):
So if they are paying for layer one transactions, it’s because they find them sufficiently valuable, right? They want to do cold storage, or they want to do a transaction, which is harder to sensor. And the Bitcoin main chain has fundamental advantages. So they’re paying for something that they value, but incrementally, if a block is got one more or less transaction there, it doesn’t change the cost of mining it, right? So, at least for the midterm, the idea that it costs so much blocks or kilowatts to do a transaction is not really a usable metric because the blocks will get produced anyway, some portion of them are actually empty for technical reasons.

Adam Back (01:16:07):
And as you were alluding to the layer twos, have a massive multiplying effects. And in a way, there are kind of informal IOU type of transaction systems, i.e the trading insight exchanges, I mean, there are coins changing hands, very rapidly at massive multiple of what happens on chain and even credit arrangements between exchanges and institutional traders and so on. It means that there are coins moving around that don’t reflect on the chain. So those, you have a trust element, but the layer twos like lightning and liquids improve that to not single trust.

Preston Pysh (01:16:52):
I think that’s where my frustration comes with a lot of the energy articles and the FUD that’s out there is they’re looking at the amount of transactions that are happening on layer one, they’re saying, for this to become a global transaction layer, this is how many transactions would have to happen globally. And when we look at how much that would cost on layer one, the number is this high, which is all the countries on the planet times 10 of their current energy levels. And I’m just like rolling my eyes. And I’m saying, these people have no technical understanding of what’s being built on top of this, which is going to handle that throughput, which is going to be a majority of the transactions. And then when you do look at what will happen on chain and the cost of that, I think it’s going to be not anything near what these projections of these energy articles are saying, because they just don’t understand what’s being constructed from a technical standpoint on top of the layer one.

Adam Back (01:17:58):
Yeah. I’m really smirking over here but the audience won’t be able to see, but the level of understanding is like childlike and just ridiculous. I mean, they’ll make arguments that basically misunderstand supply and demand, or assume that you scale networks by saturating the internet with micro-transactions and no network ever was built like this. I mean, even the Starlink satellite network is not a broadcast network, right? It’s got lots of routing within it, many downlinks, thousands of laser links between satellites. And if you can put it the whole network into a single broadcast, massive wifi hub, it’s transaction throughput… I mean, it’s theater throughput, it’s latency, it’s efficiency in terms of dropping data because too many devices are trying to talk at the same time, would just fail.

Adam Back (01:19:03):
I mean, it would be thousands of times less efficient, just fundamentally so, and it’s not. People will throw out the argument, well, computers get faster each year and all this kind of stuff, but the speed of light doesn’t get faster each year. And at no point, does it make sense to throw money away. So, people are using more bandwidth every year too, for high fidelity video streaming, real-time interactive things. So demand for bandwidth and storage is insatiable. So at any point, switch networks will win, and I don’t understand why anybody with any kind of basic understanding of how things work would imagine that Bitcoin should be different. I mean, it’s just shocking how people get such strong opinions about very basic facts about networks, like any networks, internet, like Starlink, GSM networks, radio networks, they all have layers and routing.

Preston Pysh (01:20:04):
Do you think that the adoption or the incentive structure for lightning adoption will go up when the price of Bitcoin gets a lot higher and your person who’s trying to have a small coffee size level transaction just has no incentive whatsoever to settle that on-chain because of the cost of the fees that would be associated with it, which would force them down into lightning. So like I had a conversation with Will Reeves over at Fold and I’m just looking at what he’s doing. So he has all these people, various levels of payments in Bitcoin rewards. And I’m thinking, if he’s trying to send all those out via on chain layer one transactions, the fees associated with that are tremendous. They’re huge. And as a person who has rewards with him, if I could take those rewards over lightning, I absolutely would because A, I could do it immediately.

Preston Pysh (01:21:12):
And two, he wouldn’t assess any type of fee to me in order to receive those rewards. And so in the back of my mind, I’m thinking, it seems like the incentive structure isn’t necessarily there yet, but give it another three or four years, the incentive structure, the build-out lightning for a lot of these payment vendors and people that are providing these types of services where people have maybe not a significant amount, but they have a small amount and they don’t want to be dealing with fees all the time. It’s going to force feed the further lightning adoption. Is that how you see it or am I way off basis here?

Adam Back (01:21:50):
No, I mean, I think like other networks, you end up with different protocols for different applications. So like the internet you have, voiceover IP, video streaming, web, and so on, and they’re optimized for different use cases and certainly for retailer micro-payment lightning is just better. I mean, it’s making a trade off, so it’s not as good for security, hot wallet risk, but for other factors like speed up finalities it’s almost instant. The fee structure scalability is much better. And we’re seeing a bit of that with liquid as well, which is a kind of side chain type of layer two. So it doesn’t involve channels, but in same way as lightning, you can move funds in and out of it. People use technology for what they want to use it for, despite the thought processes of the people who build it.

Adam Back (01:22:48):
And we were certainly thinking that liquid will be interesting for traders because it offers advantages down, but organically, we’re seeing a lot of people use it for just medium-sized payments because it’s cheaper and faster and has confidentiality. So, I don’t think it’s done as well. I mean, I think there will be more layer twos and the technology will improve over time, there are more being developed, the so-called state chain, there are people working on that nowadays.

Preston Pysh (01:23:16):
Adam, I’ve never used lightning. I’m kind of curious if I have… I think you guys have a wallet called liquid, is that? I’m sorry. What’s the wallet, Aqua? You have a wallet called Aqua that I know you can put liquid assets on. So walk a person through, if I was going to download this app and I wanted to purchase one of these assets, talk us through what that process would be like from a user experience.

Adam Back (01:23:50):
Yeah, I mean, the exchange is in payment processors and simple swap services will let you swap Bitcoin for liquid Bitcoin and liquid has other assets. So it also has US dollar tethers and Euros and different assets. I mean, the user experience is very like Bitcoin. You set up a seed, you use QR codes to send and receive. So it’s very Bitcoin like experience. Plus then you have the transactions that are a bit faster because the blocks are every minute instead of being randomly distributed around a 10-minute mark and two blocks is actually final for some technical reasons.

Adam Back (01:24:37):
Of course it has trade offs, right? As with lightning, censorship resistance is not as good and so I would tell you for cold storage, you should move funds onto the main chain. And it seems like some people are doing that. They’ll do the dollar cost average stacking into liquids and then, once a quarter or once in a while, when they’re built up enough they’ll convert it and put it in cold storage on the main chain, so that’s another use case.

Preston Pysh (01:25:05):
But you have go to an exchange in order to procure these, you’re not doing this on the app, right?

Adam Back (01:25:11):
Well, there’s another wallet called [site swap 01:25:17] swap by a company called [Site Swap inaudible 01:25:19] Limited, and they have for Android and iOS, a smartphone app that lets you swap an app. So you can swap or exchange Bitcoin for liquid Bitcoin and you can swap any direction and you can swap those, tellers for a liquid Bitcoin actually in a trustless way. So it’s a kind of atomic swap. And so that seems to capture a lot of people’s imagination and they’re building up more user originated swaps, where you can sort of place orders in it and be the provider. So at the moment they’re the middleman, but they are trustless way. So that kind of thing is possible too and presents a nicer user experience because you have one app that can do both.

Preston Pysh (01:26:15):
All right. That’s all the questions that I have for you guys. I really appreciate you guys taking time to do this again. I know the last one that we had, we got a lot of incredible feedback from folks really enjoying the conversation. So I appreciate your time. Both of you guys give folks a handoff where they can learn more about you.

Adam Back (01:26:36):
So on Twitter, it’s adam3us and for the Blockstream’s related products it’s @blockstream.

Plan B (01:26:47):
Okay. And I’m on Twitter under planb@100trillionusd. That’s 100 trillion USD. And I have a website it’s All the articles and previous interviews are on there. If you’re interested in it please have a look.

Preston Pysh (01:27:06):
Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week and we’ll catch you the next Wednesday.

Outro (01:27:21):
Thank you for listening to TIP. To access our show notes, courses, or forums, go to This show is for entertainment purposes only. Before making any decisions consult a professional. The show is copyrighted by The Investor’s Podcast Network, written permissions must be granted before syndication or re-forecasting.


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