We Study Billionaires - The Investor’s Podcast Network - BTC028: Bitcoin Update w/ Plan B & Dr. Adam Back (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to our Wednesday release of the podcast where I'm talking about Bitcoin. On today's show, we bring back by popular demand, Dr. Adam Back, who's the CEO and founder of Blockstream, and we also have Plan B, who's the creator of the stock the flow model. On the show, we talk about the broader macro implications of Bitcoin reaching a market cap in excess of a trillion dollars, but still having market corrections of $500 billion. We talk about Chinese mining news, We talk about energy concerns and highlights.

Starting point is 00:00:33 Additionally, we talk about the derivatives market and how it had an impact on the recent sell-off. So if you're looking for a good update from two of the smartest guys in the space, hang on tight because here we go. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. Like we said in the introduction, I'm here with Adam Back and Plan B.

Starting point is 00:01:09 gentlemen, welcome to the show. Thank you. Thank you. All right. So where I want to start this off, I've done a lot of thinking as this price has just gotten punished over the last two months, month and a half or whatever it is. And one of the things at the top of the list is just systematic risk. A few months back, we saw Wall Street bets do the whole GME thing. and it had, you know, just a small kind of pittance of a market cap, but the implications of that

Starting point is 00:01:43 were massive. So you had Melvin Capital, the Citadel had to come up with $2 billion. You had $2.72 asset management. All of them were just, you know, it created a mess in the financial markets. You saw the broader markets selling off through some of this. And, you know, it was only a $6 billion loss all around, but the implications of what you saw that this created in the overall market was was kind of crazy. So when I think about Bitcoin having a market cap, it was well over a trillion dollars, and it has a 50% drop in price. And so we're talking $500 billion, and that's just Bitcoin alone. What in the world does this mean long term when we think about the implications of the price potentially being higher?

Starting point is 00:02:36 maybe a Bitcoin price of $100,000. What would that mean for systematic risk? At what point is Bitcoin potentially wagging the tail of the regular market and how they're going to have to respond with further liquidity? Is this something you guys have given much thought to? Well, I think the Bitcoin market has some very high volatility, and it's just part of the market. I find it really funny that we all knew at the beginning of,

Starting point is 00:03:06 the bull market, that we would not go up on a straight line, and that there would be multiple minus 35 or minus 50% drops along the way, like it did in the 2017, in 2013 bull run. So now we have one, our first minus 35% dip month to month. And it feels like this is new and upsetting everything and changing everything. But it's not. At least in my opinion, it's just a normal thing that is present in a market like Bitcoin that has also the returns that go with those high volatility. And we should expect those drops and not be afraid of them, make use of them.

Starting point is 00:03:57 And, you know, psychology is different because it feels like Bitcoin is dead every time. But you know there will be another mind. 50% minus 50% drop and a minus 35% drop. So I don't think structure, think that structurally, anything has changed. It's just part of the buildup, part of the growth of this market and part of the charm of this market as well. Because you cannot have 200% annualized returns without volatility. And to be honest, minus 35% versus a plus.

Starting point is 00:04:36 200% annualized return. They still have a bargain deal. Yeah. But I guess where I'm getting at it is once we achieve a certain market cap in size, it's almost like Bitcoin starts to become this thing that's going to drive central banking policy because it's so substantially large and it has so much volatility. Because I don't think, you know, if we go to, let's just say the market cap, goes to something like $5 trillion and it's starting to become competitive with gold.

Starting point is 00:05:11 I still think the volatility is going to be there. I don't think the volatility is going to wane at that point. I think you're still going to have aggressive volatility. And if true, and the market cap would be something of that magnitude, doesn't this create a situation where central bankers are now having to respond because of the impairment that such volatility would cause to the overall market participants. You see where I'm going with that? Yeah, maybe. Yeah, and I agree that volatility will not go away.

Starting point is 00:05:44 It will stay here. It's part of what Bitcoin is. And let's not forget that the stock market and especially the bond markets and a lot of other markets are less volatile because of the central bank, right? They step in, they rescue it, and they take out the volatility.

Starting point is 00:06:02 And with it, they take out the returns. So Bitcoin feels like the only place in the world where capitalism or normal market behavior is still allowed. And yeah, there will be a point when the market steps in, but it doesn't feel like this is now. It doesn't feel like the central bank will rescue Bitcoin, right? Yeah, no, and I completely agree with that. I guess I'm just looking at the size when we hit a trillion and it's dry. dropped 50% and you look at it just in the nominal terms of how much capital just disappeared. And you think about, all right, so the people that that had these positions and the implications

Starting point is 00:06:47 of their counterparty risk of their other positions, when does that start to become a factor, that that's going to have a much broader impact to the market is kind of my concern as I'm looking at this. And then how is that good? more importantly, how is that going to be received, right? How is the rest of the market going to think about that? I think that will be at a much higher market cap than one trillion. I think one trillion is still very, very small compared to the gold market, the bond market, stock market.

Starting point is 00:07:19 It's near to nothing. So, yeah, we'll have to grow, I guess, beyond the $10 trillion mark to really make a dent. Yeah. Yeah. I mean, I saw an interesting statistic. One of the big brand name kind of fund manager who has been what recently interested in Bitcoin made the comment that, you know, in the 2017 run up and then the price falling back in 2018, 2019 that the on-chain data was suggesting that 86% of people just held right through it. They didn't sell it.

Starting point is 00:08:01 Yes. Yes. This was Stan Drunken Miller's comments. Exactly. Yeah. Yeah. And so, you know, I mean, you'd think, well, he was surprised by that, right? But I think, you know, people have a reason to fear being out of market.

Starting point is 00:08:19 So, you know, before, going back a few years, I had the come to the realization, maybe 2014, something like that. that it wasn't that good an idea to day trade this thing, you know, just try and think, oh, I'll sell some now, I'll buy it back later, because is you looking at something very highly volatile, more so at that time, and plus or minus on some kind of exponential part of an S curve, and otherwise a random variable. So if you sell and buy back, the odds are stacked against you. And another statistic which highlights this,

Starting point is 00:08:57 that if you eliminate the 12 single-day largest gains in a year, Bitcoin loses money year-on-year. So your biggest risk is being out-of-market for any of those 12 days. And so, you know, simply buying more when it goes down, if you can afford that or just hold, you know, put excess income if you have a job into it, that tends to work out very well, have a long period of time. And certainly for myself, from 2007. I had come to the heuristic of buying any time the price dropped by at least 20%. Below that, I didn't consider a dip.

Starting point is 00:09:35 And so I bought my first post-20,000, 16,000, and just kept buying down to 3500. And I was kind of a low on cash at that point. But, you know, obviously, if you're still holding those today, that looks pretty good, right? So I think the other thing is the, you know, you're talking about if as the market gets bigger, how will it adapt to this? And I think the way it adapts is kind of biological or evolutionary that people who can't handle it leave. They put money in. The price drops. They sell at a loss.

Starting point is 00:10:10 And Excel. Maybe they learn not to do that in future when they see it come back. Or maybe they don't. Maybe they leave. But in any case, the coins just organically change hands. to people who are inclined to hold them or who are better at managing risk, you know, if they're, you know, doing leverage or selling a bit and buying back. Another rule of thumb I use is if you are inclined to day trade, at least restrict yourself to 10% of

Starting point is 00:10:38 claims. That way, if it all comes horribly unstuck, you'll still have 90% of the claims cold stored. So I think a lot of what happened in the last month is down to over leverage. And that we can talk about, but it creeps up on people faster than they think. So as Bitcoin gets bigger, higher market cap, I do wonder if you would start to see more value investors. I mean, I tend to view it as a value investor, so the price falls or try to buy more. And you see that with stocks, right? There are analysts who are looking at it and saying, well, this is overweight or underweight

Starting point is 00:11:19 based on, you know, courtly reports, expectations. And if it falls a bit, they will start to buy it with a fund or something, right? And so we might see some of that coming into Bitcoin in the longer term. If, you know, as more people gain confidence in the long term trajectory, the long term viewpoint, you know, the volatility's normal. It's fine. It's necessary even, right? Otherwise, the price would already be much higher.

Starting point is 00:11:47 You know, Adam, you're hitting on a point that I think is so, vital for people that are maybe getting into this for the first time is they don't understand the conviction that's associated with people who hold a majority of the coins. It's not like that you have these fringe people that have a small position size that have this insane level of conviction. It's the people that have enormous stakes in it that have this level of conviction that as the price goes down 50%, they didn't even think about selling it. In fact, they were doing everything that they could buy more. And so when we, if you look at the amount of coins that have been issued through the protocol,

Starting point is 00:12:33 and you'd take a percentage of that, of those coins, what percent of it is held by people with this deep, ridiculous conviction that are deep in the money and really, really, aren't even phased by a 50% drop, I would argue that that number is really high, like 80% or something of that magnitude. Yeah. I mean, the interesting thing is it doesn't have to even be the natural, you know, makeup of the average investor. It's just that those people are the survivors.

Starting point is 00:13:10 Because if you don't take that attitude, you tend to get washed out, right? or you, you know, you panic, you would, you would be inclined to sell in a dip or not buying the first place because you're worried about volatility or something. So the people that either start out with this attitude or develop it over time, I think most people will develop it over time. I think if basically your investment portfolio denomination changes, that's been my view for a long time now, that I want to increase the number of coins I have. And if the price is plus and minus 50%, I don't even account for it. Like, you know, one Bitcoin is one Bitcoin. The question is, how do I get more Bitcoin without incusing risk that I might lose some

Starting point is 00:13:53 of the Bitcoin I have got? And so that's where the leverage trading gets potentially dangerous if you overdo it, because it can, there's another saying which is leverage can't make a bad investment good, but it can make a good investment bad, which is to say that you have something like you long-term want to buy and hold, but if you over leverage a price pullback that you would like to buy, kind of forces a sale to protect, you know, so that liquidation is partial or not full or something, because if you, certainly, if you, you know, some people are doing quite high leverage and that can like completely liquidate portfolio, basically, or whatever's on exchange.

Starting point is 00:14:35 Yeah, maybe to add on the, I totally agree with the, um, the point you made earlier, earlier about the holders with vision and great conviction, they're the great holders. They are the holders you like to see in Bitcoin. And it's funny, I tweeted that the other day and got a lot of hate for that, that people who cannot afford or cannot stand the volatility. Yeah, they shouldn't be there, you know? they shouldn't position themselves into a position that they can be shaken out against their will. And we all know those people.

Starting point is 00:15:20 Let's look at last two months when the price was $57,000, $60,000. I know personally a lot of people who entered the market, but who I could tell, couldn't stand the minus 35, minus 50% drops. And yeah, well, so when it happened, they chickened out within a month, within two months. And that was really a lot of people. From on chain, I guess, about $20 billion was lost by people who bought the month before. So that shows us that I guess the people with vision, the really long-term holders, they were okay until last month. And I would say March and April, because in those months we got so much people with high leverage, I guess, with no vision that did not really understand Bitcoin or at least not the low time preference that goes with it, that should go with it.

Starting point is 00:16:26 and they sold. I have never seen it on chain, by the way, in any other a month or year. So the holders that bought last two months are the weakest holders ever that couldn't stand the volatility. And yeah, I agree. The volatility is part of the market.

Starting point is 00:16:46 It's part of what makes Bitcoin great. And if you can't handle it, you will hurt yourself. So be careful. Here's the other thing on top of that is how many people did you talk to two months ago that said, I'm going to wait until I get a better buying opportunity because it's just so overheated. I'll buy it when there's the next dip. Well, now here's the dip. And you know exactly what they're doing is they're not buying because they're saying, well, it's probably

Starting point is 00:17:17 the top happened and now it's going to keep going lower. And they'll just never get off their hands. And so what we're really talking about here, at least in my opinion, is what is the advice to somebody who wants to own Bitcoin but is just emotionally psyching themselves out? And, you know, the only, and I'm curious to hear your thoughts, but the only conclusion that I have come to is that people need to dollar cost average. They need to start off with smaller position sizes so that, you know, this insane volatility that you just naturally experience with Bitcoin isn't really a factor if it's, you know, a 1% or 2% position in your portfolio. It's not a big deal. And so if you're slowly just doing dollar cost averaging into Bitcoin over a year's period of time,

Starting point is 00:18:08 like if you've been buying it slowly every month for the last year, you're way up, right? even through this 50% drop that just happened. But I think most people just want to do their full position size all at once and they want to get that perfect price or they want to get a deal. And that's the thing that is, it presents a really tough situation for people to be able to handle emotionally, especially if they don't have the knowledge or the conviction behind what's all going on behind the scenes with the protocol. Yeah, not to give any financial advice, of course, but in my opinion, the institutional investor mindset is great also for retail. And that is, if you decide upon vision and strategic analysis, some longer term thing that you want an exposure in a asset, say it's Bitcoin, then by all means acquire that exposure, that exposure, acquire that. position regardless of the price. Yes, dollar cost averaging great, great way. Or do it small. Say, okay, I want a position. I want to be part of Bitcoin because I like the vision. I like

Starting point is 00:19:25 where it's going in five or ten years. And then you buy a really small stake for one person, that's $1,000 for another, that's a million, but something that you're happy to lose, that you can afford to lose. And then don't look back. Give yourself the time to, to at least hold it for four years because nobody who held Bitcoin for four years had any loss at all. So, yeah, I would, if you decided to take a position that you want to have exposure

Starting point is 00:19:59 because you read the Bitcoin standard under the white paper and did your research, by all means, don't look at the price. It doesn't matter. Just get the position. And really, if Bitcoin goes 5x or 10x, what does it matter if you bought for, for 30,000 or 60,000, it doesn't matter.

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Starting point is 00:24:27 So I want to just throw this out there because I think a lot of people don't understand necessarily how the derivatives market works. At least, you know, maybe people that are new to the space. And what we've seen over the last month and a half was just a cascading event of selling that was induced by people that had long positions, which is kind of ironic when you take a step back

Starting point is 00:24:55 and you think about it, is these people that were selling were the ones that had an opinion that Bitcoin's going way higher. and they're the ones that supplied a large portion of the sell-off that happened. So I'm going to throw it over to U-Plan B to kind of explain simply for people what causes this and what does it mean right now as we're going through a consolidation as well. Yes, so derivatives markets are a phenomenon that is associated with mature markets. So only a spot market, it's, yeah, it's not much.

Starting point is 00:25:34 You need futures markets, option markets, swap markets. And what those derivatives markets do is they divide the risk return profiles that are available in the spot market into two different risk return or more different risk return packages. So for example, with futures, you can do leverage on the one hand And there were a lot of leverage longs of people that thought Bitcoin would go to 100,000 or more this month or next month. And you can do that with futures.

Starting point is 00:26:08 And then there's the other side of the trade of people that say, well, I can provide you that leverage for a certain 30% or even 40% annualized return. And we were laughing about that the other day at the podcast with the three of us. like how can it be that there's 30, 40% Bitcoin neutral returns available in dollar terms? Well, that was because there's a lot of people that wanted to go leverage long positions. So, yeah. And that, of course, can go wrong. It's very interesting to see the dynamics of that spread of the 30% being totally eliminated.

Starting point is 00:26:55 right now. It's zero and almost in backwardation to future markets. But then you see in the option markets, you see the volatility coming back. So those are very attractive right now. Option prices are based on volatility and are another derivative that split the market in two parties, two or more parties. People don't want to bet that Bitcoin goes up or down, but don't want to have the other side of the trade and the option providers, sellers that take the premium and, yeah, make a very calculated bet. So I think derivative markets are great as long as people that play on those markets know what they're doing.

Starting point is 00:27:42 And obviously in a maturing market like Bitcoin, I guess the leverage is a problem at the moment because, yeah, 100x leverage is like a certain loss. I mean, if you go 1% into the wrong direction, you're wiped out. And the chance, the odds of being wrong are 99.99%. So it's a certain win for the exchanges that provide 100x leverage. And it's a certain win for the people, yeah, who provide the other side of the trade. And I think that went horribly wrong last month. Now, where we're at right now with the price being low and you have a ton of short sellers that are now entering into the market and taking their positions.

Starting point is 00:28:31 And it's almost like you see the exact opposite of what we saw a month and a half ago with everybody going long. Now you have a pile of people going short. But these derivative products are not controlled. Like the underlying price is going to do what it does. and then the derivatives are going to react based on that underlying price. And so, you know, when people see these big mass of green bars that explode up in what feels like minutes, and they're wondering, where did all these buyers come from? And the buyers came from the people that had an opinion that Bitcoin was going lower.

Starting point is 00:29:10 And they basically got margin called and they become forced buyers at that point. So right now, as we're seeing this price consolidation, are you seeing that plan B with the short sellers stepping into the market at scale? That could potentially be the ones that provide the big green bars if the underlying starts to move upward? Yeah, I more see I see more the liquidation of the leverage longs. more than the buildup of a leverage shorts position. But I'm sure there will be leveraged shorts at the moment. And yeah, they will be liquidated too when we go up, as you say. And it's because exactly what Adam said,

Starting point is 00:30:04 because the money will go to the strongest hands and not to the gamblers that hit the 10x or 100x leverage button. because in asset like Bitcoin, to trade that with leverage is as close to stupidity as one can come. So you can see, I personally joke about it with France, especially the institutional investor friends. It's like a tax on stupidity. So yeah, it will be. So the good news then is that a lot of that money flows into the market to the strong hands. It sounds horrible when I say that, but that's just how it goes, right?

Starting point is 00:30:45 All those people lose their money, especially the 100-X traders. And that money will be available for the other side of the trade. And will be a nice step-up for another bull run or leg up, if you will. So, yeah, I guess it's part of a ferociously capitalistic market without much interference of the governments. And yeah, I sort of like it. to see this market in its primitive and most pure form there is. Yeah, I think many would even say that it's extremely healthy that this is allowed to happen. So just for some numbers here on all the exchanges, the open interest for futures,

Starting point is 00:31:28 futures only was around $20 billion prior to like at the beginning of May. and now you're down to 11 billion. So it's almost been cut in half the amount of futures open interest that's out there. Adam, I'm curious if you have any thoughts on some of these ideas with the derivatives. Yeah, I mean, it's curious that probably, you know, people think that the market fall is driven by panic sellers. So people are trying to hold onto dollar value who didn't have to sell. versus force sellers. People who actually were, you know,

Starting point is 00:32:12 just desperately trying to accumulate more Bitcoin, but pushed it too hard on the leverage. And I'm thinking it may be more the latter than the former. So certainly some people will instinctively sell to preserve some dollar value. Maybe they'll think, this is too much for me and they'll leave, or they'll hope to time it and buy back later,

Starting point is 00:32:30 which is also dangerous, right? It can turn around in a heartbeat too. So certainly that, that, you know, that statistic about the 20 billion down to 11 billion on, I presume that's the perpetual future open interest is telling. And, you know, just to for some illustration of how the perpetual future is a kind of quadratic instrument. Like, you know, if you're, if you're trying to buy Bitcoin, more Bitcoin using Bitcoin, you've got a risk from the price falling, when you're hoping it's going to go up, but you've got another compounding risk that makes it a squared loss,

Starting point is 00:33:14 which is that the value of the collateral, like the Bitcoin, is also full. So you've got, you know, so basically, if you, if you had 100 Bitcoin or 100 million bitcoins, you know, 0.1 Bitcoin, same thing, just the ratio, right? So 100 units and you go two times long and a price starts at 50,000, By the time the price falls to 33,000, which is only a 33% fall, you'd be 100% liquidated on that position. So you think, well, two times. And if you look at the upside, it's not as great as you think because you make a profit on the price increase, right? And then you want to convert that price increase into Bitcoin, and they have to divide it by a new higher price.

Starting point is 00:34:05 So the asymmetry is kind of not in your favor. And it's not that shorting is particularly safer. I mean, shorting Bitcoin is probably even more dangerous, if anything, because you have the same quadratic kind of effects in a way. The, you know, if you are shorting with dollars, then your dollars are shrinking in relation to Bitcoin. So you have the quadratic effect. So I think actually most of the short interest in the market is not

Starting point is 00:34:34 really short. It's the long short, you know, it's a Bitcoin neutral way to collect yield to lend money to people who are trying to go along, as Plan B was just saying. And so I think most of the market is made up, most of the short market is made up by that. So it's not actually exposed. And that is stable because, you know, your, your betting the price will go down. But, but the, if it goes up, the collateral increases and vice versa. So that's completely stable and doesn't actually won't get liquidated, generally speaking in, you know, a 10x increase or a 10x pullback. It's pretty stable. So go ahead. Do you think that because this derivative's market was not mature during the last bull run,

Starting point is 00:35:19 now we're seeing all sort of like these perpetual futures contracts that you're talking about. This is something that's very unique to Bitcoin and the crypto economy that doesn't exist in your normal traditional market. And you're able to do these perpetual futures contract because of the 24-7 immediate clearing aspects that are inherently part of this, you know, this type of asset. And I guess my question is this. Are we seeing the price perform differently where there's a little bit less volatility in the momentum of the price action with systematic cascades, either up or down that kind of happen more sporadically, is that what's going to pop out of these derivatives,

Starting point is 00:36:12 all these derivatives that are there now? Or do you think that that's just kind of what we've seen in the past year? Because to me, it seems like the price was way less volatile until we got just this super saturated long position. And then it was just this massive cascade of selling. which feels very different and even as percentage-wise is very different than the last cycle, because the last cycle, the biggest drop you had was 38% and now we've had one that was over 50. Is that the derivatives? I mean, I don't know the full data, but it seems like it's a big factor because you hear of people who've got liquidated, it's probably everybody knows somebody who's had an overlong position or like multiple positions,

Starting point is 00:37:00 some of the liquidate ad. And that's typically it, right? they were holding and trying to increase their Bitcoin returns. And of course, since people would put on along and got away with it, you know, without liquidation when the price was $10,000 are probably looking pretty good even today, right? And so there are some people who have put these positions on and leave them for a long time, you know, hope to catch a wave, you know, price doubling. That gives them a lot of insulation where they can put a stop loss, which is still in the money somewhere in a market.

Starting point is 00:37:30 So I think it's in terms of how this works going forward, I think that it's educational, like in a painful way, obviously, for many people, but they won't do that again, right? Or they'll start more cautiously. If they are using leverage, they'll use less of it, or they'll put stop losses, or paradoxically, maybe they will make higher leverage bets, but smaller ones that they can afford to liquidate. I mean, if you put on a 10x and it falls 10%, it's gone, right? It's liquidated. So at least then, you know, I think professional traders in, let's say, forex leverage products, products trading, things like that, they're going to look at the news flow, make predictions, hope to be right,

Starting point is 00:38:15 maybe 60% of the time, and makes more bets, right? Lots of them. And so I think one of the mistakes is that people made large bets that became larger than they anticipated because it's quadratic effect, which people don't think about because when there are small movements, it's more linear. It gets more quadratic as you get further down or further up. So yeah, I think that there are people who stepped in to buy coins, certainly when a market hit the 31,000 around about there. I happened to be looking at the market when that was going on, and it was it was insane. You know, the price was jumping one or two thousand, every,

Starting point is 00:38:55 few seconds just jumping around as people were getting liquidated and other people were buying. So I think there's got to be some coin transfer, you know, every sale has a matching buyer, and some of those buyers won't be as leveraged or won't be leveraged or will be start better or become better at managing risk and having stock bosses and smaller position sizes and things like that. So plan B, my question for you is just when you're looking at the on-chain data, what kind of indicators are you seeing right now as far as, you know, where we might be heading moving forward, what we just saw, kind of give us a snapshot of how you're reading the data right now? Sure. To go one step back to your previous question about derivatives markets and did it change the price, I honestly don't think it did change that much in the price dynamics. Because if I look at, for example, April 2013, the price in the 2013 bull run hit $140, $140 at that time.

Starting point is 00:40:10 And then four months later, in July 2013, it hit at the lowest point, 63, 140 to 63. So it went down more than 50%. So we also had that in the early days, those big, big price jumps. And maybe derivatives markets exaggerate it and increase those swings. I don't know. It looks just looking at the data, it looks like the same thing. So nothing abnormal there. If I look at the on-chain, the on-chain data is very interesting at the moment.

Starting point is 00:40:51 And there's lots of people doing it, like Clement, Willy Wu and the GlassNode guys. It's really a growing space, and that's very interesting. What I see is two things, basically. First of all, we don't see a lot of volume, a lot of transactions that are normally there at bull markets, at the end of the bull market, like the 2017 and 2013. 13 bull market and without being specific about what kind of transactions those are but just picture the volume some volume of transactions is just not at that at that level we're about halfway so that gives me an indication that we're we're not seeing we're not in the upper part of the

Starting point is 00:41:43 bull market yet more like halfway and that and then if we look at this the the spend the the the coins that are spent on chain. And of course, we know all, you know, the complete Utex O set is there to be analyzed for us. So we know every Utex O when it was created, what the price was at the moment, et cetera, et cetera. So you know how much is sold or bought, but especially sold with a loss and how much is sold at a profit. And this month was the first month in, in, well, quite some time that the net effect of all the Utexos that were sold is a loss, a big loss. And that is, that was not present in 2017. There were no loss months in 2017.

Starting point is 00:42:38 But there was a big loss month in 2013. So the plateau and the jump from 140 to 64. I just described in that period, in that same period, a lot of coins were, or you take those were sold at a loss on chain. So that leads me to the conclusion that either we are halfway, sort of like 2013, and the biggest jump is still to come, because in 2013, it jumped all the way from 62 to 1,000, right, or even 1,100 even. or this was it, this was the bull run, we're now entering more months of selling at a loss

Starting point is 00:43:25 and that will be, well, the end of stock to flow model for one, but then we'll have to wait till another bull market, which probably would be there after the next half thing. But I guess you know which scenario I prefer. I don't believe at all that we're, that that 60,000 was the top and that this was the bull market because I think we're in a 2013 kind of scenario and the best is yet to come. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect

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Starting point is 00:47:14 This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I wonder if the asymmetry of buying power is part of it. So because the market is generally very net long and people don't like to be net short, Bitcoin. the sort of buying power left on platforms is, no, there's not that much reserve dollars to buy coins.

Starting point is 00:47:48 And buying coins using leverage is, it's self-risky. So it makes, you know, unlike, and people who are interested in Bitcoin tend to end up very exposed. They don't have cash reserves because they'd sooner redenominate in. Bitcoin. So you don't have that kind of market maker sort of value investor phenomena where there are, let's say, mutual funds and so on that are looking analyst reports and buying unvalued stocks that they think have long-term value. So you do have some new parts of that, which is the institutional investors coming in. And, you know, you, you, you, would expect them to be less phased and more long-term looking to be accumulating at this point.

Starting point is 00:48:46 But that remains to be seen, I guess. And otherwise, I just think that generally some people use leverage to buy lower down so that the leverage hasn't gone away, right? It's just shrunk. So probably some of that bought the 30,000 to 35,000 range on lower leverage or something. So I assume that it will, you know, now that some of that risk has been removed from the system and coins transferred hands, that things will gradually get more solid and pullbacks less rare. I'm more rare. Yeah, I completely agree with that.

Starting point is 00:49:28 If we look at the last couple of months, it was basically Alan Musk and Tesla buying Bitcoin. and then a lot of people copied that behavior they also thought, well, if Alan is doing it and Tesla is doing it, then we go in as well. And then Alan quit and did the energy foot thing and he quit. And then those people stepped off the train again.

Starting point is 00:49:57 So I guess the whole reason to buy Bitcoin because Alan Musk did it, or that was some kind of sign that other companies would buy and follow Tesla as well. That story came up and went down. We left up behind us. And now I totally agree with you that the army of holders that held through this event, again, this energy foot Tesla event and held through so much more of these events,

Starting point is 00:50:28 they will be the strong base of the next leg up because they don't sell. they don't even, like yourself, don't count in dollars anymore. They want to have more Bitcoins. So they make use of this dip, like a real value investor. And they say, thank you very much, Alan Musk and Alan Musk copycats. We're here for a long run and not for a quick buck in one or two months. So yeah, Bitcoin for sure is stronger now than it was four months ago. Elon apparently didn't actually sell the coins.

Starting point is 00:51:04 or at least the ones that are on the balance sheet of Tesla, I guess, right? Because it's a public market company. He commented it to himself. But I'm not sure that institutional buying is, you know, people form opinions based on little snippets of news, and the media likes to amplify negative news or make it up or recycle it. And, you know, there's a lot of confusion. Like the assumptions that people make about news are wrong.

Starting point is 00:51:40 And for example, the mining thing that we talked about last time that, you know, that the hash rate was down a large amount and it wasn't. They were looking at, you know, the effective extrapolated data. And that that would hurt miners outside chain error and actually helped them. And so, you know, the inferences are very confused and wrong. So if people trade them, that's kind of giving value to people who understand the market structure better. And I think that negative news cells, so news organizations will recycle old information that isn't even new or, you know, China is a good one for it because of the language barrier.

Starting point is 00:52:16 Sometimes people, you know, mistranslate things or amplify things. And then there's nobody really stepping up to explain what really happened. But the institutional buyers, I think there are still there coming because it takes people, people maybe, not familiar with how long it takes these entities to get to a position. And they've got to do lots of tax planning, legal planning, and get external advice from, you know, auditors and regulatory lawyers and figure out how best to hold it. And maybe that involves, you know, board approvals for a public market company. And, you know, in the case of even micro strategy, right, he went to quite elaborate lengths to protect the company from adverse reactions by offering a share buyback for anybody who didn't like the strategy. So all those things take, you know, months and months,

Starting point is 00:53:18 maybe six months or a year to set up. And if you recall going back a while ago, micro strategy organized an institutional buyer's kind of private conference or something. And there were, you know, hundreds and hundreds of company participants. So, you know, we'll see. I mean, certainly companies can turn out to have weekends too, but they're at least operated on a five-year time horizon plus. And the other thing that's kind of surprising about time horizons is if you would buy, you know,

Starting point is 00:53:55 uh, stock market, just stocks like a stock index, or individual stocks in sectors, any financial advisor would tell you, well, don't buy that if you need the cash for, you know, three years plus, right? You should expect to hold it because the market has cycles. It can be volatile. It does well in the long term, but in a short term, it may go down. That kind of advice that people give out. And yet it's Bitcoin and they're selling, you know, barely a month after they bought it.

Starting point is 00:54:31 I don't know what they were thinking, really. I mean, in a Bitcoin space, it's sort of similar to the stock situation in having cycles, but just much, you know, a higher sharp ratio and a volatility to go with it. So if you adapt for that, you know, divide everything, divide the sharp ratio by 10, volatility by 10, it's something very similar, right? So I don't see, you know, people should catch up and learn that. It just takes a while to adapt to, you know, this kind of volatility and understand that it actually is something that is storing value for you over the long term, right?

Starting point is 00:55:08 It seems, I guess it seems counterintuitive. I can confirm the institutional buying behavior, by the way. It takes ages before you get past compliance and accounting and legal, etc. And then for sure, they will, when they did the whole process and they made the decision, the strategic decision to acquire an exposure, they will do it. So they will not be influenced by news or something else, Fudd or whatever. They just made the decision and execute the decision. And that will take probably also days or at least weeks to acquire a big, say,

Starting point is 00:55:49 a billion dollar chunk of Bitcoin without moving the price. And that, by the way, is also a very interesting fact. that if, for example, micro strategy bought, like, what is it, $2 billion? And he was very detailed, Michael Saylor, about how he did it. He acquired that position without moving the price very much. And it can be done, right, by buying very small parts over a long period of time. So you don't influence the price. The price action that we saw last month, and especially this month, the down action,

Starting point is 00:56:23 was always in the in the illiquid hours of the market. So it was deliberately destructive. It was not sold by someone who wanted the most dollars for his Bitcoin. It was sold at illiquid times in the market

Starting point is 00:56:43 with far too big of a chunk to get a good price. So it was destructive selling. And that is very, very interesting for me. And actually, if you look at the price charts, for example, the daily chart for the last couple of months, you see that all this destructive selling, all this selling, which, by the way, took place at the end of each month, strangely, all that selling was bought within

Starting point is 00:57:15 one or two weeks. So it was like a V-shaped recovery within. within two weeks. And that also is for me a bit of a hallmark of institutional selling that they scare people out of their positions,

Starting point is 00:57:33 even liquidate. Institutional selling or buying? Buying, sorry. Yeah, buying, buying. Because they, together with their OTC desks, scare retail and normal people

Starting point is 00:57:49 out of their positions, even liquidate people out of their positions and then buy the scraps in the weeks after it. And that is especially effective if you sell and push the price down in illiquid hours and then buy the stuff at liquid hours in small chunks. And that is basically what I'm seeing since January, so last five months.

Starting point is 00:58:18 And that's very, very, bullish in my eyes. So I wouldn't be surprised if this lag down in May would be bought up in June again, and especially since it's now the beginning of the month again, which is a pattern that has been present for five months already. Very interesting. Maybe random, but I, yeah. Are they going to do that strategy, would they have to do it when they're buying, would they have to buy in the derivatives market long in order to offset the selling that they're having to do in the underlying? No, no, no, no. They just buy spot, but small amounts like Michael Sater explained.

Starting point is 00:58:58 So a lot of bolts. Okay, I'm with you now. So they're leveraging the lack of liquidity to drive the price lower in that short term. And then they're trying to scoop up in the morning hours in New York or whatever. Right. Right. And they combine the pushing down of price with big orders and illiquid times. They combine it with FUD.

Starting point is 00:59:19 So news stories that the, the, the, the, the, the, the, the, mainstream media will talk about the day after. And, you know, this is not conspiracy. I've seen it with my own eyes. Whenever a large party buys something or wants to buy something, there's a whole playbook of how they're going to buy it, how they're going to acquire that exposure. And it goes with a communication plan. So the FUD. If you buy something, you want to buy it cheap. So you want to have FUD in the market when you buy it. And that's, I think, nothing secret. I saw a lot of people talk about this, especially the last couple of weeks,

Starting point is 00:59:59 people from the scene. They recognize, I mean, Goldman Sachs and Morgan said, everybody is doing this. That's why you buy those banks, right? That's what they do. They create FUD and they create a, they acquire a position for you. And I guess the OTC desk, the Bitcoin OTC desks are, very professional ex-investment bankers that know the play. Adam, I wanted to ask you about some of the information about China mining and how a lot of

Starting point is 01:00:31 it's migrating here to North America. What do you, what kind of inside info do you have on some of the mining rigs leaving China? I know the China news story that came out was absolutely recycled FUD, but is there anything that is happening over there that's suggesting that the Chinese are putting a kibosh on a lot of this stuff? I mean, it's happened multiple times before, so it's always difficult to take it seriously, you know, because we'll have the China bans Bitcoin or China bans mining or China bans, I don't know, exchange trading or something. And I think maybe Some of it is context related.

Starting point is 01:01:19 So people look at it from the point of view of the regulatory environment they used to living in. And they think, well, if our regulator set that, we would have to do something to get seriously. But in China, the sort of regulations are handled differently. So effectively, you need permissions to do many things, but you can't get the permissions. So everything is kind of in the gray zone.

Starting point is 01:01:47 And then they make announcements to kind of soft tune what's happening on the ground. So if they think that something is getting too big that they'd sooner shrink, they'll say something negative. And so generally speaking, things just flow around it like water like they will, you know. So it's definitely a bit of news about people trying to look for hosting and power outside of China. I recall in the previous version of this a few years ago, the story was that some miners had secured power in Russia and driven equipment and trucks over the Russian border and set up shop over the border. But it seems like nevertheless, a lot of hash rate continues in China. So I wouldn't be surprised if that plays out this time. Some may relocate, and generally there has been a bit of a trend towards North America and Europe. over the last few years without, you know, much, much fanfare just because I guess institutional

Starting point is 01:02:49 investors doing mining are a bit more savvy about geopolitical risk. So they will say, you know, okay, that 70 cents per kilowatt hour, but under what conditions, right? You know, are you using air filtration? What's what's the electrical safety like? You know, what's the chances that the mine will catch fire? And what's the political overhang? you know, are you, you know, is there a chance that the local or national regulator could change the power price without notice or ask you to leave and, you know, ask you to stop mining its jurisdiction? So the, those sort of more sophisticated investors look at the non-pure price factor, right? So they look at the quality and the political risk. And so that, I think,

Starting point is 01:03:36 drove, you know, organically meant that hash rate grew faster outside of China. So that's changed a balance of it and there just seems to be, you know, people looking to move equipment, but I don't know how much, you know, spare capacity is just kicking around. You know, somebody says they want, you know, tens of per hash of, or hundreds, even X a hash of miners to move, you know, people are building just in time because it's capital intensive. So it can't move that quickly. It takes time to build infrastructure and they would be talking about, you know, moving it within a few months. So I guess between the lines it won't actually move instantly. We'll certainly get a view on it, right? If you look at the hash rate and if it goes down and stays

Starting point is 01:04:24 down, that's because people can either mine it or move it, relocate it fast enough. So we'll see how it plays out. But it doesn't matter, you know, I mean, I guess the point, because people hear this and it sounds so alarming, but I mean, ultimately, you know, Bitcoin doesn't care. Sounds callous, but it really doesn't. You know, the difficulty will go down. Mining will become more profitable for people outside the jurisdiction that's affected. And, you know, there was already a shortage of miners. So if some of it sold, you know, that alleviates some of that shortage.

Starting point is 01:04:57 Because it's difficult to buy used equipment because you don't know how it's been treated, right? If it's been air filtered or overheated overrulpt, etc. So that's tricky. Speaking of another topic that I don't think Bitcoin cares, let's talk about the energy discussion, because I mean, this is getting a lot of attention in the media. I'm just kind of curious to hear both of your thoughts on it and kind of where you stand. Well, I mean, I think there is, I mean, people are not so familiar with the energy sector in general, but. the, you know, the total amount of power in the world that is consumed by Bitcoin is quite small. And Bitcoin miners tend to want cheaper power.

Starting point is 01:05:51 And so that tends to be renewable just because there's no, you know, extraction, refining, and transport costs for the fossil fuels that are the alternative. And so, and the other thing that really favors that kind of green, or renewable energy for mining is that it's very location independent. So for general power infrastructure, it's going to be around population centers, around, you know, heavy industries. And Bitcoin can be anywhere, right? So that's partly how it ended up being in these remote periods of China,

Starting point is 01:06:28 because due to the efficiencies of central planning, they massively built out hydrodams where there are no humans and no industry. And so they were just sitting there with a water pouring downstream, right? Because there was nowhere. You can't just generate electricity and not use it. You have to send it somewhere. So they were just underused massively. So, you know, and people are engaging in extremely bad data science when they throw out metrics.

Starting point is 01:06:55 You know, they'll take the amount of hash rate that they estimate is from the country using crude methods. And then they'll multiply it by that whole country's average. source of energy, even though it's predominantly green because it's cheaper and unused. So they'll just throw out bad data. Another interesting data point, which we know first hand, is in the Quebec province of Canada, which we have a data center in Montreal in the Quebec province. There's 37 gigawatts of hydropower, most of which is unused. And so You know, that one province in one country could fully power the Bitcoin network. Like that's a multiple of the entire Bitcoin network.

Starting point is 01:07:41 So just a bit of context. Another thing about power is there's an enormous amount of wastage. So, you know, power that doesn't end up getting used. Power stations take a time, like a delay to power up and power down in response to demand. The excess is just, you know, people are paid negative energy rates to get rid of the excess power because they can't balance it fast. So in aggregate, it's a very inefficient thing and improving over time as people get, you know, more renewables and nuclear actually power infrastructure online. So I generally view that Bitcoin is actually a net positive for development of green infrastructure because it gives a steady base load that can be turned off on demand, which is excellent for funding. infrastructure like projects because, you know, they have to make it, I mean, you know,

Starting point is 01:08:40 people have a political world, so has a green power in the world, but you have to convert that into finance, right? Somebody has to come up with billions of dollars to build new dams and so on. And those are done using project financing. And the project financing, what's a business case to say, well, okay, we'll finance this billion dollar dam, but how are you going to, you know, pay it back? And if the way they're going to pay it back is heavy industry and there's no industry and there's no population there, they're going to say no. But if you have a long-term contract for a mining, Bitcoin mining, and that can provide, they can supplement or subsidize the infrastructure,

Starting point is 01:09:18 and then the industrial and residential demand is variable. You know, you get a heat wave and the power use goes up. That's what happened in Texas earlier this year. They had like kind of roll in blackouts because I guess there was a heat wave and everybody turned up their air conditioners and overloaded the grid. And so, you know, if you saw more Bitcoin-funded grid infrastructure in Texas, you know, residential prices are usually much higher than Bitcoin prices. So it would just, people would turn off, you know, some percentage of the Bitcoin mining

Starting point is 01:09:50 and there'd be no power blackouts. So I think that's a future. The other thing is that, in my opinion, you know, civilization has followed a long arc of becoming, it's basically driven by energy, right? So I think the future ultimately will involve more infrastructure. There's this kind of metric called the Kardchev type 1 metric, which is some kind of, you know, civilization metric, which we haven't reached yet, which is, you know, extracting a decent proportion of the energy that lands on the planet fire solar radiation and other sources.

Starting point is 01:10:31 And, you know, there's an enormous amount of untow-out, even, you know, even just not built, but even use of existing, you know, as the Quebec province case shows. So, and actually the Quebec province is an interesting one because there is an interest from miners to mine in that province, but politics got in the way. So actually, you know, sometimes politicians, become active in proposing a positive social agenda, but often they get in the way they're sort of grit in the gears and they prevent industry from solving problems. And this is one of them, right? So certainly we, we as a company were intending to expand in that region, but ended not

Starting point is 01:11:15 not being able to because the politicians kind of, you know, it was an election year and they made a mess of it, basically. Yeah, well, I'm not an energy expert, but it reminds me very much about the energy that was used against the internet back in the day, 20 years ago. There was a lot of energy fud about the internet and how much coal and

Starting point is 01:11:39 carbon dioxide it would use etc. But it's like today, the people that use that energy foot are mostly people that don't understand or don't see any value in Bitcoin at all. So

Starting point is 01:11:54 any energy that is used on Bitcoin is too much. And they just don't see the added value on the other side. And I think that's where the biggest problem is. But the energy currently that it's used against Bitcoin is a bit dangerous, I think, because it very quickly leads into the discussion that we should go from proof of work to proof of stake. And that is a very dangerous, well, attack factor.

Starting point is 01:12:34 That's how I see it, because proof of work is essential. It's in Bitcoin. It's one of the essential ingredients. And everybody who understands Bitcoin knows that. But if you don't, I mean, most people cannot even read the white paper. So those people are very, yeah, vulnerable for falling for this, this, this, this, and also the alt-coin foot that there's coins that are green and that use proof of stake instead of proof of work. So the whole proof of work, proof of stake thing is a nasty side effect.

Starting point is 01:13:21 I guess we're not done with the energy foot discussion because it will. be kept alive. Explain real fast for people, from your point of view, why the proof of work versus proof of stake is so important. Yeah, I'll do that very quickly because Adam Beck can do this 10 times better than I, of course. But me as a ordinary investor and not a programmer or nor a cryptographer, I understand that Bitcoin, the peer-to-peer network needs something to make.

Starting point is 01:13:56 sure that every peer-to-peer decentralized node, like my own node, knows which block it should add to the, it can add to the database because we have a synchronized database peer-to-peer, but everybody can shoot in blocks and transactions. But how do I know that it's a right block without a central party like a bank or a server or some company like with Ethereum or a ripple. How do I know the block that I got fed is okay and I can add it to my my blockchain? And that's the proof of work, the hash that is valid and also has a correct number of leading zeros. And proof of stake doesn't have that. You cannot validate the block and add the block to your blockchain just by getting the block. You have to have additional information from

Starting point is 01:14:52 validator nodes or, well, some kind of server. the biggest stakeholders, proof of stake, that tell you, okay, this one is correct and this one is not. So, yeah, that's how I see. I see it as an essential part of Bitcoin. Without it, I couldn't build my blockchain peer-to-peer. Yeah, I mean, I think in some ways, I find the argument to be more economic than technical, which is that there's it may be a sort of fundamental need for a hard money to have a cost of production. Things which don't have a cost of production end up being politically sought after.

Starting point is 01:15:40 And then, you know, resources are expended carrying political favor. So basically the cantalone effect, bribery, corruption, wars. and lobbying. So all of those things can consume resources too, but in an ugly and productive way. So, you know, if a Bitcoin is valued at 30,000, 50,000, whatever the value is, then people can economically spend up to that marginal value in chasing, you know, receiving an additional coin. So they will spend it on equipment and power infrastructure and electricity. And if it were just handed out to a federation, I mean, I think of the proof of stake as basically a federation, you know, a federation, you know, it's just a group of businesses or something, which is, which is an okay structure, but you don't really need steak. I think stake makes it worse because then it's vulnerable to somebody amassing. more money and gaining more influence and control over the allocation of new money that enters

Starting point is 01:16:55 the system. So it ends up sort of looking similar to the current system, either a Fiat system with central banks and quantitative easing, all this kind of stuff. And I think that's how you end up with these very unpredictable supply curves for various kinds. So I think monetary economists will tend to view predictability as an important factor, like that the supply curve is very predictable. In the case of gold, it's reactive to price. People will ramp up production at the price is high. And Bitcoin, that doesn't happen because of difficulty adjustment. So, yeah, I think it's kind of fundamental. The other thing is it doesn't incrementally, it costs less because coins were mined faster at the beginning when the price was low. And that

Starting point is 01:17:50 that factor is continuing, you know, due to the stock to flow ratio that the number of new coins per halving is shrinking. So, you know, ultimately when most of the coins are in circulation, it wouldn't have cost a very big portion of the value to extract them. And I think, you know, people don't, curiously, people don't be main gold production costs very much, but that's, you know, a very industrial process in itself. And, yeah, is, you know, the value of having hard money is very useful for society. And the other thing is, I think that Bitcoin is a savings technology has pushed people towards paying more attention to saving who would otherwise be inclined to us. Many people are very consumerist, right?

Starting point is 01:18:45 They spend plus and minus everything they receive, they spend, or they take credit, and then they spend. And so some societies are heavier on saving where they'll save 90% of their income. Others are, you know, spend 90% of their income. And so Bitcoin tends to push people more towards saving because they can, in a more, in a much stronger sense to them with compound investing in, you know, bonds or stock markets. they can see that the saving will have a higher value later. So there's a time preference argument.

Starting point is 01:19:18 And so the argument there is if, you know, money comes from somewhere, so the money spent on buying Bitcoin and indirectly on Bitcoin mining, in the alternative would have gone in buying, you know, consumer goods that have a lot, don't last very long and end up in landfills. And so, you know, the industrial production cost of all those goods that filled up landfills. And now, you know, that part of the, you know, to the extent that Bitcoin is make up part of the world's economy, the world has become less throwaway consumerists and filling up landfill. And, you know, many, many consumer goods are made from petrochemicals, plastics,

Starting point is 01:19:59 and industrial processes and so on. So I think for that reason also, Bitcoin is probably already a net positive just, just from that factor. Adam, I've tried to make the argument that when you look at the Lightning Network, it's automatically providing a proof of stake type system, but with the, where it's a little bit different, is anybody can run a full node, and you don't have to actually stake coins in order to provide a node into that network of the consensus that's happening on the Lightning Network. That's where it's a little bit different than call it Ethereum's proof of stake kind of model. So you get the added energy benefits or the reduction of energy expense in order to confirm

Starting point is 01:20:52 transactions between individuals that really don't need the level of security that you have on the layer one. But you're getting it at a significant reduction in energy. And I think when we would warp ourselves 10, 15, 20 years into the future and you look at where most of your transactions are going to be occurring, I would suspect a significant portion of the transactions are going to be actually conducted on the Lightning Network and not on chain. Only your large substantial transactions would be on chain. So are we effectively getting proof of stake in a way that it doesn't come with the setbacks that are associated with proof of stake? by having the Lightning Network? Well, I mean, certainly Bitcoin layer twos don't, you know, they don't produce coins, right? They are just layer two's. So I saw that somebody from, I think it's PayPal commented the difference between, in the Elon's thread.

Starting point is 01:22:00 They came out and said, well, you know, the current chief. architect at PayPal or something said, well, at PayPal, we know the difference between someone networks and payment networks. So I think you could make that argument for Bitcoin that, you know, the different layers are not resulting in new coins being created. I think another confusion, because the media likes to sensationalize, is the cost per transaction, which is actually close to zero in effect, like, you know, an empty block. Okay, the miners don't get the transaction fees, but, you know, most of the value is actually

Starting point is 01:22:45 the freshly mined coins and people have a choice of layer two's. So if they are paying for layer one transactions, it's because they, they find them sufficiently valuable, right? that they want to do cold storage or they want to do a transaction which is harder to censor. And the Bitcoin main chain has fundamental advantages. So they're paying for something they value, but incrementally, you know, if a block has got one more or less transaction, it doesn't change the cost of mining it, right? So, you know, at least for the midterm, The idea that it costs so much, you know, dollars or kilowatts to do a transaction is not really a usable metric because the blocks will get produced anyway.

Starting point is 01:23:37 Some portion of them are actually empty for technical reasons. And as you were alluding to, the layer twos have a massive multiplying effects. And in a way, you know, there are kind of informal IOU type of transaction systems, i.e. the trading inside exchanges. I mean, there are coins changing hands very rapidly at a massive multiple of what happens on chain. And even credit arrangements between exchanges and institutional traders and so on, it means that there are coins moving around that don't reflect on the chain. So those you have for trust element, But, you know, the layer two is like lightning and liquids, improve that, you know, to not single trust. I think that's where my frustration comes with a lot of the energy articles and the FUD that's out there is they're looking at the amount of transactions that are happening on layer one.

Starting point is 01:24:35 They're saying for this to become a global transaction layer, this is how many transactions would have to happen globally. And when we look at how much, you know, that would, cost on layer one, the number is this high, which is, you know, all the countries on the planet times 10 of their current energy levels. And I'm just like rolling my eyes and I'm saying, these people have no technical understanding of what's being built on top of this, which is going to handle that throughput, which is going to be a majority of the transactions. And then when you do look at what will happen on chain and the cost of that, I think it's going to be, you know,

Starting point is 01:25:21 not anything near what these projections of these energy articles are saying because they just don't understand what's being constructed from a technical standpoint on top of the layer one. Yeah, I'm really smoking over here for the audience we won't be able to see. But, you know, the level of understanding is like childlike and just ridiculous. I mean, you know, they'll make arguments that basically misunderstand supply and demand or assume that you scale networks by, you know, saturating the internet with, you know, microtransactions and like no network ever was built like this, you know. I mean, even the Starlink satellite network is not a broadcast network, right?

Starting point is 01:26:08 It's got lots of routing within it, many, many downlinks, thousands of laser links between satellites. And if you converted the whole network into a single broadcast massive Wi-Fi hub, it's, you know, it's transaction throughput. I mean, it's, you know, it's kind of data throughput, its latency, it's, you know, efficiency in terms of dropping data because too many devices are trying to talk at the same time. We just fail. I mean, it would be thousands of times less efficient, just fundamentally so. And it's not, you know, people will throw out the argument, well, you know, computers get faster each year and all this kind of stuff.

Starting point is 01:26:45 But, you know, the speed of light doesn't get faster each year. And at no point does it make sense to throw money away. So, you know, people are using more bandwidth every year, too, for high fidelity, video streaming, real-time interactive things. So, you know, demand for bandwidth and storage is insatiable. So at any point, you know, switch networks will win. And I don't understand why people, where anybody with, you know, any kind of basic understanding, you know, how things work, would imagine that Bitcoin should be different. I mean, you know, it's just shocking how people get such strong opinions about, you know, very basic facts about networks, like any, any network for Internet, like Starlink, GSM networks, radio networks. they all have layers and routing.

Starting point is 01:27:37 Do you think that the adoption or the incentive structure for lightning adoption will go up when the price of Bitcoin gets a lot higher? And your person who's trying to have a small coffee-sized level transaction just has no incentive whatsoever to settle that on-chain because of the cost of the fee. that would be associated with it, which would force them down into lightning. So, like, I had a conversation with Will Reeves over at Fold, and I'm just looking at what he's doing. And so he has all these people, various levels of payments in Bitcoin rewards. And, like, I'm thinking, you know, if he's trying to send all those out via on-chain layer one transactions, like the fees associated with that are tremendous. They're huge. And as a person who has rewards with him, if I could take those rewards over lightning, I absolutely would because, A, I could do it immediately. And two, he wouldn't assess any type of fee to me in order to receive those rewards. And so in the back of my mind, I'm thinking,

Starting point is 01:28:55 it seems like the incentive structure isn't necessarily there yet, but give it another three or four years, the incentive structure, the build out lightning for a lot of these payment vendors and people that are providing these types of services where people have maybe not a significant amount, but they have a small amount and they don't want to be dealing with fees all the time. It's going to force feed the further lightning adoption. Is that how you see it or my way off basis here? No, I mean, I think that like other networks, you end up with different protocols for different applications. So like with the internet, you have voiceover IP, video streaming, web and so on. And they're optimized for different use cases. And certainly for retail and

Starting point is 01:29:41 micropayment, lightning is just better. I mean, it's making a trade-off. So it's not as good for kind of security, hot wallet risk, but for other factors like speed of funnality is almost instant, the fee structure, scalability is much better. And, you know, And we're seeing a bit of that with liquid as well, which is a kind of side chain type of layer two. So it doesn't involve channels, but in the same way as lightning, you can move funds in and out of it. That it's, you know, people use technology for what they want to use it for, despite the thought processes of the people who build it. And we were certainly thinking the liquid will be interesting for traders because it offers advantages to them.

Starting point is 01:30:26 but organically we're seeing a lot of people use it for just medium-sized payments because it's cheaper and faster and has confidentiality. So, you know, I don't think it's done as well. I mean, I think there will be more layer twos and the technology will improve over time. There are more being developed. You know, there's the so-called state chain. There are people working on that nowadays. So, Adam, I've never used lightning.

Starting point is 01:30:51 I'm kind of curious if I have, I think you guys have a wallet called Liquid. is that, or no, I'm sorry, what's the wallet to Chia? Aqua. Yeah. You have a wallet called Aqua that I know you can put liquid assets on. So walk a person through, like, if I was going to download this app and I wanted to purchase, you know, one of these, one of these assets, talk us through what that process would be like from a user experience. Yeah. I mean, the exchanges and payment processes and kind of simple swap services will let you swap Bitcoin for Liquid Bitcoin.

Starting point is 01:31:36 And Liquid has other assets. It also has US dollar tethers and euros and different assets. So you would just, I mean, the user experience is very like Bitcoin. You know, you set up a seed. You use QR codes to send and receive. So it's very Bitcoin like experience. Plus, then you have, you know, the transactions are a bit faster because the blocks for every minute instead of being, you know, randomly distributed around 10 minute mark. And two blocks is actually final for some technical reasons.

Starting point is 01:32:10 Of course, it has tradeoffs, right? As with lightning, the censorship resistance is not as good. And so I would tell you, you know, for cold storage, you should move funds onto the next. main chain. It seems like some people are doing that. You know, they will, they'll sort of do their dollar cost average stacking into liquids. And then, you know, once a quarter or once in a while, when they're built up enough, they'll convert it and put it in cold storage on the main chain. So that's, that's another use case.

Starting point is 01:32:38 But you're having to go to an exchange in order to procure these. You're not doing this on the app, right? Well, there's another, there's another wallet called Sideswap, by a company called Syswap Limited, and they have for Android and iOS, a smartphone app that lets you swap in app. So you can swap main chain Bitcoin for liquid Bitcoin, and you can swap the other direction, and you can swap doors, you know, tethers for liquid Bitcoin actually in a trustless way. So it's a kind of atomic swap. And so that seems to have captured a lot of people's imagination.

Starting point is 01:33:20 They're building up, you know, more user-originated swaps where you can sort of place orders in it and be the provider. So at the moment, they're the middleman, but they are, they're trustless way. So you can, that kind of thing is possible to and presents a nicer user experience because you have one app that can do both. All right. that's all the questions that I have for you guys. I really appreciate you guys taking time to do this again. I know the last one that we had, we got a lot of incredible feedback from folks

Starting point is 01:33:59 that really kind of enjoying the conversation. So I appreciate your time. Both of you guys, give folks a handoff where they can learn more about you. So on Twitter, it's Adam 3 U.S. And sort of Blockstream-related products. It's at Blockstream. Okay, and I'm on Twitter under Plan B at 100 trillion USD.

Starting point is 01:34:26 That's 100 trillion USD. And I have a website. It's PlanBTC.com. All the articles and previous interviews are on there. If you're interested in it, please have a look. Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using. We really appreciate that.

Starting point is 01:34:48 And if you have time, leave us a review. So thanks for joining us this week, and we'll catch you next Wednesday. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC028: Bitcoin Update w/ Plan B & Dr. Adam Back (Bitcoin Podcast)

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