Preston Pysh (00:03:10):

So when I first started investing, it’s real simple. If I bought a stock and it was up 10% in dollar terms, I was up 10%. But in investing, it’s all about what’s your opportunity cost to investing in something else? Because if I’ve invested in stock X and it was up 10%, and I could have invested in stock Y and it was up 20%, if I compare stock X to stock Y, I was down negative 10% in general. You’d have to go back and look at the compounding rate and all that kind of stuff to really … But in general, you were down 10% relative to stock Y if you bought stock X, if you were looking at it as a comparison to that.

Preston Pysh (00:03:52):

In dollar terms, if you’re not accounting for a growth in the amount of dollars in the system, you were up 10% or 20%. Now, let’s say that the dollar was debased by 10%. In dollar terms, stock X was up 0% and stock Y was up 10%, after you adjust for the debasement rate of 10%.

Preston Pysh (00:04:15):

So when we say this word debasement, I think there’s mass confusion over what that actually means. Because the term you typically hear is the term inflation, and people throw around this term inflation, and going back to my original example, you could say that stock Y was inflating by 10% relative to stock X. So the term inflation really gets confusing when you start throwing it out there, because when you talk about inflation, you’re choosing to accept a government issued yield or rate that is increasing in price relative to no monetary adjustment that’s being made. When you publish inflation this year and you publish inflation next year, you’re not making any adjustments for an increase in the overall money supply. I would tell you that it’s really difficult to even know what that adjustment is in the money supply itself, because you don’t know how much credit’s being constructed on top of the monetary baseline units that are being added into the system. And that’s really what quote unquote, “Money” is. And I like to refer to it as currency opposed to money.

Preston Pysh (00:05:28):

So I bring this all up because everything is morphing and changing. And we’re at a point in time where it’s happening at an unprecedented rate, like we’ve never seen in any of our lifetime, any of our parents’ lifetime, or our grandparents lifetime, for that matter. And when you get in a situation where it’s being manipulated at the pace that it’s being manipulated, people can fall into old habits and old belief structures that everything’s like it’s a calm pond, and the number of units in the pond, if you’re measuring it ounces or milliliters or whatever is constant, when it’s nothing of the sort. And so this is really, really insanely important when you are talking about the idea of investing and outperforming the market, which is what our whole podcast network is about. How can you outperform the market?

Preston Pysh (00:06:20):

So the question immediately turns to, “Well, what market are we talking about? Are we talking about the S&P 500? Are we talking about the NASDAQ? Are we talking about the Russell 2000?” Because each one of those I would argue today, or at least in the last five to 10 years, have had the grossly different returns. Grossly. So when you really start pulling the thread on this idea and you really start to internalize it, you start to say, “Everything becomes very definitional.” It was like, “Well, what do you mean by market? What are you using as your market return?”

Preston Pysh (00:06:54):

For me personally, a market return for me today is outperforming the NASDAQ. That’s the benchmark for me, personally. If I can’t outperform the NASDAQ, well then I’m doing something wrong. I’m underperforming the market.

Clay Finck (00:07:06):

When we hit the end of 2021, I checked how the S&P 500 and the NASDAQ performed. Both the S&P 500 and the NASDAQ both had roughly a 27 or 28% excluding dividends. Definitely no easy task to beat those hurdle rates.

Preston Pysh (00:07:23):

And think about that. How many people out there today do you think had a 28% or better performance in 2021? And I’m not saying this to brag. I absolutely did, and by a lot. Now, for a person who would hear that, they would say, “Yeah, but you have enormous concentration risk.” And that’s true. It’s 100% true.

Preston Pysh (00:07:48):

Now, I could get into a big, long argument on how my portfolio, from a non-operational standpoint is completely centralized, and it’s highly focused. But if I would look at it, if you would capitalize equity that I own, that’s operational, that is highly illiquid, I feel like I’m in a pretty balanced spot. And that’s what I don’t talk about ever on the show. And who knows what the valuation of that equity would be if I was forced into a position where I would sell it? And what percentage of that would make up my portfolio versus the Bitcoin portion of it. So I can make decisions that are very different than a person who’s basically just investing from a non-op operational standpoint. Because if you have a nine to five job, that’s pretty much what you’re doing. You’re just investing non operationally.

Preston Pysh (00:08:42):

So that’s an important thing for people to consider when they look at what I’m doing versus what maybe they should be doing and whatnot.

Robert Leonard (00:08:49):

Hey Preston. When we talk about these concepts, we’re talking about some relatively complex things. Debasement, money supplies. Some rather complex economic concepts. And I think there’s a lot of people who were still trying to get on the board of just investing in general, understanding what compounding is, understanding that the earlier you get started the better it’s going to be for you in 40 years. To be honest, I’ve talked to a lot of people that listen to the show, and lot of people have no idea what any of these complex concepts are. So I’m wondering, are the days of investing passively in an index fund for the next 40 years, are those days gone? Do people need to level up even more than what we’re doing, and do they need to understand all of these concepts in depth like we do, because we’re so passionate about it?

Preston Pysh (00:09:34):

I think for a person who is listening to this and they’re saying, “I don’t understand a word this guy just said.” And I’m trying to not … The whole purpose of staying at this network was so that people could understand conversations, and when they turn on CNBC it didn’t sound like a foreign language. Sometimes you get away from your mission after you’ve been doing it so long and you understand why all this terminology is here.

Preston Pysh (00:09:57):

So what I would tell that person is they should probably be an index type person and invest in what it is that they feel like they know and understand as a majority of their portfolio, until they start getting comfortable with the terminology. And it’s just a knowledge thing. You have to study this, if it’s something you really just love to do, I really want to try to learn how to outperform the market like these greats. Well you’re just going to have to put in a lot of work, even if you put in a lot of work, you still might not do it. The odds are that you won’t be able to do it. People need to start there.

Robert Leonard (00:10:30):

What if they don’t want that though? What if they don’t care that much? They just want to make sure that they get enough of the market return earn so they can be okay in 30 or 40 years?

Preston Pysh (00:10:40):

I think that they’re going to save themselves a ton of time, and they can apply that time and energy into other things that maybe they really enjoy doing. For me personally, I absolutely love this stuff. When I’m not working and doing this, this is what I’m talking about. This is what I love to do. So I think that that’s perfectly acceptable. You just got to pick the right index. If you’re going out there and you’re picking this stock and that stock, last year, if you didn’t get 20%, you are you are underperforming something that you could have just gone in there and purchased Q, Q, Q, and fell asleep for the year, and you would’ve outperformed it with pretty much no fee. And I think that for most people, that would’ve been the best decision for them.

Preston Pysh (00:11:21):

Now, I want to emphasize this because I know a ton of Bitcoin people that are following me, and I want to say this. If you look at Bitcoin and you’re saying, “I don’t understand it, I think it’s crazy. I think it’s magic internet money that could go to zero, and all these other things. Here’s the problem for that person. Whether they’re right or wrong, it doesn’t matter. They have no conviction because they don’t understand the trade. To go buy it just because I said buy it is most likely going to be a mistake. Especially with something that has 70, 80% annual volatility to it. Because what you’ll do is you’ll buy it as it starts to run because you’ll be like, “Oh God, I missed it. I should have listened to that guy.” They’ll buy it. The thing then does what it does, which is 60 or 70% volatility or whatever it is on an annualized basis, it’s going to go down, and then the person’s going to say to themselves, “I knew it. That thing was a farce. I was just chasing everybody else.”

Preston Pysh (00:12:17):

And then as it’s cranking down and has all this volatility, they’re going to sell the position, people like me will step in and buy it, and then it’s going to go back up 150%, or whatever. And then they’re going to stay away from it for another three or four years as it continues to rip, and the whole thing is just going to be a bad experience and they’re going to miss out and blah, blah, blah.

Preston Pysh (00:12:37):

So I think what I’m getting at is for you to own anything investing, you have to understand what you own, and you have to have conviction for what you own. Because if you don’t, it could be the kiss of death, even though it might be one of the best investment opportunities of your lifetime. You have to personally understand it.

Clay Finck (00:12:55):

Yeah. I totally agree. Whether it’s stocks, Bitcoin, or whatever asset, you need to have that understanding and conviction in what you’re investing in.

Clay Finck (00:13:04):

Now, I wanted to dive deeper on how you define inflation. I’ve seen you mention that you use the M2 money supply growth. I’m curious, why don’t you account for any deflation due to the rapid technological advancements that we know is happening in real time?

Preston Pysh (00:13:21):

So I think that last part is where the terminology gets really confusing for a lot of people when they talk about like technology being a deflationary force, which it is in a way. So what do I mean by that?

Preston Pysh (00:13:36):

Let’s say we had a form of money. Well, this is what Bitcoin is. Bitcoin has 21 million units, but it has 10 to the negative eighth that you can move the decimal point over to a Satoshi. So I think there’s 210 quadrillion units in it, that don’t divide lower than that, or become divisible lower than that. So if you have all these units in the system, and let’s just say the whole planet is using this as their units of account, and still people can build credit on top of that. So if I said to you, “Hey, lend me this many Bitcoin or this many Satoshis. Lend me a million Satoshis, and I’ll pay them back to you at this interest rate.” Then a person can go and then trade that promise, because for you that promise is an asset, for me it’s a liability. You could then trade that asset, and then there could be this growth in the quote unquote, “Money supply,” because that credit spends like money. And so with any type of monetary baseline unit, in this case we’re talking about Bitcoin, there’s going to be credit that’s constructed on top of it.

Preston Pysh (00:14:40):

The reason Bitcoin is more optimal to talk about for me personally, is because in that type of world where you’d be using Bitcoin, the amount of credit that would be constructed on top of it would be extremely minimal, relative to the world that we live in today, where it’s just Fiat units and they keep adding more and more of the units into it. But the base with the Bitcoin system is totally fixed at that 21 million Bitcoin.

Preston Pysh (00:15:04):

So when that credit gets constructed on top of it, and those promises get broke, that will blow up, and it will always come back to always being 21 million units in the system. It won’t contract below that. Let’s say every promise in the system blew up. Everything would come back down to the 21 million number of units in the system. And then that’s really important.

Preston Pysh (00:15:27):

When you’re talking about a fractional reserve based system like the one we live in today, you might have … We’re going to use the same numbers, just as an example. You might have 21 million baseline units in the system, but then you might have 100X units and credit constructed on top of that, because the baseline units in there are fractional reserve from the start. Meaning that the banks are already putting a money multiplier on top of that, and then as they’re put into the system there’s more credit constructed on top of that. So just to give you an idea of how much growth is built on top of the credit on top of the system.

Preston Pysh (00:16:09):

So in the Fiat system in 1971, when we came off the gold standard and we were strictly on a Fiat-based global system, for every $1 of monetary baseline in the system, there were 55 units of credit, M2, that was on top of that. One to 55. Today, we are at one to 314 units. So for every one monetary baseline unit in the system, there’s 314 M2 on top of that for a 6X growth, just in the fractional reserve since ’71. And it’s aggressively expanding when you look at that rate of change. So now you can have M3, you can have more and more credit that’s constructed on top of this.

Preston Pysh (00:16:58):

So when you talk about what people will say in the economy, there’s this deflationary contraction and deflation that happens. What they’re talking about is all that credit is blowing up. The promises are blowing up, and let’s say it’s 314 to one. Maybe it goes down to 200 to one, and then the central bank doesn’t step in and reflate things by adding more monetary baseline units into the system, because that’s what they’re doing is they’re adding more monetary baseline into it so that they can make up for the credit that basically vanished in the system because the promises were broke, and then when they put more monetary baseline into it, more credit is again constructed on top of it at an even lower interest rate. That’s how they’re able to keep this Ponzi scheme going. And this is really fundamental and really important, and I think this is probably one of the most misunderstood things for amateurs and people that are first coming into the market that they don’t understand.

Preston Pysh (00:17:55):

So when you say deflation, what I know is that is short term in nature, that is something that is ephemeral. Where it’s only going to last as long as the central banks allow the pain to continue to persist in the market. So COVID, perfect example. Huge, massive supply/demand shock to the system. They could have just, “Hey, let’s see what the market just naturally does to itself. Who has been saving for the rainy day?” In a free and open market, that’s what should happen is all these companies should have blown up, the people who are ultra conservative with the way that they manage their finances and their balance sheet then step in, buy those assets for 10 cents on the dollar, all the assets get reallocated into very conservative hands that have a low time preference, and they put those things to use in a conservative type way that’s not out there trying to run a race. Because that’s the ultimate thing here that should be happening in a free and open market, is this give take between aggressive competitiveness, and then a reset into the people who are being fiscally responsible with the way that they’re managing their assets and retained earnings and everything else.

Preston Pysh (00:19:09):

But in a system where you have a Fiat currency that’s dominated for, what are we up to? 50 years. And then you get this idea of too big to fail with the banks, you’re effectively holding a gun up to the market’s head that says, “All right, go ahead. Let me fail. Because if you do, this entire scheme is going down. If you let me fail, the bank right next to me is going to fail.” And this is what we saw in 2009-2009. And they let Bear Sterns, they let a few of them fail, and then they realized, “Holy hell, if we let this keep going the whole thing’s going to come melding down.”

Preston Pysh (00:19:48):

And so I think that that was a big advantage that I was experiencing that in 2008. I was an active participant in the market, and I saw how quickly everything just evaporated. People will say it was fear. It wasn’t fear. It was credit units blowing up. The units were missing out of the market, and you had all this counterparty risk that had to sell, had to sell their assets to adjudicate the promises that were broken. And that’s why people sell. It’s not because it’s just fear. It’s because they had promises that they failed to uphold, and they had to sell the only things that were still valuable, and so you get into this forced selling event. And that’s what a credit event does is it creates this, and here’s the word, deflationary event where everything goes down in price. And then the central banks have to come in and add more monetary baseline units to make up for all those promises and credit that contract it.

Robert Leonard (00:20:45):

Are we going to get them meltdown in bitcoin price if we see that type of event happen with a recession, or anything like that? That’s something I’ve always wondered about Bitcoin. I’m not nearly as educated on Bitcoin as you or Clay, Preston. So what I’ve wondered to myself is, do people have to sell their Bitcoin to get Fiat because of those other liabilities that they have in the Fiat world, whether it be credit or any other obligations? Is that going to put a downward pressure on Bitcoin’s price, even though a lot of people think Bitcoin is supposed to uphold during that time? Is it actually going to get downward pressure?

Preston Pysh (00:21:24):

Absolutely. Make no mistake about it. What we saw in March of 2020 with the COVID shock, Bitcoin got crushed. I think it went from like 7,000 … No, it was higher than that. It was maybe 10,000 and then I think it sold off down to 4,000. So it was about a 60% drop. You could absolutely see that again right now. I think we put in a high of 69,000 in Bitcoin, and if we went through another big credit event it could absolutely, positively go down 60% from that high. Maybe more.

Preston Pysh (00:22:03):

So in that situation, you had central banks that came back, put monetary baseline units into the system, dropped interest rates, did all these things. They did PPP loans, they were pushing out checks to people, all these things. That was a very swift response, and that’s why you saw Bitcoin come screaming back to right to where it was, eight or $9,000, within I think 60 days, because of how swift the response was.

Preston Pysh (00:22:30):

Now, if central banks would not have come in and put more units back into the system with the monetary baseline units that they put into the system, and all the policies that they put in place, the price could have just stayed down there for quite a while. Because what that represents, when you see that happen, then you saw the same thing happen with gold. And you see it happen with gold every time there’s been … Go back to 2008, 2009. When you look at how gold performed into the crash, the third quarter of 2008, gold got punished. Go look at the charts. Got absolutely punished. Then, from the fourth quarter, when they really started inflate the economy into the middle of 2009, gold went on a 100% tear. Very similar to what Bitcoin did in the second quarter of 2020. And so you’re going to see that continue to play out.

Preston Pysh (00:23:23):

Now, I’m going to caveat this. That’s going to keep playing out until the market cap size of Bitcoin starts to rival that of Fiat currencies, globally. So we’re pretty far away from that.

Robert Leonard (00:23:37):

So is it not meant to be a safe haven? Is that correlation between the economy and the markets with Bitcoin’s price not supposed to be a problem that Bitcoin is solving?

Preston Pysh (00:23:47):

Well, here’s what you have to ask yourself. What is a safe haven during that type of event? Because there’s one thing.

Robert Leonard (00:23:53):

Real estate, I like to think?

Preston Pysh (00:23:56):

Well, you might think that because it’s not liquid. You think that because you’re not being shown up market price 24 hours a day. But if you were seeing that, you would see that it’s going down just like everything else. The only thing that does well in that environment is the dollar, or the Euro, or the Yen. And the reason why is Fiat currency. It’s because everybody is trying to adjudicate their promises with monetary baseline units. That’s the only thing that’ll be accepted. You can’t trade a promise for a promise when all the promises are blowing up, and you have to sell stocks to come up with monetary baseline units to make good on the promise that blew up. You’ve got to sell your Bitcoin to come up with Fiat monetary baseline units to pay off promise that blew up. That’s what’s happening, is there’s a bid on monetary baseline unit dollars, Euro, Yen, whatever the Fiat currency is. And mostly dollars, because most of all these promises are denominated in dollars all around the world. I don’t know what the percent was, but if I was going guess, it’s 60% of the promises are all the denominated in dollars. So you have to come to the dollar to adjudicate that, and to prove that you’re good for the promises.

Preston Pysh (00:25:14):

And remember, these promises make up a majority of the economy. So if you’re going to … Just going to the example that I was talking about M2 to monetary baseline, this M2 just takes you out to, I think, three year money. I’m sorry, three year promises. So if you go out to M4 it’s way further than that. And I think the average duration of debt, at least US debt, I think is around five years in duration. So we’re just talking about the promises out to three years when we’re talking M2, and that difference between monetary baseline, one monetary baseline dollar today is equal to 314 M2s, promises. So when those start blowing up, it just is forcing all this pressure into the monetary baseline units.

Clay Finck (00:26:04):

I’m taking away from this, don’t make promises.

Preston Pysh (00:26:08):

Well, you can make promises as long as you can continue to pay yield. And this just shows you how fragile all this is now. So the number of … The one to 314, that ratio that we’re talking about, you’re now dealing with yields that are next to nothing. And they’re literally trying to make the yields negative. They’re trying to issue this stuff. How insane. We’re in clown world, man. They’re trying to issue this stuff with negative yields saying, “Hey Clay, give me a dollar and I’m going to give you 98 cents. I swear to God, I’ll give you 98 cents back in five years,” or whatever it might be. That’s where they’re trying to go with this. That’s how crazy and insane, and how duped, and how much lack of critical thinking there is amongst everybody. It’s crazy to me. I can’t understand it.

Preston Pysh (00:27:02):

And it’s think you start with the education system and you can understand why. How many people are learning anything about any of this in business school alone? You’re not learning about this in business school. You are not. You’re learning about CAPM models where you’re using volatility to figure out what the value of company whatever is, and you don’t even look at the assets. You don’t even look at the underlying assets and whether they’re they’re going to become impaired or not because of competition. You don’t even look at that, but you use these models to figure out what the company’s worth. You’re in clown world, dude.

Clay Finck (00:27:37):

I asked Jeff Booth in the previous episode about what the Fed has been saying recently. And I asked him if they’ll be able to taper their asset purchases and raise interest rates. I’m assuming that you have a similar opinion as Jeff, that they won’t actually be able to do this without things starting to fall apart, so to speak.

Preston Pysh (00:27:56):

I think that they’re in a situation now where when you look at the bond yield curve, you’re seeing pretty much to date. There’s a couple situations where this isn’t true, like Operation Twist 10 years ago or eight years ago, where they went out on longer duration debt and they were manipulating that, and they were buying it and causing the yields to come down, and adjusting the yield curve. For all intensive purposes, they just control the overnight money rate, so far. Get ready for it because they’re coming for the rest of the curve. But so far they only control the overnight money rate. And so what you’re seeing in the open market is the rest of the yield curve is selling off. Particularly three month money out to seven year money is selling off like crazy, because of these quote unquote, and I use quotes, “The inflation print,” of 6.8%, that they’re telling you.

Preston Pysh (00:28:50):

And so the market’s just selling off like crazy, and here’s the Feds literally sitting on their hands at 0%. And the market’s looking at them like, “Are you guys going to do something? Because if you don’t raise rates, what the hell are you going to do next time it throws a deflationary fit, and all the promises blow up? What are you going to do then?” And so the Fed’s trying to keep the rates at zero, but act like they’re raising them. And so that’s why they’re messaging. Clay, why message? Just do it. Just raise the rates. Why do I have to tell you, “Oh, in six months from now I’m going to raise the rates.” Why not just do it?

Preston Pysh (00:29:23):

It’s because they’re trying to do both things at the same time, and they can’t do both things at the same time. And it’s as shortsighted as shortsighted can get. But let me tell you, if I was Jerome Powell and I was trying to keep things stable … Let me rephrase. As stable as they could be, probably be doing the same thing, man. I don’t know what else you could do. You’d have to do what he’s doing.

Clay Finck (00:29:49):

What are his incentives?

Preston Pysh (00:29:51):

I truly think that his incentives are just stability of the system. And so the problem you run into is anytime you manipulate a system, there will be a price paid for the manipulation. If you manipulate something over the very long term, it might appear like you have control of it, but eventually it’s going to slip away, and it’s going to slip away in a spectacular kind of way because you have forced it to remain inside of cage for so long. And that’s pretty much what’s taken place here.

Preston Pysh (00:30:25):

So when does this thing come to a head? Well, it comes to a head when you keep getting CPI prints that are trending towards double digits in the gauge that you’re measuring, which I would tell you if you’re using M2, you’ve been there for a while. And the interest rates are trending in the exact opposite direction, because there comes a point in time where the market says, “We’re being lied to here. How can the tenure treasury be below 1%?” Which it’s not right now, but it’s going to go back there. It was. It’s going to go back there, and I think your CPI numbers are going to keep going higher. This is important.

Preston Pysh (00:31:01):

I don’t think they’re higher maybe for the next year, but after the next deflationary fit they’re going to probably go double digits. So this is me. I have no idea. I’m not an expert on forecasting CPI numbers. But my intuition tells me that 6.8 might have been probably the high for this current mini cycle that we’re in, and when they step in and they replenish the monetary baseline units after the next deflationary fit, they’re going to step in in spectacular fashion, and I think you’re going to see CPI numbers that will exceed double digits at that point. And it’s going to be combined with bond yields, the tenure will be under 1%, the 30 year will probably be trying to press down to 1%, 100 basis points. And I think that’s going to be a moment in time where the market just says, “This is not trending in the right …” and it’s going to scare the hell out of people with massive amounts of buying power. Because they’re going to realize what’s happening, I think at that point.

Preston Pysh (00:32:07):

Honestly, I think that … The next deflationary fit I think can definitely happen within the next 12 months. I think that could happen. Now, whether it will or not, I have no idea. But it would not surprise me in the least bit if it happened in the coming 12 months. And you might ask, “Well, why would you say something …” I’m just looking at the bond yield curve and I’m looking at when it would go flat or start to invert itself, and based on the trends, and these trends can change, tomorrow they could demonstrate that it’s changing or whatever. Those trends are showing to me that in the summer to maybe in the fall months, that you’re going to be a flat bond yield curve, or maybe even an inverted bond yield curve. And if that’s true, that’s typically when the markets start throwing deflationary fits.

Clay Finck (00:32:52):

I wanted to talk a little bit more about incentives and game theory. What do you believe are the incentive for the continued adoption of Bitcoin?

Preston Pysh (00:33:02):

There’s a lot of different factors when you get into the incentive structure of Bitcoin, of why it just keeps on growing in market cap, even though it’s happening with a lot of volatility, when you look at it on a long time horizon the value just keeps appreciating. One of the biggest drivers that I think there are is so many of the coins are being held by people that have been in the market for a very long period of time, firmly believe in the technology, and firmly believe that the number of Fiat units in the global economy are going to keep expanding at a breakneck pace and accelerate. So if you just think of it like this. If Bitcoin’s 21 million units, and there’s 21 million Fiat units, and then next year there’s still 21 million Bitcoin, but there’s 42 million Fiat units, I’m sorry, but the value of Bitcoin’s going to go up in that scenario if you’re using those Fiat units to measure it.

Preston Pysh (00:33:58):

And so any Bitcoin, in a very simplified kind of way, views the world this way. They view it as what they’re up against is a system that’s just totally debasing itself and manipulating itself, and it’s getting worse every single year. And it appears like that’s accelerating, not slowing down. And the expectation isn’t that elected officials around the world are all of a sudden going to start becoming fiscally responsible. If anything, we’re seeing the exact opposite where policies are getting more aggressive to just vote money into the districts, and helicopter money out, and drop interest rates lower, which expands the number of units that’ll be constructed on top of the baseline units. The Fiat units.

Preston Pysh (00:34:43):

So a Bitcoiner would just look at that and say, “Well, that’s why I’m going to keep holding, and that’s why I have no incentive to sell.” And then you get into a significant number of them don’t need to sell because they’ve got a significant amount of wealth that’s been generated out of this. And I think the stability of the protocol is huge, that you don’t see these drastic type activities where they’re trying to change the code base and do all these other swoopty things. Anything that’s happening as far as growth on Bitcoin is happening on layers that are above the base layer. Those would be the simplified arguments that I would make.

Clay Finck (00:35:17):

You mentioned that there’s people that have been holding coins for a while. And this runs along that same idea. I’m sure you’ve heard of Craig Wright recently in the news. For those who haven’t, Preston, tell us what the situation is going on with Craig Wright, and what you think about that whole fiasco.

Preston Pysh (00:35:36):

So for people that are intimately in the space, they’re hardcore pit corners, Craig Wright is just a meme. He’s a joke. I don’t know how else to put it.

Clay Finck (00:35:47):

What’s he doing that makes him a joke? To people who don’t know necessarily what the situation is.

Preston Pysh (00:35:52):

Well if you go back to 2017, the big fork that happened in 2017 was just, “Hey, we got to increase the block size to handle more transaction throughput.” And so there was people that increased the block size, and then there was others that, held the block size … It was still increased a little bit for the base, as we know it Bitcoin today, but in general the block size was kept the same and there was updates so that you could do the [inaudible 00:36:19] update, which allowed the layer two and everything else to be constructed on top of it, which is the Lightning Network that we have today.

Preston Pysh (00:36:25):

So back in 2017, I distinctly remember going through this, and it was a kind of a scary scenario, especially if you didn’t understand the tech all that well, of which protocol or which fork is going to be the winner in this? Craig Wright, he was somebody who thought that you needed to increase the block size. He started saying that he is Satoshi Nakamoto, and that he could prove it, but yet he can’t sign an original genesis block. If you’re Satoshi Nakamoto, you’re going to verify that. I think this would be one of the funniest things is if the genesis block, if one of those transactions, if Satoshi would actually say something funny about Craig Wright. I think it’d be hilarious. And I think it could happen, but I doubt Satoshi’s ever going to do anything that could potentially compromise who he is, the location, who she is, who they are. I don’t think they’re ever coming back on the scene ever again.

Robert Leonard (00:37:22):

Do you have a theory on who you think it is?

Preston Pysh (00:37:24):

No. I have no idea. At this point I would argue, I would strongly argue, that Satoshi Nakamoto not being part of Bitcoin is the best thing … Not the best thing, but one of the best things that’s ever happened to it. And to exemplify that I would point no further than Ethereum, to point out how I think it’s bad that Vitalic holds so much esteem in that community. And that if he says anything, whether it’s right or wrong, the community is going to get behind what he says. And I think that’s very dangerous. And so I think one of the greatest gifts Bitcoin ever got was Satoshi disappearing.

Preston Pysh (00:38:03):

And so when you look at the actions of Craig Wright, and then he even forked the … So you had Bitcoin cash that popped out of the big block piece, and then Craig even forked that. And then his chain, it’s called Satoshi’s Vision of Bitcoin, which is even worse than Bitcoin Cash, and it’s gotten 51% attack all the time because there’s no hash rate on it. It’s a disaster. So for people that are looking at it from a distance, and I’ve had multiple people bring this up, Robert, they’re like, “What about Craig Wright? Maybe he’s Satoshi,” and this and that. And it’s just straight laughable,” but I can see how somebody who’s just paying attention from the fringe would see that and be like, “Well, what the hell’s this guy’s deal? Maybe he’s the …” I’m telling you. Nobody who’s been in this space for a long time, and especially from the coder side, these guys just laugh at that dude.

Robert Leonard (00:38:54):

Yeah. From the articles that I read, I didn’t think he was Satoshi by anyway. But it’s definitely been an interesting development that I’ve seen come across my feed a bit. There was a theory, I don’t know if I’d call it a conspiracy, but there was a theory about a gentleman, I can’t think of his name right now. His name is slipping my mind. But he had ALS and he passed, and there was a lot of people who thought that he was Satoshi. And that theory that I heard about it was really fascinating, and kind of convincing, to be honest.

Preston Pysh (00:39:19):

Yeah. Might be. I think at this point we’re so far down the path of how much it has grown, especially when you get into the Lightning Network on the layer two and things like that, that it’s fun for people to try to figure out who it is, because it’s a mystery kind of thing that I think really sucks and captures attention. But from a building and moving the football forward, it’s just not important and just not something that most people in the community really spend much time or energy thinking about.

Clay Finck (00:39:52):

When I bring up Bitcoin a lot of times, I’ll get asked who the creator is. Then they’ll be like, “Well, if we don’t know who it is, then it sounds like a scam.”

Preston Pysh (00:40:01):

Yeah. And for that person to say, “Well, who invented the internet?” I don’t think most people would tell you the name of the person. You don’t need to know. You can audit every line of code in it, which I think is important. I run a full node and I audit every single block that gets minted. And that’s what’s important, is that anybody can do that from anywhere as they’re doing an onion wrapped, encrypted connection to the network. So even your internet service provider has no clue that you’re auditing the blockchain.

Clay Finck (00:40:29):

What are the most important metrics that you’ve review to test your Bitcoin thesis over time? Are you looking at adoption at all? Are you looking at the hash rate? Or what are you looking at?

Preston Pysh (00:40:41):

Yeah, there’s a few things. Have you ever seen this chart where the price is going in a circle around, and it’s broken up. Each quarter on that chart is a year. And when you look at it, the price just keeps circling out, and it never intersects a previous portion on the chart. For me, this is a pretty important chart, because what it’s demonstrating is Bitcoin has gone through a full cycle. For people that aren’t familiar, Bitcoin has this four year having cycle where it gets basically the monetary policy where you talk about quantitative easing. I would describe this as quantitative tightening, where the monetary supply, the amount of issuance is getting tighter and tighter. It’s still debasing out to 21 million, but the rate at debasement is getting tighter and tighter. And I suspect that as that scarcity or stocked flow, or however you want to define that, happens on a four year cycle, you should see the price appreciating in value. Because it is finding itself into stronger and stronger hands over those four years, the Bitcoin are, and that causes the price appreciation as long as there’s still value being … The community as a whole is valuing that protocol’s ability to store value.

Preston Pysh (00:42:00):

If that’s happening and it’s growing in its network value, you should see that price never really penetrate a previous price four years previously. So that’s one thing that I look at that I thinks important. And I would say that right now, the price compared to the previous four year period is the tightest it’s ever been, I think relative to any other four year period. Just being an honest broker.

Preston Pysh (00:42:26):

The other thing that I look at is the growth in the hash rate. So the minors have to have an incentive to continue to mint blocks. And as long as they’re continuing to mint blocks and more and more minors are showing up on the scene in order to perform that work to secure the network, that demonstrates to me that they find value, and they have an incentive. The incentive structure is aligned to keep bringing them into the market in order to secure the protocol. So I think that’s really important.

Preston Pysh (00:42:54):

So this past year we basically had, I would call it an attack from the Chinese government, where they told … This used to be one of the biggest gripes against Bitcoin is that the hashing, 50% of it was located in China, and that posed a threat. A lot of people in the community, myself included, said that it wasn’t a threat. We were all obviously right, because they turned off 50% of the hash power this past year and the network didn’t miss a beat. Some of the blocks for probably about a month and a half were a little bit slower, but Bitcoin has what’s called a two week difficulty adjustment built into it that just automatically adjusted every two and a half weeks, and then it made another adjustment, made another adjustment, and after three of those difficulty adjustments everything was functioning as it was designed.

Preston Pysh (00:43:43):

And those mining rigs migrated to other geographic areas. A lot of them came here to the United States, which I think strategically for the United States was a massive win. Unprecedented win in the long term. It won’t be realized probably for two more decades how insanely valuable strategically that was for the United States. So that’s another metric that I pay attention to.

Preston Pysh (00:44:07):

A new one that I’m really paying attention to is the growth rate on the Lightning Network. So when I think about the Lightning Network and where that fits into the grand scheme of things, as all of this matures, I think that today it’s a store of value. It is not being used as a payment rail for everyday purchases. I think you’re starting to see it used as immediate clearance into stable coins, which is going to be the next really big step for Bitcoin, which is you’re going to see the Lightning Network being used to send value across international borders, into stable coins, which will be immediately swapped and people won’t even realize that the Bitcoin were being used because how low the transaction fees are and how instantaneous it is on lightning. That’s the next big thing. And so when I’m looking at fundamental metrics, that’s one that I’m really paying attention to and you’re seeing the numbers just explode. The rate of growth on the Lightning Network is astronomical right now. Huge.

Preston Pysh (00:45:10):

When I think El Salvador was a major part of the impetus for why that’s really taken off, and I think that it’s going to continue to take off, is people are seeing the whole Jack Maller’s piece that he’s doing with Strike. And that’s just one application, I think, that is being used on top of lightning. So I’m paying attention to that and the growth rate of that, and it all, to me, looks extremely healthy.

Preston Pysh (00:45:33):

So for a person who’s coming into this and looking at the price action and saying, “Well, it’s sold off this much percent since the last high,” I think they’re missing the real fundamentals. Just like if you were looking at a company in a stock and you’re saying, “Hey, the price is down 20%, but they just acquired this new asset which I think is going to expand their top blind by this amount, it’s going to expand their bottom line by this, and it’s going to make them way more competitive in this particular domain.” That’s how real investors make their money is they’re looking at things from that lens while the rest of the market might be penalizing the price or whatever.

Clay Finck (00:46:08):

I recall listening to your Mastermind episode on We Study Billionaires back in the first half of 2020. Bitcoin at the time was trading around $7,000. And your investment pick was obviously Bitcoin at that time, in that episode, and you predicted that we would see a $20,000 Bitcoin at the end of 2020, and 100,000 at the end of 2021. And Bitcoin did hit that first target, but not the second. Would you say that the reason it didn’t hit that second target is because of China’s ban on Bitcoin mining?

Preston Pysh (00:46:43):

So there’s a little bit of luck in some of the … Hitting the 20,000 call, there’s a lot of luck there. It went up to 69,000. I was saying 100,000 two years ago, which was mostly based on the stock to flow model, and it was really based on previous cycles and how much it had gone up percentage wise is what I was using at the time to estimate where that should be. I do believe that not only the hash rate migration was the first blow that just took the wind right out of the sales of Bitcoin in 2021, then I think the second hit was here in November and December where you can look at the exchanges and you can see the flows in the exchanges, and all of this selling from 69 to where we are right now, we’re at 47,000 or something right now, all of that selling was coming out of Asia.

Preston Pysh (00:47:34):

And what I think might be happening is you might have some major credit events happening in Asia, particularly with the Evergrande and everything else that’s popping out of that. Asia seems to be struggling in the third and fourth quarter of 2021, and it might have been impacting the Bitcoin price, but I don’t know for sure. That would be my speculation though.

Preston Pysh (00:47:56):

In going to Robert’s original question, which was if you go through another one of these deflationary credit busts, would the price of Bitcoin go down? We might already be starting to experience that. You asked about that first thread that I wrote about basically readjusting the units to account for M2. When you collectively look at the global economy and you look at the performance of the global stock market, it’s crazy to see when you look at that chart and you adjust it for M2, I believe you are right back to the bottom of the COVID 19 shock.

Preston Pysh (00:48:37):

So the bottom of COVID to now, the market from the global economy adjusted for M2, is only up 9%, believe it or not. And that’s adjusting all the currencies. Because what I did is I take each stock market, I adjust it into dollars, and then I adjust those dollars for M2. And the global stock market is only up 9% since the bottom of the COVID.

Preston Pysh (00:49:05):

Now, if you don’t adjust for M2, you are up 47% since the bottom for the global stock market. Then if you were going to take, let’s say we took the NASDAQ, which I was telling you was my baseline, not adjusted for M2, since the bottom of COVID till now, the NASDAQ is up 142%. And when you look at that time horizon to go that many percent, 651 days. Go back in time and look at how long it would take the stock market to appreciate that much. This is crazy.

Clay Finck (00:49:43):

One of the questions I pulled from Twitter was concerns about the bear case for Bitcoin. What does a potential bear case look like from your vantage point?

Preston Pysh (00:49:52):

I think one of the concerns at least that I have, and it’s more of a limitation of my knowledge is just the SHA 256 encryption. And I think that there’s no way to really prove whether that might have an issue at some point in time, because there’s no way to back test that all the … When you’re dealing with encryption, it’s one way functions. So it’s not like you can solve them in reverse. So anytime you’re using any type of encryption mechanism, there’s just … Well, we’ve used it for a long period of time and there’s never been multiple solutions for this one way function. So that’s one thing that I would say is a concern of the unknown. You don’t know whether that will continue to work as advertised.

Preston Pysh (00:50:36):

For the other types of protocols, I think one of the concerns is really the founder or centralized influence having an impact. You could argue you that there’s concerns whether proof of work will continue to get by the ESG policy makers, which seems to be a huge, huge political narrative that’s being pushed from the highest levels, on a global scale. That’s one of the things I will say that surprised me in 2021. I expected that to be a way bigger issue, and here at least in the United States, it seemed to be actually surprisingly well accepted. States like Texas and Wyoming and others are actually passing laws to promote it and to incentivize it. And then earlier in the middle of 2021 there was a lot of policy discussion at the federal level, where even the White House was coming out with very pro proof of work, and it was very strange. It was not what I was expecting out of the policy makers. I was expecting a huge fight there, and we actually got the exact opposite.

Preston Pysh (00:51:43):

But let’s just say that you get a new administration. There’s another risk. You could have a new administration come in and be very difficult in this area, and be very pro US dollar, which could pose a threat to the United States. But as far as posing a threat to Bitcoin doing what it’s going to do, I don’t see it has any type of effect, whether one country or 10 countries or 20 countries try to come up with policies to ban it, because there’s going to be countries that find the value in it, like the El Salvadors of the world. They’re going to continue to promote whatever they can with it. And those units and the mining rigs and everything else is just going to flow into that domain, and good luck competing with them. You’re going to have every person with foreign capital trying to get in there. And so that’s the part that’s going to make this really hard for anybody to have a long lasting ban, or preventing it. You saw India. They said they banned it, then they reversed their position. And there’s reasons why they’re reversing their positions.

Preston Pysh (00:52:43):

That was a little bit of a pro spin there at the end. Sorry about that.

Robert Leonard (00:52:47):

So with all this talk about the Lightning Network and you may inch and Jack Mallers, I have been pretty public about my biggest position in equities market being Square. And some people have come to me and asked, “What do you think Bitcoin’s going to do to Square? What do you think the Lightning Network does? What do you think what Jack Mallers is doing in Strike?” And any really FinTech organization like Square, whether it be PayPal or Visa or MasterCard, how are these types of companies going to fare? So I’m curious, Preston, from your perspective. How are these companies going to do from a competitive standpoint against what Bitcoin’s offering?

Preston Pysh (00:53:20):

Bitcoin is going to eat into a lot of financial service, period. How much is really the question. And that’s really hard for me to be able to really understand how much. When I look at Square, who would be best positioned to endure this and who would be worst positioned to endure this? When I look at Square, they are leading the charge. Way out in front compared to everybody else. And as you guys study these tech companies, if you’re not cannibalizing yourself somebody else is going to do it to you. And so I see Square upholding those ethos probably better than anybody else, where they’re like, “Hey, if this means we’re going to cannibalize ourselves, so be it. Are we going to fight to retain our competitive advantage because of we can, because of a network effect that’s been previously established for as long as possible, but intelligently migrating over where we cannibalize ourselves at the right moment in time?” I think that’s how they view it. I think that’s what they’re going to do.

Preston Pysh (00:54:19):

Now, what that means to their bottom line and what that means to when this will happen, Robert, I have no idea. But you go to like some of these other big banks like Wells Fargo and others that are just, in my opinion, idiots relative to Square, I’ll take Square every day of the week. Because they have cultural issues. They have major cultural issues. And if there’s one thing that’s really hard to change in a company, I forget what the Buffet quote is, it’s cultural issues. There’s a very good quote Buffet has on that.

Robert Leonard (00:54:50):

It gives me a bit of comfort that the leader of Square is so gung ho about Bitcoin as well. That gives me a little comfort at least.

Preston Pysh (00:54:59):

Yeah. So let me just get into this a little bit. So they have tons of hardware. You’re always going to need hardware. To accept the payments, they’re going to have to flow through that hardware if you’re square and you’re putting up a QR code for a transaction, there’s data there that can be captured. That doesn’t mean that the store owners can’t do their own type of wallets and things like that to accept payments and blah, blah, blah. That’s what Bitcoin … At the essence of Bitcoin is able to do a lot of these swoopty things.

Preston Pysh (00:55:28):

I forget … There’s people that have hardware wallets, you can build right there at your house for nearly nothing, and you can accept Bitcoin payments with them. I think most of your major businesses, they aren’t necessarily too concerned about that data analytics piece. And they’re just looking at something that’s convenient, that’s turnkey for them that then will produce Bitcoin QR codes and whatnot. And they’re going to still be able to do … Because that’s the value for Square is the data analytics on every single transaction on the planet.

Preston Pysh (00:55:59):

This is one of the things that I think was really interesting in ’21. Sorry to like go off on a tangent here. When Jack Dorsey made his tweet about the hyperinflation, and everybody, everybody, every bank, every academic, everyone’s like, “This guy’s off his rocker.” But yet he probably has better data analytics and information on the pricing of everything on the planet than anybody in the world with Square. But hey, you come up with whatever theories you want. He’s marching to the tune of whatever … Maybe he knows something. Maybe you aren’t accounting for the fact that this guy knows the price of everything on the planet, and understands data analytics of everything finance better than anybody. But we’ll see.

Clay Finck (00:56:40):

Pretty crazy to think about. I have question somewhat related to that. I think that many millennials, especially those that are younger, are upset with the cards they’ve been dealt, or just feel somewhat hopeless getting ahead financially. You, Robert, and I all see these people going crazy over whatever’s going up or trending at the time, whether it’s GameStop, Doge Coin, NFT’s and so on. With that said, I’ve heard you say that now is an extremely exciting time to be alive. I’d like to ask you why you believe that to be the case, and what millennials can do to capitalize on the opportunities that are out there today.

Preston Pysh (00:57:19):

If you’re under the age of 40, you’ve been so screwed, in my opinion. Unprecedentedly screwed. And what I mean by that is when you look at the ownership of the equity in the world, it is consolidated into the hands of the few. I love using a Monopoly example because it’s something that everybody can understand. If we were playing Monopoly, there’s one player on the board, he already owns all the property, and there’s a couple dollars sitting in front of the other three players’ seats. There’s nobody sitting in the seats, and the millennials were asked to come up and play the game with a couple dollars in front of them. And all the equity’s already owned by the one other player. And the bank is adding more into the board, but the way they’re doing it is they’re giving it to the player that already owns all the equity, in exchange for some of their equity. They’re giving them more cash.

Preston Pysh (00:58:13):

And let’s just say that the other three players had one property on the board, and the fourth player, the person who’s already sitting at the table, who’s sitting on quote unquote, “All the equity,” is getting more cash from selling a few of those properties, which are getting clawed off the board. That equity’s not being offered back up to anybody. The bank is then taking that equity and putting it in the board’s container. That one player who owns all the equity is going to those three players, those three millennials that just started playing the game with no money and one property, and saying, “Hey, I’ll pay you whatever for price just for that one equity that you own.” Meanwhile, you’re going around the board, every time you roll the di you’re landing on someone else’s property and it’s taking the $3 that you have left in the game. This is the life of the millennial.

Preston Pysh (00:59:02):

If I was going to tell you why I’m so excited about Bitcoin, what Bitcoin is is the three millennials can pick up the table, and they don’t just flip it over, but they flip over the whole table and then they beat the one player who started the game over the head with the table. The other person grabs the Monopoly board and hits him in the crotch, and they take all the paper Fiat and they shove it in his mouth. That’s what Bitcoin is. Because it’s a system that removes the vicinity to the money printer for the few participants that hold all the equity, who aren’t allowed to fail. They’re just going to continue to get bailed out. Because that’s the current system they’re too big to fail. The ownership of the equity has been completely consolidated. All the wealth, quote unquote, “Wealth,” in the world is in the hands of very few people. And so how can you play that game?

Preston Pysh (00:59:55):

People listening to this thought about their current situation. How many of them actually own the company that they work for? They’re working for somebody else. Then you think about, “Okay, well let me think about this company that I work for. How big is it?” Okay I work for, let’s just say you work for, I don’t know. Name the company. You can almost name any company. All right. Walmart. Huge, massive. Name another one that’s not that big. And then you have to ask yourself, “Well, who owns their equity?” And when you start pulling on that thread, that equity is probably owned by some massive conglomerate. And then if it’s a public company and you start saying, “Well, who owns that?” BlackRock, Vanguard. The equity is controlled and owned by these massive, massive trillion dollar in assets under management organizations.

Preston Pysh (01:00:45):

This isn’t something that’s taught in school. This isn’t something that people critically think about. What they think about is, “I just got paid this amount, and it feels like I can’t even buy what I used to buy yesterday.” Because they’re buying power is getting debased, and when you get a check for whatever amount, 400 or $500 or whatever it is, all it’s doing is pulling forward. They’re so desperate to pull forward your tax rebate, that now they’re sending it to you on a monthly basis. And if they’re sending it to you, they’re sending it to everybody else. And if your house is going up by 5%, so is everybody else’s house, and it’s not creating value for you. Spending value, buying power, nominally it’s going up. But in buying power terms, it’s diminishing. It’s going down. You’re losing buying power if you’re not outpacing the QQQ.

Clay Finck (01:01:39):

They don’t teach this in business school, but they teach you that The Investors Podcast Network. That’s for sure.

Preston Pysh (01:01:45):

That’s right. And going back to when I was beating up the business schools, they’re teaching you CAPM models. You want to get me going? Just get me talking about CAPM models, man.

Clay Finck (01:01:54):

Preston, I really can’t thank you enough for coming onto the show. I’ve learned a ton from you and Stig for many, many years, and I know Robert’s in the same boat. So it’s incredible to have the opportunity to bring you onto the show. Before we close out the episode, where can the audience go to connect with you, in case they aren’t already?

Preston Pysh (01:02:12):

I’m active on Twitter, and I try to respond to most people. If I don’t, I apologize. But I’m very active there. I’m looking for counter ideas, I’m looking for why I might be wrong, I’m looking for kind, happy engagement. My resolution for 2021 is to be a kind thought leader, and somebody who’s using critical thinking without always using the sword at somebody’s throat to prove them wrong. So I’m going to try to be the nice, happy-go-lucky investor of 2022. I think I said ’21, right?

Clay Finck (01:02:49):

Preston, thanks again.

Preston Pysh (01:02:51):

Absolutely.

Clay Finck (01:02:53):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can and get these episodes delivered automatically. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (01:03:16):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcaster.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.