We Study Billionaires - The Investor’s Podcast Network - TIP244: Bitcoin Basics w/ Leading Expert Tuur Demeester (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we're talking about a very intriguing topic, Bitcoin. Now, we've covered this topic many times on the show. In fact, the first time we covered Bitcoin here in the investors podcast, the price was in the $200 range. Today, it's about $8,000. Although this fascinating topic has some of the most volatile price movements in any financial market, it doesn't seem to die or go away. So what in the world is going on with Bitcoin and what is it?

Starting point is 00:00:25 On today's show, we talked to one of the most reputable and well-known Bitcoin influencers, Mr. Tur Demaster. When we talk to Tur, we're not covering advanced crypto topics. Instead, we're going to talk about the reason the Bitcoin community believes in this movement so strongly and how some of the technology works and what it's trying to achieve. In short, this is our coverage of Bitcoin 101. So if you've ever tried to understand the why behind this movement, TUR is one of the best people you could ever listen to.

Starting point is 00:00:51 So without further delay, here's our coverage of Bitcoin Basics. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to The Investor's podcast. I'm your host, Preston. Pish, and as always, I'm accompanied by my co-host, Stig Broderson. And I'll tell you, we are really pumped to have Turr back on the show. Tur, welcome back to the Investors podcast. Always awesome to have you here. Hi, Preston. Nice big. Good to be back. There has been a lot that has happened since the last time we talked. The last time we talked, I believe, was in 2017 during the meteoric rise of Bitcoin and many other crypto coins. And after we saw it peak, at least Bitcoin peak in December of 2017,

Starting point is 00:01:55 we've had about an 80% decline in the price of Bitcoin. I think it got down into like the, what, mid-3,000 range or something like that. But since that bottoming, which probably happened a few months ago, Bitcoin has had a little bit of a surge here. And I think it just hit over $6,000. And so my question to you, Ter, is I think everybody who's listening to this is wondering this question. Why is Bitcoin still relevant today? Yeah, and why does it remain relevant throughout these rallies and crashes? We've seen several of them. The first one in 2010, the second one, 2011. There were two in 2013. We had a major rally and crash in 2014.

Starting point is 00:02:36 And then the one that most people are aware of now is the 2017 cycle. Rather than ask, well, why is Bitcoin relevant? I would kind of turn it upside down. I wonder, like, well, do these crashes take away from the value of Bitcoin? and why are they happening? Bitcoin is relevant because it has the promise of being a digital store of value, you know, not only for millennials, but definitely very appealing to millennials. And it's something that for a long time, like ever since cryptography became something that private individuals could work with and academics started developing onto that. And then in combination with the rise of the internet,

Starting point is 00:03:15 this idea of a digital cash or digital goal really was out there as a challenge for, scientists like going back to the 80s there were ideas and plans to try and make this work and so bitcoin was the first time that all the pieces came together in a very elegant way to make it a reality and so now we do have and it's i'm kind of excited that i found this word bitcoin is now a denarian currency it's it's over 10 years old which is quite amazing if you think of it like we've had almost zero downtime during that time it's never been stopped there has never been reorganization of the ledger to censor transactions or to rollback transactions for nothing. Like there's been exchanges that were hacked and that tried to get all transactions to be reverted. That this just never happened.

Starting point is 00:04:01 So it's as good as gold in that sense is that transactions are real and irreversible. But then it has all these additional benefits of the digital world where you can, I mean, we'll talk about it more, I'm sure. But so the gist of it is that Bitcoin is relevant because it's a politically neutral store of value. That's the promise of it. It could become a reserve asset. And so much. of the world's prosperity is built on this ledger that gold was. Like the gold was a scarce measuring stick for value. It allowed you a store value and then later deploy it in however use of it as an entrepreneur or as an investor. And so Bitcoin kind of restores that idea.

Starting point is 00:04:37 We kind of lost our way with fiat currencies that can be debased that are very, you know, very effective because you can send them around the world easily. But they can just continually be debased. And so they're losing their, that feature. of store of value. And so that to me is what's so attractive about Bitcoin. For somebody who's hearing your response to why it's still relevant today, they might get lost in some of the technology talk or they might get lost in some of the other aspects of how we can just talk about all this technical stuff immediately. Anytime you talk to somebody

Starting point is 00:05:10 with Bitcoin, it gets to be a very technical conversation. But what I think is really interesting is when you take a step back and you say, what is it fundamentally that Bitcoin and solving? Like, why would a person own Bitcoin opposed to owning gold? Or what is it that Bitcoin brings to the world that we don't already have with the currencies that exist? If you look into the white paper that was published in 2008 to basically explain what Bitcoin was about, and the introduction, Satoshi Nakamoto, the pseudonymous creator, he says, and I quote, commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.

Starting point is 00:05:52 So then he goes on to explain how, you know, the fact that we have to trust a third party, it comes at significant cost and significant risk to the savers, to people that want to transact digitally. I mean, he says online, but it's really like globally. Like all the money is digital. So we're talking about it, this huge market. And one of the main problems that has emerged for people that want to save or store value, it's really hard to know how scarce the money is these days.

Starting point is 00:06:18 And there's this aphorism. I forget who wrote it, but it's like money is scarce. And if it's no longer scarce, it's no longer money. So there is definitely that breaking point that we've seen at some point, things break down and get pretty bad. And so how do you create a system that is provably scarce where I have a digital token, but I can't just copy it and, you know, send one to Stig and another to Preston, even though originally I only had one? How do you kind of prevent forgery?

Starting point is 00:06:45 Bitcoin is just this really elegant solution to that problem. And the basic idea is that rather than you having to trust, like, hey, this is a real coin, believe me, I'm some kind of fancy bank and you just have to trust me. I will only ever create this much inflation. Like, trust me, rather than having to do that, I can just look at the actual protocol and see the rules that are embedded in that. And then I can see how many computers in the world are choosing to run this protocol. And then when it comes to one Bitcoin, am I like spending the same Bitcoin twice? How do I know what the valid transaction is? Because presumably only the first time you spend it, that should be the valid time.

Starting point is 00:07:25 The second time you've already spent it so it's no longer in your wallet. And the way you can verify that is by looking at the ledger that has the most accumulated work embedded into it. It's something that seems wasteful on the surface actually serves a very deep purpose that has to do with security and not having to actually trust an authority. Tur, it's interesting you would say that, and for a person that hears this and might not have a background in computer science or understand programming,

Starting point is 00:07:53 you say that you can look at the protocol to verify the system and build a trust in the system. But most people, including myself, would have no idea how to do that, and we're probably not looking to spend the time learning how to do that. How should we think about all of this? Yeah, that's a great question.

Starting point is 00:08:11 and I'm not a computer programmer either, so I definitely had to ask myself that question. How do I trust a trustless system that I cannot verify myself? The way Bitcoin does that or kind of helps people trust it is that the entire code base is open source so anybody can look at it and there's the explicit invitation to do so.

Starting point is 00:08:29 So that means that for the past 10 years, hackers around the world and computer scientists and operational security experts have been explicitly invited to audit this. There are instances of investors who've hired teams of hackers to try and break the system and to try and kind of find a loophole. And of course, there's also financial incentive to do so. Like, as the value of the ledger increases, the financial incentive increases to find the bug that

Starting point is 00:08:55 allows you to drain the account, so to speak. And so that strengthens my trust over time. And it's like that with a lot of things in life where, you know, how do you trust the internet works? Well, you know, you use it every day, but there's also you rely on certain proxies. How do you know that this gold coin is real? You can pay someone who's an expert that can really verify it. The fact that it's out there and it's open source, it's an invitation to the world.

Starting point is 00:09:20 Like, hey, I'm the champion. Like, you know, beat me up if you can. Right now you could call it a $100 billion bug bounty on Bitcoin. Like, hey, if you can crack this, here's the bounty, right? It's right here. Just get it. You know, obviously you cannot crack all the accounts of Bitcoin. But even just one, there's accounts out there that have easily over 100,

Starting point is 00:09:39 thousand Bitcoin. So that's way, way over $100 million just sitting in one Bitcoin account. I think it's testament to the Bitcoin protocol and the continual conservative improvements that it's, it's very, very reliable and trustworthy. Trace Mayer has just a great discussion on network effects. One of the reasons I like this so much is because whenever I talk to people about Bitcoin, one of the first things that they say is, well, if these people created the code for this, whoever they are, how do I know that they just can't go back and change the code to adjust it? Because right now, the selling point on Bitcoin is that there will only be 21 million coins, no more, no less. It's going to get to 21 million coins. And so you have a fixed monetary

Starting point is 00:10:21 baseline there for it can't beat the base. But how do I know that somebody can't go in there and adjust the code? Oh, you can absolutely do that. I mean, Charlie Lee has done it in 2011 when he created light coin. He just took the code base and was like, hey, let's tweak this little rule. And now we have a a coin with 84 million coin supply rather than Bitcoin's 21 million. So you can totally do that. The challenge is that if you change the basic rules of Bitcoin in your new codebase and you start running that software, it's not going to talk to the other nodes. The other nodes are going to reject it because it doesn't adhere to the same rules that they do.

Starting point is 00:10:56 There's kind of like a Babylonian problem that occurs. But there's no limit. You know, over 1,000 altcoins out there and they're all iterations. but they don't ever, like the Bitcoin network never listens to those nodes. And so the only changes that over time have been accepted by Bitcoin nodes are changes that restrict rather than expand the rules. I don't know if that makes sense, but it's a little bit like state legislation, at least in theory, it can make more specifications as to what people can do, but it shouldn't violate

Starting point is 00:11:29 the constitutional rights that are maybe, you know, across the federation. So you could call the Bitcoin Core Protocol as a sort of constitution. And so you can either propose a hard fork to change the constitution, which for the past 10 years has always been rejected by Bitcoin savers because they don't want to see the value of their coins being diluted. That's a hard fork that's always been rejected. But what has been sometimes accepted is more specific rules. And those are called soft forks where you kind of narrow things down a bit and smoothen the edges

Starting point is 00:11:59 and make things more efficient as long as it doesn't violate the core. ideas of what Bitcoin is about. So, for example, the 21 million supply, the 10-minute block time, the very, very basic things, they are really hard-coded into Bitcoin. And it's true. Like, technically anyone can change the rules, but it's kind of like saying, well, you speak English and Stig speaks English, but what if I change English and I make it into a new language? Like, wouldn't that mess up your day or like, no, because I would be on my own on an island with my newfangled language, and you guys would just choose to keep talking English. So it's kind of like disqualifying yourself.

Starting point is 00:12:37 If you change the rules, the conversation is over. That's a great and very relatable example. So what if the community wants to change something in the open source code, which is having multiple times before? What is the process of proposing and then implementing changes? There's a mature process that has developed over time, and it was very much inspired on how open source code bases are adjusted and upgraded, even though nobody's really in charge of open source projects like Linux and things like that.

Starting point is 00:13:06 Responsibilities are named in that ecosystem, but it's still not controlled. It just means like somebody helps facilitate the process and they're the ones and usually GitHub is used. And if you have a proposal to make a change in Bitcoin, it's called a Bitcoin improvement proposal. And that's subject to peer review for a while and then finally propose it to several core developers who have a very long experience. And then it'll go through significant review to make sure that. that, you know, we're not, like I said, we're not changing the constitution. We're just trying to make things a bit more efficient, for example. And so eventually it gets merged into a new release of Bitcoin.

Starting point is 00:13:41 And then that release is basically just proposed to the world. Some developers are like, hey, you know, here's a version of Bitcoin that we think is a little better. Feel free to give it a run. And it's a very gradual adoption process. Like, you're not really encouraged to assume that change on day one. But because it has efficiency improvements, there is this economic incentive, especially for miners and professionals to run the latest version, the most efficient version of

Starting point is 00:14:04 the software. But of course, I mean, they don't want to expose their customers to vulnerability, so they might do internal testing as well to make sure. So yeah, one example was the soft fork of that merged Segwit into Bitcoin and that allowed the block size to grow from around one megabyte to theoretically could be up to four. So Bitcoin's capacity increased. The transaction size shrunk, which means that the average fee that you have to pay to the network is also going to be lower. And so that's, that's valuable for exchanges and miners. It was like a two, three year process where finally over 50% of the transactions are now Segw transactions. So it's a very slow process. And I think that's good. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:18:57 people to hear some of this, especially if they haven't paid attention to Bitcoin since 2017, because that's one of the interesting changes that have occurred since back then is this Segwit update. And what it's allowed is what's called Lightning Network. In the most simplistic way, you can describe this, what is the Lightning Network and why is it important? The simplest description would basically be that you go out with your friends and you go to a bar and rather for the barman to register every single one of your transactions with a credit card, he just keeps open a tab and just closes it at the end of the night. Another word

Starting point is 00:19:34 for this payment channel. So you basically, for small amounts of transactions, you defer it to another layer. It's a smart contract layer basically that keeps track of all these tabs and then occasionally settles with the Bitcoin main chain. Because Bitcoin main chain transactions only have a capacity of about three to five transactions per second. And they are expensive, right? They can cost 50 cents, half a dollar, or sometimes several dollars. And Lightning solves that and allows for very fast, huge volumes of transactions, but still denominated in Bitcoin. So let's say I completely understand and trust Bitcoin. I understand that you're being incentivized to hack the system. As you said, it's been running for more than days.

Starting point is 00:20:16 It's a decade and it hasn't happened yet. Having said that, though, why would I trust the new system? Why would I trust the botaner? It's not entirely trustless in that sense. So it's kind of, it's just a metaphor to kind of show that we're deferring. It's somewhat less robust than the Bitcoin main chain, but it's still very much lower trust. Like it's still what you could call a decentralized layer.

Starting point is 00:20:39 If you have a balance on the Lightning network, you cannot be stolen from very easily. I mean, Bitcoin is the most secure database on the planet. Like, that is a very high bar. You lower that bar a little bit to allow for very fast transaction settlements. At the core, it's still a trustless solution. So you would describe the security risk on lightning to be way less than the security risk on an exchange like Coinbase. You think that that holds a lot more security risk. I don't feel confident to say that because if you have, that's the problem with trust of third parties is that sometimes they are trustworthy.

Starting point is 00:21:14 And sometimes they do a great job. And having to secure your own lightning note, that's also, that's on you, right? That's for you to take these precautions. And also the software is still in very early stages. So it's kind of like I'm more talking about the promise of the protocol rather than the way it is today. In the long run, rather than saying what's more secure, I would say it's more permissionless. You know, imagine someone in India, they want to buy in-game credits on their phone. They can use a lightning wallet.

Starting point is 00:21:41 They don't need to have any bank give them permission first. So let's say that I'm worried about the debasement of my currency. I might live in, say, Turkey. And I'm considering whether or not I should hold gold or I should hold Bitcoin, perhaps both of them, because they have the same argument about a predictable and fixed monetary baseline. How do you think through what I should own in my portfolio in that case? Demographic surveys and all the data points in the direction that Bitcoin is being adopted

Starting point is 00:22:10 slowly. And it's right now only at maybe 5% adoption. that's probably even overstating it, depending on how you look at it. It's going through this adoption curve, which means that the value is going to increase by a lot, if I'm right about that. And then on top of that, we have this demographic tailwind in the sense that millennials just absolutely love Bitcoin. Like the early adopters were mostly millennials. And right now, if you look at the appetite from investors, it's mostly millennials. And right now millennials are, I mean, I think in their maybe late 20s, early 30s, kind of on average.

Starting point is 00:22:44 In about 10 years in 2029, their collective purchasing power is going to supersede that of Generation X and also the baby boomers. So that's going to be the largest earning generation. My hypothesis is that the gold that they inherit, part of that is going to be sold and Bitcoin is going to be bought by millennials. And of course, you know, you don't have to inherit the gold. You can also think about how to protect your portfolio against systemic risk. and that's when gold and other liquid assets with low third party risk come into play. So that would be my case for why you want to own some Bitcoin, is that it's going to complement gold.

Starting point is 00:23:19 And maybe we'll talk about this more, but Bitcoin has a lot more functionality, literally, I mean, technical functionality than gold. It really can become the internet of money because it's natively digital. And that makes a big difference versus gold. If you want to make gold part of the digital world, you have to then build a gold bank. and then all of a sudden you're talking about trusted third parties again. This might sound kind of funny for a person who has as much experience as you have in this field.

Starting point is 00:23:48 But whenever I've had conversations with people that know nothing about Bitcoin, I hear them often say, oh, well, it's $6,000 a coin. I'm not going to buy one of those. Slam this one out of the ballpark for us, let people know that it's divisible and all that kind of stuff. Yeah, so saying one Bitcoin is too expensive because it's $6,000 today, that's kind of the equivalent of saying, you know, one 400 ounce ingot of gold is too expensive because it's over half a million dollars today. Like that is kind of going past the fact that it's, we're talking about a fungible good. It's almost infinitely divisible.

Starting point is 00:24:21 So you can just as much, you know, buy 0.01 Bitcoin. It doesn't matter. It's still claiming a bit of real estate on Bitcoin Island, right? Bitcoin Island is 21 million coins, whatever that surface is. You claim your stake and it doesn't really matter how small. that is it doesn't have to be a one coin stake. So I can go out and buy 0.007 Bitcoins if I want. Yeah, I mean, for the moment, Bitcoin is divisible up until 100 millionth of a Bitcoin. That unit is called a Satoshi. So yeah, you can theoretically, probably even in practice, you can buy 100 millionth of Bitcoin.

Starting point is 00:24:57 And with the Lightning Network, you actually can. It was a competition recently. Somebody sold an art piece, and the piece would be given to the person that managed to pay the least amount of Bitcoin. coin. And so in Lightning, you can actually go below one Satoshi. So I forget the amount, but somebody calculated that the value of the winning bid was lower than the price of one grain of sand. I don't even know how that would be possible if the protocol set up for, what is it, 10 to the negative eighth units you can go down to. So how in the world can you do that on Lightning that you go below it? Well, it's kind of like it's the same thing with the tabs, right? I mean, And you can, even though you have a one cent coin in your wallet and that's supposedly the lowest

Starting point is 00:25:39 denominator, the bartender can agree to keep a tab for a lower amount. Yeah, that makes sense. Oh, that's cool. Another question that is often asked to Preston and me, and I'm sure you hear that a lot too, is that why Bitcoin? There's so many other coins out there. How do we know that Bitcoin is the coin that will prevail and maintain the position as the top currency in terms of market cap?

Starting point is 00:26:03 I mean, I would be hypocritical if I said, oh, just trust me, it's Bitcoin. Like, obviously, don't trust me and, you know, do your own research. I guess my suggestion would be look at the developers involved in Bitcoin, like their pedigree is just of a totally different level compared to any of the other old coins. These are people that have actually built the Internet. These are the people that are now building on Bitcoin. And then I would also say, consider this perspective on Bitcoin is that what Bitcoin is a about, it's not, you know, we can talk a lot about, you know, the technicalities and things like that.

Starting point is 00:26:38 But at its core, what Bitcoin does is it converts electricity into financial reliability. All this work that goes into Bitcoin, all this mining, what that is, is just building a moat around Bitcoin to make it immutable to have this decentralized consensus. And so once we've come up with a mechanism to do that reliably, why would we need 10 different protocols to do that? I mean, and Bitcoin has shown it's been around for over 10 years. years now, it has the Lindy effect, I believe, which is this, Asim Taleb talks about that often. It's a phenomenon that as time progresses, they become only stronger lodged into the human

Starting point is 00:27:14 consciousness and in society. And so the fact that it's around for 10 years already, it predicts that it'll be around for a lot longer. You know, in terms of brand value, you have to consider that too. In my mind, it's really the dot com of the space compared to dot org, dot net, dot rU. There is no physical reason why dot-com domain names are 80% of the entire domain name market and why the value of, for example, pizza.com or investing.com is going to be literally 100x that of the next domain name at times or at least 10 times higher. And the reason that it does have a higher value is kind of a self-fulfilling prophecy. It's just that if you buy a dot-com domain name, it signals to the world that you are making a long-term investment,

Starting point is 00:27:57 you believe in your business, that you're not just going to go for a quick scam. And so I believe it's similar in Bitcoin, whereas the actual protocol may be only a little bit different from the next altcoin. The fact that Bitcoin has kept its integrity for 10 years, has not changed its rules, has the largest by far. I would have to look up the percentages, but probably around 90% of the electricity in the world that's used for mining coins is going to Bitcoin. It's definitely above 70%.

Starting point is 00:28:27 And so it has that that huge firewall around it. The fact that it's slow to change is actually its core virtue, the fact that you can rely on it. So it's almost like an element on the periodic table where you can just, it has these features that are just never going to change. And that's what will allow the world to build on it. Those would be some suggestions of areas for people to look in. And then finally, maybe also consider if people talk about features and say,

Starting point is 00:28:54 oh, but this coin has that feature that Bitcoin doesn't. consider that digital protocols are developed in layers. So you start with a core basic bottom layer that has one feature and then new layers are added on top of that in a stack. So people talk, for example, about the internet protocol stack, like TCPIP is only a part of that. And so the same with Bitcoin. If the core protocol is reliable, then you can reliably build new layers on top of it. And that's what's happening with the Lightning Network, with these federated side chains and other things that are happening, all those features that people are saying, oh, but my altcoin has that, that's all going to come to Bitcoin. It just needs some time. And that's something that the market is learning,

Starting point is 00:29:35 is that it's an incredibly rich ecosystem. And we don't need to invent a new Bitcoin to have, you know, the next fancy feature because it can be embedded in higher layers. So Bitcoin's a protocol. And for people that are not computer science majors, when you say T-C-I-CP, and you're talking about the protocol layer that the internet runs on, and Bitcoin is a protocol, help a person understand what a protocol is. Yeah, a protocol basically is just a way of doing things. You know, the fact that all around the world we use similar shipping containers, you could call that a protocol.

Starting point is 00:30:10 It's just a universally accepted standard way of doing things. And that's what sets apart a unique design, such as, you know, this architect's building my home uniquely for me. That's what sets that apart from a protocol, which is going to be universally, it's almost like a language is a protocol too, right? The fact that we're talking English, even though we're probably sitting on different continents right now, it allows us to move information around.

Starting point is 00:30:34 The same with these shipping containers. It's one piece, one element of the entire supply chain of the world, but it's important. The fact that it is so uniform and reliable. So that's the interesting thing about protocols is that sometimes their inertia and their immutability, and that is sometimes really the strength of it, like, you know, the fact that very simple things like bolts,

Starting point is 00:30:54 our uniform around the world or just so many examples of that. So that to me is the intuitive way to think about protocols. So let's shift gears here. Sure, back in 2017, when you had the huge surge in the price of Bitcoin, the vast majority of the investment banks and other big financial players did not allow people to purchase Bitcoin through their platforms. A lot has happened since then. What is the most important development all the past two years for the Bitcoin community? We're making incredible inroads in that sense. I call it Bitcoin's financialization where, you know, more and more wrappers are built around it. More financial institutions are integrating it into their operations. Yeah, so 2017 was a very modest start. We had LedgerX with their physically settled Bitcoin Futures, CME, also a Bitcoin Futures product. So that was a big announcement. And then it took until 2018 until ICE, the company that owns the New York Stock Exchange, they announced a data. product that was related to cryptocurrencies and then also a Bitcoin Futures Platform that's called

Starting point is 00:31:58 backed. So that's going to go live later this year. 2018 was also the year where Goldman Sachs invested in cryptocurrency custodians. We also had TD Ameritrade backing a Bitcoin futures platform. This year really is quite stunning. I mean, we have fidelity of all players, like $7 trillion in assets under management. They have already soft-launched digital custody. So they are becoming a Bitcoin custodian. The NASDAQ is launching Bitcoin futures.

Starting point is 00:32:25 Northern Trust is going to provide cryptocurrency custody probably also this year. So, I mean, these are the onramps that large institutions need. They also need Bitcoin insurance. So that's also coming. Traders, they need more sophisticated products, which is, you know, exactly what's being provided. This is huge. This is really, really huge. And it's happening in the bear market.

Starting point is 00:32:44 The fact that these onramps are going live, despite the price being down 70%, really shows that there's long-term commitment from. these very large institutions. 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 proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, Vanta gives you

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Starting point is 00:36:06 This and other information can be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So for a person that's looking at this with maybe a skeptical point of view, they're saying, oh, you know, this sounds great. But I can't go to the store. I can't go to the mall. I can't go to the gas station and buy something with Bitcoin. So how is that potentially changing in the future? When am I going to be able to pull out a card and swipe it and pay with Bitcoin? I think unfortunately in the early years of Bitcoin, it was very often promoted as e-commerce. Like this is the new e-commerce currency. and a lot of Silicon Valley startups, they started excitingly building payment systems on Bitcoin.

Starting point is 00:36:52 And it was just too early. It's only the Lightning Network that allows for these fast payments. Before that, we basically had a very clunky system that's way worse than PayPal, much slower, maybe more reliable, but definitely not as performant as PayPal or let alone Swift or something. So I think it was kind of putting the card before the horse trying to expect of Bitcoin to be a payment network. But what we have seen is this massive growth. in reliability and usability of the core features of Bitcoin, which is the digital gold idea,

Starting point is 00:37:23 reliable custody, so many better hardware wallets out there now. So you can really be your own bank. For Bitcoin to become attractive as a payment currency, it has to grow more on the ladder of growing into becoming a money. People often say, well, money has four features. I think it's actually more accurate to say that money evolves in four stages rather than it's either zero or one, it's actually a process. And so money always starts out as this collectible that doesn't have anything else going for. It's just something interesting that people want to own. The next phase of money is store of value, like people want to own it because other people consider it. And then the next stage is to some extent it is used as a settlement mechanism as a payment. And then the final

Starting point is 00:38:08 stage is unit of account is this basically people, it's so embedded, it's so universal that people think in it. Like it's like language, right? It's like that's the final stage of languages if you speak it. And so to me, people paying in Bitcoin and thinking in Bitcoin, that's really, whatever you imagine the potential future of Bitcoin, that would be the final stage. That's what Jack Dorsey is talking about of like, this is the currency of the internet. Like that is going to be that last stage. So I would say, you know, don't get distracted by critics who lambasted for not a lot of stores are accepting it or something. I would say, like, look at how many family offices are always. it. Fidelity did a survey recently. 22% of their family offices own it and funds out of the 400

Starting point is 00:38:51 that they surveyed. 50% of them said that they planned to own it. So these are the numbers that matter in my opinion. Like is it used and seen as a store of value around the world? You had billionaires like Mark Zuckerberg of Facebook and Jack Dorsey of Twitter and Square who are really into cryptocurrencies. And specifically for the two of them, talk to us about the idea of decentralized applications that has crypto coin tethered into the protocol layer. Yeah, it's really interesting that you mentioned Jack Dorsey and Mark Zuckerberg, because to me, they represent kind of opposite sides of a spectrum. And you're right.

Starting point is 00:39:29 I mean, they both want to be involved in what we call the cryptocurrency space. So Jack Dorsey, he's very explicit about being a Bitcoin believer and wanting to help Bitcoin become a standard and integrate Bitcoin with, I mean, obviously, eventually Twitter. but for now it's cash app. That's about 7 million users. It's actually one of the best places to buy Bitcoin. I think they have a $10,000 limit, weekly limit or something like that. That's on the one hand.

Starting point is 00:39:55 And then on the other hand, there's Mark Zuckerberg, who has hired this team, a lot of which comes apparently from PayPal to create what I believe, basically a digital token backed by dollars. So what's called a stable coin. And then the idea is that a little bit like China, really, where people bank and transact often through their social media. media accounts. I think the idea is that people are going to use Facebook for financial transactions between friends and maybe even have your employer pay you using Facebook and things like that.

Starting point is 00:40:23 So to me, that just means that Zuckerberg is trying to market share away from banks and financial processors. It doesn't really mean that he's competing with Bitcoin. Like this is just something internal, something that already was happening, the whole fintech evolution of startups. They're trying to be and often succeeding in being more efficient and cheap. cheaper than banks. That to me is very different than a Jack Dorsey who's saying this open source protocol. I love it. I just want to integrate with it as much as possible. I think that is a lot more bold, to be honest, than what Facebook is talking about. It's a bit unfair to say that Facebook is going into cryptocurrencies. Like, that is a bit weird to me. Because it's like Amazon

Starting point is 00:41:04 already has a dollar-backed token. Like you can buy Amazon coins and they're just almost one-to-one trade for dollars. And then you can buy things on Amazon with that or gifted. to people. It's kind of old wine and new bags, I think, which doesn't mean that it could become big, like Apple Pay or something like that, but it's much more fintech than cryptocurrency. Tur, for people who are listening to this, and they're saying, hey, you know what, this interests me. I'm going to learn some more about it, whatnot. I think the number one thing that would be on that person's mind would be, how are you valuing Bitcoin today? Like, how are you coming up with a value for this currency that has never been done before?

Starting point is 00:41:44 talk us through how you think about that. For several years, I did not understand when people asked me this, like investors, they're like, how do you value Bitcoin? I'm like, what do you mean? Like, obviously it has value because it could disrupt all these markets. But that's not what they mean. They mean relative to its current adoption, is the Bitcoin price overvalued or is it undervalued?

Starting point is 00:42:03 Is it higher than it should be or lower? And then, yeah, we really invested a lot of time trying to come up with a good answer. To me, the way to value Bitcoin is you first identify what it's core uses, and then you try and measure that activity. You look at how the price evolves relative to that activity. And so to me, the core use case of Bitcoin is saving. It sounds a bit weird because it sounds so passive. But really, I mean, Bitcoiners call it hoddling. Like, you just hold your Bitcoin. And the idea is that it's a store of value. It's serving you every day by being liquid. You have that optionality of being able to sell it every day. The very, very cool thing about

Starting point is 00:42:40 the Bitcoin blockchain is it's transparency, not that you can see. all the identities of who's using it, but what you can see is the age of the transaction. So you can see how long people have been holding onto their coins or how briefly. And so it's a little bit like imagine if you could, in the gold world, if you could identify very large amounts of gold after being immobile for say 100 years, if a very large amount of gold all of a sudden started moving, well, that should mean something. That's a significant event. And you can aggregate those things. and we have a measure that we call liveliness, you can see the extent to which Bitcoin is being meaningfully used as a savings settlement platform. So we have one measure derived from that

Starting point is 00:43:21 that we call unrealized profit and losses. So that's basically the aggregate amount of unrealized gains or losses. We can track that over time. And so then we can start identifying the sentiment of the market. If there's, for example, in late 2017, we had huge unrealized profits. All these investors had basically pay for profits. And then finally, as the market declined, we had a capitulation in November 2018, during which that unrealized profit turned into an unrealized loss. And that was really painful. And it was very palpable in the sentiment in the market. So that's one measure. And then the other one, of course, there's many others, but those are the two main ones that we lean on, what we call Hodler net position change. It answers the

Starting point is 00:44:05 questions, are Bitcoin whales in the aggregate? Are they accumulating more Bitcoin? are they saving or are they dissaving and moving and selling their coins? Using that, we can identify periods of overvaluation and then also capitulation. And then right now, we believe we are in accumulation. We think this is the accumulation phase. It's the last phase of the bear market. Maybe you can link to this, but we put out a report that's called Bitcoin in heavy accumulation. Where we make this case is that the bottom is likely in, and we're currently trading in a range between 3,000, 6,500.

Starting point is 00:44:39 And once we break out of that, that's going to be the start of the next bull market. Very interesting. And we'll definitely link to a report Bitcoin in heavy accumulation in our show notes. For us primarily looking at the stock market, it looks very, very volatile to look at Bitcoin. This recent 70, you call it, 80% drop you saw from 2017 to the end of 2018. It's not as unprecedented as many people might think. If you do follow Bitcoin, this is more than that. the rule than the exception.

Starting point is 00:45:11 Sure, could you please walk us through the various bull and bear markets for Bitcoin? So we actually have a drawdown analysis in our report as well where we kind of put it all together in the table. I'm reading from it right now. The numbers are actually much harder than we suggest. Measuring a bull cycle, you're starting from the bottom of the previous cycle, not from the previous top necessarily. So for example, I mean, the percentage gain of the first one is almost, it's almost incalculable.

Starting point is 00:45:38 It's, I mean, based on what we saw, it was almost a million percent just because Bitcoin hardly had a price early on. But then in the second bull market, which ended in late 2013, there the percentage gain was 51,000 percent. And then in the most recent bull market, which ended in late 2017, the total gain was 9,500 percent from the bottom. And it bottomed that about $150. So, yeah, we went all the way up to close to 20,000.

Starting point is 00:46:05 What's interesting about these drawdowns is that they become more shamed. And just like you heard, I mean, the percentage gains, even though they're obviously astronomical, they do lower over time. And we see the same thing with the drawdowns. They also become more shallow. And that, to me, is a sign of this maturation process is that, yes, Bitcoin is cyclical. But if you think of it, all commodities have cycles. Oil has cycles, copper, gold. What I think is happening is that Bitcoin is slowly maturing into a full-fledged commodity with these very long cycles. And so the amount of days per cycle has increased in Bitcoin and the downturns are becoming more shallow. So for example, the first crash of Bitcoin in 2011 produced a downturn of

Starting point is 00:46:46 92%. Second bear market, we had a drawdown of 85%. And the most recent one was 84%, which is very close, of course, of the last one. I think this ICO mania, the mania of 2017, I think that pushed prices higher than they would have gone if it was just Bitcoin, kind of boring. Bitcoin quote unquote. And so I think the drawdown would have been less. Very fascinating. Anything else that you think would be pertinent for a person who really doesn't know a lot about this field. And I guess I call it a field because it encompasses so many different aspects of currency to network effects, to encryption. And I mean, you could just go on and on all the things that this movement kind of has going on. What do you think you would say to a person who's never

Starting point is 00:47:34 looked into this before. What would you say to them? I would suggest to buy an insignificant amount of Bitcoin. I'm not even talking about an investment. You just buy a very little bit. And what it tends to do is that it gets people, it becomes something on your radar and you kind of follow it a bit more and you become more interested just because it's a really interesting experience to actually have Bitcoin on your phone, for example. It's like this weird thing. Like all of a sudden, I have something on my phone that I can send anywhere in the world to view, to anyone, without somebody in the middle, like without counterparties. It's a really powerful experience.

Starting point is 00:48:09 So I think that would probably help people understand where some of this passion comes from. Because I think it's pretty clear that there's just lots of passion. You know, you could say zealotry even in the Bitcoin space. What's the biggest risk an investor in Bitcoin faces today? In my opinion, the biggest risk that an investor faces in the Bitcoin space today is counterparty risk. So it means that you store, your Bitcoin with a custodian, with an exchange, and then they get hacked. And there is no FDIC insurance, there's no bailouts. It's gone. Like that is the biggest risk. And that has scared people in the past,

Starting point is 00:48:47 and it will continue to scare people. And it's just the flip side of the coin of Bitcoin, where you create a trustless system that has no central banks. And that also means that you have to take responsibility and think about how to store your coins. If my mom was listening to this, you'd say, well, Tur, you just said that it can't be hacked. So go into the difference between the protocol, getting hacked, and an exchange, just so they kind of understand what you mean by third party risk. It's the analogy of gold banks in the 19th century and before. Like, you know, the fact that gold is a reliable store of value, it doesn't mean that you cannot lose your gold if your local bank gets robbed. All right.

Starting point is 00:49:23 So, Tur, I just want to give you the opportunity because you pump out some just incredible content. You're writing. anytime you post an article. Also, your Twitter feed is just incredible. Where can people find you if they want to learn more about you? I would say just Google my name. The first results is my Twitter page. And then I have a sticky tweet on top of that. I don't think you even need a Twitter account to see that. That links to our latest report. It's 15 pages. It's been read over 20,000 times around the world. And we can see where the downloads come from. So it's so fun to see these extremely remote places in Africa and beyond, like people are reading it. And we really put a lot

Starting point is 00:50:03 of effort into it. It's like several months. It's widely circulated in institutional circles as well. We just love having you on the show. And the reason we love having you here is because you are so balanced in your perspective on how you see things in this space. And we just look forward to the next time that we invite you to come back and have another conversation. And if, if things go the way it's looking. It might be sooner rather than later because I'm sure if the price continues to go up, it's going to be, there's going to be a lot of people interested in this to learn more. So thank you for your time today. Always a pleasure. Thanks so much, guys.

Starting point is 00:50:37 All right, guys. That was all the press done I had for this week's episode of the Ammasters podcast. We see you till then again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to the investorspodcast.com. To get your questions played on the show, go to to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP244: Bitcoin Basics w/ Leading Expert Tuur Demeester (Bitcoin Podcast)

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