We Study Billionaires - The Investor’s Podcast Network - BTC155: Dylan LeClair Bitcoin Market Overview (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I bring back by popular demand, Bitcoin magazine's Dylan Leclair. During our conversation, we talk about the Bitcoin gamma squeeze that recently caused the price to shoot up over $6,000 in a day. We talk about his thoughts on cash-settled derivatives and their ability to impact the underlying price of Bitcoin, his thoughts on the BitVM announcement, and much, much more. So without further delay, here's my choice.

Starting point is 00:00:30 chat with Dylan LeClair. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone. Welcome to the show. I have Dylan back by popular demand. Welcome back, Dylan. Thanks, Preston.

Starting point is 00:01:00 I'm happy to be here. The last time we talked, I think we kicked off the conversation talking about AI and how you were using it to code in Python and do all these things that you had never even had a class on, but you were doing all these miraculous things with charts and data. I'm kind of curious how that's evolved since we've talked last. Crazy stuff. I mean, the tools have only gotten exponentially better. And I think that's the trend. It's wild to think I know we're in kind of our own little like echo chamber of tech and Bitcoin and like Twitter especially. A lot of this stuff is kind of like the coolest, newest thing is, is flashed in front of us.

Starting point is 00:01:39 But I think a lot of people still have, have no idea just how powerful this is. Like, obviously, it's being built and used at, like, the enterprise level. But, like, on an, you know, the average person, like, I showed my parents who, like, I would understand that they're not on, you know, chat GPT and their day-to-day workflow, but I showed them some of the stuff that could do, right? Like, you know, I got a, one of my parents had a medical procedure, and they got a doctor's list, just super crappy handwriting of just whatever the notes. where I took that, I put it in, and it not only like read it, but then I asked it questions

Starting point is 00:02:11 about probabilities and asked it about symptoms. And, you know, was it perfect? Like, who knows, right? But they were amazed that it wasn't a doctor on that. They were like, who's, who's saying that? And I was like, well, no, it's the AI that's feeding you these probabilities and info. And so, never mind like the whole, you know, market stuff or, or like the data coding. Just like the scope and scale of what you can do is pretty mind-blowing. And yeah, it's going to dematerialize a whole lot of stuff. It's also going to get kind of like scary with the deep fakes and, you know, the fake images and a whole other rabbit hole itself is like how that's going to be leveraged with propaganda and like the sciops. And so we know, we got a weird decade ahead of us.

Starting point is 00:02:51 Exciting. It's super exciting, but very weird. You know what's so crazy to me. So I've been listening to quite a bit of Peter Diamandis. He's been interviewing a bunch of AI. folks. And there was a gentleman, I think his name is Imod. He was on, he's like a leading expert in AI. And he was just talking about how much like space these models are taking. So like GPT4, and I might be wrong, but I'm pretty sure this number is correct, quoting his interview. He said that it was compressed down the 200 gig. Like you can ask this thing anything. It's not like referencing some depository where it's pulling the data from, right? Like it has, after they trained, it has been compressed at just 200 gig. Like, I could store that here on my computer, here at my house,

Starting point is 00:03:40 and then I can ask it any question. Like, I can provide any type of input to this compressed 200 gigs. And then it spews out the response to anything. And with, like, high precision accuracy, like, I just can't even wrap my head around how profound that is. Like, it doesn't even make sense. how something like that could even be possible. And, you know, they're talking about like GPT5 and what they're going to be feeding it and how like the processing and everything that they're going to be doing to create these models. But the compression of the actual file after it comes out probably won't be all that much larger. I mean, it'll be larger than 200 gig, but probably not a lot larger. Like, I don't know, but I would guess 300, 400 gig on GPT5. And the level performance is going to be,

Starting point is 00:04:27 it's not going to be twice as good. It's going to be like a thousand times better than four. So like, I don't even know how to like comprehend like what's taking place right now. It's totally nuts. Totally nuts. I mean, you got to give him a lot of credit. Jeff Booth was coming on here and he was talking about he was getting, you know, doing the folding paper analogy and you fold it 30 times or something and it goes to the moon or the sun or what. There was something like exponential analogy he would always give. And, you know, like the AI stuff. and like all of like Morris law. It sounds good.

Starting point is 00:05:00 And you're like, whoa, that's really incredible. And then to watch it happen in a year, two years, like every month, it's like leaps and bounds better. You know, you can submit a picture of a meme and it breaks down to me like no text, just an image, right? It's just like, wait, this thing is, I mean, it's not thinking for itself, but it's, I mean, to us, it appears like it's thinking for itself. Yeah.

Starting point is 00:05:23 Right. So it's pretty mind blowing. I mean, we're just along for the ride at this. point. There's no, the genie's out of the bottle, right? Like, we're not, we're not putting this thing away. For better or worse, we have it here. Get ready. Have you been still using it to make charts and to kind of just help yourself analyze large amounts of data? Yeah, so my day to day, I'm doing some stuff with UTXO management, kind of a Bitcoin-based fund. And so, again, like, didn't really know how to code at the turn of the year. And with one of my buddies, Sam Rule,

Starting point is 00:05:53 we've been putting together dashboards pulling from like, you know, 5, 6, 7, AP, eyes, kind of making just like interactive charts and data streams and all this sort of stuff. And Sam's a better coder than myself, but we're both leaning on it pretty heavily, you know, feeding it documentation and all this other stuff like errors. And, and, you know, it's not the best thing in the world. I'm sure there's far better coders, but, you know, for someone that's like, again, never had any formal training and just kind of like make it up as I go. It's a pretty powerful tool.

Starting point is 00:06:22 It's unreal. It's unreal. Hey, where I want to really kind of start off the conversation is in the bond. market. We had the on the previous episode to this, we had a mastermind discussion and had some intense debate over whether treasuries, the whole, the whole bond yield curve, whether it's going to keep selling off, whether it's going to start getting bid. To make this even more fascinating, we have the largest amount of calls on TLT, which is the long duration bond ETF that's out there.

Starting point is 00:06:51 $350,000 call contracts per day right now, which is an all-time I. And we have all-time shorts happening on the futures to basically counterbalance this long, all the market makers in order to basically cover their bases are going short on the futures market in order to cover their tracks. We have this massive setup, right, that whatever the underlying. ends up doing, it's going to probably be extremely dramatic because you have so much leverage being poured into this. What are your thoughts? Like, where is this going? I mean, for the past two, three years, you know, I would say I was in the camp of yourself, Lynn Alden, Luke Groman,

Starting point is 00:07:39 a couple other, like, very, very verbal bond bears out there. There's many more. I didn't just name, but, you know, kind of like a hard money thesis, bonds, fixed income, paper, debt assets are screwed. And that was, you know, slam dunk, home run, correct. And I think we've seen in terms of the principal value of long bonds globally, you've seen the first, you know, the past two years of price action, the worst bond price action in recorded history. Modern and, you know, there's some like, there's like a Bank of America chart. It's like the worst treasury drawdown since 1770. And you're like, okay, so ever. And so I think in terms of that, we've seen the big move.

Starting point is 00:08:22 And, you know, there's a lot of debate about belonging going to five and a half or six or seven or no, it's, you know, we're entering the deflationary phase finally of this Titan cycle and they're going to get really, really bit. But I think the interesting thing for me is like, you know, is TLT or is the long bond like a good trade over the next six months or 12 months? Like, that's a topic that you can have a really, really long debate on. But I think regardless of that, like bonds are at best, in my opinion. At best, you buy them for a trade. And I'm not telling you to buy bonds or not, right? That's everyone else's decision. But it's a trade at best, in my opinion, right, of like the long end.

Starting point is 00:09:00 Because like I will never, even at 5%, right, I have zero interest in lending my money to the U.S. government or any government in Fiatanominated terms for 30 years. So if you think about how the recession comes after a yield curve inversion, right, like a lot of the pain in the stock market in financial assets and a recession doesn't come when the yield curve inverts. It comes after the yield curve uninverts after an inversion. Right. And historically, that that inversion comes, you know, the last, I don't know, three, four or five cases have been because the front end falls, right? The Fed cuts, you know, if you're looking at, say, the two year, which is kind of just a blended average of the next two years of the market. expectations for rates, well, it's because the Fed sees weakness. You start to see real pain. They cut. Well, this cycle, it's been really interesting because, you know, the Fed's been holding. They're holding. The economy, surprisingly, to a lot of us, including myself, has been very robust in fiat nominal terms, right? They're running massive deficits, very robust.

Starting point is 00:10:00 Consumer is stronger than you'd expect. We haven't seen that kind of recession in the labor market, it's starting to crack a bit or the spending. So front end rates have been high, and we've actually seen a bare steepener, which is the long end blowing out and rising up to near around the level of the front end. There's some really, really smart people out there that I respect and follow that are very, very bullish on bonds here. And there's people that I also respect and I think are very, very smart that are like, no way. They're running 8% annualized deficits before the recession hits. I don't really have a strong bias in one way. or another. Like, I'm not, I don't think my edge is, you know, going, speculating on where our

Starting point is 00:10:41 on where long end rates go over the next three months or six months. But I do think that the economy is going from, you know, is in the deceleration phase for sure. And, you know, rates are still five and a half percent where we just, you know, post probably the second half of 20, 23 after inflation tailed off a bit in year over year terms, right, the derivative of inflation. You know, prices are still higher than ever, but they're rising not as fast as they once were. We're now actually just kind of in the tightening phase, right? Because all 2022, even when rates were being written, were rising, inflation was still 8%, 9%, 7%. And so that's, monetary policy isn't tight with inflation at 7 and rates at 5. Right? But in a very indebted economy,

Starting point is 00:11:29 monetary policy is a bit tighter when rates are 5.5% for 6%. seven, eight, nine, ten, twelve months, and inflation's lower than that. So I think that's where we are. And so, you know, due long bonds probably give a pretty good trade risk reward, you know, especially if you know, the bond math, like the convexity of the bond and how it trades, right? I think like a 1% move lower in yields versus 1% move higher in yields is like a very, very asymmetric bet right now. I don't know the math off the top of my head, but, you know, some bond guys could tell you. So like there's a lot of reasons why it's a good trade, right, or not depending on what you think.

Starting point is 00:12:05 But I think the story is still the same, right? The bet the GDP is 120%. There's no way you get out of this historically, you know, look at every single financial analog in history without a sustained period of inflation higher than interest rates, right? So do you want to buy and hold long duration paper in that environment? No. And I think that's unchanged.

Starting point is 00:12:27 You know what I think is a really important point that you're making here right now? what you're really talking about is speculation versus investing. When we look at the size of the money that's going into this market right now, we're talking trillions of dollars, I don't think you can classify it as investing. I think you've got to classify this as speculation. And we're talking about speculation to the tune of trillions. Because to the point that you made, nobody's buying this to hold it for 30 years. Nobody.

Starting point is 00:12:57 Absolutely nobody. because everybody can look at the math on the horizon and say, oh, yeah, like if you're holding that to maturity, you're going to get wrecked. I think everybody that's buying it long knows that. And so because that, if you buy into that logic, can you agree with what I just said? That means they're speculators. That means they're rolling the dice. They're betting on what they think the market psychology is going to be much more so than buying something that they actually think is value. And I think that that's just really concerning as a society at large, global society at large, is that this is what Fiat has pushed us to, which is everybody becomes a speculator. Nobody's actually buying something because they actually think it's valuable and that it's going to provide value to society. It's garbage. It's total garbage. And you are being forced to step into the casino with, trillions in buying power. And it's just very frustrating to kind of see that that's what this. And you know what? So much of it gets lost because everybody's just like, oh, well, you know, maybe I can make my mark because I'm going to be the guy who correctly called the bottom of this bond bear market. And then I made a bunch of money on the upside for the next year, the next six months until they step in and obliterate it from there. So right now,

Starting point is 00:14:24 it's super precarious because you have so much leverage that's pouring into, this exact moment in time. And I think everybody's looking at the last 40 years and they're saying, well, if you get that right, like, you make a whole bunch of money as the bid comes back into the market because the government comes to rescue it all. I just don't know that that's necessarily the case this time. Like, the government's stepping into rescue it this time. Like, I don't know about you, but I think the top of this 40-year bull market in bonds was COVID. Like, I think that was Absolutely. Yeah.

Starting point is 00:14:58 That was the top. That was it. So, like, moving forward, what does that look like when the government steps in to, quote, unquote, rescue it? Because rescuing it means the numbers are getting worse, right? Because, and I think people that are looking back at, like, the 1940s to 1980, when we were in a 40-year bear market in bonds, literally 40 years of bare market, the difference between that period of time and now is we didn't have 120% debt to GDP,

Starting point is 00:15:33 right? Or 8% deficit to GDP, which is huge. And the demographics and the total obliteration of mid-cap, small-cap businesses that have been all consolidated into the hands of a couple, and you don't have a naturally occurring. You have a totally synthetic economy at this point. You didn't have that from 40 to 1980. So people that are thinking that treasuries get bid through that, I'm not saying that they won't. What I'm saying is it's not such a guarantee like we have seen for 80 years that that's what plays out.

Starting point is 00:16:13 I'm curious, do you agree, do you think that you could actually see them sell off harder by some announcement that they're stepping in? Is that possible? I saw, I think maybe you shared it. It was Luke, Luke Roman saying like, head of, you know, and there's been a bunch of people for the past,

Starting point is 00:16:29 you know, 10, 20 years that said, hey, the fed's trapped, the fed's trapped, the fed's trapped, which, you know, may or may not have been true at the point,

Starting point is 00:16:36 but the trend has gotten worse. The outlook has gotten worse repeatedly time and time again with each subsequent intervention. And now it's, it may or may not be true, right? Where you correctly called the BTFP,

Starting point is 00:16:49 basically a, implicit yield curve control for the banks, you're bailing out the banks and their bond exposure while leaving Main Street hanging. But now with a long bond trading where it is, it's like if yields blow out and you intervene and say, hey, we're printing, maybe there's a knee-jerk reaction and stuff and the fixed income gets bid, yields fall. But then it's like, wait, oh, they're printing. Like, why would I hold this paper? So the environment's very, very different than it's spend. There's no question in my mind, the nominal top and the real top in fixed income was COVID, right? You're never going to see, I mean, even if, and I am extremely skeptical and doubtful

Starting point is 00:17:28 this happens, but even say, we see the 30-year trade back to 1%, which is, in my opinion, is absolutely not happening. I agree. I agree. But even in that scenario, you've had 30% inflation since that point. For you to get back to your all-time high purchasing power term, in fixed income, you need to see yields go negative, which, like, again, this is a bizarre world that doesn't exist in a free market, right? Like, the whole reason that anybody besides someone that was mandated to buy fixed income or bonds at 1%. The reason that they would possibly be bullish, the reason people were buying a hundred-year

Starting point is 00:18:06 Austria debt, right, or negative debt for, you know, German buns was, oh, well, if it was more negative, I make a boatload of money. And so, like, that whole environment is. is done, right? The 60-40 inverse correlation of bonds and stocks that everyone's made a bunch of money off of, 2022 was a shock for them because bonds got killed, stocks got killed. Now in 2023, bonds are flat, you know, they rebounded and then a sense have sold off and stocks have killed it. Big Tech has killed it. Fang plus Navidia and Tesla have killed it. And that's just started to normalize, but now it's really interesting because, and I don't think this is so much of like

Starting point is 00:18:45 a directional indicator of like, you know, it's buy stocks or buy bonds or, or, you know, short, short one or the other right away. But if you're looking at like the equity risk premium, ERP, difference in expected earnings, expected yield of investing in stocks and bonds, it's the lowest it's ever been in recorded history. Right. So, so is that saying that the bonds go up, decrease in yield? Or does that mean that stocks are grossly mispriced, right? Like the basket of, of tech, really, I mean, it's just that the top seven equities, the top seven stocks, everything else, the Russell, everything's been getting, been getting killed. I think there's like 30% of of companies in the Russell don't make any money. They're like a cash flow negative.

Starting point is 00:19:30 So like all of this stuff is completely different than it's been in the past. We don't have a balanced, you know, a balanced economy here like you said. We have this distorted kind of passive zumbified equity index environment where, again, No one's really conducting like investment calculation. They're just like, oh, you know, let me just buy KQQ because KQQ has positive momentum. And so, yeah, there's a real, real potential in my opinion for pain, you know, whether, what that looks like if the Treasury continues to run $2 trillion deficits. That's really interesting because I don't think anybody and no portfolio manager, no, no one

Starting point is 00:20:09 that's invested in the United States in anyone's lifetime has experienced that. But, you know, maybe who has? Well, anybody that's kind of invested or ran money in an emerging market where they understand this environment. They understand what happens in an environment where you have just absolutely no fiscal prudence and you're just printing at will. You're issuing money anywhere and everywhere, you know, $100 billion to Ukraine and in Israel or, you know, like whatever.

Starting point is 00:20:39 I'm not even getting into the political left right. I don't care about that. It's more just like, oh, you know, debt ceiling doesn't matter, actually. We're going to issue $2 trillion and just let it rip. And, you know, I think that should be pause and the cost for concern for anybody that's managing money, right? It's like, you know, what's your benchmark? And that's in flux, right? Because even the official like inflation numbers, right, may or may not actually be an accurate indicator of that.

Starting point is 00:21:06 I think there's a real good case for even equities, right, instead of like 2021 inflation-adjusted terms being, maybe not like a generational top, but being a top for a while, right? Whether you want to use CPI or some shadow stats or M2 or whatever you want to use, right? If you just look at where the S&P 500 traded, like, as a basket, and you put it and you say just divide it by CPI to keep it simple, right? We may just be in for a decade of job, right? Where, like, stocks do a decent job of maintaining or kind of quasi-maintaining your purchasing power, but it's not the free lunch up 8 to 10% year-over-year compounded return.

Starting point is 00:21:43 that people were used to for the past decade, two decades, four decades in the case of like, you know, the baby boomers. So that's a real interesting thought too. And I don't think many people have, you know, kind of ran through those ideas. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You got long days of daylight, incredible food, floating saunas on the Oslo Fjord. and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:26:02 S-B. All right, back to the show. The thing that I think people are missing with this basis trade that is just insanely levered right now is if the spot does take the prices lower, the bond price is lower and the yields higher, you're going to have a squeeze of epic proportions that quickly make these numbers that don't look like they work today from like a fiscal standpoint and just totally amplifies the living hell out of them. And that's when things potentially could get really, really crazy. And I'm not saying that that's my base, I don't even know what my base case is. I'm just looking at the amount of leverage that's sitting here right now at this moment in time because I can see the rationale for a recession

Starting point is 00:26:52 coming, right? Like we can see the spreads between the 10 and 2. And like if you just look at all the various spreads, it's kind of suggesting that unemployment's going to really start to take off here in the coming six months. All of those metrics, like leading indicator metrics are saying the recession is coming and it's coming very soon in the coming year for sure. I can understand why people might think that that's what's about the play out here. But if it doesn't, because there's so much leverage at this exact moment, like it could get really hairy, really fast. And boy, I just can't imagine what that would result in. But no question there. I guess I'm just highlighting, I think this is really, really important for people to pay attention to this bond yield curve right now. And if they can't

Starting point is 00:27:38 keep the oil prices in check and some other things that are leading indicators of inflation, I think that's going to be the thing that potentially tips it or maybe causes people to really have to unwind this really hard position that they're taking right now that we're going to get a bid into the next 12 months. I 100% agree. I think I maybe said it on your show at the end of last year, at the end of 2022. And I mean, here we are with yields having, you know, broken the 22 highs they made. It was a really interesting stat, you know, just a small sample size, two of two. But it's something I think everyone should ponder.

Starting point is 00:28:16 And it was the last time, this was in 2022, but it's the last time stocks and bonds drew down to the magnitude that they did in 2022 of like 20% plus each was two separate occasions. And it was 1931 and it was 1969. And in each of those instances, two years following, the U.S. defaulted on its debt. They broke the gold peg in both cases. So, you know, maybe that's not a technical default, however you want to think about it. You know, but FDRC's your gold. And Nixon said, we're not honoring the gold, the international gold peg. So, I mean, here we are with fiat currencies, right?

Starting point is 00:28:50 We have no gold peg. So what is, and with, you know, with 120% debt to GDP, whatever it is, I think it's a bit higher at the current moment. There's been 50 instances, 53 instances of governments reaching that level ever. And all of them except modern day Japan and the U.S. currently have defaulted, either implicitly or explicitly. Explicitly means, you know, they literally didn't pay it back in the case that, you know, the debt was in, say, dollars or another currency or gold,

Starting point is 00:29:18 or implicitly because basically they inflated it away, hyperinflated or just, you know, a sustained period of financial repression. And even like modern day Japan, right, you see what's happening with the yen, right? Everyone goes, well, Japan's got away with it for so long. And I say, okay, I'll look at the yen. Like, yeah. So, right, if you think about what's Japan doing to address their debt, well, they're doing yield curve control, you know, and they've gone from a 25 basis point peg in the 10 year

Starting point is 00:29:41 to a 50 basis point peg. And now they've said, well, we're targeting 1%. Japan, every time the yields, and they've moved it, right? But every time that the 10 year goes above that, that peg, and you see, you know, the swaps market and a bunch of spats. speculators shorting that debt, challenging, they're shorting the bonds, sorting the currency, basically speculating attack the central bank. They just print more money, right? And then on the other side, they sell their yen, or they sell their, they sell their dollars to buy the yen. They

Starting point is 00:30:08 sell their treasuries and buy yen. And so they're trying to maintain that, they play this impossible game. And they do have a lot of foreign exchange reserves. But I ask people say, like, okay, well, if you're analogous modern day Japan, like if that's, you're like, oh, the U.S. can get away with this for so long. Like, they can do what Japan has done. Don't worry about it. Well, in that scenario, what's your dollar versus the yen? If the U.S. is conducting yield curve control, whether implicitly or explicitly or the

Starting point is 00:30:36 capping yield somehow, they come out with some word salad facility with the Fed and the treasury, like, what's your dollar to the yen in that scenario? Like, if the U.S. comes down and says, yeah, we're capping the 30 year at 5%, or again, whatever it looks like, who knows? The BTFP on steroids, right, with more complexity to kind of fool the modern day person as to what's actually unfolding. What do you do? Like, what, as an investment manager?

Starting point is 00:31:02 And for me, like, I think you see Bitcoin react as the dollar is doing against the yen on steroids, right? That's what I mean, and gold too, right? But again, like that, if there's, we're in like really unprecedented territory. And there's really, there's no actual. Aside from an unprecedented productivity boom, which maybe your thesis is AI does that, right? We see just a massive real productivity boom. Sure, I respect your opinion if you think that.

Starting point is 00:31:32 But aside from that, there's actually no way out other than a sustained period of inflation and basically the central bank punishing creditors and savers. And so that's where we are. And that, you know, that's completely unchanged. Two points to what you were just saying. The productivity boom because of AI is so laughable to me that when I hear people say that. It's like, okay, so in past, when productivity happened, it was because there was humans that were in the loop. What we're talking about now moving forward is humans not being in the loop and it's being consolidated into more and more robots and software.

Starting point is 00:32:11 But the other point that you had brought up as far as the implicit default in the 30s and in 69, I think for people that that hear that and they're like, okay, so we came off the gold standard, we came off the gold standard. So what would that be now? Well, we're working off of a quote unquote petrodolar system. What it would look like now is a total erosion of that relationship. And so just for people to think about it. What would that look like?

Starting point is 00:32:43 Well, I think we're seeing that right in real time. And we have since COVID happened where a lot of these net producing oil nations are, they're not having it anymore. They're not going to save their retained earnings for the physical material that they're delivering. They're not going to save that in treasuries when the treasuries are mathematically bound to just keep going to keep getting debased, aggressively debased, just based on the mathematics. Right. Yeah.

Starting point is 00:33:13 Well, I mean, it would probably look like, you know, the U.S. draining. It's SPR at the fastest rate in history. Bingo. And, you know, the biggest oil producing nations like Russia and Saudi Arabia and Iran and yada, yada, yada, all attempting to reduce their exposure of treasuries because of conflicts abroad. And if we ever saw that happening, it would be really curious. Time to wake up, folks. to wake up. Wonder what we're going to use as something that we can all agree upon that doesn't require trust that is bound by energy. It's like, oh my lord. Okay. We were talking about gamma

Starting point is 00:33:55 squeezes there. Talk to me about the Bitcoin price action this past week because we, you know, one morning I got up, it was like a 29,000 in USD terms. And then at some point in that same day, It was at $35,000 for a $6,000 move. What is causing this, Dylan? What caused that? So, you know, options market, it's quite the fun one to dive into because there's all these Greeks and terms, you know, gamma and Delta and Theta and Vega. And it's a bit esoteric, but essentially what happened for most of 2023, especially following

Starting point is 00:34:31 the, and this is a bit of an oversimplification, but I think it holds true, is after we saw all of these counter parties blow up in 2022, specifically like the genesis of the world, who were, you know, borrowing and lending in Bitcoin terms and dollar terms and a bunch of different cryptos. We saw, you know, and they all blew up, right? And since, you know, 2023 started, Bitcoin's gone from like 18,000 to 30. And for about six months was ranging around. And you saw record levels, low levels of realized volatility in Bitcoin and implied volatility in Bitcoin. And for those that aren't familiar with the difference, realize volatility is just how much the actual price action is moving around. And you can just look at price for that.

Starting point is 00:35:15 Implied volatility for the S&P 500, that'd be the VIX or for bonds, that'd be move, the move index. And for Bitcoin, you can look at something like there's a bunch of them, B-Viv is one of them. This company named Valmex is doing this. They're using Deribut options. There's also like DeVol and a couple other ones. But essentially, that implied volatility, and these indexes are only a couple of years old. don't have too much to work with as the options markets grown bigger. But implied volatility was near record lows, near all-time lows, as Bitcoin is ranging around from 30,000, 25,000.

Starting point is 00:35:48 And so what you saw was because the genesis of the world blew up and there wasn't really any, and again, there's no way to natively get yield on your Bitcoin. It always is, you know, that you are taking some risk. It's whether it's hidden or not. But those lending vehicles all blew up. So you saw a bunch of counterparties. I think the rumors kind of where some of them were in China. We don't really know. It's a bit opaque. But to get that Bitcoin native yields, and it's honestly technically incorrect to call it

Starting point is 00:36:18 yield, but for the sake of the conversation, we'll call it quote unquote yield, they were selling call options. So Bitcoin's at 28K. I'm going to sell next month, I'm going to sell a $32,000 call option. And so as long as the price of Bitcoin doesn't go. above 32,000 or the volatility states low, it goes down, I collect a bit of a fee, a premium. And so I get that in Bitcoin terms. And so you saw basically this trade just get rolled over and over again throughout

Starting point is 00:36:48 2023 of selling calls, selling calls. Whenever Bitcoin pumped a bit, sell a call. And it almost in a synthetic sort of way. And obviously hindsight is 2020, but you see this happen oftentimes with indices or like a Tesla, right? Or even like the mean stocks of the world, a lot of the world. a lot of the massively dramatic volatile moves, upside or downside are amplified by these dynamics in the options market, gamma squeeze. And so they were selling these options and basically it's different than maybe a traditional just short, short exposure.

Starting point is 00:37:20 I'm shorting an asset where it's one-to-one as price climbs. The pain of this short call trade was amplified with each additional uptick in the Bitcoin market. So they were short, but their short exposure, both because of the price action. and the volatility, as volatility spiked, and as price spiked, it compounded their pain. So that's why, you know, price went from 30,000 to 35,000 in about three seconds or like five minutes, was just because there was this massive short trade out there. And so they blew up, right? So it was like picking pennies in front of the steamroller for all of 2023.

Starting point is 00:37:55 And, you know, someone out there evidently blew up. And Galaxy actually this morning, and who knows that when this episode's released next week, if we see them get squeezed again, but it looks like they may have rolled over some of that short exposure, and they're now short up into the high 30s, 36, 37, 38 short gamma once again. So gamma squeezes can work both ways. I can also sell putts, right? I can sell putts as income, and I'm short that option, and I can get my face ripped off on the other way.

Starting point is 00:38:23 But it's pretty interesting. It's a very nascent market. It's very liquid. The spot market volumes are the lowest they've been in a while. And honestly, I think this plays really into like the hoddle mindset. of just no one's selling the coins, right? Like across literally every duration, one month, three months, six month, there's a really cool tool called Hoddlewaves, Unchained Capital,

Starting point is 00:38:42 showed it. And it's basically showing how much Bitcoin hasn't moved since X period. And basically across every single duration you look at, one month, three months, six month, one year, two years, it's an all time high amount of Bitcoin that hasn't been moved as a percent of the total supply. So the market's just like super, super tight. No one's selling, especially after the last two and a half years of,

Starting point is 00:39:03 of madness. If there's any inflows, you know, there's spot ETF rumors, all of that, you know, there's not a whole lot of Bitcoin to go around, you know, especially if there's four spires. So that's where we get some really aggressive moves. And you see, you know, weeks where the NASDAQ and SEP and bonds are down 5 percent and Bitcoin's up 25, right? Like, that's, that breaks a lot of models. It's probably one of the only markets where people who have significant positions, they're looking at the price action over the past year. It's up, call it 100% this year. And I would argue that a lot of people that have significant position sizes are just

Starting point is 00:39:39 yawning. They're just like, oh, yeah, this is absolutely nothing. Like, this does not even begin to entice me to some, if anything, their conviction quadrupled. And I don't think that that's normal. That's not what you would see in any other financial instrument that moves 100% in a year. Like, people would be taking some of the win and doing other things and looking for the next trade or whatever. And you do not have that for people that have significant position sizes, or at least the people I talk to that have what I would assume are significant position sizes.

Starting point is 00:40:14 Nope, not at all. There's two really interesting narrative violations that occurred on the back of that that move last week. One is across every single, and I'm not sure maybe it's changed. I mean, the price is near the highs now, so I doubt it. But across every single, really every day that Bitcoin's existed, the 69,000 all-time high, April 2021, 64,000, whatever, you know, because the narrative is all, Bitcoin's still down 50%, right? Super risky, volatile, yada, yada. If you dollar cost average every day, the same amount, one buck, 10 buck, it doesn't matter, you'd be in the green from every single day on a quarter of history at $35,000 Bitcoin.

Starting point is 00:40:54 The second narrative violation is at the current trading tick, Bitcoin is down less than the long bond. So you have an entire financial complex that's telling you this thing's too risky, it's too volatile, it's untouchable, it's not an investable asset, stick with what you know, 6040, right? And the 6040 is down 35%. Like Bitcoin, it's like, okay, it's too risky. Sure. But it's down 50% from the highs and anybody that's just been buying the thing and sitting there is up ever, right? So it doesn't matter when you started.

Starting point is 00:41:30 You could have literally FOMO'd in at $60,000 and just bought a little bit and stayed the course and you're in the green today. Again, it's obviously there's volatile. Dylan, there's a ton of people that that's how they do it. They just dollar cost average on the week or by the day or by the month. And that's just it. So. Yep. And if you don't believe the math, go do it.

Starting point is 00:41:52 it and you're going to be shocked at what you find. Yep. You're going to be shocked. And so it's volatile, right? It's always been volatile. But like that, and it sounds like a mean when Bitcoin's, you know, 70% from its highs. But the volatility is quite literally your friend. And you can do the math.

Starting point is 00:42:10 Like, again, I'm not telling my baby boomer parents that aren't in finance what a sharp ratio is because they don't care. But if you're in finance, like, run the math. You know, look at the sharp ratios. You know, run the passive, because like all these 6040 portfolios are passively indexing as well. So if you're doing that math, well, do it, do it on a Bitcoin spot index, right? Yeah. And so where, yeah, it's far too volatile.

Starting point is 00:42:34 Great. But the long bonds down on 55% on no volatility, right? So what does that tell you about all the preconceived notions of the finance industry in Bitcoin? And so I think that's a lot of conversations happened last week in financial advisor circles, you know, that spot ETF hasn't rolled out. Who knows? I think it's probably Q1 of next year at some point. Maybe there's a couple things on the regulatory front that happened before that.

Starting point is 00:43:01 You posted a good article last week on kind of the narrative of like, you know, the terrorist financing and all of that. Who knows how much of a deal they try to make with Tether and Binance. We've yet to see. And they've mentioned some of that stuff in previous ETF filings or denials. But I think it's quite clear. The only reason, like people, the narrative I saw was pretty funny. They were like, well, yeah, Bitcoiners are capitulating to Wall Street. You know, they're celebrating the spot ETF.

Starting point is 00:43:29 And I'm like, no, the capitulation is happening the other way. Like, the Bitcoiners don't care. Like, the narrative, it's completely reverse of what you think and that the capitulation is happening because people are going up to Larry, Larry Fink and BlackRock and investment banks. And they're saying, hey, like, I want this exposure. And I want it in my Charles Schwab account. I don't want it on, I don't want it on like Coinbase or I don't want it in your private fund that's a liquid or whatever. Like I want it just like how I have my other ETS.

Starting point is 00:43:56 And so like that's the capitulation is happening from Wall Street capitulating in. Right. And they're the ones that are knocking on Gary's door, Gary Gensler and saying we want this thing. It's not the other way around. 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 explain.

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Starting point is 00:47:59 percent in cash. In that portfolio construction of only 2% Bitcoin and 98% cash will match the S&P 500, the S&P 500 performance over that same period that you select, but you'll do it with one-fourth the volatility. Okay, that for people that are trying to understand what the sharp ratio is, it's showing you performance. So you're matching performance with only a 2% versus 100% in the S&P 500. and you're getting one-fourth of the volatility in your portfolio. And you select the four-year period. And the reason why you do four years is because Bitcoin has a four-year-having cycle. And I think that that's probably a great way to kind of understand the cycle theory.

Starting point is 00:48:43 Like if you're talking about like a traditional cycle, or at least the way it used to work, in equities, it was every eight years or whatever. I think that that's getting smashed like a hammer. But anyway, so that's just another neat metric. you were talking about dollar cost averaging. I think that's another one for people to dig up and look at. Willie Wu, on this idea of derivatives and spot price, he was really kind of hammering home this idea that he thinks the price of Bitcoin can be controlled by derivatives. What is your response? And I saw you guys going back and forth and I was also involved there a little bit. And Dylan, just for being open with the audience, you and I agree on this versus Willie. But like, what's your point of view? as you would respond to Willie, who's saying that he thinks derivatives can kind of wag the tail of the spot price.

Starting point is 00:49:33 You know, there's, I think, a few different camps or like maybe subsectors of like the futures argument. One is it kind of the gold bugs who are saying, well, look, we have this hard money asset. And for 20 years, 30 years, like forever, as we've been investing in it, it's been manipulated. Like, then they point to the JP Morgan, you know, guys getting fined and fired and all of that. and the settlements there. And it's like, see, we told you they're manipulating the futures market and putting a lid on the price.

Starting point is 00:50:03 And it's like, well, yeah, because there is no spot gold market. Well, why is that? Because you can't physically settle gold instantaneously. I can't buy gold on an exchange and withdraw it in 30 seconds. And I do that with Bitcoin a few times a week. There's that component. The futures market, whether it's like for gold, it's a calendar's future, right, next month. next week, whatever, where for Bitcoin, there's spot market and there's also a futures market.

Starting point is 00:50:31 There's calendar futures, but more particularly, there's the perpetual future, which never expires and just rolls over. And so to break it down, if you would say, well, the futures market is either artificially inflating the price or suppressing the price, there's a few things to consider. One, for every long, there's a short, right? Two, there's a dynamic financing rate or funding rate, as it's technically called, in this market, that references the spot market price. So say, spot Bitcoin's trading at 35,000. If the futures market's trading at 34,000, there's an interest rate that the people on the long side of the trade are getting paid to buy it. So if you buy this contract and hold it, you're receiving every eight hours an interest rate. And that

Starting point is 00:51:16 interest rate is calculated based on where the price is relative to the spot market or the spot reference rate. So what does that mean? Well, essentially, if the price is, you know, too high compared to spot market or too low, the longs are directly paying the shorts or the shorts are directly paying the long. Any derivative dislocation you see, in bull markets, it often happens to the upside. There's a ton of speculators. Everybody's going long. They're, you know, using Bitcoin as collateral, dollars as collateral.

Starting point is 00:51:45 There's a frenzy. It's a mania. And that often resolves in dramatic de-leveraging events versus, you know, say like December of 2022, it was the opposite. And the spot market price and the price on CME futures was actually under the futures market was under the price of the spot market. So you were actually paying to go short Bitcoin. The shorts were paying the longs. And all of those, all of those people got blown out of the water. The notion that Willie says that you can suppress this price on a long time frame is, in my opinion, wrong. The one thing to consider is this goes out the window if they,

Starting point is 00:52:23 there is an exchange that's operating, that's not operating fairly, right? And in that case, the solvency of the exchange or the legitimacy of that exchange is in question. It's not, it's not a matter of if the futures market itself is suppressing the price. So like with SBF, right? They're like, well, you know, look at what happened with Sam. It's like, well, yeah, he was leveraging his solvency to cap this thing, right? It wasn't the futures market itself that was acting as the mechanism because that's very much self-correcting. I don't know if that made sense or not, but that's my two cents.

Starting point is 00:52:57 Because at a certain point, there are exchanges that are allowing people to withdraw Bitcoin because they're operating ethically. And it just becomes so obvious because we can audit on chain data that if there was a really bad actor, let's say backed up by a sovereign entity that was allowing them to manipulate it through derivatives, that it would eventually manifest itself because there would be so much coin consolidation of people that are acting in the rest of the global economy network, that it would become obvious that, oh, my God, there's 95% of the coins haven't moved in the last year.

Starting point is 00:53:37 Like, how in the world is this price doing this kind of situation? And I think it would point to the exchange that would have been manipulated. And then it really gets the cascading event that would materialize out of that would be quite phenomenal to watch. And I'm not saying that's what I think is happening. happening. I'm just saying I think that that's on a long tail. If that was the scenario playing out, I think it would still manifest itself as a free and open market that would demonstrate the truth. I think there's also another important point. And like a lot of people think, you know,

Starting point is 00:54:09 if you're not following these markets closely, don't realize this. Like, there isn't a Bitcoin price. There's a hundred Bitcoin prices on a hundred different exchanges. And obviously, some are bigger than the others. But if say, let's say on FTX 2.0, right? there's someone out there that's maybe backed up by government or, you know, just a whale or someone in Big Bank that wants to suppress this thing and not let it rip. Well, you're going to see that, right? You're going to see that on FTX 2.0. The price of Bitcoin is 34,000. While on finance and Bitmex and Coinbase and XYZ exchange, the price of Bitcoin is 35,000, 35,500. Like, you're going to see the discrepancy, whether that's the futures market or the spot.

Starting point is 00:54:53 market and there's going to be a flow of coins, you know, whether it's withdrawn from one exchange to the other, right? You're going to see that be armed away. And so at a certain point, the person that's trying to suppress this thing, right, like, you can get away with a good trade. But if I'm sitting here and the price just keeps, just keeps bidding up and every single time I'm short, I'm selling, I'm selling, I'm selling, well, it's like, I mean, you're trying to suppress a beach ball underwater at some point and you're going to get blown out of the water. Like no one has infinite Bitcoin denominated capital, right? So that you're going to get checked, you're going to get called on your short position

Starting point is 00:55:29 or if, again, if the exchange is operating in such a manner, the exchange solvency is going to get called into question. So that's where I disagree. And, you know, the futures market and the spot market are very much intertwined. But on a net basis, futures, right? Like, if I buy a spot, I never, I never have to sell it. Like, I'll probably sell some spot at some point, right? But I buy spot.

Starting point is 00:55:49 I send my Bitcoin to my cold wallet, cold storage. if I enter a long position or if I enter a short position, at some point in the future, I have to close it. I can never just log off and never. Like there's always a net negative or net zero effect, net negative if you account fees. Again, this is where I think it's a nuanced debate or conversation, but because of the instantaneous settlement of it, because of the fund of flows, because I can buy and settle immediately, it's quite different than let's say a gold, gold futures market.

Starting point is 00:56:21 very much so. I completely agree with you. Let's talk about BitVM. Yeah, quite exciting stuff. I'm not going to pretend to understand that the intricacies of it all. But essentially, what was it? Earlier, like two or three weeks back, this guy, Robin, Linus, publishes a white paper. I'm in Amsterdam for the Bitcoin conference that's happening later this week. And this guy publishes a paper and it's basically like, you know, here's a proof of concept, we figured out how to do compute off-chain with a virtual machine and verify it on-chain with a fraud-proof. Essentially, it's not, again, this isn't a great technical way, or a correct technical way to say it, but in the same way, Lightning has a system of channels where it can verify that, hey, if Preston says, you know, he sent me 100,000 Satoshes and he didn't, and he tries to cheat me, I can take your funds, right? Like, I can, there's a fraud proof there that If you're lying, I can manually force that channel close and make sure you're not a cheater. That's what keeps people honest in Lightning.

Starting point is 00:57:26 It's a similar sort of dynamic and BitVM where there's off-chain computation. And by computation, I mean, if you think about a lot of the stuff that these altcoins say they do, right, smart contracts and referencing an Oracle price and then derivatives and swaps and all this other stuff. And not that the exciting thing here isn't to create the altcoin complex on a Bitcoin channel or a a Bitcoin denominated system. The real exciting thing here is that the value prop per se of the Ethereums of the world was there was all this functionality that Bitcoin couldn't do. Bitcoin's just a boring rock, right? You can only send them receive.

Starting point is 00:58:04 And Robin basically figured out how to, with just simple taproot implementation, and a simple proof of concept, but they've been iterating on more and more complex designs and versions of this, adding and layering a little. a bit more complexity. And actually, I spoke to Robin for a couple hours in Amsterdam and went to a bit devs, literally the day after it was released. And there's like three or four core developers there. And it's like a hyper technical convo.

Starting point is 00:58:31 And he spoke about they're working on creating basically their own version of their own coding language, essentially like a solidity, like an Ethereum style solidity, where they created, that solidity was actually created for the Ethereum virtual machine. Right. And all that compute goes on chain. Well, Robin and the guys that are working on, BitVM, realize that you don't have to, the innovation of this is you don't do the compute, you don't do all the verification and the computation on chain. You do it off chain on a virtual machine and then peg it back in to the chain. So all of the side chain stuff and swaps and stable coins and all this stuff that people have been talking about as a theory and pegged assets, that wasn't ever possible with Bitcoin.

Starting point is 00:59:15 And now there's, you know, it's still proof of concept, but we now have the ability to do this sort of thing and verify it into the Bitcoin channel. So I think probably the TLDR is that the value prop for basically the entire Altcoin complex is, you know, it hasn't been realized yet, but gets destroyed because you can't scale everything on chain, right? That was like the essence of the Fork Wars, if you remember, obviously. And I wasn't around, but I read the history of it of like, oh, we need to infinitely scale the block size to accommodate for all this global finance. And the Bitcoiners and user-activated software said, no, we're not infinitely scaling it. And so B-cash was created in Bitcoin SV and all this stupid stuff where they scaled up the block size by a crazy amount. And then you have, say, like with Ethereum, right, where you're doing all this complex computation on chain, right? And it's cool.

Starting point is 01:00:08 It's innovative. I understand it, right? But if you look at every time, even just NFTs or meme coins or Shiba Inu get launched on Ethereum, what happens? Gas fees spike to the moon, meaning gas, meaning the computation to settle that contract on Ethereum, because there's so much demand for this block space, right? So what emerged? Well, all of these layer twos, right?

Starting point is 01:00:34 Optimism and Arbitrum and all these other alt coins, right, that were. basically forks of Ethereum, Binance chain and avalanche and I rate, like there's a million of them. And to reduce the fee, it was become more centralized, right? To reduce the fee, it was we have to be even more centralized than Ethereum

Starting point is 01:00:54 to be able to do that. But keep going. Essentially, right? And the phalanas of the world, we're all a little bit different implementations, right? But it was essentially, we're going to take this further centralized. We're going to expand the block space.

Starting point is 01:01:06 We're going to consolidate the node running. And this spectrum of like decentralization or scalability kind of gets blended where it's, you know, they all claim to be decentralized. They're all not, right? Like, I don't know anybody that's running a Solana node, right? And you can say like it's important or not. People have these debates of like how much decentralization is needed. But the entire point is that these things can't scale infinitely.

Starting point is 01:01:29 Right. And so they kept coming into this question of like, how do we scale the thing? Compute on chain. How do we scale it? And so all these layer twos on Ethereum, they peg in. They all have their own token. right? And all the the contracts themselves and the olives of the world, they all have their own token, right? And so kind of like it all dissolves down into like the tokenization Web3

Starting point is 01:01:50 thing. And it's like, it's an entire mess. And I don't even encourage people to go in the weeds and follow all this stuff because it's all just like seedy, mindless, whatever. But the essence of the debate is, okay, well, we all have to do this on chain to verify, to verify, right? On chain. And we all, you know, of course, because of the incentives, the monetary, and economic incentives, they all need their own token. And the beautiful simplicity of BitVM, which again, I should reiterate, like hasn't been not even close to fully realized yet. But essentially, they're like, oh, wait, we can do trillions of terabytes worth of computation

Starting point is 01:02:27 off-chain and bully in logic and logic gates and yada, yada, yada, technical stuff. And then we can boil it all down into one Bitcoin transaction and settle. Here's what I find so brilliant about this solution is when you push the processing off chain into the localized hands of the two parties, the frequency of computation is now at their discretion, as opposed to a constant update that has to happen on chain. So like, let's say you and I enter into a contract and we don't even need to check that contract for a year based on the terms and conditions of the contract between the two of us. We are locally processing that off chain to make sure that the contract is upheld.

Starting point is 01:03:14 Do I need to run that every five seconds? Do I need to run that every day? No, I need to run it once we're getting close to the year or at that moment in the future when the terms and conditions of the contract specify that there needs to be some adjudication of the contract. So think about the energy reduction. Think about the efficiency of this. because we don't have to do that on chain.

Starting point is 01:03:39 We just need the validated on chain after like we come to the terms that there's been some type of event that exercises the contract. And if we understand the frequency of that, like this is so much more intelligent of a way to do smart contracting that people were talking about for a year. We just didn't know how to do it. I said that this bit VM thing is almost like they found silicon in the blocks. because now you're able to do assembly. They're doing the assembly language now in order to do the if then or statements with what they're writing into the layer ones. And I think that another thing too is like, so how does validation work? Well, validation works through the debasement of the native token of the quote unquote blockchain of these other blockchains, right?

Starting point is 01:04:32 So you're paying for that validation. you're paying for that processing and computation that's constantly happening through the debasement of the native token, you don't have to do any of that with this BitVM solution. I don't know. I find the whole thing fascinating. Where I'm a little bit at a loss, and this really comes to just my lack of technical expertise, is where this fits relative to like what we're seeing with the Taproot asset protocol that Lightning Labs just came out with.

Starting point is 01:05:02 are they complimentary? Are they competitive? I just don't know, but I would imagine they're complimentary to each other, but I truly don't know. And if there's people that are listening to this and you want to put some comments out on Twitter when we post this episode, I would love to read what people think about that. Do you know, Dillon? I'm just assuming that you don't. No, I mean, I don't have a very nuanced take there. I think the really interesting thing is the taproot was rolled out, you know, November timeframe 2021. And for a while, it was like, you know, there was somewhat of a narrative, whether it was trolling or not, it was like, oh, this thing was, yeah, that was stupid, worthless, right?

Starting point is 01:05:45 It was like, why you didn't even need that thing. And then, ordinals came out. And then, like, again, I don't think speculating on JPEGs is the most interesting thing in the world. Or, you know, BRC 20 tokens, which was literally a JSON file, the transfer, a synthetic token that was valueless or useless on a blockchain, like that's not exciting for me. But the cool thing was like where an Ethereum NFT

Starting point is 01:06:08 is essentially like an image file linked to a website, well, like actually, with the ordinal protocol, you're actually saving it on the blockchain. So is it computationally efficient? No, it's not. But there's a bunch of cool people that are saying, oh, hey, like we have this immutable, decentralized database essentially, ledger.

Starting point is 01:06:28 Well, what if we put the WikiLeaks file? files on Bitcoin forever. Right? Like, what if we, what if we do the, and it's there forever? So like, again, I don't think that's like the most interesting thing for this. I think the most, you know, the biggest market in the world is global money. But I think the point I'm getting at is that basically two years after Taffroot was, was rolled out.

Starting point is 01:06:50 We see things that nobody had thought was, like people thought this, this BidVM style implementation was simple. It was never achievable. And so now, once it was launched, You had a whole bunch of people, even like the smartest guys in the world I saw like on this stuff, core developers, you know, Adam back, right? They're like, wait, how does this work? And, you know, I saw Robin the whole time we're at Amsterdam, we're in the back room and people are coming up to him and I'm only following, you know, 50% of the convo. And it's like, wait, how does this work?

Starting point is 01:07:22 And, you know, eventually, like literally I was at the bit depths and there's four core developers at this bit depths. and Robin does an hour presentation explaining the white paper piece by piece. Someone raised their hand and goes, wait, so what's the point of this again? And it was funny to me because I was like, these are like literally like the gigabrains of the world. And there's so much complexity and technical jargon here that it's hard to follow. And so, but the real exciting thing is once people kind of get the basics of it and they're going and doing a hacker house and getting this language built out and documentation and specs, I think there's going to be a Cambrian explosion. of innovation and development on this sort of stuff. And not, again, not that the exciting thing for me is like a uniswap where you just swap

Starting point is 01:08:07 valueless tokens and whatever. Like, I don't care about that. It's more so that Bitcoin itself has extremely strong trustless elements to it, decentralized trustless elements. Like, I don't have to trust my counterparty. I don't know. You send me Bitcoin. I don't have to trust you.

Starting point is 01:08:22 It's verified. And so now if we have... Oh, I was just going to say this is where AI comes in, too, which you're, You're saying it's going to be an explosion of growth. It is going to be an explosion of growth because this is effectively assembly language that they're doing for if and or gates on like blocks. Like that would take time to build out and to write and to make sure AI, I mean, that's what it's prime for is taking this really obscure stuff and just like you can ask it a couple

Starting point is 01:08:50 questions and it's like banging out stuff so fast. And the implementation can just happen at a pace that is. somewhat unimaginable, I think. I'm sorry. I interrupted you again, Dylan. I'm sorry. No, no, no worries. I think it's a great point.

Starting point is 01:09:06 And so I don't think we can imagine what's going to be built in terms of whether it's, again, whether it's derivative markets, right, or like lending markets, right? And whether that's exciting to you or not is a question. But also, if you think about just Bitcoin being integrated with the global financial system and everybody was like, well, you see, like, it can never work because the seven transactions per second and it will never scale for a global economy and the block subsidy and Bitcoin's going to be insecure and like, well, what if we abstract a bunch of this stuff to higher layers that all has, it all takes the trust out of the loop, right? And we can have a trustless verification

Starting point is 01:09:45 whether that's a lightning implementation and channels, right, to just produce, you know, micro payments or value transfer or, you know, more complex smart contract languages where we can do the things like the integration with, imagine if we have a Bitmex, but instead of a crypto casino, it's a stock settlement platform with Bitcoin integrated at the base layer. Like, again, that sounds super hyper unrealistic. And I'm just kind of throwing out an idea. But all of these things that were previously never able to be built,

Starting point is 01:10:14 unless there was a centralized infrastructure at the center of it, can now, in theory, right, with a virtual machine, with essentially infinite compute, can be, built. So what's going to be built? I have no idea. And that's the most exciting thing is that someone, we figured out the implementation of it. Not we. I didn't certainly. Some really smart people did. But that's where it's exciting. And again, I have no idea what comes of it. But there's going to be a Cambrian explosion of activity on Bitcoin. And I've seen personally just side channels, back channels on Twitter, a lot of the people in the Alkoyne space that have left, you know,

Starting point is 01:10:49 either they were developers or even just speculators or followers, investors, if you want to call them that that were interested in the weeds of all the technical stuff happening on the altcoins because, again, Bitcoin was this boomer rock that nobody could develop on or do anything with. We're all, are all saying like, oh, wow, this makes me question like a lot of the underlying assumptions I had about Bitcoin and like the quote unquote investment thesis, quote unquote, of these alt coins, et cetera. So I think you're going to see a massive amount of like mine share come back to Bitcoin. If not, it's already happened. And especially, you know, as the trillions of dollars of capital come in here. It's going to be really,

Starting point is 01:11:25 really exciting. I don't think we can imagine what was going to be built, right? Like there's, you know, when lightning came out, 28, I mean, it was developed for a while, but post-Seguit, it gets rolled out on Mainnet, 2018. Could you have thought, you know, four years later, five years later, that we have

Starting point is 01:11:41 like lightning back stable coins, right? USV synthetic stable coins and derivative markets on Bitcoin, trading futures and all this other stuff. Like, that's built, right? And some the trust models aren't, some of them are you know, more centralized in others, right? Of course.

Starting point is 01:11:55 But all of that stuff is coming, for sure. And it's going to be, you know, it's going to get faster, better, safer, more secure, and less centralized, more trustless. So it's quite excited. This is the last one I got for you. So what is something that you're seeing in this space recently that you think is underreported or not fully appreciated or that just needs to have a light kind of shined on it? It's a great question.

Starting point is 01:12:23 Well, I don't think I have too much to add about like the ETS and stuff. I think a lot of that stuff's been covered on both sides of like, this is hyper bullish or like the downsides. It's like, oh, well, it's not going to get approved for X, Y, and Z until this happens. I don't think I have too much to add there. Here's something. It's a little bit niche, but I think it's pretty fascinating. Last cycle, you saw a lot of the miners, which again, the mining industry, the Bitcoiners talk about it a bunch. There's now kind of an investment landscape around it.

Starting point is 01:12:51 There's like 20 or so public companies, 10 billion market cap or so, maybe 15. I'm not sure at the top of my head. But basically almost all of them were close to blowing up at the bottom of the cycle. And I know a bunch survived. But they were all levered long, their A6, A6 collateral, Bitcoin collateralized loans, no loan hedge. Everyone is doing a hoddle model. And it was an ex-paying scenario.

Starting point is 01:13:17 Difficulty in hash rate went up tremendously, right? hash rate all time high. So I think like, what was that at the high? It was like 150x hash, or 180x hash and now it's like 400 something, like just crazy mind boggling versus, you know, the price went down 80%. So it's this max pain scenario where their their hash price, minor revenue per terra hash got decimated. And I think one of the more interesting things out there is the advent of a hash rate derivative marketplace. So there's like a couple companies doing this. Luxor is doing it as well as block green, different models. but Luxor has quite literally a hash price futures curve,

Starting point is 01:13:55 whereas Block Green has a, and the age old question is who's the buyer of a hash rate derivative contract? Because if it, other than it's maybe a speculator, meaning like who's the buyer of hash rate? And how do you like, like who's a natural buyer of future hash rate,

Starting point is 01:14:09 especially in a scenario where you continue to expect it to go higher and higher? And so like, you know, the Block Green model is doing it in a Bitcoin denominated way, that every single contract, like it's, there's a ton of disclosure, there's a ton of transparency.

Starting point is 01:14:22 You know, I know your balance sheet. I know your power prices. I know your operational efficiency, your previous basic uptime. And I can come in and, you know, say we expect difficulty to be X, right? There's some assumption baked in. Well, similar to kind of like a bond market where there's a credit rating system and a yield excess of the risk-free rate. Well, similar to that, there's, on the other end, there's basically lower and lower discounts

Starting point is 01:14:47 to what you would expect that fair value or that, that, that, that, hash rate production to be. I can be a buyer of your future hash rate a 10% discount or a 15% discount. So this allows for two things. One, in a brutal bear market, you can come in and I can, instead of raising debt in a frozen debt market or selling equity, I can sell future hash rate production in Bitcoin's in nominated terms to raise liquidity. Or in a euphoric up only bear market where everybody's rich, everything's exploding, I can

Starting point is 01:15:20 hedge, sell some future hash rate production, get back Bitcoin. And maybe I sell the Bitcoin, maybe I don't. You know, that idea is still very niche. It's still very small. And it's niche in a small sector. But I know Block Green's working with a few companies. I know Luxor's working really hard. They got a really smart team.

Starting point is 01:15:37 And so that's exciting for me is because, one, it's a Bitcoin denominated futures market. That's technically not a futures market. It's more of like an OTC style hedging device. but it's a Bitcoin denominated capital market for a Bitcoin native commodity in the sense of a hash rate settled. So that's really interesting. It's very small. I don't talk about it too much, but it's something I'm keeping my finger on the pulse there. I love that.

Starting point is 01:16:05 And I love the way that you're describing it as a Bitcoin settled market and just kind of yet another thing that's out there that slowly creates this situation where Bitcoin is in demand for. for utility purposes and not just for savings technology purposes. And for people that are trying to wrap their head around this, if I was just going to simply describe what this hash rate derivative purpose would be, if you're a minor and you're looking at this fierce competition that's happening in this space, it's protection against that of being able to kind of smooth that out. If all this competition comes on the market and it was more than what you were expecting, you can protect yourself against that.

Starting point is 01:16:48 Or if the hash rate was lower, then you can take advantage of that. So just kind of a real simple way for people to kind of wrap their head around what this, this hash rate derivatives market would mean and who it would mean it to. And it can't be done in like a trustless way, right? Like there can't be a trustless market where I can go in and sell my future hash rate because what if I just don't deliver, right? What if I just turn out my basics and sell it? Like there has to be, there is a trick.

Starting point is 01:17:13 This isn't like this decentralized, like, this decentralized. sort of thing, but I would I would kind of compare it to like basically a credit market, right? Where where there's there's trusted institutions that are involved in this. It's a swap. There's there's no risk being eliminated and risk, as you want to call it, of like maybe just thinking about, you know, volatility of the hash rate, right? Like there's, we don't know what the future difficulty is. There's a, there's an assumption baked in.

Starting point is 01:17:39 There's obviously a discount of what like, of what they're selling that future hash rate, that what the price is, right? So there's a discount based on, you know, how credit worthy or not or how risky or not that purchase is, you know, or that mining operation is selling it as. So in a similar way, like, I'm not going to lend to a junk corporation at Fed funds plus 100 bips. I'm going to lend to them at that funds plus 500 or whatever like that junk kind of credit rating scale is. There's a similar thing happening with hash rate production. And then that, you know, that being sold to someone that's interested to providing liquidity on the. the other side. So it's like very niche, right? I expect, but I expect in the next cycle that,

Starting point is 01:18:20 you know, hopefully, obviously human psychology takes hold, but I think there will at least be another tool for all these mining operations and an extremely cyclical business to hedge risk out because all of them were levered long, you know, they're levered long Bitcoin. Their operation by very definition is, is leverage long Bitcoin. You know, the ASIC collateralized loans, the whole nine yards. And so this is just another tool for the, them to mitigate some risk. And even in like, say, that have incomes, Bitcoin's prices going sideways. You know, who knows, right? Like, a lot of these miners will be pretty hurt. Instead of having to go raise or dilute their stock price, right, I could, in theory, I could just

Starting point is 01:18:59 sell some future Bitcoin production and raise liquidity there, which is an avenue that hasn't existed previously. One of the things I find so fascinating about this whole space, so like when you're talking about how they're levered long and how competitive this industry. is, all I can think is it's a massive incentive for those rigs to flow into naturally abundant energy source regions, right? Because if you can get it for two cents per kilowatt, you can just compete all day long. Like, you just can because you have such a huge advantage because you're tapping into abundant energy. But if you're paying much higher prices and you're getting

Starting point is 01:19:40 levered, like you blow up, all those rigs are just going to flow straight into an area that It just has naturally abundant energy. And I find that fascinating. I find that to be totally in harmony with what nature actually wants here. And just at no point other than I just, I kind of marvel at all. It's a fantastic point. I just marvel at this. It's not understood that point of like, you know, you'll be, oh, what's going to happen

Starting point is 01:20:06 in the next halving when their revenues get cut in half as if it's like a gotcha? And it's like, well, what's going to happen is the inefficient commercial miners that are mining on grid energy are going to go under or they're going to have to sell. And, you know, who's going to be mining is like someone in the middle of the, you know, North Dakota Bakken who has free energy because they're flaring with natural gas or, you know, some, you know, like excess free energy and some, you know, hydro dam that has way too much, you know, has way too much energy and no one to buy it. Like this process of mining and whatever you want to, assumptions you want to bake into like what fees are going to be in the future or Bitcoin price.

Starting point is 01:20:45 You can do like Bitcoin denominated assumptions or dollar denominated. This is going to be commoditized. And the winners aren't going to be these massive scale, you know, consolidated mining operations. It's going to be, you know, the edge case hyper-efficient miners, you know, like there's people that are heating saunas and heating spas with ASICs, right? And that heat isn't going to waste. That heat and that energy is actually, you know, the byproduct of that is being used to heat things, right? There's like so many use cases that like nobody has thought of.

Starting point is 01:21:22 And as that difficulty gets cranked higher, hash rate continues to go up and the block subsidy continues to ratchet lower, that efficiency in aggregate, which is, you know, it's impossible to measure like what's the average energy input cost for the Bitcoin network. We can quantify a lot of things. We can't quantify that. We can kind of guesstimate it. Well, that trend is just going to continue of like increased efficiency where I can't my, I can't make money mining Bitcoin on my laptop.

Starting point is 01:21:48 You used to be able to. Well, like, that's a good thing, right? Because this is just increasing the energy efficiency everywhere that it's leveraged. Bitcoin's not wasting energy on the ERCOP grid. It's actually, you know, all the green energy stuff, right, where I'm going to, you know, a bunch of solar panels and, you know, wind energy, right? like that you can't have that system without something to balance the load, right? Without something to absorb that excess supply when there is no demand.

Starting point is 01:22:17 And so, you know, explaining that nuance is obviously one, another thing entirely. But Bitcoin, I guess you could argue AI too, right? Yeah. Of kind of a dynamic load, a dynamic buyer or, you know, demand for that energy. That's, you know, the commoditization of that is, and the convergence of energy markets is the, probably the most fascinating thing. One point I'll add, just kind of going back a bit to the bit VM thing. And this is just kind of a side point.

Starting point is 01:22:45 And this is just my personal opinion. But I think it's quite ironic that seemingly peak ESG, you know, low oil prices, peak ESG narrative, can't really quantify it. But Ethereum and it's somewhat kind of not, you know, I kind of had a network effect of its own in terms of a smart contract chain, if you want to call it, network. went from proof of work, right, which directly tied to that real world energy input into a proof of stake kind of just completely virtual environment, right, where the very thing that ties Bitcoin, like Bitcoin's intangible asset has an exchange rate, but it's not intangible,

Starting point is 01:23:26 right? Because it takes me $40,000 to produce Bitcoin if I go mine Bitcoin in my garage and plug it in, or, you know, probably $60,000 per Bitcoin or whatever that my energy input costs are. Like, there's a tangible aspect to that. So it's not just this like, untangible digital asset that's synthetic, like it is, but there's a marginal energy input cost. Like, that's the same reason why like commodities have value. And so it's the first, Bitcoin's the first thing that like has a completely inelastic supply relative to demand with an input cost. And that's like, I mean, that's the golden goose in my opinion. That's like the aha moment of like, oh crap. This thing is like becoming increasingly a hard.

Starting point is 01:24:07 harder to produce forever. That's, that's, you know, the magic aha moment that I don't think many people have had. And I think it's a bit ironic that you would purposely kill that. But that's a different discussion entirely. I love it. I love it. Yeah, for the person that walks up and says, what's going to happen when all these miners, well, sir, we're actually going to have a free and open market. And we're going to find out who deserves them and who doesn't. You know, and what a, What a beautiful thing to exist in a world where it doesn't seem like too much of that happens these days. So that's why I'm a bitcoiner. I know that's why you're a bit coiner.

Starting point is 01:24:46 And boy, what an exciting time to be alive. Dylan, give people a handoff if they want to learn more about you. Thank you for making time and coming on the show. I know I learn a ton from you every time we get a chance to talk. And it's just always such a pleasure. But give people a handoff. Yeah. No, I appreciate you having me on.

Starting point is 01:25:03 I think it's our third drift together maybe. Yeah. Yeah. But yeah, I mean, I'm just on Twitter at Dylan Leclair underscore. On Nose or 2, I admittedly got to get on there a bit more. I'm doing some stuff with U-KXO management these days, among other things, including some stuff with OnRamp. I know you just talked with Jesse Myers recently.

Starting point is 01:25:22 I have a small part there. They're doing some cool stuff. And, you know, in the face of all the Black Rock ETS stuff, they I think have a pretty novel Bitcoin-Native solution. So, yeah, again, I appreciate you having me on. This is always fun. an hour and a half went by quick. It did go by quick.

Starting point is 01:25:37 And thank you again, Dylan. This was a lot of fun. Cheers. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday,

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