Preston Pysh (06:11):

I don’t know if you noticed the smirk and the grin on my face when you were talking of about your time in college and just the valuation process, because like you, I just wasn’t satisfied with buying like a mutual fund or an index. I was just like, “Well, there’s these other people out here that are able to buy individual companies and do it in a way that they outperform the market significantly.” And it seems like you had the exact same opinion. So for me, I just started studying Buffett. I’m curious, your approach was to crack that nut of like, “How do I outperform the market by buying individual companies?” So early on. What were you doing?

Mike Alfred (06:50):

I’m very tactile. I had stuff to do things in order to learn, it’s how I learned guitar, I had a few teachers but I quickly would outgrow them. And the same thing happened in markets. I would buy stocks and then read for 10 hours a day about the companies, and then move on to the next industry. I cycled through pretty much every industry. I’ve made money in energy, I’ve made money on internet stocks, I’ve made money in biotech, I’ve made money in traditional technology. Right now, I’m really long consumer staples, grocery stocks, the value guys. So I tend to tilt towards spaces that everybody hates that I assume will come back, like healthcare and grocery stores, which are inevitable. People are not going to stop needing healthcare, it’s one of the best demographic bets of the next 50 years.

Mike Alfred (07:30):

And so if you’re fishing in that space with low multiple stocks, you’ll probably do okay over 10 years. And so a lot of it is just, I went in and I did it. I discovered the SEC website and I realized all the documents were on there, I could read through 10-Qs and I could read through all kinds of updates, I could read the quarterly conference call notes. I was following the RagingBull message boards. Today, we have Reddit, but back then it was RagingBull. And I’ve since befriended the founder of RagingBull. He had a hedge fund for a while that did really well and he’s also an advisor to another hedge fund that I’m an advisor to.

Mike Alfred (08:01):

And so that was it, that was the source of information. I don’t know if you remember this, Preston, but real time quotes in 1999, 2000, it was something you paid for. So if you were trading stocks in the late ’90s, something we take for granted today that everything’s real time, it was 20 minutes delayed. And when you wanted to trade on ETRADE, it was $19.99 each direction, so you had to make 40 bucks on a trade in order to make money because you were going to spend $19.99 on the entry and $19.99 on the exit.

Mike Alfred (08:26):

So, so many things have changed since then, but fundamentally, the game is still the same, find the most undervalued companies that you have an edge and understanding over anyone else in the world, buy them in reasonable size that doesn’t jeopardize your whole portfolio, and then hold am long enough to generate that excess alpha. And I’ve been doing it for 20 years and it surprises me that the opportunity still exists because with all these high frequency traders and all the liquidity that’s active in the market today relative to like the ’99, 2000 tech bubble, it’s just totally different game.

Mike Alfred (08:54):

It’s just a harder game if you’re trying to play short-term games. But if you’re trying to play long-term games, I think it’s actually never been a better time to be an individual company investor, a value investor, because the alpha comes back when everybody decides there’s no alpha on doing that.

Preston Pysh (09:08):

What attracted you to this? Because I think people that would be hearing this from the outside, they’d be like, “Oh, Mike just wants to make a lot of money.” But I don’t think that that’s what it is. You often find people that love this stuff, that are pouring through a 10-K or a 10-Q, they like the complexity, they’re just wired in a certain way, that they’re trying to piece together a puzzle. So, how would you describe it? Why were you attracted to this kind of stuff?

Mike Alfred (09:34):

I think the main thing I realized as I was working as an investor, as a young investor, in training in a sense, is that I had entered the most interesting intellectual game that exists anywhere. It’s multi-level, it’s multi-dimensional, it’s constantly evolving. It’s like the ocean, it’s like the difference between surfing and snowboarding. The conditions change in snowboarding, so it’s kind of interesting. Like sometimes there’s more powder, sometimes there’s less powder, whatever, but in surfing, the entire ocean is moving all the time. Literally, the wave you’re riding didn’t exist in that space before, five minutes before you rode that wave.

Mike Alfred (10:09):

And investing is the same way, everything you think is cyclical. There are cycles in markets, but there are also things that you’ve never seen before. There are things like the mobile phone, there are things like the internet, there are things like Bitcoin that are basically impossible to model. And once I realized it was a game with no balance… Poker’s a solvable game now, no-limit hold ’em has been solved by machines more or less. It’s very hard even for the best players in the world to beat a game theory optimized robot. Chess was obviously solved years ago, Go is more recently solved by Google.

Mike Alfred (10:37):

And so, all of these games, they’re finite, there’s a limit to how many different variations. It might be more than all the atoms in the universe, but there’s still at least some real limit. In investing, it felt like the most limitless intellectual game that I could possibly play. As I dug into it more and more, I said, “This is something I could spend 50 or 75 years on.” And I just haven’t seen anything else in life that looks like that.

Preston Pysh (11:01):

I have the exact same passion and just intellectual curiosity. That’s why I’ve been in the space for all these years, I just find it so exciting to try to understand and piece together the complexity. But the way you just described it helped me understand it in a way that I’d never thought of it like that. I loved how you just described that. So Mike, let’s talk a little bit about your first business. So you’re trying to do this data analytics, you’re standing it up. Talk to us about some of the trials and tribulations, things that you learn that you just have no clue until you start your own company.

Preston Pysh (11:37):

If you’re going back and reassessing yourself, what would you tell yourself right now if you could go back in time?

Mike Alfred (11:43):

Pres, there are so many things on the micro level, but at the macro level, the very, very top end for an entrepreneur starting a business today, the guys at Sequoia, some of the partners there like Bryan Schreier and Alfred Lin, who I’ve spent a little bit of time with, they told me this years ago and it didn’t make sense at the time, because when you’re a young entrepreneur and your nose is just in your own business, you don’t want to hear those big picture ideas because maybe it conflicts with what you’re actually trying to do. But they said, “Look, here at Sequoia, what we focus on first and foremost is the team, of course. But secondly, it’s just the market and the size of that market.”

Mike Alfred (12:17):

Because if you start a business, even if it’s the best business in the world, but you start it in a small market, it’s going to be a small business. If you start even a mediocre business in a huge and growing market, it has a potential to be a very large business, you don’t even have to be that smart. I can think of a few companies in crypto that would qualify for that second one. And so early on, I wish somebody had taken me aside at 22 years old and said, “Hey, you could save a lot of time by just waiting until you see a fat pitch in a market that actually justifies spending 10 years of your life on it.”

Mike Alfred (12:45):

Because I spent eight and a half years on BrightScope. I think we changed the 401(k) industry forever, we lowered fees. We worked directly with Obama’s CTO, we wrote reports for the GAO, we worked with the Senate Aging Committee, we worked with the House Educational Labor Committee. I was close with executives across most of the largest financial services companies in the US, there were a lot of really interesting impacts personally and professionally from building the company. But ultimately, it was a $30 million outcome. And with the same amount of effort, I’ve seen $300 million companies and $3 billion companies, with the same effort and no dramatic differences in management quality, execution capabilities, capital raise, etc.

Mike Alfred (13:21):

I’m noticing now, it’s just as easy to raise a 30 million series A as it is to raise a five or even a $2 million round. And as you dig deeper into these businesses, you realize a lot of it is just market. And fundamentally, you’re riding these tailwinds. So why I’m so excited about investing in Bitcoin and crypto business in particular is that I think you have 100X plus tail and it has a lot of great value. Investors like to say, you could take a great management team, but you’re going to find out that the management reputation doesn’t survive the experience.

Mike Alfred (13:50):

And in the same way, you could put that around and say, “Look, you could take an idiot, put them in a crypto business and they might look like a genius.” And so at the very macro level, I could talk about a lot of like very detailed things from being a CEO for 10 years and now sitting on boards for another five or 10 years of experience on top of that, but none of them are going to be as important as just choosing the right market.

Preston Pysh (14:10):

I love that. Tell us your Bitcoin story. When did it first come on to the radar for you? What timeframe are we talking? And then, how did you act as this entered the marketplace or your stream of thoughts and your ideas as you were looking at it?

Mike Alfred (14:27):

Yeah. I said this before a couple times, and I still regret it to some degree, but I wish I had more of a beginner’s mindset with Bitcoin. I used historical analogy from markets rather than starting from the, “Hey, understand Bitcoin in context of other monies,” which I think is the correct way to get to a real understanding of Bitcoin. So 2012, 2011, I’m reading an article, one of the magazine articles talking about Bitcoin going from five bucks to 20 bucks or 20 bucks to 100 bucks. And I see it and right away I think, dot-com bubble. Because those of us who lived through the dot-com bubble, investing our own money, still have scars around what happens at the end of a bubble.

Mike Alfred (15:04):

I actually think it’d would be something good for most of these Robinhood pajama traders today to go through, is one cycle, one full cycle, just one. The Fed probably won’t even allow it. Most of the traders that are in Robinhood today obviously have never lived through a single cycle because they came onto the market in the last decade and we really haven’t had a full business cycle. But having lived through that, what I saw Bitcoin initially, and I saw how bubbly and frothy had traded, it looked a lot like the stocks I traded in my Stanford dorm room in 1998.

Mike Alfred (15:29):

And so I made a mistake. I made a logical mistake, I made an intellectual mistake in writing it off. And so I called the top at Thanksgiving dinner, I think it was 2013 or 2014, there was that $1,000 top. And I said, “This is nuts. This is going to collapse. It’s a bit of a bubble.” So short term, I was right, long term, completely wrong, because I didn’t even know what I was talking about. I was talking about a ticker, I was talking about a thing that was trading like things that I had seen before that blew up, rather than asking, “Huh, what is this thing that went from basically no market price to $1,000 in three or four years?” That was the more interesting intellectual conversation.

Mike Alfred (16:03):

The other thing that caused me to make that mistake though is that the people who were recommending Bitcoin to me at that time were all venture capitalists, and I had a personal disdain for some of these people because frankly, some of them are personally obnoxious and I found their behavior obnoxious, showing 25 minutes late for meetings, telling you they’re going to have a partner meeting and then disappearing for three weeks, taking you around as an entrepreneur. So some of the people that I personally disliked were also big fans of Bitcoin. And again, another mistake, I’m actually getting better at this as I age.

Mike Alfred (16:32):

More and more, I pay more attention now when somebody I personally dislike likes an asset, I tend to actually do more work on it because I found when somebody really distasteful to me likes something, almost always that’s a good investment. And so my story is that I waited until 2017 to actually do the work. So its spring of 2017, I finally started reading, I finally said, “Okay, I’m actually going to understand what this is.” And I started buying Bitcoin. That was the beginning of a process.

Mike Alfred (16:55):

What really got me to where I am today was working in the space, working with crypto hedge funds, working with Bitcoiners, looking at the data, helping hedge funds understand the data. That really gave me a better fundamental understanding of what was going on.

Preston Pysh (17:08):

So your comment there, I love it, that you actually dig in deeper when somebody that you don’t particularly like maybe on a personal level is recommending something or you know that they’re buying it. Do you think that this is because you’re just running in circles with people that have a little bit of a Midas touch to things and if they’re just continuing to crush it time and time again, that you might look at them because of whatever ego they might have as a personal level of why you dislike them, but at the same time, you intellectually have respect for their ability to be right through the years? Is that what’s going on?

Mike Alfred (17:44):

I think there’s a few things. One is that the smartest people in the world are often not the most fun people in the world. And often, in my experience some of those in the world are both difficult and stubborn. And so they’re going to be the people that when you’re having dinner with them and you want them to just let something go because maybe you made a misstatement or maybe they’re calling you out on something you did five years ago, they’ll just won’t let it go. They’re tenacious. They’re going to beat you up, they’re going to punch you in the face intellectually, they’re going to tell you you’re wrong. They’re not going to let you off the hook, and they’re not going to change the subject until they’re done.

Mike Alfred (18:15):

And so that can be painful. Now, if you’re intellectually honest and you recognize you made a mistake, then maybe you can use it as an opportunity for growth. But in general, some of these world class investors, they’re not going to be your best friend, they’re not the person necessarily you want to have the beer with every Friday night. But if you get the opportunity to sit down with people like this, it can change your life because you will be exposed to ideas that 99.99% of society haven’t even heard about yet.

Mike Alfred (18:41):

In 2012, 2013, that was Bitcoin. Anybody talking about Bitcoin with real conviction at that time was somebody that was thinking deeply. Generally, they’re going to have a contrarian vent. Often, these times are surly, aggressive, sometimes nasty even, people, but ultimately they’re right. And being right and being right big requires that kind of stubbornness, requires you not to care so much what other people think.

Preston Pysh (19:05):

Talk to us about just how you think about a portfolio, specifically today in 2021. Portfolio construction, how much equity you’re thinking relative to just owning Bitcoin itself. Talk to us about your ideas on this.

Mike Alfred (19:20):

Obviously, they’ve evolved quite a bit over the last three, four years. I spent a lot of time with Ric Edelman who’s one of the top financial advisors in the world. He put together Edelman Financial Engines, it’s up publicly traded, I don’t know, six, $7-billion company. He just exited. A very wealthy, very successful guy, had a radio show for 30, 40 years. He was like the original well marketed financial advisor in the public eye. When we talked about this in 2018, it was like, “Oh, maybe one to 5% for the average person who’s 60 or 70 years old, they’re retired, they can afford to have an 80% drawn out an a 100% of their portfolio.” I think that’s evolved a bit, I’m now up to 20% for retired people. I think 20% of a portfolio should be in Bitcoin.

Mike Alfred (19:59):

When you run the numbers and you really back test the numbers with other assets included, you’re not going to have a significant change or at least a significant enough change to ruin someone’s portfolio with 20% Bitcoin. For me personally, I’ve gone much higher, but a lot of that’s just because I don’t rebalance. So my view today is you should buy the amount of Bitcoin that you think you can buy and hold for 10 years, whatever that amount is, and then simply don’t rebalance it. So if it becomes 80% of your portfolio because it outperforms everything, so be it.

Mike Alfred (20:28):

But I think rebalancing is counterproductive in Bitcoin, because if Bitcoin’s right, it’s 100X or 300X, if it’s wrong, it’s a zero. It’s a rebalancing, it’s just under-exposing you to the thing that’s likely to perform the best. I’m actually going to probably put together a fund next year, and it’s going to be basically a reflection of my own personal philosophy on investing, so it’ll be an ultra-long duration vehicle. Initially, it’ll start with just five or 10 million of my own money. So I’m not going to take any outside LPs, at least initially, although I have a couple of soft commitments to put in 20 or 30 million.

Mike Alfred (21:01):

The way I’m thinking about portfolio construction for my fund, which I’m calling Alpine Fox, I can talk about what Alpine Fox means to me, but it’s going to be a forever, long duration, 30, 40, 50-year type of fund. Initially, I imagine about a third of the portfolio will be in just pure Bitcoin, spot Bitcoin, probably cold storage, never to be touched, just sitting there riding for 20, 30 years. About a third will be in small cap activism. I’ve done a little bit of small cap activism over the last couple years, partnering with a hedge fund out in New York called Outerbridge Capital.

Mike Alfred (21:30):

I work very closely with the partner, Rory Wallace, there. We did a campaign last summer at Barnes & Noble Education, that’s a New York Stock Exchange listed company, the ticker is BNED. We were buying the stock at $1.50. We proposed four new board members. We got up to about 13.5% of the stock, and stock was very cheap last year, partially due to COVID. I was on the four-member board slate, so I was one of the four board members we proposed. We ultimately settled for two, took two board seats.

Mike Alfred (21:53):

I think the stock today is at like $10.30, something like a seven, 8X in a year. We just announced today, we proposed three new board members for a company called Comtech, which is a publicly traded NASDAQ-listed company. So somewhere in that 100 million to a billion-dollar range is where I think small cap activism can have the most impact because Dan Loeb and Paul Singer and those guys are not there, but guys like Rory. Now, Rory’s about three years younger than me, he’s also a Stanford history major. His wife was Stanford freshman roommates with my sister. So there’s a lot of family connections there now. And so we just have built trust and we love to do these activist campaigns.

Mike Alfred (22:26):

So I want to have my own dedicated vehicle where I can do these small cap activist stuff. This is very idiosyncratic investing, it’s one company at a time, it’s understanding that company’s exact story, like who the management is, where the opportunities are, the levers to pull to create value. So you pair this idiosyncratic small cap investing style with Bitcoin. And then the third component will be classic, traditional value. And so that’ll be things like the grocery stores and the Bristol Myers Squibb that Lyn Alden and I have been talking a lot about over the last six months, things that are low multiple, good businesses, but misunderstood or undervalued at the time.

Mike Alfred (22:59):

And I think when you pair those three return strings together in one vehicle, you’ll get some performance and risk characteristics like you’ve never seen in a single fund before.

Preston Pysh (23:07):

So Mike, take us back to in 2017 when it clicked for you with Bitcoin. What was the thing that put you over the top and just the light bulb went off?

Mike Alfred (23:19):

I think it’s along the lines of what is in the Bitcoin standard. So when you think about, what is the best money and how has money worked to store? I’m a historian, I was a Stanford history major, so I always think in the historical context, and when I think back at all the monies in human history and the fact that fiat currencies have only really been a thing for 50 years. I’m 40 years old, so like 10 years before I was born, fiat currencies were really becoming a big thing and going off the gold standard. It just dawned on me that my entire paradigm for the future was probably wrong because it was based on a very, very short time period in the past.

Mike Alfred (23:57):

But when you actually just build up from what makes good money, Bitcoin is clearly the best money in human history, period. I think that’s very, very clear once you’ve done the work. But maybe more importantly from the investor’s standpoint, for me, it was that I think Bitcoin is maybe one of the best investments in human history. And I tend to agree with the hardcore toxic Maximalist who says stuff like Bitcoin’s the best savings technology, it’s not an investment. So Pierre Rochard, if you’re listening, I agree with you buddy.

Mike Alfred (24:23):

But in terms of my background and what I’m doing as an investor, I also think it’s probably the best investment opportunity in history because I think Bitcoin has the biggest stamp in human history.,I think it has the biggest total addressable market of any asset, any company, and maybe any idea in human history. And I’m comparing it with other ideas, other companies, other religions. I would even compare it to things like capitalism and democracy and religions. But I think Bitcoin is unique amongst those things because it really has no competition.

Mike Alfred (24:51):

Like if you’re Buddhist, you’re probably not going to be Mormon, you’re probably not going to be Muslim, you’re probably not going to be Christian, there’s always an alternative. Once you understand Bitcoin at scale, there really is no alternative as base money. And so, I think Bitcoin has uninterrupted path to significantly higher values, whether you want to reflect that in traditional existing fiat currencies or you want to reflect it in terms of real world assets or however you want to express that, I think Bitcoin’s path is so clear in terms of becoming the most widely used money in the world that from an investment use case and an investment standpoint, it’s probably one of the best value investments in history.

Mike Alfred (25:29):

So it has this weird paradox where once you deeply understand it, you want to put all your money into it, but from an investor’s standpoint, you also recognize that in order for Bitcoin to succeed, it also is going to need other pieces of the stack to work, it’s going to need infrastructure, it’s going to need ways to exchange, it’s going to need ways to transfer it. It’s going to need Bitcoin mining, CapEx to support, the hash rate, which is going to allow it to scale over time.

Mike Alfred (25:55):

A lot of people like to just imagine Bitcoin’s price going up in the metaverse infinitely with no constraints, and that’s a wonderful vision, but the reality is, a lot of infrastructure has to be built in order for us to see those prices. I think Bitcoin incentivizes in an organic way, all those things to happen in such a way that because it’s decentralized and because nobody can stop it and nobody can turn it off, that it invariably you get something like a 30 to 100% [CEGA 00:26:20] over the next 10, 20, 30 years. And I think you get that with a much lower risk than you get with a company.

Mike Alfred (26:26):

I’m thinking of companies like Amazon that if you held over the last two decades, you would get similar CEGA, thinking about companies like Tesla over the last 10 years. The problem with Amazon and Tesla was there’s so many things that could have gone wrong. Tesla could have blown up so many times, whether through fraudulent accounting or fraudulent tweets about funding secured, just the behavior of the senior executive team or mismanagement or failed execution or too many stock options. Bitcoin can’t fail like that because so much of what’s going to happen with Bitcoin is programmatic, it’s algorithmic, it’s predetermined.

Mike Alfred (26:56):

And so what a great investment if I can get an Amazon type return string over 20 years without all of the company specific risks that you get with an individual equity. So for me, Bitcoin’s one of the greatest investments in history. I’m pretty confident if you just buy and hold it over the next 20 years, you’re going to beat almost any equity investor straight up.

Preston Pysh (27:13):

Is that risk reducing over time? As that market cap of Bitcoin goes higher and higher, the risk is going down. Is that a linear reduction of risk or is that like a parabolic type reduction in risk that’s taking place, like a non-linear reduction?

Mike Alfred (27:29):

I think it depends on what dimension you’re thinking about. In terms of the network adoption, I think it’s exponential, it’s parabolic. Because money becomes more valuable the more people that use it. I like to talk about the telephone. Imagine you could buy AT&T 100 years ago, or imagine you could buy a telephone token that represents the adoption of the telephone. And then imagine somebody came to you when there were only two telephones in existence and said, “Hey, Preston, I want to sell you a telephone token for 0.00000001 cent. I want to sell you 0.0001 of these things.” And you’re like, “Okay, I don’t really know what that means.” But then four of your friends get telephones and all of a sudden you wake up now, the price is a dollar, but now four of your friends have telephones and they start trying to call you on that phone.

Mike Alfred (28:16):

Now you recognize the value. And of course, when everybody has a telephone, it becomes indispensable. And that’s how I view Bitcoin. So I think along that vector of user option and the network becoming more anti-fragile, I think that’s exponential. Some of the other pieces like the having cycles and the difficulty adjustments are more programmatic and step functions. I know we’re going to talk about this a little bit, but when you think about companies like Marathon and Hut 8 right now, they’re just going to get bigger.

Mike Alfred (28:41):

The challenge is every four year, the amount of Bitcoin they’re going to be able to mine, is going to get cut in half. And so there are different parts of the Bitcoin stack that do different things. And so I try to understand as many pieces of them, and I think when you put it all together though, you do get a network overall, it’s like a flywheel. Overall what you get is a network that de-risks itself organically over time as more users come on, as more miners come on, as hash rate goes up, as more infrastructure gets built, as more exchanges and Fiat on-ramps and off-ramps and payment services are built, the entire network de-risks as it scales.

Mike Alfred (29:16):

So I would agree generally with the idea that as the price goes up, unlike in equity, Bitcoin actually gets safer from an investment standpoint.

Preston Pysh (29:24):

Let’s talk about Marathon and Hut 8, just two miners, is equity that you own, correct?

Mike Alfred (29:31):

Those are my two top picks for publicly traded miners today, just because I’ve spent more time with those management teams, I’m more familiar with their operations. I could tell you more about them and why I think they’re going to win.

Preston Pysh (29:42):

Talk to us about the valuation. How are you thinking about this because people ask me all the time, Preston, “I want to own equity in addition to owning Bitcoin in the space, I’m having a hard time figuring out how to value it.”

Mike Alfred (29:56):

Maybe start at the highest level, which is in my view, there’s four legs to Bitcoin ecosystem stool. There’s users, which includes people just buy and hold Bitcoin, people who use it in Nigeria to transact with each other. People who run nodes to confirm their own transactions. So they’re important, obviously without users, there’s no Bitcoin, there’s no need to have it. There’re also investors who are attracted by all the user activity who want to invest in the ecosystem. They’re also software and infrastructure providers.

Mike Alfred (30:25):

So I’m thinking of companies like Coinbase and BitCo, and Lightning, and Strike, and Lightning Labs and Strike, and other folks that are building really interesting components, but maybe one of the most important, but most misunderstood components of this tool in Bitcoin for me is the Bitcoin mining part of the stack. And so your Bitcoin miners serve so many different roles, but obviously at the very front end there, they’re providing the hash rate that keeps the network secure. So without Bitcoin miners, proof of work just doesn’t actually work. And so you need them to be there.

Mike Alfred (30:55):

But they’re also, when you think about it, they’re the only people in the ecosystem who can create new Bitcoin. Everybody else is interacting with Bitcoin that they already owned or that already existed. Bitcoin miners are creating new Bitcoin every day. And so they’re like central bankers in a sense. I hate to use that nomenclature just because it’s not going to go over well with this community, but in a sense, they’re like bankers. And so when you’re thinking about a Bitcoin miner, I like to start with a balance sheet. I think it’s a good way as a value investor to make sure you don’t lose money.

Mike Alfred (31:21):

And so let’s just start with the high level. So Hut 8 and Marathon are my two favorites, but Hut 8 and Marathon are slightly different companies. Hut 8 is Canadian, Marathon is based primarily in the US. Hut 8’s about a $1.5 billion company, Marathon’s about 3.7, let’s call 3.5. So together they’re about $5 billion companies. So when you look at their most recent production port, you see some really interesting things though. Hut 8 actually mined 362 Bitcoin in the month of August, Marathon mined 460 for the month of August.

Mike Alfred (31:51):

So you can build that up to like an annual run rate, so the way I think about it right now is approximately that Hut 8 and Marathon should be able to mine about 10,000 Bitcoin over the next 12 months. Think about that, 10,000 Bitcoin. That’s incredible when you think about it. And their current Bitcoin and their balance sheet right now, for Hut 8, it’s about 205 million, so it’s 4,450 BC for. Marathon, it’s 6,695, so about 6,700. So they had about little over 11,000 collectively, it’s a sum total of about 500 million of Bitcoin, but they’re actually over the next 12 months just given the current assumptions we have about hash rate and the price and whatever, they’re probably going to be able to mine 10,000 Bitcoin.

Mike Alfred (32:30):

And remember, that should continue for the next about two years and eight months until the next having, two years, seven months, two years, eight months, something like that. And so I think they should be able to mine collectively about 28,000 Bitcoin to add to the 11,000 they already have in balance sheet. Remember, both Marathon and Hut 8 have come out publicly and said, “Our strategy is to huddle Bitcoin. We do not sell Bitcoin.” And this is a new thing by the way, this is part of the falling cost of capital we’re seeing across the mining space.

Mike Alfred (32:54):

Four or five years ago, it was so hard to raise equity or debt for miner. Now, all of a sudden there are a lot of people active. And some of the biggest mining deals that happened by the way this spring were never even announced, like $100 million plus equity and debt deals that were never really even talked about. And so because of that, the cost of capital is falling. And so now Marathon and Hut 8 are able to just stack Bitcoins. So they’re effectively industrial scale HODLers, and my current forecast, over the next decade, they should be able to add about 60.

Mike Alfred (33:19):

So they’ll have about 60,000 Bitcoin collectively, just these two miners, which today have a sum total of a five billion market cap. So remember those number, five billion market cap, about 11,000 BTC on the balance sheet today, probably something like 60,000 BTC within say six years between the end of this having cycle and the end of the next having cycle, so 2026, 2027, six years approximately. Let’s say we get to 60,000. Now, humor me for a second and assume that we see a million-dollar Bitcoin price. Now, you’re talking about 60 billion of balance sheet Bitcoin in six years collectively on two companies that today are worth five billion.

Mike Alfred (33:50):

So you’ve got something like a 12X just on the balance sheet. Now, remember today that these companies are trading at collectively a $5 billion market cap, but they only have 500 million of BTC. So they’re effectively trading at 10X their balance sheet BTC, but I’m talking about their balance sheets growing 12X over the next six years. That’s just the balance sheet side. Now, think about all the business lines that you can build on top of Bitcoin mining. So hitting 10, the big secret for Bitcoin mining is that base layer Bitcoin mining is just like step one of building a platform play in this space.

Mike Alfred (34:20):

You’re going to obviously run your miners, you’re going to run them cheap, you’re going to keep your cost of power low. You’re going to acquire miners when they’re cheaper, you’re going to plug them in. You’re going to be smart about keeping them cool, keeping them clean, not over clocking them, but over clocking them maybe just a little bit to get to maximize your yield. But at the end of the day, some of this business gets commoditized over years, but I do think the best operators will continue to be able to maintain market share.

Mike Alfred (34:42):

Right now Hut 8’s about 1%, network hash rate maybe a little more, Marathon is closer to 2%, but they’re forecasting. Marathon is forecasting explosive growth. They’re forecasting 133,000 Antminer S19 plugged in July of next year with something like 13X hash. Something crazy like that. And assuming the network hash rate goes back up to over 150 towards 200, I think Marathons headed to like five to 8% market share and Hut’s going to probably be able to maintain 1%.

Mike Alfred (35:11):

So the numbers I just gave you, 60,000 BTC in six years at a million dollar price, which would be 60 billion of balance sheet, that’s assuming that they just maintain their current one and 2% share. I actually think the best companies will actually increase their market share over the next five years, because what’s happening is as the business gets bigger, it’s harder and harder for people that don’t have scale to negotiate for the lowest power cost, to negotiate with Canaan, and MicroBT and Bitmain, and Bitfury, and all these companies that make the chips.

Mike Alfred (35:40):

If you don’t have leverage, you don’t scale, you’re probably going to pay more. And so you’re not going to be competitive relative to a Marathon or a Hut. And so, that 60,000 could be 80,000, could be 70, I have no idea, but I think 60,000 is a reasonable assumption for next five years. So when you look at it just from that perspective alone, Preston, I think what you see is that Bitcoin miners are probably a pretty good way to make 20 or 60X your money over the next decade conservatively.

Mike Alfred (36:03):

And Bitcoin may do better, maybe worse, but assuming Bitcoin does go to a million-dollar Bitcoin price, you’re talking about a 20X return in Bitcoin and probably at least double that in the best performing Bitcoin miners. And for that reason, I tend to think the best idea is to own both.

Preston Pysh (36:18):

When you’re thinking about owning one miner over the other, you had mentioned that the operational execution is paramount probably as far as a consideration, first of all, what kind of metric would you look at on the income statement or the balance sheet to understand whether that operational excellence is there? I’m assuming you’re going to say you got to really take a close look at the operators and the executives within the organization, but for somebody that maybe doesn’t have that access, what would you tell them is a good metrics to maybe look at?

Mike Alfred (36:49):

I think the best way with any investment, not just Bitcoin miners is to look at management forecast and then look at actual results over any reasonable period of time, like a year or two, say, “Hey, management said we would have 133,000 machines, well, guess what, if Marathon has 64,000 machines plugged in July, I’m not going to sell the stock necessarily in July of next year, but I will at least re-underwrite it. If they have 133,000 machines plugged in, then that’s probably a pretty good sign, and they have 13X of hash on the network and you could track that, then that’s probably a pretty good sign that management’s doing what they say they’re going to do.

Mike Alfred (37:22):

But I actually think operational expertise is important, but at scale I think capital markets expertise is maybe even more important because fundamentally, they’re not differentiated by their operating metrics so much as they’re differentiated by their access to capital, and their ability to procure machines. Those are the two biggest things. So if you can get a billion dollars of low cost capital right now, like Preston, if you and I could get a billion dollars, we could spin up an industrial scale miner. If we could get somebody at Bitmain to return our phone calls or return our emails. That’s actually the biggest problem.

Mike Alfred (37:52):

You could get a billion dollars right now, it doesn’t mean you can get the machines orders done, and it doesn’t mean those machines will actually show up. Then once they show up, yes, you have to plug them in. You need to make sure your source of power is available at a reasonable cost, three cents per kilowatt hour, like that industrial scale metric. If you’re over that, it’s okay as long as you’re sustainable, like if you use wind and you use a hydro, four or five cents, investors seem to be okay with. If you use coal, it better be two cents or two and a half cents because nobody thinks that’s going to be sustainable over the long run.

Mike Alfred (38:20):

And so source of power matters. The biggest thing that could actually disrupt these companies is that the government of the municipalities that they operate in comes in one day and says, “You know what, we’re not allowing coal in Montana anymore.” Or, “We’re not allowing this other power source in this other jurisdiction.” And people who followed Greenidge, the Support.com, Spark, that just went public and became a meme stock recently. All the talk was about the Seneca Lake issues, the environmentalists talking about them heating up the lake.

Mike Alfred (38:47):

And there was a very real risk actually a few months ago that New York would pass legislation that would make it hard to be a Bitcoin miner. That would’ve been a material risk to being an investor in that particular company. So I try to obviously underwrite the management teams and a lot of it’s following their forecast versus what they do. A lot of it is following their ethos and their philosophy. So Hut actually says in their August production report that they are following their strategy of HODLing.

Mike Alfred (39:10):

I can’t make this up. There’s a public company that trades on NASDAQ that’s telling you that they’re HODLing Bitcoin. I think that’s fantastic because if somebody says they’re HODLing Bitcoin at scale is probably not going to stop HODLing Bitcoin tomorrow, next quarter, next week. I have no idea what another miner who’s going to do if they have a tradition of liquidating Bitcoin to buy more machines, that’s not what I want out of my miners. I want my miners to keep their cost to capital solo, that they can grow their business in a frictionless way and keep stacking Bitcoin at scale.

Mike Alfred (39:36):

I want them to add that 5,000 or 10,000 of Bitcoin over the next remaining having cycle, over the next 12 months, I want them to add 25 or 30 over the remaining having cycle. If they could do that, I’m confident these are winning investments. If they can’t do that for some reason, then something else is broken in the model. Bitcoin’s price didn’t do what we thought, hash rate did something we didn’t expect, etc. But assuming some of these baseline assumptions are correct, you’ll make money if management does what they say they’re going to do.

Preston Pysh (40:03):

I would think that another key consideration, Mike, would be just the regional part that you’re talking about, but if you could find, let’s say up in Canada, they have dams that are already constructed there, the cost of energy is extremely slow relative to everybody else. I would think that this is maybe even a bigger advantage right up there with the operational execution advantage that a company might have because they have strong operators.

Preston Pysh (40:32):

If you’re able to get the energy for nothing, or you have some type of government that actually is facilitating this or really getting behind Bitcoin, like in El Salvador is a perfect example. If the government’s actually trying to provide cheap energy costs to promote more and more miners to come into their country, this has to be like the golden egg of finding the right company that’s situated to do that. So how are you looking for some of that kind of stuff?

Mike Alfred (40:59):

Luckily, I had a lot of direct experience talking with miners in both Western Canada and Eastern Canada, there’s some really great sustainable miners in both of those geographies. I don’t want to docks any particular companies because they’re all private, but they’re literally companies that, yeah, you’re right, they have essentially free or close to free power. They’re in very, very remote areas where they’re tapping into rivers in some cases. And I think those models are incredible. I think those are companies that in a lot of cases, those municipalities are actually trying to attract people to those places.

Mike Alfred (41:32):

Whereas in China, the problem with China is, if you ever been to Beijing, there are just days where you can’t see your neighbor, because there is so much smog. The last time I went there, it was an odd, eerie… I think I was there six or seven years ago, I was in Beijing and I was just like, “They’re just going to have environmental problems here. There’s mudslide and there’s smog.” And they under-talked about thing in my opinion about what happened in China is just that Chinese government may not be the nicest people in the world, but they’re not idiots, and they recognize that at the scale of a billion plus people, they actually can’t afford to allow the environmental degradation to happen at the scale and the speed that it was happening there.

Mike Alfred (42:08):

And it’s just very visible. If you just walk outside in Beijing, you can’t make up another reason why that happen. That’s what happens when you don’t take care of the environment. In other geographies, it’s less obvious, and so it may be a slower process. Like Kazakhstan may take a lot longer to decide they don’t want coal miners there than China took to decide that. Canada, especially like the far north and the far Eastern part of Canada, it seems to me like one of the best geographies, because you have so many places where you can mine that are either cheap or basically free, and also where the power source is really clean.

Mike Alfred (42:40):

So I’m extremely bullish on Canada, I think Canada’s going to be one of the best places to look for miners. And I expect a whole bunch of other publicly traded miners to come out behind Hut 8 and the others that are already out there on the market.

Preston Pysh (42:52):

Let’s shift gears just a little bit. You’re dialed into the way Wall Street thinks, you have contacts there. How are they looking at Bitcoin today? Because I know what it was like back in 2017, it was almost a little bit of a joke for them to look at it, but now it seems like they’re taking it way more serious, but what are your thoughts on some of that?

Mike Alfred (43:11):

Obviously I worked at NYDIG for eight months, so I was seeing the institutional business evolving at scale. And it seems to me the conversations have completely shifted, particularly in the last year or so. There’s obviously going to be a lot of institutional inertia, there’s a lot of committees. There’s a lot of fear, there’s a lot of risk management processes. There’s a lot of compliance, particularly in the wealth management IRA space, where I’ve been spending a lot of time recently.

Mike Alfred (43:35):

But what I’ve seen happening now is a lot of the current crop of new investors are able to underwrite Coinbase as an investment, they’re able to underwrite Marathon as an investment because they understand how the traditional exchange business works. They understand how NASDAQ works. They understand how the NYC works and ICE. They understand how tradition mining works. So they’re able to use these analogies from other spaces that they’ve been successful in and then apply it to Bitcoin and crypto.

Mike Alfred (44:03):

And what ends up happening though, is they end up guiding themselves into underwriting Bitcoin itself, because you can’t own Coinbase for too long before you start to ask, “Well, okay, what’s the real value of Bitcoin? What’s the real value of Ethereum?” And so I think the fact that there are more publicly traded equities, this is where new people say, why do you own equities? And why do you invest in equities versus just Bitcoin? And it’s like, well, I actually think these equities being public is like advertising for Bitcoin.”

Mike Alfred (44:27):

These companies being publicly traded means everybody can own them whether they understand how to run a hardware wallet and use cold storage or not, they can buy Coinbase. And that’s what a lot of institutions are doing. As it relates to specific use cases, insurance companies have been really interesting and I do credit the NYDIG folks because they were all over this early. They recognize that these insurance companies have long dated Fiat liabilities, so like 20 and 30 and 50 deer type of things that they want to pay off for policy holders and in a low interest environment, like what better thing to own than Bitcoin in your general account to make sure you’ll be able to have the power to pay off those obligations far in the future?

Mike Alfred (45:04):

So I think that’s a really interesting use case. I think eventually, Bitcoin lives. And I’ve been saying this for a long time, it lives inside of insurance companies. It lives inside of insurance products, so variable universal life policies, universal life policy. Why would I want to own some index funds or whatever in my universal life or variable universal life policy when I can own Bitcoin? Bitcoin’s going to go up and value much more than equities on average. And so if I wanted to prefund an insurance policy, I wanted to put 10,000 a year into my million dollar VUL, even if I was buying an annuity, I’d want Bitcoin to be powering that.

Mike Alfred (45:34):

For asset managers, I think allocation funds is a really interesting entry point. I’ve talked to a few asset managers about putting a Bitcoin allocation into their target date funds. So these target date funds are like the 2030, 2040, 2050 fund that you see in a 401(k) plan. You probably haven’t had a 401(k) plan in so long, you’re not as familiar with these, but the average American worker, this is what they’re seeing. They sign up for their fidelity 401(k) plan and they get the fidelity 2050 retirement fund. Well, what if that fund just had Bitcoin in the fund?

Mike Alfred (46:00):

Then you don’t have to make an active decision to allocate to Bitcoin, it’s just there already. You just opt into your 401(k), you defer 3% pre-tax and it shows up in Bitcoin, or a percentage of Bitcoin based on your age and risk tolerance. So I think that’s a really interesting entry point. And then the bank channel, the traditional bank channel, all the research NYDIG and others have done has basically said that most customers would prefer to buy Bitcoin through the bank, believe it or not. So even though all of us in the Bitcoin community want banks to become irrelevant and be obsolete tomorrow, the reality is as an entry point for getting Bitcoin in more people’s hands, the bank channel’s a good way to do that.

Mike Alfred (46:34):

NYDIG publicly announced in June, they partnered with FIS. I think that was actually a much bigger deal than most people realize. And I think everybody will have access to Bitcoin to through these more institutionalized channels over the next couple of years.

Preston Pysh (46:47):

How many years out do you think we are with the 401(k) where people are going to be able to allocate a couple percent to it?

Mike Alfred (46:53):

It depends. There’ll be early adopters in the next, probably call it 12 months, and then almost everybody will be able to access in three years, and then like in five to seven years everybody will for. I still think there’s a timeline. The ERISA code and just the way 401(k) plans work, they’re highly regulated, there’s a lot of eyes on that space. And so I think you have to be thoughtful about how you do it, but there are plenty forward thinking executives in the retirement channel that understand Bitcoin. I’ve talked to many of them in the last couple months.

Mike Alfred (47:24):

And so they’re thinking about talking about underwriting Bitcoin right now internally. And so it just takes time to get it approved.

Preston Pysh (47:30):

El Salvador, is this big news, is this noise, is it a smaller deal than people were making it out to be on Twitter? What are your thoughts on it?

Mike Alfred (47:41):

I’m conflicted a little bit. I think from a geopolitical game theory and domino standpoint, it’s an incredibly bullish thing. I think it’s a great experiment I think we’re going to learn a lot from doing it and I think it will encourage other countries. I think you probably saw today that Ukraine legalized Bitcoin and crypto. I chuckle a little bit at that because if it wasn’t illegal before and then you legalize it, does it mean as much as if it was illegal before and then you legalize it? Don’t answer that because I don’t think there’s an answer, but I chuckled a little bit when Ukraine says they legalized crypto.

Mike Alfred (48:15):

But I do think there’ll be more, and I think El Salvador are doing it and taking the blows, the body blows for everybody else makes it easier for other countries to come along behind them. So in terms of easing the path and blows, El Salvador is a poor country, a lot of the people there are hand to mouth and if you give them $30 in Bitcoin, it’s not going to make an incredible, immediate impact on their lives. And I also just generally don’t support people that manage their countries in a way that I think could potentially be harmful down the line.

Mike Alfred (48:42):

I have no idea what Bukele ends up being as a leader. He may end up being one of the greatest leaders in Latin American history. We may look back in time and say, “Wow, this is like a Simón Bolívar moment for Latin America.” We also may look back and say, “Man, what an ill faded experiment by somebody who ended up becoming a dictator.” I have no idea how that plays out. So I want to be cognizant of history and I want to be thoughtful in saying that I’m bullish, I’m hopeful, but at the same time, I think it would be foolish to just put the blinders on and assume everything’s going to go well.

Preston Pysh (49:14):

Since the spring, there’s been some really hard lessons for people using leverage in this space. What k tips can you give people as to whether they should, whether they shouldn’t, anything relating to leverage?

Mike Alfred (49:29):

Well, I would step back a step and just say that Bitcoin is in my view, the only remaining large scale, truly free market in the world, almost every other market is either directly or indirectly influenced by government actors. In the US, for example, on my street, these homes just keep going up and up and up, and it’s because they’re holding the interest rates down near zero, and they’re pumping all this liquidity into the economy. And so when you first look at a Bitcoin chart, you think, “What the hell is going on with this asset? Why does it trade like this?”

Mike Alfred (49:57):

And I think the reason why it looks like that is you’re comparing the Bitcoin chart to the chart of a whole bunch of manipulated assets. And so, equities and bonds and real estate in the US tend to just like go up and to the right with very limited volatility, but a lot of that is manipulation. And so because of that, because Bitcoin is so volatile and it’s allowed to correct 80% and correct 50% very quickly, I general argue that most people shouldn’t be using leverage at all. If you can make 20 or 50 or 100 times your money in a decade, I don’t see why you need to use leverage.

Mike Alfred (50:29):

And so my general advice to my friends and the people who’ll ask me is, just like I said earlier, buy the amount of Bitcoin that you’re comfortable buying today, whether it’s 1% or 5% or 20%, unlevered, spot, if you want to hold in segregated custodian, not like these hard line Bitcoin toxic maximalist who are like… I think if you’re able to do that successfully, you should consider doing that, but you can also use services like Unchained Capital to do a more collaborative approach where you hold a key, someone else holds a key, they hold a key, that way, it also helps for estate planning.

Mike Alfred (50:59):

This is one thing that people don’t talk about enough, a lot of people are going to die with Bitcoin and most people don’t have a plan for that. Unchained Capital is one way that you can actually plan for your estate plan because you can make sure the administrator, the trustee has access to the Bitcoin. Leverage to me is a double-edge sword, yes, you can get rich really quickly, but most people I don’t think are, I think most people are blowing themselves up. And so I advise people to avoid it.

Preston Pysh (51:21):

All right. For the person who will listen to this conversation, and they’re still very skeptical about Bitcoin in general, which there’s a lot out there, what would be the thing that you would tell them that for you just makes this a no-brainer?

Mike Alfred (51:37):

I’ve successfully already built, I don’t know, several hundred people over the last four years, including serious investors, hedge fund folks, etc, that have a long history of investing. And the thing that I feel honestly resonates the most is to find the Republicans and find the conservatives, and basically define Bitcoin as this anti -MMT thing. It’s the only way to actually counteract the pure insanity that you’re seeing, and not just American monetary policy, but basically global monetary policy at this point, it’s everybody.

Mike Alfred (52:07):

Everybody’s in a rush to print as much money, to borrow as much money to basically inflate asset prices. And so if you find that distasteful for any reason, whether just because you’re a fiscal conservative, or because you’re a Republican, or because you’re just anti-Democrats or whatever, I’m an independent voter. So I sit on both sides, I don’t personally care. I will support a politician if they are pro-Bitcoin. Generally, agree with Dennis Porter and others who have said that this is the single biggest voting block maybe in human history because they unite so many different people.

Mike Alfred (52:36):

And so I think anybody who is supportive of Bitcoin is a friend of mine. And so the way I relate this to people who are negative on it is I just say, “Hey, would you agree with me that the government’s spending too much money? Would you agree with me that the government’s borrowing too much money? Do you agree with me that the government’s incentivizing too many poor behaviors? Do you agree that too many people made money off of COVID that shouldn’t have made money?” Those companies should have gone bankrupt. A lot of the high-yield debt that got purchased, saved companies where the people were being irresponsible.

Mike Alfred (53:08):

They had levered up to six, seven, eight times EBITDA. These are wealthy people, but they knew that they’d be bailed out. And I say to them, “Do you want to defund that type of behavior? And they say, “Yeah.” And I say, “Well, guess what, I’m just going to keep telling you this over and over until you get it, buying Bitcoin is the one way to do that.

Preston Pysh (53:24):

I love it. Mike, if people want to learn more about you, I know you’re active on Twitter, and like we said at the beginning there, I know you do Twitter Spaces, which is very beneficial where people can just ask you questions when you’re in that setting, but give people a hand off where they can learn more about you and anything else that you want to highlight.

Mike Alfred (53:41):

Yeah. I appreciate that. I’m just @mikealfred at Twitter. I didn’t even use the platform much previously, but three months ago upon becoming a free agent, I decided for the first time, “Okay, I’m actually going to use this thing and really understand it.” And it’s been incredible. I’ve learned so much from the folks in the community. I’ve also been able to add value back because I have a unique set of perspectives having worked deep inside of crypto and having more of a traditional investing background, I’m able to explain some of these concepts around Bitcoin to the average person in a way that’s different than the way it’s usually explained.

Mike Alfred (54:15):

And so I’ve really been enjoying, so just find me on Twitter at @mikealfred. And I engage with everybody there.

Preston Pysh (54:21):

Mike, thanks so much for making time and coming on the show.

Mike Alfred (54:24):

Thank you, Preston. Appreciate it.

Preston Pysh (54:26):

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

Outro (54:41):

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