28 December 2021

Clay Finck chats with Andy Edstrom about why Bitcoin should be considered as a part of an investment portfolio, how Andy thinks about valuing Bitcoin as an investment, how investors can potentially keep themselves from ‘buying the top’ in Bitcoin, the 14 characteristics of money and how Bitcoin stacks up against gold and fiat currency, some of the common misconceptions around Bitcoin, and much, much more!

Andy Edstrom, CFA, CFP is a wealth manager at Wescap Group and is Managing Director of Swan Advisor Services. He is the author of Why Buy Bitcoin, the only Bitcoin investment thesis published in book format by a professional wealth manager. Andy’s opinions have been published in The Wall Street Journal and The Economist, and he is a frequent guest on Bitcoin-focused podcasts.

Earlier in his career, Andy was an investor at a private equity fund and a hedge fund. Prior to the Global Financial Crisis of 2008-2009 he caught a glimpse into the making of “financial sausage” while working at Goldman Sachs. Andy holds the Chartered Financial Analyst (CFA®) and Certified Financial Planner (CFP®) credentials.

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  • How Andy discovered Bitcoin and ended up buying it.
  • Why investors should consider adding Bitcoin as a part of their portfolio.
  • Why Bitcoin has a lot of potential to continue achieving very high returns.
  • How Andy thinks about the value of Bitcoin today when buying it for his portfolio.
  • What is driving the continued growth in the adoption of Bitcoin in portfolios.
  • How investors can potentially keep themselves from ‘buying the top’ in Bitcoin.
  • Why it’s important to first understand money and what is good money versus what is bad money.
  • What the 14 characteristics of money are.
  • Why El Salvador is embracing Bitcoin and what countries might be next.
  • What makes Bitcoin different from all of the other cryptocurrencies.
  • Why Bitcoin incentivizes the movement towards renewable and green energy.
  • Why the US government is not likely to ban Bitcoin.
  • And much, much more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

You are listening to TIP.

Andy Edstrom (00:00:02):

The first is, can they actually kill it? And five years ago, maybe if all the governments of the world had united to kill Bitcoin, maybe they could have. We’re past that point. The network is so valuable, and so distributed, and has so much economic activity built on top of it.

Clay Finck (00:00:24):

On today’s episode, I sit down to chat with a very special guest, Andy Edstrom. Andy is a wealth manager at Westcap Group, and is managing director of Swan Advisor Services. He’s also the author of Why Buy Bitcoin, the only Bitcoin investment thesis published in book format by a professional wealth manager. Andy’s opinions have been published in The Wall Street Journal and The Economist. And he’s a frequent guest on Bitcoin focused podcasts. During the episode, I chat with Andy about why Bitcoin should be considered as a part of an investment portfolio. How Andy thinks about valuing Bitcoin as an investment, how investors can potentially keep themselves from buy the top in Bitcoin, the 14 characteristics of money, and how Bitcoin stacks up against gold and Fiat currency. Some of the common misconceptions around Bitcoin, and a whole lot more. As a friendly reminder, nothing included in this podcast is investment advice. Please speak with your registered advisor prior to making financial decisions. Andy brought a ton of value during our conversation. So sit back and make yourself comfortable, because you don’t want to miss today’s episode with Andy Edstrom.

Intro (00:01:28):

You’re listening to Millennial Investing, by The Investor’s Podcast Network, where your hosts, Robert Leonard and Clay Finck, interview successful entrepreneurs, business leaders and investors, to help educate and inspire the millennial generation.

Clay Finck (00:01:48):

Hey, everyone. Welcome to the Millennial Investing Podcast. I’m your host Clay Finck, and on today’s show, I’m joined by Andy Edstrom. Welcome to the show, Andy.

Andy Edstrom (00:01:57):

Clay, it’s great to be with you.

Clay Finck (00:02:00):

Now, as I mentioned in the introduction, you are author of the book, Why Buy Bitcoin? So Bitcoin is definitely right near arsenal as far as your areas of expertise. To get us kicked off, what is your Bitcoin story? How did you discover Bitcoin?

Andy Edstrom (00:02:16):

So Clay, I’m one of those three exposure guys. And I find this is quite common in the space, which is like, the first time someone mentions or you see an article, you ignore it or you think it’s stupid or it’ll ever work. And second exposure, you still ignore it. And by the third time, then you start paying attention. So I was one of those. I was on vacation with my wife and my infant son, and I was listening to The Economist Magazine on audio. So pod version, in 2013. And I heard an article and I didn’t get it at all and just completely went over my head. I thought, “Oh, that sounds strange and dumb and I’m going to ignore that.” And then the second exposure wasn’t till 2016, which is, when I saw an article, I think it was in The Wall Street Journal.

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Andy Edstrom (00:03:02):

And it was actually about the Ethereum hard fork. The Dow hack or the Dow attack and the Ethereum classic hard fork. And again, I had no idea what they were talking about. And then it was I think second quarter of 2017 when one of my smart friends, Arun Rao, who’s a Silicon Valley guy, and a startup entrepreneur. He’d started an AI company after having worked at PIMCO, which is sort of an interesting mixed bag. He’s an interesting guy, but anyway, he put it on my radar, and that’s when I started doing my research, doing my due diligence. Price was going up at a pretty rapid rate. And I didn’t buy my first Bitcoin until it was literally the day or the day after the hard fork with Bitcoin cash. So that was August 2nd of 2017. And I made the usual journey, which is you hear about Bitcoin, and then you hear about Crypto, this whole wild and wonderful world of digital assets.

Andy Edstrom (00:04:01):

And then after lots of playing around, whatever, buying, trading a bunch of different assets. And then the crash through the end of 2017, I really started digging in and focusing more on Bitcoin. And for me writing the book actually was… There were several reasons I wrote the book, but one of the reasons was actually testing my own thesis and testing my own conviction in Bitcoin at the bottom of the bear market. So it was, I started putting pen to paper in January of 2019. Bitcoin was at 3K, having come down from 20K. And I wanted to get my clients into it. And I knew that was going to be an impossible conversation at that moment, because people were going to call me a lunatic, basically.

Andy Edstrom (00:04:48):

This thing was a bubble. It was tulips, it’s down 85%. You’re crazy to buy this thing. And so I knew that if I was going to have to get… or if that I wanted to get my clients into it, then I was going to have to provide some ammunition, some really strong analysis, a real development of this thesis, real exhaustive lists of all the risks, the potential risks. And so that was the Genesis of the book, which took from January to September of 2019. And the book was published in September 2019. So that’s sort of in a nutshell, my Bitcoin journey.

Clay Finck (00:05:24):

We’ve really seen the price of Bitcoin take off the past 12 to 18 months. And it’s just so interesting to see so many people starting to take interest in it, especially people I would’ve never imagined that would own it, are now owning it. It almost feels like Bitcoin has crossed that inflection point where couple years ago, you’re pretty crazy if you owned any of it. And now it’s just totally normal to have it as some part of your portfolio.

Andy Edstrom (00:05:52):

I think we have crossed that threshold. Exactly as you said, when I was sort of shouting into the wind in 2019, after publishing the book, trying to talk to my fellow financial advisors, people in wealth management, people in the institutional space, and they just weren’t interested. They were not paying attention. By now, obviously the pandemic provided extra or fuel for the fire, because it was just another story, or Bitcoin has to some degree been another story of, oh, the world’s moving online. And if this is internet native money, then yeah, this is going to be bigger. And then of course, we’ve finally seen actual interesting inflation numbers coming through the official statistics, in excess of six point… or excuse me, 6% inflation on the CPI index for the last 12 months. So there’s definitely been parts of the story that have fallen into place in the intervening time.

Andy Edstrom (00:06:50):

But I agree with you, people who were not paying attention, started paying attention. Part of it is because of this amazing technology. This number go up technology is what we like to call it, which is when the price goes up, people start paying attention. That’s when I was paying attention back in 2017. I saw the price go up and I thought, “I got dollar signs in my eyes or now Bitcoin signs in my eyes.” And that really grabs people’s attention when the price goes up, then they do the work and the due diligence, and it becomes a sort of feedback loop through these cycles. But the thesis for owning a hard money asset with a limited supply has never been stronger than where we sit in the world today here in late 2021.

Clay Finck (00:07:40):

Now, when it comes to Bitcoin, there’s just so many topics in areas to study as cryptocurrencies are brand new asset class. Bitcoin is invented prior to 2010. So it’s been around less than two decades, and there’s no way we’re going to be able to cover everything regarding Bitcoin just in one episode. But we’re going to touch on some of the interesting pieces. And maybe if it’s something that’s new to you, it’ll help you guide you in the right direction. Now Andy, you are a financial advisor and wealth manager. So let’s dive into portfolio allocation and how that relates to Bitcoin. So first off, why should someone even consider Bitcoin in their portfolio?

Andy Edstrom (00:08:22):

Gosh, and there’s so many good reasons. Let’s see if I can hit them all. So the first thing is that we look to history. Bitcoin is the best performing major asset in history ever. So as you pointed out, it’s over a decade old, let’s call it 13 years old roughly. Now, it didn’t trade with a dollar price until maybe a year after its birth. That’s the famous or infamous pizza transaction, right? 10,000 Bitcoins exchanged for two Papa John’s pizzas. Needless to say that now weighs in at about 300 million per pizza in today’s purchasing power terms for Bitcoin. So those were expensive pizzas. Last low, Hanshik. I’m mispronouncing his name. He’s the guy who made the transaction. I don’t think he regrets it. I suspect he has plenty of other Bitcoins in his treasury because he was an early Bitcoin minor. Suffice to say that the price has gone up dramatically, and it’s now over a trillion dollars in network value.

Andy Edstrom (00:09:32):

So you look to history and you say, “Wow, that’s a great forming asset.” And when you construct a portfolio that includes Bitcoin, some interesting things start to happen. First of all, the performance of the portfolio goes up because of what we just described. The second is, and I’m just talking about total return, right? But the second is when you think about standard deviation or volatility of the portfolio, and that’s one of the risk measures that investors use. It’s not my primary risk measure, because when I think of risk, I mostly think of permanent loss of capital, but a lot of people in the investment world care about the volatility of a portfolio. And what’s interesting about Bitcoin, is that it’s price movement is pretty uncorrelated to most major asset classes. So when you run the matrix of correlations between Bitcoin and US stocks, foreign developed market stocks, emerging market stocks, the bond market as represented by the Barclays Aggregate Index, gold.

Andy Edstrom (00:10:35):

You run this correlation matrix, and what you find is that since it’s history, let’s say it’s roughly 10 years of dependable price data that you can get on Bitcoin. It doesn’t extend further than that. Really the data aren’t that strong. There’s holes in the data, in the price data. But if you look at the last 10 years of data, you find that the correlation between Bitcoin and any of those assets is less than 20%. So that’s really nice to have an uncorrelated asset that goes up a lot in price or in value. Well, so that’s the past, but what about the future? I still see huge upside in Bitcoin. I see the market potential or the potential value of Bitcoin, let’s say a decade from now, I could easily see us at million dollars per Bitcoin. By the way, current prices in the high 50 thousands. So you’re talking about making close to 20 times your money, but the potential really honestly, could be close to 100, to $200 trillion of value.

Andy Edstrom (00:11:38):

And now you’re talking about multiple millions of dollars of value per Bitcoin. And that market potential we can get into in some detail. The no-brainer thing is digital gold. So if the gold market today is roughly 10 trillion, and maybe you say, “Okay, but the investment component of that is, I don’t know, six or seven trillion.” Is Bitcoin going to eat a bunch of that? Yeah, I think it is. Is Bitcoin going to eat a significant portion of the Fiat money market, Fiat currency market? Yeah, eventually, if it reaches its potential. What about offshore assets? If I’m a hundred million dollar guy, especially not located in the United States or Western Europe, and I want to diversify my assets. Used to be that I buy a real estate in London. I buy a flat in London and I buy an apartment in New York and I buy a few different assets in different places.

Andy Edstrom (00:12:31):

Do I want to get me some of that asset that I can walk across a border with based on my ability to remember 12 or 24 words, that somebody would literally had to beat out of me if they want to get my money? Yeah, I want to own me some of that. So that’s offshore assets. You’ve got demonetization of other assets. So we’ve lived in this strange world where things like real estate are what people use as a store of value. Well, if I had this much more liquid and much more transportable and transferable and unseasonable and hard to censor in terms of payments, asset class, how do I think about if there’s 300 billion of real estate, should some of that flow into store of value used for Bitcoin? Yes, I think it should. The bond market is enormous, right?

Andy Edstrom (00:13:23):

Maybe it’s, I don’t know, a hundred trillion roughly globally. If bonds are yielding negative rates, right? Because, okay, your bond portfolio is yielding two, three, four, 5%, but inflation is 6%. Do I want to own that limited supply hard money asset? Or do I want to own these negative real yield bonds? I think that’s a pretty simple answer. And then there’s probably ways to win with Bitcoin that we haven’t even thought about. It’s software, it’s extensible. You can build new use case on it, and software developers are smart. So if there’s an opportunity to build something cool on Bitcoin, they will. And so my guess is there will be uses and things built on Bitcoin that we just haven’t even thought about yet. So lots of ways to win, huge potential upside on the valuation. My evaluation framework, I’m actually updating it lately. I think in the book, it was something like $400,000 per Bitcoin by the end of a decade.

Andy Edstrom (00:14:22):

So that was two years ago. So that would be $400,000 in eight years right now. I’m actually more bullish, probably because the price is already moved toward the target. Needless to say, it was 8,500 when I published the book. Now where at whatever, 58,000, something like that. So we’re closer to the target, but also a lot of things have happened in the world that get us closer to success. One of the key events being China, basically, all the mining capacity, or much of it moving out of China. And we can talk about that. That’s another story. So anyway, that’s the valuation framework. I haven’t fully answered your question yet though, which is what’s the other role in the portfolio? Because people ask me this all the time. They say, “Okay, what’s your Bitcoin allocation for low risk portfolios, medium risk portfolios, high risk portfolios for clients?”

Andy Edstrom (00:15:09):

And the answer is, about 5%, 5% and 5% at the moment. Why is it the same for different risk levels? Well, it serves a different role for different risk levels. So at the high end, it’s kind of obvious. Okay, Bitcoin’s dollar price or Euro price or Fiat currency price is quite volatile. And so people view it as a risk asset. And the upside potential is, orders of magnitude. You could make a huge return on this thing. So that means it belongs in a high risk portfolio. But then at the other end of the spectrum, what is the biggest risk? What is CryptoNight for a “low risk portfolio?” Low risk portfolio tends to be cram full bonds, and it’s inflation that can really ruin a bond portfolio. So how do you hedge out the inflation risk? Well, you own what I call hard money assets. For me, that’s gold and that’s Bitcoin.

Andy Edstrom (00:16:06):

And I got to tell you, it’s become more Bitcoin and less gold on a relative basis, because I see Bitcoin capturing mind share. I see smart institutional investors saying, “Well, there was a reason that I owned gold as that hard money asset that could potentially protect me from significant inflation in the future if that happens. But now I see that Bitcoin actually outscores gold along a lot of the parameters that make something a good hard money. And so I want to own more Bitcoin than I would’ve otherwise. And I’m going to take a chunk out of the gold allocation of the portfolio and put it into Bitcoin.” So there it is. That’s basically the investment thesis where I see it fits in the portfolio. That’s how I implement it for my clients. And as time goes by, that may change. But in a world of higher inflation than we’ve seen in three decades, to me, it’s a pretty clear case for Bitcoin in the portfolio.

Clay Finck (00:17:03):

Now, I’m someone that’s a bit younger than many investors and many listeners of the show. I’m 27. Something that’s digitally native might make more sense to me. And you mentioned all these asset classes that Bitcoin could potentially steal market share from. And one of the biggest ones being the bond market. With inflation being so high, it makes sense to me why funds would naturally flow from bonds potentially to Bitcoin either as some sort of hedge or diversification tool or for whatever reason, but to put myself in the shoes of some of these other investors, maybe that are potentially older than me, they might be thinking, “Okay, real estate and stocks. These are tangible assets that produce cash flow and are productive in the economy. So why would something that produces cash flow that’s real and tangible? Why would that potentially flow into Bitcoin?”

Andy Edstrom (00:18:01):

Yeah, that’s a really interesting question. And I think there’s two layers there, probably. So first of all, the earlier half of my career, basically, I was a value investor. I will never forget great guy. My former colleagues names, Matt Fair. One day, I think it was probably in 2010 or 2011, came and pitched me on why to own gold in a portfolio. And I basically vomited all over his investment thesis. I didn’t get at all. To me holding some assets that generated no cash flow was completely anathema, made no sense to me. This is classic Benjamin Graham, Warren Buffet value investing stuff. It took me almost eight years later, however long it took. It took Bitcoin expanding my mind and forcing me to think about new assets, including monetary assets. It took that event for me to understand why monetary assets have value despite the fact that they don’t generate cash flow.

Andy Edstrom (00:19:04):

Now, there’s a few frameworks to apply to this, but suffice to say that, when you go back to the Austrian economist, Carl Manger specifically. He had a framework for three types of assets. And I talk about this in the book. There’s capital assets. There’s let’s say three types of goods. There’s consumption goods. Okay. That’s like food and clothing and stuff we consume every day. There’s capital goods. Those are the productive investment assets, factories, basically any actual physical capital good that you can have a paper claim against, that is generative of cashflow flow over time. And then there’s the monetary good. And the monetary is a separate category. And it stands to reason that actually the best money doesn’t have any capital value in it, because that’s not why you hold or use money. You use money basically to have some working capital, and store your wealth, and something that’s not too volatile in it’s purchasing power.

Andy Edstrom (00:20:09):

We can talk about that issue with Bitcoin, but that’s why you hold money. And then when you transact, you don’t really want to be using some asset that has a significant capital good value bundled together with the monetary value, because it just muddies the two pieces of value there. You’d rather have your pure monetary asset separate from your pure capital good asset, separate from your consumption goods. So that’s a little bit the framework there. So then, okay. But back to the investor perspective, which is like, why would I even consider holding a monetary asset, which as you say, doesn’t generate cash flow. Well, there’s a few reasons. One is that, when debt levels are so high and governments have to print their way out of the problem, hard money assets like gold, tend to perform very well. As a reminder for the market historians out there. And this was before my time. And definitely before your time.

Andy Edstrom (00:21:05):

The 1970s and 1980 eighties specifically, call it basically the decade of the 1970s ending in 1981, gold went up in price in dollar terms by 20X, right? You went from, I think it was $35 an ounce, to around $700 an ounce. And in that market environment, bonds got murdered basically, because inflation was high, and stocks also did relatively poorly. So there are certain market environments in which owning the hard money asset is actually really critical to the overall performance of the portfolio. So that’s just looking to history. Now think about Bitcoin. Bitcoin is a growth money or a growth monetary asset, that is eating away at the gold market, as well as some of the other markets we described before. And so it’s taking share of other assets, some of which do not generate cash flow, but the fact that it’s taking market share out of existing assets like gold, that have huge market capitalization, means that there is very significant upsides. And if it can do the job of gold better than gold itself, that’s just a huge opportunity.

Clay Finck (00:22:23):

It can’t just be due to Bitcoin. Why do you believe gold hasn’t performed as well as this inflationary environment?

Andy Edstrom (00:22:31):

The latest peak in gold price was 2011. And if we go back to the global financial crisis, so 2008, 2009. After that, obviously we got significant quantitative easing. Stimulus from central banks, printing of base money. And people feared that that would be inflationary. Talking about consumer price inflation. Now it turned out not to be, and we can get into why I think that is in retrospect, but there are definitely people out there who were worried. I’ll never forget. I think it was Paul Singer who runs a big 30 or $40 billion hedge fund, name escapes me at the moment, took out a full page ad in The Wall Street Journal, talking about how central bank printing, the feds actions were going to ruin the economy, and we were going to end up in a high inflationary environment. I think he was a little early, might not have been wrong in the long run, but certainly it was early to be talking about that eight or nine years ago.

Andy Edstrom (00:23:31):

So we didn’t see significant consumer price inflation, but gold sort of spiked up and then peaked in 2011 and then fell back. And then it had a little bit of a run starting in 2016. When you look at the last year and a half, it’s been pretty disappointing. So coming out of COVID, it started to perform for the sort of obvious reasons that the fed and all other central banks and governments were running big deficits and spending money to monetize those deficits. It’s been pretty lackluster performance in the last almost year and a half. My personal view is that part of the story is Bitcoin just has more mind share and Bitcoin is taking market share. I’ll speak just for myself and my own clients. I first put gold in my client’s portfolios, I think in 2016, for the first time. And then I added Bitcoin in 2019.

Andy Edstrom (00:24:28):

And have I been adding a lot of gold? Not really. Have I been adding Bitcoin? Yes, I have. And so that’s like marginal dollars for my client’s portfolios. And that movement is only millions of dollars to that ask class among my clients. But I have to believe that there are others like me who are thinking in this way. And then the second thing I’ll say is, because of the rapid recovery, relatively speaking, in the US economy and a lot of other economies globally, stocks have just continued to outperform, margins have gone up. And if gold, which as you say, does not generate cash flows, is having to compete with stocks overall, then, yeah.

Andy Edstrom (00:25:16):

As long as we’re not in a sort of deep recession or depressionary scenario along with high inflation, then gold does struggle to keep up with stocks. And so I think you’ve got sort of a perfect scenario for Bitcoin lately, which is, oh, there is some inflation, but also the economy is performing, let’s say a lot better than people feared it would, in the earlier stages of the pandemic. And so it’s kind of risk on. And so you’ve got plenty of people saying, “Well, Bitcoin’s a new thing. It’s going to take share from gold, but it’s also sort of a risk asset because the volatility is high, and in a risk on environment, I’m going to put some money into Bitcoin as well, even regardless of inflation.” So yeah, several factors there if I had to guess, and it’s impossible to prove any one of them, but that’s my assessment.

Clay Finck (00:26:13):

Like we mentioned, Bitcoin is up significantly in the past 12 to 18 months, and I think many investors are like, “I miss the boat. I need to move on to something else.” And earlier you mentioned that you have a model you use for Bitcoin’s price, which I think is pretty interesting. And with how volatile Bitcoin is, how do you value it and how do investors prevent buying the top so to speak? Like previous bear market, it dropped over 80%. So I’m sure investors want to make sure they aren’t buying the top again and seeing another significant draw down. So how do you see the value and how can investors prevent losing money in this spectacular asset that’s performed very well.

Andy Edstrom (00:26:58):

First of all, everyone thinks they’re late to Bitcoin. There are guys who watched it go from a dollar to $30, and that thought they were late, and watched it go from a couple hundred dollars to $1,200. That was in 2013. There’s actually a great video. I can’t remember how to find it or what it’s called on YouTube, but it’s this guy talking about, “Never buy Bitcoin because you know it’s going to crash.” And he talks about, “Bitcoin went from a dollar to $30, and then it crashed to $2. And then it went from $100 to $1,200 and it crashed to $300.” And he’s going through the history of the cycles and you’re thinking, “Yeah, but if I just bought it, [inaudible 00:27:34], I would’ve made insane multiples of my investment.” And if the market potential is as I suggested, potentially in excess of a hundred trillion dollars some day, than at a trillion dollars a change today, you could still make 100 times your investment.

Andy Edstrom (00:27:50):

Now, as far as the valuation is concerned, I mentioned earlier five or six categories of value, whether it’s gold, whether it’s Fiat money, whether it’s offshore assets, whether it’s 10 taking share and demonetizing other major asset classes like the bond market, and whether it’s new applications. I’m actually in the process of updating my valuation model literally as we speak. I was working on it yesterday, for a purpose we’ll probably discuss later in the conversation, but my target had been about eight trillion total. I had laid out in the book two trillion of market share from gold, two trillion from Fiat money, two trillion from offshore assets. By the way, the offshore asset market, nobody really knows how big it is, but somewhere in the 10 to 30 trillion range. I was rather conservative with the category of taking share from other assets, demonetizing other assets. I just assumed a trillion dollars of value there.

Andy Edstrom (00:28:54):

If real estate alone is 300 trillion in stocks and bonds or another several hundred trillion there, I actually think that there’s much more significant potentially higher share that can be taken from those various assets. But like I said, I had used a trillion dollars there, and then I’d assigned a trillion dollars of upside for new applications that we just haven’t even thought of yet. So the total value was $8 trillion, and that would be $400,000 per Bitcoin. Now, like I said, I’m revising this target upward. My latest target is about 20 trillion within a decade. And 20 trillion is roughly one million per Bitcoin, or call it 18 times the current price. And what’s changed between then and now. What changed between my eight trillion target and my 20 trillion target. And there’s a couple things that have changed in the two, two and a half years that have gone by.

Andy Edstrom (00:29:52):

So the first is just the thesis has played out. I mean, obviously back then we were at 8,500 per Bitcoin, now we’re at 58,000. So it’s already made a multiple, but that’s just a price move. That says nothing about the underlying fundamentals. Well, another thing that happened was, one of the major risks, which is that somehow China or the Chinese government manages to take over and control a majority of the mining capacity, that risk has been removed to be because China earlier this year, kicked out most of the minors, which meant that now most of the mining capacity is not located in any one single country, which removes this big risk of one government basically taking action to try and destroy Bitcoin. So that risk is basically gone now. So that’s one.

Andy Edstrom (00:30:43):

And then the second thing I would say is just ongoing stimulus. I mean, I published the book with the eight trillion target before COVID, and so we had several trillion dollars worth of new money printed, trillions of dollars in deficits. And it appears not only that we had that sort of one time stimulus expense, but also we’ve got ongoing new government policy. We had a regime shift, democratic party took power in the United States, and it looks like the democratic party is happy to run even larger deficits than had been the case under the prior administration. And so every deficit dollar that gets spent, has to be paid for somehow, and it gets paid for either by outright borrowing, where investors are lending the government money. I’m talking about mom and pop investors, or fund managers who have institutional money, or foreign central governments who are buying US treasury bonds. But the reality is demand is falling. Foreign central banks, especially China, are not buying as many us treasury bonds.

Andy Edstrom (00:31:55):

And so who’s had to step into the breach. Well, that’s the federal reserve. And how does the federal reserve pay for the bonds that they buy to fund these deficits? They print money. And so we’re seeing actual outright monetization of government debt. And historically, that has been significantly inflationary. It actually gets to one of the more interesting pieces of analysis that I’ve found in my studies of Bitcoin, which is, everybody talks about Milton Friedman free market monetarist economist. And what he said about inflation was, it’s always in everywhere a monetary phenomenon. And that’s true as far as it goes, which isn’t very far. When you look at the historical record, and there’s some work done by another economist, Steve Hanke, who by the way is not pro Bitcoin, but he does have some things right. And one of the things he has right is, he’s done a historical survey of major inflations through history, especially in the last century.

Andy Edstrom (00:32:59):

And what he found was that it isn’t until governments are really running large structural fiscal deficits. It’s not until you reach that point, that you tend to get large inflations. So yes, it’s monetary, but really it’s about the government is way over spending, and therefore the central bank comes in and starts monetizing the debt and printing the money. And that’s when you tend to get higher inflation in modern history. So anyway, all that’s to say that if I already thought that the way out of the excess debt problem, not only in the United States, but in the Western world and the rest of the world. If I already thought that the easiest way out was printing money and inflation, well, now that thesis is, is all the more clear. And by the way, if it’s of interest, we can talk about some of the theoretical alternatives for getting our way out of this excess debt problem or even what the magnitude of that debt problem is. But I’ll leave it up to you.

Clay Finck (00:34:02):

And to follow up on my second part of my question, how can investors prevent buying the top?

Andy Edstrom (00:34:10):

First of all, there’s no way to be sure. Like I said, everyone thinks they’re late and yet if you hold Bitcoin for any five year period throughout its history, you make a multiple of your investment. So there’s that historical fact. So if you can hold for five years, history tells you, you’ll make a nice return. And of course, the future past is… past performance is no guarantee the future. Signs that I look for regarding a top. I look for that telltale blow off top, which is a rapid price movement in a short period of time. And what that looks like is, you had blow off tops in 2017, as well as 2013. And the one in 2013 was extremely dramatic, but even the one in 2017 was pretty noticeable. Basically you had the price double in like a month. And so I’m looking for that telltale sign of price doubling in roughly a month, sitting today at a little under 60K per Bitcoin.

Andy Edstrom (00:35:19):

It’s almost Thanksgiving where we’re recording here. If by Christmas we’re over 100K, then yeah. Maybe I’m getting a little nervous about buying a top. The other measurement that’s actually somewhat useful is the 200 day moving average. Basically when the price to the 200 day moving average price, when that ratio goes above two or even goes above two and a half, that’s when by historical standards, you’re really in pretty thin air. It means that the price has moved very rapidly overall compared to recent history. And the chances are high that you’re going to suffer a downturn or a correction. So yeah, blow off top or current price to 200 day moving average of over two and a half times. Those are some telltale signs of the top for me.

Clay Finck (00:36:12):

That reminds me, TIP put together a similar tool to look at Bitcoin’s current valuation relative to historical data. Preston Pysh put this together with Trace Mayer, I believe. And they called this statistic, the mayor multiple, which is the current prize over the 200 day moving average. I’ll be sure to link the info we have on TPS’s mayor multiple and the show notes for those interested.

Andy Edstrom (00:36:35):

It’s funny you mention it. I think I actually remember Twitter handle may be like TIP mayor multiple or something.

Clay Finck (00:36:42):

Yeah, that’s right.

Andy Edstrom (00:36:43):

Yeah, it’s a useful tool. Hats off to Preston, who’s a friend and who’s been on top of this Bitcoin situation for a number of years now.

Clay Finck (00:36:53):

One thing I find fascinating about Bitcoin is how much emphasis the people in this space put on things other than Bitcoin. So like your book, for example, the name of chapter one is why is money? Number two, is what is money? And then we’ve already talked a little bit about just like the global economy and current environment in which Bitcoin operates, which is, in my opinion, is very important. So why is it important to first understand money? And what is good money versus what is bad money? Maybe compare Bitcoin to gold and the US dollar or Fiat currencies if you’d like.

Andy Edstrom (00:37:31):

So Clay, this was maybe the most important and the hardest pieces of analysis or pieces of learning for me, which is exactly what you said, what makes something good money? And nobody teaches us this stuff. I took an economics degree from a good college. And the extent of the discussion of what is money is, oh yeah, it’s a medium of exchange and a store of value and a unit of account. And there was no discussion of, well, what makes something a medium move exchange or store value or unit of account. So I researched it, and I came up with a framework of characteristics that underlie good money. And I am sorry to say that I found 14 of them. I wish it was a short answer, but it’s just not. And so the 14 characteristics I identify are that a good form of money should be identifiable, transferable, durable, divisible, dense in value, scarce. That’s really important. Short term stable and long term stable. I differentiate between those two. Fungible, unseasonable, censorship resistant, private, required for some purpose, and backed by a powerful agent.

Andy Edstrom (00:38:47):

And we can talk about those various characteristics if you’d like, but suffice to say that no form of money scores well on all those characteristics. So it’s not like you can say, “Oh yeah, the world’s best money checks all those boxes, and not only checks the box, but scores really well.” Because each of those characteristics is itself, some spectrum. It’s not binary of, oh, it’s scarce or no, it’s not scarce. It’s, how scarce is it? And likewise, transferable, fungible, all those characteristics. So they’re each a continuum. So what I do is I equal weight them, which is certainly wrong, but it’s also the best thing I can think of because deciding, oh, scarcity is whatever, twice as important let’s say, as de visibility, or durability is one and a half times as important as identifiability.

Andy Edstrom (00:39:46):

These are impossible things to quantify, but I think it’s useful as an exercise to think about, oh, if I equal weigh these characteristics, how does the dollar score, how does gold score? How does Bitcoin score? And not only how does Bitcoin score today, but how might it score in the future? And so that’s one of the things I do. And the dollar for me at the moment, scores better than gold, except for the more and faster they print those dollars, the lower the score, because that scarcity and also that long term value stability is hampered or is impaired as more dollars are printed. Gold is kind of static. Gold ain’t changed much in the last couple of millennia. Bitcoin already to me, outscores gold slightly overall, but Bitcoin is improving because Bitcoin is only 13 years old, and there are more smart people who are coming to work on the base protocol, as well as are building exchanges, borrowing and lending systems while it’s for transferring value, financial services and companies that are basically integrating with the existing financial system.

Andy Edstrom (00:41:02):

So the Bitcoin network is continuously improving, not only at the base protocol layer, but in terms of the overall ecosystem that’s being built on top of it. And I see therefore Bitcoin’s overall score such as it is, going up in the future. Whereas gold’s is static, and the dollars frankly is going down. And by the way, I’ll just say, is the dollar becoming worse money over time? Yes, as they print it faster. However, the dollar’s still the cleanest dirty shirt among the Fiat currencies. And when I look ahead to the future, I think about, okay, what does the monetary world look like five years from now or 10 years from now? I don’t see Bitcoin killing the dollar. If anything, I see Bitcoin taking share from some of the much weaker currencies in the world today. And perhaps ironically, I see stable coins, which are sort of a manifestation of dollars on a crypto based blockchain system. I see those getting adopted more, and I see actually stable coins, which are digital dollars, more likely stealing share from weaker foreign currencies. And then perhaps Bitcoin taking share from the dollar ultimately, years from now.

Clay Finck (00:42:27):

You talked about Fiat money, gold and Bitcoin, and how they kind of relate. And you mentioned the 14 characteristics of money. Where is Bitcoin superior in these 14 characteristics? And where is it inferior?

Andy Edstrom (00:42:41):

Maybe we’ll start with first of all, scarcity. So gold is quite scarce. And the way that Gold’s scarcity is commonly measured, is with this concept called stock to flow. And it’s the ratio of how much gold is there above ground in the world, versus how much gets created in a given year. And today the stock to flow ratio of gold is an excess of 50, which is to say for every 100 tons of gold that exists above ground world, two tons get pulled out of the ground every year. The dollar has no real scarcity other than how quickly the federal reserve board decides to print base money. Plus how quickly the banking system on top of those reserves multiplies out the money supply. And so suffice to say that the level of M2 monetary supply increase over the last year, or year and a half, I can’t remember.

Andy Edstrom (00:43:46):

It’s like 30 or 40%. It’s a really big number. So it’s growing. The number of dollars is growing much more rapidly than the 2% growth in the quantity of gold. Now we look at Bitcoin. Bitcoin stock to flow ratio and therefore its scarcity, changes over time, and it’s all algorithmic. It was set in the code from day one, and it has this characteristic, what we call this event, which is called the having. It’s a 50%, or a having, of the amount of new supply that gets printed every day with every block of transactions every 10 minutes in fact. And we’ve already been through, what? Three havings, because it used to be 50 Bitcoins per block. And then four years later it was 25 per block, and then 12 and a half, and now we’re at six and a quarter. And at that rate, Bitcoin is already scarcer.

Andy Edstrom (00:44:43):

That is to say, the rate of production annually is a lower percentage than gold. And then of course in a couple more years from now, it’ll be even further reduced. So already Bitcoin is scarcer than gold, and gold is considered effectively the scarcest major form of money or monetary asset in the world. So clearly that has an advantage on scarcity. Let’s talk about identifiability, which is a little bit like talking about counterfeiting. So as we know, dollars can be counterfeited. They frequently are. There are certain governments even out there, that counterfeit dollars, other governments, not the US government. Gold can be counterfeited. I’ve heard tell of tungsten bars wrapped in gold, where the core is much less expensive tungsten. I don’t believe there’s been an audit of Fort Knox and the gold holdings there. I’m not sure there’ve been audits of the gold holdings in London in recent history.

Andy Edstrom (00:45:44):

So we don’t really know whether all the gold is there. One of the beauties of the Bitcoin network is, it’s impossible to fake a Bitcoin. Either your private key can be used to sign a transaction to access an unspent transaction output on the Bitcoin network, or it can’t. There’s really no faking it. So Bitcoin has essentially perfect identifiability, provided that you’re running your node, and you’re running your soft for it correctly. The divisibility of Bitcoin is very strong. People talk about, “Oh, a Bitcoin’s $58,000. I missed the boat. It’s too expensive.” Well, okay. But each Bitcoin is divisible into a hundred million pieces called satoshis, and needless to say, 58,000 divided by a hundred million is a pretty small number for sat, as we like to stay. So it’s extremely divisible. Let’s talk about seasonability. One of the problems with gold, and it’s true as well of physical dollars, cash, is that you can get stolen by a man with a gun.

Andy Edstrom (00:46:50):

And one of the beauties of Bitcoin is, it’s actually securable. It gives you a lot of flexibility with how you secure it. So for example, you can write down your key on a piece of paper, not advisable. Better than that is writing it down on a piece of paper and cutting it into pieces and putting those in different places, such that no single piece gives you access to the full key and therefore the money. Can’t do that with cash, with gold, right? Yes, you can divide your gold pile into three pieces, but each of those is worth stealing on its own. Same with cash. Better than what I described, is setting up a multi signature scheme, which is something that is native to the Bitcoin blockchain. It’s part of the code, and you can set it up so that you have to have three keys to access the money, and each of those keys is useless on its own. Truly useless.

Andy Edstrom (00:47:44):

At least if you split a key into three pieces, and you have two of the pieces, well then maybe you can brute force and guess the third piece, right? But not so with multisig. Each of those pieces gives you no information. There’s interesting ways in which you can secure Bitcoin. Of course, the most interesting we like to talk about is the brain wallet, which is, if you can memorize 12 words, you can walk across a border with any amount of Bitcoin in your brain. And that’s a pretty useful trick for people who have to relocate, leave war zones, et cetera, et cetera,

Clay Finck (00:48:19):

The feasibility piece you talk about and the potential implications of it are just mind blowing, just like from a personal level to the sovereign level. It’s just incredible what that can potentially lead to.

Andy Edstrom (00:48:32):

The mind goes to interesting places, right? What happens if Bitcoin reaches its potential, turns into 100 trillion or $200 trillion asset, and therefore a significant portion of the world’s wealth is stored in this asset that you can store in your brain, where the only they can take it from you is if they literally beat it out of you. And that is, criticism to that as well. Governments will beat it out of you if they have to, or thieves, kidnappers, what have you, but you still have the advantage or the holder, the user still has the advantage that yes, they can be coerced, but they still at some point have to cough it up. They have to comply. And if the victim is killed, tortured to death, let’s say, the aggressor doesn’t get any value out of that.

Andy Edstrom (00:49:22):

That’s different than if someone kills you for your gold, or someone kills you for your real estate, for that nice piece of land you’ve got on a hill. Once you’re gone and once you’ve failed to defend it, well then the aggressor gets the asset. Not so with Bitcoin. You can take it to the grave. And that really reduces actually the incentive to violence, because you can either set it up very, very securely, like I described, so that you don’t have outright control. Or if you do have outright control, there’s not an incentive to steal it because the aggressor is not guaranteed that they’ll get any value out of it, even if they perpetrate violence against you.

Clay Finck (00:50:04):

Now, you mentioned a few of the pieces where Bitcoin, it seems to be superior. The scarcity, seasonality, and you mentioned a couple others. The ones for me that come to mind are, the volatility. I’m not sure which one exactly that falls into, but are there any others where Bitcoin today is inferior?

Andy Edstrom (00:50:27):

There are a couple categories where is inferior. So two that I identify are… and maybe I’ll get into three actually. So one is powerful backing, or backing by some powerful agent. So the classic case of course is, the dollar is effectively backed by the US military machine. Bitcoin doesn’t have that today. On the other hand, there are already significant constituents, whether they’re commercial organizations, there’s an entire Bitcoin industry that has sprout it up, or whether it’s even governments, right? We’ve got our first government that’s outright backing Bitcoin. That’s El Salvador, where it was declared legal tender. So we’re starting to see inklings of powerful organizations basically backing Bitcoin, but nothing yet that compares to the US military. So that’s a deficiency, I guess you could argue. Another one is basically, requirement for some purpose. So again, the classic case, you got to have dollars to pay taxes if you’re a US citizen.

Andy Edstrom (00:51:27):

Or whatever jurisdiction you’re in, you got to pay taxes in the local Fiat currency. So that provides call it artificial demand for that money that Bitcoin doesn’t have. And gold doesn’t have, frankly. I think eventually, we may see a world where Bitcoin is the preferred form of money. It is the form of money people prefer to receive. And whether or not that’s a government that’s sort of forcing people to hold some amount of the money to make a specific kind of payment, I don’t think it’s going to matter in the long run, but I think in the short run, that is a factor. And the third one, I think I’ll highlight is privacy. This is a major misconception in the general public is, people think that Bitcoin is private money. It’s like the secret transaction money. If you want to buy your illicit good or service, use Bitcoin.

Andy Edstrom (00:52:19):

Please people, if you’re going to buy illicit goods or services, use cash dollars, much more effective. Because one of the things that’s interesting about Bitcoin, is the entire transaction history is all embedded in that blockchain data structure. And so all you have to do is tie someone’s identity to some point in that history in that chain, and it becomes relatively clear who transacted. Now, there’s an entire industry devoted to this. It’s called chain analysis. There are several companies with multi-billion dollar valuations. Some of their customers, some of their best customers are government agencies, by the way, no surprise. And so, the Bitcoin blockchain is actually pretty well surveilled. And so the privacy in Bitcoin is actually not very good, which is somewhat of a disappointment to me in general, because I do believe free people should have the right to transact privately. It’s possible that upgrades…

Andy Edstrom (00:53:22):

There was actually a recent upgrade that happened to the Bitcoin blockchain taproot, which implements new signature schemes and new ways of aggregating transactions that could be helpful for privacy in the future. And there are some techniques like coin joins. Basically, pooling different quantities of Bitcoins of unspent transaction outputs, and then directing them at different locations, provide arguably some measure of privacy. I personally don’t really trust the privacy level of those systems. Will they improve over time? Perhaps. Maybe, probably. I think it may take years and years to get better privacy on Bitcoin. But for the moment, if you want privacy when transacting, physical cash dollars are your best bet.

Clay Finck (00:54:17):

You mentioned El Salvador there. And I don’t know if I could talk about Bitcoin without at least bringing up what is happening in that country. Now, before we get into this, I just want to say, I’m sure Andy and I, or anyone we’re associated with, we don’t endorse anything that the government is doing in El Salvador. We’re just analyzing what they’re doing with Bitcoin specifically. And just this year we’ve seen El Salvador adopt Bitcoin as legal tender. And in other news this week, they announced a potential bond issuance of $1 billion. I’m not sure if you saw this, but I just read the details on this just recently. And I believe they were going to use half of that money to just straight up buy Bitcoin, and the other half to in Bitcoin mining rigs. So I’m curious what your thoughts are. Just some of the things El Salvador is doing and is there potential for other countries to start following suit?

Andy Edstrom (00:55:19):

Absolutely, there is. And this has been one of the great exciting surprises of the year 2021. Not the only surprise, but one of the biggest ones. I did not anticipate a country declaring Bitcoin to be legal tender by 2021. That is something that I thought might happen farther into the future. Surprise, surprise, it happened this year. So there’s a lot of different elements to this. So the first question to ask is, what kind of country would have an incentive to try and adopt Bitcoin in large scale in a widespread manner? And there’s a few factors that I consider. One is, do you have a weak currency? Does your currency inflated a rapid rate or is it not widely accepted or do people just not really want to use it? Or as in the case of El Salvador and other countries, are you already on a dollar standard?

Andy Edstrom (00:56:14):

So do you already not control your own monetary policy, such that if you switch to Bitcoin, you’re not giving up some monetary policy control that you had to begin with. So that was the case with El Salvador. There are other dollarized countries in the world. Ecuador comes to mind. I think Panama as well. Although Panama may have a dollar peg. I can’t remember off the top of my head. Another major factor is remittances. And this is a huge story for El Salvador, which is, something like quarter a third of the entire GDP, the entire annual output or production, of the company of the country, excuse me, comes in the form of money sent from abroad. A lot of El Salvadorans living in the United States, they work jobs that pay better here than they do in El Salvador. And then they remit money back to their families in the country.

Andy Edstrom (00:57:10):

So if you’re on a dollar system or you don’t have a strong currency and you have huge remittance flows, then you’ve got good incentive basically to go to Bitcoin. Likewise, arguably if you have significant energy resources and you can effectively compete in the global market for Bitcoin mining, I think that’s another factor. So I would not be surprised to see other Latin American countries, central American or Caribbean or south American. I thought of Haiti as an example. And there have been stories. It’s mostly stories. I don’t know how much traction there is, but things going on in the Congress in Panama. I think there was a proposal maybe in Uruguay. Argentina has chronically had a problem with inflation and defaults. Wouldn’t surprise me if they came on board at some point. So yeah.

Andy Edstrom (00:58:03):

Will there others? I am pretty confident there will be. I don’t know necessarily whether they’ll just outright adopt Bitcoin. You definitely could see some hybrid models where okay, the country has a Fiat currency, and maybe they start to buy back Bitcoin as partial backing for their Fiat currency. And so they hold Bitcoin as a reserve asset. Maybe it’s not the only reserve asset they hold. Maybe they hold some Bitcoin. Maybe they hold some gold, some kind of a hybrid structure like that. But it’s a really interesting case study of a country that didn’t have that much to lose with respect to their existing monetary system, and had a lot to gain in terms of savings on remittances, as well as press. Let’s be frank. President Nayib Bukele, who has a very high approval rating still in El Salvador, is a master of social media.

Andy Edstrom (00:58:59):

And he’s created a perception which is, El Salvador, which is a relatively poor country, is forward looking is forward thinking, and it’s open for business. And if you are someone who is positive on Bitcoin, maybe you hold a lot of Bitcoin, or maybe you work in the industry, you see now a jurisdiction that’s friendly to you because you are a big believer in Bitcoin. There’s a potential to attract a decent amount of talent, talented people, that otherwise would not have been interested in moving to El Salvador. So there may be an opportunity basically to raise the economic game of this relatively small impoverished country in central America. And that’s a, if it works out, and we’ll be watching carefully, that could be a huge win for the country overall, as well as for his presidency.

Andy Edstrom (00:59:55):

Just getting to the bond issue. I did see that headline in the story. I don’t know if we know that much detail about how it’ll shape up, but yeah, they had already bought some Bitcoin for their treasury. And now they’re planning on buying more, as you said, half a billion dollars. And there was relatively soon or early in the process of El Salvador adopting Bitcoin, there was this meme, which is, let’s basically put the of volcanoes to work, right? Let’s harness the geothermal energy from the… I don’t want to say active volcanoes, but yeah, I guess that’s effectively what it is in El Salvador, and use it to mine Bitcoin. And they’ve already started implementing it. And look, it’s a pretty interesting idea. Geothermal energy by the way, is very clean from a carbon and greenhouse gas emission perspective.

Andy Edstrom (01:00:47):

And also it’s frequently located far from population centers. And so it’s an opportunity basically to monetize an otherwise stranded clean energy asset. And it’s a smart move. We’ll see how they actually implement it and build it out. And no doubt it’ll take a while to actually build out the data centers, get the mining rigs, get it all plugged in and mining Bitcoin, but pretty interesting financial transaction there. And it’s also a source of funding in general for the economy. I mean, the El Salvador economy is not that big. So a billion dollar inflow of capital actually moves the needle.

Clay Finck (01:01:30):

It’s insane to think about how El Salvador is literally harnessing the energy of volcanoes to mine Bitcoin, and is taking on cheap US dollar debt to do it. And you brought up the environmental piece of that. I love to touch on some of the common misconceptions around Bitcoin and get your thoughts, because it seems like we hear the same concerns over and over again. To get us kicked off, let’s start with the environmental concern. Many people will state that Bitcoin is bad for the environment because of the amount of energy that is required to run the protocol. So my question to you is, is Bitcoin bad for the environment?

Andy Edstrom (01:02:09):

So this is a really subtle question, and there’s several factors at play here. So the first response to that question is, compared to what? So as an example, Bitcoin, as we talked about, is competing to be the world’s premier hard money asset, and it’s taking market share from gold. Well, the data I’ve seen indicate that total energy usage to extract gold, to mine gold, and keep that monetary system running, something like three times the energy usage of the Bitcoin network. So Bitcoin is currently more efficient in terms of energy usage than gold. By the way, the total cost of running the dollar network, who knows, I mean, it’s bank branches, and armored trucks to move the cash. Arguably it’s some percentage of the US military to keep the piece in the middle east to support the Petro dollar and that’s a whole other story.

Andy Edstrom (01:03:04):

So the first question is, compared to what? The second thing to consider is, actually Bitcoin is accelerating, I believe. The adoption and the installation of carbon neutral energy capacity, electricity capacity. So why is that? Bitcoin is the first global market for electricity. What I mean by that is, electricity doesn’t travel that far. In other words, if you’ve got a power plant, you have to locate it within a couple 100 miles of the population center where you’re using the electricity, because too much is lost in transit if it’s farther than that. So there’s all this renewable energy that’s located nowhere near people. Whether that’s hydro power in the inland areas of China, or whether that’s geothermal in remote areas of Central America or Iceland or what have you, or it’s deserts where the sun shines very brightly, where you’d like to put a lot of solar panels, but there’s no people there.

Andy Edstrom (01:04:12):

And likewise, it’s very windy locations that aren’t located near cities. And so now, those assets can be monetized. I happen to know specifically of several projects. There’s one going on in the deserts of Morocco, which is both wind and solar based. And they’re going to set up a bunch of Bitcoin mining capacity. And so what that is, is it’s generating incremental demand for wind and solar and other renewable installed capacity, which means more sales for those companies, which funds their research and development budgets, which brings down the average cost of those renewable energy assets. And that’s the situation we’re in right now, especially for most of the developing world. I just imagine the conversation with some, I don’t know, regional governor in India, where some person, some representative from the UN is saying, “Don’t you install that coal capacity.” Install renewable capacity.” Same with China.

Andy Edstrom (01:05:13):

And the guy’s like, “Look, I got people living on a couple dollars a day.” I got to just install the cheapest energy source that’s available to me. So I’m going to install what’s cheapest right now. And so if Bitcoin is increasing the installed capacity of renewables, then it’s bringing those sources down the cost curve faster, which means that when there are decisions about new projects getting installed a few years from now, those energy sources will be all the more competitive. There’s another factor here, which is base load capacity, and basically, Bitcoin providing a buffer on existing functional grid. So one of the things that’s happening in Texas is, there’s a bunch of new Bitcoin mining that’s been installed and also being installed. Texas had this sad case last year of large parts of the grid, just basically losing power. It was very cold.

Andy Edstrom (01:06:07):

People died. My aunt and uncle, they were fine, but it was a pretty unpleasant experience for them living through that for several days with basically no access to energy. And one of the things that Bitcoin does is, Bitcoin is the easiest user of energy to take offline. And so what that means is, Bitcoin provides demand for energy. So you get installation of capacity. And then whenever, God forbid, there’s some outage, and there isn’t enough energy to feed both the Bitcoin miners and households and factories, et cetera. Well then the Bitcoin miners say, “No problem. We’ll go offline. It’s okay if we’re offline for a day or a week. We can still be profitable with 95 plus percent uptime over the long run.” And so grid operators, utilities essentially, are contracting with Bitcoin miners saying, “Hey, we’re happy for you to be on the grid and consume power, as long as you guys are willing to go offline when the rest of the grid, when households most need that energy.”

Andy Edstrom (01:07:11):

And so it’s this swing consumer of energy that actually makes the overall grid more robust because it incentivizes extra capacity, and you can pull the Bitcoin demand off the market when necessary basically, in an emergency to feed the rest of the critical users of energy. So there’s a lot of ways to look at Bitcoin’s energy use. The final factor is, I think about Fiat money in general. Does printing more money and reducing interest rates, and stimulating demand and spending on goods and services. Is that good for the environment overall, or is that bad for the environment overall? I believe it results in excess consumption. It results in us buying more stuff that we don’t really need. And I think that if we were on a hard money standard, equilibrium interest rates would be higher, but people would think harder about spending on frivolous stuff that they don’t need. And the environmental benefit of that on a hard money standard like Bitcoin, could be truly enormous, and that will take years to get to, but if we get there, I think it’ll be a huge net positive for the environment overall.

Clay Finck (01:08:28):

So essentially, that last point there, an inflationary system essentially, it needs to grow in order to continue to function. So that means it needs to grow forever. Is that right?

Andy Edstrom (01:08:39):

Yes. And perhaps even at an accelerating rate, and this is the statistic I think Jeff Booth put in his great book, which is… and I can’t remember the timeframe. I don’t know if it’s a decade or decade and a half, but it’s something on the order of, global GDP has grown I want to say… well, I can’t remember the number. Maybe it’s like 50 trillion. I think it’s 30 trillion is the number. Maybe it was 30 trillion of economic growth in 20 years or something. But the amount of debt in the economy to fuel that growth is 150 trillion. It’s like five times as much debt issuance for a given level of economic growth. And that is pretty clearly unsustainable.

Andy Edstrom (01:09:24):

That system, that debt fueled system has lasted longer than many people thought it would, but it appears to be accelerating, and not decelerating. And that’s likely to end and badly unless and until we can transition to a better hard money system. I personally believe that Bitcoin is the best shot we’ve got at making a peaceful transition from this long term disastrous debt based economy, onto a hard money standard, which is going to be much more functional for civilization in the long run.

Clay Finck (01:10:01):

And the book you referenced there is, The Price of Tomorrow by Jeff Booth. It’s a fantastic book, and relates to the environmental piece square and Ark Invest did research on this exact topic of how Bitcoin potentially incentivizes the transition to renewable and clean and green energy. And I’ll be sure to link all of that in the show notes for those interested. Now, let’s talk about the scarcity of Bitcoin. Some might argue that Bitcoin is not scarce because there are thousands of cryptocurrencies and there are new ones at it all the time. So what makes Bitcoin special, and why is Bitcoin better or different than all these other coins?

Andy Edstrom (01:10:46):

So to my mind, Bitcoin is the only cryptocurrency or digital asset that has a credible scarce monetary policy. And what that means is, it’s one thing to write the monetary policy into the code, which is the case for Bitcoin, but there also has to be a social consensus around that monetary policy, because it is ultimately people that run the network. They run the nodes, they run the minors. Now, the history of Bitcoin is truly unique. First of all, the founder disappeared. This is a feature, not a bug. It means that there’s no central figurehead or Monarch, basically that runs things. There’s no leader. That’s a good thing, because you want the network to be broadly distributed. The second thing is, the Bitcoin community essentially… well, in a figurative sense, fought a civil war, culminating in 2017. There was a fight between two factions. One of which wanted to increase the block size, which would’ve increased the potential number of transactions that can clear through the network in each 10 minute block.

Andy Edstrom (01:11:55):

And it got really ugly. It ultimately ended up culminating in a hard fork, Bitcoin cash split off of the Bitcoin network. And there were a few important things that came out of that. The first is, the hard fork essentially failed. When you look at the market capitalization of Bitcoin today, versus the faction that forked off into Bitcoin cash. First of all, that faction forked again. And secondly, the market value is a tiny fraction of Bitcoin core, or let’s just say a Bitcoin. So there’s historical record there of an attempt by a faction to change the consensus mechanism failing. What does that mean? It tells you that that group within Bitcoin, that resisted this change in the code and this change in the consensus mechanism, one, and it gives us high confidence as Bitcoin holders, that if someone were to suggest, “Maybe we should just print a few more of these things, maybe we should have a little bit of inflation or a little more inflation in Bitcoin.”

Andy Edstrom (01:13:02):

It gives us high confidence that anybody who suggests that’s going to be rejected out of hand. So I have very high confidence in not only the code, but the social consensus around Bitcoin’s monetary policy. And I don’t have that kind of confidence in any of the other assets out there. And by the way, another reason that I have confidence in Bitcoin’s monetary policy and consensus, is that it’s really pretty easy to run a Bitcoin node. So one of the problems with these more feature rich crypto currencies, is that if they are touring complete or they can essentially do anything. It takes more data storage and it takes more bandwidth. So I can, and I do run a Bitcoin node on a not too fancy desktop computer that I have sitting on my right. And the Bitcoin blockchain is about 500 gigs or half a terabyte of data.

Andy Edstrom (01:14:03):

So that’s like half of a not too fantastic solid state hard drive. And if Moore’s law continues or if we keep seeing increases in the computational ability and storage capacity in these guys, smartphones, we’re probably not too far, maybe a couple years or a few years, from being able to run a Bitcoin note on a smartphone. This is not the case with some of these wizier, fancier cryptocurrencies, where it takes a lot more bandwidth and a lot more storage to run a node. What that means is, few people run those nodes. Those nodes tend to be less distributed. They’re sitting in data centers. Frequently, they’re operated by a centralized, basically a data center operating companies, rather than random people, individuals like me running their Bitcoin node. And so it’s a lot easier to run a node, which means there a lot more of them, which means the system is that much more resistant to change or to capture from some faction that basically wants to change the rules.

Andy Edstrom (01:15:10):

So those are the reasons that I have much higher confidence in the monetary policy of Bitcoin. And so for me, there’s really no substitute in the world of cryptos. I’ll add one more factor which is what we call The Lindy effect. This is this factor which was observed. It’s named for Lindy’s eatery, which is now closed as of I think five or six years ago. It’s this place that actors used to hang out off Broadway. And they would talk about and speculate on how long would a Broadway show likely run. The finding was that the longer a show had been running, the longer it was like to run, or likely to run. You get things like cats running for 50 years or whatnot. And so this is actually a sort of a mathematical finding in nature, and in human history and sociology and anthropology, which is yeah, if something works securely or does its job over a long period of time, chances are it will continue in the future.

Andy Edstrom (01:16:09):

Okay. Well, this is especially true of security. And so the fact to the Bitcoin blockchain really hasn’t failed, or hasn’t been hacked, or funds haven’t been stolen at the blockchain database level. It’s one thing when people have failed to secure their private keys, and those private keys get stolen, because they’re stored on a computer and some hacker gets into the computer, that’s a different thing, but Bitcoin has been chugging away unmolested in that regard and successful for longer than any other blockchain. And it always will be longer than any other blockchain, because Bitcoin was first. So I have high confidence in the security of Bitcoin, because the Bitcoin blockchain hasn’t been hacked in 13 years. And it’s hard for other competitive cryptocurrencies to catch up in that regard. And crucial to that by the way, is the size of the bounty.

Andy Edstrom (01:17:01):

So said a different way. If Bitcoin is a trillion dollar plus asset, then figuring out how to compromise it means you could potentially steal a trillion dollars. And so Bitcoin has had longer time in the field with more value over that time in the field, than any other cryptocurrency. And as long as Bitcoin stays ahead of the pack in terms of its total network value, which it has done since it was incepted 13 years ago, as long as that’s the case, then I’m going to have likely higher confidence in Bitcoin. And by the way, even if another one of these digital assets cryptocurrencies eclipses Bitcoin in total value, at some point, or for some period of time, I’m still going to be able to rely on the fact that the Bitcoin code changes and evolves very, very slowly. So some of these other projects, they regularly go through hard forks intentionally. They update the code, they make it such that the new code does not comply with earlier versions of the software, which means anyone who is running a node on the network, is out of luck.

Andy Edstrom (01:18:12):

You better upgrade your software. If you don’t upgrade your software, you’re kicked out of the system. Not so with Bitcoin. Bitcoin progresses by soft forks, which means that new versions of the software can be implemented and run, while old versions of the software, old versions of the node, people running the nodes can still continue to run the old software. This makes the network much more robust and resistant to either malicious attacks by developers of new versions, or just from accidental errors, bugs basically, in the new versions of the software. It’s a very different ethos. It’s a very different way to run a distributed network. To my mind, it’s far more secure than many of these other systems that continuously go through rapid change and hard forks. And so I still have more confidence in Bitcoin, even if some other digital asset becomes more valuable in terms of network value in dollar terms for some period of time.

Clay Finck (01:19:12):

Many people will bring up, “If Bitcoin’s so great and it’s really going to do all these things that people say it’s going to do, then the US government’s going to feel threatened by it, and they’re just going to ban it. And this thing is just going to fizzle off.” So maybe talk about that risk and what that potentially might mean for Bitcoin.

Andy Edstrom (01:19:32):

Clay, I’m glad you brought that one up because it’s my favorite risk, or it’s my favorite piece of FUD, where FUD is, fear, uncertainty and doubt. And the reason it’s my favorite is because I think the biggest gap exists between people’s perception of the risk, and the reality of the risk. And what does that mean? Well, a big gap between perception and reality, is an investment opportunity. Yes, people say that governments want to be in the business of issuing the money, and therefore any new non-government form of money will be quashed by governments. I think that there’s a couple major errors in this logic. The first is, can they actually kill it? And five years ago, maybe if all the governments of the world had United to kill Bitcoin, maybe they could have. We’re past that point. The network is so valuable and so distributed, and has so economic activity built on top of it. Whether it’s the wallet providers, whether it’s the exchanges, whether it’s the lending platforms, the peer to peer payment providers, there’s just too much at stake.

Andy Edstrom (01:20:39):

And of course, there’s lots of rabid Bitcoiners like me, who will defend the network to the death, because not only do we have wet in it, but we actually believe that it’s good for the world and that it’s worth fighting for. So I don’t think governments can kill it. The second issue is, why would a government even want to try to prohibit it? Because you’re talking about prohibition. And the thing about prohibition, at least in the United States is, it has a pretty ugly history. You think of alcohol prohibition, which directly fueled the organized crime business. Likewise, the war on drugs, which is still with us today, right? I mean, how much smaller and less powerful and influential would the drug cartels, would organized crime be throughout the Americas if we hadn’t been militarily fighting this industry for decades on end. I think there’d be a lot less violence throughout large portions of central and south America.

Andy Edstrom (01:21:38):

What we know is that prohibition doesn’t work. And by the way, if you think that people get excited and riled up about defending their right to drink or smoke pot or what have you, or snort Coke, imagine how fired up they’re going to get about the right to hold their own money in an environment when the government is printing and debasing the currency at a faster and faster rate. Oh, and by the way, try confiscating Bitcoin, right? At least with something like illicit drugs. It’s a physical object in the real world. You can get your hands on it. You can take it. Not so with Bitcoin if properly secured. So I think governments are going to recognize that they can’t prohibit it. And by the way, again, at least in the US, I don’t mind mentioning holding a fundraiser for congressperson or let’s say, candidates running for Congress, Erica Rhodes, who is running to unseat Brad Sherman, who is the incumbent probably most anti-Bitcoin member of Congress out there.

Andy Edstrom (01:22:45):

But there are people like me who are willing to spend dollars and effort in the political process defending Bitcoin’s right to exist, while simultaneously educating members of Congress and other people in power about the manifold benefits of Bitcoin overall to the US economy, and to other economies throughout the world. So yeah, I just don’t see it happening. I mean, is there a greater than zero chance of prohibition for Bitcoin in the Western world in the United States? Any risk is greater than zero. I see that risk as like less than 1% at this point in the United States over the next decade. By the way, even if it happens, Bitcoin’s still probably going to win.

Andy Edstrom (01:23:32):

In other words, by far the most likely outcome is, prohibition never happens. Bitcoin continues to grow and flourish. Even in a scenario where prohibition does occur for some period of time. By the way, think back to alcohol prohibition, that didn’t last. Even drug prohibition in the modern age is getting reversed slowly with time. So I think Bitcoin still wins in the long run. It’s just a question of whether we take the easy path or the hard path. I’m doing my part to help put us on the easy path, but we’ll see how it goes.

Clay Finck (01:24:08):

Very interesting. Andy, thank you so much for coming onto the show. If anyone wants to learn more about Bitcoin, I highly recommend Andy’s book, Why Buy Bitcoin. Before we close out the episode, Andy, tell us a little bit about what you’re doing at Swan and where the audience can and go to connect with you and learn more about your work.

Andy Edstrom (01:24:29):

I am still a professional wealth manager. I’ve been at this for almost a decade. Prior, I was a buy side investor. And I couldn’t miss the opportunity here to help bring Bitcoin to my fellow financial advisors. So as of very recently, I am also helping Swan Bitcoin launch Swan Advisor Services. And what we’re doing is we’re providing a service, which is, outright Bitcoin ownership for clients. And we’re going to set it up as a product that is as seamless as possible, with the financial advisors’ software. Whether it’s portfolio reporting, buying and selling the asset, billing for assets under management. And it’s different from a paper wrapped security type of Bitcoin instrument like the Bitcoin trust, right? Ticker GBTC that everyone knows. In this case, with this product, it is third party custody. But if the client wants to take custody of their own keys, of their own coins, they can do that.

Andy Edstrom (01:25:35):

They had the ability to do that. So Swan is the only provider that I know of, that’s giving outright coin ownership implemented for financial advisors, that’s focused only on and Bitcoin. We’re leading with education, and we’re leading with the focus on Bitcoin, which we think is the clear leader among the hard money assets out there in the world today. To any listeners out there who either are financial advisors, or no financial advisors, or have a financial advisor that you think would benefit not only from getting Bitcoin into client’s portfolios, but also just learning more about Bitcoin. I mean, we’ve got multiple people on the team who have published books.

Andy Edstrom (01:26:17):

I’m not the only one. Yan Pritzker is another good example. We’ve got a whole team of really smart Bitcoiners that have written extensively in article format as well as podcasters. And we’re here to help educate both financial advisors, and their clients if they want. If you want to pull us into a meeting with a client who asks about whatever risk, whether it’s prohibition or quantum computing, or the environmental impact or anything like that, we’re available to help. So anyway, contact us at swanbitcoin.com/advisor. If you want to keep up with me on Twitter, my handle is Edstrom Andrew, and my personal website is andyedstrom.com. And as you mentioned, the book is Why Buy Bitcoin.

Clay Finck (01:27:04):

Awesome. Thank you so much, Andy. You guys are doing fantastic things at Swan, and I highly recommend everyone check them out. Check out Andy’s book. Thanks again, Andy. It was really a pleasure chatting with you. I really, really appreciate it.

Andy Edstrom (01:27:17):

Pleasure was mine, Clay. Thanks for the chat.

Clay Finck (01:27:20):

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 (01:27:43):

Thank you for listening TIP. Make sure to subscribe to We Study Billionaires by The Investors 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 Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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