The Pomp Podcast - #1332 John Arnold | Bitcoin Is Eating The World

Episode Date: March 25, 2024

John Arnold is the Principal at Ten31, a bitcoin focused investment platform. In this conversation, we talk about the total addressable market for bitcoin, what that means for financial returns, where to place capital, products, services, industries that will get built around bitcoin, and more. ======================= In this podcast, we dive into the revolutionary concept of PropyKeys, an application that allows anyone to mint home addresses all over the world on blockchain. PropyKeys.com is a part of the Propy ecosystem, that has a grand mission to make homeownership more affordable and user friendly. We will explore the journey of Propy’s founder and how this innovative technology provides benefits for homeowners, and for the real estate industry. Join us as we discuss the Propy’s latest collaborations, including Coinbase, and its new fun project PropyKeys. X (Twitter): @PropyKeys Website: Mint an address at propykeys.com. dApp: ⁠⁠⁠⁠https://dapp.propy.com/⁠⁠⁠ ======================= Get the freshest price feeds free for 12 months. Join Supra’s early integration program for zero-cost access to the fastest oracles and dVRF across 50+ blockchains: https://supra.com/pomp. Earn $1,500 by referring Web3 projects to use Supra services. The projects get the fastest services for free, and you earn $1,500 for every referral. Learn more at the link above. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's conversation is with John Arnold. He's the principal at 1031, a Bitcoin-focused investment platform. In this conversation, we talk about the total addressable market for Bitcoin,

why 1031 and John believe it is so much bigger than everyone else has been thinking about, what that means in terms of financial returns, where to place capital, and also what are some of the products, services, and industries that are going to get built around Bitcoin as it continues to be adopted globally. This conversation is fascinating. John is not that well known outside of a very small group in the Bitcoin community, but I think he is one of the brightest minds. His writing is incredible and more people should know who he is and also follow him. So please, after you get done listening to this podcast, go and find John Arnold on Twitter, follow him, go check out 1031, go look at the writing that he's been doing. It is fantastic.

And I think that he is going to be a star. So here is my conversation with John Arnold. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion.

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Supra is offering the fastest oracles and DVRF free for 12 months at Supra.com slash POM for a limited time. Supra delivers the freshest oracle price feeds across 50 plus blockchains, critical price levels or liquidation triggers beat your competition to the punch with Supra. It's as good as having the first mover advantage on every price update. Supra is more secure, easier to integrate and runs on up to 12x lower gas per feed than other oracles so you'll want to bank on this 12 months free offer as soon as possible if you're just listening and know any builders you can earn one thousand five hundred dollars by letting them

know about this deal they can get the fastest oracles for free for 12 months and you get fifteen hundred dollars for every referral visit supra.com slash pomp to learn more that's s-u-p-r-a dot com slash pomp all right guys bang bang i've got john here with me uh john you wrote this amazing piece called Bitcoin is Eating the World. It's a little bit of play on words of software is eating the world from Marc Andreessen. And one of your big messages in it is just there is a massive total adjustable market for Bitcoin. And so maybe you could talk us through a little bit as to why is total adjustable market such a big focus? And then how do you come to the conclusion of like, what is the TAM for this asset class? Yeah, absolutely. That's kind of

the big thing that, you know, makes us so excited about the space, you know, I start off the piece just kind of talking about how whatever kind of investor you are, whether you're, you know, one more value focused investor, where you're looking, you know, just kind of invest at the best price as possible, whether you're an investor looking to just buy the leaders in the space and ride the blue chips, every single one of those investors, every single methodology is going to have to consider at the end of the day

with your investment, with the company that you're investing in, how big is the prize that they're going after? Because that's going to be a massive lever in determining how successful the investment is ultimately going to be long term. Just if it is successful, a sign of probability of success to it, where does that leave you in terms of kind of in-state and in terms of revenue opportunity? And I think the thing that the world probably still has yet to catch on to is Bitcoin is following the same path that the Internet did 30 years ago, which is to say Bitcoin has a TAM that is at least as big as the Internet, if not much bigger, because money, which we believe Bitcoin is superior money, money is half of every transaction. So there's no economic actor, there's no business, there's no commercial exchange

that is ultimately going to be able to avoid the implications of growing Bitcoin adoption. And we think that adoption is going to be inexorable because unlike the Internet, there's an adoption incentive deeply baked into the way that Bitcoin is built. we colloquially refer to it as number go up, but there's this kind of self-perpetuating rush to move first into Bitcoin adoption. Those who get there earlier accrue a larger share of the fixed total pie of Bitcoin that are ever going to be out there. So as that knowledge distributes, the rush to get into Bitcoin is only going to accelerate, which means its adoption is only going to accelerate. And if that happens, then that's only going to happen because of

tools and services and applications and companies that make that adoption, that make your average person capable of easily adopting Bitcoin, that make your average business capable of integrating it. So the motivation is going to be there. The demand is going to be there to adopt it. What people have not fully caught on to yet, they probably haven't fully caught on to that. But even if you're sympathetic to the idea that that adoption is going up, what a lot of people still haven't caught on to even beyond that is that adoption only happens if there are companies and services enabling it and kind of riding that wave up along with it. And so that TAM, we can get into how we size it, but the TAM for those companies building

on Bitcoin and adding utility to it and building services around it is a function of Bitcoin's TAM itself. So we think the ultimate TAM of Bitcoin is essentially everyone on Earth. The addressable user base is everyone on Earth. And so the derivative implication of that is that the companies building on it have access to the biggest addressable user base on earth as well um at the end of the piece which you can kind of see like we after we go through you know everything that we're seeing in the space and the ways that we're starting to see that play out you can see like we frame up some of the major

kind of first wave of industries and companies that bitcoin can ultimately address and so it's things like your obvious you know payments asset management financial services uh energy infrastructure power infrastructure various consumer applications you know if bitcoin captures one to five percent in the value chain of all those industries you know we're talking hundreds of billions of dollars something in in the neighborhood of like how big b2b saps is today and that's with what we think fairly conservative estimates for what bitcoin should touch in a lot of those industries so to sum up um if bitcoin adoption is as inexorable as a lot of people people listening to us probably think it is, that means that the same is going to be true for the

companies that are building on it and around it. And the natural result of that is pretty much every industry will have some of its value chain eaten and enhanced by Bitcoin. And so you've got right in front of you, conservatively, hundreds of billions of dollars of TAM, if not much more over time. When you think about the total addressable market, it seems like you guys are saying, hey, that is the single most important thing from an investment perspective to look at like how big that addressable market is um is there a sequence to this like obviously it's not hey you know satoshi launches bitcoin bam everyone in the world has it uh there is the kind of like these adoption circles and and i would argue that um you know i don't know what the exact number is

but maybe half of the world has the internet you know maybe two-thirds of the world has the internet but there's still a third to a half of the world that does not have the internet and so while it may be addressable in the future when they get the internet like are there almost concentric circles of like okay there's an addressable market that's right in front of our face there's kind of a second one and then there is hey once everyone has the internet then bitcoin can reach everyone or how do you think about that i think that's totally right concentric circles is exactly how we frame it internally and i really like that phrasing and i think you know we talk a lot about like there's an order of operations here right like the the first kind of layers of

bitcoin infrastructure that will be necessary to fully enable its its ongoing adoption um to the the whole world, you know, are still being built out. I think there's some kind of misconception among people who look at kind of the crypto space broadly that, well, Bitcoin's basically done everything it's going to do. The major problems in it have been solved. And now, you know, any innovation is going to happen kind of elsewhere. And Bitcoin's kind of boring. You know, we think that's absolutely not the case. Even the kind of the first layer of infrastructure is going to be built out. So that's things like custody and basic financial services, you know, a company like Unchained Capital or Anchor Watch that we're invested in that are helping solve the problem

of trusted third parties and custody with things like multi-institution, multi-sig and insured multi-institution, multi-sig, things that are kind of table stakes for any institution or large high net worth that really wants to hold a large amount of Bitcoin and just custody it securely over time. That basic problem of holding Bitcoin has not been solved in a meaningful way at scale. There's you know, buying and selling the coin kind of globally and reliably. You know, we've seen Coinbase has in some ways done a good job of that over the last 10 years. And I think there's some misconception, again, that, well, that problem's been solved because, you know, a couple of big exchanges exist. But we've also seen during this last bull run how many times that we've seen Coinbase kind of go offline or have issues and sputter.

And, you know, we think a company like Strike that's rolling out to 70 countries worldwide with its global wallet and has licenses across the world and has been able to build durable, reliable infrastructure that can sustain high volumes, even through big spikes in activity. We think that they present a compelling alternative or competitor to Coinbase over time. And so all that is to say that just buy-sell has not really been solved. So that's still in progress. Back-end infrastructure for just B2B applications, Strike is providing that as well. Mempool.space is a huge one that virtually every company in the space takes for granted to track flows in the mempool and where transaction fees are going and whether you're kind of into you know ordinals and inscriptions or whether you're just kind

of a standard you know company doing like batch payouts like everyone's relying on a tool like that and you know that's still how you know is in its infancy and is being built out um energy and power integrations that i referred to you know earlier a company like upstream data or giga energy that's plugging in directly to the huge opportunity that exists in the oil and gas fields and with flared gas and the ability to turn that from an environmental liability into an actual revenue stream in a way that's never been possible before until bitcoin came around the same thing with kind of grid balancing and integrating bitcoin mining into local grid infrastructure to make it more cost effective make it more reliable like these are very kind of like

hard tech things that will be ultimately kind of hidden and abstracted away or just taken for granted in 10, 20, 30 years. But right now, even 15 years into Bitcoin, they still have yet to be fully solved. We think our companies are really providing great solutions to solve them. But to your point, that's the first kind of layer in that order of operations. That's that first concentric circle. By itself, like I referred to earlier, that's hundreds of millions of dollars of PAM with the industries that that will touch, that those different applications will touch. And then from there, yeah, we expand out to a few other applications that we can talk about. But ultimately, we think there's going to be just continued demand as Bitcoin gets more integrated into these kind of base layer first order operations. There's going to be more understanding of it, knowledge of it should be further, and demand will flow from that to integrate in different ways into new industries that are kind of less obvious today. And we can maybe get into some of those that we see over the next 10 years. So what's interesting to me is like there is Bitcoin as an investment kind of argument or narrative.

Hey, I'm going to buy Bitcoin. It's going to go up in dollar terms. There is Bitcoin as a use. And then there is Bitcoin as a network. And we can go through each one of these. But you spent a lot of time in the piece talking about Bitcoin from an investment standpoint. You compare it to other investment returns. You talk about the kind of global and national debt.

You talk about liquidity in the market, kind of market structure things. And so how much of the addressable market gets captured by just people want to invest capital or they need to invest capital because their dollars or their local currency is being devalued? And is that the major kind of driver initially of the adoption? Yeah, I think that's right. I think for the initial kind of wave, which I think we're still very much in, we've had obviously several cycles now. But I think we're still very much in kind of the first phase of the world waking up to what Bitcoin is. But I think you kind of see it being driven out of like just necessity of on one side, it's kind of capital preservation, which that's probably more of like a Western and developed economies phenomenon. Although it's very relevant in countries that are experiencing hyperinflation, you've got kind of that side.

But then you've got also the kind of acute need for censorship-resistant payments and the ability to make remittances and payments across borders with some level of ease and without taking 5%, 10%, 20% off the top, as many citizens of countries in emerging markets are kind of used to with the existing remittance processors. And so you kind of see, like, from both a less developed economy angle and a very developed economy angle, reasons and motivations that people, whether it's institutions or just individuals, would see to get into Bitcoin and to start using it, whether that's just as an investment, as you're saying, or as a way to actually kind of escape some of the more deleterious impacts of living in a less developed economy. So I do see those first kind of just like, I won't say desperation, but just highly motivated use cases to either preserve wealth, escape hyperinflation, or make censorship-resistant payments among authoritarian regimes or payments that are cost-effective across borders in a way you couldn't before. Those are the first most obvious, I think, knock-it-out-of-the-park use cases for Bitcoin. And so I do think that will continue to be a lot of what drives ongoing adoption over the next five to 10 years, for sure. And when you think about the investment case, it seems like there are people in the United States who are like the dollar's good. There's people in other countries, you know, Argentina, Venezuela, Zimbabwe, you kind of go through these countries and they're like, I know my native currency is not good. um how do you think about the sequence or the path of what people in america which is still

the capital and when it comes to finance you know of the world uh kind of waking up to this is it no it's more about like how much dollars can i make by buying bitcoin and so people have that kind of fiat mindset and keeping through it or at some point is there this like escape valve you know kind of transition mentally to oh no my native currency isn't good i need to go and buy this Bitcoin thing? Yeah, I think in the West, for sure, in the US and Canada and Western Europe, it will, for most people, very much start as wanting access to number go up. That's generally been like one of Bitcoin's killer apps or its main killer app in terms of kind of just onboarding people and making them pay attention. And just as more people see that after every 50 to 80%

drawdown. Bitcoin comes back and rips off to get another all-time high. That draws more and more attention in. And most people are initially going to get into it. I think it was the case for me. It's the case for many founders in the Bitcoin and the 1031 portfolio. We kind of got into it initially for kind of the fiat gains. Our concern was not necessarily that the dollar was going to hyperinflate tomorrow, but rather that we just wanted a Bitcoin allocation as a part of an investment portfolio. I think that'll continue to be the case. And I think that's a feature, not a bug in terms of just making people pay attention and then making them actually want to do the work and kind of dive in. I think what you find is that a lot of people from a lot of

different walks of life, whether you are coming from Wall Street, I certainly was, or coming from software development or any other kind of background, you come for the gains and you kind of stay for what Bitcoin can actually do longer term, what it actually means for the world and what it enables technologically and socially. And I think, you know, the ETFs are the spot Bitcoin ETFs that were approved earlier this year are fantastic top of funnel mechanism for that to happen. I don't encourage anyone to buy the ETFs. I think that there are better ways to replicate essentially the same UX

in a more cost effective and tax efficient way, if that's your concern, and holding real Bitcoin, again, through places like, you know, Unchained Capital. Um, but that said, we can't ignore the relevance for kind of traditional capital allocators who are building portfolios of having a, what feels like to them, you know, a very traditional easy on-ramp into Bitcoin and like a brokerage account that they kind of already have set up and understand, but also having like the, the direct imprimatur of a black rock and a fidelity on these products. You know, um, I think that that has materially de-risked the, the perception of Bitcoin in terms of like career risk, you know, generally like five or 10 years ago, if you went

and had to make a big effort to go open a Coinbase account or some other account to get access to Bitcoin, and then you experienced like an 80% draw on Bitcoin, you know, that's potentially a fireball offense, right? But now we're kind of in a position where just as you don't get fired for buying IBM, like you don't get fired for making a small allocation to a BlackRock ETF, especially when, you know, Larry Fink is out on mainstream news, kind of constantly now extolling the virtues of Bitcoin and talking about how it's, you know, a way to hedge against inflation and it's a tool for freedom and for hope and it's a flight to quality and all these different things like these executives who, you know, five years ago were calling Bitcoin an index

of money laundering are now out there just extolling its virtues and promoting it actively. They're not just like launching this product and saying, hey, this is out here. If y'all want it, I don't believe in it. Please don't buy it. But we put it out there because we have some demand for it. No, they're actively marketing it very aggressively. And so all that is to say, I think we are about to see yet another huge wave of adoption coming from, to your point, kind of the desire for number go up, the desire for fiat gains now enabled by this huge valve, this widened funnel of these Bitcoin ETFs. And so I do think that'll be the ongoing driver for the next five to 10 years of adoption is just kind of wanting those gains.

And then people later on realize like how much more there is to the space and what Bitcoin can do. So part of this thesis is like if Bitcoin becomes this globally adopted asset, then there's a bunch of companies, right, and services and products that get built around Bitcoin. So it's not just like buy Bitcoin and that's it. You all described 1031 as this like Bitcoin-focused investment platform. What are some of those companies or areas that you think have very high degree of opportunity to drive value or kind of create some sort of outperformance of Bitcoin by allocating there? Yeah, absolutely. I mean, I think you said it right. If we do our jobs correctly, we think the company is kind of building on Bitcoin and adding value to it and building enabling technology for it should be like leverage plays on Bitcoin. You know, you can look at oil field services, businesses relative to oil or gold miners relative to gold or kind of health care and life sciences tools providers relative to kind of the underlying biotechs and big pharma companies that ultimately bring drugs to market.

You know, the tools providers, the picks and shovels providers, if you want, on top of, you know, an adoption wave of any commodity, have very much a track record about performing the underlying commodity or at least, you know, the blue chips among them, the most successful among them, you know, should be able to outperform and add leverage to the underlying performance. The ones kind of in the near term that we think are most likely to do that are kind of that first order of operations that I mentioned earlier. So that's like custody and financial services, Bitcoin-backed lending and on-ramps, insurance and derivative products, back-end infrastructure for different B2B applications, applications built on top of Lightning and other Layer 2 protocols that merge, whether that could be something like Chitami and eCache as well. We're seeing a lot of really interesting developments there with both the CacheView protocol and the FedEvent protocol, which I encourage people to go look into and supporting both of those protocols, both with grants and investment dollars. The mining infrastructure, primarily the picks and shovels players within mining. So we have a few

investments in prop miners, but we're also investing in focusing more as well on just the infrastructure around what's needed to mine, especially in the oil field. And if you are a power utility provider, as well as just rack space in general for mining operations, the ability to stand those up in a cost-effective way quickly is no small feat. And we think that's differentiated capability that will drive significant returns in the next 10 years, security infrastructure, that's hardware and software on top of Bitcoin to enable both retail and enterprises to use Bitcoin in secure ways long-term. And then just a variety of consumer applications that leverage Bitcoin in different ways. So that could be gaming communications like

the Nostra protocol and the way it's integrated Bitcoin and Lightning payments, consumer rewards, social media applications. And then the last thing I would say that we're starting to see that I think we're really excited about is just non Bitcoin companies coming into Bitcoin and kind of leveraging it creatively. That's one of the things I talk about the piece is that, you know, if we're right about what Bitcoin is going to be over time, if its adoption mirrors the Internet, then just as every company had to become an Internet company, every company will have to be in some way a Bitcoin company. You can go through our portfolio and see some examples of a few companies that didn't really start as Bitcoin companies specifically. They're not fixing

shovels plays. They weren't built to cater to Bitcoiners or businesses using Bitcoin. Rather, they're fulfilling some of their use case, but they've identified interesting ways to leverage Bitcoin in providing the ultimate end user experience that they're creating. And we're seeing that also just in the deal flow that we look at, that's becoming a more and more common theme. And we would expect that to very much continue. And that just dramatically expands again, like the surface area that we can hit as an investment platform that focuses on Bitcoin. And so that's just, you know, we expect, said another way, that's kind of an early example of what we're talking about with the TAM just continuing to expand and expand and ultimately

becoming what we think is going to be the biggest TAM on earth. Now, when we look at these companies, How much of the future value is going to come from existing players adopting Bitcoin, changing, you know, being able to figure out services and products, whether they upgrade theirs or they build new ones versus, no, actually most of the value creation and kind of future is going to be built by new companies, right? It's kind of like the incumbent versus the challenger. And as a investor in the market, you know, I think about this all the time. hey, how much of this is like, oh, PayPal is going to go and just create a feature and next thing you know, bam, it's out there. And actually buying PayPal stock would be better than trying to go and invest in a brand new company that's got to start from scratch and build this new world. On the other hand, man, it's a big bureaucratic cruise ship that's got to turn and try to figure

it out versus the little speedboat. And the startup actually has some advantages structurally. And so how do you think about the differences between the incumbents and the challengers? Yeah, totally. I think it's a great question. And it gets back to the classic problem of can the innovator find distribution before the incumbent finds innovation? And traditionally, there's been a long history of the innovators finding distribution first and the incumbents, especially at a certain scale, not really being able to compete and turn the ship quickly enough to make dramatic innovations. And the reality is Bitcoin is a dramatic paradigm shift from the way that the fiat and legacy financial services system and payment systems have been set

up. Those systems rely entirely on this Rube Goldberg machine of transferring credit obligations across different parties, even have T plus 30, T plus 60, T plus 90 settlement. And there are middlemen all throughout that chain looking to take their cut. And it's, you know, it's often a very manual and just kind of inelegant way to patch things together. And so moving outside of that paradigm is, I think, very difficult for, you know, $100 billion company or $200 billion company that has, you know, tens of thousands of employees in different divisions and a great feel of bureaucracy. You know, there's a video circulating recently of Elon Musk back in 2008, when they were rolling out the first Tesla Roadster. And regardless of what you think about

Elon, you know, makes the point that large organizations are traditionally very good at kind of incremental management of existing innovation, things that, you know, they've already built up and things that they know how to process and deal with. They're traditionally very poor at paradigm shifting innovation. And in many cases, it's the innovator's dilemma where you have your Kodak moment where you're disincentivized internally and structurally from moving in a direction that would potentially in the near term disintermediate and be a threat to your existing business. And so that's kind of a structural disincentive to a lot of large players moving towards something that does not enable them to have exactly the same business models

that they previously had. So I think PayPal is a good example of that. We think large fintechs like PayPal, large financial services institutions, when they do come around to Bitcoin, and we think it's inevitable, we think everyone capitulates eventually, but when they do come around,

the obvious solution for them is going to be like it's been for the internet companies and the early software leaders of the past 20, 30 years. It's going to be to go acquire. It's going to be to go buy the companies that have already built up the infrastructure, the network effects, the brand power, the user base, the user bases, and plug them into their own infrastructure and then try to drive synergies on top of that. That's going to be, in a lot of cases, a better risk-adjusted path than spinning your wheels for five-plus years trying to just catch up to where the innovators already are.

It's going to make a lot more sense for a lot of larger companies to, when they have the light bulb moment, to just go buy. And we think a lot of the companies that they will buy are sitting in our portfolio. And so we're quite bullish about where our portfolio is positioned for the next 10 plus years. Now, in that portfolio, do you worry about correlation risk? Like if you're buying Bitcoin, if you're investing in Bitcoin companies, if you're investing in companies that are building Bitcoin services, Like, is there a degree of risk that you're taking there that you have to think through? And obviously, if you're right, it doesn't matter. Like the whole idea is if you're right, then that's where all the returns are.

But how do you think about the risk or the downside and like correlations and things like that? Yeah, for sure. It is something we think about. I do think, you know, it's fair to say if you're not bullish on Bitcoin at all, if you're highly bearish on Bitcoin, then 1031 is probably not going to seem like an attractive fund to you. And a lot of our companies are levered in some way to just Bitcoin's ongoing adoption. And so there is like some natural degree of correlation. We think that's going to be quite positive for us over time because, you know, Bitcoin going up, you know, 10x over the next 10 years, 20x, whatever it may be.

If we were investing in any other category, you know, broader fintech or healthcare or something else, like we wouldn't have any leverage to that trend. But if we're right that that's going to be the case, like all of our companies have direct leverage to that trend and they get this huge kind of secular tailwind from that. That said, I do think there's more downside mitigation in the portfolio than might be initially obvious. There are kind of a variety of industries, like I was mentioning with oil and gas or energy and utilities, where the company's providing picks and shovels for those industries to start integrating, say, Bitcoin mining in some way.

aren't directly levered to Bitcoin's price. Certainly, they go through cycles where people in those industries get more or less interested as Bitcoin pumps or dumps. But as long as Bitcoin maintains some level of market capitalization and liquidity, mining is a use case for those industries that has no competitor. There's nothing better to do with flared gas than mine Bitcoin on it as long as Bitcoin exists. So if Bitcoin never goes up from here, there's still a huge business case for that to happen and thus for the picks and shovels players enabling that trend to continue to benefit dramatically. Payments businesses that are going to leverage, say, like the Lightning Network or potentially Xiaomi and eCash on top

of Bitcoin over time, you know, that can create substantial economic value because of the instant settlement properties that Bitcoin and Lightning have because of the incredibly low fees that they can drive relative to something like, you know, your entrenched Visa network over time that can, you know, Visa is one of the biggest businesses in the world. There's a huge kind of, you know, margin opportunity to go attack there, regardless of whether Bitcoin is, you know, 10x-ing from here or, you know, going down 50% or whatever the case may be. There's real kind of underlying economic value that can be generated just from leveraging its unique properties that can't be generated any other way. And so, you know, businesses providing

that kind of like Bitcoin infrastructure to merchants or to online payment providers, whatever the case may be, they have a business case and a reason to exist and potentially thrive kind of regardless of Bitcoin's price action. And then you've got, you know, last example I point out is like you know exchanges and on and off ramps um as long as and custody businesses too you know they obviously benefit from bitcoin continuing to go up but again as long as bitcoin you know exists and maintains some level of liquidity they can the exchanges the on and off ramps can benefit kind of on both ends both on the upswing and the downswing in terms of the volumes that they drive and then as long as there's you know some level of ongoing growth

and demand to hold bitcoin then you know your custody and asset management to kind of have a role as well. Their role will be greater or smaller depending on how much Bitcoin adoption increases and thus how much its price goes up. But we think that there are a lot of companies in the portfolio that don't automatically zero out if Bitcoin, for some reason, just goes through a very long spell of not going anywhere or just going down and down and never up. So there is correlation for sure. We think that generally that's positive if this is the secular tailwind that we think it is because it gives us leverage to the biggest secular tailwind in the world. But we think that the correlation is mitigated somewhat as well by the amount of

companies that can benefit just from leveraging Bitcoin's native properties, regardless of what the price is doing. Now, one of the things that I always find interesting in Bitcoin is everyone hates fractional reserve banking, right? They hate lending. They hate all these components that have made the traditional system what it is. Definitely, there's been times where they've been bad. Definitely there's been times where they've been good. How do you see Bitcoin as a financial system if there isn't fractional reserve or there isn't lending or there isn't some of these components, right? Is there a world where we just don't have as much access to credit and can't build as much? Is there a world where we have less risk but also less potential reward as a society

and as humanity in terms of building? Or no, actually, there is a way to do this without the bad sides of the traditional system and all the good aspects of kind of Bitcoin in this new system? Yeah, so there's a lot there. I think we have enough humility at 1031 to know that we can't exactly forecast all the ways

that that will ultimately look at kind of a hyper-Bitcoinized world or a heavily Bitcoinized world. But I would say, I mean, a few things. I think that you still can have, a decent amount of credit and lending in a more Bitcoinized economy, I think you'd probably have a lot more equity-like investment, more so than credit, because the cost of capital in credit markets, I think we can all agree, has probably been artificially subsidized by central banking

and by the lender of last resort that it can provide to backstop lenders that overextend themselves with, you know, fractional, fractionally reserved accounts. I think that probably what happens is you end up with something more like a free banking type model where you've got, say, like, you know, Chamini cash mints that can act as analogs to free banks that existed in, you know, the 1800s. And you can have lending on top of those pools of capital with, you know, So any given mint taking more or less risk with its fractional reserves, we think probably you tend to see a lot. If you had fractional reserve, it's a lot less likely to get to a systemic level because there is no backstop. There is no winner of last resort to come bail you out in a Bitcoin world.

And so to the extent that you were going to have money in some kind of mint structure or some kind of pooled capital structure that was paying you a yield to park it there, you would be kind of taking the risk and acknowledging the risk that, okay, they're lending this out to some level. Maybe it's not, you know, with with zero percent reserve, maybe it's 50 percent reserve, maybe it's 80 percent reserve, whatever, to some level that I'm comfortable with. And I'm realizing I'm getting some yield on this that's built on the risk that the loans being made might might not be good. I might not be made whole on the capital that I'm putting up. I think a lot of people will opt instead to just hold Bitcoin or make equity-based investments where they accrue more of the upside value of whatever they're putting at risk. And so the risk-reward there probably looks a lot more favorable for something like an equity investment. But I do think you can have credit on a Bitcoin standard. I just think probably the amount that you would see in circulation would be a lot lower than what we've traditionally seen with the fiat system over the last hundred years.

And, you know, additionally, you can, I think, still have significant benefits to just anyone in society holding Bitcoin from a basis of capturing the deflationary impacts of growing innovation that technology will provide. And so whereas today we've had deflationary technology like the Internet, like the information revolution that has driven prices down on a lot of goods, but a lot of that has been offset by ongoing money printing. And so you might have had, say, like 5% annual deflation in a certain piece of technology. Well, could that have been 20% annual deflation? Could we have gotten a lot more abundance set another way for society in the absence of a credit-based economy, an artificially subsidized credit-based economy? So even if you had less credit, you might have likely have a situation where if the world is broadly holding Bitcoin and thus kind of accruing the benefits of ongoing technological deflation, you kind of get year on year gains and wealth that way, rather than kind of artificially pumping up, you know, say GDP numbers through basically ongoing credit expansion. So there's a lot in there. It's hard to say exactly where the world will shake out.

I wouldn't be surprised if we still have some kind of credit-based system on top of Bitcoin, but I think it would be a lot more constrained and its downsides would be dramatically less systemic and existential than what we see in the fiat system basically every five to 10 years. My last question for you is in the piece towards the end, you say this one line and it's bold. So I think you know that it's an important sentence, but I took it away and it's the one that made me think the most, which is many of the largest Bitcoin industries of the future have yet to emerge. Describe a little bit in terms of how do you find those industries? How do you predict them? How do you measure whether, you know, somebody's doing something new doesn't mean it's going to be successful or valuable. And then how many of them are there? Is it like, hey, we only have 20% and there's 80% left to go?

Do we have 80% and 20% left to go? just how do you kind of think through this? Yeah. I mean, it's, it's obviously tough to say, I think the percentonics around that, you know, that line and that line of thinking, um, you know, I, I cite in the piece businesses like, um, like service now and Salesforce and Shopify, where, you know, those are businesses that even at the, you know, the, that all founded, I think after 2000. And so you could have been, you know, an internet focused or like software focused investor in the early 90s, kind of watching the birth of the internet and seeing it as this, you know, secular theme that you wanted to invest behind being very bullish

on it. But you might not have been able to conceive, you know, very easily of something, you know, like e-commerce or kind of cloud computing. These are things that required, you know, a variety of precedent innovations and technologies to, you know, to exist in the first place and then to like fully scale up to the point where, you know, they were in use by a wide array of, you know, consumers and businesses and end users. And so I think, you know, the point I'm trying to make there is just like, if we're still laying that first kind of order of operations of infrastructure for Bitcoin, which we kind of

talked about earlier, then we're in that kind of like early 90s period of the internet where it's very likely that innovation will continue to accrue on top of these current waves of innovation, just like Bitcoin itself is built on the innovations of, say, cryptography and the internet. And the founders thereof, the people who are really pushing it forward, pushing those things forward in the 50s and even before that, probably didn't really have much of a conception of what Bitcoin would exactly look like. We also don't have much of a conception of what the next waves of innovation will look like in 10 or 20 years that are being built on things like the lighting network right now, or, you know, custody infrastructure right now. So I think it's just

all that is just to say, if this is as meaningful as we think it is. And, you know, all the parallels identifying the piece suggests that, yes, this is as going to be as meaningful as the internet, then we will, it stands to reason that we should see, you know, 10s of billions of dollars of value created in industries that we aren't even like fully conceptualizing right now. Now, is that has 80% of the businesses, business models been built, and only 20% are left to be, you know, discovered, or is it the other way around, you know, impossible to really say, I would probably tend to lean toward that it's like less than 50% of the kind of outlines of the business models that you'll see are have currently been drawn and are being unlocked.

I think it's, you know, it's certainly under half. But either way, I think that, you know, we're sitting on this opportunity today, and it's hundreds of billions of dollars already, probably just even in those basic opportunities we can see today in the portfolio going even way higher than that. And it's just yet another reason for bullishness that it's very likely that if we're right about all of that, then there are going to be more waves of innovation built on everything we're investing in today that will create probably yet more value. Think about how much more valuable Shopify is today than a lot of very early stage internet companies or technologies that needed to come first before you could build something

like a Shopify. So that's just kind of another lever for bullishness on our thesis. Yeah. Makes a ton of sense. Where can we send people to find you on the internet or find out more about 1031? Yeah. So you can find out more about 1031 at 1031, T-E-N-3-1.V-C. We've got all our content there and information on our portfolio. You can find me on Twitter at JohnArnold1031. I'm also on Nostr. You can find my profile link there on Twitter. And yeah, the whole 1031 team is both on Twitter and on Nostr. And we put out content constantly through Matt Odell and Marty Benz podcast, which goes out as well. I appreciate you coming on. This is great. More people should follow you. I think that you've got

some really interesting ideas. And the piece that you wrote, I was reading it. I was like, how did more people not know about you, know about your work and follow you online? So hopefully that all will change today and we'll definitely have you back and do this again. Awesome, appreciate it.