Clay Finck (01:56):

Let’s dive right in and get kicked off covering your background. How did you first become interested in Bitcoin and what led you to end up becoming just so passionate about it?

Dylan LeClair (02:09):

Yeah. Funny enough has a little bit to do with this Investor’s Podcast Network. Just really, really loved numbers. I was always just kind of a problem solver from a math perspective. Growing up in high school, I didn’t really know what I wanted to pursue, but leaned more towards like the business angle just because of the number aspect of finance and econ and all of that, and started really getting passionate about just learning about the financial system, the economy, just investing in general, like the concept of working for your money versus letting your money work for you was something that just like naturally attracted me and fueled my passion for learning the stock market stuff.

Dylan LeClair (02:43):

I learned a little bit about Keynesian economics in my own time, like in high school and went to the University of Vermont for business. And at the same time, I’m learning about this, the ICO bubble happens. I don’t participate at all, but I knew of people that did participate and it was just kind of like the wild, wild west. I knew someone, a friend of a friend that became an overnight millionaire and then lost everything. And it was like, “Whoa, what’s happening over there?”

Dylan LeClair (03:06):

So as I started learning a little bit more about just markets in general, the crypto side of things wasn’t something that I wrote off. It was honestly just kind of interesting and because I didn’t have a framework to go off of. It wasn’t something I immediately dismissed, which I might have if I was 40 years old and hadn’t been in the Keynesian system for two decades.

Dylan LeClair (03:24):

So because of that, I had more of an open mind, had a Twitter account and honestly found, I don’t even know how. I found Bitcoin, Twitter kind of just stumbled into it, found Preston’s show. And he wasn’t full-time Bitcoin podcast every week like he is now, but he always had an open framework for it, for evaluating it and its role. So March 2020 came around and I’m more or less like I’m paying attention in class in college, but I’m listening to podcasts every day and honestly learning more on my own just because that’s how I roll.

Dylan LeClair (03:50):

It’s not as much structure and more so, just like whatever interests me in the moment. So they kick us off because of COVID that we get sent home and I’m like learning at home from Zoom “learning”. At the same time while I’m ignoring all my stuff that I’m paying to learn and just learning on the internet for free.

Dylan LeClair (04:07):

So I stumbled pretty hard into the Bitcoin rabbit hole at this time. I read like Ray Dalio’s framework for big debt cycles and that really made it click for me where we were. I learned like Austrian economics and what that was from a first principal stand point. So I guess you can call it orange pill, decided to leave school. And really it was about stacking as much Bitcoin as I could was my rationale for it. My parents thought I was crazy, but more or less that was kind of my decision.

Dylan LeClair (04:32):

If the internet is stripping back the cost of education, and I can see that in real-time and I wasn’t going to be an engineer or a doctor, I was going because I liked numbers and problem solving and I was doing that by myself. So more or less just popped around on Twitter for a year or so while I just had a regular manual labor job and kind of parlayed that into a role in the industry, doing some media stuff with the Bitcoin Magazine. And about a year later, pretty involved with their market research side of stuff on chain macro stuff that I really like to learn about out.

Dylan LeClair (05:01):

So definitely a dream come true from that sense. Just get to learn and look at markets and charts every day. A lot of that is just from podcasts like yourself and Preston.

Clay Finck (05:11):

Very cool story. A lot of what you mentioned definitely falls in line with the path I took. It’s very interesting business and finance and numbers. Ended up going sort of that path for a while. I was also a huge fan of The Investor’s Podcast Network as well, and really took a big interest in Bitcoin when they did. So when Preston started to talk about it more and more, I knew I had to dig deeper on it.

Clay Finck (05:34):

Now, you wrote this fantastic article that pulls all of these ideas from different places including Ray Dalio’s book, Principles for Navigating Big Debt Crises, which you mentioned. Your article covered the long-term debt cycle in great detail, which was a concept that Dalio wrote about as well. Could you summarize what the long-term debt cycle is and where we’re currently at in that cycle today?

Dylan LeClair (05:59):

Yeah. So the long-term debt cycle, I think a lot of people are like intuitively they’re familiar, even if they’re not business student or in the working in finance. They have an understanding of the short-term debt cycle. The boom and bust of an economy. Oh, a recession. It happens once every 10 years. Even if they understand the mechanics behind, it’s just something that makes sense. It’s just ingrained at everyone’s head like, “Oh, yeah, we have a recession.” But without understanding the mechanics of why that happens and kind of the gears of credit and debt that really caused these declining productivity quarters or years or recessions.

Dylan LeClair (06:32):

So I think what’s not really understood is that long-term debt cycle. So over the course of multiple short-term debt cycles, you’ll see if you’re in the upswing of a credit boom, you’ll see that debt continues to accumulate across various sectors, but the debt load never gets reduced to where it was during the prior upswing. Debt accumulates, malinvestment occurs. A boom happens where everyone feels like they’re getting rich, but it’s really a lot of paper wealth. And that malinvestment attempts to that get liquidated. And because of this Keynesian system that we’re in with central banks, with governments, with fiscal spending, what you see is that stimulated effect come in the form of additional credit, additional debt to prop up the system.

Dylan LeClair (07:11):

So over the span of not 10 years, but 50 years or a hundred years, if you want to zoom like way out, you see this kind huge cycle occur. Most people don’t really understand it because we’ve never lived through a long-term debt cycle before. We’re all just in one right now. So right now we have interest rates at 0%. If you just look at, I think the best chart is the 10-year treasury or the fed funds rate, you can just see those higher lows of interest rates.

Dylan LeClair (07:35):

It doesn’t really take a genius to understand that the cost of capital continues to just fall. And it can be raised to higher levels because of the debt burden. So approaching that from an investor framework and how to allocate your capital and how to protect or grow your wealth during potentially the conclusion of one of these debt super cycles was something that was really fascinating to me because you have guys like Ray Dalio come out and say cash is trash.

Dylan LeClair (07:56):

Well, why is cash trash? What’s the reasoning behind in that. And the reality is with our Fiat system like if there was a bearer asset that everything could collapse upon like say gold in the previous system, then that’s what you want to hoard. But in a Fiat system where there’s no underlying collateral except the credit system itself, you have a problem. And it’s basically that there needs to be perpetual credit expansion for the entire system collapses and the biggest depression the world has ever seen, and that sounds very dark, but more or less if the fed doesn’t step in March of 2020 and bail out the debt market, that’s what happens.

Dylan LeClair (08:30):

You have this unwind of your liabilities and assets, the asset side of your balance sheet falls, there’s counterparty risk everywhere. So this is not just an individual, but an aggregate level. The asset liability mismatch causes you to force liquidate more assets, which is a kind of a reflexive doom loop all the way down. Obviously, the response is printing more money, more stimulus, more of the same. But where does that lead to? And I think that’s where I applied Ray Dalio’s traditional framework of find a monetary bearer asset, find something with no counterparty risk in a production cost and apply that to Bitcoin in a way that made sense to me.

Clay Finck (09:05):

Your article also references Dalio’s video, How the Economic Machine Works, which is a fantastic video for your everyday person to start to wrap their head around this stuff. It’s funny, in that video Dalio states that the long-term debt cycle ended with the 2008 financial crisis, but everyone knows that ever since then, we’ve just had an additional boom that has expanded the everything bubble for lack of a better term. So my question is, did the response to the 2008 financial crisis just delay the inevitable of this financial reset of the monetary system? Or how do you think about that?

Dylan LeClair (09:43):

Yeah. So I would preface it with saying that all I’m referencing is history. So just kind of reading it from a historical lens, but essentially they successfully kicked the can again in ’08. And this time it wasn’t through interest rate policy, because rates hit that at zero lower bound. What they turned to was debt monetization or what they called quantitative easing. And they use a lot of these big fancy words. More or less, it’s essentially printing money and there’s nuance there where they’re not actually printing money, they’re printing bank reserves and it doesn’t actually enter the system and it’s just taking toxic debt off the bank balance sheets.

Dylan LeClair (10:12):

But what they were doing is essentially bailing out the credit markets in a way that they could no longer do through interest rate policy, which is their go-to lever. They turned to quantitative easing or just essentially stuffing fixed income markets with more money and taking that debt out and putting it on the central bank balance sheet. So we saw that for the last 10 years essentially. We saw varying levels of quantitative easing. They barely got interest rates off that zero lower bound. We had basically negative real yield yields for a decade or more. And then they really tried to unwind that balance sheet and the corporate debt markets created in 2018.

Dylan LeClair (10:45):

So we saw the Powell Pivot. It was kind of infamous. I saw the repo market blow out in 2019. These were all signs that a recession was coming regardless. And then conveniently, and this isn’t like conspiratorial in any way, but conveniently the biggest pandemic ever comes in and they have to print ungodly amounts of money in a safe space like, “Oh yeah, it’s a pandemic. Of course we had to do this. It was emergency measures.”

Dylan LeClair (11:06):

I mean, it says the pandemic and the great financial crisis 10 years before that was much worse, but the reality was the debt problem. The problem that occurred in ’08 was much worse 12 years later. So we had all these emergency measures. Now, where are we? Well, inflation is at 40-year highs. The fed funds rate is still at zero. The entire treasury curve, and really the entire global debt market is negative in real terms, from junk bonds all the way to treasuries. Stock market at all time highs.

Dylan LeClair (11:32):

So where do we go from here? And I think that’s what a lot of investors are trying to figure out. Is inflation transitory? Well, it might not be. And what does that mean for the assets you hold in your portfolio?

Clay Finck (11:43):

So you’re describing how these debt bubbles move in cycles where eventually the debt taken on eventually has to come due. But today with the money printing we’re seeing to pay off the current debt, they pretty much have to take on more debt to pay that off, which means they need to keep interest rates low to keep things chugging along. And that’s when it seemed fairly obvious to me that something is going to have to give on that front. So I’m curious, you mentioned that these long-term debt cycles move in 75 to 100 year time periods. How is the end of this debt cycle maybe different than the previous one and how did the previous one even end?

Dylan LeClair (12:22):

Yeah. I mean, you can look at it from a couple different angles. I think we saw that the Great Depression where following the ’20s, the roaring ’20s, we saw this huge private debt bubble. They were on a gold standard or a redeemable gold standard. So you had those paper notes with gold as that bearer instrument underneath the banking system. All of that credit creation collapsed upon itself, that paper wealth, and it induced the recession.

Dylan LeClair (12:44):

Obviously, there was other variables there like famine and all of that, but what the cause was credit bubble on top of that bearer asset. So that collapsed. We go into the ’30s and then obviously have a world war, all this stuff, but we have a monetary reset. They devalued a debt in real terms. Roosevelt did in 1932 by confiscating everyone’s gold and immediately reevaluating it higher.

Dylan LeClair (13:05):

That was one of the things they did. So that in real terms, that debt burden got eroded a little bit. And then 1944, Bretton Woods, the world comes together and says, “All right. The US will hold our gold and our dollars are redeemable for gold.” And the game theory there was, “Well, the US cheated more or less with their paper claims on that gold and country started to call their bluff.” Right? Because there’s that peg, but who’s enforcing that peg and do they have the gold to back it up was the question. And ultimately they didn’t.

Dylan LeClair (13:32):

So we defaulted upon our promise. So you can kind of look at the end of that debt cycle in a couple different ways, but really there was a couple defaults. There was a default in 1932 when we seized everyone’s gold. And then there was a default in 1971 when we defaulted upon basically like global, central banks and their redeemability for gold.

Dylan LeClair (13:50):

So since then, and I like to look at like 1980, 1981, that’s kind of like that secular top in interest rates. Since then, we’ve had the greatest asset boom of all time. Just a secular bond bull market and a secular everything bull market. Essentially real estate equities. Anything that benefits from the cost of capital going lower, which is basically every asset.

Dylan LeClair (14:09):

So in terms of when that debt cycle last occurred, well, there’s a couple quasi resets, but I think now with a global coordinated Fiat currency regime where it’s almost a race to the bottom and you’re incentivized to devalue your currency, we’re in something that’s never really occurred at this scale, and it is quite unprecedented.

Clay Finck (14:28):

Now, we’ve been in this secular trend of ever decreasing interest rates and now we’ve hit essentially the floor, which is 0%. But I see that countries like the countries in Europe and Japan have negative interest rates. Is that something that’s even in the cards for the US? What do you think on that front?

Dylan LeClair (14:47):

Yeah. So I don’t think it is. I think because given that we’re the world reserve currency, we can’t have nominally negative interest rates, but what they’re attempting to do right now, and this was actually laid out the IMF, put out this playbook in 2011 and it’s also kind of Ray Dalio’s framework for it. When the debt burdens are this high what you can do is essentially financial repression by artificially capping these interest rates and letting inflation run hot.

Dylan LeClair (15:10):

So negative real yields are essentially a wealth transfer from creditors to debtors. That’s what’s happening right now. If you’re sitting on treasury bonds and over the last year, inflation 7%, if you received a 2% coupon yield, well, you lost 5% of your wealth. So whether a CPI is a correct measure of inflation or not, essentially during periods of negative real yields, that’s what’s happening as a wealth transfer of purchasing power.

Dylan LeClair (15:33):

Not a nominal terms, because you’ll get paid back. If you own treasury paper, I’m almost certain you’ll get paid back in nominal terms. There’s no reason to nominally default with a Fiat currency like there would be with a gold currency where you just don’t have enough of that base metal. But with the Fiat currency, they can always print it. So that’s the game theory and incentive for politicians is to keep the money printer going brr and letting those debt burdens erode in real terms is I think the game. So you don’t really even need that nominal negative yield to accomplish that.

Clay Finck (16:01):

In reading your article, the obvious difference in opinion between yourself and Dalio is the potential solution. Dalio said on a recent We Study Billionaires that a small, say, 1 or 2% position in Bitcoin is prudent. While you firmly believe that Bitcoin is the solution, why do you believe so strongly that Bitcoin is a solution to this mess, the United States and the rest of the world is in?

Dylan LeClair (16:27):

Yeah. So obviously someone like Dalio who’s a billionaire can just have his schmuck insurance hedge have 1% and really kind of protect his wealth and not need to fully allocate to capture this move. I mean, honestly, he probably couldn’t fully allocate his wealth because he has so much of it that it would move the market to a great extent where someone like myself is obviously not facing that problem.

Dylan LeClair (16:48):

But that aside, my thesis is that a lot of people will say, “Bitcoin, it’s the first iteration of digital currency. How do you know it’s the one?” And my response is, “Well, it’s really not. Digital currency was tried for years. There was multiple iterations of it that failed.” And what Satoshi did was basically combined a bunch of different iterations of digital currency, public key, private key, cryptography, all of these things and put them together in a way that no one had ever thought of before to solve the double spend problem.

Dylan LeClair (17:13):

Basically, value to transfer on the internet between intermediaries, between counterparties, couldn’t be trustless. There wasn’t a way to do it without trusting your intermediary. So with Bitcoin, there was kind of an immaculate conception with digital cash. Not only that, but we have absolute scarcity. Absolute scarcity was never a thing before the advent of Bitcoin. Well, now we have provable, verifiable, absolute scarcity and a decentralized monetary system that no one can shut down or no one can stop.

Dylan LeClair (17:38):

So that is how I think of it in terms of the properties of gold and what do you want to protect yourself in a debt crisis? Well, why do you hold gold? Well, you hold it not because it’s a shiny rock and it’s pretty, you hold it because, one, it’s absolutely scarce. Gold is relatively scarce obviously, but atomically scarce on earth. Maybe we find some rocks in space, but for the point being, it’s relatively the most scariest thing we have.

Dylan LeClair (18:01):

It’s durable. Not very portable, but it does the trick. It’s fungible, and there’s a production cost. It’s really costly to go find more gold. Humans have been looking for a long time. So you can’t arbitrarily dilute someone else’s wealth as a gold holder. You have to put in that kind of proof of work to find gold by either exchanging it from someone else or forcefully taking it.

Dylan LeClair (18:18):

But that’s kind of a lesson of history. Everyone wants the other person’s gold. But besides there’s kind of a proof of work expenditure for gold. So I applied that framework with Bitcoin and it’s okay. I can hold my own Bitcoin, my own key with no counterparty risk. There’s a provable production cost. And actually if you dig into the mechanics of it with hash rate, the difficulty adjustment and this asymptotic supply curve, it’s basically the marginal production cost I’ve concluded, the marginal production cost of Bitcoin is trending towards infinity.

Dylan LeClair (18:45):

So that people look at me wide-eyed when I say that, but just if you look into the hash rate, you look into the difficulty adjustment and you look into the amount of Bitcoin that’s being issued. The incentive is to basically chase it down with the lowest energy cost all around the world until there’s no more wasted energy. And there’s a lot of waste energy out there, so that marginal production cost is going to go the other way, which is up.

Dylan LeClair (19:04):

So all the things that are desirable in a monetary bearer instrument, when you think of gold as money or previous monies in history, Bitcoin is the best by far. So people would think maybe there’s a margin of error there. Maybe there’s some flaw in my thinking and I, basically, for better or worse, am quite certain that there is no alternative.

Clay Finck (19:23):

My question to that is the central banks around the show right now, and the central banks own a whole lot of gold. So why can’t gold be something someone should hold in this scenario or why isn’t this a potential solution going forward? Maybe they set up some sort of financial system based on a gold standard again? What are your thoughts on that?

Dylan LeClair (19:44):

Yeah. So I mean, I would say that it’s probable. I mean, right now what you’re seeing is Russia de-dollarized and they’ve accumulated gold for the last almost decade. So gold isn’t obsolete yet, and that maybe it won’t ever be in terms of having that monetary premium. Like it’s not just an industrial metal, like say copper, or tin, or iron. There’s a monetary premium to gold the base metal, because of its properties.

Dylan LeClair (20:06):

So will that go away tomorrow? No. But I would say there’s a reason why we’re on a Fiat standard in the first place and it’s because of that trust and that cooperation required on a gold standard. I can’t go to the store with the bar of gold and shave a little bit off to pay for my candy bar or my gas in my car. Right?

Dylan LeClair (20:23):

So what’s required? Well, what’s required is some certificates of deposit, some counterparty holding my gold and issuing me some notes saying that I own it. Well, we already tried that and it failed. That’s what a bank run is. The incentive to kind of create money in the form of… Clay, you deposit your gold bar at my institution. And I fractionally lend out two of those notes because I realized that people don’t come and redeem them. That already happened.

Dylan LeClair (20:46):

So I think that natural incentive of human greed is you can print money. You will print money is inevitable. So if Russia came out and said, “We have some gold backed currency. That’s cool, but I don’t really trust that you have the gold to do it. And if you want to prove it, great. But how is that verified? How are those incentives aligned?” And I just believe that fundamentally in a 21st century economy, it’s just not feasible to return to the metallic monetary standard.

Clay Finck (21:12):

So the end of the previous long-term debt cycle was the Great Depression timeframe where we saw asset prices just collapsed. So is that a possible scenario in the end of this cycle? Could we see a deflationary bust and how does that affect Bitcoin?

Dylan LeClair (21:29):

Yeah. I mean, if you were just look at what happened over since November, people will say Bitcoin, the central banks can manipulate it by tightening monetary policy or they pop the bubble and they’re not necessarily wrong in that sense. To a certain extent central banks still have that lever to control the value or at least the fed to control the value of that dollar. Right?

Dylan LeClair (21:48):

If they tighten monetary policy, well, BTC-USD with the denominator going up, then Bitcoin probably takes a hit. During a credit unwind, Bitcoin is not insulated. But what they can’t manipulate is Bitcoin’s own monetary policy. So can a Great Depression type event happen? Well, yes, just with how overindebted the system is. But again, there isn’t that gold standard base collateral for everything to collapse upon.

Dylan LeClair (22:10):

In a fractionally reserved Fiat system like we’re in today with all of this counterparty risk prevalent, during an unwind, it just goes to zero. And that sounds crazy, but money is created in this Fiat system through only lending. Every dollar in circulation was lent plus interest. So if that loan, or if that money is defaulted upon, then that money is commercially it’s destroyed. So what you have is balance sheet impairment across the entire economic system and collateral values falling, and it’s just this aggressive unwind.

Dylan LeClair (22:37):

So that’s why they have to come in and save the system because they can’t let it. So I believe regardless of both scenarios, I believe if they let everything unwind, which all of the political incentives don’t align with that happening. Well, I still have a monetary bear instrument Bitcoin with a provable production cost, and I’m 99.999% sure that a block will come in approximately 10 minutes or so, and I’ll be able to settle this value somewhere in the world.

Dylan LeClair (23:02):

But if that scenario doesn’t happen and they don’t let everything completely unwind and go to zero, and they do what their incentives align and monetize the debt, fiscal stimulus, the whole nine yards, well, there’s going to be more money in the system. I would bet money that the price of Bitcoin in nominal dollar terms goes up as a result. So I think either way, you’re going to maintain that purchasing power with the Bitcoin network, its absolute scarcity, and that production cost.

Clay Finck (23:29):

Yes. So essentially, despite us being in the, quote-unquote, everything bubble, there’s every incentive in place for them to continue to expand the monetary base of the Fiat currency units, which internally lead to continued adoption of Bitcoin since it has a fixed supply and all of its other attributes.

Dylan LeClair (23:49):

Yeah. A hundred percent. It’s also needs to be said that Bitcoin itself through its own kind of adoption is there’s a ton of volatility, just because of the absolute scarcity of it, because of the Hobbler conviction and oftentimes the wall of money that comes in after Bitcoin breaks an all time high and the reflexivity of markets and cycles and sentiment and euphoria, and then overlay that with derivative markets on top of it, and things get really crazy. You see liquidations, and it’s just madness. There’s a lot of volatility.

Dylan LeClair (24:16):

Now, combine that with the fact that we have a Fiat system that’s more over indebted than ever before, and we’re seeing look at the VIX, look at the volatility index in the current system. We’re seeing a ton of volatility recently. And it might get even more volatile. So I would say for anyone that’s holding this asset, make sure that you’re mark to market leverage like as a Bitcoin holder for just a little less than three, four years, I’ve seen multiple. I think I’ve seen four separate 50% declines.

Dylan LeClair (24:44):

At this point, it’s nothing but a thing because my cost basis is obviously a lot lower and it’s rising daily. But if you can’t withstand 50% drawdowns, if you’re marking that leverage to market every second and you’re 2X long, well, you might lose your coins because of that exchange rate risk. I guess that’s the one thing that I’d say is that volatility increasingly in the Fiat system, but also in this asset class, I wouldn’t expect it to flatline, not like a lot of people say. And because of that, don’t put yourself in a position. The worst thing to do is put yourself in a position to become a force seller of this thing.

Clay Finck (25:15):

Let’s transition to talk about institutional adoption. We saw some huge institutional players come in over the past couple of years, notably MicroStrategy, Tesla, and Square as far as public companies go. But we haven’t seen too many recently, at least over the past year or so. Why do you think that other public companies haven’t really followed this trend despite the high levels of inflation and monetary easing?

Dylan LeClair (25:42):

Yeah. So I mean, I think the one thing is that from a corporate standpoint, it’s not very attractive from a gap accounting standard. If you look at MicroStrategy or Tesla, they have to mark to market their losses as an impairment when the price goes down, but they don’t get to do that on the way up. It’s not treated as a cash equivalent. So I think that comes in due time, but it makes perfect sense in my opinion to adopt a Bitcoin standard or at least a partial Bitcoin standard in this environment.

Dylan LeClair (26:08):

Obviously, you have a bunch of institutions that are interested in 2021 after the price already 6X’ed and is at 60,000. No matter how good the idea is, it’s really tough to buy into something that’s already gone, absolutely vertical. So I think maybe not on the public side, I think you see a lot of institutions, hedge funds, Wall Street Pit guys come in when the price is at 30K or the chart looks bad and say, “Hey, I’m going to get a little bit of an allocation here.”

Dylan LeClair (26:34):

But in terms of full public company adoption, I think we’ll have to wait and see. And as the asset class matures, we’ll see more of it. But it makes total sense as the cost of capital in these markets. Again, MicroStrategy borrowed a billion dollars, 500 million at 0%. It was a convertible bond issue, but they borrowed 0% where 0.5% coupon for six, seven years out. And they bought Bitcoin with it. So just doing the calculation, even the purchase of $57,000, I think they raised, and they bought at 57,000 is break even in 2027 is 65,000.

Dylan LeClair (27:07):

So obviously, they’re underwater now. The stock is getting beat up, but if you can hold and if you’re not becoming a force seller, well, that’s obviously pretty advantageous. You’re seeing that also with publicly traded miners, right? They’re mining all Bitcoin and they’re just using this artificial kind of cheap debt to finance their operation. And that’s a new dynamic that we hadn’t seen in Bitcoin before where miners don’t have to sell their coins because of this kind of integration with public financing.

Clay Finck (27:30):

Yeah. That’s one piece I find really interesting is all these public miners, there’s riot, there’s hut, and there’s a number of others. They’re able to take on these cheap debt loans like you just mentioned, call it 3% interest, give or take and they’re going to invest in these mining operations that are paying… Even if Bitcoin’s price stays leveled, they’re getting something like 100% return on their money. And then they’re able to take on additional debt to maybe pay off those expenses and they can just hold the Bitcoin indefinitely, which is just insane to think about.

Dylan LeClair (28:01):

Yeah. I mean, if you look at public market data right now, and this won’t always hold true, it’s up to hash rate and the block subsidy and all this other stuff, but the average production cost for publicly traded miners is like plus or minus 10,000. Bitcoin trading at $44,000. So they’re producing this commodity. And unlike any other commodity producer, this is what people don’t understand. Look at gold miners. They mine all their gold and they dump it. Look at oil producers. They produce all this oil, they sell it.

Dylan LeClair (28:26):

Look at Bitcoin miners. They mine all their Bitcoin, they stuff it on their balance sheet. They borrow more money to buy more Bitcoin. They don’t want to sell a single Satoshi of this asset. And it is really interesting because when you’re thinking about Wall Street and the kind of Fiat lending coming with this hard monetary asset and combining over collateralized Bitcoin lending, people say it’s so risky to borrow against your Bitcoin.

Dylan LeClair (28:47):

Well, for the lender, it’s a no-loss business. If I over collateralize two to one and borrow money from you Clay, you can mark that to market and assure that you lose none of your capital because it’s liquid 24/7/365. And it’s in any jurisdiction. So I think you’re going to increasingly see… Right now you can get a mortgage at 3 or 4%. Well, you can borrow against your Bitcoin at certain lenders for, say, seven or 8%.

Dylan LeClair (29:10):

For the longest time you couldn’t do that at all. I think that ultimately like the Bitcoin collateralized lending space is going to be the cheapest in the world like you can go to Goldman and get fed funds plus 50 basis points on your equity if you’re a multimillionaire or something. I imagine that that’s going to be true for Bitcoin really everywhere because it’s a no loss business once again. And I think that’s not very understood.

Clay Finck (29:32):

I am not going to lie. I can’t wait for the day I can put Bitcoin down as collateral and avoid having to give the bank a large down payment for the loan. That’s going to be a pretty incredible development for people that own Bitcoin.

Dylan LeClair (29:47):

Yeah, it’s coming. I mean, people are building it. So it’s not well understood, but the convergence of this hard monetary asset with this Fiat zero cost of capital world, it’s converging faster than people think, and I think that’s when things get really, really crazy when you have guys that are a lot bigger than MicroStrategy and Michael Saylor. I mean, Michael Saylor is a billionaire, but let’s be real. He’s not a big fish billionaire.

Dylan LeClair (30:10):

So when you have a lot of people like… And again, when you’re thinking about Fiat currency money is created through lending. So when you go borrow a billion dollars in the corporate debt markets, it’s actually like… And this sounds crazy, but it’s actually creating supply. So if Stan Druckenmiller goes and borrows $10 billion from Goldman Sachs and buys Bitcoin with it, well, he’s acquiring a fixed supply of this 21 million and creating a bunch more Fiat units. It’s called a speculative attack.

Dylan LeClair (30:33):

I mean, this happens in currency markets all the time. But we haven’t seen this with an absolutely scarce asset ever. So there’s some pretty big implications here, and I don’t think a lot of people will have walked through the game theory of this all.

Clay Finck (30:43):

When I really dug into Bitcoin in 2020, the risk reward to me just seemed so good. The narrative was these four year cycles and the Bitcoin having happened in 2020. We did see violent price action to the upside in the later half of 2020, but we actually haven’t seen it perform as well as prior cycles. What do you think the difference is between the cycle and the prior ones? Is it just the macro landscape having such a large effect on just the price of every asset?

Dylan LeClair (31:15):

Yeah. So I mean I can’t lie to the having and kind of the stock to flow model and all that. People hate that model. It definitely helped make it click for me that to the impetus to allocate to this thing, get in, like I was showing my parents the stock to flow charts and saying like, “Hey, look at what happens after the blue dot.” I mean, that is definitely a great way to think about Bitcoin and these cycles. But I think now with the block subsidy and the annual inflation rate at say 1.8%, next having at 2024 the block subsidy is going to get cut in half again. 3.125 Bitcoin every block will be issued that inflation rates can be less than 1%. I don’t think it has a huge impact on the market as much as it did in the prior halvings.

Dylan LeClair (31:54):

I think more so, it’s just the state of the capital flow into these markets. So we saw a lot of that institutional capital and then it was just probably a couple hundred billion dollars worth maybe. Maybe a hundred million worth of flooding all at once to try to secure this thing. And because supplies in elastic and not a lot of people were selling, price goes parabolic.

Dylan LeClair (32:13):

Ultimately, you have some people will distribute, will see somewhat of a kind of a distribution that’s what’s occurring right now. But under the surface, and this is part of the reason why I love on-chain analytics so much is you can kind of see these like supply-demand imbalances occur in real time. So people say like supply squeeze. We’re actually in a pretty tight supply squeeze dynamic right now. But for the last three, four months, what we’ve seen is marginal selling for the most part from these macro allocators, right?

Dylan LeClair (32:40):

If you’re just thinking about the guys that are trying to ride the tide of the everything bubble, well, what have they been doing since November, since Powell said, “Oh, wait. Inflation is not transitory. We got to hike guys. We weren’t planning on this. Well, there’s some marginal selling. Well, who’s buying? The convicted Bitcoiners that understand this end game.

Dylan LeClair (32:57):

So ultimately, when the macro allocators like the hedge fund guys, anybody that wants to secure a Bitcoin position, which is quite a lot of people I think in the future, well, they’re going to have to buy into a super, super tight supply dynamic, and we have a lot of people that are publicly stating, “I’m not selling at any price for Fiat.”

Dylan LeClair (33:15):

So we can see 61% of Bitcoin have moved in a year. 86% of Bitcoin haven’t moved in the last three months despite price getting cut in half. Over the last year, price got cut in half twice and it doubled once. 61% haven’t moved. So that sort of thing, you can’t really see that in any other asset class, but also I think the conviction and the type of investors or holders of really any other asset class, aren’t this convicted crazy. I mean, we don’t see that anywhere else.

Clay Finck (33:40):

Let’s talk a little bit more about on-chain analytics. For those who aren’t familiar or haven’t been following you or Will Clemente, what is on-chain analysis and why does it even matter for Bitcoin?

Dylan LeClair (33:53):

Yeah. So with Bitcoin, we basically have this public ledger of property rights, if you want to think of it. It doesn’t say this is Dylan’s Bitcoin, but in a pseudo-anonymous type of fashion, we can see every single Bitcoin that’s ever moved and what address is holding it, and when the last time it was moved. We have this ledger of property rights. So with that, we can do a lot of cool things. A lot of what we focus on is potential market impacts, but it doesn’t have to be market related at all.

Dylan LeClair (34:18):

A type of on-chain analytics is like, “What’s minor revenue over the last month?” We could see that and we could pull that data up like this. You can’t see that with gold. I mean, you can guesstimate it, right, but you can’t see any of these sort of things. You can’t see what’s money velocity in the dollar standard. Well, you can guess, and we can have a group of 10,000 PhDs at the federal reserve, try to crunch numbers and come up with an answer, but it’s not like verifiable and mathematically certain.

Dylan LeClair (34:43):

With Bitcoin, we have that. You can spin up your own full node. You can run it on your laptop or a little computer this big, and you can look up all this data to yourself. I mean, luckily we have companies like Glassnode and Coin Metrics do this data for us. But we can see underneath the surface what’s happening in the Bitcoin market. And it’s pretty fascinating. Like those four-year cycles that we’re talking about, throughout a lot of the history, what you saw was really this convicted Bitcoiners.

Dylan LeClair (35:06):

You saw this supply squeeze dynamic really build up into a parabolic bull run, whether the chart looked good or whether it was some kind of macroeconomic dynamic. What you saw was this real supply side liquidity crunch, if you want to think of it like that formed at the same time wall of money hit the market. So what happens, price goes parabolic. So people think it’s seemingly random that these blow-off tops happen, these parabolic runs happen, but really a lot of the cool thing is that we can see this stuff happen on chain.

Dylan LeClair (35:36):

We can see when price goes parabolic, a few million coins that accumulated at the depths of the bear market distribute. Like, yeah, HODL, but if price runs up 20X or 100X, maybe some people take a little bit off the top and we can see that happen. And the marginal seller, the marginal buyer comes exhausted and price dips. So that’s, I think one of the most fascinating things about on-chain analytics is that we just have a transparency that doesn’t really exist anywhere else.

Clay Finck (36:01):

Yeah. I do think that’s really cool how the ledger is completely public. Anyone can go out and pull the data and do their own analysis on that. What are some of the most important on-chain metrics that you keep your eye on?

Dylan LeClair (36:15):

Yeah. I think one of the most basic ones… Oh, maybe not basic, but I think one of the most simple ones and easy to understand is what I like to call a realized price, or you can think of it as realized cap. So market cap is just circulating supply times price for any asset, right? But with a realized market cap, what we can see is every single UTXO, which is the technical term for Bitcoin on-chain. We can see when it was last moved.

Dylan LeClair (36:36):

So for instance, Satoshi’s coins mined in 2009, never moved. There wasn’t even a market price when they were acquired. So there’s about a million or so Bitcoin that are presumably Satoshi’s that have zero market price. So because of this, in the realized calculation, they hold no waiting. Whereas in the market cap calculation, it’s a million times 44,000. They count for $44 billion for market cap valuation.

Dylan LeClair (36:58):

What we can and see is the relative valuation or ratio of the market price versus the realized price. And historically right now about that realized price is $24,000. So you can think of that as the average on chain cost basis of all the Bitcoin on the network. Is it a perfect measure? No, because if you buy your Bitcoin on an exchange, or if you just say cycle some Bitcoin between yourself and wallets that you acquired six years ago today, it might move up the cost basis.

Dylan LeClair (37:23):

But in aggregate, it’s a pretty accurate measure of average market cost basis. So we can see this ratio of market price to a realized price and come up with some pretty interesting relative valuation framework. If that measure ever gets below one, it’s usually like generational buy opportunity. So that’s what in my research, I often talk about it, I’m like, if we get below 25,000, who knows what happens next? But traditionally that’s a sell the farm type of an event. So do we get it? Who knows? But in terms of previous cycles, that’s the level.

Clay Finck (37:52):

Yeah. It’s kind of funny. March 2020, I was watching Bitcoin that day. It went down 50% in one day in less than 24 hours. It just insane to think about, but when you look at the actual fundamentals nothing about the Bitcoin network changed. It was continually producing blocks. It was just the macro framework where there was just a giant bid for dollars. So if nothing has fundamentally changed about Bitcoin and you’re bullish on the asset, and you look at some of these metrics, like you mentioned the realized price, you can just identify those generational buying type opportunities. It’s really, really cool. I think.

Dylan LeClair (38:27):

Yeah, you’re 100% accurate. In that March of 2020 event, nothing changed about the network itself. I mean, you had a derivative market liquidation. You had the Dixie go to 100. There was a bid for dollars. You nailed it there. So at that point like people were liquidating Bitcoin for dollars because of that denominator. Right? BTC-USD. I think that’s something that’s not going to even really change as long as the global debt market is that size.

Dylan LeClair (38:51):

But in the meantime, you can use these relative frameworks evaluation whether it’s the MVRV or we have all sorts of cool things we can do. We can quantify the conviction of HODL’ers with on-chain metrics and we can put a… Whether it’s oversold or over bought. And is it perfect? No. Is it going to time tick the bottom at the very second? No. But we can say like this is in the fifth percentile of relative valuation.

Dylan LeClair (39:14):

So it gives a pretty good idea of like risk reward and when it’s attractive or not to allocate based on the conviction of what other UTXOs are doing.

Clay Finck (39:23):

Now, Bitcoin whales are the wallets that hold the most amount of Bitcoin. What percent of the supply do Bitcoin whales hold? And is that a concern for you at all? Or how do you think about that?

Dylan LeClair (39:37):

Yeah. So it’s kind of tricky with on-chain stuff. I see a lot of data reports published and they’ll say X amount of Bitcoin. I’m not even sure what it is because I mostly disregard it. They’ll say X amount of Bitcoin supplies held by the top 900 addresses. Are there whales in Bitcoin? No doubt. I mean, there’s people that understood what we’re talking about today, back in 2011 and said, “All right, I’m going to mind this on my computer and I’m never going to sell it.” They’re 100% whales. Do they manipulate the market?

Dylan LeClair (40:02):

No, it’s a free market and they can buy or sell whenever they want. And that’s the beauty of it. But there are people with thousands of Bitcoin, tens of thousands of Bitcoin, maybe even 100,000 of Bitcoin. And the beauty is we don’t really know if people have their privacy measures and they do it right.

Dylan LeClair (40:16):

But in terms of how much percent of the supply whales have, well, about two and a half million Bitcoin are on exchanges. So we can say, well, those exchanges, guesstimate, there’s at about a hundred million people that use those exchanges or have access to them that have onboarded onto them. So how much of that Bitcoin is to each user? Well, we don’t know. So that’s why address analysis isn’t always all that accurate. I mean, it’s like saying like how much of the dollar supply does the federal reserve have on its balance sheet?

Dylan LeClair (40:42):

Well, the federal reserve serves a lot of member banks and they serve all these people. It’s just not a great way to frame it. So for that sense, like wallet data, you can do stuff with tracking whales. You can see, like, “Oh, what are whale holdings doing if you filter out and do all this heuristic up with exchanges and all that.”

Dylan LeClair (41:00):

But for the most part, just straight up supply percentage analysis, there’s a little bit of nuance there. So that’s why for the most part, I don’t stay away from it, but there’s nuance there.

Clay Finck (41:09):

You mentioned a bit earlier that one of the potential catalyst for the next Bitcoin price movement upwards is Bitcoin’s body TF. We’ve seen one in other countries such as Canada being released. So what’s the hold up with one being released in the US?

Dylan LeClair (41:27):

I’m not entirely sure what’s on Gary Gensler’s mind. There is a Grayscale product, GBTC that has 650,000 Bitcoin. I think a little bit less than that, which is just an outstanding amount. They were a huge driver early in the bull market of 2020 and 2021. And just with how that fund works and the redemption structure was very interesting that because it was trading on OTC markets with a premium, you had accredited investors that could go and give Grayscale a hundred bucks of Bitcoin or dollars.

Dylan LeClair (41:55):

And if say the GBTC product was trading at a 30% premium on these secondary markets, they could go and get $130 of GBTC shares from Grayscale immediately, but those had a six-month lockup. So all these Wall Street books went to Grayscale and just immediately marked up their books with a 20, 30, for 40%, whatever premium it was and scooped up all this Bitcoin in this GBTC trust. But everyone did that. It became a crowded trade. And now funny enough, GBTC trade got a 25% discount in that asset value.

Dylan LeClair (42:25):

So it’s not like an ETF structure where every dollar of inflows means a dollar of allocation to the base asset like an S&P 500 ETF would be. So what is Gary Gensler doing and why is he holding up? I’m not sure. And I think there’s a whole another realm of things that he would have to tackle in the cryptospace in terms of what’s a security what’s not. I believe that he’s made it pretty clear that Bitcoin is not a security in his eyes after teaching a class at MIT and all this other stuff.

Dylan LeClair (42:52):

I mean, I think ultimately you should really, really work to hold your own keys and utilize self-custody best practices, but that’s spot ETF when it comes then, I think it’s not an if, but it is a when. It’s going to unlock a whole bunch of institutional capital that’s going to flood into this and it’s going to be probably a pretty big catalyst for the next bull market whenever that comes.

Clay Finck (43:11):

Is there any possibility that an ETF could lead to Bitcoin’s price being artificially suppressed like we’ve seen in the gold market?

Dylan LeClair (43:20):

Yeah. So in October, we actually had that futures ETF pass, right? So there is that CME market. And interestingly enough unlike other futures products, say on Binance or BitMax, there is no kind of Bitcoin settlement on the CME structure. Actually, they use cash collateral, treasury collateral for these Bitcoin futures.

Dylan LeClair (43:40):

So the CME tethers its price to a spotted index. Interestingly enough is that we’re not seeing that Bitcoin settlement occur in these future markets like you are seeing on other derivatives exchanges. So that unlocks the question, “Well, is it going to suppress the price like gold?” I believe because we have this final settlement occurring, 24/7/365, the ability to withdraw your keys, or the ability to kind of arbitrage spot prices, right, that gold doesn’t have, if you just think of the settlement process with gold. Any dislocation in future price will say the future ETF was being shorted, or there’s a CME product that people were trying to artificially suppress the price.

Dylan LeClair (44:20):

Well, I think that would be reflected and you can look at the there’s a spot market Bitcoin price. And then all of these derivative contracts have their own price that’s traded free of spot. Oftentimes, when you see a sale like a huge volatile move to the upside or downside, what that is essentially is that’s forced selling or forced buying on a derivative product that got margin called.

Dylan LeClair (44:39):

We could see that happen in real time where there’s a liquidation engine that’s forced buying or selling. Shorts are getting squeezed. Longs are getting liquidated. Whereas you don’t see that settlement, that mark to market every single second occur with, say, a gold ETF. So if there was some kind of price suppression, I’d say a paper product like CME, what I would look for, and I don’t see this at all would be a really different price relative to spot price.

Dylan LeClair (45:03):

If CME was trading at 43 and the Bitcoin price was trading at 48, well, one, I wouldn’t want to be buying Bitcoin on CME because I don’t know if I can redeem that and take that off the exchange. But two is, yeah, we are going to have a true and a free and open market somewhere around the world, whether that’s with baseline dollars or stable coins or whatever it is that will reflect that free market dynamic that we don’t see with gold.

Clay Finck (45:28):

Yeah. The thing with Bitcoin I keep hearing is that it’s just so easy to take personal custody of it. If you buy gold, you need to take physical delivery. You need to have it shipped. You need to pay for these transport costs. Whereas with Bitcoin, you can just instantly have it transferred to your account. So people are going to want to be able to take custody of that Bitcoin or at least have the option to, in my opinion.

Dylan LeClair (45:52):

Yeah. I mean, I haven’t told too many people this. I actually bought gold in March of 2020 and ordered a coin, an ounce coin. It was like 1,700 bucks an ounce. And the entire process took two weeks. It feels cool in your hand. But I realized I didn’t want it. A month later I was like, “I should have bought Bitcoin. What am I doing?” I went to sell it and I got arb on the bid. I got arb when I paid for it, 50 bucks above the spot market. And then when I sold it, I think I sold it for like a hundred dollars below the spot price.

Dylan LeClair (46:17):

And at the same time, gold was rising, but I lost money on the investment because of just how the dealers worked and how slow and clunky everything was. It was just a nightmare. I was like, “I’m never, ever buying gold again other than just like trinkets. This is the worst form of liquid collateral that I can think of. It’s not even liquid. It’s like very E-liquid in that sense, if you’re doing it with a small amount.”

Clay Finck (46:39):

Dylan, thank you so much for coming on to the show. I really, really enjoyed this conversation and appreciate you coming on. Before we close out the episode, where can the audience go to connect with you?

Dylan LeClair (46:51):

Yeah, I really appreciate you having me on. This was a fun riff. You can find me on Twitter @dylanleclair_. That’s where we connected first. It’s super fun. Just kind of throwing ideas out there and interacting with the community. So yeah, I mean, I appreciate you having me on. It was awesome to connect, and I’m sure we’ll see you around out there.

Clay Finck (47:07):

Awesome. Thank you, Dylan.

Dylan LeClair (47:09):

Yeah, man. Catch You later.

Clay Finck (47:11):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can 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 (47:34):

Thank you for listening 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 theinvestorspodcast.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.