TFTC: A Bitcoin Podcast - Ten31 Timestamp: The Fundamental Haven't Changed

Starting point is 00:00:00 john we're back monday morning after a pretty pretty crazy week in bitcoin i mean we had our first recording seven days ago and between then and now the price of bitcoin dipped tipped tipped into the 50s the high 50s there 59 58 for a second on thursday i believe has since recovered currently trying to break past through a 70 000 and stay up there it's been drifting up and down long-winded introduction to basically say that people are scared and you took some time to write a newsletter that was published on saturday to really get people back to the fundamentals price is what you pay value is what you come for why do you feel compelled to write that this week i mean i feel like the only all the time like regardless of what's happening in the market with

Starting point is 00:00:51 any asset that you own, what you should be focusing on is the underlying reality of the thing it is that you own and what its prospects are, whether it's a cash flowing asset like equity in a business or a commodity and playing some sort of demand cycle or a monetary good like gold or like Bitcoin. You should always be focusing on the fundamental story, like why you're there in the first place, right? And I think that's even more true and it's most true when the fear and greed index goes to four, which it did this week. So like literally lower, lower than the COVID wick, you know, when everyone thought the world was literally ending, lower than FTX, right?

Starting point is 00:01:33 And, you know, everyone constructs those indicators differently and they're only of somewhat limited value, but I think it's still indicative. You know, the RSI this week on Bitcoin went the lowest it's basically ever gone. That was the lead chart for the timestamp this week. But I made the subtitle of the newsletter this week. I didn't hear Nobel quoting philosopher Randy Marsh, who I think puts you in the mindset you need to be in when you're getting punched in the mouth on price of anything that you own. And the only solution to manage the emotions and to not make rash decisions and to keep yourself level-headed is to re-evaluate your thesis, ask yourself if anything's changed, ask yourself why you're there in the first place. And certainly there are times when the market's giving you new information, the market's dumping something and everyone wants to get out because something has fundamentally changed and you need to re-evaluate that information in your thesis. A lot of the time, that's not the case.

Starting point is 00:02:36 And so I think it's important to follow Buffett's advice, which is where that quote comes from. Price is what you pay, value is what you get. Buffett, by way of Ben Graham, and I know he's not a favorite among Bitcoiners, but if you read his shareholder letters over the years, you'll find that he's spiritually a Bitcoiner, even if he didn't fully understand what was going on with Bitcoin. But here he gives great advice that I think all Bitcoin holders need to take to heart. evaluate the fundamentals in situations like this in weeks like this and don't tap out until you hear the bell and i don't think we've even come close to hearing the bell here no it was a bit

Starting point is 00:03:15 poetic ironic maybe not ironic it was poetic because as this price was dumping thursday over the course of the week over the course of the last month and a half really i've been talking about it on rhr i think i mentioned it last week and this is a good segue into the next chart we'll pull up but me personally i've been playing with open claw for the last three weeks and have been pushing my agent to the limits to see when i'm trying still trying to map the territory of what's possible with these agents now and one of the things i did over the course of the last 10 days was get my agent to spin up a phoenix d server so a bitcoin wallet a lightning network server and and begin signing into websites using L-N-U-R-L, L-O-F,

Starting point is 00:04:00 which is, for those who are unaware, it's basically an authentication sign-in flow where instead of putting an email and a password, you basically use the private key in your Lightning Network server to sign into a website, and that is your identity. And so my agent signing into websites with its private key that it controls

Starting point is 00:04:17 and going back to price versus value, it is a confirmation of something that we've been talking about me and you personally it's part of our thesis at 1031 is that bitcoin is native internet money and as ai becomes more prominent and agents begin doing more things they are going to need money to do things and the ease with which my agent was able to spin up a phoenix d server use bolts to submarine swap to open up a channel and begin signing into websites and sending bitcoin to them was astonishing. So as the price was falling, I was being starkly reminded of the fundamental

Starting point is 00:04:57 value that exists within Bitcoin and particularly at this intersection with AI, which you want to talk about today. You have this chart that is highlighting the CapEx spend of these hyperscalers, which is exploding this year above $600 billion. Yeah. It's a crazy chart in terms of order of magnitude here this is i said in the newsletter but we're now at a point where and this doesn't even include oracle neoclouds core weave etc um you know the hyperscaler complex broadly like the ai data center complex is basically spending like one tarp a year now on you know the thing that led to bitcoin's creation in the first place the bailout of the banks you know a during the financial crisis. We were all just like pearl clushing at the time that, you know, we're spending $800

Starting point is 00:05:49 billion on this bailout packages. The numbers are so high. You couldn't even imagine it. You couldn't conceive of it. And now we're just kind of casually, you know, doing that in a year for data centers. Right. And granted, yeah, you know, it's, it's not a constant dollar comparison, whatever. Like, I think it just goes to show you how, how much the monetary base has expanded and how much our kind of expectation of, you know, what a dollar buys has changed. But this, these huge numbers um and i think there are this chart says a lot about a lot of different things that are going on in the market right now both in and out of bitcoin um i think number one is what you what you first said is on the most fundamental level for bitcoin like what this chart tells you

Starting point is 00:06:30 is like the smartest and most well capitalized and most shall we say singularly oriented people in the world, in the world of tech, are going to bring about their version of like digital god or die trying. We can debate whether that's a good thing for society. I think there are a lot of implications we get into of that. But this train is not slowing down. I think all the commentary on the earnings reports over the last two weeks, which is where these estimates come from, all these companies updated their CapEx estimates for the year on those calls. You know, the commentary is like, I think Sundar at Google has literally said, we would rather go bankrupt than lose this race, right? They're all thinking that way. And you can see in, Marty, what you're talking about

Starting point is 00:07:18 with progress on the agentic side in the last couple of weeks, that you've just, that's just scratching the surface of like, what's going to come as long as scaling laws hold, which is basically, you know, the idea that very simply, and there's a much more technical kind of way to about it but like you are getting you know more output relative to the input of computation and training and gpus and power that you're throwing at these things right so as long as this curve continues to produce positive roic or positive returns on you know positive intelligence returns for for the spend it's just going to keep going up and clearly the plan among all these companies supported also by the trump administration with the running hot agenda is this line just needs

Starting point is 00:08:02 to keep going up and that's going to have implications for all these agents that people are playing with in the last few weeks just getting more and more capable again assuming scaling loss can you hold and you know that's the first kind of fundamental indicator to me about where bitcoin's going right like you often hear people the moon that bitcoin doesn't have a use case it's not being used as money well you're starting to see you're starting we can talk about other ways that in the real world you're starting to see it uses money but we've got a growing army of bots out there now that pretty quickly discovered with some human prompting maybe somewhat autonomously maybe somewhat not whatever but discovered how to use internet native money

Starting point is 00:08:43 and are are using it right and that's this chart tells you like that kind of thing that kind of trend is only is just we're in the the warm-ups right of the nine inning ball game like that's just starting. And I think we're going to see a lot more of it over the coming year, two years, et cetera. So that is fundamentally like a positive tailwind for the most widely accepted, largest network effect, most robust internet native money. I just full stop. The other piece that I think is worth highlighting here is there are a couple of things, other things we can say. One other thing I'll say before pausing is there are implications to that on employment, right? On white collar employment. And this is one of the things that I was alluding

Starting point is 00:09:27 to a second ago, like the many potential social near-term downsides of the implications of this chart. You know, Dario at Anthropic has reiterated multiple times in the last few months that AI or AGI or however you want to define it over the next couple of years, we'll be able to do an increasingly percentage of white collar work autonomously. There's some book talking there because there's massive capital required for all this stuff. So he, he and Jensen and all these guys are, are incentivized to, to overplay it and to, you know, talk it up aggressively, but you know, so maybe it's not six months when everyone gets disrupted, but is it like two years?

Starting point is 00:10:08 Is it three years? Like it, you know, I don't think it's 10 years. I don't think it's 20 years, assuming again, scaling laws hold, assuming this spending continues, et cetera. And so what does that do to the run at hot agenda? What does that do to the federal budget, which is already like historically constrained? We talked about last week, you know, non-discretionary spend relative to tax receipts already running up right at a hundred percent with fairly low unemployment. If you get

Starting point is 00:10:33 like a couple additional percentage points of unemployment, even it due to kind of white collar workforce disruption, what does that do to automatic stabilizers in the budget? What does that do to everyone's mortgage payments, everyone's car payments, the household debt, etc. This chart tells you like you could quickly get into a situation where, yeah, you get a ton of productivity, you get a ton of like nominal GDP going up, but potentially at the cost of meaningful employment disruption, which is something we typically haven't seen historically, right? At least at any kind of like accelerated pace, like what would be happening here. So the other implication of this chart for Bitcoin is for all of this agenda to hold

Starting point is 00:11:14 together and for all of us to work and for all of these projects to kind of bear fruit in the way that people are thinking and hoping, you know, they're probably, unless it all goes at exactly the right pace, there's probably some implication for employment and unemployment benefits and the need to finance those without blowing up the whole system. So I'll pause there, but I think those are some key things that we can take away from this chart as it relates to what's fundamentally happening in the world as price you know goes goes against us yeah i mean we've been talking about it i mean it's been very clear uh with the trump administration trump too scott besant came in before he came in famous manhattan institute interview where he says

Starting point is 00:11:58 there's gonna be new monetary order is gonna be reordering i want to be a part of it and it seems like that is certainly in play with this don roe doctrine of the national security strategy that was laid laid out at the end of last year and then you couple that with it has become very clear as well that this ai race is existential for the long-term dominance of the united states at least is viewed that way i think it's pretty clear that whoever wins this race is going to have a lot of leverage in the brave new world that we're venturing into and to your point it's going to have the the win at all cost is going to come with some negative externalities in the form of job disruption and they're going to have to print money and there's a very strong case to be made

Starting point is 00:12:47 that the fundamental value that exists in scarce assets the scarcest asset in the world that is bitcoin is not priced in that and like you said we're warming up before the game is even started and uh it's going to be very interesting what happens and there's a ton of people out there thinking that we're um going back into a bear market uh four-year cycles are still intact as it pertains to bitcoin's price movements and i think i would just take this information in mind when when thinking about where bitcoin could go from here but one thing i think there's other knock-on implications that are more direct to bitcoin that we can see you've got a chart here hash rate and i think this is actually an important chart to bring up because there's a lot of

Starting point is 00:13:33 misinformation floating around about equine mining as an industry right now and what's happening what's causing this collapse not collapse but a very strong correction in hash rate i think we had our 12th largest downward difficulty adjustment ever at the end of last week and it was this largest downward adjustment since the chinese mining ban in 2021 that that adjustment was 28 last week's adjustment for bitcoin was let me pull it up here 11.15 so pretty pretty massive downward difficulty adjustment you have people saying that with the price down like all miners are unprofitable the quantum fud uh miners are diversifying away from bitcoin mining because worried about quantum risk they're all going to ai quantum risk i don't think many bitcoin miners

Starting point is 00:14:24 really thinking that way i think there is certainly increased competition from ai and an appeal to diversify into ai data center infrastructure because of how profitable it is in the chart we just looked at the hyperscalers going to be throwing a ton of money at scaling this stuff and so with that it's going to come sort of they don't care about energy prices they'll pay whatever it takes but i think i'll start with debunking one of the lines of fud that's been out there is which is all miners are unprofitable i'm sure many of you have seen the stat that the average cost or the cost of mining bitcoin there's there's a stack going out there like it cost a hundred thousand dollars to mine a bitcoin uh and and obviously the price is at

Starting point is 00:15:10 69 000 right now so all miners are unprofitable and this is just completely idiotic because each individual miners an individual actor with their own sort of setup their own electricity price their own hardware that they bought at a certain price and i would just say that not every miner is unprofitable there are miners out there that are using electricity that they're getting for very cheap for example i've got personal miners on a stranded natural gas well and the cost of that electricity is probably around one cent per kilowatt hour so it's not 13 cents per kilowatt hour which is the stat that you'll see floating around is that all mine will take the average residential or industrial cost per kilowatt hour of electricity and just basically paste that on

Starting point is 00:15:57 bitcoin miners and say look this is how much it costs to mine a bitcoin that's not true there are miners out there with very low cost of energy very high performance machines and there are plenty of miners out there that even at 69 000 are are plenty profitable and now that we've had a 11.15 downward difficulty adjustment it's easier to mine so their revenue in stats should be going up after this despite where the price is um so i'll end it there my little rant and pass it to you any comments on this chart yeah i think it's all great the other piece that i would throw out is just so people are aware because i've seen i saw a lot of posts about it this week you know looking at this this recent drop again without usually the charts presented on like a six-month basis

Starting point is 00:16:44 or maybe a one-year basis. So not really zooming out and saying, oh, look at how massive the drop is. You know, it started in earnest with the crazy winter storm a couple weeks ago, which we talked about last week on the show. So there's an element of major drop-off that you would kind of expect, especially in a more like sideways or down price environment. So that's a big piece of it. I think the idea that everyone suddenly decided that quantum is an existential risk and that they need to turn their miners off, or they only just now realized they should be pivot into AI is, I think, pretty suspect. And I think that's just illustrated by zooming out on the chart like we have here. For the last couple of years, the data center story has been very much

Starting point is 00:17:25 in play. You've seen many, many public trader miners moving to AI capacity, using their rack space for that, kind of a hybrid strategy. And yet, hash rate has just continued to climb higher and higher. This is a crazy chart. And this is the first real meaningful pullback that we've had in hash rates since the China mining ban, which now you can barely kind of even see on this chart, right? So this is a fundamental KPI as we think about kind of values or prices what you pay, values what you get. Here's a fundamental KPI that I think is worth paying attention to. Our more and more real world resources, physical world resources over a reasonable amount of time being applied to bitcoin mining by some set of actors right and i think

Starting point is 00:18:12 this chart tells you like the answer is just absolutely resoundingly yes you know we shouldn't expect if we continue to to range here or dump here you know should we expect some ongoing consolidation or decline in in this chart yeah probably that that would likely happen but this is this is telling you as we think about the rotation that is now just starting to be like popularly discussed in mainstream financial press of you know the rotation from bits to atoms right you're seeing software getting killed unfortunately bitcoin's kind of traded basically like igv like a software stock like the software etf over the last few weeks or months you're seeing software get killed and anything that is kind of capital light or thought of as immaterial or leveraged

Starting point is 00:18:59 to the world of bits the world of the you know ones and zeros and just pure data is kind of of getting sold hard on the various theses about running it hot and reshoring and needing to aggressively build out physical infrastructure again and not being able to rely on just-in-time supply chains that are mostly dependent on china right this chart is should be a reminder to everyone that bitcoin is effectively the one system in the world we've ever invented that on a decentralized basis control why no one dynamically links bits to atoms right there's a whole massive like unbelievably large amount of infrastructure that has been deployed to make this chart happen and to make bitcoin run as it does um it adjusts dynamically based

Starting point is 00:19:45 on a whole host of market forces well again without any central coordinator and the long-term trend on it is very very clear there's clear utility to bitcoin mining even and probably most especially to actors that are not primarily profit oriented or who use it more as a tool or an input than a standalone business. That could be HPC data center, that could be a sovereign, that could be an oil and gas company, that could be a grid operator using it for load balancing, that it can uniquely do that nothing else can do. And so again, for the people who are watching Bitcoin's price decline and saying, well, obviously it's going to zero, it doesn't have a use case, it's $69,000 too high. I think this chart is a good reminder on a long-term basis of

Starting point is 00:20:30 one of the most interesting and valuable elements of you know what bitcoin is and why um anyone's selling it on a bits to atoms rotation thesis is really missing the the force for the trees on this yeah and i'm just going to pull up a more dynamic chart i'm going to pull up mempool.space 1031 portfolio company but to the same chart but with the difficulty adjustment going back to the value of bitcoin and the protocol itself and how it operates you had the hash rate so you had this chart but i'm just going to overlay difficulty which reacts to the amount of hash rate on the work on the network at any given point in time which the network basically guesstimates that by looking at the the time it takes to produce a block every 2016 blocks and i think to your point

Starting point is 00:21:18 the value, this connection of the world of bits and atoms via proof of work in Bitcoin is something that many people do not appreciate fully yet. And when we're talking about the price falling, hash rate coming off, and people wondering, is it profitable to mine Bitcoin? That is the beauty of Bitcoin. Satoshi designed the system in a way where it dynamically adjusts based off of the amount of compute dedicated to the network at any given point in time and so as difficulty as the price goes down as hash rate comes off the network knows like okay it seems like people aren't incentivized to mine as much right now because blocks are coming in longer than 10 minutes on average and so i need to adjust the protocol needs to adjust down to make it easier

Starting point is 00:22:05 to mine to incentivize more people to come in and construct and broadcast blocks and keep adding them to the ledger and there is incredible fundamental value just in that that little design aspect of bitcoin and in and of itself the difficulty adjustment is one of the most important parts of the bitcoin protocol it's working as designed this is exactly what you want to see um so we just add that as well we're talking if the theme of today is price versus value the difficulty adjustment has a ton of fundamental value that will ensure that the network persist into the future that blocks are being produced and miners are incentivized to produce blocks um i'll try to keep this a tight 30 minutes we got five minutes left what should

Starting point is 00:22:49 we end it on i think the last thing maybe that i would just direct people to i referenced it in in the newsletter but if you've never watched parker lewis's video his talk bitcoin is not a hedge i think that would be good to to play this week and kind of delve into his points there when you see the price fall rapidly on market uncertainty or correlations to the NASDAQ or the S&P, when Bitcoin's not acting like a quote-unquote safe haven, it's not acting like gold or the 10-year or something, everyone comes out of the woodwork. All the concern trolls come out of the woodwork to say, see, it's not acting like an inflation hedge, or it's not acting like a debasement hedge, or it's not acting like an uncertainty hedge. Why would anyone own this?

Starting point is 00:23:34 I think it's important to realize that Bitcoin is not a hedge right now. It can become a hedge. We think by doing what we're doing, owning Bitcoin, trying to help the ecosystem develop, investing behind it, that it can and will become a hedge over time. But despite the crazy gains in market cap that it's made over its life without any marketing department or central force pushing it forward, it's a tiny asset relative to global capital flows. And the vast majority of capital is controlled by, I wrote in the newsletter somewhat sarcastically, septuagenarian central bankers or bulge bracket wealth managers. And those classes of people are just barely beginning to wake up to what Bitcoin even is. A lot of them are still dragging their feet on it. They kind of

Starting point is 00:24:26 still think it's going to go away and it'll die. They won't have to worry about it or learn about it. You know, vast majority of the world hadn't heard of Bitcoin 10 years ago. So the idea that anyone, any massive allocator is going to reflexively shift allocations into Bitcoin when things get hairy in the world, when markets get more uncertain, when they're worried about an increasingly multipolar world, increasingly fractured world where globalization is kind of ending or changing. The idea that their knee jerk is, let me just up my Bitcoin allocation a few percent to keep the portfolio balanced and to keep myself hedged against tail risks that may be growing is kind of insane. It's a meme, but it's also very true. We are so early in the development

Starting point is 00:25:12 of what Bitcoin is. Gold has been around thousands of years. The treasury market is obviously quite a bit younger, but also has the backing of trillions of dollars of U.S. military aggregated capability and force behind it and a massive network that's been built up around that. Bitcoin is just so young. And so when you see it fall on market uncertainty, when you see it fall in periods when you thought, because you understand it, you thought it should have been going up, remember that we're not yet in a place where it can meaningfully function as a hedge. The longer it goes without dying, the more converts it wins, right? The more knowledge of its fundamental properties that we've discussed here distributes around society and especially within circles of large capital allocators, the more it will tend to act like a hedge if we're right about what it is and if it continues to operate. And, you know, there's the old the old phrase, somewhat morbid phrase, science progresses one funeral at a time, like big portfolio management also progresses one funeral at a time, right? Or one retirement at a time, maybe less morbidly. The composition of capital allocators is changing, it's going to change, but it changes slowly. And knowledge also among all those different classes and ages of capital allocators has to distribute slowly.

Starting point is 00:26:28 so don't be fussed when bitcoin doesn't do what you think it should do because you deeply understand it and you've read every bitcoin book and listen to every bitcoin podcast remember that the vast majority of people who have money have never done any of that and they don't really want to still at this point right so just keep that in mind as price action goes you know against you i'll end it with with a short story to validate this uh we've got the boys in a new uh catholic montessori school and the school is very good about getting all the parents together so we had our kindergarten parent party on friday and it's always weird for me people are like what do you do i'm like i work in bitcoin and they're like oh what's that mean like and then you try to

Starting point is 00:27:08 explain i run a partner at a fund i run a media company like what do you do but one woman just deadpan looked at me and she's like oh you're in fake internet money that by saying is that what you do i was like yeah i guess i guess that's what you think i do but to your point knowledge has not been distributed evenly amongst amongst the masses and not even a subset of the masses the those who control the the wealth of the world and so your early price is what you pay value is what you get there's a ton of value in bitcoin i think we just spent 30 minutes we could spend hours diving into the fundamental properties of bitcoin that give it immense value but i think this was a good little short rip to highlight some of the areas in which that value is

Starting point is 00:27:51 emerging today cosine all of it all right we'll be back next week we're getting good at this this is nice i like this 30 minutes is a good a good form factor for this we'll be back next week freaks

TFTC: A Bitcoin Podcast - Ten31 Timestamp: The Fundamental Haven't Changed

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