Vijay Boyapati (01:59):
You need patience and Bitcoin will teach you patience because the gains that are there are there to be had, I think this is the most important innovation to money in 1,000 years and I think there are tremendous gains ahead. But you’re only going to get these gains if you have patients. And I think that the people who’ve seen this as sort of just a trading opportunity have been the ones who’ve missed out on these huge gains in 2011.
Vijay Boyapati (02:23):
You look at people in the early years who got ahold of Bitcoin at a few cents and then sold over a dollar, and they were like, “Oh, wow, that was great. I made five, 10X on my money,” but they missed out on this massive bull run. And what you’ll see is that people who made the biggest gains over that period of time were the ones who had deep conviction in the importance of this technology. And in the early days, it started out as an ideological conviction.
Vijay Boyapati (02:49):
This is something that can change the world, this is something that can make the world freer. And I believe in that and I’m not going to let go of that. So I would say, if you’re going to get into Bitcoin and you believe that you’re doing it for financial gains into the future, you really need to have a lot of patience and conviction.
Preston Pysh (03:09):
I think that it’s so important for a person who doesn’t have the conviction, and I’ve had this conversation with a lot of family members, friends. I tell them, “If you don’t have a lot of conviction, you really need to manage this emotional rollercoaster with your position size and keep it very small upfront.” What are some of your thoughts on that?
Vijay Boyapati (03:27):
Yeah, that’s great advice. And there’s this famous story about an investor who spoke with a very experienced older investor and said, “I’ve got this position, it’s doing really well, but I can’t sleep at night. What do I do?” And I think the older wiser investor’s story goes with J.P. Morgan. I’m not sure I remember the exact story, but I think it was J.P. Morgan. And if that’s correct, J.P. Morgan said, “Sell down to the sleeping point. Sell down to the point at which you can handle it.”
Vijay Boyapati (03:54):
If you can only handle 1% of your portfolio in Bitcoin, that’s fine. There’s nothing wrong with that. I don’t think your position should be zero though, I don’t think that makes any sense. In this day after 10 years and everything, we’ve learned, to have a position of zero in the most important innovation to our financial system to money in a long, long time. But 1% could make sense for a lot of people, and again, it depends on your age, your risk tolerance, and various factors like that. If you’re feeling sick, if you can’t sleep, sell down to where you can sleep.
Preston Pysh (04:25):
I think that’s great advice. When a person looks at this space, I think that their immediate reaction is there’s just so many coins. I think your typical person’s going to log on to Points Market Cap and just look at all the coins that are there and they’re saying, “How do I know Bitcoin versus these thousand other coins that are out there?” Then they’re talking to their friends and one of these thousand other coins out there and there’s a lot of noise in the space.
Preston Pysh (04:55):
So how would you address that for somebody who’s just coming in and looking at that situation?
Vijay Boyapati (05:01):
Great question, and it’s a very natural issue if you come in and you’re not familiar with the space, you haven’t really thought about network effects. You haven’t thought about winner-take-all technologies. You haven’t thought about these issues. You come in and you’re like, “Wow, I could buy the cheap one,” and the cheap one is either, name one of the old coins that are out there.
Vijay Boyapati (05:19):
I think with Bitcoin, I see it as this unique innovation or revolution to money and it’s something that happens once every thousand years by the minting of coins or the development of promissory notes or something like that. And when it came about, Satoshi solved the critical problem in computer science, which is to invent digital scarcity. Before Satoshi’s invention, we all understand the idea of that when you put a picture online, it’s really easy to copy. When you write words online, it’s easy to copy. If someone writes a book, it can get pirated easily, or music can be pirated.
Vijay Boyapati (05:54):
Satoshi figured this out, that you can create something that’s scarce and digital, which is a profound, profound innovation. And then other people came along, they said, “Hey, he solved this problem, I can just copy his solution.” But copying doesn’t give you the same thing. I think that’s a really important idea. All copying does in my mind is illustrating what the original is, where the real innovation is.
Vijay Boyapati (06:17):
And I think of it like the Mona Lisa. There are tens of thousands of copies of the Mona Lisa, but all of these copies just illustrate that there’s only one real Mona Lisa. Or cars for instance, you can copy a Ferrari and make a cheap facsimile of a Ferrari, but there is only one brand Ferrari. Your cheap facsimile isn’t a Ferrari and people are not going to treat it like Ferrari, and Bitcoin is the Ferrari of cryptocurrencies.
Vijay Boyapati (06:41):
There’s only one and I think this is a winner-take-all market. You don’t see that right now because it’s going to take time for the market to figure that out, but I think in time, the market will figure it out, and I think it’ll figure it out as institutional money comes in.
Preston Pysh (06:55):
When you said it’s the Ferrari, what attributes make it the Ferrari?
Vijay Boyapati (07:00):
I think because Bitcoin is a new form of money. Its superiority is not related to its technological attributes. That’s one of the big mistakes that people make when they come into the space is that, “Hey, there’s this new one out there and it has these new bells and whistles.” As a monetary good, Bitcoin competes on its monetary attributes, and it competes against other monetary goods like gold and fiat currencies on the attributes that we know make the good money and we’ve known for thousands of years since the days of Aristotle.
Vijay Boyapati (07:30):
Scarcity, fungibility, portability, verifiability, and Bitcoin excels across all of these attributes. And really, I think the most important of these attributes is scarcity. Is it scarce or is it not scarce? Something that’s abundant doesn’t make good money, so sand is not good money. For instance, you can find the standard of the beach, a superabundant commodity. And this has been known for 100s of years as well, good money is always scarce.
Vijay Boyapati (07:58):
And really what matters is, can I believe in the scarcity of Bitcoin? This is a new digital good that’s being created through the invention of Satoshi Nakamoto. Does the monetary policy of Bitcoin, its finite supply, which we know is that most 21 million Bitcoins doesn’t have credibility. That is the key aspect that I don’t think any other cryptocurrency has or is it even close? They’re not even in the same ballpark. I don’t think they have any credibility.
Preston Pysh (08:25):
And would you say that that’s the case because of the security that Bitcoin offers relative to all the other altcoins, the decentralization, and the security?
Vijay Boyapati (08:35):
It’s a combination of factors, certainly, the decentralization, the balance in which different powers within the Bitcoin ecosystem trade off against each other and no one really controls Bitcoin. There isn’t the same sense that you have in other cryptocurrencies. If we sit back, the vast majority of cryptocurrencies could be turned off by one or two people. They are not decentralized at all.
Vijay Boyapati (08:58):
They’re really no different to someone running a computer on Amazon Web Services that issues tokens. It’s kind of decentralization theater, it’s not real. If you look at the second largest cryptocurrency, Ethereum, its credibility or whether it’s decentralized or not is being completely shattered from the beginning. They had a problem with one of the contracts that was issued on Ethereum, which allowed someone to hack the contract and steal hundreds of millions of dollars and they said, “Hey, let’s just roll this back. Let’s make it so this never happen.”
Vijay Boyapati (09:32):
That’s not something you can do in a truly decentralized system. And if you want to aspire to be a monetary good, you really want to aspire to be something like gold. You imagine that if someone stole some gold from a bank, there is no central authority that can say, “We’re going to wind back that theft and that no longer happen.” Because if that was the case, you would no longer trust gold as something that if you had it, you really had it. There’ll be someone else who could take it from you.
Vijay Boyapati (09:58):
That’s the problem I see with Ethereum. I think it’s sort of theater that it’s decentralized. I think it has a huge problem and it has a founder. That’s another issue. Vitalik Buterin has enormous influence. Whether he says he has no influence or not, he clearly has enormous influence in shaping priorities Ethereum where development happens, decisions that are made in that community.
Vijay Boyapati (10:19):
That’s another thing I think Bitcoin excels at is, it had this immaculate conception. It was invented with this brilliant insight from Satoshi Nakamoto and then he disappeared. And it’s very likely we are never going to know who Satoshi Nakamoto is. He left us with his gift of a new monetary good that can change the world and then he left. Having a founder or a group of founders around is a pressure point.
Vijay Boyapati (10:44):
It’s a point at which states can come along and say, “We didn’t like how this is going, can you change it a little bit? Or could you add in a backdoor that reverses certain payments that we don’t like?” And perhaps in some cases, those kind of illicit payments are bad, but the power that you give a government is a very, very slippery slope. And I think Ethereum is already well down that slippery slope and there’s no way to get back from it.
Preston Pysh (11:09):
It’s interesting that you talk about not being able to roll back a transaction because I think for somebody that’d be entering the space for the very first time and getting interested in it, they’re looking at, somebody stole my credit card and I was able to get the bankroll back the payment and I was able to get my funds back. In that situation, that’s pretty much what any person would want.
Preston Pysh (11:30):
But when you’re talking about Bitcoin and you’re talking about something that’s at the foundational level of measuring all monetary transactions around the globe at a foundational level, I think you’re exactly right where you say it needs to perform just like goal where either you have it or you don’t have it. And if you don’t have it, it’s not like you can reverse that at least at a foundational level.
Preston Pysh (11:54):
Now, when you get into the second, third, whatever layer you want to talk about that would be put on top of this, where we’re talking about transactions; going and buying coffee and whatever unit of account that you’re using in order to conduct that type of purchase, I can see how a person would want something like that, that small level purchase to be rolled back.
Preston Pysh (12:13):
But when you’re talking about something like this and we’re talking about billions of dollars that would be exchanged maybe between central bank someday or whatever it might be, it needs to be finalized, it needs to be complete. I see you nodding your head. I’m assuming that you agree with what I’m saying there. I’m curious if you have any additional points on that.
Vijay Boyapati (12:31):
Yeah. I think what you say is absolutely correct, and I think this stems from modern misunderstanding of money, which is, people primarily associate money with payments and its transactional use, the medium of exchange role of money. Money also has historically a store of value use, people keep their savings in money. And when you think of payments, yeah, there is some utility to be able to roll back transaction if someone’s scamming you. But with savings, you really don’t want people to roll back your savings.
Vijay Boyapati (13:02):
You don’t want people to roll back your savings through inflation or through confiscation, which are the primary ways that nation states have rolled back savings from people. The idea that you can have savings that cannot be debased and that you can transport without anyone’s permission is the pillar of Bitcoin’s value proposition. It’s a great, the best, in my opinion, savings technology that has ever been invented.
Vijay Boyapati (13:28):
So yeah, this is a problem that’s existed since the beginning of Bitcoin where people really focused on the payment and medium of exchange role of money and completely forgot the savings aspect. And I link that to a failure of economics in the last century where the economic profession really got in bed with governments and said what governments wanted, which is, “Yeah, print away. It’s good for everyone.” No, it’s not, it’s terrible. It’s terrible for savers.
Vijay Boyapati (13:57):
And so, the modern economic establishment has focused on the medium of exchange role and they’ve completely ignored and debased the savings aspect of money, which is why modern economists always poo-poo gold. And if you ask them, “Why is gold still so valuable?” They don’t have an explanation. They don’t have a coherent explanation for why gold is valuable. No one’s using it to buy anything. Or why Bitcoin is valuable. Very few people are using Bitcoin to buy anything right now because they don’t understand savings.
Preston Pysh (14:31):
I want to pull on this thread a little bit, because this has been a really popular topic lately, Bitcoin versus gold. And gold did really well at the start at 2020. And then in the last quarter, it has just fallen apart. And coincidentally, the last quarter, Bitcoin has gone on an absolute tear. And so there’s quite a bit of emotion in the community because you find there’s a lot of people that are Bitcoiners that are also gold bugs and I can see some infighting amongst the two. So I’m curious to hear Vijay’s opinion on gold versus Bitcoin.
Vijay Boyapati (15:08):
I have to confess, Preston, that battle, that fight was happening in my own heart. I’m a, half-full gold bug myself and I do own gold and it’s a really nice thing to hold and perhaps it’s part of my Indian heritage, it’s in my DNA that I loved gold. But I definitely recognize Bitcoin’s superiority. And I think one thing that’s interesting is that in the family of global financial assets, Bitcoin and gold are actually… they’re very close cousins. They’re both non sovereign monetary goods that are valued for their monetary properties.
Vijay Boyapati (15:41):
And this is something that I’ve written about on Twitter, despite their similarity, they have very, very different distributions of ownership. You look at the ownership distribution of gold, and I think this is quite ironic, it’s central banks own a very, very large fraction, a large fraction is owned by Indians as jewelry, which is a store of value use of gold like keeping your savings on your neck or as a bracelet on your hands.
Vijay Boyapati (16:06):
And then there is some investment usage, which is dominated by ETFs like GLD and various other funds, which invest in gold. Bitcoin on the other hand, the ownership distribution, it skews much younger and much more technologically savvy. And quite a lot of the Bitcoin out there is still owned by relatively few people. I’d say maybe tens of thousands of people own like 30 or 40% of the supply. And those people are computer scientists, cryptographers, people with an ideological affinity for Bitcoin who Libertarians and so forth.
Vijay Boyapati (16:41):
And they’re all much younger, I’d say the average age is probably in the 30s or something like that. To me, raises a question, as Bitcoin is going through this process of monetization and the total pool of world savings moves into Bitcoin, is this going to affect gold? Are we going to see some of the savings that are in gold drain out and drain into Bitcoin? Especially in this next coming bull market as Bitcoin really gets into geopolitical significance in size, which to me is beyond a trillion in market cap.
Vijay Boyapati (17:09):
And I think that gold’s core source of demand from central banks and from people who use it as a store of wealth and jewelry and various possible wealth is not going to move into Bitcoin in this cycle. I think the other third major source of demand, family offices and rich individuals and so forth, I think you will see some movement from them, so some of the savings will move from family offices for instance, into Bitcoin out of gold because they see Bitcoin as a much better asymmetric bet.
Vijay Boyapati (17:41):
But the core foundation of got gold’s demand I don’t think will change for, I think quite a while. May be subsequent cycles once it really is established that Bitcoin is here to stay permanently. In my mind, that’s something that takes a couple of decades. Sorry to go on a little tangent here, but if you think of the internet. After the internet had been used for about 10 years, which was the early 2000s by my reckoning, people were like, “Okay, this is cool. This might be important.” But they didn’t really understand in the early 2000s how profoundly important that was going to be.
Vijay Boyapati (18:13):
But take another decade and go into 2010, ’11, ’12, thing’s obvious, the internet was transforming the world, and I see the same thing for Bitcoin. It’s a decade old, people are starting to get an inkling, hey, this is important. It might change the financial system. We don’t really understand how, but it’s important. Given another decade, if this thing is still around and I strongly believe it will be, people are going to think this is a permanent institution of the modern world.
Vijay Boyapati (18:38):
That’s when you get massive flows of savings moving into it, nation states and sovereign wealth funds and things like that. That’s when you’re going to see the movement from the big boys.
Preston Pysh (18:48):
Last week on Squawk Box, they had, I don’t remember the gentleman’s name, but I know he was the CIO for fixed income I bet, BlackRock. $7-trillion assets under management organization, which is a number that’s so big, it’s unfathomable for the most part for a centralized organization to have so much capital under management. And his comment on Squawk Box was, “Yeah, this is a thing that could replace gold in your portfolio.”
Preston Pysh (19:18):
I’m curious if you think that maybe this has happening faster, and will that narrative that we’re already seeing playing, we haven’t even hit a new all time high yet and you’re already seeing people at that level. They’re having these conversations on Squawk Box. And It’s the last two weeks that these conversations have been happening, just prevalent on every single hour of programming. So I’m curious, do you think that the news cycle could blow this into a level that maybe we’re not even expecting or that’s way more bullish than we’re expecting?
Vijay Boyapati (19:51):
Yes. And I’m honestly personally surprised that it’s happening as quickly as it is. I thought this cycle might take longer to play out, but I’m getting inbound requests from funds, managing money to speak to their senior partners, to give them an explanation of Bitcoin because there’s internal interest. I thought that this cycle might take a couple more years. There are models out there which say we’re moving exactly according to schedule.
Vijay Boyapati (20:19):
I’ve always been cautious about those kind of things, because I am extremely bullish about Bitcoin in the longterm. I look at the time horizon for what’s the world going to look like for my posterity and my kids, my grandkids. Whatever that kind of time horizon, I’m very, very bullish. But I don’t make strong predictions in the short term because I honestly don’t know. But I am surprised how quickly things are moving and how quickly large and influential investors are getting interested even before we make a new all time high, as you say, which I think is critical because we’ve seen these cycles play out before.
Vijay Boyapati (20:56):
They eerily look like a fractal pattern of increasing magnitude. So we’ve seen this exact pattern happen in 2011 to 2013 and from 2016 to the end of 2017, this exact pattern. Almost superimposed them and they looked very, very eerily similar. So the point I’m trying to make is I don’t believe the real frenzy of interest begins until we make an all-time high. Because when we do make new all time high, that’s when the media gets interested.
Vijay Boyapati (21:28):
And that’s when everyone starts to talk about it and people at these major funds are like, “I might look bad if I’m the last one on this ship. Maybe I should start looking into this thing.” And that’s really accelerated by media interest because you don’t want to be the fool who didn’t get your fund invested in Bitcoin when all your buddies are making 30 or 40% in a year in your returns that like S&P, which is like maybe 5%, maybe it’s a bad year and it’s negative 5%.
Preston Pysh (21:57):
I was having a conversation with Raul Pal and he made that exact point that you just said, which is, now you got all these fund managers that are green-lighted to put this in the portfolio because you have the Paul Tudor Jones, you now have Stan Druckenmiller saying that they’ve got positions in it amongst others.
Vijay Boyapati (22:18):
Ray Dalio as well. He’s got a position, but I think there’s a critical turning point you can see in him that he’s curious. And that’s a very important point when someone goes from being skeptical to curious, and you are seeing that in a lot of prominent fund managers.
Preston Pysh (22:33):
And so, all the fund managers that would be classified underneath of all these literally celebrity level fund managers, you’re going to start to look a little silly if you don’t have some of this in your portfolio. So then it starts compounding on itself that everyone has to have a 1% exposure or whatever the case might be, the talking narrative that runs around Wall Street that we all know runs prevalent. That’s some interesting stuff.
Preston Pysh (22:58):
I’m curious about your framework for valuation. Talk to us through how you think through that.
Vijay Boyapati (23:05):
I’ve been interested in Bitcoin a long time as you mentioned at the start, but it was mostly from interest as an economist, which is, how does this have a price at all? How does it have a market price? And I recently started thinking a little bit more about valuation frameworks and how institutional investors might come and look at this thing. And I wanted to think about what are the valuation frameworks that are out there and be agnostic to which one’s correct, just descriptively say what they are.
Vijay Boyapati (23:33):
And I came up with four main valuation frameworks that I’ve observed over the last nine or 10 years looking at Bitcoin. The first one is the most obvious one that everyone comes with, which is, this is a choreomania, this is a crazy bubble. It has no value, it has no comparative advantage to any monetary good that exists or to the current financial system. And if you were to believe this evaluation framework, you’d assign a long-term target of zero to Bitcoin.
Vijay Boyapati (24:00):
That’s the Peter Schiff, Paul Krugman, Nouriel Roubini valuation framework. They’ve never been able to detach them from that initial skepticism turning into curiosity as it does for people who are a little more open-minded. The second valuation framework is that, hey, yeah, this is cool, this is a new technology. We haven’t seen anything like this, but it really has limited interest. It’s for people who are ideological minded like Libertarians or people who are very technologically savvy, they want to have some savings in a digital good, but it’s not for the average person.
Vijay Boyapati (24:34):
There are still a lot of savings held by those kind of people, like you look at Silicon Valley, is a tremendous amount of savings in Silicon Valley. If you would believe this valuation framework, you’d also believe that Bitcoin is going to be inherently volatile, because it’s still a small basic users, and as funds flow in and out, it’s going to go up and down in price quite a lot.
Vijay Boyapati (24:54):
If you believe this valuation framework, I think you would assign a price target to Bitcoin somewhere between 10,000 and 100,000. It’s interesting, but it’s never going to be geopolitically significant. The third valuation framework is that this is a direct competitor to gold. It is doing the same thing that gold does, but in a much, much better way. And the market is eventually going to recognize that the monetary properties that make gold good for savings, make Bitcoin great for savings.
Vijay Boyapati (25:24):
And if you believe that this valuation framework, and you look at the market capitalization of gold, then you probably assign a price target on Bitcoin somewhere between 300,000, is comparable a bit lower than gold to about a million, which is okay, this is gold, but it’s better than gold. And the final valuation framework, I think is that this is going to be the world’s reserve currency eventually and it’s going to take the role that gold had in the 19th century, which is, it is the dominant means of savings used by nation states around the world and large savers around the world.
Vijay Boyapati (25:56):
It’s the final means of sales between banks, large banks and financial institutions around the world, and everyone will price everything in Bitcoin. You’ll go to the local grocery store and the loaf of bread will be 100 Satoshis. If you were to believe this valuation framework, you would assign a price target to Bitcoin somewhere, I think between 10 million and more than that, up to maybe 100 million.
Vijay Boyapati (26:19):
Because if it becomes the world’s reserve currency, I think it’s going to drain monastery premiums out of all other goods that are being used as a store value. I’ll give you one example. You think about real estate in Vancouver, BC in Canada. There are a lot of people in China who have some level of concern about the government and they want to have savings outside China. And so they buy houses in Vancouver, it’s a place which is welcoming to Chinese capital.
Vijay Boyapati (26:49):
And you have all these houses in Vancouver, which are empty being used as a store of value. If you have something like Bitcoin serves this role and is far superior to owning a house in Vancouver, because you can go anywhere on earth with all your money in your head. You just need to remember your seed words. That’s going to drain the monetary premium amount of things like real estate in Vancouver. It’s going to drain it out of rare art.
Vijay Boyapati (27:12):
You’re not going to use rare artists as your store of value, unless you really value it for the artistic purpose, but for the store value role, that premium is going to be drained out. And there are a lot of different goods like that, which have a store of value premium, and they’re all going to be drained into Bitcoin. So its price level could get really, really high if you believe that framework.
Vijay Boyapati (27:32):
I think we currently somewhere, the dominant narrative is somewhere between two and three. Probably dominant narrative is two, but it’s moving towards three, that is, okay, this could potentially disrupt gold. It’s not just a technology limited to people who are interested in Silicon Valley. This looks like it’s going to disrupt gold. So I think we’re in a kind of transition period and Bitcoin’s market capitalization is a reflection of how that transition is happening, how quickly that transition is happening.
Preston Pysh (28:02):
Earlier, you were talking about fractals and you were talking about the price looking like a near comparison of a fractal from years previous. What do you think is driving that? And what are some more thoughts that you have on that idea?
Vijay Boyapati (28:16):
I think it’s one of the most interesting things I’ve seen as an economist. As an Austrian economist, we believe that price levels are determined by human action and there’s no inherent statistical part in everything is, could change based on how people act and react in the current moment. But what we see here is it looks like it’s part of the social dynamic of monetization that it happens in this kind of S curve in a way where you have these early people who come in and who have conviction that this is important.
Vijay Boyapati (28:48):
And the price starts moving up slowly, and then people get interested in it just because the price is moving up. And then eventually get this feeding frenzy and crescendo where the price explodes. And then you have the last person in who gets in just because they’re trying to make a quick profit, and you run out of those people in a given cycle and it crashes, and then it happens again.
Vijay Boyapati (29:08):
And the thing that I find most fascinating is if you look at a chart of gold from early 1980 up to 2010, it has the exact same pattern as Bitcoin in any one of its hype cycles. So to me, this is an inherent part of the social dynamic of monetization. And it’s interesting also because people criticize Bitcoin for being volatile and having these like booms and bursts, but you can’t go from something being worth zero to being a global reserve asset in a straight line. It’s just not possible.
Vijay Boyapati (29:40):
And it’s interesting as an economist and a student of monetary theory to look at this and say, “Hey, this happens in a pretty regular way. We never would have known this,” because we’ve never seen a good being monetized in real time. Gold was monetized over millennia to thousands of years, but this is the first time in history we get to observe this in real time and we’re learning something. We are learning that monetization happens in a particular way.
Preston Pysh (30:07):
So do you buy into the idea that the four-year having event is the thing that’s driving the initial price surge because there’s less points on the market?
Vijay Boyapati (30:16):
Absolutely. I absolutely do. I think that is the most important, if not the only factor that’s involved here, which is that when you get a hobbing, that the supply of coins that come to market minus the ones who are the natural sellers of Bitcoin. They have to sell it because then they’re marginal producers and they have electricity costs and they have to pay for those electricity costs. When they get Bitcoin, they have to sell it, and when you get to the hobbing that their selling power is hobbed.
Vijay Boyapati (30:43):
But the demand stays about constant and the supply of Bitcoins that come onto the market is slowly siphoned off, the number of tradable Bitcoins is siphoned off in the hands of people who have strong conviction. And once that supply of tradable Bitcoins is siphoned off, the price can only explode higher. And I think that’s what’s happening right now, you’re having accumulation of the tradable Bitcoins really dropping the supply a lot. I think below 20,000, there’s no more than a few tens of thousands of Bitcoins available to be bought.
Vijay Boyapati (31:13):
So if you think about Michael Saylor picking up 38,000 Bitcoins, I don’t think any of the big buyers, the sharks who are in the water have the chance to pick up anywhere near that without massive slippage in the market, which is pushing the price much higher. The window of opportunity to accumulate has essentially gone and we’re now getting close to the parabolic based to the bull market, where when you make a big purchase of Bitcoin, you’re going to dramatically move the price up.
Preston Pysh (31:41):
Recently we’ve seen an enormous amount of Bitcoins being pulled off exchanges. And what’s so ironic about this is if you go back to the 2017 bull market when it ran up to 20,000, this recent one, I would classify it as not being as aggressive as the 2017, because we really came from 1,000 up to 20,000. But back then, you still saw a ton of Bitcoins sitting on exchanges as if people were like, “Okay, I’m going to potentially sell this. I might keep holding it. I haven’t really decided what I want to do, but I want to have the flexibility to do it quickly for whatever reason or whatever I come up with, how I want to respond.”
Preston Pysh (32:19):
Right now you have the exact opposite happening. You have people, it just ran up to 20,000. People were pulling their coins off the exchange like crazy. What’s the difference what’s happening?
Vijay Boyapati (32:31):
The coins moving on to exchanges is a measure of weak hands. I don’t want to use that disparagingly, I want to use it more technically as people who own Bitcoins, who’ve seen massive appreciation, those Bitcoins, they’re inherently weak hands because you imagine someone who is in college or was mining Bitcoin in the year 2010, for example, and they have a few thousand Bitcoin. They’ve seen their network go from zero to potentially millions of dollars, life-changing money for them.
Vijay Boyapati (33:00):
And it’s very, very hard to resist the temptation of selling and improving their lifestyle. And so I think what you saw in 2017, when the supply of Bitcoin was really much more concentrated in the hands of a few thousand people, is you saw a lot of those people think, I need to cash in on this. I need my house or I need my Lambo, or whatever it is that they needed. Whereas, what you’re seeing in this run is strong hands. You’re seeing people come in and say, “I believe in this thing now, and I want to get a position, and I’m patient.
Vijay Boyapati (33:32):
I’m not a retail investor, I’m a fund,” or someone like Michael Saylor who comes in and sees this and thinks, this is the best form of savings that’s ever been invented. I’m taking a position. I’m not looking for 20% out of this. I’m looking for like 100X before I even consider selling this thing.
Preston Pysh (33:50):
Hey, tell everyone who Michael Saylor is because you and I know who he is. Anybody that’s on Bitcoin Twitter knows who he is, but there’s a lot of listeners of our show that are traditional value investors, they’re hearing the name, they don’t know who he is.
Vijay Boyapati (34:04):
Thanks for the reminder. Michael Saylor is the CEO of a public company called MicroStrategy, which has been around actually for quite a while, two decades. The company itself isn’t particularly interesting. They do data analytics and they have their niche market and they’re doing well, they’re still around. But he has this history of making unconventional bets. He already had an understanding or affinity of the importance of digital scarcity.
Vijay Boyapati (34:30):
Somewhere in his career he’d bought a domain name that for $50 or something like that, and he eventually sold it for $30 million. And so he had some understanding that you can get value from digital scarcity in the form of domain names. So he was already somewhat primed to understand Bitcoin and his company is sitting on this large pile of cash and he’s thinking, this cash is being inflated away by the Federal Reserve, which is printing record amounts of money. Should I be holding cash?
Vijay Boyapati (35:00):
If I’m not going to hold cash, what am I going to hold? Am I going to hold gold? Am I going to hold other stocks, bonds? What do I do here? And he came across Bitcoin and he really went down the rabbit hole on this and he decided that the best thing to do for his company was to take a large stake in Bitcoin that the company reserves would be in Bitcoin. And he made this decision. I don’t know, maybe a year ago and it took some time for his company to execute on this.
Vijay Boyapati (35:26):
He had to win over the executives in his company and they put on a massive position. They bought, I think at the time, $500 million worth of Bitcoin, all of their treasury reserves and those reserves have since doubled in value. So it’s another opportunity for companies out there if they have companies like Google and Apple, which have massive reserves. If they want to allocate some of them to Bitcoin, that’s going to really move the price a lot as well.
Preston Pysh (35:51):
I think it’s important for you to also highlight that he doubled his money, but it wasn’t in one quarter.
Vijay Boyapati (35:59):
Even before the value of those reserves increased, the value of his stock, just because the stock market thought it was a good bet. And eventually you could imagine that if Bitcoin goes through, bull market is significant as the last one in terms of the multiple that’s assigned to it. His company essentially becomes a Bitcoin holding company, whatever their business is becomes irrelevant and they become a stock ticker for Bitcoin. They could change their stock ticket at BTC or something like that.
Vijay Boyapati (36:27):
And I think other companies… Typically, it’s the smaller companies which are nimble enough, flexible, and often don’t have as much red tape who can make these quick decisions. And in a subsequent cycle, once this gets to the level where nation states will be looking at Bitcoin, the same thing applies. It will be the small nations, which are nimble and I think somewhat unfortunately, it will be the tinpot dictatorships and the autocracies and countries like North Korea will be looking at positions before the Western democracies do.
Vijay Boyapati (36:58):
Because there’s so much bureaucracy, there’s so much dithering. It’s such a difficult process to move a democracy to deciding something like this is important. But unfortunately, the first nations that are going to jump on this bandwagon are going to be the worst nations up there.
Preston Pysh (37:15):
Vijay, talk to us about this idea of psychological process of monetization. What does this mean? This is a term that you’ve coined.
Vijay Boyapati (37:24):
What I call it is the number of touch points. The number of times that you had to have heard about Bitcoin before you become curious about it, or interested enough that you want to allocate some savings to it. And I think it’s part of the psychological process for an individual to get involved and invest. And we know that Bitcoin is being monetized in a series of cycles. And what I think I’ve observed is that each cycle is defined by a cohort of people who are reachable in that cycle.
Vijay Boyapati (37:54):
So the first cycle was the computer scientists and the cryptographers who really understood Bitcoin significance, even in the very earliest days, because they’d be thinking about this problem before for decades. But even amongst that cohort of people, there were some people who were skeptical of Bitcoin and they had to hear about it multiple times before. They were like, “Okay, actually, this is important. This is significant. It doesn’t have any holes, I’m willing to invest.”
Vijay Boyapati (38:18):
And Greg Maxwell is a funny example of someone who wrote to Satoshi and said, “This can’t work.” And he’s now one of the most prominent developers of Bitcoin. The next cycle was people who had that ideological affinity and early investors, Libertarians and people who saw the freedom potential of Bitcoin. And then the next cycle was early adopters and early Hedge Funds and things of that nature.
Vijay Boyapati (38:45):
But the observation I make about this is that some people need to hear about something like Bitcoin multiple times before they pay attention. To me, it was twice and lucky for me, it was twice. I’m usually a pretty slow person with these kind of things, but it was two people I really trusted and they were planting ideas in fertile ground with me. I was a libertarian, I am a libertarian, so I saw the potential of something like this.
Vijay Boyapati (39:12):
But someone like my mom, she’s probably going to have to hear about it from 10 or 15 of her friends saying, “Wow, Bitcoin’s really amazing,” before she thinks, hey, everyone around me is talking about this. And one of the important points about this psychological process is, once Bitcoin gets into the head of an influencer, they have inordinate impact on the cohort of people around them. And one person I like to think of is Russell Okung, who’s NFL football player who got interested in Bitcoin a couple of years ago and he’s constantly tweeting about it.
Vijay Boyapati (39:44):
Constantly tweeting about why Bitcoin’s important and he’s followed by a bunch of other NFL players who are like, “Oh, Russell is talking about, what is this thing? What is this thing?” And then maybe I hear about it from someone else or one of their wife’s friends say something about it. For different people, it’s going to take a different number of touch points before they become interested. And that’s something that I find particularly interesting that some people will pick it up really quickly, and some people, it’ll take a lot of prodding and hearing other people doing well before they become interested.
Vijay Boyapati (40:14):
And some people won’t ever become interested because they have an ideological problem with Bitcoin. People like Paul Krugman, they don’t want to see Bitcoin succeed, so acceptance that maybe it is an important technology and a revolution to money is not something they can affect without attacking their own personal identity.
Preston Pysh (40:32):
Talk to us about your opinions on trading, because I think you have some really valuable thoughts on this.
Vijay Boyapati (40:38):
I really am concerned about people who start trading altcoins. And I worked at a company in the 2016, 17 bull market and I saw… It was a company with a very young average employee age and I saw a lot of people get interested in Bitcoin and then start chasing returns in altcoins. And I have seen this before and seen people lose all of their money, trading altcoins. People didn’t listen to me and it was really sad.
Vijay Boyapati (41:04):
I didn’t like seeing people get hurt coming into this space and seeing what I think is the greatest innovation to money and then losing all of their money because they get sidetracked down this dangerous dark path. I think when you think about trading altcoins, the thing that’s most important to understand is that there’s an opportunity cost to trading them versus just holding Bitcoin. And if you’re going to trade one of these altcoins, ultimately most people who are trading them take their profits and hold them in Bitcoin.
Vijay Boyapati (41:32):
The problem with doing that is when you trade an altcoin successfully and you make profit, that profit is taxable, so you’re already losing if you’re successful 30 or 40% of your gains. And then if you adjusted for risk, the risk of these altcoins is much, much higher. It’s very, very hard to profitably trade, factoring in taxes and adjusting for risk. It’s very hard to outperform Bitcoin. And my rule of thumb is, if you’re training altcoins, you really need to think about it as, I have to be doing five to 10X better than Bitcoin for this to be worth it.
Vijay Boyapati (42:08):
Because this is much riskier and when I take my profits, I’m going to lose a big chunk of them to taxes. And I think probably the people who are trading altcoins of minuscule minority are actually doing that, making five to 10 X. Some of them may be making say, either a 50% more than Bitcoin jumping in and out of positions. That 50% then drops to 20% more than Bitcoin. When you think about it, you’re trading these crazy volatile coins that may disappear, and you’re making 20% more than Bitcoin. That is absolutely insane. You should not be doing that.
Preston Pysh (42:41):
I always tell people that tell me who the buyer is on the other end or tell me who the seller is that’s going to give you the drop that you’re going to then re-buy back in. And of course, there’s no way that you can tell me who that is and you can’t tell me how much money they’ve got too. So when people on this most recent run, particularly Bitcoin, it was running up and I had a couple people reach out to me and say, “I think I’m going to sell right here. I’m going to buy back in after it drops 10 or 20%.”
Preston Pysh (43:07):
And I’m just like, “Who’s this seller that’s going to make the price move down by 10% that you just know is going to be there?” And of course, it’s just total silence. And maybe there’s a buyer that’s going to step in tomorrow and bid the price 7% or whatever it is. And without knowing that or having an appreciation for it, that’s how the big moves take place because you have a whale or a group of people with very large amounts of capital moving that. How in the world can you predict something like that?
Preston Pysh (43:38):
It just blows my mind for people to think that they can trade that or that they think they’re seeing some pattern that I don’t know. It just doesn’t make any type of sense to me, and especially after you account for the capital gains tax, that frictional barrier that’s there, I just can’t wrap my head around that thinking.
Vijay Boyapati (43:57):
I think that’s a really great point and it reminds me of a very famous book in wall street called Reminiscence of a Stock Operator where there’s a famous old investor called old Mr. Partridge in the early 20th century. And he gets a tip from someone who really loves giving and taking tips that a particular stock is going to drop. And old Mr. Partridge thanks him for the tip and smiles and goes on his way.
Vijay Boyapati (44:18):
The next time the person says, “It dropped. Did you sell and buyback your position?” He said, “Absolutely not.” He said, “Why? I gave you a tip and it worked.” And he said, “I would have lost my position, and I need my position when it’s a bull market.” That is what it comes down to, you’re trading in and out, you’re losing a position in something that is going to give you tremendous gains.
Vijay Boyapati (44:39):
Warren Buffett did not make his billions from trading in and out of the stocks. He saw something was valuable, he got a position in it and he held it for a very, very long time. And the world’s most wealthy people all make their money that way. They hold on to something for a very, very long time. It becomes massively valuable.
Preston Pysh (44:58):
Talk to us about PayPal not allowing self custody of Bitcoin. And how does this not lead into a rehypothecation nightmare similar to gold?
Vijay Boyapati (45:09):
It’s a problem. It’s definitely a problem, I’m not going to deny it. I think they’ll be forced by pressure eventually, but I think it’ll come down to education of the people who buy Bitcoins on PayPal. At first, the people who buy Bitcoins on PayPal probably are not particularly savvy, they don’t really understand what they’re buying or what they’re doing. But some of the large buyers on PayPal are going to eventually want to get a clue about what they’re and when it doubles or triples in value.
Vijay Boyapati (45:35):
They’re going to start paying attention and they’ll go down the rabbit hole as well and understand, “This is something that gives me power to be self-sovereign over my savings and I want that power. And I want you, PayPal to let me have that.” And eventually PayPal is going to have this natural lobby of people who they use and they’re saying, “Give this to me or I’m going to Sue you.” And really they are custodying funds for other people, they don’t own those funds.
Vijay Boyapati (46:01):
I see the fact that they’re not letting people withdraw right now is the immaturity of their technology. They’re coming into a space, they don’t really understand how to custody and how to handle withdrawals and deposits and that kind of thing. So they’re taking the most conservative approach, which is fine for them. But in the long-term, they’re going to need to serve their customers interests or their customers are going to move elsewhere.
Preston Pysh (46:24):
How do you see the whole loaning and rehypothecation working in the future?
Vijay Boyapati (46:31):
I didn’t have quite as much of a problem I think as other people in this space about that. I think it’s much harder to run a fractional system on Bitcoin because it’s much easier to reclaim your Bitcoin or ask for a withdrawal. So bank runs when they happen will happen much more quickly. I think if you look at the 19th century, part of what allowed banks to get away with this is, it takes some time. You have to figure out bank may not have the gold, you have to run down to the bank.
Vijay Boyapati (46:56):
We move in a digital world and if you’re running a fractional reserve, and if there’s any hint that you’re doing something dodgy, those funds are coming out immediately, your credibility is shot within an hour. And I think that’s going to keep the fractionalizing well, well in check. So I’m not really concerned about it. I think there’s always going to be this pressure of people wanting to take Bitcoins off exchanges and out of these services to self custody, which is going to keep this in check.
Vijay Boyapati (47:22):
I’m willing to say that it could be wrong about this, but it’s not something I’m concerned about yet.
Preston Pysh (47:27):
Do you think it’s something that could evolve into a company having to show some type of public proof of how much has been rehypothecated? Do you think that becomes like an industry standard?
Vijay Boyapati (47:39):
Yeah, absolutely. I think the standards that are going to be applied to financial institutions when they’re built on honest money is going to be much, much higher affinities now.
Preston Pysh (47:49):
Here’s a question that we got from Twitter. Somebody asked, “How do we defend against Bitcoin being required in FBAR? Tell people what FBAR is and what they’re getting at here with the question.
Vijay Boyapati (47:59):
FBAR is a U.S. regulation that if you have a financial account outside of the U.S. and you have any more than $10,000 in any number of financial accounts outside of the U.S., then you have to disclose all of your accounts. Your account number, the address of the account, the bank name, all of this gets very, very intrusive and it’s particularly scary. Especially if anyone who has dual nationalities. They’re not doing anything wrong, but they like a bank account.
Vijay Boyapati (48:27):
I’m in Australian, I have a bank account in Australia, I’m not doing anything wrong. I’m also an American. It’s very intrusive and it is a concern that this is a path that governments are going to go down, which is requiring people to disclose their holdings. This I see as one potential small scale nation state attack. The largest scale ones are just outright banning Bitcoin and saying, “We need to shut this down. It’s bad for the nation.” A small scale one would be, get people to disclose their private information about their savings.
Vijay Boyapati (48:59):
To me, this question comes down to there’s a race and the race is whether Bitcoin gets a large enough group of motivated lobby of people who are willing to defend it and to lobby for it before nation states see it as a threat and start attacking it. And the example I like to use is Uber, which is Uber goes into marketplaces and disrupts them and it’s almost immediately attacked by an entrenched interest, which is the taxi lobby.
Vijay Boyapati (49:29):
But because of Uber’s speed, it goes in and it has drivers, and it has users who become a natural lobby for it. And Bitcoin has the same thing, is the people who have savings in Bitcoin who are a natural lobby. And what you need in the Western democracies is you need a large enough pool of savings distributed among the population for the population to be a strong enough lobby to prevent the state attacking Bitcoin.
Vijay Boyapati (49:53):
And that’s an open question, whether this race will go one way or the other, I am hopeful and optimistic that Bitcoin is going to spread faster than the enemies of Bitcoin will have to recognize it’s a threat. There’s a slight inkling already that Bitcoin could be a threat to the status quo and to the central banking system. There was an article in the Wall Street Journal a couple of years ago, which said, “The real threat here is not the Bitcoin crashes, but that it actually keeps going up because then central banks lose control of monetary policy.”
Vijay Boyapati (50:25):
And I was like, “That’s right on. That’s a good thing.” But it was that recognition that yeah, if Bitcoin does become a dominant means of savings, it really restricts central banks’ ability to inflate. Because what they’re inflating is the pull of savings in a country. And if that pool of savings flees to Bitcoin, they don’t have control of monetary policy anymore.
Preston Pysh (50:46):
This is a good point for us to get into this. Talk to us about the risks that you see for Bitcoin right now.
Vijay Boyapati (50:53):
In the beginning, I think the first and most important risk was protocol risk, which is, this is a new technology, new monetary good that’s built on cryptography. Is it cryptography, is it computer science that it’s based on, even sound? And that was an open question honestly, for the first three or four years of Bitcoin’s existence. And people were be banging on it, trying to hack the network.
Vijay Boyapati (51:15):
There’s never been a successful hack of Bitcoin, any meaningful hack. So by now, I think there’s pretty much unanimity in the amongst cryptographers that this is sound cryptography and it’s not going to get broken. Another risk is competition, which is other cryptocurrencies, and we’ve covered that already and why, I think that’s not something concerns me.
Vijay Boyapati (51:37):
One of the big risks that we haven’t really talked about happened in 2017, which is, what is the dominant narrative for what Bitcoin is? And in the early days, people were confused, is this a payment technology, or is it a savings technology? And there was kind of a schism in the community about what it was and the network split in two. One split was Bitcoin and another one was something called Bitcoin Cash, where a group of people who were involved in Bitcoin said, “No, we think this is better as a payment technology. It’s a decentralized PayPal versus what Bitcoin is now, which is digital gold.”
Vijay Boyapati (52:14):
And the market really overwhelmingly supported the digital gold narrative and the other split of Bitcoin has almost no market capitalization now relative to Bitcoin. And so that was a very, very important risk to be resolved in Bitcoin’s history, because there’s no longer any contention about what Bitcoin is. It’s very clear that this is digital gold and there’s no longer going to be any contentious forks like that where some chunk of the community say, “No, this should be something else.”
Vijay Boyapati (52:45):
The primary risks that I worry about, we just talked about it, is a nation state attack. And I think that is going to become a dominant issue that people worry about once Bitcoin surpasses gold’s market capitalization. Because central banks always have gold in the side of their vision like, “What’s happening with gold? What’s happening with gold?” Gold’s always been an indicator that they’re doing something wrong.
Vijay Boyapati (53:09):
This is something that Greenspan actually talked about. He would set monetary policy based on gold. If gold’s price went up, he would tighten. If gold’s price went down, he would loosen, or maybe it’s vice versa. I’m not sure. But once Bitcoin reaches gold’s market capitalization, central banks are going to pay attention to it as a barometer of whether they’re doing the right thing with their monetary policy.
Vijay Boyapati (53:30):
And if it gets out of control and Bitcoin starts overtaking the currencies of nation states, I think that’s when you’re going to see concerted nation state attacks. Like I said, we have to see, it’s an open question, whether or not we get a strong enough lobby for Bitcoin to make it unlikely for those state attacks to succeed. And I’m optimistic. We’ve just seen a U.S. Senator, a lady in Wyoming elected to the U.S. Senate who’s a strong proponent of Bitcoin.
Vijay Boyapati (53:58):
And I think that is going to accelerate in the next four years. I think if you look at the 2024 election, you’re going to see a lot of people in Congress who are supportive of Bitcoin.
Preston Pysh (54:09):
Especially when you think about how their future funding for their next election is paid for.
Vijay Boyapati (54:15):
Absolutely. When you have a million people in the U.S. who have seen tremendous gains in their Bitcoin, in your constituency saying, “Don’t attack these, you’re hurting my pocket book if you attack this.” It’s going to have a big impact on the message that the people who get elected to Congress bring to Congress.
Preston Pysh (54:34):
Who are a few people that you closely follow on Twitter like if they deleted their handle, you’d be very upset?
Vijay Boyapati (54:42):
Preston Pysh (54:44):
Vijay Boyapati (54:46):
No, honestly, I do. I follow you closely. Who else? That’s a good question. I have a lot of respect for Saifedean. His book, I think is great, The Bitcoin Standard. Some of the developers out there, I think, fantastic I follow them just because I’m technically interested in Bitcoin. So Peter Woolley, I don’t know if I pronounced that correctly. At the top of my head, Adam Back.
Vijay Boyapati (55:06):
Some of the people who were early on, Nick Szabo, I think I’d be very upset. I think he has incredibly deep insights about money and about Blockchains. And the article I wrote, The Bullshit Case for Bitcoin was in part inspired by his own writing on money. So I’d be pretty sad if he left Twitter as well. There are tons of people to be honest, so these are just coming off the top of my head.
Preston Pysh (55:31):
That’s great. All right. Give people a handoff, Vijay where they can learn more about you. I’m sure after listening to this, they’re going to want to be able to see your posts and just see your writing and all sorts of things. So give me a handoff.
Vijay Boyapati (55:43):
You can find me on Twitter on real_vijay, Twitter. I have my article, which I published about Bitcoin called The Bush Case for Bitcoin, which is on Medium. I’m working on turning it into a small book. I’ve had a number of people ask me to turn it into a book. So hopefully you’ll be able to find that on Amazon relatively soon. And yeah, I think that’s about it.
Preston Pysh (56:05):
We’ll have links in the show notes to all those things if you guys want to check them out. Vijay, thank you for taking the time to come on today. This was such a pleasure to chat with you.
Vijay Boyapati (56:15):
Thanks, Preston. It was really awesome to chat with you too.
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