TRIGGERnometry - Is Bitcoin Bullsh*t? - Mike Green

Episode Date: January 26, 2023

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We all want to believe that through some component we can buy into a lottery and change our lives. That's the entire pitch behind the lottery. My concerns around crypto or Bitcoin as is being presented today is that the emphasis is on that, on the idea of wealth creation as compared to utility. But what I'm not excited about is the rank speculation and what I would argue is fraudulent selling to retail of, here's the keys to how you get rich simply by buying something. And I got to tell you, very few tiers are being shed. right now for my lack of participation in the Bitcoin network or the Ethereum network,

we're social creatures. When you think about the behavior in the Bitcoin marketing story, it was all designed to appeal to the fear that we have of being left behind. When you hear somebody say, have fun staying poor, right? That's not the future of finance. That's somebody trying to trigger your fear of being left behind. This is the future of finance. Well, how much is the future of finance were?

That seems like a lot. I'm going to go, that's a big number, right? Because Bitcoin is programmatically limited in terms of the number of Bitcoins that'll ever be produced, that means at some point in the future, the system has to collapse. Hey, Francis, do you like locals? I live in London, mate. So obviously not. The only pleasure I get from the locals is when we share an intimate moment as we watch a Japanese tourist get trapped in a tube door. That is good.

But I wasn't talking about their locals, I was talking about our community on locals. You mean the one where you get phenomenal behind-the-scenes content when you... ...that you...spaces, spee spieth-phee... ...when you get to ask incredible guests like Jordan Peterson, Brett Weinstein, Bill Burr, Sam Harris, Adam Carolla, Heather Heying and others your questions? Not just that, you can get supporter only, benefits like trigonometry mugs, monthly calls with other top supporters and even a regular meal with me and Francis.

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or give us more for the higher tier benefits. Go to trigonometry.com. Go to trigonometry.com and support the show. Hello and welcome to Trigonometry. I'm Francis Foster. I'm Constantine Kissen. And this is a show for you if you want honest conversations with fascinating people. Our brilliant guest today is the chief strategist and portfolio manager for Simplify Asset Management in the US.

Mike Green, welcome to Trigonometry. Thank you, Constantine. I appreciate it. No worries. It's so good to have you on the show. Before we get into it, tell everybody a little bit about who you are, how are you where you are, what has been your journey through life that leads you to be sitting here talking to us. Well, I had asked you actually the exact same question before we got started, but I have been an investor in mutual funds, hedge funds, and now ETFs, the firm I am the chief strategist for Simplify Asset Management, is an ETF firm based in the United States. I've been doing this for about 30 years, and what I'm most well known for is the work that I've done around derivative structures, alternative investments like crypto or Bitcoin. and in particular, the opportunities that you can,

the opportunities that investors have to incorporate those types of investments into their portfolios to improve returns over time. Well, it's great to have you on the show. The main reason we wanted to talk with you is Bitcoin and Crypto, because we've had one or two people on the show who are very enthusiastic about it. We've also had one or two people who are less enthusiastic, and I know that you have some skepticism, not necessarily, about Bitcoin or crypto itself, but about the way it's been marketed and promoted.

So, you know, if I open my Twitter account, it's going to be about three messages down before there's a hot girl talking about how you should put all your savings into crypto immediately to make your life better and to have better sex and whatever else it is that Bitcoin offers everybody, allegedly. What's wrong with that? Well, it sounds like my settings are on my Twitter are wrong because I've blocked all those people, But there's a couple of things, I think, that are really important to understand as it relates to crypto or Bitcoin. The first is behind any form of narrative or marketing pitch that has to be an element of truth.

Right. And so people are understandably very frustrated and very upset at the levels of intervention in monetary policy, the perception that the system is stacked against them. And something like Bitcoin that has, quote unquote, performed extraordinarily well where the price has risen to the point that people who made relatively small investments have experienced life-changing degrees of wealth is naturally seductive to people, right? We all want to believe that through some component we can buy into a lottery and change our lives. That's the entire pitch behind the lottery. My concerns around crypto or Bitcoin as this being presented today is that the emphasis is on that, on the idea of, wealth creation as compared to utility, trying to make people money instead of trying to help people make money in one form or another.

And the reason that you're talking to me is I got involved in debates around Bitcoin sometime in early 2021, as I increasingly began to hear from my clients the language that had somewhat become universal, which is it's the dominant trade, right? It's the only trade that makes sense in the environment that was there. that was fully embraced both within the institutional community and it was embraced, certainly within the retail community, that this was an opportunity to buy something that was simply going to make you rich simply by virtue of buying it right now. In many ways, it's important to identify that that type of identification, something that makes you money without you having to do anything other than buying it, by definition as a security, and therefore it passes what's called the Howie Test. therefore you end up in this very uncomfortable position as you try to explain to people, well, the math behind that actually doesn't work. So what Bitcoin really is, is it is compensation that is paid to the accounting firms that manage the database behind Bitcoin.

Database is called the blockchain. The accounting firms are called the miners. And all they're doing is they're performing very complicated but ultimately pointless math to compete to build the next block in that blockchain. It was called a proof of work system. The idea of mining is similar to you getting down with your pickaxe and knocking away little pieces of rock in order to generate gold. But at the end of the day, what you're paying for is the accounting system in Bitcoin. Now, that accounting system could actually be valuable in and of itself. And again, it is valuable in the context of what Bitcoin was originally designed to be, which is a peer-to-peer payment system.

It allowed people to avoid the rails of the banking system and to conduct transactions. And in turn, the work that was done around and counting allowed those transactions to be proved. That's actually a really interesting and important observation. What it has morphed into is a speculative asset in which people are competing to buy in the secondary market, this token, what we call Bitcoin, that is used to compensate the miners. very few people understand that this way the system is set up ultimately requires a continual inflow of the pejoratively named fiat currency, right, dollars, pounds, euros, etc. You need to actually have a continuous flow of money into the Bitcoin network in order to keep that accounting system robust and in order to keep people doing it.

Sounds like a pyramid scheme. That's what I was going to say. Isn't that pyramid scheme? It is very much a pyramid Ponzi scheme until actual utility emerges. Right. So retail transactions, people's decision to buy or sell something on that accounting network could actually theoretically create value in the same way that the Visa network creates value for visa shareholders.

We could have moved in that direction. But ultimately, we failed to do so because we became so enamored of the speculation around the value of the token itself. That's actually a really important distinction whether the network itself had value as a payment mechanism, which it very clearly did for money launderers, for those who were in third world countries and trying to evade punitive banking systems and punitive government behavior absolutely has value in those areas. But that's where it stopped.

It never turned into a robust payment system for the rest of us. It never turned into a robust peer-to-peer transfer system for the vast majority of people. Instead, it became a bunch of speculative nonsense. Very interesting. And you know what? I think instinctively Francis and I are both kind of small-sea conservative when it comes to money. Because when we looked at Bitcoin, it was always that feeling of like this is a bubble that's going to burst probably many times because of the speculative element of it.

But let me ask you a different question. I know this is sidetracking the conversation slightly, but I can, I can. I can tell you you really understand these things deeply. There's a lot of people who are not hot girls on Twitter who are really excited about blockchain as a technology. Can you explain to us what it is and why reasonable people are excited about that part of it? So there are elements of blockchain that are actually very valuable, right? So or elements behind the thought process,

which is that instead of having to trust the single holder of record, For example, Visa saying, yes, we show that you made this transaction, right? Instead of having to rely on Visa to accurately capture that information and accurately report it to me, in other words, be a trusted intermediary. Blockchain takes the idea of that database and spreads it out over anyone who wants to participate, right? What's called running a node, effectively. Everybody gets to audit all of the transactions that are occurring when they happen on-chain. In other words, going through that accounting system.

There's some interesting components of that because the removal of trust from a system establishes a component of a series of transactions of record that are very hard for people to argue against and very hard for people to change. Now, that can actually have value and there are many situations in which that becomes quite interesting. Unfortunately, the blockchain technology as it exists today is largely way too slow and way too limited in order to accommodate all the transactions that people are claiming it's useful for. So that process, that process of distributing that database inherently makes it very slow. It's like trying to do work where you're constantly seeking consensus. We've all been parts of organizations where meetings are the primary, form of activity and everybody tries to come to consensus and we recognize that nothing really

interesting gets done. That's very much where blockchain is today. It's just inherently quite slow. Some second and third generation blockchain technologies are beginning to emerge that allow this concept of a distributed database with limited areas of trust that actually become quite robust and quite interesting. And again, there has to be an element of truth in order to get people to buy into something to get people to participate in a scheme, right? If I were to turn around and tell people something completely absurd, like the sky is purple and therefore the world is going to end tomorrow, people could very simply look at the sky and say, well, it's not purple, therefore this guy's an idiot. They may choose to say that independently. That dynamic of having an element

of truth is really critical. And there are a lot of truths behind this idea of digitization of documents, this idea of digitally native securities. I often show people, I don't happen to have it on my desk right now, but my mother purchased for my children's stock certificates, physical stock certificates, right? Now, ironically, what this means is that I receive, as the shareholder of record for these shares, I receive one penny dividend checks, right?

Checks written out in my name for one penny, which drive my wife completely insane and I'm forced to cash at a cost to the system of probably, several dollars. It costs about 85 cents to write and check and process a check. And that check is being sent to me for one penny. Right. Now, that's completely absurd, but it's reflective of the analog nature of the securities industry. There continues to be an overreliance on paper records. That's true for your mortgage. That's true for stock certificates. That's true for bond certificates, et cetera. All of this stuff doesn't truly exist in digital form that places limitations on a lot of

things that we should be able to do that we currently can't do. I'll give another simple example. Most of your viewers would be familiar with the movie The Big Short and the idea of securitization of mortgages. Part of the reason why securitization is this fancy special word is it to build a residential mortgage-backed security, that securitization, requires on average some around 3 million paper documents to be held and physically maintained by the issuer of that piece of paper. Wow. That's kind of crazy when you think about it in the 21st century, but it is a legal requirement. If we were to move everything to truly digitally native securities, not only would I be able to do that

individually because I no longer have to hold 3 million paper documents in a storage facility somewhere. But I can also start to attach all sorts of interesting features to that in which various performance components, various distribution dynamics, the waterfall that was described so well in that movie The Big Short. All of those can be embedded in things we call smart contracts. Your viewers, again, would be familiar with those terms. So, like, I'm incredibly excited about that world. But what I'm not excited about is the rank speculation and, you know, what I would argue is fraudulent and selling to retail of, here's the keys to how you get rich simply by buying something. Everything I just described involves me creating something, you know, changing the system

significantly so that more people have access to the ability to create new stuff and do new things. That's a very exciting world. One of just ranked speculation, you know, to me, just feeds the frauds that we've seen. And we're now seeing those, of course, come home to roost. Francis, before you jump in, can I disagree with you, Mike? I reckon if you said the sky's purple and the world's about to collapse, in the current age, there's a lot of people who would go along with that.

But anyway, Francis, carry on. By the way, I actually agree with you. I would probably capture a reasonable cult-sized following over the internet that would allow me to sell them anything going forward. But yeah, go ahead. But so that being the case, what is the difference as far as you're concerned if there's any difference between Bitcoin and the rest of the world? of crypto like Ethereum, et cetera?

So I think that there is actually functionally very little difference. They are, at the end of the day, they're just algorithms that set a certain protocol for behavior, right? So Bitcoin, as I mentioned, is really just a token that is compensating people who are doing accounting for the Bitcoin system. Ethereum, now that it's moved to what's referred to as proof of stake as compared to proof of work, is moving to a slightly different dynamic where the Ethereum token is actually a requirement similar to posting U.S. dollars as collateral.

It's a requirement for posting collateral on the Ethereum network. So I don't think that there's actually that much difference. They're all protocols that are basically just code. The question is, what is the utility of that code? What is the utility of that protocol? Ethereum has its flaws. It has significant flaws. and ultimately I'm somewhat skeptical about whether it will end up winning or not.

But it at least attempts to make things useful, right? Things like the introduction of smart contracts, the introduction of proof of stake or the use of proof of stake that basically says, I'm willing to run the risk of losing X amount of Ethereum tokens or US dollars, et cetera, if this turns out not to work. So I'm basically putting my money where my mouth is in that price. process. That's, again, quite different than the dynamics of speculation as to whether or not Bitcoin's going up in price or down in price, which makes me very sad, right? You know, those radically

different components. Ethereum is theoretically designed for building. The biggest challenge that you have in Ethereum is that it is, again, relatively slow and relatively high cost at this point. So, Mike, there was a period, I remember during the pandemic, I think it was 2021. where all of these cryptos spiked, and then it suddenly crashed. Can you explain to us what actually happened? Was it that people lost confidence, or was there something else going on?

So there is something else going on, and this is actually, this overlaps with the work that I do in broader markets. What you're actually describing is a byproduct of a system that exhibits an economic property called inelasticity. So you can think of elasticity like, rubber band, right? Things are very flexible. They change a lot. Most models of markets assume a high degree of elasticity. In other words, for significant changes in supply and demand, price doesn't change all that much. An inelastic system is one in which the price changes a lot for small

changes in supply and demand. In the case of something like Bitcoin that has a fixed issue in schedule, right, so you've heard terms like the halving of Bitcoin, et cetera, the supply is fixed. A continuous supply is generated of new Bitcoin that is available. The existing supply of Bitcoin doesn't change. Therefore, an increase in demand ends up causing a significant increase in price. We can run through this model very quickly. Francis, let's pretend that you and I are effectively the market for Bitcoin. I own Bitcoin.

You want to buy Bitcoin. Offer to buy my Bitcoin. I will offer you $15,000 for one Bitcoin. No. I'm hoddling. I'm not going to sell to you. Now you have to get Bitcoin. You've told your investors you're going to get Bitcoin.

You're an institutional investor that just launched a Bitcoin fund. You need that Bitcoin. Come on, bid up. So I'll offer you $18,000 for one Bitcoin. No, I'm not selling it to you. Keep going. Okay. 22K.

Yeah, that's not anywhere close to the right answer. Let's keep going up. I'll sell you one for 20,000. Okay, so there we go. That's actually what ends up happening, is exactly that. Most people choose to refuse to sell as that new demand comes into the market.

Prices exhibit inelasticity, in other words, rise significantly. That increase in price, in turn, lets people think, oh my gosh, something really valuable must be going on here. Why would I sell? I'm actually incentivized now to hoddle.

These guys are right. Bitcoin is going to go to a million. And then suddenly, Constantine shows up and spoils the party by saying, well, gosh, I got some Bitcoin at $12 back in 2011. At 22,000, I'll sell some. Okay, now the story's over. The price begins to collapse. That's exactly what happened in 2021. And it was tied to the growth of the institutional social.

story, this dynamic that I was referring to before, Bitcoin is the dominant trade. It's the best of the inflation trades, right? Number go up. That phenomenon is what we experienced in 2021. Because there were so many people, Mike, who are evangelical about this, who are saying, you know, this is the future of currency. This is, you know, if you've got to jump on the Bitcoin train now. If you don't, you're missing out. And then it collapsed. Do you think that we've kind of seen the end of Bitcoin as the way they marketed it as the future of currency? Or do you think it's still got somewhere to go? So I hope that it's over. I think unfortunately it was a fundamentally flawed theory that propelled its growth and its adoption, this idea that you could replace states

in terms of the states, meaning governments, in terms of the role of currency. So this is part of what my early debates on Bitcoin tried to educate people on, is what money actually is. As crazy as it sounds, money is a byproduct of debt. Money is the legal tender that is used to cancel debt contracts. That's what it actually means. Mike, explain that for the ordinary person, because I think to most people, that'd be quite confusing. So if you look at a U.S. dollar and I can't speak,

to a British pound because I don't know the answer to this. I don't have one directly in front of me. It has the same statement. I know what you're talking about yet. This is the legal tender for all debts, public and private. The ultimate debt that is created is the government saying you have to pay taxes. And the only thing that we'll accept for the payment in taxes is the US dollar, the British pound, the euro, et cetera.

Right. The minute you actually make that statement as a government and as a government, you have the monopoly on force that allows you to say, if you. you didn't pay your taxes, I'm going to put you into this thing we call jail, right? That suddenly creates demand for the currency. People have a reason that they need it. Render unto Caesar what is Caesar's, right? That is really what is going on with currency.

It is declared as legal tender for debts, both public and private, within that circle of the monopoly of violence, right? Where the government controls the resources that allow you to enforce this, whether this is a court system, or the physical army or anything else, right? That's what currency actually is. It is that which cancels debt. There is no native Bitcoin debt. There is no native Ethereum debt. There is no mechanism for enforcement other than saying you can't participate in the Bitcoin

network or the Ethereum network. And I got to tell you, very few tears are being shed right now for my lack of participation in the Bitcoin network or the Ethereum network because there's almost nothing useful I can do on them other than money laundering, drug dealing, various forms of sex trafficking, et cetera. Now, I understand how offensive that feels to the person who has transferred money to their relative in a developing country or the person in a developing country that has used the Bitcoin network to shield their hard-earned savings from an abusive government. Those situations do exist, but understand one person's freedom fighter is another person's

terrorist. If you're using the Bitcoin network to hide money from your government, you're breaking the law. I'm not going to make a statement as to the moral appropriateness of this if you happen to be in Lebanon or Iraq or anywhere else, right? Like take your poison. Many places have terrible governance. But this is a way of skirting the law. And in developed countries like the United States or the UK or Europe, right, that's lawbreaking. And you should expect it to be treated as such. Well, that's one of the things that I always, as someone who's not an expert by any means in this area, I sort of heard people running around and going, well, you know, crypto allows you to sort of take government out of the thing. I was like, death and taxes, like the government's going to get involved no matter what.

You can build whatever you want. The government will find a way to tax it and to control it. Speaking of government, one of the other things I hear the sort of crypto enthusiast talking about a lot is these, big, scary digital currencies that the governments are working on. Can you shed some light onto those and what those are about? Sure. So what you're referring to as central bank digital currencies. Again, addressing this idea that the system that we have right now is analog, right? It's not digital in its underlying construction. A move to central bank digital currencies is both an opportunity and a threat. And the reason why I say that is from an opportunity

standpoint, it creates all sorts of functionality like what we're referring to, right? So if each token, which is what the US dollar or British pound is referred to, is natively digital and basically built into the system so that it's constructed as such, each use of that token in turn is going to natively be in that digital system and open up all the opportunities that we were talking about before, right? You as an individual could securitize your own mortgage, for example, right? I'm not suggesting that's necessarily going to happen, but that type of opportunity would exist. The issue with digital currencies, as done by central banks, is that they also represent extraordinary risks of privacy intrusion. It creates the opportunity for the government to do things to the money that you think of as being in your, to steal from the crypto phrase cold wallet, right?

that thing we have in our pocket where I've got physical paper certificates, the government traditionally was limited in their ability to debase or reduce the value of that by conducting centralized activities, right? They want to reduce the value of the dollar I have in my wallet. The only way they can do that is by large-scale printing of dollars that are then distributed from the government, right? That has an indirect effect. When you move to that digital dynamic, you actually open up.

the risk that if I do something the government doesn't like, they literally reach into my wallet and take that money away from it. Now, that's a very scary proposition. It's also a very scary proposition to think about the potential for the government to monitor every single transaction that I do. Right. And this is actually my biggest complaint about CBDCs is that the government appears to misunderstand the opportunity and importance of having anonymized transactions because they don't actually respect the price signals that it received. It may be morally repugnant that I choose to buy drugs or that I choose to hire a prostitute or that I choose to watch pornography. But that's actually the price signal that's sent by that demand is actually an important

signal to the economy. If we choose to weigh down that price signal through moral, statements that that's not okay, I'm going to reduce your social credit score by virtue of your personal behavior in the privacy of your own home, that damages the signals that are received by society, right? It hurts our society, and it hurts the economy in that process. Well, how does it hurt our society? Sorry. Oh, I think it's incredibly important that people are actually able to convey signals of what they want, right? That's what the invisible hand of capitalism is all about. You know, I would hope that I've made life choices that I'm not in a position that I need to purchase drugs to deal with the mental distress associated with my day-to-day

existence or to use pornography or to hire a prostitute. But that's actually actually, you know, there's an incredibly important economic signal that's coming through when people engage in that behavior, right? I'm conveying a system of wants that is actually very valuable into the economy and can encourage people to create less harmful and more effective substitutes. So moving on now, we've talked, we've spoke about the crash, and obviously the collapse, I think it's FTX and Sam Bankman Fried. What happened there? Because this was a billion-dollar company, a crypto exchange, and overnight it lost all its value, and he went from being a billionaire to literally owning nothing. How does that happen? I think it's effective altruism, isn't it?

Gave away all his money on the day. He gave away all his money. That was his plan all along, wasn't it? I think, again, it speaks to this general question of what does worth actually mean, right? And what is true value? We often inhabit a world where people will say things like, well, gold is money. Gold is real value. Again, gold is really only valuable to the extent that you can use the brick to hit somebody over the head and steal their wallet or food. Right. It historically had value because governments designated as the mechanism that could be used to pay those taxes. Otherwise, you went to jail.

We're beaten over the head by a soldier and had your food taken away, right? This is the same game that we played with Bitcoin. When you talk about what is the value of FTX, there's two ways. ways of thinking about that value. One is it has an intrinsic cash flow associated with it. It is a profitable business that provides goods and services that people value and that the company is able to provide at lower cost than what it sells to the market. An Apple iPhone would be an obvious example to something like that, where it's something that people now increasingly treat as an indispensable part of their daily existence. It costs them somewhere in the neighborhood of $400 to manufacture,

and they're able to sell it to us for somewhere in the neighborhood of $1,200, giving them margins of around 65%. That math is very straightforward and simple, and if they're able to repeat that over and over and over again, the company generates a series of cash flows that I, as an investor, can then consider worth a certain amount, right? Another way to think about it, and this is the one that we've largely entered into in the last, give or take, 15 to 20 years, is the value of something is simply a function of what somebody else will pay for it. right now there could be any number of reasons why people decide that they need to buy something you've got a wonderful poster behind you on the wall there are scenarios in which your fans would decide i have to have that poster right i'm willing to pay a thousand dollars for that poster there's things that you could do that would potentially enhance the value of it you could sign it you could make it a limited edition of one or a five or of ten and those would all add potentially add value to somebody who's interested in purchasing it and being able to say, look, I have this, you know, trigonometry, you know, NFT, we'll call it, right? That type of speculative finance is what drove the value of FTX.

It's that other people wanted to buy it. Other people wanted to get a piece of Sam Bankman-Fried. And this was venture capitalists. This was high net worth individuals. This was family offices. all of whom with very limited due diligence stepped in to give money to Sam Bankman-Fried at a valuation that created these billions and billions of dollars. Once he's exposed as a fraud, guess what? Nobody wants to give him money anymore, and that value collapses. Because there's no real value there, right? He's not creating a product.

There's no cash flow associated with it like an iPhone. Right. Wow. So, Mike, I love how brilliant you are at explaining these what are to most people complicated things in a very simple way. So let me riddle me this. Why do all these capitalists, venture capitalists and all these other people who deal with this every day, who are very smart, certainly a lot smarter than me, etc. Why do they buy into this shit? Because I wouldn't. Well, because they're smarter than you.

That was a joke. Yeah. The unfortunate reality is I mentioned that this has now been kind of 15 to 20 years in process, potentially even longer than that. You know, we have seen repeatedly that the mechanisms that are in place for rewarding individuals for the decisions that they make reinforce that. A venture capitalist receives a percentage of the excess returns that are generated over and above the cost of the initial.

investment. So in an environment in which people are encouraged to separate the value of something from its cash flows and instead treat it in some variant of like, well, anything has value as long as other people are willing to pay for it, what traditionally would be referred to as the greater fool theory or Ponzi financing. When you've been rewarded for that, the institutions grow up and flourish that reinforce that type of behavior. And that's very much where we are. Unfortunately, I would argue that most venture capitalists or many venture capitalists have not lived through a cycle in which they have to critically examine why did Google work? Why did Microsoft work? Why did Apple work? Why did Amazon work? Instead, they've largely been rewarded by the activities of those companies

that are now protecting their modes. So Google, for example, has purchased over, I believe it's 1,500 companies over the last 15 years since it went public, largely not. Not. to generate cash flows in those businesses, but to protect its existing golden goose in search and prevent competition from emerging. That's made it incredibly profitable to build things that simply have the threat of displacing Google, have the threat of making Google's core business less attractive by funding that they're creating conditions under which for Google it's just more profitable to say, you know, forget it, I'll just buy it. Let's just make it go away. Right. And that's always the story of Silicon Valley for the past 20 years.

So just coming back to the FTX thing and the fact that a venture capitalist, am I hearing you correctly that basically from a venture capitalist perspective, all they're doing is essentially buying into this Ponzi scheme on the basis that Ponzi schemes can make you money in the short term and they're going to get a slice of that revenue, basically. Correct, with no recourse against them if they don't. right if i sell that company to google the fact that it never generates profitability that it quietly disappears right and think about any number of technology companies that have splashed onto the excitement pages you know let's take obvious ones you know yahoo and tumbler and all

this sort of stuff that ultimately end up having almost no value whatsoever right once they're required and purchased by something it doesn't matter anymore i got my 20% carry Wow. That's pretty effed up, man, isn't it? It's a very messed up system. And again, that truth, the fact that the system is effed up, right, technical term in finance, that effed up system creates and it facilitates the narrative that people have, which is nothing has any value, nothing has any meaning, nothing means anything. Right. And it's a huge societal ill that people are not in a position to critically examine these assumptions. We're social creatures.

When you think about the behavior in the Bitcoin marketing story, it was all designed to appeal to the fear that we have of being left behind. You're not going to make it. Well, why do the zebra herds all turn right for the most part? Because there's safety in a crowd. Some fraction of the population, I'm unfortunately structurally wired differently so that my bias is to say, hey, wait a second, why is it? everybody turning right. Now, in nature, that means I probably get eaten by a lion. But I happen to inhabit a regime in which I'm given the luxury of critically examining many of these things, but most people just have not had the training or skill set or interest to develop those

capabilities. And I understand why. I actually think it's incredibly important that most people broadly do what they're told, right? And I've annoyed any number of people, my wife, especially, with my refusal to do what I'm told, right? But that's just part of how we're wired. And it's important for people to understand when it makes sense to argue and when it makes sense to say, hey, why are we all doing this? And sometimes you just got to go along, right? It's very difficult for people to separate those two. When marketing is designed to exploit that, you hear something, say, have fun staying poor. That's not the future of finance. That's somebody trying to trigger your fear of being left behind. Right. So with FTX, what did they actually promise?

How did they get so many people to invest in them? How did they become this huge organization? Well, again, define huge organization, right? The number of employees at FTX was relatively limited. They managed to occupy a penthouse basically in the Bahamas as a as an office. So this is not a giant organization in the classic sense. It was a giant organization in terms of the valuation. And that valuation was pretty straightforward, right? This is the future of finance. Well, how much is the future of finance work? That seems like a lot. I'm going to go with That's a big number, right? So do you think part of this, of the explosion of crypto,

comes from the fact that we have a generation who are going to struggle to get on the property ladder, things have become more expensive, wages have stagnated for the past 10 or 12 years, or however long it is, and they saw crypto as an opportunity to not necessarily gain the system, but to get rich and to find a way around those problems. It's like a luxury ticket. It was absolutely a lottery ticket, but it was a very special type of lottery ticket. It was a lottery ticket that required you to do a little bit of work

to actually be able to find where to buy it. It was one that they could explain how you're unique and you're special because you've navigated these holes, you've educated yourself, you've done the work. It's not like going to the gas station or petrol stations, station and buying a lottery ticket. This one your grandmother couldn't figure out, right? You're special.

You've figured out how to gain access to it. Of course I deserve to make a lot of money because I'm special. By the way, my mom and dad told me how special I was my entire life and I've got the trophies to show it. Right? And this just proves it. It plays in perfectly to the millennials. Wow.

You know what, Mike, this, we've talked, as I said, about cryptocurrency. with a lot of people, but I don't know, maybe you are playing my tune and we are, Francis and I started the show called Trigonometry because we also often refuse to go with the herd. But everything you're saying makes absolutely perfect sense to me. And you know why? I grew up in Russia in the early 90s when the Soviet Union collapsed and you've got to understand nobody in the Soviet Union had any financial training of any kind, really. And then the Soviet Union collapses and you've got the supposed free market.

And this thing comes on the screens of every television. You didn't have advertising in the Soviet Union. Suddenly, these full-color, interesting scenes playing out on your screen. And these guys talk about this system called MMM, Triple M. I don't know if you're familiar with it. And basically, you know, this was one of the original scams, if I remember correctly in Russia. Well, right. So what happened was, you know, these guys would come on your screen and go,

oh, mate, I went down to the thing yesterday, and I bought. you know, 10 rubles worth and now it's worth 100. And I told my mate, and he went down. And every day you'd be bombarded with this messages. And my dad happened to be financially literate. So every time as a young kid, I'd ask him what's going on, he just said to me, it's a scam. And I'd be like, yeah, but my mate at school,

he said that his dad bought it and he did well. And my dad would be, it's a scam. And this went on for like months. And eventually, of course, it turned out to be a scam. And every time people talk to me about Bitcoin or crypto, and they go, well, look, you know, this is what happened and then and I'm always I've always got that memory in the back of my head and everything you're saying just makes so much sense because you know it isn't physically possible

for this to be or be true in the way that people the marketing side says it is yeah unfortunately that unfortunately that is that appears to be true right I want to be very clear that everything I've expressed is my opinion and my analysis of this system and of what we have experienced for the last several years, it's possible I'm wrong, but I don't, I have yet to see. If you're wrong, how are you wrong? If you were wrong, how would you turn out to be wrong? So if I were wrong, my expectation of how I would be wrong is a major government making an incredible mistake in choosing to back its currency with Bitcoin in a manner similar to what was historically done with gold. And that's one of the reasons I spoke up because it would be such a

terrible choice. Gold actually is, I'm going to piss whatever fraction of your audience I haven't already pissed off by saying like gold itself is really just a mineral, right, or a metal actually be more accurate. And it fills a relatively unique role on the periodic table because it's non-reactive, it's non-toxic, it doesn't tarnish. In other words, it doesn't oxidize, right? It doesn't poison you when you pick it up like mercury might. It doesn't, you know, fall through your, eat through your pocket and fall to the floor and disappear on you. It actually has unique properties as a metal that can be used in that manner, just like silver, just like copper, just like tin, and just like nickel, all of which have been used throughout history as metallic coinage. There's nothing unique and

special about gold. But governments chose to peg their currency to gold because they wanted to place limitations on the behavior of individual men or Congress to radically change monetary schedules, right? So the idea was very straightforward. You need to have a set quantity of gold. That was an important message, and it was an important limitation on the behavior of governments, particularly in an environment in which information was very hard to obtain, right? We didn't have instantaneous communications over the internet, et cetera. But it also approached its limitations as populations exploded. What that meant was one of two things. Either the quantity of gold per person was going to collapse, or we were going to decide, okay, we're going to break the message of this.

We fought through basically the first 40 years of that with a series of deflationary episodes, basically from about 1880 until the 1920s, where the global population is exploding, and yet the supply of gold is not rising in a similar fashion. That led to deflationary conditions. It led to economic stagnation. It led to warlike behaviors, et cetera, right? All sorts of things and problems emerge. when people are forced into unplanned and unanticipated scarcity on those dynamics.

Bitcoin takes that dynamic and adds an additional wrinkle to it. Because Bitcoin is programmatically limited in terms of the number of Bitcoins that will ever be produced, that means at some point in the future, the system has to collapse. The behavior of a Bitcoin system, if you were to build it like a video game and run it forward, ends with one person owning all the Bitcoin. That's the way the system ends, almost like the dynamics of entropy in the universe. Gold had an interesting feature to it,

which is if shortages of gold emerge, the price of gold rises. That encourages people to devote resources to mining. It encourages people to devote resources to recycling. It theoretically causes people to melt down jewelry or silverware, etc, to provide additional supply into the market. It encourages new technology. What actually fixed a lot of those problems for a temporary basis was a new form of refining gold

that allowed the treatment of types of gold that were previously not available. By the way, the same thing's happening in nickel and in some types of copper today where higher prices are encouraging new technological innovations. Bitcoin takes that away. It robs the system of that reward to human ingenuble. And so in so many ways, it's worse than gold. Like, that's a pretty staggering statement to make. But not only is this not the future of finance,

but it is the byproduct of people who fundamentally did not understand what they were doing. Mike, the thing that always struck me with Bitcoin as well, what you're saying is incredibly illuminating is the way it was marketed, is the marketer, the way they marketed it, even the origin story. was, excuse my language, fucking ridiculous. There was this Japanese inventor who created these Bitcoin and then he disappeared. I'm like, come on, are we all like 14 years old again? Well, it's, again, if I'm going to sell you something, right, I have to be thoughtful about

what is the origin story that I'm going to create. So I'm going to tell you that there was a man who was actually a God who was sacrificed, died for our sins, then came back. Like, we have no evidence of this. We know broadly that these things are somewhat ridiculous in their story, that there's a godlike figure in the sky. But remember, we are a society that requires that narrative, require that explanation to get us to turn right when the lion threatens us.

As is heard, we have to follow those behaviors. This, you know, there's a book called The God Gene that effectively posits that some people are wired to follow those. instructions. Well, you have to give them that story. You have to give them the why. Why are you doing this? Because Satoshi Nakamoto said so and it was good. Right. Mike, absolutely brilliant. I'm enjoying this conversation so much. And as far as I said, illuminating is exactly the right word. Do you mind if I asked you some sort of political and cultural questions or just because it strikes me that you'd have an interesting take, but I understand someone in your position might not want

to talk about it. I mean, I reserve the right not to answer, but I'm happy to answer questions. No, it just strikes me, and I know that, am I right in thinking you've worked with Peter Teal as well? And he's obviously someone who speaks on those issues, too. Yeah. Yeah. So I managed Peter Thiel's personal capital for a couple of years.

Right. So I'm curious what you make of what's happening in society more broadly. And is it in any way connected to some of the stuff we've discussed today? You know, the cultural shifts we've seen in recent years with Advent and social media and so on. Do you have any thoughts on everything that's happening in the cultural sphere? So I think there are, I think unfortunately that there are incredible overlaps, right? If I draw a Venn diagram of why this sort of thing works and what's going on broadly. That's why I asked you, I had the sense that you'd have something to say on this.

Yeah, so I do think that they are very deeply linked. I would actually, you're over in the UK, right? Is that right? I would encourage people to check out the work of Ole Peters, O-L-E space, capital P-E-T-R-S, right? There's a broad school of theory in economics that says something along the lines of the market is always making the right choice. And the most important thing for us to do is to reinforce the signals that come from the free market. And that in turn leads to a rise in meritocratic outcomes and an

improvement of skill and capability in society. That story has unfortunately largely morphed into a variant of social Darwinism. Those who are rich are rich because they deserve to be so. Instead of those who are rich might very well be rich because Google fell for a story and ended up buying out their company at a valuation that made no difference to Google whatsoever, but provided a generational wealth to that individual. Once you've achieved that generational endowment, you can then proceed to change your behavior of investment to one that allows you to place a series of bets that have no individual consequence but have option-like characteristics that allow you to enhance that wealth.

Peter, brilliant in financial analysis and cultural analysis, I would argue largely figured out that that is the primary benefit of being involved in venture capital, that it allows you to make a series of option-like bets that potentially have a thousand times payoff with very little consequence, right? You're able to construct your portfolio as a series of diversified call options that in turn, each one underperforming has very little impact on you, but one winning causes an incredible home run. But that's really only something that can be done by somebody who has already, already gotten lucky. And we fail to consider that dynamic of luck. Now, the work of Oleg Peters takes, in my opinion, goes a step further than the work of, say, Hickety and Sayez, which is this

whole dynamic of, you know, R minus G, it's or R greater than G, et cetera, that, you know, wealth concentration is a function of the returns on capital and the scaling dynamics associated with that. I don't actually think that that's necessarily true. I think what unfortunately we've entered into is a system in which the creation of those bets, the wealth created by those bets, and the participation in those systems has increasingly moved into a narrative. And Peter very famously wrote exactly a book on this, zero to one, about the power of monopolies. Starting in the 1980s in the United States and broadly the rest of the world tends to follow U.S. behavior on these things for fairly straightforward reasons.

It is the world's largest economy. It tends to hold the dominant role. the world's largest military, that sphere of violence that offers as those in Iraq and Afghanistan discovered can be quite disruptive to the rest of the world. You know, so people broadly followed us in this. We stopped fighting monopolies. We stopped saying, hey, that's actually evidence of market power. That's a bad thing. We also stopped saying, guess what? You as an individual happen to win the lottery. And therefore, you should be subject to a degree of, what I would not argue are punitive taxes, but actually a recognition that you created a windfall by virtue of participation in the

system that people are ignoring, right? I mean, the fact that I invented Google, and I'm being very broad in these terms, understand. One, I didn't invent Google. Two, I have no particular knowledge of the individual components associated with that. But Google fundamentally benefits from the protection of the intellectual property rights that it has by the U.S. government. It should be paying extraordinary taxes for the windfall that's created from the participation in that system. And instead, we've moved to an environment in which the narrative has been captured that says, well, Sergei Bryn is so brilliant and his creation of Google was so profound that if we just left him with more of the money, he's probably going to do it again. The evidence for that is zero.

And again, in fact, Oleg Peter's work would suggest that the evidence in the system is that we have a negative distribution for skill versus luck. In other words, a system that was built purely off of luck would do a better job of describing the current distribution of wealth and income in the United States than one that was actually matched the skill. And so I think that there's a very fundamental flaw in our economic system, our treatment of success, our, resentment of, quote unquote, punitive taxes for the extraordinarily wealthy and well-performing, because none of us really wants to participate in society as it's currently constructed. We're all kind of libertarians at heart where it's, you know, I'm successful because of my capabilities, but that person is unsuccessful because of their bad choices. It's not because I'm exploiting the system in one way, shape, or form.

And the evidence, unfortunately, I mean, I'll give a very firm example of this. I look at the technology companies like Apple, Google, et cetera. They have been found guilty of intentionally enforcing non-compete contracts and non-solicitation contracts for their employees, right? Apple turned to, in a, you know, in a pure collusion behavior, turned to its competitors and said, you can't try to hire our employees. Right? That impoverishes their employees on a relative sense, enriches Apple shareholders, its behavior that is illegal everywhere in the world, and Apple paid basically sofa change as a penalty for it.

Every single one of these technology companies that I refer to apparently does most of their business in Ireland. Why? Because it's a tax arbitrage that they're able to take advantage of. Is it almost required of their managers to exploit that arbitrage? Of course, because they should have their interest. of their shareholders at heart. But as a government, the United States should not be encouraging that. And the government of the

United States should be penalizing it candidly. Mike, because what you're describing earlier on, I mean, that's the American dream, isn't it? Isn't that what we're all buying into? You mean... I'm successful because of me,

you're a failure because of you. You know, and I succeed on my own merits. That's the beauty of America. That's the dream. A man can pull himself up by his bootstraps and be whatever he wants. Yeah. So unfortunately, the evidence for that is increasingly untrue. And the systems that we've put in place have increasingly encouraged extreme success

as compared to the more modest success of the individual, right? We've also moved to an environment in which we presume that signs of success are goods unto themselves, right? So a college degree is perceived as the objective. as compared to adequate educational training to allow me to take advantage of the opportunities that exist in the environment today. The college degree is a mechanism increasingly for signaling, I'm a member of an elite class. You should consider me for this employment opportunity. And we've taken away the market signals that would be associated with those degrees and the quality of those degrees

if people actually had to contemplate the real costs associated with it. Going to Harvard is an objective in and of itself, not the Harvard education. And in fact, I would increasingly argue that the Harvard education is separated from the Harvard degree. I have a daughter who's at the University of Pennsylvania. Cheating is rampant because kids are more focused on the grade than the actual education.

And if that's happening at the elite, schools, imagine what's happening at the second rate schools. Well, that makes perfect sense. And I suppose in terms of your point about monopoly power is something I've been thinking about for a long time. I imagine a big factor in that is what we saw with Sam Bankman-Fried, where you're giving lots of money to politicians to shape policy to match what you're trying to do. And I imagine, I mean, I don't have to imagine, Google and Amazon and all these other powerful

monopolies in their markets. The reason they are not losing power and accumulating more power is that they know how to spread that wealth around and make sure that they get the right policies from government. Constantine, I couldn't have said it better myself. You were 100% correct. Well, on that happen, you know, Mike, listen, I have to say it's been one of my favorite interviews we've ever done on trigonometry because you've just pierced straight through a lot of the things that I think are confusing and perhaps deliberately confusing for people. or certainly for me. And I've really enjoyed it, and I really appreciate your time. As always, we'll do a couple of questions from our supporters that only they will get to see

the answers to on our locals, on our local site. But before we do, we've got one final question for you, which is, what is the one thing we're not talking about as a society that you think we should be? Well, so while I've done a lot of work in the crypto space and spent time talking about that, the area that I'm most concerned actually is in what's referred to as passive investing and the emerging monopolies around those behaviors. Again, theories of markets, theories of economies have led people to believe that in many situations, the right choice is not to actually try to invest, not to try to select investments, but simply to mirror what everybody else is doing.

the theories that underpin that are at least, if not significantly more flawed than the theories that describe the economy. I was referring earlier to the work of O'L.A. Peters was referred to as the efficient market hypothesis, this idea that all information is out there and simply, you know, mimicking everybody else's behavior allows me to participate without running the risk that I underperform, right? unfortunately, markets don't work that way. Markets are not driven by information. Markets are driven by transactions.

There is no such thing as a passive investor. The theory behind passive investing describes passive investing as someone who never transacts. Well, the firms that are engaged in passive investing and index type investing transact every single day. Vanguard BlackRock between the two of them receives somewhere around $3 billion worth of inflows every single day. their behaviors are increasingly structurally affecting the signals and behavior of the investment markets that we see.

Simple theories often decry that as being tied to the Federal Reserve or other central banks. Increasingly, those models are at odds with what I would describe as the reality of how markets behave from a structural framework. And that actually creates extraordinary risks for us as a society because when retirement systems fail and ultimately, That's where this system is heading. It's creating a liquidity crisis that I would argue as accelerating as we speak. That crisis almost always signals the end of democracy. Constantine, you saw this happen in Russia. When the pension system fails, that's when you move to an authoritarian system.

Wow. Well, it's been a happy interview. Mike, listen, we really appreciate your time. It's been absolutely fantastic. If people want to hear more of your thoughts, is there a place they can go to do that? I mean, the most disappointing version of that would be to go to my Twitter feed, which is at Prof-Plum-N-N-N-N-N-N-N-E-R-O-F, P-L-U-M-N-N-U-M-N-Fusingly, I look like the character Vassini from the Princess Bride.

Before anyone asked, one, I never anticipated being well-followed on Twitter, and two, the reason I chose Vassini is because I constantly try to remind myself. that the perception that you're the world's smartest man is doomed to lead to your own demise in some ridiculous game where you didn't really understand the rules of the game that were being played. You can find a little bit more of my stuff by Googling these types of podcasts and interviews, occasionally I'll write on my medium profile. And the last thing is that if you're interested in very esoteric discussions around market

structure and options, the derivative dynamics around that, you can check out the work of Tier 1 Alpha, T-I-E-R-A-L-F-A-L-P-H-A-J.com, which I wrote a morning note before. Fantastic. Well, I'll be sure to follow you on Twitter right after this. Stay with us because we'll ask you a couple of questions for our locals, but thank you for being here. And thank you guys for watching and listening. We will be back very soon with another brilliant episode like this one, or Raw Show. All of them go out at 7 p.m. UK time. And for those of you who like your trigonometry, on the goal,

Oh, it's also available as a podcast. Take care and see you soon, guys. Danny Fandango asks, I believe the prevalence of successful scams in the crypto space is indicative of the individuals who are drawn to it, and therefore is indicative of the lack of real value of Bitcoin. What do you say in response? How many discounts does USA auto insurance offer? Too many to say here. Multi-vehicle discount. Safe driver discount? New vehicle discount. Storage discount. Storage How many discounts will you stack up? Tap the banner or visit usa.com

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