[00:02:31] Dylan LeClair: And yeah, it’s going to dematerialize a whole lot of stuff. It’s also going to get kind of like scary with the deep fakes and, you know, the fake images and a whole nother rabbit hole itself is like how that’s going to be leveraged with propaganda and like the psyops and so we’re, you know, we got a weird decade ahead of us, exciting, super exciting, but very weird.

[00:02:52] Preston Pysh: You know, it’s so crazy to me. So I’ve been listening to quite a bit of Peter Diamandis. He’s been interviewing a bunch of AI folks and there was a, there was a gentleman, I think his name is Imad. He was on, he’s like a leading expert in, in AI and he was just talking about how much space these models are taking.

[00:03:12] Preston Pysh: So like GPT4, and I might be wrong, but I’m, I’m pretty sure this, this number’s correct, quoting his interview. He said that it was compressed down to 200 gig. Like, you can ask this thing anything. It’s not like referencing some depository where it’s pulling the data from, right? Like it has, after they trained, it has been compressed to just 200 gig.

[00:03:34] Preston Pysh: Like I could store that here on my computer here at my house, and then I can ask it any question, like I can provide any type of input to this compressed 200 gigs, and then it spews out the response to anything and with like high precision accuracy. Like, I just can’t even wrap my head around how profound that is.

[00:03:54] Preston Pysh: Like, it doesn’t even make sense, like, how something like that could even be possible. And, you know, they’re talking about, like, GPT5, and what they’re going to be feeding it, and how, like, the processing and everything that they’re going to be doing to create these models, but the compression of the actual file after it comes out probably won’t be all that much larger.

[00:04:12] Preston Pysh: I mean, it’ll be larger than 200 gig, but probably not a lot larger, like… I don’t know, but I would guess 300, 400 gig on GPT5 and the, the level performance is going to be, it’s not going to be twice as good. It’s going to be like a thousand times better than four. So like, I don’t even know how to like comprehend like what’s taking place right now.

[00:04:34] Dylan LeClair: It’s totally nuts. Totally nuts. I mean, you got to give him a lot of credit. Jeff Booth was coming on here and he was talking about, he was getting, you know, doing the folding paper analogy and you’d fold it 30 times or something and it goes to the moon or the sun or whatever. There was some like exponential analogy he would always give and you know, like the AI stuff and like all of like Moore’s law, it sounds good.

[00:04:57] Dylan LeClair: And you’re like, whoa, that’s really incredible. And then to watch it happen in a year, two years, like every month, it’s like leaps and bounds better. You know, you can submit a picture of a meme and it breaks down to me, like no text, just an image, right? It’s just like, wait, this thing is, I mean, it’s not thinking for itself, but it’s, it, I mean, to us, it appears like it’s thinking for itself. Yeah. Right. So it’s pretty mind blowing. I mean, we’re just long for the ride at this point. There’s no, the genie’s out of the bottle, right? Like we’re not we’re not putting this thing away. For better or worse, we have it here.

[00:05:30] Preston Pysh: Get ready, get ready. Have you been still using it to make charts and to kind of just help yourself analyze large amounts of data?

[00:05:39] Dylan LeClair: Yeah, so my day to day, I’m doing some stuff with UTXO management, kind of a Bitcoin based fund. And so again, like didn’t really know how to code at the turn of the year. And with one of my buddies, Sam Ruhl, we’ve been putting together dashboards pulling from like, you know, five, six, seven APIs, kind of making just like interactive charts and data streams and all this sort of stuff.

[00:05:58] Dylan LeClair: And Sam’s a better coder than myself, but we’re both leaning on it pretty heavily, you know, feeding it documentation and all this other stuff like errors. And, and, you know, we, it’s, it’s not the best thing in the world. I’m sure there’s, there’s a far better coders, but you know, for someone that’s like, again, never had any formal training and just kind of like making it up as I go, it’s, it’s a pretty powerful tool.

[00:06:19] Preston Pysh: It’s unreal. It’s unreal. Hey, where I want to really kind of start off the conversation is in the bond market. We had the, on the previous episode to this, we had a mastermind discussion and had some intense debate over whether treasuries, the whole, the whole bond yield curve, whether it’s going to keep selling off, whether it’s going to start getting bid, to make this even more fascinating, we have the largest amount of calls on TLT, which is the long duration bond ETF that’s out there, 350, 000 call contracts per day right now, which is an all time high.

[00:06:54] Preston Pysh: And we have all time shorts happening on the futures to basically counterbalance this long, all the market makers in order to basically cover their bases are going short on the futures market in order to cover their, their tracks. We have this massive setup, right, that whatever the underlying ends up doing, it’s going to probably be extremely dramatic because you have so much leverage being poured into this.

[00:07:25] Preston Pysh: What are your thoughts? Like, where is this going?

[00:07:28] Dylan LeClair: I mean, for the past two, three years, you know, I, I would say I was in the camp of yourself, Lyn Alden, Luke Gromen, a couple other like very, very verbal bond bears out there. And there’s, there’s many more I, I didn’t just name, but, you know, kind of like a hard money thesis, bonds, fixed income, paper, debt, assets are, are screwed.

[00:07:49] Dylan LeClair: And that was, you know, slam dunk, home run, correct. And I think we’ve seen, in terms of the principal value of long bonds globally. You’ve seen the first, you know, the past two years of price action, the worst bond price action in recorded history, modern and, you know, there’s some like, there’s like a bank of America chart.

[00:08:09] Dylan LeClair: It’s like the worst treasury drawdown since 1770. And you’re like, okay, so ever, you know? And so I think in terms of that, we’ve, we’ve seen the big move. And, you know, there’s a lot of debate about the long end going to five and a half or six or seven, or no, it’s, you know, we’re entering the deflationary phase finally of this Titan cycle and they’re going to get really, really big.

[00:08:29] Dylan LeClair: But I think the interesting thing for me is like, you know, is TLT or is the long bond like a good trade over the next six months or 12 months? Like that’s a topic that you can have a really, really long debate on. But I think regardless of that, like bonds are at best, in my opinion, at best you buy them for a trade and I’m not telling you to buy bonds or, or not.

[00:08:50] Dylan LeClair: Right. That’s everyone else’s decision, but it’s a trade at best, in my opinion, right. Of like the long end. Cause like I will never, even at 5%, right, I have zero interest in lending my money to the U. S. government or any government in fiat denominated terms for 30 years. So if you think about, you know, how the recession comes after a yield curve inversion, right?

[00:09:11] Dylan LeClair: Like a lot of the pain in the stock market and in financial assets and a recession doesn’t come when the yield curve inverts. It comes after the yield curve uninverts after an inversion. Right? And historically that inversion comes, you know, the last, I don’t know, three, four or five cases have been because the front end falls, right.

[00:09:30] Dylan LeClair: The Fed cuts, you know, if you’re looking at, say the two year, which is kind of just a blended average of the next two years of the market’s expectations for rates. Well, it’s because the Fed sees weakness, you start to see real pain, they cut. Well, this cycle has been really interesting because. You know, the Fed’s been holding, they’re holding, the economy, surprisingly, to a lot of us, including myself, has been very robust in fiat nominal terms, right?

[00:09:54] Dylan LeClair: They’re running massive deficits, very robust, consumer is stronger than you’d expect, we haven’t seen that kind of, like, recession in the labor market, it’s starting to crack a bit, or the spending. So front end rates have been high and we’ve actually seen a bear steepener, which is the long end blowing out and rising up to near around the level of the, of the front end.

[00:10:15] Dylan LeClair: There’s some really, really smart people out there that I respect and follow that are very, very bullish on bonds here. And there’s people that I also respect and I think are very, very smart that are like, no way they’re running 8 percent annualized deficits before the recession hits. I don’t really have a strong bias in one way or another, like I’m, I’m not, I don’t think my edge is, you know, going speculating on where our, on where long end rates go over the next three months or six months.

[00:10:41] Dylan LeClair: But I do think that the economy is, is going from, you know, is, is in the deceleration phase for sure. And you know, rates are still five and a half percent where we just, you know, post. probably the second half of 2023 after inflation tailed off a bit in year over year terms, right? The derivative of inflation, you know, prices are still higher than ever, but they heard they’re rising, not as fast as they once were.

[00:11:04] Dylan LeClair: We’re now actually just kind of in the, the tightening phase, right? Cause all of 2022, even when rates were being written were, were rising inflation was still 8%, 9%, 7%. And so that’s monetary policy isn’t tight with inflation at 7 and rates at 5. But in a very indebted economy, the monetary policy is a bit tighter when rates are 5.

[00:11:28] Dylan LeClair: 5 percent for 6, 7, 8, 9, 10, 12 months. And inflation is lower than that. So I think that’s where we are. And so, you know, do long bonds probably give a pretty good trade risk reward, you know, especially, you know, the bond math, like the convexity of the bond and how it trades. Right. I think like a 1 percent move lower in yields versus 1 percent move higher in yields is like a very, very asymmetric bet right now.

[00:11:52] Dylan LeClair: I don’t know the math off the top of my head, but you know, some bond guys could tell you. So like, there’s a lot of reasons why it’s a good trade, right. Or not depending on, on what you think. Right. But I think that the story is still the same, right? The debt to GDP is 120%. There’s no way you get out of this historically, you know, look at every single financial analog in history without a sustained period of inflation higher than interest rates, right?

[00:12:15] Dylan LeClair: So do you want to buy and hold long duration paper in that environment? No, I think that’s unchanged.

[00:12:23] Preston Pysh: You know, what I think is a really important point that you’re making here right now, what you’re really talking about is speculation versus investing. When we look at the size of the money that’s going into this market right now, we’re talking trillions of dollars.

[00:12:37] Preston Pysh: I don’t think you can classify it as investing. I think you got to classify this as speculation. And we’re talking about speculation to the tune of trillions because to the point that you made it, nobody’s buying this to hold it for 30 years. Nobody, absolutely nobody. Because everybody can look at the math on the horizon and say, Oh yeah, like if you’re holding that to maturity, you’re going to get wrecked.

[00:13:02] Preston Pysh: I think everybody that’s buying it long knows that. And so because that if, if you buy into that logic, can you agree with what I just said? That means they’re speculators. That means they’re, they’re rolling the dice. They’re betting on what they think the market psychology is going to be much more so than buying something that they actually think is valuable.

[00:13:25] Preston Pysh: And I think that that’s just really concerning as a society at large, a global society at large, is that this is what fiat has pushed us to, which is. Everybody becomes a speculator. Nobody’s actually buying something because they actually think it’s valuable and that it’s going to provide value to society.

[00:13:46] Preston Pysh: It’s garbage. It’s total garbage. And you are, you are being forced to step into the casino with trillions in buying power. And it’s just very frustrating to kind of see that that’s what this, and you know what, so much of it gets lost because everybody’s just like, oh, you know, maybe I can make my mark because I’m going to be the guy who correctly called the bottom of this bond bear market.

[00:14:11] Preston Pysh: And then I made a bunch of money on the upside for the next year or the next six months until they step in and, and obliterate it from there. So right now it’s super precarious. Because you have so much leverage that’s pouring into this exact moment in time. And I think everybody’s looking at the last 40 years and they’re saying, well, if you get that right, like you make a whole bunch of money as the bid comes back into the market because the government comes to rescue it all.

[00:14:37] Preston Pysh: I just don’t know that that’s necessarily the case this time. Like the government stepping in to rescue it this time, like. I don’t know about you, but I think the top of this 40 year bull market in bonds was COVID. Like, I think that was, I think that, yeah, that was the top. That was it. So like moving forward, what does that look like when the government steps in to quote unquote rescue it?

[00:15:03] Preston Pysh: Because rescuing it means the numbers are getting worse. Right? Because, and I think people that are looking back at like the 1940s to 1980, when, when we were in a 40 year bear market in bonds, literally 40 years of bear market, the difference between that period of time and now is we didn’t have 120 percent debt to GDP, right? Or 8 percent deficit to GDP. Which is huge.

[00:15:35] Dylan LeClair: And the demographics too.

[00:15:37] Preston Pysh: And the total obliteration of mid cap, small cap businesses that have been all consolidated into the hands of a couple, and you don’t have a naturally occurring, you have a totally synthetic economy at this point. You didn’t have that from 40 to 1980.

[00:15:53] Preston Pysh: So people that are thinking that treasuries get bid through that, I’m not saying that they won’t. What I’m saying is it’s not such a guarantee like we have seen for 80 years that that’s what plays out, right? I’m curious, do you agree, do you think that you could actually see them sell off harder by some announcement that they’re stepping in?

[00:16:16] Preston Pysh: Is that possible?

[00:16:17] Dylan LeClair: I saw, I think maybe you shared it. It was, it was Luke, Luke Gromen saying like head of, you know, and there’s been a bunch of people for the past, you know, 10, 20 years that said, Hey, the Fed’s trapped, the Fed’s trapped, the Fed’s trapped. Which, you know, may or may not have been true at the point, but the trend has gotten worse.

[00:16:34] Dylan LeClair: The outlook has gotten worse repeatedly time and time again with each subsequent intervention. And now it’s, it may, may or may not be true, right? Where you correctly called the BTFP basically an implicit yield curve control for the banks. You’re bailing out the banks and their bond exposure while leaving Main Street hanging.

[00:16:51] Dylan LeClair: But now with the long bond trading where it is. It’s like if yields blow out and you intervene and say, Hey, we’re, we’re printing, maybe there’s a, you know, a knee jerk reaction and stuff. And then the fixed income gets bid, yields fall, but then it’s like, wait, Oh, they’re printing. Like, why would I hold this paper?

[00:17:09] Dylan LeClair: So the environment’s very, very different than it’s been. There’s no question in my mind, the nominal top and the real top in fixed income was COVID, right? You’re never going to see. I mean, even, even if, and I am extremely skeptical and doubtful this happens, but even say we see the 30 year trade back to 1%, which is, in my opinion, is absolutely not happening.

[00:17:31] Dylan LeClair: I agree. I agree. But even in that scenario, you’ve had 30 percent inflation since that point. For you to get back to your all time high purchasing power terms in fixed income, You need to see yields go negative, which like, again, this is a bizarro world that doesn’t exist in a free market. Right? Like the whole reason that anybody besides someone that was mandated to buy fixed income or bonds at 1%, the reason that they would possibly be bullish, the reason people were buying a hundred year Austria debt, right.

[00:18:03] Dylan LeClair: Or negative debt for, you know, German buns was, oh, well, if it goes more negative, I make a boatload of money. And so like, that whole environment is done, right? The 60 40 inverse correlation of bonds and stocks that everyone’s made a bunch of money off of. 2022 was a shock for them because bonds got killed, stocks got killed.

[00:18:24] Dylan LeClair: Now in 2023, bonds are flat. You know, they, they rebounded and then since it’s sold off and stocks have killed it, big tech has killed it, Fang plus NVIDIA and Tesla have killed it. And that’s just started to normalize. But now it’s really interesting because. And I don’t think this is so much of like a directional indicator of like, you know, it’s buy stocks or buy bonds or, or, you know, short, short one or the other right away.

[00:18:48] Dylan LeClair: But if you’re looking at like, like the equity risk premium, ERP difference in expected earnings, expected yield of investing in stocks and bonds, it’s the lowest it’s ever been in recorded history. Right. So, so is that saying that the bonds go up decrease in yield? Or does that mean that stocks are grossly mispriced, right?

[00:19:09] Dylan LeClair: Like the, the basket of tech, really? I mean, it’s just that the top seven equities, the top seven stocks, everything else, the Russell, everything’s been getting, been getting killed. I think there’s like 30 percent of. of companies in the Russell don’t make any money. They’re like cashflow negative, right? So like all of this stuff is completely different than it’s been in the past.

[00:19:29] Dylan LeClair: We don’t have a balanced, you know, a balanced economy here. Like you said, we have this distorted kind of passive zombified equity index environment. Where again, no one’s really conducting like investment calculation. They’re just like, Oh, you know, like, let me just buy QQQ because QQQ has positive momentum.

[00:19:50] Dylan LeClair: And so again, there’s a real, real potential in my opinion for, for pain. You know, whether what, what that looks like if the treasury continues to run 2 trillion deficits. That’s really interesting because I don’t think anybody and no portfolio manager, no, no one that’s invested in the United States in, in anyone’s lifetime has experienced that, but you know, maybe, maybe who has, well, anybody that’s kind of invested or ran money in, in an emerging market where they understand this environment, they understand what happens.

[00:20:20] Dylan LeClair: In an environment where you have just no, just absolutely no fiscal prudence and you’re just, you’re just printing at will, you’re issuing money anywhere and everywhere, you know, a hundred, a hundred billion dollars to Ukraine and Israel or, you know, what, like whatever, I’m not even getting into the political left, right.

[00:20:37] Dylan LeClair: I don’t care about that. It’s more just like, Oh, you know, 2 trillion. And just let it rip. And, you know, I think that should be paused and a cause for concern for anybody that’s managing money, right? It’s like, you know, what’s your benchmark? And that’s in flux, right? Because even the official like inflation numbers, right?

[00:20:57] Dylan LeClair: May or may not actually be an accurate indicator of that. I think there’s a real good case for even equities, right? Instead of like 2021 inflation adjusted terms being maybe not like a generational top, but being a top for a while, right? If you, whether you want to use CPI or some shadow stats or M2 or whatever you want to use, right?

[00:21:17] Dylan LeClair: If you just look at where the S&P 500 traded, right? Like as a basket and you put it and you say, just divide it by CPI to keep it simple. Right? We may just be in for a decade of chop, right? Where like stocks do a decent job of maintaining or kind of quasi maintaining your purchasing power, but it’s not the free lunch up 8 to 10 percent year over year compounded returns that people were used to for the past decade, two decades, four decades in the case of like, you know, the baby boomers. So that’s a real interesting thought too. And I don’t think many people have, have, you know, kind of ran through those ideas.

[00:21:52] Preston Pysh: The thing that I think people are missing with this basis trade that is just insanely levered right now is if the spot does take the prices lower, the bond prices lower and the yields higher, you’re going to have a squeeze of epic proportions that quickly make these numbers that don’t look like they work today from like a fiscal standpoint and just totally amplifies the living hell out of them.

[00:22:21] Preston Pysh: And that’s when things potentially could get really, really crazy. And I’m not saying that that’s my base. I don’t even know what my base case is. I’m just looking at the amount of leverage that’s sitting here right now at this moment in time because I can see the, the rationale for a recession coming, right?

[00:22:38] Preston Pysh: Like we can see the spreads between the 10 and 2. And like if you just look at all the various spreads. It’s kind of suggesting that unemployment’s going to really start to, to take off here in the coming six months. Like all of those metrics, like leading indicator metrics are saying the recession is coming and it’s coming very soon in the, in the coming year, for sure.

[00:22:59] Preston Pysh: Like, I can understand why people might think that that’s what’s about to play out here, but if it doesn’t, because there’s so much leverage at this exact moment, like it could get really hairy really fast. And boy, I just can’t even imagine what that would result in, but no question there. I guess I’m just highlighting.

[00:23:17] Preston Pysh: I think this is really, really important for people to pay attention to this bond yield curve right now. And if they can’t keep the oil prices in check and some other things that are leading and. Indicators of inflation. I think that’s going to be the thing that potentially tips it or maybe causes people to really have to unwind this really hard position that they’re taking right now that we’re going to get a bid into the next 12 months.

[00:23:42] Dylan LeClair: I 100 percent agree. I think I maybe said it on, on your show at the end of last year, at the end of 2022. And I mean, here we are with, with yields having, you know, broken the, the 2022 highs they made. It was a, it was a really interesting stat, you know, just a small sample size two of two, but it’s something I think everyone should ponder.

[00:24:00] Dylan LeClair: And it was the last time this was in 2022, but it’s the last time stocks and bonds drew down. to the magnitude that they did in 2022 of like 20 percent plus each was two separate occasions. And it was 1931 and it was 1969. And in each of those instances, two years following the U. S. defaulted on its debt.

[00:24:20] Dylan LeClair: They broke the gold peg in both cases. So, you know, maybe that’s not a technical default. However, you want to think about it, you know, but FDR seized your gold and Nixon said, we’re not, we’re not honoring the gold, the international gold peg. So, I mean, here we are with fiat currencies, right? We have no gold peg.

[00:24:36] Dylan LeClair: So what is, and with, you know, with 120 percent debt to GDP, whatever it is, maybe it’s, I think it’s a bit higher at the, at the current moment. There’s been 50 instances, 53 instances of, of governments reaching that level ever and all of them except modern day Japan and the US currently have defaulted either implicitly or explicitly explicitly means, you know, they literally didn’t pay it back in the case that, you know, the, the, the debt was in say dollars or another currency or gold or implicitly because basically they inflated it away, hyperinflated or just, you know, a sustained period of financial repression.

[00:25:09] Dylan LeClair: And even like modern day Japan, right? You see what’s happening with the yen, right? Everyone goes, well, Japan’s got away with it for so long. And I say, okay, I’ll look at the yen. So if you think about what’s Japan doing to address their debt, well, they’re doing yield curve control, you know, and they’ve, they’ve gone from a 25 basis point peg in the 10 year to a 50 basis point peg.

[00:25:28] Dylan LeClair: And now they’ve said, well, we’re targeting 1 percent Japan every time the yields and they’ve moved it. Right. But every time that the 10 year goes above that, that peg and you see, you know, the swaps market and a bunch of speculators shorting that debt, challenging, shorting the bonds, shorting the currency, basically speculating attack the central bank.

[00:25:46] Dylan LeClair: They just print more money, right? And then they, on the other side, they sell their yen or they sell their, they sell their dollars to buy the yen. They sell their treasuries and buy yen. And so they’re trying to maintain the play this impossible game and they do have a lot of foreign exchange reserves, but I asked people say like, okay, well, if your analog is modern day, Japan, like if that’s, you’re like, oh, the US can get away with this for so long.

[00:26:08] Dylan LeClair: Like they can, they can do what Japan has done. Don’t worry about it. Well, in that scenario, What’s your dollar versus the yen. If the U. S. is conducting yield curve control, whether implicitly or explicitly, or they’re capping yields somehow, they come out with some word salad facility with the Fed and the Treasury, like, what’s your dollar to the yen, that scenario?

[00:26:30] Dylan LeClair: Like if the, if the U. S. comes out and says, Oh, we’re, we’re capping the 30 year at 5%, or what, like, again, whatever it looks like, who knows? the BTFP on steroids, right? With more complexity to kind of fool the modern day person as to what’s actually unfolding. What do you do like, what as an investment manager?

[00:26:47] Dylan LeClair: And for me, like, I think you see bitcoin react as the dollar’s doing against the yen on steroids, right? And gold too, right? But again, like that, if there’s, we’re in like really unprecedented territory and there’s really, there’s no actual, aside from, you know, an unprecedented productivity boom, which maybe your thesis like is AI does that, right?

[00:27:11] Dylan LeClair: We see just a massive real productivity boom. Sure. I respect your opinions if you think that, but aside from that, there’s, there’s actually no way out other than a sustained period of inflation and basically the central bank. Punishing creditors and savers, and so that’s, that’s where we are and that, you know, that’s completely unchanged.

[00:27:31] Preston Pysh: Two points to what you were just saying. The, the productivity boom because of AI is so laughable to me that when, when I hear people say that, it’s like, okay, so in past when productivity happened, it was because there was humans that were, that were in the loop. What we’re talking about now moving forward is humans not being in the loop and it’s being consolidated into more and more robots and software.

[00:27:55] Preston Pysh: But the other point that you had brought up as, as far as the implicit default in the thirties and in 69, I think for people that, that hear that and they’re like, okay, so we came off the gold standard. We came off the gold standard. So what would that be now? Well, we’re working off of a quote unquote petrodollar system.

[00:28:17] Preston Pysh: What it would look like now is it is a total erosion of that relationship. And so just for people to think about, right, what would that look like? Well I think we’re seeing that right in real time. And we have since COVID happened where a lot of these net producing oil nations are they’re not having it anymore.

[00:28:40] Preston Pysh: They’re not going to save their retained earnings for the physical material that they’re delivering. They’re not going to save that in treasuries when the treasuries are mathematically bound to just keep going, to keep getting debased aggressively debased, just based on the mathematics. Right.

[00:28:57] Dylan LeClair: Yeah, well, I mean, it would probably look like, you know, the U. S. draining its SPR at the fastest rate in history, and, you know, the biggest oil producing nations like Russia and Saudi Arabia and Iran and yada, yada, yada, all attempting to reduce their exposure of treasuries because of the oil crisis. of conflicts abroad. And if we ever saw that happening, it would, it would be really curious.

[00:29:24] Preston Pysh: Time to wake up folks. Time to wake up. Wonder what, wonder what we’re going to use as something that we can all agree upon. That doesn’t require trust that is bound by energy. It’s like, Oh my Lord. Okay. Let’s, we were talking about a gamma squeezes there. Talk to me about the Bitcoin price action this past week.

[00:29:45] Preston Pysh: Cause we. You know, one morning I got up, it was like a 29, 000 in USD terms. And then at some point in that same day, it was at 35, 000 for a 6, 000 move. What is causing this, Dylan? What caused that?

[00:30:01] Dylan LeClair: So, you know, options market is quite the fun one to dive into because there’s all these Greeks and terms, you know, gamma and delta and theta and vega.

[00:30:10] Dylan LeClair: And it’s a bit esoteric, but essentially What happened for most of 2023, especially following the, and this is a bit of an oversimplification, but I think it, it, it holds true is after we saw all of these counterparties blow up in 2022, specifically like the Genesis of the world who were, you were, you know, borrowing and lending and Bitcoin terms and dollar terms and a bunch of different cryptos.

[00:30:34] Dylan LeClair: We saw, you know, and they all blew up. Right. And since, you know, 2023 started, Bitcoin’s gone from like 18, 000 to 30 and for about six months was ranging around and you saw record levels, low levels of realized volatility in Bitcoin and implied volatility in Bitcoin. And for those that aren’t familiar with the difference, realized volatility is just how much the actual price action is moving around.

[00:30:58] Dylan LeClair: And you can just look at price for that. Implied volatility for the S&P 500, that’d be the VIX. Or for bonds, that’d be MOVE, the MOVE index. And for Bitcoin, you can look at something like, there’s a bunch of them. BVIV is one of them. This company named Volmex is doing this. They’re using terabit options.

[00:31:14] Dylan LeClair: There’s also like DVOL and a couple other ones, but essentially that implied volatility and you know, these indexes are only a couple of years old, so we don’t have too much to work with. as the options market’s grown bigger, but implied volatility was near record lows, near all time lows, as Bitcoin is ranging around from 25, 000.

[00:31:33] Dylan LeClair: And so what you saw was because the genesis of the world blew up and there wasn’t really any and again, there’s no way to natively get yield on your Bitcoin. And it always, it always is you know, that you are taking some risk, it’s whether you know, whether it’s hidden or not. But those lending vehicles all blew up.

[00:31:49] Dylan LeClair: So you saw a bunch of counterparties, I think, room the rumors, kind of where some of them were in China. We don’t really know. It’s a little bit opaque. But to get that Bitcoin native yield, and I, it’s honestly technically incorrect to call it yield, but for the sake of the conversation, we’ll call it quote unquote yield, they were selling call, selling call options.

[00:32:09] Dylan LeClair: So Bitcoin’s at 28k. I’m going to sell next month. I’m going to sell a 32, 000 call option. And so as long as, as long as the price of Bitcoin doesn’t go above 32, 000 or, you know, the volatility states low, it goes down. I collect a bit of a fee, a premium. And so I, I get that in Bitcoin terms. And so you saw basically this, this trade just get rolled over, over and over again throughout 2023 of selling calls, selling calls, whenever Bitcoin pumped a bit, sell a call and it, and it almost in a synthetic sort of way.

[00:32:41] Dylan LeClair: And obviously hindsight is 2020, but you see this happen oftentimes with indices or like a, like a Tesla, right. Or even like the mean stocks of the world, a lot of the, you know, massively dramatic volatile moves. Upside or downside are amplified by these dynamics in the options market, gamma squeeze, and so they were selling these options and basically it is different than maybe a traditional just short, short exposure.

[00:33:05] Dylan LeClair: I’m shorting an asset where it’s one to one as price climbs. The pain of this short call trade was amplified with each additional uptick in the Bitcoin market, so they were short, but the short exposure, both because of the price action and the volatility, as volatility spiked, and as price spiked, it like, it compounded their pain.

[00:33:25] Dylan LeClair: So that’s why, you know, price went from 30, 000 to 35, 000 in about three seconds or like five minutes was just because there was this massive short trade out there and so they blew up, right? So it was like picking pennies in front of a steamroller for all of 2023. And, you know, someone out there evidently blew up and Galaxy actually this morning.

[00:33:45] Dylan LeClair: And who knows that when this episode is released next week, if, if we see them get squeezed again, but. It looks like they may have rolled over some of that short exposure and they’re now short up into the, you know, high thirties, 30, 36, 37, 38 short gamma once again. So gamma squeezes can work both ways. I can also, you know, sell putts, right?

[00:34:03] Dylan LeClair: I can sell putts as income and I’m short that option and I can get my face ripped off on the other way. But it’s pretty interesting. It’s a very nascent market. It’s very liquid. The spot market volumes are the lowest they’ve been in a while. And honestly, I think this plays really into like the hodl mindset of just no one selling the coins, right?

[00:34:19] Dylan LeClair: Like across literally every duration, one month, three months, six months, there’s a really cool tool called hodl waves, Unchained Capital showed it. And it’s basically showing how much Bitcoin hasn’t moved since X period. And basically across every single duration you look at. One month, three months, six months, one year, two years, it’s an all time high amount of Bitcoin that hasn’t been moved as a percent of the total supply.

[00:34:41] Dylan LeClair: So the market’s just like super, super tight. No one’s selling, especially after the last two and a half years of madness. If there’s any inflows, you know, there’s spot ETF rumors, all of that, you know, there’s not a whole lot of Bitcoin to go around, you know, especially if there’s forced buyers. So that’s where we get some really aggressive moves and you see, you know, weeks where the NASDAQ and S&P and bonds are down 5 percent and Bitcoin’s up 25, right?

[00:35:06] Dylan LeClair: Like that’s, that breaks a lot of models.

[00:35:09] Preston Pysh: It’s probably one of the only markets where people who have significant positions. They’re looking at the price action over the past year. It’s up, call it a hundred percent this year. And I would argue that a lot of people that have significant position sizes are just yawning.

[00:35:24] Preston Pysh: They’re just like, Oh yeah, this is absolutely nothing. Like this does not even begin to entice me to some, if anything, they, their conviction quadrupled. And I don’t think that that’s normal. That’s not what you would see in any other financial instrument that moves a hundred percent in a year. Like people would be taking some of the win and doing other things and looking for the next trade or whatever.

[00:35:49] Preston Pysh: And you don’t, you do not have that for people that have significant position sizes, or at least the people I talked to that have what I, what I would assume are significant position sizes.

[00:35:59] Dylan LeClair: Nope, not at all. There’s, there’s two really interesting narrative violations that occurred on the back of that, that move last week.

[00:36:06] Dylan LeClair: One is across every single, and I’m not sure, maybe it’s changed. I mean, the price is near the highs now, so I doubt it. But across every single, really every day that bitcoins existed. The, the 69,000 all time high. April, 2021, 64,000, whatever, you know, because the narrative is, oh, Bitcoin’s still down 50%, right?

[00:36:25] Dylan LeClair: Super risky, volatile, yada yada. If you dollar cost averaged every day the same amount, one buck, 10 buck, doesn’t matter, you’d be in the green from every single day. Recorded history. Mm-hmm, at $35,000 Bitcoin. The second narrative violation is at the current trading tick, Bitcoin is down less. So you have an entire, you know, financial complex that’s telling you this thing’s too risky.

[00:36:54] Dylan LeClair: It’s too volatile. It’s untouchable. It’s not an investable asset stick with what, you know, 6040, right? And the 6040 is down 35%. Like Bitcoin, it’s like, okay, it’s too risky. Sure. But it’s down 50 percent from the highs and anybody that’s just been buying the thing and just sitting there is up. Ever. Right?

[00:37:13] Dylan LeClair: So it doesn’t matter when you started, you could have literally FOMO’d in at 60, 000 and just bought a little bit and stayed the course and you’re in the green today. Again, it’s there’s a ton of, there’s volatile.

[00:37:23] Preston Pysh: Dylan, there’s a ton of people that that’s how they do it. They just dollar cost average on the week or by the day or by the month.

[00:37:32] Preston Pysh: And that’s just it. So, yep. And if you don’t believe the math, go do it. And you’re going to be shocked at what you find.

[00:37:40] Dylan LeClair: Yep. And so it’s volatile, right? It’s always been volatile, but like that, and it sounds like a meme when Bitcoin’s, you know, 70 percent from its highs. But the volatility is quite literally your friend.

[00:37:53] Dylan LeClair: And you can do the math. You can, like, again, I’m not telling my baby boomer parents that aren’t in finance what a sharp ratio is ’cause they don’t care. But if you’re in finance, like run the math, do the, you know, look at the sharp ratios, you know, run the, the passive. ’cause like all these 60 40 portfolios are passively indexing as well.

[00:38:10] Dylan LeClair: So if you’re doing that math well do it, do it on a Bitcoin spot index. Right. And so where, yeah, it’s, it’s far too volatile, great, but the long bonds down on 55 percent on no volatility. Right. So what does that tell you about all the preconceived notions of the, you know, the finance industry and Bitcoin?

[00:38:28] Dylan LeClair: And so I think that’s a lot of conversations happened last week in financial advisor circles, you know, that spot ETF hasn’t rolled out. I, you know, who knows, I think it’s probably Q1 of next year at some point, maybe there’s a couple of things on the regulatory front that happened before that you, you posted a good article last week on kind of the, the narrative of like, you know, the terrorist financing and, and all of that, who knows, like how much of a, of a deal they try to make with, with Tether and Binance.

[00:38:56] Dylan LeClair: We have yet to see, and they’ve, they’ve mentioned some of that stuff in previous ETF filings or denials, but. I think it’s quite clear. The only reason, like people, the narrative I saw was pretty funny. They were like, well, yeah, Bitcoiners are capitulating to Wall Street, you know, they’re celebrating the spot ETF.

[00:39:12] Dylan LeClair: And I’m like, no, the capitulation is happening the other way. The Bitcoiners don’t care. Like the, the, the narrative, it’s completely reverse of what you think. And that the capitulation is happening because people are going up to Larry. Larry Fink and BlackRock and investment banks and they’re saying, Hey, like I want this exposure and I want it in my Charles Schwab account.

[00:39:32] Dylan LeClair: I don’t want it on, I don’t want it on like Coinbase or I don’t want it in your private fund. That’s a liquid or whatever. Like I want it just like how I have my other ETFs. And so like that’s the capitulation is happening from Wall Street capitulating in. Right. And they’re the ones that are knocking on Gary’s door, Gary Gensler and saying, we want this thing.

[00:39:49] Dylan LeClair: It’s not the other way around.

[00:39:51] Preston Pysh: One of the, on the idea of the sharp ratio and talking to your parents, here’s a metric that I just find mind blowing. Pick any date in Bitcoin’s history, and then go back four years to measure the performance of that four year period. You can, you can take the top, you can take the low, whatever, wherever you want to cherry pick the number, but then go back four years, look at that performance.

[00:40:14] Preston Pysh: And then assume you held 2 percent of your portfolio in Bitcoin and 98 percent in cash and that portfolio construction of only 2 percent Bitcoin and 98 percent cash will match the S&P 500, the S&P 500 performance over that same period that you select. But you’ll do it with one fourth the volatility, okay, that for people that are trying to understand what the Sharpe ratio is It’s it’s showing you performance So you’re matching performance with only a 2 percent versus a hundred percent in the S&P 500 and you’re getting one fourth of the volatility in your portfolio And you select the four year period.

[00:40:55] Preston Pysh: And the reason why you do four years, because Bitcoin has a four year halving cycle. And I think that that’s probably a great way to kind of understand the cycle theory. Like if you’re talking about like a traditional cycle, or at least the way it used to work in equities, it was every eight years or whatever.

[00:41:12] Preston Pysh: I think that that’s getting smashed like a hammer. But anyway, so that’s just another neat metric. You were talking about dollar cost averaging. I think that’s another one for people to dig up and look at. Willy Woo, on this idea of derivatives and spot price, he was really kind of hammering home this idea that he thinks the price of Bitcoin can be controlled by derivatives.

[00:41:35] Preston Pysh: What is your response? And I saw you guys going back and forth, and I was also involved there a little bit. And Dylan, just for a moment. being open with the audience. You and I agree on this versus Willie, but like, what’s your point of view as you would respond to Willie, who’s saying that he thinks derivatives can kind of wag the tail of the spot price?

[00:41:54] Dylan LeClair: You know, there’s, there’s, I think, a few different camps or like maybe subsectors of like the futures argument. One is it kind of the gold bugs who are saying, well, look, we have this, this hard money asset. And for 20 years, 30 years, like forever, as we’ve been investing in it, it’s been manipulated. Like, and they point to the JP Morgan, you know, guys getting fined and fired and all of that.

[00:42:17] Dylan LeClair: And the settlement’s there. And it’s like, see, we told you they’re manipulating the futures market and putting a lid on the price. And it’s like, well, yeah, because there is no spot gold market. Well, why is that? Because you can’t physically settle gold. Instantaneously. I can’t buy gold on an exchange and withdraw it in 30 seconds.

[00:42:38] Dylan LeClair: And I do that with Bitcoin a few times a week. There’s the, there’s that component, the futures market, whether it’s like for gold, it’s a calendar’s future. Wait, next month, next week, whatever. Where for Bitcoin, there’s a spot market and there’s also a futures market. There’s calendar futures, but more particularly there’s the perpetual future, which never expires and just rolls over.

[00:42:59] Dylan LeClair: And so to break it down, if you had said, well, the futures market is either artificially inflating the price or suppressing the price, there’s a few things to consider. One for every long, there’s a short, right? Two, there’s a dynamic financing rate or funding rate as it’s technically called in this market that references the spot market price.

[00:43:20] Dylan LeClair: So say spot bitcoins trading at 35,000. If the futures market’s trading at 34,000, there’s an, there’s an interest rate that the people on the long side of the trade are getting paid to buy it. So if you buy this contract and hold it, you’re receiving every eight hours and interest rate. And that interest rate is calculated based on where the price is relative to the spot market for the spot reference rate.

[00:43:43] Dylan LeClair: So what does that mean? Well, essentially you’re getting, if the price is too high compared to spot market or too low. You’re getting the, the longs are directly paying the shorts. So the shorts are directly paying long. Any derivative dislocation you see in bull markets, it often happens to the upside.

[00:44:00] Dylan LeClair: There’s a ton of speculators. Everybody’s going long. They’re using Bitcoin as collateral dollars as collateral. There’s a frenzy. It’s a mania. And that often resolves in dramatic deleveraging events versus, you know, say like December of 2022. It was the opposite. And the spot market price and the price on CME futures.

[00:44:21] Dylan LeClair: Actually under the, the, the futures market was under the price of the spot market. So you were actually paying to go short Bitcoin, you, the shorts were paying the longs, and all of those, all of those people got blown out to the water. The notion that Willy says that you can, you know, suppress this price on a long timeframe is, in my opinion, wrong.

[00:44:40] Dylan LeClair: The one thing that to consider is this goes out the window if there’s an exchange. That’s operating. That’s not operating fairly, right? And in that case, the solvency of the exchange or the, the legitimacy of that exchange is in question. It’s not, it’s not a matter of. If the futures market itself is suppressing the price, so like with SBF, right?

[00:45:02] Dylan LeClair: They’re like, well, you know, look at like what happened with Sam. It’s like, well, yeah, he was leveraging his solvency to cap this thing, right? It wasn’t the futures market itself that was acting as the mechanism because that’s very much self correcting. I don’t know if that made sense or not, but that’s my, my two cents.

[00:45:18] Preston Pysh: Because at a certain point, there are exchanges that are allowing people to withdraw Bitcoin because they’re operating ethically. And it just becomes so obvious because we can audit on chain data that if there was a really bad actor, let’s say backed up by a sovereign entity, that was allowing them to manipulate it through derivatives that it would eventually manifest itself because there’d be so much coin consolidation of people that are acting in the rest of the global economy network that it would become obvious that, Oh my God, there’s 95 percent of the coins haven’t moved in the last year.

[00:45:58] Preston Pysh: Like how in the world is this price doing this kind of situation? And I think it would point to the exchange that would have been manipulated. And then it really gets the cascading event that would, that would materialize out of that would be quite phenomenal to watch. And I’m not saying that’s what I think’s happening.

[00:46:14] Preston Pysh: I’m just saying, I think that that’s on a long tail. If that was the scenario playing out, I think it would still manifest itself as a free and open market that would demonstrate the truth.

[00:46:26] Dylan LeClair: I think there’s, there’s also another important point and like a lot of people, I think, you know, if you’re not following these markets closely, don’t, don’t realize this, like there isn’t a Bitcoin price, there’s a hundred Bitcoin prices on a hundred different exchanges.

[00:46:38] Dylan LeClair: And honestly, some are bigger than the others, but it’s a, let’s say on FTX 2.0, right there, there’s someone out there that’s maybe backed up by government or, you know, just a whale or someone in big bank that wants to suppress this thing and not let it rip. Well, you’re going to see that, right? You’re going to see that on FTX 2. 0, the price of Bitcoin is 34, 000, while on Binance and BitMEX and Coinbase and XYZ exchange, the price of 500, like you’re going to see the discrepancy, whether that’s the futures market or the spot market, and there’s going to be a flow of coins, you know, whether it’s withdrawing from one exchange to the other, right?

[00:47:20] Dylan LeClair: You’re going to see that. Be armed away. And so at a certain point, the person that’s trying to suppress this thing, right? Like you can get away with a good trade, but if I’m sitting here and the price just keeps, just keeps bidding up and every single time I’m short, I’m selling, I’m selling, I’m selling.

[00:47:36] Dylan LeClair: Well, it’s like, I mean, you’re, you’re trying to suppress a beach ball underwater at some point. you’re going to get blown out of the water. Like no one has infinite, infinite Bitcoin denominated capital, right? So that you’re going to get checked. You’re going to get called on your short position. Or if again, if the exchange is operating in such a manner, the exchange solvency is going to get called into question.

[00:47:57] Dylan LeClair: So that’s where I disagree. And you know, the futures market and the spot market are very much intertwined. But on a net basis futures, right? Like if I buy a spot, I never, I never have to sell it. Like I’ll probably sell some spot at some point. Right. But I buy spot, I send my Bitcoin to my cold wallet, cold storage.

[00:48:13] Dylan LeClair: If I enter a long position or if I enter a short position at some point in the future, I have to close it. I can never just log off and never like, there’s always a net negative or net zero effect. Net negative if you account fees, again, this is where I think it’s, it’s a nuanced debate or conversation, but it, because of the instantaneous settlement of it, because of the fund of flows, because I can buy and settle immediately, it’s quite different than, let’s say a gold futures market.

[00:48:43] Preston Pysh: Very much so. I completely agree with you. Let’s talk about BitVM.

[00:48:48] Dylan LeClair: Yeah, quite exciting stuff. I’m not going to pretend to understand that the intricacies of it all, but essentially what was it earlier, like two, three weeks back, this guy, Robin Linus publishes a white paper. I’m in Amsterdam for the Bitcoin conference that’s happening later this week.

[00:49:07] Dylan LeClair: And this guy publishes a paper and it’s basically like, you know, here’s a proof of concept. We figured out how to do compute off chain with a virtual machine and verify it on chain with a fraud proof. Essentially, it’s not, again, this isn’t a great technical way to correct technical way to say it, but in the same way, lightning has a system of channels where it can verify that, hey, if Preston says, you know, he sent me 100, 000 Satoshis and he didn’t.

[00:49:35] Dylan LeClair: And he tries to cheat me. I can take your funds, right? Like I can, I, there’s a fraud proof there that if you, if you’re lying, I can manually force that channel close and, and, and make sure you’re not a cheater. That’s what keeps people honest in lightning. It’s a similar sort of dynamic in BitVM where there’s off chain computation, and by computation, I mean, if you think about a lot of the stuff that these altcoins say they do, right, smart contracts and referencing an oracle price and then derivatives and swaps and all this other stuff, and not that the exciting thing here isn’t to create the altcoin complex on a Bitcoin channel or a Bitcoin denominated system.

[00:50:13] Dylan LeClair: The real exciting thing here is that the value prop per se of the Ethereums of the world was, there was all of this functionality that Bitcoin couldn’t do. Bitcoin’s just a boring rock, right? You can only send and receive. And Robin basically figured out how to, with just, with just simple taproot implementation and, you know, simple proof of concept, but they’ve been iterating on more and more complex designs and versions of this.

[00:50:39] Dylan LeClair: Adding and layering a bit more complexity. And actually I spoke to Robin for a couple hours in Amsterdam and went to a bit devs literally the day after it was released. And there’s like three or four core developers there. And it’s like a hyper technical convo. And he spoke about, they’re working on creating basically their own version of like their own coding language, essentially like a solidity, like an Ethereum style solidity where they created like a solidity was actually created for the theory and virtual machine.

[00:51:06] Dylan LeClair: Right. And all of that compute goes on chain. Well, Robin and the guys that are working on BitVM realize that you don’t have to, the, the innovation of this is you don’t do the compute, you don’t do all the verification and the computation on chain. You do it off chain on a virtual machine and then peg it back in to the chain.

[00:51:25] Dylan LeClair: So all of the, the side chain stuff and swaps and stable coins and all of this stuff that people have been talking about as a theory and pegged assets. That wasn’t ever possible with Bitcoin. And now there’s, you know, it’s still a proof of concept, but we now have the ability to do this sort of thing and verify it into the Bitcoin channel.

[00:51:45] Dylan LeClair: So I think probably the TLDR is that the value prop for basically the entire altcoin complex. Is, you know, it hasn’t been realized yet, but gets destroyed because you can’t scale everything on chain, right? That was like the essence of the fork wars, if you remember, obviously, and I wasn’t around, but I, I read the history of it.

[00:52:04] Dylan LeClair: I was like, Oh, we need to infinitely scale the block size to accommodate for all this global finance. And the Bitcoiners and user activated software said, no, we’re not infinitely scaling it. And so Bcash was created and Bitcoin SV and all this stupid stuff where they scaled up the block size by a crazy amount.

[00:52:22] Dylan LeClair: And then you have, say, like with Ethereum, right, where you’re doing all this complex computation on chain, right? And it’s cool. It’s innovative. I completely, I understand it, right? But every, if you look at every time, even just the NFTs or meme coins or Shiba Inu. get launched on Ethereum, what happens? Gas fees spike to the moon, meaning gas, meaning the computation to settle that contract on Ethereum because there’s so much demand for this block space, right?

[00:52:51] Dylan LeClair: So what emerged? Well, all of these layer twos, right? Optimism and Arbitrum and, and all these other alt coins, right? That were basically forks of Ethereum. Binance Chain and avalanche and in a rate, like there’s a, there’s a million of them.

[00:53:07] Preston Pysh: And to reduce the fee, it was become more centralized, right? To, to reduce the fee, it was… we have to become even more centralized than Ethereum to be able to do that, but keep going.

[00:53:18] Dylan LeClair: Essentially right. And the Solanas of the world were all a little bit different implementations, right? But it was essentially, we’re going to, we’re going to take this further centralized. We’re going to expand the block space.

[00:53:27] Dylan LeClair: We’re going to consolidate the node, the node running. And this spectrum of like centralization or scalability kind of gets blended where it’s, you know, they all claim to be decentralized. They’re all not right. Like, I don’t know anybody that’s running a Solana node. Right. And you can say like, it’s important or not.

[00:53:43] Dylan LeClair: People have these debates of like how much decentralization is needed. But the entire point is that these things can’t scale infinitely. Right? And so they kept coming into this question of like, how do we scale the thing? Compute on chain? How do we scale it? And so all of these layer twos on Ethereum, they peg in, they all have their own token, right?

[00:54:01] Dylan LeClair: And they, all of the, the, the contracts themselves and the Aave’s of the world, they all have their own token, right? And so kind of like, it all dissolves down into like, like the tokenization web three thing. And it’s like, it’s an entire mess. And I don’t even encourage people to go in the weeds and follow all this stuff because it’s all just like seedy mindless, whatever, but the essence of the debate is.

[00:54:23] Dylan LeClair: Okay, well, we all have to do this on chain to verify, to verify, right, on chain, and we all, you know, of course, because of the incentives, the monetary and economic incentives, they all need their own token, and the beautiful simplicity of BitVM, which again, I should reiterate, like, hasn’t been, not even close to fully realized yet, But essentially they’re like, Oh wait, we can do trillions of terabytes worth of computation off chain and Boolean logic and logic gates and yada, yada, yada technical stuff.

[00:54:54] Dylan LeClair: And then we can boil it all down into one Bitcoin transaction.

[00:55:00] Preston Pysh: Here’s what I find so brilliant about this solution is when you push the processing off chain and to, into the localized hands of the two parties, the frequency of computation is now at their discretion, as opposed to a constant update that has to happen on chain.

[00:55:18] Preston Pysh: So like, let’s say you and I enter into a contract and we don’t even need to check that contract for a year based on the terms and conditions of the contract between the two of us. We are locally processing that off chain to make sure that the contract is upheld. Do I need to run that every five seconds?

[00:55:38] Preston Pysh: Do I need to run that every day? No, I’d need to run it like once we’re getting close to the year or at that moment in the future when the terms and conditions of the contract specify that there needs to be some adjudication of the contract. So think about the energy reduction. Think about the efficiency of this.

[00:55:58] Preston Pysh: Because we don’t have to do that on chain. We just need to validate it on chain after, like, we come to the terms that there’s been some type of event that exercises the contract. And if we understand the frequency of that, like, this is so much more intelligent of a way to do smart contracting that people were talking about for years.

[00:56:20] Preston Pysh: We just didn’t know how to do it. And I said that this BitVM thing is almost like they found silicon in the blocks. Because now you’re able to do assembly, they’re doing the assembly language now in order to do the if then or statements with what they’re writing into the layer ones. And I think that another thing too is like, so how does validation work?

[00:56:43] Preston Pysh: Well, validation works through the debasement of the native token of the quote unquote blockchain of these other, of these other blockchains, right? So you’re paying for that validation, you’re paying for that processing and computation that’s constantly happening through the debasement of the native token.

[00:57:02] Preston Pysh: You don’t have to do any of that with this BitVM solution. I don’t know, I find the whole thing fascinating. Where I’m a little bit at a loss and this really comes to just my lack of technical expertise is, is where this fits relative to like what we’re seeing with the taproot asset protocol that lightning labs just came out with, are they complimentary?

[00:57:24] Preston Pysh: Are they competitive? I just don’t know, but I would imagine they’re complimentary to each other, but I truly don’t know. And if there’s people that are listening to this and you want to put some comments out on Twitter and the, when we post this episode, I would love to read what people think about that.

[00:57:43] Preston Pysh: I’m curious, do you know, Dylan? I’m just assuming that you don’t.

[00:57:47] Dylan LeClair: I, no, I mean, I, I don’t have a very nuanced take there. I think that the really interesting interesting thing is the taproot was rolled out, you know, November timeframe, 2021. And for, for a while, it was like, You know, there was somewhat of a narrative, whether it was trolling or not.

[00:58:03] Dylan LeClair: It was like, oh, this thing was, you know, those stupid worthless, right. It was like, why you didn’t even need that thing. And then Ordinals came out and then like, again, I don’t think speculating on JPEGs is the most interesting thing in the world or, you know, BRC20 tokens, which was literally a JSON file to transfer a synthetic token that was valueless or useless on a blockchain.

[00:58:24] Dylan LeClair: Like that’s not exciting for me. But the cool thing was like where an Ethereum NFT is essentially like an image file linked to a website. Well, like actually with the Ordinal protocol, you’re actually saving it on the blockchain. So is it, is it computationally efficient? No, it’s not. But there’s a bunch of cool people that are saying, Oh, Hey, like we have this immutable decentralized database, essentially ledger.

[00:58:49] Dylan LeClair: Well, what if we put the WikiLeaks files on Bitcoin forever? Right. Like, what if we, what if we do the, and it’s there forever? So like, again, I don’t think that’s like the most interesting thing for this. I think the most, you know, the biggest market in the world is global money, but they were, I think the point I’m getting at is that basically two years after taproot was, was rolled out, we see things that nobody had thought was like, people thought this, this BitVM style implementation.

[00:59:17] Dylan LeClair: Was it was, it was never achievable. And so now once it was launched, you had a whole bunch of people, even like the smartest guys in the world. I saw like on this stuff, core developers, you know, Adam back, right there. They’re like, wait, how does this work? And, you know, I saw Robin the whole time, right?

[00:59:34] Dylan LeClair: Amsterdam were in the back room and people are coming up to him and I’m only following, you know, 50 percent of the convo. And it’s like, wait, how does this work? And you know, eventually like, like literally I was at the bit devs and there’s four core developers at this bit devs. And Robin does an hour presentation explaining the white paper piece by piece.

[00:59:55] Dylan LeClair: Someone raised their hand and goes, wait, so what’s the point of this again? And it was funny to me because I was like, these are like, literally like the giga brains of the world and there, there’s so much complexity, technical jargon here that it’s hard to follow. And so, but the real exciting thing is once people kind of get the basics of it, and they’re, they’re going and doing a hacker house and getting this language built out and documentation and specs.

[01:00:18] Dylan LeClair: I think there’s going to be a Cambrian explosion of innovation and development on this sort of stuff and not, again, not that the exciting thing for me is like, like a unit swap where you just swap valueless tokens and whatever, like, I don’t care about that. It’s more so that Bitcoin itself has extremely strong trustless elements to it.

[01:00:37] Dylan LeClair: Decentralized trustless elements. Like I don’t have to trust my counterparty. You send me Bitcoin. I don’t have to trust you. It’s verified. And so now if we have…

[01:00:46] Preston Pysh: Oh, I was just going to say, this is where AI comes in too, which you’re saying it’s going to be an explosion of growth. It is going to be an explosion of growth because this is effectively assembly language that they’re doing for if and or gates on like blocks.

[01:01:01] Preston Pysh: Like that would take time to build out and to write and to make sure AI, I mean, that’s what it’s primed for is taking this really obscure stuff and just like, you can ask it a couple questions and it’s like banging out stuff so fast. And the implementation can just happen at a pace that is somewhat unimaginable, I think.

[01:01:22] Preston Pysh: Sorry, I interrupted you again, Dylan, I’m sorry.

[01:01:25] Dylan LeClair: No, no, no worries. I think it’s a great point. And so, I don’t think we can imagine what’s going to be built in terms of whether it’s, again, whether it’s, you know, derivative markets, right, or like lending markets, right, and whether that’s exciting to you or not, is the question.

[01:01:39] Dylan LeClair: But also if you think about Bitcoin being integrated with the global financial system and everybody was like, well, you see, like it can never work because the seven transactions per second and it will never scale for a global economy and the block subsidy and Bitcoin is going to be insecure. And like, well, what if we abstract a bunch of this stuff to higher layers that all has, it all takes the trust out of the loop.

[01:02:03] Dylan LeClair: Right. And we can, we can have a trustless verification, whether that’s a lightning implementation and channels. You can just purchase, you know, micropayments or value transfer or, you know, more complex smart contract languages where we can do the things like the integration with, imagine if we have a BitMEX, but instead of a crypto casino, it’s a stock settlement platform with Bitcoin integrated at the base layer.

[01:02:26] Dylan LeClair: Like, again, that sounds super hyper unrealistic. And I’m just kind of throwing out an idea, but all of these things that were previously never able to be built, unless there was a centralized infrastructure at the center of it, can now, in theory, right, with a virtual machine. with, you know, essentially infinite compute can be built, right?

[01:02:46] Dylan LeClair: So what’s going to be built. I have no idea, and that’s the most exciting thing is that someone, we figured out the implementation of it, some really smart people did, but that’s where it’s exciting. And again, I have no idea what comes of it, but there’s going to be a Cavery, an explosion of activity on Bitcoin.

[01:03:03] Dylan LeClair: And I’ve seen personally, just side channels, back channels on Twitter. A lot of the people in the altcoin space that have let, that let, you know, either they were developers or even just speculators or followers, investors, if you want to call them that, that were interested in the weeds of all the technical stuff happening on the altcoins, because again, Bitcoin was this boomer rock that nobody could develop on or do anything with.

[01:03:24] Dylan LeClair: We’re all, are all saying like, oh, wow. This makes me question like a lot of the underlying assumptions I had about Bitcoin and like the quote unquote investment thesis quote unquote of these, these altcoins, et cetera. So I think you’re going to see a massive amount of like mindshare come back to Bitcoin.

[01:03:40] Dylan LeClair: If not, it’s already happened. And especially, you know, as the trillions of dollars of capital come in here, it’s, it’s going to be really, really exciting. I don’t think we can imagine like what is going to be built, right? There’s, you know, when, when lightning came out 28, I mean, it was developed for a while, but post SegWit, it gets rolled out on main net 2018.

[01:03:58] Dylan LeClair: Could you have thought, you know, four years later, five years later that we have like lightning back to stable coins, right? USD synthetic stable coins and derivative markets on Bitcoin, trading futures and all this other stuff like that’s built, right? And some of the trust models aren’t, some of them are, you know, more centralized than others, right?

[01:04:16] Dylan LeClair: Of course, but all of that stuff is coming for sure. And it’s going to be, you know, it’s, it’s going to get faster, better, safer more secure and less centralized, more trustless. So it’s quite exciting.

[01:04:31] Preston Pysh: This is the last one I got for you. So what is something that you’re seeing in this space recently that you think is underreported or not fully appreciated, or that just needs to have a light kind of shined on it?

[01:04:42] Dylan LeClair: It’s a great question. Well, I don’t think I have too much to add about like the ETS and stuff. I think a lot of that stuff’s been covered both on both sides of like, this is hyper bullish or like the downsides of like, Oh, well, it’s not going to get approved for X, Y, and Z until this happens. I don’t think I have too much to add there.

[01:04:59] Dylan LeClair: Here’s something it’s, it’s a little bit niche, but I think it’s, it’s pretty fascinating. Last cycle, you saw a lot of the miners, which again, the mining industry, the Bitcoiners talk about it a bunch, you know, there’s, there’s now kind of an investment landscape around it. There’s like 20 or so public companies.

[01:05:16] Dylan LeClair: I’m not sure at the top of my head, but they basically almost all of them were close to blowing up at the bottom of the cycle. And, you know, I know a bunch of survived, but they’re all levered long their ASICs. ASICs collateral, Bitcoin, Bitcoin collateralized loans, no one hedged. Everyone is doing a huddle model.

[01:05:36] Dylan LeClair: And it was Max Payne scenario. Difficulty and hash rate went up tremendously. Right? Hash rate all time highs, because I think like, What was that? The high, it was like 150 X hash, or 180 x hash. And now, it’s like 400 something. Like, just crazy mind boggling. Versus you know, the price went down 80%. So, it was this Max Payne scenario where they’re, their hash price, my revenue per terra hash got decimated.

[01:05:59] Dylan LeClair: And I think one of the more interesting things out there is the advent of a hash rate derivatives marketplace. So there’s like a couple of companies doing this Luxor is doing it as well as Blockgreen, different models, but Luxor has like quite literally a hash price futures curve. Whereas block green has a, and the age old question is who’s the buyer of a hash rate derivatives contract, because if it, other than it’s maybe a speculator, meaning like, who’s the buyer of, of hash rate and how do you like, like, who’s the natural buyer of future hash rate, especially in a scenario where you continue to expect it to go higher and higher.

[01:06:34] Dylan LeClair: And so, like, you know, the block green model is doing it in a Bitcoin denominated way that every single contract, like it’s, there’s a ton of disclosure, there’s a ton of transparency. You know, I know your balance sheet. I know your power prices. I know your operational efficiency, your previous basic uptime.

[01:06:49] Dylan LeClair: And I can come in and, you know, say we expect difficulty to be X, right? There’s some, there’s some assumption baked in. Well, similar to kind of like a bond market where there’s a credit rating system and a yield excess of the risk free rate. Well, similar to that, there’s on the other end, there’s basically lower and lower discounts to what you would expect that fair value or that, that hash rate production to be so I can buy, I can be a buyer of your future hash, hash rate, a 10 percent discount or a 15 percent discount.

[01:07:19] Dylan LeClair: So this allows for two things. One in a brutal bear market, you can come in and I can, I can, instead of raising debt in a frozen debt market. or selling equity, I can sell future hash rate production in Bitcoin denominator terms to raise liquidity. Or in a euphoric up only bear market where everybody’s rich, everything’s exploding, I can hedge, sell some future hash rate production, get back Bitcoin, and maybe I sell the Bitcoin, maybe I don’t.

[01:07:47] Dylan LeClair: You know, that idea is still very niche, it’s still very small and it’s niche in a small sector. But I know Blockgreen is working with a few companies, I know Luxor’s working really hard, they’ve got a really smart team, And so that’s exciting for me is because one, it’s a Bitcoin denominated futures market, right?

[01:08:03] Dylan LeClair: That’s technically not a futures market. It’s, it’s, it’s more of like an OTC style hedging device. But it’s a Bitcoin, you know, it’s a Bitcoin denominated capital market for a Bitcoin native commodity in the sense of a hash rate settled. So that’s really interesting. It’s very small. I don’t talk about it too much, but it’s something that, you know, I’m keeping my finger on the pulse there.

[01:08:24] Preston Pysh: I love that. And I love the way that you’re describing it as a Bitcoin settled market and just kind of yet another thing that’s out there that slowly creates this situation where Bitcoin is in demand for utility purposes and not just for savings technology purposes and for people that are trying to wrap their head around this if I was just going to simply describe what this hash rate derivative purpose would be if you’re a miner And you’re looking at this fierce competition that’s happening in this space.

[01:08:58] Preston Pysh: It’s protection against that. of being able to kind of smooth that out. If all this competition comes on the market, and it was more than what you were expecting, you can protect yourself against that. Or if, if the hash rate was lower, then you can take advantage of that. So just kind of a real simple way for people to kind of wrap their head around what this, this hash rate derivatives market would mean and who it would mean it to.

[01:09:22] Dylan LeClair: And then like, it can’t be done in like a trustless way, right? Like I can’t, there can’t be a trustless market where I can go in and sell my future hash rate because what if I just don’t deliver, right? What if I just turn off my ASICs and sell it? Like there, there has to be, there is a trick. This isn’t like this decentralized like sort of thing, but I would, I would kind of compare it to like basically a credit market, right?

[01:09:42] Dylan LeClair: Where, where there’s, there’s trusted institutions that are involved in this. It’s a swap. It’s a, there’s, there’s no risk being eliminated. And risk, as you want to call it, of like, maybe just thinking about, you know, volatility of, of the hash rate, right? Like there’s, we don’t know what the future difficulty is.

[01:09:57] Dylan LeClair: There’s a, there’s an assumption baked in. There’s obviously a discount of what, like, Heather MacKenzie perhaps what we’re seeing is there’s a lot of underpinnings stewardship.

[01:10:08] Dylan LeClair: I’m not going to lend to a junk corporation at Fed funds plus 100 bips. I’m going to lend to them at that funds plus 500 or whatever, like the, that junk kind of credit rating scale is. There’s a similar thing happening with, with hash rate production. And then that, you know, that being sold to someone that’s interested in providing liquidity on the other side.

[01:10:27] Dylan LeClair: So it’s like very niche. Right. I expect, but I expect in the next cycle that, you know, hopefully obviously human psychology takes hold, but I think there will, there will at least be another tool for all these mining operations in an extremely cyclical business to hedge risk out because all of them were levered long, you know, their levered long Bitcoin, their, their, their operation at by very definition is, is leveraged long Bitcoin.

[01:10:51] Dylan LeClair: You know, the ASIC collateralized loans a whole, the whole nine yards. And so this is just another tool for them to mitigate some risk. And even in like, say that have incomes, bitcoin’s prices going sideways, you know, who knows, right? Like a lot of these miners will be pretty hurt instead of having to go raise or dilute the stock price.

[01:11:08] Dylan LeClair: Right. I could, in theory, I could just sell some, some future Bitcoin production and raise liquidity there, which is an avenue that hasn’t existed previously.

[01:11:17] Preston Pysh: One of the things I find so fascinating about this whole space. So like when you’re talking about how they’re levered long and how competitive this, this industry is.

[01:11:27] Preston Pysh: All, all I can think is it’s a massive incentive for those rigs to flow into naturally abundant energy source regions, right? Cause if you can get it for two cents per kilowatt, you can just compete all day long. Like you just can, because you have such a huge advantage because you’re tapping into abundant energy.

[01:11:47] Preston Pysh: But if you’re paying levered, like you blow up, all those rigs are just going to flow straight into an area that it just has naturally abundant energy. And. I find that fascinating. I find that to be totally in harmony with what nature actually wants here. And just no point other than I just, I kind of marvel at it. I marvel at all of it.

[01:12:10] Dylan LeClair: It’s a fantastic point. I just marvel at this. It’s not understood, that point of like, you know, you’ll be like, Oh, what’s going to happen in the next halving when their revenues get cut in half? As if it’s like a gotcha and it’s like, well, what’s going to happen is the inefficient commercial miners that are mining on grid energy are going to go under, or they’re going to have to sell and you know, who’s going to be mining is like someone in the middle of the North Dakota Bakken who has free energy because they’re flaring with natural gas or, you know, some, you know, like excess free energy and some, you know, hydro dam that is, has way too much.

[01:12:45] Dylan LeClair: You know, as well as way too much energy and no one to buy it. Like this process of mining and whatever you want to assumptions you want to bake into like what fees are going to be in the future or Bitcoin price. You can do like Bitcoin denominated assumptions or dollar denominated. This is going to be commoditized.

[01:13:03] Dylan LeClair: And the winners aren’t going to be these massive scale, you know, consolidated mining operations. It’s going to be, you know, the, the edge case, hyper efficient miners, you know, like there’s people that are heating saunas and heating spa, spas with ASICs, right? And that heat isn’t going to waste that heat and that energy is actually, you know, the byproduct of that is, is being used to heat things, right? There’s like so many use cases that like nobody has thought of and, and as that difficulty gets cranked higher, the hash rate continues to go up and the block subsidy continues to ratchet lower. That efficiency in aggregate, which is, you know, it’s impossible to measure, like, what’s the average energy input cost for the Bitcoin network?

[01:13:48] Dylan LeClair: We can quantify a lot of things. We can’t quantify that. We can kind of guesstimate it. Well, that’s, that trend is just going to continue of like increased efficiency where I can’t, I can’t make money mining Bitcoin on my laptop. You know, you used to be able to. Well, like that’s a good thing, right? Because this is just increasing the energy efficiency everywhere that it’s leveraged.

[01:14:07] Dylan LeClair: Bitcoin’s not wasting energy on the ERCOT grid. It’s actually, you know, all the green energy stuff, right? Where I’m going to, you know, a bunch of solar panels and, and, you know, wind energy, right? Like that, you can’t have that system without something to balance the load, right? Without something to absorb that excess supply when there is no demand.

[01:14:28] Dylan LeClair: And so, you know, explaining that nuance is obviously one, another thing entirely, but Bitcoin, I guess you would, you could argue AI too, right, of kind of a dynamic load, a dynamic buyer or, you know, demand for that energy that’s, you know, that the commoditization of that is and the convergence of the energy markets is the probably the most fascinating thing.

[01:14:50] Dylan LeClair: One point I’ll add, just kind of going back a bit to the BitVM thing, and this is just kind of a side point, and this is just my personal opinion, but I think it’s quite ironic that seemingly peak ESG, you know, low oil prices, the peak ESG narrative, you can’t really quantify it, but Ethereum, and it’s somewhat kind of uh, not You know, it kind of had a network effect of its own in terms of a smart contract chain, if you want to call it network.

[01:15:18] Dylan LeClair: These terms went from proof of work, right? Which directly tied to that real world energy input into a proof of stake kind of just completely virtual environment, right? Where the very thing that ties Bitcoin, like Bitcoins intangible asset, has an exchange rate. But it’s not intangible, right? Because it takes me 40, 000 to produce Bitcoin.

[01:15:41] Dylan LeClair: If I go mine Bitcoin in my garage and plug it in, or, you know, probably 60, 000 per Bitcoin or whatever that my energy input costs are like, there’s a tangible aspect to that. So it’s not just this like intangible digital asset. That’s synthetic. It like it is. But there’s a marginal energy input cost, like that’s the same reason why like commodities have value and so it’s the first, Bitcoin’s the first thing that like, has a completely inelastic supply relative to demand with an input cost, and that’s like, I mean that’s the, the golden goose in my opinion, that’s like the aha moment of like, oh, crap.

[01:16:15] Dylan LeClair: This thing is like becoming increasingly harder to produce forever. That’s, that’s, you know, the magic aha moment that I don’t think many people have had. And I think it’s a bit ironic that you would purposely kill that, but that’s a different discussion entirely.

[01:16:31] Preston Pysh: I love it. I love it. Yeah. For the person that walks up and says, oh, what’s going to happen when all these miners, well, sir, we’re actually going to have a free and open market and we’re going to find out who deserves them and who doesn’t, you know, and what a, what a beautiful thing to exist in a world where it doesn’t seem like too much of that happens these days.

[01:16:52] Preston Pysh: So that’s why I’m a Bitcoiner. I know that’s why you’re a Bitcoiner. And boy what an exciting time to be alive. Dylan give people a hand off if they want to learn more about you. Thank you for making time and coming on the show. I know I learn a ton from you every time we get a chance to talk and it’s just always such a pleasure. But give people a hand off.

[01:17:12] Dylan LeClair: Yeah, no, I appreciate you having me on. I think it’s our, our third riff together maybe? Yeah, yeah. But yeah, I mean, I’m just on Twitter at @DylanLeClair_, I know so too. I admittedly got to get on there a bit more. I’m doing some stuff with UTXO management these days, among other things, including some stuff with on ramp.

[01:17:30] Dylan LeClair: I know you just talked with Jesse Myers recently have a small part there. They’re doing some cool stuff. And you know that, you know, in the face of all the BlackRock ETS stuff, they, I think, have a pretty novel Bitcoin native solution. So yeah, again, I appreciate you having me on. This is always fun. An hour and a half went by quick.

[01:17:46] Preston Pysh: It did go by quick. And thank you again, Dylan. This was a lot of fun. Cheers.

[01:18:05] Preston Pysh: Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm.

[01:18:20] Preston Pysh: So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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