Bitcoin Market Sentiment and Liquidity Cycles w/ Andy Edstrom (BTC256)

(00:00) So, I can admit Bitcoin is sort of very long-term quote unquote savings technology, but really it's an investment. I ask myself the question, okay, how much greater of a return risk adjusted do I expect to earn holding something like MSTR versus just holding spot Bitcoin? And that's the question. And so, for me, it has to offer some significant premium in terms of expected value. (00:31) where you wanted to talk when I briefly chatting with you before we decided to do the show is you wanted to do a post-mortem on treasury companies and really kind of get into some of this because it's really kind of percolating if you will. So what's your key takeaway? Let's start there and then I'm sure we have plenty other places we can go beyond that. Yeah. Let's do it. A warning. (00:56) This is the episode where Andy Edstrom finally gets cancelled in the Bitcoin community. So, so here we go. So, yes, Bitcoin treasury companies are a dumpster fire. I mean, they are an unmititigated disaster. My words, not yours. You know, I know lots of people that I consider good Bitcoiners who have gotten absolutely shellacked by these things. They're all dudes. You know, we still need more women in Bitcoin. (01:22) We have a few. I'll recommend people listen to your recent episode with Ned Brunell. But yeah, a number of my friends who are Bitcoiners have lost tons of money in these things. And obviously it's a spectrum. You know, there's better and worse ones. And uh I think there's pain across the sector. The newer, diceier ones are down, I don't know, 90 plus% off their peaks in some cases more. the higher quality ones. (01:58) I mean, I guess you probably have to put MSTR in a league of its own, you know, disclaimer disclaimer. We both have relationships with Michael Sailor. And I think it's now uh back to 2020, fall 2020, when you and I did an episode. And uh we were talking about they had just put half a billion dollars of their balance sheet into Bitcoin. (02:18) And I observed that maybe the balance sheet could bear a little bit more leverage than it had. And I had no idea that he would take it as far as he has. But uh here we are. Here we are today. Just a little bit more leverage. Just a little bit. Although actually it's interesting on a I'd have to think about like as compared to MNAV or compared to the balance sheet value, you know, you got to define Yeah, the leverage because you're actually a lot of equity raises is what it's actually Yeah. Go ahead and define this for people because they might snarl (02:48) at the terminology. Yeah. Well, and I don't have the former numbers in front of me from back in the day, but I guess my recollection is that balance sheet had very little debt. It had half a billion in cash and the core business, the business intelligence software was cash flowing like maybe a hundred million a year or something. Mhm. (03:12) And 100 million a year roughly of cash flow, you know, you should be able to put a few turns of leverage on that. you know, you ought to be able to put if there's 100 million of cash flow, maybe you can borrow 300 or 400 or if you really want to push the envelope, you know, 500. (03:30) Those would have been kind of normal leverage levels for a company like that with recurring revenue and contracts. Obviously, fast forward to today, and I don't have the exact numbers in front of me, but I mean, it's billions of dollars of actual debt. That's the convert debt. And then obviously, we've got billions of dollars now of preferred. And the preferreds are technically not debt. (03:48) You know, they can shut off the dividends, but they're sort of debt like, you know, with the interest payments on those things being, I want to say 7 or 800 million a year. And then I guess if you looked at balance sheet and you said, okay, if the market cap of uh it's funny, as we're speaking, I'm pulling up market cap on uh the Bitcoin. (04:12) Yeah, the Bitcoin is worth 56 billion as of today. Yeah. So, you know, if you have 50 plus billion of stock and you've got, I don't know, 20 billion of quasi debt claims against that, that's actually not that levered. So, yeah, you know, it doesn't feel that bad. And certainly, it's a cash flowing business and certainly it's by far the largest player in the market. And so, Andy, take Micro Strategy. (04:37) Let's put it on the shelf. We'll come back and talk about that. Talk about all the other treasury companies. And I think what is your broader dumpster fire talking point? Let's talk that and then we can maybe talk the nuance of micro strategy since I think we both agree it's very different than anything else that's out there. Yeah. And look, I mean I'm sort of hesitant to name names. (05:00) I think probably everyone listening

to this program knows the name what these companies are because, you know, there are various promoters that have been marketing the heck out of them over the last number of months. And yeah, they range from companies that have new public company CEOs like leaderships never run a public company to problems with reporting like failing to file SEC filings on time, you know, to businesses that have no cash flow whatsoever to serve as debt and have done debt deals, generally convert deals. And then yeah, just the (05:36) numbers of, you know, anybody who bought the top or near the top of these stocks a few months ago, they're down in some cases 80%, other cases 90%, in other cases 95%. So that's my short answer, I guess, on the dumpster fire. You know, for me, I've been trying to where I really struggle to explain this to family and friends or really anybody for that matter is when people are asking about a treasury company specifically that's trying to securitize Bitcoin. like talking about this arbitrage between Bitcoin's performance and what (06:13) they're issuing whether it's preferred or convertible debt and then arbing the difference between like people's eyes just glaze over and they just immediately are like what in the hell is this guy talking about and so I think a framework for me that has resonated I think a little bit better for people is to frame it like this so people understand tether very quickly the stable coin, you know, they're buying US treasuries. (06:46) They're tokenizing it to create a dollar stable coin and they're putting these dollar stable coins out into the economy, but it's backed by US sovereign debt. I would make the argument, and I think this would be a really controversial argument. And I think other people in the market might not agree with this framing, but similar to how Tether is or Circle or any of them are securitizing these dollar stable coins with treasuries. (07:14) I think what Micro Strategy is effectively doing is also creating stable coins, dollar stable coins that produce yield, but instead of using US treasuries, they're using Bitcoin. And in order to do that in a way that isn't unsafe, they have to overcolateralize it, the number I keep hearing is 5:1, right? And I think when you look at the 5:1 over collateralization, it's a function of Bitcoin's volatility. (07:41) So if Bitcoin can go down by 70 or 80% in a year, you really do need to be 5 to one backed, assuming it doesn't go any lower than that to ensure that the peg of what they're issuing stays intact. And people might hear that and say, "But it's not the same. " Well, I'm not saying it's the same. (08:06) I'm trying to use it as a frame of reference or a mental model for people to try to understand what he's trying to do. who he's effectively doing dollar stable coins. He's issuing them as preferred stock and they pay a dividend where dollar stable coins really aren't paying any type of dividend or coupon, but they are pegging themselves to the dollar with something that's way less volatile in dollar terms than using Bitcoin as collateral. So would you agree? I like that. (08:33) I like that framework and it brings into relief because you mentioned Tether. a couple things. First of all, you know, people like to think in binaries and usually that's wrong. So you use the example of Tether and yes, Tether is mostly collateralized by US treasuries except for it's not 100% as far as I know, right? It's like I don't know 95% treasuries or something. (08:58) And then they've got some in Bitcoin, they got some in gold, they got various other assets. And so when I think about Tether, I think about yeah, it's dollar good except in the unlikely probability, right, that it isn't. You know, like there's a run on the system. (09:15) People try to redeem their tethers for actual dollars and they sell all the treasuries and even if they get out of the treasuries apart, maybe they have to sell some of the other collateral and does the rest of the collateral cover all the claims against it in the form of tether tokens. And the answer is yes. in pick a number, you know, 99% of cases it will cover it except for maybe it won't. (09:34) And then you look at something like the MSTR balance sheet and yeah, I see that as also on the spectrum of highly likely to be solvent and highly likely to not have a problem paying out all the contracted liabilities except for there is some small probability that it doesn't work out and that it unwinds. (09:57) Mhm. And so, you know, reasonable investors can make the bet like, okay, I think it's 95% certain

that they'll pay all their liabilities and the accretion rate of value of Bitcoin will occur at a faster rate than they have to pay out and therefore it'll be accretive to shareholders. (10:22) And I just think people have to acknowledge that, oh yes, but there's some downside risk, you know, that it doesn't work out because there's a prolonged bare market in Bitcoin in dollar terms or, you know, god forbid Bitcoin fails completely, etc., etc. Yeah, we're on the same page. So, so you got that. And what becomes a huge part if you're taking Bitcoin securitizing it and issuing stable coin like equity that pays dividends around you know what he's doing is 10%. (10:51) So you've got that and you've got this ratio of 5:1 to ensure that this stays intact assuming the math and everything kind of stays the same and the volatility stays in that range and Bitcoin continues to grow. a lot of assumptions, very different than just owning Bitcoin. We fully acknowledge that. (11:10) And then you have other companies that are to the dumpster fire part of your talking point that are trying to do that. They're trying to do what Sailor, which I would say is doing in a responsible way based on the math, but they don't seem to be executing. And I think that's the real talking point is the execution's different. (11:35) You have treasury companies that aren't even using Bitcoin as their reserve. They're using Binance tokens. They're using Ethereum. They're doing all sorts of and these things are being referred to for people that aren't familiar as DATs. They're going out and they're basically pumping the price of these other things and saying it's like Micro Strategy. (11:54) And you know, that's for the market to determine. And I think the market's determining it pretty quickly. Any thoughts on that part of it or any other talking points on the dumpster fire that you want to quantify, Andy? Yeah, look, couple things to key on. One, obviously, yeah, the digital asset, treasury companies, the DATs. (12:15) I guess it's like anything else, right? You got this long tale of crypto assets, digital assets, whatever you want to call them. uh the farther down the curve you go on those things, the more inherent risk there is in the underlying asset. And then add on top of that you're levering it. So yeah, good luck. Good luck to all participants in those markets. I wish them the best. (12:38) I think it's going to be tough for a lot of those. Some will succeed. I don't know which ones. I think yeah with respect to the issue of how fast can you raise capital to build a balance sheet that is accreative to shareholders just in the Bitcoin treasury company land that's the major part that I think is I don't want to say totally unpredictable but a reasonable investor will say how quickly can these things raise capital in an accretive manner over time and therefore how can they build that if you want to call it the Bitcoin yield right how quickly can they accumulate coins (13:23) such that there's accretion and outperformance versus the underlying price of Bitcoin and it all depends on market conditions right I mean a few months ago these guys were in some cases able to raise tons of money relative to the size of their market caps and now they can't raise any or some of them can't raise any. (13:46) Some are ekking out small amounts of capital raises and so as an investor there's always uncertainty. I mean if you just buy a normal manufacturing company at 10 or 15 times earnings you don't know what those earnings are going to be in the future. (14:08) But probably you can look at the core business and say well it's grown at X rate over a number of years. I assume that X will continue or some discount or premium to that rate of growth and therefore I can kind of draw a box approximately around what I think those cash flows are likely to be and therefore what I think the security is worth. (14:28) I think with some of these smaller issuers where the major factors how fast can they raise capital and in what form it's just a huge possible range of outcomes. I mean the range of outcomes is so wide that it sort of becomes absurd to try and value these things. Mhm. So when you say value these things, MNAV is the big talking point. (14:52) You know, if the Bitcoin is a billion, then the company is valued at 1. 1 billion or whatever some multiple above or below that MNAV and for the company hopefully above the MNAV.

How do you think through that framework, is it a viable framework? How do you value something like this? Yeah. So, I do think it's a useful indicator and I'll give you some examples and benchmarks. (15:18) By the way, I'll just say that I think it was about 13 months ago or so, a little over a year ago, that I started hearing people in the Bitcoin community start talking about how MNAV, which is fundamentally a multiple of balance sheet value, right, was comparable to price earnings, you know, or cash flow multiples. (15:40) The implication being that a reasonably valued company might trade at 15 times earnings or 15 times cash flow and therefore that Bitcoin treasury companies might be valued at 15 times MNAV and my head almost exploded at the time and I had some conversations including on podcast and stuff. I mean it was wild. Um anyway, we've come back to reality I think and here's my sort of rough framework for MNAVs. (16:08) So the first thing to say and you know this well and you've taught your listeners about this over the years which is nothing's certain and so we have valuation metrics and none of them are precise. So this is all sort of rough math but hopefully useful. So I took a college degree from a good college in economics. (16:28) Yes, I did study some actually useful stuff like I took a lot of math but I did take a Keynesian economics degree which was a hindrance not a help in understanding Bitcoin. But one of the I guess in retrospect useful things I did back in school was I was a teaching assistant. (16:46) and I was a TA in the econ department and there was a visiting professor and he said Andy you know come do some research for me and he had some data on closedend funds and closed end funds are these structures that have existed in you know the US stock market for I don't know decades and basically they buy mostly liquid assets but unlike an open-end mutual fund right where you can create and redeem shares you can't do that it's closed end and So the uh when you buy the security it trades at either a discount to net asset value or premium (17:22) and you know this professor said look try and find some predictive pattern you know here's a bunch of data I want to make money in markets like what patterns exist in the discounts or the premiums or any other piece of data we have on how these things trade and is there anything there that's predictive of future returns and the basic range outcomes for closed end funds generally speaking was occasionally they trade at modest discounts. The equivalent being an MNAV of like you just said 1. (17:53) 1 or something that's modest premiums and then often they traded at discounts more often and 10% discount was not uncommon. 20% discount is where it often got really interesting. You know if you could buy something at a 20% discount or that'd be an MNAB I guess of8 chances were you're going to get a good return. (18:13) and then it was sort of gray area between like 10 and 20% discounts. So that's one kind of benchmark that I think about with respect to MNAV on these Bitcoin treasury companies. Okay. Second model is one with which you're well familiar very well-managed holding companies like Berkshire or Markeel Corp, right? And these things as you know often trade at you know when things are going well they might trade at two times buck like a 2x MNAV occasionally higher than that but not that often. (18:49) And then third model I think about is banks. Okay banks can use 10x leverage on their balance sheet right that's a huge advantage. They should be able to generate very attractive returns in theory with that kind of leverage. And very well-managed banks trade at maybe two to two and a half times book value, which would be comparable to, you know, two to two and a half MNAV. (19:15) So, none of these examples or these models is perfect when it comes to Bitcoin treasury companies. But I do sort of triangulate to some notion of these things if they're extremely well-managed, you know, maybe they should trade at two times, maybe two and a half times in extremists, but that's rare. (19:39) And more normally, they should trade at either modest premiums or possibly even, you know, modest discounts. I think for the listener they get wrapped up into like look at Micro Strategy and I mean for all intents and purposes the 100 mil that the operating business makes is completely dwarfed by the 56 billion that sits on the balance sheet. (20:04) And so somebody's just looking at it very generically and they're saying,"Well

I just don't understand why I would pay more for something like this that doesn't even give me the attributes of Bitcoin that for all intents and purposes is the same. I could go out and buy one Bitcoin or I could buy one share of Micro Strategy and let's just assume the MNAV is at one and not at a discount or a premium. (20:23) " the person's asking themselves, why would I go buy that thing when I can just go buy Bitcoin and know that I have custody of it can do whatever I want with it as opposed to this? I've got an opinion. I'm curious how you would respond to that person as they would ask such basic and I like the basic 15-year-old kind of question because it gets to the root of what it is versus Bitcoin. Yeah. (20:53) So, let's get to the nub of why I hold Bitcoin. And I'll just speak for myself and maybe other people will find that idea useful. And there's sort of three legs of the stool for me. So, one is uncensorable money, you know, asset that I can carry across a border if I absolutely have to. (21:13) You know, if I get debanked, if I get cut off from my assets and I need to have access to something where I hold the keys. Okay, that's a good reason to own Bitcoin. You don't get that obviously with let's say Bitcoin Treasury Company stock or MSTR stock. The second reason I own Bitcoin is uh number go up. I don't call it savings technology. (21:37) I actually take issue with the notion that Bitcoin is quote unquote savings. To me, savings should not have purchasing power that fluctuates plus or minus 50% in short periods of time. I think if Bitcoin reaches its potential, it will become savings technology. (21:59) And look, granted, if you live, I'm speaking for myself again, right? If you live in a hyperinflationary location, you know, country that's got a terrible fiat currency, then Bitcoin kind of is savings. Mhm. Although caveat again, if you live in such a place, you also probably have access to Tether or some other stable coin, which might be a better short-term savings technology than Bitcoin. (22:18) So, I can admit Bitcoin is sort of very long-term quote unquote savings technology, but really it's an investment in my view. Someday, if it reaches its potential, it'll be a savings vehicle. Today, it's an investment vehicle. So, anyway, yeah, second reason is, you know, I expect the value to go up. (22:37) I expect to earn a an attractive rate of return holding Bitcoin and in that case either Bitcoin itself or some paper version let's call it some version where that sits in a brokerage account can satisfy that criterion and then for me the third reason is I actually believe that a world in which Bitcoin succeeds is a better world so you know for ethical reasons basically I hold Bitcoin and I'm involved with Bitcoin so two of the legs of that stool can be achieved with something like MSTR. One cannot. (23:08) And the leg of the stool of it's an investment and it's supposed to earn a rate of return. I ask myself the question, okay, how much greater of a return risk adjusted do I expect to earn holding something like MSTR uh versus just holding spot bitcoin? And that's the question. And so for me it has to offer some significant premium in terms of expected value. (23:35) Mhm. And then you know reasonable people can disagree about how much premium is required to hold that asset as opposed to just outright Bitcoin. Yeah. At the end of the day MSTR can use leverage and it can use leverage from publicly traded markets to enhance its return profile. (24:01) But it comes with added risk for sure and it comes with lacking taking self-custody and like all these things that we talk about with Bitcoin. So if people need to think through those tradeoffs and they have to make an informed decision and take self- responsibility for themselves. And by the way, those risks are several, right? They're not just one. (24:24) Like you mentioned leverage, okay? If the leverage goes wrong and the stock goes to zero, let's put it this way, things can go badly in Bitcoin such that the price goes down for a long time, but it's not a zero and it recovers ultimately. Whereas company stock where it's levered and the price of the underlying Bitcoin stays down long enough that it unwinds, right, the stock can be a zero. So that's one. (24:50) And then you've got obviously key man risk in the case of micro strategy because you know the chairman I believe Michael Sailor still has control if god forbid something happens to him you know the board can probably make

a decision a different decision about what to do with the corporate strategy. So that that's risk for the shareholder. And then of course you got the concentrated coin risk which is if you're a believer in the long-term potential of Bitcoin, then you have to ask yourself, well, what happens with a big enough pile of coins when governments get very interested, right? When governments need to get some coins and they look for, (25:26) you've talked about this in the past on other episodes, and they look for the biggest uh the biggest honeypotss, is there risk associated with expropriation there? So yeah, there's numerous risks in addition just to the levered outcome on the price of underlying Bitcoin. (25:50) What about companies that um you know, you mentioned Birkshshire, you mentioned Markeel holding companies that are acquiring fully owned operational subsidiaries and that are generating free cash flows. What about businesses that would be then taking the free cash flows and putting those retained earnings into Bitcoin but also entertaining more acquisitions depending on, you know, whether the price is a lucrative return profile. (26:14) You haven't seen that. What you've seen is this Bitcoin Treasury play where you're basically tokenizing dollars through the issuance of preferred stock and you're overcolateralized. Uh that seems to be the playbook that everybody's taken and not more of a Birkshshire model. (26:34) Do you see that coming to market? being something that would work? Just in general, what are your thoughts? Yeah, I think my biggest overarching thought is everything takes longer in Bitcoin than we think it will, right? So, amen to that. Yes. Game theory, you know, game theory, government's buying, omega candles, you know, moon moonbags. (27:00) Yes, much or all of it will happen in time and it always takes longer than we think it will. Is it just an education burden? Is that what why does it take longer for more people to kind of come to this conclusion? Yeah, I definitely think education is a major factor. It's so hard to understand Bitcoin, you know, I imagine I have some significant understanding of Bitcoin and more than 99% of the population. (27:22) Also, there are people that know much more about it, orders of magnitude more. Uh, so it's all a distribution, but yeah, it takes a ton of work to climb the curve on the game theory, the math, you know, the network topography, the history of money, the geopolitics, all that stuff. (27:44) As you know, it's a pretty heavy lift. It takes a lot of work. So, most people don't have the time. Many are too lazy. Many just are living hand-to-mouth day-to-day. They don't have time to research this stuff. Others were taught the wrong thing. They got to unlearn the wrong thing and learn the right thing. Sorry. Go ahead. No, no. (28:05) To that last point, I think this is also a huge factor of it is a lot of people I think if you would look at just from a percentage standpoint, at least half the population is just living paycheck to paycheck. And if there's one thing that I've learned is people just can't go and put money that they that they're not even earning because they're living paycheck to paycheck. (28:24) If you can't put anything into savings, that in and of itself is a non-starter. And then for the people that do have just a small amount of retained earnings or cash flows, they want to put it into something that they know is going to be their almost like a rainy day fund kind of thing. and they don't want a lot of volatility in it. (28:48) So, they're being constrained by their lack of desire for having any type of volatility. And then for the ones that are the huge earners that I would say are ripe for owning Bitcoin because they have free cash flows and they can deal with intense volatility. A lot of them are looking at things that for all intents and purposes, and Bitcoiners would probably hate me for saying this, but that are sexier. (29:13) They're looking at AI or they're looking at things like that I guess is easier to understand. As crazy as that sounds, it's easier to understand AI because they can go on their computer and they can type one question in there and it pops out this fantastic answer and they're saying, "Oh my god, I don't know what this is, but I need to own who's ever making this. " And then they put investments into that because it's just it's very quick to understand. (29:35) There's no big education burden. You can use it one time and you're like, "Okay, this is pretty cool and this is going to be revolutionary. " And like that's the end of the thesis and that's where they're throwing their extra cash. 100%. There's all these bears. (29:52) Bitcoin is arguably irrelevant as you're pointing out to huge swath of the population that doesn't save. And then I agree completely that the AI narrative has sucked a lot of the wind out of Bitcoin in terms of US dollar price in the

last year or two. By the way, I'll go a little bit further. Here comes some heresy. When I published Why by Bitcoin in 2019, my view at the time was that Bitcoin was the best riskadjusted investment I'd probably ever see in my lifetime. Mhm. (30:21) Granted, that was at, you know, started writing it was 3K and when it went to press it was like 8K. So, we're 10x higher in price now. And yes, a lot of the risks have been removed. But now I have to ask myself like, is this still riskadjusted the best investment opportunity available to me? And I can still answer yes, but also I can say, but not to the point that I want to put, you know, substantially all my portfolio in it. (30:53) In other words, there are other opportunities, investment opportunities that are also attractive. And if I think about risk and I acknowledge the fact that Bitcoin could still go to zero, god forbid, it might be worth owning some other assets as well. And so when I think about the opportunity that Bitcoin offers, it was crazy attractive when I first started buying it and made a big bet on it. (31:20) It was even more crazy attractive when you uh made your first buy. I wish I had been around uh at that time and now it's very attractive, you know, but are there other assets I want to own out there? Yeah. What are some of these other things? I mean, it's an investing show. Let's talk about some of these other ideas you got. I love it. Let's hear it. Yeah. I mean, God help me. (31:43) I'm probably going to be buying some uh some real estate soon. So, that's one thing that I think it's okay to own. I like monetary metals. I don't think Peter Schiff is right, but I do think that gold and silver and platinum and various other lesser monetary metals are probably going to be continue to be good investments over the at least the medium term. I kind of like commodities in general when oil and gas is kind of washed out. (32:11) I think that if we're going to build out all this electricity capacity and general power capacity, there's going to be a huge role for NAT gas because it takes a long time to get the nuclear online and um solar's not going to fill the void. And yeah, I had this argument with my uh so my brother-in-law is in the solar install business and he's like, "Solar is going to eat everything. " And I say, "No, we're just it's just going to be more. " You know, this is Lyn Alden's view, too. (32:38) It's like it's very rare in history that some form of energy generation just goes away. You generally just get more of all of the above as uh humanity finds new and more interesting ways to consume energy. And then uh there's parts of AI that I like. I mean, I'm a Google shareholder. What did you think about uh Elon recently did an interview and was asked what are some of the investable things in the space? I'm paraphrasing the thing and he named one company and only one company and it was Google. Um, which I found noteworthy as a comp of an interview of an (33:16) interview he did probably 10 years ago and this was like maybe before open AAI was founded. I don't remember exactly when open AI was founded, but it was it might have been in the early days of Open AI. And someone was asking him his concerns about AI in general, you know, and the threat of AI to humanity. (33:34) And they asked him, well, what companies are you worried about? And at that time, he said, there's only one. He didn't say which one it was, but uh it was pretty clear already at that time. Yeah. It was Google. Yeah. Yeah. (33:55) It is really noteworthy because the whole reason that he initially funded Open AI with Sam was because of his conversation with uh I think it was Sergey from Google. You know, he had that conversation and the specious comment came out and it scared the living be Jesus out of him and then he went and funded Open AI to compete with Google. (34:13) And so I guess I just I found it really interesting that just I think the interview came out just this week where the one company that he named as a viable competitor to what he's doing with XAI was Google. Uh when Google first came out with some of their AI models, they were not impressive. (34:32) And I would just say just in the past month, it really seems like they're giving Open AI a real run for their money. I know I've been playing around with their model with their Gemini model and some of the things that I'm getting back are very impressive and completely on par with OpenAI's model 100%. And if you know the classic trope of lock in and having a platform and you know offering multiple products look it affects me okay like I still have a Gmail account god help me I use Google calendar so you

know is it convenient to use Gemini all on the same login? Yeah. Yeah, you bet it is. Yeah. Bundling. Yeah, there is massive lock in there. (35:10) What about you, Preston? I mean, what else do you like in terms of investments? I mean, I know over the years, and by the way, I'm sympathetic to your view, which is like if the world reprices on Bitcoin, then companies probably aren't going to be worth 30 times earnings. You know, they might be worth eight times or 10 times. (35:27) But, uh, is there no nowhere else that interests you right now? Yeah. Where I get frustrated uh with all of this is for the companies that I am finding that I think are going to have a huge impact in the future. The risk adjusted return is really kind of the real question. (35:47) And it's like should I be paying these crazy multiples to own the company when the execution risk and the competition risk and all of the risks that you just start listing, right? Uh, you know, I look at Bitcoin and although I'm not real thrilled with the past year's performance to be quite honest, I find that Bitcoin seems to do really quite well, especially after those times when you're most frustrated with it. (36:12) Uh so until I kind of see a real clean break that the network adoption rate that we've seen growing at a power law type pace is broken or doesn't seem to be fulfilling what many would say is mathematical certainty or just kind of a global network rate of adoption. (36:37) If I ever felt like that was breaking down, which I don't, I'm having trouble finding things in the market that I think are going to outperform. It's I'm sympathetic. I'm sympathetic to that view. And by the way, you know, God helped me six years ago, I published a price target for Bitcoin, right? I had three scenarios. (36:55) And this is obviously simplistic, right? But it's what I decided on, which was back then, scenario one for me was, you know, it fails, it dies. 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from start to finish and help you unlock your home equity to purchase Bitcoin. Transform your home equity into Bitcoin today with Horizon. (40:13) and I put a one-/ird probability on that which was probably too high but I was still learning uh cut me some slack and then the second scenario was okay it's kind of already reached its potential remember this was at publication of like 8k Bitcoin and then the third scenario which I assigned a one-/ird probability to was the success case and you know I didn't look ahead decades and decades but I picked a 10-year price target and the 10-year price target was 8 trillion of network value which would be about 400k per coin. Okay. And um remember (40:47) price was 8. So 8 to 400 that would be a 50x right? Pretty attractive for a 10-year return. And how's it gone? Well that was 6 years ago and it's gone 10x right which leaves another 5x for the next four years. I still kind of like that price target. You know it's kind of in the ballpark. (41:12) I could definitely be wrong, but you know, do I want to hold an asset that I expect to go 5x in the next four years? Yeah, you bet I do. Do I want to hold it in size? Sure. Everyone always says, "Why so bearish, Andy? " But I think I'm sticking with that target, at least for now. (41:29) I guess I'm more bullish in when I look at what a lot of this technology is going to bring, especially in the form of robotics and AI. I'm just looking at like how are the governments going to respond to so much dislocation that's going to happen from all these advanced technologies and they're going to have to print. print just like they've been printing maybe even more. (41:48) And when I look at Bitcoin and the fact that you can't it's immutable. I can send it straight over any type of internet connection where gold you can't do that. I just like I don't know the use case is there times 10 for me in the face of everything that's transpired since 2019, right? Like you know the timeline that you're throwing out when you were writing the book. (42:11) I'm looking at like back then we weren't talking about AI as being like it was a fiction novel back then. It was more of like, oh yeah, we're tinkering with these neural nets and they can do things and there was no like chat bot that you could talk to and it would give you some like super advanced answer. (42:30) The humanoid robots just in the past year when I look at the numbers and the quantities that Elon alone is saying he's going to be pumping out in the coming 5 years. Like this thing's moving out like a freight train. And you know, when you look at the gigafactories that he was building for the cars and like all these battery plants and like how many cars he the projections of like what he was saying he was going to do around now and in the coming couple years when they were building that and like the size of some of those factories and when it's first getting announced, I was like, come on. Like these the size (43:01) of this is crazy. Like is there really going to be this kind of demand? And now in 2025, when I'm hearing and seeing the cost reduction to the end user with the driverless technology and what it's going to do to Uber as far as the robo taxis and I just kind of pull on that thread a little bit, I can quickly see how they're just going to be such a dominant player, like absolute dominant player. (43:32) And so then I I'm hitting copy paste on the humanoid robot side which I think is not seen by I think very few people everyday people are looking at the humanoid robots and thinking that it's going to be a viable thing just like we were looking back in 2020 or 2019 with the robo taxis and saying I don't know man like will it now it's getting very real. I think you're going to have the same thing with the humanoid robots in about five years from now. (43:57) And I think that's when it's going to really set in where the printing press is going to get super hot and maybe starting to catch on fire because of the pace that it's going to have to be moving at. And do I think what Elon's doing is going to be a market leader? Yeah, I absolutely do. (44:17) But like all things, it comes down to like, well, how much are you going to pay to participate? like what's the markup on owning that equity versus just betting on the printing press continuing to fire off, you know, $100 bills all day long, all day and all night. So, we're going to get a lot more shirt bucks. You're right about that, Preston. (44:37) I have almost no doubt about that conclusion. And yeah, we're still at a point, you know, Bitcoin is now still less than 10% of gold, you know, in terms of market cap. I mean, if gold's 20 something trillion at current prices and Bitcoin's at two trillion or a little under, you know, I think gold's just so easy for the market to understand. (45:02) I think people are finally

understanding the debasement trade. They're finally understanding that nothing stops this train. I think that has finally hit a Wall Street and you can speak. I'm sure you still have tons of friends that work on Wall Street. It seems everybody understands that and everybody agrees that the printing press is never turning off and the math don't work for fixed income anymore. I think everybody understands that. (45:27) And so then the question is okay well then how does that get resolved and like what do I want to own as that's resolving itself? And it just seems like everybody's like yeah Bitcoin's a lot to kind of like wrap your head around. There's all this encryption stuff and like you know do I trust the people that wrote it? And like I think it's a lot of work where gold is just this easy button that they can push and it just answers the mail on the thesis the debasement thesis and so I think you have a lot of people just hitting the easy button because they just don't want to do the work to understand it would do 100% and reminder there was a very (46:03) very long time where wealth managers wouldn't even own gold right like forget about Bitcoin which is you know if your thesis is hard money. At least you ought to get your head around gold. But I would say until very recently, most of my wealth management brethren were not willing to buy gold for their clients. Yeah. (46:28) Um and so if Bitcoin is like a bridge farther than that, this stuff I guess just takes time. And then of course you got the factor which is central banks are actually buying gold. it's not clear that they're actually buying Bitcoin with rare exceptions, right? And so, yeah, my belief is that there is Bitcoin accumulation going on behind the scenes at the sovereign level, probably in size, but we haven't heard about it yet. (46:58) And that's the smart strategy to be honest, right? This it's not smart to say, "Yes, I'm going to buy a bunch of this thing before you actually buy it because that bids up the price. " it might as well accumulate quietly over time, even if your long-term goal is to uh turn it into a significant part of your overall reserve portfolio. So, stuff takes time. It's still early days. I guess that's just where we are. (47:20) What are your thoughts on the four-year cycle? Yeah. So, I believe that the four-year cycle remains undefeated. And where we sit today, I'm 60% or 60 plus% of the belief that it's another four-year cycle and we're in a bare market. Which is also to say that I think there's a 40% chance that it's not a bare market and that uh you know we'll recover from this current downturn and probably there'll be significant upside. (47:56) You know, I'm thinking in terms of like 200k, let's say next year or within 18 months or roughly that timeline. So, you're saying it's a baby cycle. Sure. It's just a mini sell-off. Yeah. In that scenario. Exactly. Or just a Yeah. a market correction like we routinely get in Bitcoin. We've suffered through many of them over the years or celebrated them. Right. (48:22) If you've got cash and you're stacking sats and you're buying cheap. That's right. It's a huge opportunity, right? And so, uh, yeah, look, my base case, my 60% case is the four-year cycle remains undefeated and we're living through a bare market right now. And I'll tell you why. (48:41) You know, the history of course of the four-year cycle was at the beginning in the first epoch, if you were a minor and you found a block, you got 50 coins. That was the block subsidy. Yes, you also got transaction fees, but they didn't amount to hardly anything. But basically, you got 50 coins per block. And the software was written such that four years hence or whatever, 200,000 blocks, I don't remember the exact number, the reward would get cut by half in terms of coins. You go 210,000 blocks. (49:11) Thank you. 210,000. And so there was some doubt in the community about whether the miners would actually do that, right? what was to stop them from just continuing to mine with a 50 coin reward and so yeah so there was doubt in the early days hence when they actually did the right thing and cut the reward by half you know that was a catalyst for a bull market and then by the second epoch or I should say the coming of the third epoch there was arguably some doubt I mean I guess you actually were around in that time I was not you would know better than I let's say maybe some members of the community had some (49:48) doubt and others didn't. Anyway, it worked out. So, the cycle became more muted. I would say the factor that still was a factor in the last having was there's still the game theory fact that if you were to attack the network, do a 51% attack

the best time to do it is right after the having. (50:12) And the reason is that if you're a minor and you're doing your capital expenditures and you're investing in mining equipment in AS6, you are making some assumptions about the return on investment you're going to get. And uh you're assuming that you're going to mine the current block subsidy until the next having. And by the way, you probably have at least a 4-year outlook. (50:33) like you're not buying brand new machines with the expectation that they're going to be obsolete in less than four years. So you're budgeting for oh I'm going to make good money until the having and then maybe after the having like I'm close to break even I'm making a modest profit. Well of course if that's the set of circumstances then the most miners are likely to be at or near break even on the most amount of their equipment right after the having. (51:00) So if someone were to, you know, someone, I don't know, governments, who the heck knows, were to implement a 51% attack, they would probably do it right after the having. And so if you get past the having and you don't have a 51% attack, right, well then you probably save for the next four years. So that's I think been an ongoing factor. (51:19) Now, today at this point, the block subsidy is so small as a percent of the total number of coins that I think it's reasonable to say, okay, it shouldn't be a major factor. However, we still live in a world where a lot of the coins are concentrated in a few hands. (51:40) People probably know that the literal top of this year price-wise was when one single individual according to Galaxy Digital, you know, used them to sell 8,000 coins. I think it was one guy. 80,000. Oh, excuse me. Thank you, Preston. Off by an order of magnitude. 80,000 coins. And that was one guy. And that was the literal top of the market. By the way, you may object, oh no, that was the 124k top. We subsequently hit 126. (52:05) Well, one of my other, you know, non-consensus views perhaps is that I measure an inflation adjusted terms roughly speaking. So I would suggest that the purchasing power of 124 was either higher or about the same as 126 months later. Yeah, related concept. (52:24) In my view, we did not get an all-time high right after the ETFs when we hit 72K. I guess early last year, was it early last year? Um, though we hit 72 and the prior high was 69. To me, that was not an all-time high because it was years after the fact. So, 72K several years after 69K had actually less purchasing power than 69K years ago anyway. So, yeah. So, look, individual whales can put a ceiling on the market. Period. (52:49) full stop. This will not be the case someday. Someday more coins will be distributed. You know, there'll be fewer and fewer very large holders who are OGs who acquired their coins either by mining or by accumulating at very low prices a decade plus ago. Those guys will eventually be gone or at least their ranks will be reduced. (53:16) But unless and until that happens, these guys dumping can basically cause the bare market. And they've, you know, they've lived through several uh the same pattern in the past. And uh don't get me wrong, as far as I know, I don't have any personal relationships with anyone who owns 80,000 coins. (53:37) But I got to believe that there's some percentage of OG whales out there who say, "I've seen this movie before. I do want to lighten my load. buy other assets. I do have other life goals. You know, there's other things I want to do with my time. And so, I'm going to sell some coins here. And it can be self-fulfilling. And again, I look forward to the cycle where it ceases to be a cycle and I'm wrong. (53:56) And I'm quite confident that will happen someday. And it may happen. You know, this may be it. And that's why I assign a 40% chance to it. Um as opposed to the 60% that No, it's just another normal cycle. any other highlights or things that when you look across the market right now that you think are super important that the audience should know or that you think warrants a final call out. Yeah. (54:23) Yeah. Maybe I should just keep the bearish trend going here. Here's a scenario. Okay, Preston, where uh I'm not that bearish just for I'm not that bearish. I'm just kind of like uh Oh, I'm bearish. No, I know. I but I think the audience has heard a couple conversations that I've had and a lot of the people that I've had on are pretty bearish these days. I don't know that I'm that bearish. (54:47) I'm just more confused than I think I've ever been in that like the S&P 500 Andy is 1. 5% off of its high and Bitcoin is down 30%. And historically like the correlation between risk on indices and Bitcoin has been

way more correlated. You know, if Bitcoin was down 30%, the S&P would probably be down 15% right now. And everybody from a market sentiment would be, hey, risk off is happening. (55:15) And I'm just not seeing it in the indices. So although we're talking a lot about this, it seems to be a bearish sentiment specifically to Bitcoin, it's just like everything's just not adding up for me right now. And I'm, you know, go ahead. I interrupted your point, but I'm not bearish. (55:32) If anything, I'm just kind of confused. I think is more where I'm at. So, first thing to say, like did I predict that we'd touch 80K, you know, in the month of November this year? No, I did not predict that. I'm surprised also. Second thing I'll say is, you know, the correlation data has definitely been more pronounced in recent years. (55:51) And that's if I were to explain it, I would suggest, yeah, it's because Bitcoin has sort of financialized and entered the mainstream, right? Yeah, you know, if you can buy a Bitcoin ETF in your brokerage account, then when uh when you get scared about risk and you're looking at things to sell, you can sell some of that in addition to your NASDAQ or whatever else. (56:12) So, that's undoubtedly true. In recent years, the correlation's been higher. And so, yeah, we have a decoupling now, and that's supposed to be good. We we're supposed to like it when Bitcoin doesn't correlate to risk assets, except for when it's to the downside. Then, that's not so fun. (56:31) I'm not aware of any fundamental problems, you know, like anything actually breaking as we speak or in recent months here. So, there could be some explanation we just haven't heard about and don't know about. But I don't have any insight there. (56:49) When I think about like short to medium returns and I look at Bitcoin and I say, well, if it's a bare market, like what's my expected downside? I kind of assume like I don't know something like 60k. Maybe it's a maybe the 58k gang gets to ride again. Uh we'll see. But the upside if this is not a bare market and the money printer comes back which there's a very good chance of even in the near term we see 200k next year. You know the expected value. I multiply out those probabilities. (57:14) I say look I think we're back to 100 what's the number 116k or something? you know, well into six figures next year and on a percentage basis, that's pretty good. And then again, long-term, nothing's changed for me. I still expect multi00,000 Bitcoin before the end of this decade. (57:36) And if it reaches its potential, obviously, you know, it goes into the millions and beyond. So, that's all good. Yeah. Look, the bare scenario that I was about to lay out was with debt levels this high and with inflation this much of a threat and with uncertainty about return on investment in the hot areas like okay in AI buying AI stocks broadly defined at current valuations is that likely to yield an attractive rate of return? You might say no. you know, because everything's a everything's kind of bubbly looking or many things are. (58:11) B the capex burden is huge for these guys and they may not earn a return on investment on that capex anytime soon. In fact, they may be vastly overinvesting and it may be that you know it's like electricity or other sort of general technologies where actually most of the value occurs to the users you know they capture the surplus rather than the producers. We don't know. (58:36) But I can envision a scenario which I'm not saying is high probability where yeah ROI at current prices on quote unquote AI stocks is not that attractive. You know maybe it's if you buy a basket, you know, maybe you make low singledigit returns or something because some a bunch go to zero and then a few survive but they don't go up enough to make the basket do really well. (59:03) And then maybe the Preston pitch thesis of stocks are on average 25 times earnings and they're going to go to 10 times. But it might take a decade and earnings grow through all that. So you get whatever 10% earnings growth, but your multiple contracts by more than half and so you make like a modest return. Maybe you beat inflation and Bitcoin heroically makes uh 15% a year and it's the best performer in your in your portfolio among major asset classes. I don't know. (59:34) Or maybe it makes, you know, 20 to 25% a year, which by normal standards is very attractive. Very very. So, you know, that's the way it could go. And we could be in an era where the returns on Bitcoin are very attractive compared to other assets, you know, but we're not in a world where you're going to make 40% annualized and you're doubling every couple of years on average. (59:57) Um those days may be behind us and

um Bitcoin has other benefits we discussed earlier and you know that's fine. Mhm. So, we may be in the uh in the get-rich slower time period rather than the get rich quick era of Bitcoin. Not what people want to hear. We're going to get rich slower than you thought. Exactly. We're back to saving and patiently investing. (1:00:27) Uh really sexy stuff. I mean, Andy, these are unprecedented times. Like, I don't care what anybody says. When you look at history and you look at the rate of change that happens throughout history and you look at right now relative to any other point in time and this is wild man like the stuff we're seeing rolling out the pace that it's rolling out. (1:00:51) I mean I'm covering tech now on the show and it's just like it's unbelievable the amount of things that are coming up on the radar. It's wild. But uh it's obvious you were smart to pivot into that area because a it's fascinating, you know, endlessly fascinating. I know your mind appreciates uh exploring the frontier and uh I'm glad you're still uh doing some Bitcoin content as well. Yeah, because it's relevant to the future. (1:01:17) But yeah, you're going to have lots to do. There's going to be no shortage of topics for you to cover in future and it's all interconnected. I mean, it's going to have so much dislocation when it comes to just the employment market and things like that as we go further down the timeline and the offset that the governments are going to have to print for all of that. (1:01:35) And like all of it's interconnected and what a time to be alive and you know what a pleasure to talk to you, sir. Uh, and I really appreciate you always making time and coming on the show. Give people a handoff, Andy, if they want to learn more about you or they want to check out your book. Give them a hand off where they can learn more. (1:01:51) Sure. Why buy Bitcoin is the book. I'm still on Twitter, notwithstanding the degraded experience. It's Edge from Andrew is the handle. Someday I'll make it onto Nostra with you, Preston, but you know, it took me I don't know how many years to adopt Bitcoin. And uh you know, so maybe if it took me seven years to adopt Bitcoin, I'll be on Nostra in a few years from now after it's proven its uh value in terms of risk return to a lite to a knucklehead like me. (1:02:22) Well, we'll have links to that in the show notes. And uh Andy, thanks for always making time, serve. Thank you, Preston. Keep up the great work. You have put in this work and you deserve to feel like you have control over your time and your future. And that's what Bitcoin offers you. (1:02:40) And Bitcoin is in my opinion the best solution, but it's really just representative of a good form of money that allows you to save for the future because it cannot be debased, because it is scarce, because it is divisible, because it is portable, because it, you know, answers to all of these defects that came before in other forms of money. (1:02:59) That's like the whole message is for the first time in human history, we have a form of money where the average person can start to accumulate a political globally traded capital.