What Bitcoin Did - BITCOIN PRICE, ADOPTION, MSTR & NATION STATES w/ Eric Yakes

Episode Date: February 19, 2025

Eric Yakes is the author of The 7th Property and Managing Partner at Epoch, a Bitcoin venture firm. In this episode, we discuss Bitcoin adoption trends, the role of ETFs and institutional buyers, and whether nation-states will adopt Bitcoin as a reserve asset and the rise of Bitcoin-backed corporate finance. MASSIVE THANKS TO OUR SPONSORS: IREN: https://www.iren.com/ RIVER: https://river.com/wbd CASA: https://casa.io/ LEDGER: https://www.ledger.com/

You can't say Bitcoin's going to zero anymore. I think it's incredibly hard to say Bitcoin isn't going to consume the market of gold. Like that, I view it like basically a near certainty at this point. Anything beyond that is where we have to make arguments. And like that's kind of the world of more technical debate, etc. But like that's the cultural shift. And I think that's the big catalyst that we're running into this cycle is there's this huge cultural shift. I, what I expect is that in like three to five years from now,

I think people are going to be considering, stocks, bonds, and Bitcoin. All right. Got your book here. It's always front and center, mate. I hope you've seen you're rapping. Because it's your favorite? Yeah.

It's got me. Do you know what? I actually do like it, but my favorite Bitcoin book is Ellen Farrington. Alan Farrington, yeah. I'm the pragmatic one. He's the abstract one. But your book is the coolest because, you have Kanye quotes

and Mike Tyson quotes at the start at all. Yeah, mine far and away has the best style. Everybody else's book is a bit more like just like nerdy. I'm leaving this in by the way, so you're calling everyone out there. And how are you going to do the Kanye quotes in the next book? That's going to get some, it's going to get a bit tricky.

I have, there is no next book yet. There could potentially be a next book at some point in my life. I certainly don't have time to write another book. Well, this annual report basically is a book. It's 30,000 words, so call that a book. And there is a quote, there's one

quote in it. Yeah, which is made typical. It's Johnny Cash. Same thing, though. At least for you, Australian, it's the same thing. Yeah, basically the same thing. But it's a book. It's an absolute monster. 147 pages. Should we start just to explain why you've done this? Yeah, yeah, okay.

I did it. And not just me, our team did. it. Yeah, full disclosure. I'm a venture partner at E.Pox, so this is pure nepotism right here. Yeah, this is a conflict of interest we're getting into. But it'll be, so, okay, when I was looking at, like, in terms of like Bitcoin specific research, right?

We're in the Bitcoin world, we believe that we are going to focus on Bitcoin and and that that's really important. And then people complain about VCs and how they support crypto, et cetera. And a lot of that comes from what people believe. And how do you influence what people believe? You have to write about things and communicate ideas. And I think the biggest thing was like what we wanted to do for our firm is make our research like a strong differentiator. And I think that that helps us with communicating what we believe the founders, educating people that are potential investors, educating the broader ecosystem so that people kind of understand what's going on.

There's tons of smart people. it's just a lot of the information scattered too. And there aren't like in traditional finance where I come from, it's like you want to invest in one of these industries that's more mature. Well, then, you know, there's a bunch of analysts out there who are in a bunch of firms who all have like annual reports that are like covering these different things. And we're just like, who does that for Bitcoin? We're like, I don't think anybody does that for Bitcoin.

I think the closest thing we found is this venture studio called Thesis. And they do, they put out an annual. report for kind of like L2 type protocols. But that's just, that's this one aspect of Bitcoin. We're like, who does a comprehensive report on? Here's like everything we can basically think of a Bitcoin.

And nobody was doing it. We're like, all right, let's do it. And we kind of decided that back in September. So we've been working our ass off the past five months to like get this out. We're kind of a month later than we'd hope for. But,

um, but it's cool. I think there's a lot more that we want to get into with it next year. And doing it the first time around. There's a lot of like upfront heavy lifting that we had to do. but I'm proud of it. Our team kicked ass, and there's a lot of just completely novel

and unique things that have come out of it. Yeah, it's very cool. And it's very, very comprehensive. I was trying to think of the best place to start, and I think probably it's to do with, like, Bitcoin adoption. So if we start there, and we'll go from there. So how do you try and gauge Bitcoin adoption in a report like this? Like, all we try to do is think about it from as many ways as we could.

and then what's somewhat measurable. So, okay, I think probably what's in most listeners' mind is the people are always comparing Bitcoin adoption to Internet adoption. Like there's that chart that always goes around. And I remember when I first thought, I was like, okay, let's look into it. And basically how the numbers work is that people have Bitcoin addresses and there's a little bit extra data. but they back into a few assumptions about things to basically say, based on some of this information, addresses aren't people, obviously.

And if you're running your wallet right, then you should have quite a few addresses. But there's different assumptions that go into a methodology that kind of back into like a user base. And then some people have tried to conduct surveys and things like that. But like really popular numbers are crypto.coms,

adoption numbers. A lot of people compare that to internet adoption numbers. And then the other thing to be like totally intellectually honest about are we outpacing internet adoption? Is that a lot of that comes down to when you decide the internet started and you can kind of shift the bars to align different directions. So it's not some sort of like highly defensible stance. It's not a hill that I would ever die on if I was arguing with the normie and saying

Bitcoin's outpacing internet adoption. But the trend is pretty structurally true that like we're growing at a rate that some of the most influential technologies in the world are growing at. like mobile technology and microwaves and other adoption curves that followed. And that's kind of what we're at right now. So like when we looked at it, we tried to break it across like different metrics and and we looked at that adoption number. And one really interesting thing that our analysts found was the adoption methodology

doesn't really account for kind of one common form of ownership. And we call it like owners by association. So you can get in and say, You can be like, okay, so if 20 million people in the U.S. own Bitcoin, then there are owners by association. If we're really just trying to say, like, Bitcoin adoption is people who actually have some sort of claim to that Bitcoin in the future. Well, a lot of those people have wives. And if you look at the standard demographic for male ownership between the age of like 25 and 45 is the most prominent, then there's definitely a lot of wives associated with that.

So we did a bunch of statistical analysis and yada, yada, and basically came. out to we think kind of somewhere in the range of like 40 to 50 million people in the U.S. have exposure to Bitcoin. And then globally, that's somewhere in the range of like three to 500 million within like certain standard of error. And that was kind of one of the first big things that we looked at. And then we wanted to break it down across like, okay, well, individuals and then businesses and then nation states, ETFs, other blockchains and how that works with like wrapped Bitcoin.

We wanted to throw some numbers in there around that. And then the last cool thing that was pretty unique was we wanted to take a look at how it's being spoken about in the media and what ultimate media presence is. And we did some web scraping around that. What Bitcoin did is brought to you by our lead sponsor and massive legends, Iron, the largest NASDAQ listed Bitcoin miner using 100% renewable energy. Iron are not just powering the Bitcoin network. They're also providing cutting edge computing resources for AI, all backed by renewable energy.

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and earn up to $100 in Bitcoin when you buy. That's r-I-V-E-R-com forward-slash WBD. So let's start with those numbers of like Bitcoin adoption. Did you say 400 million? Yeah. Yeah. See, to me, like that seems really high. Like, and so I think it's worth breaking down where that ownership is.

So for like we know there's not 400 million people on chain. Like that's impossible. It's like you can just see that that's not the case. Yeah, completely. How many people do you think are actually on chain? Oh, that's a good question. Honestly, I don't know. Because to me, I would have guessed that number would be like less than 10 million.

Yeah, like, yeah, like 10 million or something, a very small percentage. The vast majority of this I would expect would be like, you know, custodial ownership in some form. But and then with like, what was interesting on the ETF side is that like, you know, a good amount of that's non-filers. And then we can kind of assume from the data that a good amount of non-filers of the ETF is represented by retail investors. So there's a lot of people that are coming into like custodial based products. And then in terms of like the growth of that number, is there any idea of whether that's growing in a Bitcoin specific way or if it's like a broader crypto exposure growing? That's interesting. We did have some of the crypto data.

And, you know, I think it's a it depends. It's grow. It was growing pretty drastically for both. I wasn't deep diving as much into the crypto side of things, but we definitely could have put those numbers in there. But I think that it's, the growth was like, I think about it was, it went from like 5% of the U.S. population in 2021,

up to 15% is kind of our estimate right now. And that seems pretty intuitive. I think like anecdotally in my life, Like, because when we try to like baseline ourselves a bit on some of these estimates, it's like, does that add up like 15% of people? It's just like, yeah, anecdotally, like male population, younger, kind of within this region, most people I know that fall within that demographic, which I'm over representative of. But they have exposure to like Bitcoin or crypto in some form.

Yeah, I think it would be similar to like my friendship group. Although they're definitely not Bitcoiners. So there's still work to be done there. but I think that there's people that have like some exposure. Yeah. One of the things that's changed quite drastically this cycle compared to last is Bitcoin's dominance at this point. So it seems like the sort of crypto world has bifurcated massively where it's now just Bitcoin and meme coins. Yep.

And everything else is kind of just like an also run. How much did you look into that? So we have some data on it. And I think that that's that's kind of one of the big structural trends. So, like, dominance is going back up, and it's going back up in a pretty significant way that's a bit out of pattern historically. In the big shift in market capitalization, which is more, that's not actually in our adoption section. It's towards the end of the report we put into the VC, but the VC section, which is the final section. But the market capitalization of Bitcoin versus all the rest of the other cryptocurrencies, it's always been parallel historically.

like crypto just followed, you know, it was high beta Bitcoin following it. And right now, over the past few months, we've started to see a pretty significant divergence in that. And so it's kind of like, well, why do you think that's happening? And that's what's so compelling is, one, there could be a data issue here with some of the stuff that we're seeing. And it's not all being incorporated because there's thousands of new things with, you know, kind of these like bullshit market capitalizations that exist on different trading websites and meme coins. and lose a significant amount of market value that's been going into that through meme coins. But, I mean, how I look at it is,

my favorite thing about the meme coin cycle, like, I think meme coins are hilarious. I think it's pure gambling. It's calling it exactly what it is. I like to gamble. I mean, I'm not like a gambler. I have buddies who like sports bet all the time, but like it's like a social thing.

It's like a fun thing. If I go to casino with people or something, like when you and I were in Vegas, and you told me to put another $500 on, roulette and I want everything back like that was awesome but you know I it's not like that cultural thing's fine with me I just think that what I'm against is when there's all these false marketing narratives with tokens trying to convince people it's groundbreaking technology when it's just as much of a meme coin as anything else and so that's what I like

about the meme coins is that it is reality and people know exactly what they're getting into And I just view it as like there was some of the earliest, if you go back to like the beginning of the emergence of crypto with like name coin and some of these original all coins. These were all like very legitimate attempts to really try to compete against Bitcoin. And Ethereum was like that as well.

And then as they've learned like lesson number one, don't try to compete against Bitcoin as money. And two, now that we can't do that, the moniness of our crypto is not really a sustainable value over time. They keep shifting further and further down the risk curve. And it's like, and then, you know, investment shift more into like NFTs and we have these cycles around this. And it's just like, obviously, that's not competing with Bitcoin.

And it's just this purely speculative thing. But at least it has some tangible real world value. Meme coins are basically like this new category of gambling that emerged. And it's like in the purest sense exactly what it is. if we can just simply get enough attention on this, then it will happen. So I kind of view it as like we've pushed all the way to the end of the risk curve. And people have kind of said like, okay, we've tried all these different things. We keep moving out.

And it's almost like this, I kind of view it as like this nihilistic last hurrah for the legitimacy of crypto from a monetary utility standpoint. And I feel like we're starting to see that divergence where a lot of people know that. And what was interesting that we found is when we were in the looking at media adoption, we're trying to say like, you know, how much attention is or some of these other key search terms getting. And we did some web scraping of like traditional media is trying to look at that as the most representative of, you know, what the broader population is thinking outside of like our bubble and our demographic that's on social media. And what was really, really interesting is that, and this was for the New York Times and for CNNBC, a very similar pattern, that the number of mentions of cryptocurrency and Bitcoin,

they've both rebounded with this bull market. They're a lot lower than they were in prior sales, but they both have rebounded with this bull market in parallel, as you would expect from the historical relationship. What hasn't is the key search term Ethereum. And that's really interesting to see that, like, for the first time since, like, you know, the emergence of Ethereum's popularity, that divergence is starting to happen in the traditional media.

And that's what I kind of see is that there's a bit of a shift in like the categorical representation of Bitcoin now. And I think that that's actually going to start to compound a lot more. And I feel like there's a bit of a cultural shift. Yeah, I definitely want to talk about that media side. But just quickly before we do, one of the things that's interesting on meme coins is because like obviously we've seen this stuff come and go in the past. Like we saw ICOs and NFTs and all that shit. And they're here for a bit and then they're gone. The interesting thing is, meme coin seems to be staying around a little longer.

And I've been trying to figure out why. And I think it's just that gambling doesn't go out of fashion. So I don't think it's going to have cycles in the same way. Totally agree. I don't think it'll be as much cycles. I think it's a new category of gambling. I think it'll always exist. I will buy meme coins when they're built on Bitcoin.

Like that's when I will buy a meme coin. Because some of them are hilarious. That's kind of funny. I kind of want to go throw five bucks into that or something. But yeah, the second that we have and those things coming on top of Bitcoin where I think that there will be meme coins and gambling markets and things like that, then I'll be interested in it. I just think it's a new category for it. Yeah, it is interesting. So back to the media thing, though.

One of the interesting things in the report is whereas, like Bitcoin has kind of had a peak again recently in terms of media interest, but it's still way lower than 2017. And I was watching Matthew Pines, he was on like this UFO podcast. recently. I love Matthew Pine, so I try and watch everything he does. But if you read the comments under that, it was brutal. Like, just the fact that he'd mentioned Bitcoin, he got absolutely slated. So I think there's a strange thing that's happened where I think everyone's heard of Bitcoin. Everyone knows what it is, at least to a degree. But people are really turned off by the idea of it. How do you think that changes? So, so like, you're saying like broader population is still like resistant to it and you think

like this site it. They know what it is. They hate it. Yeah. Yeah. I guess like, I don't know, man. I kind of think that here's what I've experienced. And of course there's always going to be haters, but like a lot of what I experience and for context for listeners, you know, I've kind of come from like the traditional finance world. And there was a period of time where like, I think very early on when I was getting involved in Bitcoin, there was just a lot of outward critics. They'd be like, oh, that's ridiculous or something. And then there was kind of a period of time where, if I was talking about in conversation, they would just kind of go quiet because they have a different opinion.

I think the biggest shift that I've noticed over the past year is there's so many people who were those people who were quiet, not too long ago, that are now like, you know, a bit more wide-eyed, a bit more open-minded, and they're saying like, yeah, it's interesting.

I feel like within the financial world, at least, there's a huge shift towards being open-minded towards learning more about it. And that was something else that we flagged and we found evidence for is like the Bitcoin obituaries website and we put that on a chart of price over time. And like, you know, different media sources qualifying Bitcoin is dead, you know, having that extremist standpoint of this thing is going away forever, it's going to zero. That's pretty much died off now. And like that, that's kind of the big shift that I see culturally is I don't, I think it's incredibly hard because all of the data is on

our side at this point to say that you can't say Bitcoin's going to zero anymore. I think it's incredibly hard to say Bitcoin isn't going to consume the market of gold. Like that, I view it like basically a near certainty at this point. Anything beyond that is where we have to make arguments. And like that's kind of the world of more technical debate, et cetera. But like that's the cultural shift. And I think that's the big catalyst that we're running into this cycle is there's this huge cultural shift. What I expect is that in like three to five years from now, I think, people are going to be considering stocks, bonds, and Bitcoin in their portfolios. I think it's going to become a cultural normality, particularly with younger generations, of just saving it. I think that shifts

happening right now. And the media and a lot of like, you know, the price information, etc., there's a lot of things that I think are pointing to that. Yeah, so let's get into the price. But before we do, how much for issue do you think unit bias is going to be there, especially when it comes to younger people. Like so the people in sort of tradfair world who are rich, they're not going to care that the price of $100,000. If anything like in a risk adjusted way, it's a more interesting option for them now than it was in the past. But for people who earn 60K a year or whatever and are just like trying to stack sats, what do you think that means for them? I think once it's a cultural shift and their uncle is educating them on it, it's not like he's a bitcoiner, he's just some guy who's doing it. I

think that that's going to become much less of an issue. I think that people are generally just going to be more educated on it as a phenomenon, and they're going to know that everybody else around them is doing it, and then they're going to ask how they, um, if that is the case when it's happening. But, you know, it is wild how prevalent unit biases with it. And, um, and maybe I'm dead wrong about that. But I, I just think that that's going to shift really quickly when once, uh, a material proportion, or like the majority of people around you are doing it, then they're very going to quickly, oh, no, you can buy a fraction of a Bitcoin. And I think that'll start to shift.

Yeah. That's one that, like, just again, from like a personal standpoint, I feel like it's already putting off people in kind of my friendship group. Like I think a lot of people are now looking at Bitcoin. I've been telling them about this for years and years at this point. And they're just looking at it now as too expensive. So I think there'll be a weird gulf in between where people are scared to get into Bitcoin before they realize they kind of have to.

But we'll see how that plays out. But let's get into price. So, I mean, Bitcoin just keeps winning. It's crashed again to $95,000. We live in a crazy time. Do you think this cycle is going to play out similarly to previous cycles, or do you think something shifted sort of fundamentally in the market? I think that we're hitting an inflection point right now.

I think that, you know, the biggest thing in my mind is like, Right now, all of the data is on our side. What's wild are the guys who were grooming into the void early on in Bitcoin's livelihood and just arguing basically based off fundamentals. It's like, yeah, this thing is kind of, you know, it's just a mailing list a few years ago. People are speculating it. We use it for drug trade. But it's going to be the next neutral monetary system of the world.

Like making those arguments back then was wild. And like now today, you know, being a Bitcoin advocate today doesn't take, you know, 100th of the amount of balls it took those guys to do it back then. Today, all the data is on our side and we can say, like, Bitcoin is one of the best performing assets in measurable history. And, you know, in terms of, like, out of publicly available data, right, and we look at, like, you know, recent asset prices, there is no company that has reached a $2 trillion market cap in 15 years.

Like, that's how rapid this has been. for it. And like we, a lot of the companies that are more valuable from an equity standpoint than Bitcoin, you know, it took them 30, 40 years to kind of get to this point. So like, that's what's really interesting is like we have one of the best performing assets. It's risk adjusted returns. And this is the biggest thing I think to like financial allocators to cycle. Risk adjusted returns are outperforming all other asset classes. And like even when you compare, can you explain how that actually works? Yeah, yeah. So like there's, there's, there's different ratios, there's a sharp ratio, there's a Sortino ratio that basically take the

performance of the returns and then they divide it by a standard deviation over, like, I won't go through the whole formula, but it's like over a market premium. And what they do is it basically tries to say, given the amount of risk you've taken on, which we measure by some measurement of the volatility of this asset relative to the market that it's trading in, how do, how is it performance relative to how much risk you took? And now a lot of people will argue that like, well, volatility is a risk, and that's true. It's kind of hard to actually really measure risk, but most things in finance are truly just proxies.

And this is kind of our proxy for risk-adjusted returns. And it definitely gives us more insight into the amount of risk we took on than not doing it at all. So like when you look at it from, regardless of even if you disagree, like a lot of Bitcoiners like to like throw a wrench into things. And I'm always happy to argue about financial theory. But the whole point is that it doesn't actually matter. What matters is that portfolio allocators look at this metric. And they make their decisions based off of it.

And so when we think about it from that standpoint, and it's just like we have this asset that's performing so well, it's the best performing ETF in history. Its AUM is larger than the gold ETFs. It had performance in two months when it took the gold ETFs two years to do. It's more scarce. It's the only asset in the world of supply that doesn't respond to demand. Like, you know, largest computer network.

work in the world, we can go on all day. There's just like a million things that you can go into now. And all the data supports its price performance and sharp ratios. And then they have to say, okay, the burden of proof is on them now as to why they do not have this incorporated in their client's portfolio. And I view that like over the next few years, this is like all these 60, 40 portfolio guys are going to be thinking, okay, that you at least need a one to five percent allocation. Like that's one of the big shifts that's happening right now is like, okay, we need a little bit of an allocation. And I think that, like, I think that there's a few metrics, and this is what we incorporated in the report of what we're watching, that will change that one to five percent

to turning into like 30 percent in the not too distant future. So, like, the, I'm not like a, you know, price guy. I don't spend a lot of time looking at this stuff. There's just a few things that I'm usually looking at to say, like, long term, what is going to change the perception of this asset? And then that'll ultimately cause some sort of demand change. Two big things are, what is the assets, long-term trend in volatility? And what's really cool is that it's declining significantly, as you'd expect of a maturing asset as it gets larger. And which is funny because like when Taleb went all anti-fragile on us, like that was

like his primary argument. He was like, it's volatile. And like, look at like these past four years of data and it's, it's very volatile. It's just like, it was crazy that he made that argument. Of course, it was like some sort of emotional thing he was doing because it was stupid. But we look at the volatility data now and he's like, dead wrong. It's declining as the asset matures. And I think that that's being driven by one larger scale.

It's harder to influence the market price with smaller capital flows. And then the maturity of the asset class in credit markets. So, like, as we have less like 2021, fraud in credit contractions because nobody knows what they're doing. And a lot of that you could argue is because companies weren't allowed to really participate in the traditional financial system and take advantage of the risk management that those institutions have been doing for a long time. So, like, that's one reason.

But nonetheless, now that, like, Sab 121's repealed and banks are going to start doing this, you might disagree with how a bank can actually make loans, But the reality is that even if banks end up taking on a ton of risking credit, they have access to a Fed discount window. And society has to pay through that for inflation. It ain't right. It ain't wrong. But what it's going to do is it's going to backstop credit contractions.

And I think that that will change how leverage is being deployed around the asset in the market over time. And it's probably going to be a lot less volatile from that. And then lastly, like, passive flows are a big change fundamentally in the market right now. too with ETFs. There's a lot more institutional passive allocators that are just buying and putting it away for a longer period of time. So, I mean, all those factors combined, I expected to shift a lot more on the volatility side. And then it's like, what does that mean? I bet correlations changed. Now, that hasn't changed too much. At the beginning of last year, I was getting excited because there was like a couple quarters where it was starting to shift. Those have all recently reversed

over the past quarter. But correlation of Bitcoin with other outside classes is still pretty high, particularly with equities. And a lot of that's just driven by like liquidity. And we've been in this, you know, whatever it is, 15 year bull market of Fed liquidity since GFC. And so there's a lot of that going on. But I think that as volatility declines, that that's going to start to change within this asset. Because we have a chart in there that shows like, what is the number of number one concern for people that invest in this asset. Far and away, it's unstable value. Like, nothing else compares in terms of concerns. So, like, as volatility goes down, that changes the way people are going to be buying it and thinking about it, and then it's going to mature,

and then that's going to change its market structure. And then that's when we're going to start to see a decoupling and its correlation with other asset classes. And that's the big thing. And I feel like that's right around the corner. I feel like we're, you know, years away from that happening. and once that happens is when a bunch of portfolio manager, that's when I think Bitcoin changes a 60-40 portfolio to becoming the 30-30 portfolio for the hyperinflationary central bank environment. And then a lot more like, you know,

Bitcoin standard people are going to come out of that as well. So when you talk about diminishing returns, obviously last cycle, it was just full of fraud. I don't feel like we ever went as high as we probably would have done without FTX and Lunar and 3AC and all that stuff. Do you think we see diminishing returns this cycle, or do you think this is something in the near future kind of post this cycle? Yeah, I don't know. I'm bullish.

Like, I'm bullish. I think that I still think we have a few S curves. I think that we're seeing diminishing returns in the asset right now. But like, the, the, you know, because that that's on a relative basis, not an absolute basis, right? Like the amount of capital that will come in to push Bitcoin from 100K to a million is massive. And obviously that'll be the biggest bull run. But like the relative performance of that to like the 2011-2013 rally is not going to be as good. So like we're still going to see diminishing returns relative to its prior cycles.

But nonetheless, we're going to see very momentous changes in its adoption in society. So, and that's just comes from it, you know, getting to the scale that it's getting at. But I think that still being able to capture, you know, a 10x return is in an asset that I view as safe as Bitcoin. That's, that's like, it's the best bet that you can be making right now. And so a little early, you were talking about like the ETF buyers. How do you try and characterize the ETF buyers in the market? because I've been really surprised personally how few net outflow days we've had. Like there's definitely been some and recently there's been a few more.

But do you think they're kind of displaying the same characteristics as Bitcoiners as in they're just buying and holding this asset? Yeah, it's interesting. I don't think so. You know, because a lot of the non-fileers, we can assume we're kind of like retail types. But there's a lot of like hedge funds that are involved in it as well. Do you know the makeup between like retail and hedge funds? Okay, so of all Bitcoin in existence right now, USETFs are 5.5% and non-fileers are 4.3% and I think that we can ask our analyst about it, but of that 4.3%, like 80% we would expect as like retail types. and then of the remaining,

the largest category is hedge funds at 0.5%. And then, you know, like investment advisors, R.A. is 0.4%. So those guys... So it's largely retail. Largely retail. Largely retail is still buying this. And it doesn't mean that like institutions aren't getting a significant presence, but there could be the types of like non-filers that would be getting involved in it. There's probably some people that can speak a lot more to the details.

It's really not our area that we focus on. But we can look at similar proportions and kind of apply them to this. This episode is brought to you by CASA, the leading Bitcoin self-custody solution. I've been using CASA for a few years at this point, and I can't recommend them enough. Kasa have options for all Bitcoiners from a 2 of 3 multisig to a 3 of 5, and a private client option for absolute best-in-class security. CASA also have an inheritance product which I've recently set up and it couldn't be easier. My inheritance plan has gone from a vague treasure map for my wife to a rock solid plan that I have total confidence in.

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Right, let's get into Nation States. It's been a pretty big week for nation states. We've seen Central Africa African Republic come out with a meme coin. Malay, I don't think he actually he started the meme coin, but he's been shilling. I don't even know what happened. What happened with that? He's been shilling Libra. I don't know any more details in that, to be honest.

But then also, Abu Dhabi have come out and said their own, is it $440 million and like a Bitcoin ETF? So like Nation states, stuff is happening. Obviously there's talk about strategic Bitcoin Reserve. Give us your kind of like overarching view on nation state adoption of Bitcoin. Okay. Okay. This one's a bit bigger. And like in the report, we kind of tried to,

we kind of try to baseline like the significance of these different categories of adoption for people, what they could potentially mean. Like we've seen the success with the ETF. And we put some charts in there to basically say, okay, so the, if you think about how a nation state's going to be thinking from like a reserve standpoint, then their gold reserves are kind of like the most addressable market for Bitcoin to consume within their reserve category right now. And I'll get into like the reasons for why we think that way. So of all of the gold reserves that exist amongst nation states, if, you know, 5% of that were to get switched into Bitcoin,

which I think over the next like five to 10 years is a very likely outcome, then that's going to be more than all of the ETF demand that we've seen today in terms of their AEIM. So it's huge. Just like 5% of not their whole reserves or just their gold reserves. And so like,

it's this very significant category. And I wrote a paper years ago just trying to, and this was when like Russia got kicked out of our got sanctioned from the Swift system. And I wanted to just like really steal man some of the Bitcoin arguments for what's happening right now. And I, I think the big thing, like the way that a nation states thinking that is important to consider is, you know, when they have a reserve asset, when they have all this liquidity and there are these assets that they want to, you know, maintain certain characteristics, then from their perspective, how are they thinking about it? Well, they want an asset that is really liquid. They want an asset that is really stable. They want an asset that has like a really high yield capital appreciation on it.

And then the two added benefits that Bitcoin kind of brings to the table is that you can permissionlessly send it. So like permissionless payment rails and the ease at which you can permissionlessly store it. So like when you kind of add gold up, it's like those last two points are huge. It's great advantage. And like every nation state's thinking about that. And it's a really big deal. The question that where Bitcoin falls short from a nation state standpoint. And where it's going to take it time to ultimately become competitive is in terms of liquidity and stability, which is going back to the point I was making about like volatility. As it grows in size, it only becomes more likely that it becomes a more capable asset because

the market gets larger, it becomes a more liquid asset. What makes gold so valuable is that it's like one of, you know, it's like top five most liquid assets in the world that you can actually sell into. That doesn't mean that it's like efficient to physically transact. in gold. Don't misinterpret it like that, but it means that you just can sell very significant sums of it without moving the markets. So if I'm Saudi Arabia and I want to go liquidate $200 billion worth of assets into something, there's not a lot of markets in the world where I can go do that. What's the best in the world? U.S. debt, U.S. currency. It's very deep, it's very widespread, and it's very liquid. So there's, like, those are kind of the characteristics. It's like, okay, so

They still want some of it, though. And the question's like, okay, when they start doing it, what are they going to say? They say, okay, well, we can take our gold, which has very similar properties to it. And maybe we can shift 5% of it into that. And I think that, like, that's kind of the gradual process where it makes its way in, gets access to this new, you know, market of adoption. And then over time, that can bring it into, like, gold-level territory of liquidity. And once it has that, it's going to be much more stable at that point as well.

And then I think it's going to be, like, kind of an kind of the ultimate sovereign reserve asset. And there's a bunch of other geopolitical arguments that, you know, you can make for why not even just like Bitcoin versus other assets, but why just generally speaking, sovereign nations are switching more towards commodities right now. And this is something that's like pretty heavily talked about, right, and like macro financial media. But there's this shift that, you know, the geopolitical strategist who qualify as we're shifting from a unipolar

to a multipolar type structure of the world. It's not the system where we're going to have another dominant foreign power. People saying that the Chinese Yuan is going to take over dominance as just kind of like the boy who cried wolf for the past few decades. If you actually look at the data of yuan representation

at a global level, it's pretty immaterial. The next biggest competitor is the euro for a lot of trade contracts. And you look at different things like trade contract denomination and capital market denominations for like debt. And what proportions of different currencies follow within all of that. But like what we do see as a structural trend is that like dollar dominance is definitely declining in a pretty significant way. But who's picking it up? And it's just it's just a bunch of different countries that are picking it up.

So it is kind of shifting towards this multipolar type world. And another shift that we're seeing is a move from, you know, fiat-denominated debt assets more towards commodity-based assets because trust is starting to be reduced amongst countries and tensions are getting a bit higher. So if we're having a shift towards commodities and gold is a very significant type of commodity for that, and then we're also living in a world where Bitcoin is being considered by all of these and trust is declining. so the permissionless nature of its movement and its storage is much more valuable and probably will continue to be, then it makes a pretty strong case that, like, nation states are going to have at least some sort of, you know, minor allocation to it over the next few years. And the size of that market's the biggest. The funny thing to me is that, like, I agree with everything you're saying there.

And I think the states that are most likely to benefit from having a Bitcoin reserve or whatever is probably like Russia, China, North Korea. like it's the pariah states right but at the same time the US who probably have the most to lose by doing this are the ones maybe pushing this the hardest do you think that we'll see a strategic Bitcoin reserve in the US

I it doesn't seem like it at least in terms of what the broader market thinks when they're talking about a strategic Bitcoin reserve you know like Trump's always used the word stockpile and and I don't necessarily

know what that means but like are they going to own some sort of they will i mean they technically already do own it right um are they going to create any sort of future demand for it um i view it is pretty unlikely like my take on all of it it's like there's a difference between what we think will happen and then what we think um you know we want and like my take on all of it like people are getting mad at bitcoiners because you know quote unquote they're like starting to simp for the state or whatever and it's like i all adoption of Bitcoin is good. Full stop. Now, given that, I don't really want the government, like, it doesn't make any sense that the U.S. government should be starting a sovereign wealth fund, much less Bitcoin for

that matter, because of how indebted they are and because they got their money from taking it from people. They should give it back to us and we should put it into Bitcoin. That's the kind of street. I want to pump up my strategic reserve. I don't want them to have a strategic reserve. And so like that that's kind of like what I want. I think that there's arguments of like, I think it was like Nick Carter kind of made the argument that they would never do it because of like the signaling of the currency. And I don't want to put it in Nick's mouth. Maybe it was somebody else.

I thought it was him. But because it signals like dollar weakness essentially. Dollar weakness, yeah. And like I don't agree. And maybe I'm straw manning it and didn't understand. understand it, but I thought whatever. I'm pretty sure it was Nick and I thought I saw it on Twitter, but like, the, like, everybody knows that. Everybody knows the dollar, anybody who's like a significant capital allocator, we know that the dollar isn't, you know, backed by anything. And I don't

think like Bitcoin changing that signal is going to matter. What matters is our military power and our ability to protect trade routes, like pretty much all the contract denomination that exists today and what allows it to sustain is that if you want to conduct trade across these different ways. You have the support of the most powerful Navy in the world that's going to be protecting those routes. And so many things emerge from that that have entrenched the dollar globally, like the petro dollar system. And if that stops tomorrow, then we probably have a issue with our currency being adopted at more of a global level. There's going to be a much more drastic shift because we're not doing our part of the bargain here. So I don't think Bitcoin signals

it. It's like, that's more of an argument that like happened with Luna. And that's because the market actually believed that Luna was valuable. And like, you can't blame all the retail. There's, like, billionaires getting tattoos and supporting it publicly. So, like, you know, and everybody asks themselves, well, am I smarter than these guys? And then it turns out, well, all these guys are dead wrong. And that's, like, the funniest thing about this industry is how much you learn that really smart people make massive mistakes all the time.

And, but so everybody actually believed that that collateral was very. valuable that was backing Luna. And then once they, the founder, whatever, Duquan was like, no, we're going to shift some of it into Bitcoin. Then it signaled to everybody. They're like, oh, well, I thought that Luna token was valuable. Why would Bitcoin be more valuable? And then that like basically de facto started the run on the entire system and everybody

realized that it was just a circular reference in the protocol. And like, I don't know. I think it's an argument for stuff like that, but I don't think that it really applies to like U.S. strategic reserves. So you think really the argument whether it's good or bad for the dollar is just semantics and any any Bitcoin stacking is good? I mean, it would have to be, I think that like any, at the end of the day, any Bitcoin stacking is good. My perfect world, they should give us our money back. That's not going to happen until 20 years from now. And that's, that's my number.

But once, in the meantime, it's better that they buy it. But I just, I don't think, that I don't think that the strategic reserve is something that it would have to be so significant in size for it to really influence anything for the US strategically. And I doubt that anything that comes from it is going to be that significant size. Yeah, fair. What about the smaller nation state? So obviously, like El Salvador had great first move by advantage. Bhutan have absolutely crushed it with mining Bitcoin. Do you think we'll see more of those smaller states taking the opportunities to be fast. Because they're the ones who can win the most from it, right?

They have such an incentive to get early on this and drastically change their economies overnight from it. I mean, look at what's happened down in El Salvador, the amount of nobody even heard of it until they adopted Bitcoin. It's a small country that's like, you know, basically its GDP is the size of a mid-cap public stock. Like, it's very, it's basically like a. city, right? And they had the worst crime rate and that's all changed. And like there's a lot of

really good things and a ton of tourism has come around. All these things that are impacting it pretty well. And a bunch of other, that's signaling it's all these other countries that are doing it. And that's always been my, um, my baseline thesis for political adoption. I was pretty surprised at how everything changed politically here. And it makes sense in hindsight. I just thought that given how deep leftist politicians had gotten into this, I was surprised that the right responded so drastically. And it makes sense because we are such a material proportion of the voting class at this point. That kind of supports the adoption metrics, by the way, that, like, they are pretty significant

because of how much political pandering or catering to this class that happened over the past cycle from the right. but it's uh i think that like that support politically is um it's something that's not going to um it's just something that's like you know it's just like it's they're they're doing it for votes there isn't like any sort of strategic rationale here that they believe in like the one politician i think truly strategically believed in bitcoin was rfk i think he actually understood it. And like if RFK was president right now, I think he'd be like actually aligned with us in terms of we're going to take this country to the 21st century and we're going to have the most valuable collateral asset backing us the whole way through. I legitimately believed him, which I don't

really say about politicians very often. He just had such a good understanding of it. And but yeah, it's this political pandering. And that'll probably keep happening and that's good. That's why, like, that is the argument for why it matters that, like, the, uh, you know, like, you know, like accelerationists. Um, yeah. Yeah, like accelerationism. I used to be kind of in the camp a few years ago of like, no, we want this to happen gradually, um, so that people don't get hurt. And then like, as I thought about that point a lot more, I'm just like, that doesn't really exist. Like, it's just going to happen and people are going to move.

The timing is, one, something about. completely outside of our control. And the longer it takes, it's really just putting it more at risk of being stopped in some sort of way, or at least corrupted in some sort of way. And therefore, it's just like, you know, ripped the band-aid off. And I think that, like, that's the argument, like, Bitcoin grew fast enough and adoption got wide enough to where now we have politicians simping for us as a voting class because we're such a significant proportion of the U.S. economy. And that's good, particularly in our world, because it's really going to impact the amount of risk that like founders who are building things that support Bitcoin adoption are going to have to

take on people's lives are going to get a lot easier because of it and that's that's great. Totally. So I want to get into this kind of corporate finance side, but before we do that, you brought something up there that's I think worth talking about, which is on the sort of regulation side. Now, like, no matter what you think of Trump and whether he actually is going to do with a strategic reserve, the one thing that has come out of this that's been very good is more relaxed regulation on Bitcoiners and Bitcoin companies. Did you tell us about what you put in a report for this side. Yeah, yeah. At a high level, it's basically like, we wanted to talk about what's happened. What's happened in the regulatory environment?

Let's put into simple language and then set some expectations for how things will go going forward. Who's in the political cabinet? What happened in the House and the Senate? What can we expect from Congress going forward in like pro-Bitcoin and crypto legislation? From a regulatory standpoint, and it's pretty much all tied very similarly in terms of crypto. And ultimately just, you know, who some of the people are that are involved in all this. Like, what could we expect from David Sachs and Paul Atkins, etc. So we just kind of talk through all the most relevant topics and, you know, set a baseline for what things will look like going forward. Okay, cool. So let's do corporate finance.

I want to start with micro strategy, mainly because I actually think the more interesting stuff is what's going to happen after micro strategy. And that's not to take away from what they've done. It's incredible. Do you think this is probably one of the most defining trades of like the recent time? I don't know because, well, one, I'm not a trader. So I don't know how to assess like when people say that,

like this is one of the best trades. It's just like, well, compared to what trades? Like, what have been the best trades? Like, there's some pretty significant ones. And yeah, maybe it's, It's a big deal, right? Like, it's, well, what he's done with the company, the way that he's changed it. I don't believe that any of this was something where, like,

um, Sailor was like, here's the master plan, you know, back in 2020. Step one is buy Bitcoin, but in 2025, I'm going to be outperforming the entire SMP 500 and I'm going to be leveraging the convertible bond market to do it. Like, I don't think that's how any of it went. I think he was just like, I like Bitcoin. I'm going to buy some Bitcoin. And then he just kind of gradually tried to. to make rational decisions over time and eventually let them to, like, we should start leveraging

this because we can actually get some pretty strong financing. And here we are today with Bitcoin doing what it does. And I think that, like, I am a bit of a contrarian when it comes to things like this. And I think when I first started, I was a bit more skeptical of it. As we dove deeper into micro strategy, I gamed a lot more comfort with it. my conclusions on it are that well I guess first I'll kind of talk about it a little bit it's like what is the trade?

Saylor is borrowing money to buy Bitcoin at a greater rate than they would be able to with the operating profits of their business or their cash and reserves and he's tapping into markets that haven't really seen a product like this so he's getting really good terms because he's giving access to a product that just hasn't existed.

Now like and that makes more sense to people I think when you understand that like fixed income investors and people that want to try to, you know, really cover their downside, like they have somewhat of a limited market as to what they can participate in. So when a new product comes in, that gives them some really interesting exposure, there's, there could be a lot of high demand, especially when all these guys are being pushed down the risk curve from like Fed liquidity. When it's just like, how are we going to get the yields that we need to get to get with this low interest rate environment and equities just keep kicking our ass all the time? and, you know, the pension fund that's been giving us money is going to start shifting it out and putting it into, like, you know, this ETF or something. So, like, it's tricky. And I think that for the people that are buying this, it's a cool new product. So he basically, like, Sailor is, like, what is driving the price of micro strategy is that Sailor has the ability to perpetually, or I think that there's a belief that he has the ability

to perpetually finance Bitcoin acquisition. And then he's going to be able to achieve terms with how he is raising capital that are going to create a yield on that Bitcoin. And I think that there's that. And then there's some front running from them getting included in like the S&P 500 and what's going to happen with that. and then there's like the, you know, Michael Saylor effect.

Like we got that meme of him, you know, no second back to like all boat out or whatever in the report because like there's a lot of that too, right? And so like all these variables come together and it's just like, okay, so if in theory micro strategies should be trading close to its book value. And when I say book value, I kind of mean by the market value of the Bitcoin on its balance sheet. Why is it trading in a premium? And everybody kind of has a different take as to what it can go up to and where it should be trending at.

What was interesting that our analysts put together was he kind of found this way where we could basically say like, we could kind of imply Bitcoin price out of what micro strategies price is trading out and a few different assumptions. But basically what the market's saying is if we know, yeah, oh, cool. Yeah, there it is. Yeah, I wanted to pull this job because it's very interesting. So do you want to talk us through it? Yeah. So our analysts came up with a study and put this together, but it was basically like, he was like, okay, so we know that Michael Saylor has kind of given us this capital plan of the future amount of debt that they want to raise by year 2030. And it's $42 billion in total, $21 million coming from debt, $21 million coming from equity. And based on that, so we can say, all right, if we assume that that is the case, that that's what they end up executing on over the next five years. then based on its current market price, which is around like $335, and we would look at,

okay, so what book value would it be in the future? So a lot of people think like, oh, you know, it should converge to one. So like, do you think it'll converge to a book value of 1x by, say, you know, the year 2030? Then if we look at that and we say, okay, current market price is 335, we assume this capital plan happens. The book value goes to 1x by the year 2030. That assumes like a fair value of the Bitcoin today is around like 171 a little bit less. So I think it's sort of closer to like $210,000 today. But maybe you don't assume that. If we kind of look at, okay, if its book value stays about the same of where it's at and it keeps this premium overtime and it doesn't go away, what's interesting is like, so that would be like

at $335 today and the book values, I think it's around like 2.25x. And on this table, that'll lead us to 95K, which is about where we're trading out right now. So maybe that's what the market's anticipating from the micro strategy price right now. But yeah, it's kind of an interesting thing that you can imply based on where micro strategy is trading, either what its future book value is going to be or, you know, kind of like a fair value or fundamental, not fundamental, but like a fair value that it's implying in the market of what Bitcoin's price should be today. How far do you think this premium can blow out in this sort of nearer term? I don't know.

I think it could get pretty loony. Honestly, what I'm currently thinking is that it's actually going to, I think it might change a lot more quickly than people are thinking. So with the Sab 121 repeal and banks starting to participate in the market, I think that that's really going to change and get a lot more capital participation. And like, so like right now, 6% of the convertible no market is really being addressed by this industry. It's not immaterial, but like it easily four or five X from here. And like sailors raised a good amount of capital just from doing this strategy. And it doesn't even have to come out of convertible. So like of your kind of like corporate lending market, I think we've addressed about 50 basis points in this industry of that market.

Like there's a lot of room for there to be more leverage applied to this similar. strategy. And I think that that's like we do this whole deep dive going into everything around micro strategy and we look at like can micro strategy go insolvent and like I can go into some of the details we looked at around all that and we like, you know, put it to a number and said here's basically what would have to happen for them to go bankrupt. But the big thing that we got into was, well, micro strategy is going to be more like the investment grade. It's going to be like the premium kind version of this model. And then as more companies start doing this over time, there is going to be an expansion in the market of the Bitcoin leverage corporate finance strategy. And that's going to

start producing diminishing returns to people that are participating in it. And our argument is like, I think this is going to be like every cycle in Bitcoin, I don't think that we're out of the whole like Bitcoin cycle. I don't think we're going into a super cycle yet. I think we're going to have another one and I think it's going to be driven by just like a crazy Bitcoin balance sheet expansion and a ton of guys that are leveraging it. Like there's going to be all these smaller companies and cowboy CFOs who want to make a name for themselves and they want to get a stock price pop. And they're going to be taking on worse and worse terms over time in the credit. So, you know, de facto greater and greater risk for their firms. And then the second we have any sort of contraction,

it's going to cause some sort of contraction in the amount. It's going to cause, you know, liquidations. effectively in a lot of it. And this is, so back, sorry, back to the start of this section, when I said micro strategy is the least interesting, this is why, because I am very confident that sailors turned out his debt in a, in a kind of reasonable way. I think he'll be fine. I think he's got, like sailors there in the boardroom. He knows what he's doing. But when we have copycats come in and try and play this trade, what will be really interesting is when the market does turn, either can they continue to pay their debt and also just do they have like the stones to get through a bear market? Because like last bear market for sailor was not easy. Like there was

a lot of talk of whether he was going to get liquidated. And so that's where I think this is going to get very interesting. Yep. Totally. And like we looked at that when we were talking about the downside was sailor. Because basically like given, you know, future capital plan expectations, we modeled it all out. And Bitcoin's going to have to fall by the year, you know, year 2029, Bitcoin has to fall to like below 45,000 for it to have negative book value based on those assumptions of the capital plans. And then for it to really go insolvent, it basically has to fall to like 12,000 US dollars. And it has to like stay there for a sustained period. Yeah, like he's safe. He's in a very good position with all of it.

I think like, so the question's like, okay, when are we going to start seeing a degradation in terms? And I think the big thing that, so like Marathon, they issued convertible debt and Riot issued convertible debt to do a similar strategy. So Marathon's debt that they issued, that was a 0% coupon similar to Sailor, but the conversion premium is 40%. Sailor's premium was 55%. So it is a slightly worse term.

Now, we didn't pull the credit agreements on Marathon and Riot, so it's not, everything's not like Pari-Pasu. We did look at the ones with Sailor. But nonetheless, we're starting to see a bit of a degradation in terms because then we can go look at riot and riot issued at about 75 basis point coupon it's paying now. And its conversion premiums even lower at 32%. So like, and these are, you know, large publicly traded stocks. There's going to be a bunch of like really small cap type guys.

I mean, I guess they're not that. large they are kind of like smaller cap but um there's going to be more and more there's going to be much like o tc desk people they're going to be people trading on foreign exchanges doing this a lot more and and everybody's going to be looking for a pop in their stock price it's going to be all these guys are just like you know we've been doing all this crap all year everybody's everybody's going to want to jump into the party i can get a 15% pop in my stock price my board's going to be happy like you know i'm going to get sleep tonight and maybe be attentive to my wife i'm like everybody's going to be thinking like that. And I think it's going to start to get wild. I agree. And I think the

real signal will be when a company does this expecting a 15% pop in their share price and nothing happens, that's almost like the Cadarion and the coal mine that this playbook is over for now. Yep. Yep. Exactly. So like once it loses it and the question's like, when's that going to happen? And part of me thinks the way that we're surprised is that it actually ends up happening pretty quickly. And the Bitcoin balance sheet idea really starts to wear off a little bit faster than we would have expected. Do you think there's a chance that this is like something that obviously the miners are different. They're already like Bitcoin aligned. Is this something that could just just be a sailor play? That's an interesting question. I mean, it's definitely to this, I think to this

scale, to this, most likely yes, like what would be wild as if like Apple got into the game tomorrow or something. Because we looked at the top 10 U.S. stocks, and if they, just the top 10 U.S. publicly traded company cash reserves, if they were to put 15% of their cash reserves into Bitcoin, then that would be greater than the AUM or the ETS. It's like that's 15% for those guys. And maybe it's not all of them do 15%. Maybe it's like half of them do 20% or something.

But like if we get one of the major cash heavy. type companies to start doing it. They could probably catch Sailor. I didn't do the math on all that, but I'm assuming that it's pretty likely. But they're like a different dynamic as well because if it's like an Apple or a meta or someone that's sat on a decent amount of cash,

they're not having to go out into the like issue convertible notes and do it through the like credit market. They can be purposeless. They already have too much cash. They don't know what to do with it. Exactly. So like I can definitely see space for that kind of play. But I do wonder if if the Sailor play

is just going to be for him. Yeah. Yeah, it's interesting. I think that there's going to be, like, you know, Metaplanet has been executed. So I think it's fair. Like Metaplanet has basically just executed on the playbook. Yeah, they're outperforming every other equity in the Japanese stock index. And what's cool, and we have a footnote in our report to their CEO because he pulled a pretty,

like back in June before pretty much all the rally happened, like he personally guaranteed some of these notes with his own personal real estate so that he could do this within the company and like such a giga-chat move like huge Cajonese type move it's kind of similar like back to the nation states it's like because MetzPonet are tiny and they've done amazingly well don't get me wrong but I wonder if this is going to be something that like the company's on the margin like on the periphery can do yeah yeah um I think there could be a few there's definitely like there's some I have in mind, but like, yeah. Who'd you have in mind?

You know, the biggest one I don't want to talk about because there is a personal relationship there and I kind of want to work on it a little bit. But it's, yeah, I think that there's some, there's a good amount of companies where I could see a huge, huge value add to, and they're not as much. I think companies with really good brands that, because like now that game stops thinking about. And now I'm in the world of just like pure speculation for fun. But like now that game stops doing this, right, like there's, we have the meme coin craze and we had the Wall Street Betts craze and we have kind of this memetic example of, you know, exuberance that goes through the stock

market and there's quite a bit of capital allocation that can flow into that at times. And so if I'm a company that wants to shake it up a bit and I want to go this route, like, I think like an old brand that's well known of kind of like this company is a bit of an artifact of what it once was, but they still have a good amount of cash. I think that they would be a great candidate because there's going to be

a little bit of like meme quality to their stock as well. The game stock one's really interesting because if you'd have asked me six months ago, I would have bet my life that they would do a meme coin. So if they actually do kind of the responsible thing and try to build the Bitcoin position,

I think that could be really huge for them. Right. I completely agree. And they're probably, they're probably going to do some dumb shit with it though. So we'll see. But I'm tweeting at them. I'm saying buy Bitcoin only and I'll buy her stock. And I would, I would buy their stock if they bought Bitcoin only just to be true to my word. Yeah, there you go. All right, let's keep this moving on the, on the report. So the next thing that I want to talk about is L2s. So again, let's just start with a broad overview of how you kind of see the landscape for L2s at the moment. Yeah. So, like, in this report, it's like, we are, you know, we have Clark Moody on our team, who's our technical advisor and like, we're technical venture partner. And like he, so he's very literate in a lot of this. The thing is, it's like there's quite a bit of technical overview that you can go find. So like for the purposes of an annual report, we just wanted to be a bit more descriptive for, you know, the average reader around how to explain some of this stuff. And so the, we have the section of Bitcoin protocols where we go into like, here's all the other, you know, Whether you want to call it an L2 or whatever, it's just, here's the protocols that interact with Bitcoin. And here's what they do. Here's, you know, how they could fail.

Here's what would make them successful. And trying to like compare a lot of it. We didn't want to do it at a very technical level. We wanted to do it more of like a marginal level to just describe, you know, our takes on a lot of it. And up front in that section, we're just like, the big things that I really wanted to get across in this is, things that I feel like I encounter pretty frequently against the technical community, me coming from more of an economic background, is that there's so much semantic debate that occurs

that's kind of unnecessary because of just people just have different perspectives. I think the broader, this isn't true as much in like the technical community, but like the broader Bitcoin community, like when people are like, oh, well, crypto lies because it says it's decentralized when it's not. I think the honest truth is that like what does decentralization mean? Like decentralization is a spectrum of definition. I think what they're intending to say is permissionlessness.

And that's a completely different. Permissionlessness is pretty binary. It's just like either I can permissionlessly access a protocol or it can't. Decentralization is something that has varying degrees of value. Like, you know, we can look at systems of just like multisig with a company like Unchained or a company like Anchor Watch that uses. this, it's decentralizeding custody to a pretty small degree. And there's a lot of value that you can get out of having that degree of decentralization. And I think that that's true for a lot

in crypto. Now, where they, they lie about a lot of other things saying, like, you know, this is fully trust list or blah, blah, blah, blah, blah. Nobody knows what these words actually mean, but they just like throw them around. But nonetheless, like, decentralization is something that we wanted to define it. We kind of get into that distinction at the beginning of the section. And then, and then I go into defining a difference between what is scaling? And there's kind of this big difference between technical scaling and economic scaling. So technical scaling being what the technical community is frequently debating and why we're talking about all these different softworks, it's to like facilitate different types of technical scaling within the protocol. And economic scaling is more like what

how Finney was talking about and saying, well, like, no, we might be able to get a similar outcome. It might have different trust tradeoffs, but we can still achieve a similar economic outcome for people in the use case. So, like, kind of defining the difference between, are we going to find this perfect technical solution that's going to scale something that does have kind of a fundamental architectural tradeoff of if we want to get more efficiency or utility out of a protocol, then that does require some sort of degree essentialization? Are there creative ways that we can, And while it might require a bit of a trade-off, much more efficient or reduce the amount of that trade-off that it requires to scale.

And I'm not nihilistic that we won't. And I think that there are a lot of really interesting ideas. And I think that, you know, I'm starting to lean less against like the, I'm not conclusive yet, but I'm leaning less against the like ossification camp because I do think that there's some pretty interesting things that if we are going to make the change, we should probably make it pretty soon because Bitcoin just got into like big boy world basically. Totally. I think, you know, network governance is such a big question mark five to ten years from

now if we're ever going to be able to get some sort of, you know, significant proposal through. But, um, but nonetheless, like, I think that, um, so, you know, I, what I've gotten, and what I write a lot about is I've gotten a lot more comfortable with the idea of economic scaling and why I, you know, I, you know, I've gotten a lot more comfortable with the idea of economic scaling. and why I think that like that type of a future, even in somewhat of an extreme, could be fine for Bitcoin. I am a huge advocate for finding, you know, great technical solutions.

But I think the problem is, is that we're never going to totally be able to create through technical scaling systems that are competitive against centralized systems from an economic standpoint and from a, yeah. So I just want to clarify what you're saying. Are you talking about things like e-cash as opposed to, say lightning. Yeah, yeah, yeah. Okay.

So like pretty, because you, so we'll talk about this. We kind of go through the different protocols in this section and like lightning has unilateral exit, arc, which is very new, also has unilateral exit. What I mean when I say unilateral exit is the ability to exit the protocol unilaterally. You don't have to ask anybody permission to say, I put my Bitcoin into this protocol and now I'm using it for whatever it allows me to do. and I want to leave now, and nobody can stop you from doing that. So, like, that's kind of the trustless nature of a protocol

is if it has that property of unilateral exit. And lightning and archa like the two that we can really, like, truly say, have that. And then there's a spectrum, and we go into bridges, there's a spectrum of different bridging mechanisms that get people into other types of protocols like side chains or state channels or ZK rollups and these other, you know, different versions of kind of more programmable layers for Bitcoin. And I think that kind of within those worlds, one of the big changes was BitVM over the last year,

which some people think of as kind of like a step function change. I think the outcome of that still remains to be seen. But there's legitimate projects and protocols that are now being built on Bitcoin because of its existence. And like the way to fundamentally think about it, and it did more things. and there's people in the technical community that can describe this much better than I could. But what are the big changes is like bridges were pretty, they're just multi-sigs.

Like all these protocols basically, it's just like you put your Bitcoin into a multi-sig and then now you can run the software on other nodes or I won't get into that detail, but you can run the software on other nodes and you can do other things with it. So like what BitVM did is they changed the trust model where like if you were to bridge

into a three or four multi-sig side chain, your trust model is that it requires, at least three, which is represented by M, three of N, which is four, three of the four have to be bad actors for that ultimately, that collusion to happen to, you know, make something malicious happen within that side chain. So it's an M of N trust model. And BidVM changed that to be a one of an trust model. We're basically allowed certain fraud proofs to be used and to take those fraud proofs so it could be publicly criticized if the node operator is doing anything malicious. And there's economic incentives where the fraud proofs can allow people to penalize

that node operator for ultimately putting something malicious on the chain that's not following the rules. So it just means a crowd can now keep you accountable if you're somebody who's running a bitfeeM-type bridge. And so it's not a perfect trust model, right? But it might actually be really good. And it might be good enough. And like, that's kind of the question that we're trying to see in the market is, what is the optimal trust tradeoff for a lot of these things? But that was something that can work with how Bitcoin works today. And, um, and that's something that I think is kind of, uh, you know, there might be very significant changes and we're going to see the fruits of that. Maybe over the next year is like rollups get built on top of Bitcoin and there could be a lot of

demand that stems from it. But, um, so I can, I can kind of take it back. I was a bit of a sidetrack into just like defining some of these different protocols. And then to your point, so we have all these things. And then it went into the spectrum. So we have trusted guys in the middle who use like multisigs. And then we also have eCash, which is kind of considered the biggest trust tradeoff. And like that's a multi-sig as well as just a single-sig. So like Fettie Mint, it uses multi-sig. Cashew just uses a single-sig. So it's like pick your degree of trust that you want and then how seamless it's ultimately going to be. And the hardest part is like creating models

where we have certain trust tradeoffs that are trying to give more trustlessness to the protocol. But it's going to be really hard to do that when you're competing against centralized parties. Where do so many users exist today, like what we were talking about at the beginning of the podcast, exchanges and custodial providers. And that's going to continue to happen.

It's not going to go away tomorrow. So the question is like, can, I think the big question becomes, should we start building technology that's going to optimize custodial systems for us in certain ways? And is that going to be something that can at least be a bridging mechanism, or kind of like a scaffolding for us going forward in the future? And I've written, and I've written pretty in depth in some other papers around, I feel very comfortable that we can use software automation, we can use cryptography to build systems natively

that have trust tradeoffs with custodial nature to them. But those systems will be vastly more transparent and ultimately create more competitive markets than we have traditionally seen in like a banking system or a financial system. And because of that, I think that it's going to serve consumers very, very well. And I think that this is more like long-term Bitcoin Vision,

but with those trust, straightoffs, the biggest thing is like, the vast majority of users are probably not going to choose to use trustless type systems. But the fact that that market exists in a significant way is a really big deal. Because now, any sort of intermediary now is to ask themselves, they have a substitute product to compete against for the first time. We've never had that. Like, people can pull their money out and they can educate themselves and they can go through the light work of operating in a peer-to-peer manner. And like, that economy is going to exist in a very large way. We don't have that in our banking system today, unless you're like a drug cartel and you want to operate in cash.

Like, those are the only guys really capable of doing it. But so having that new competitive dynamical change things and kind of getting a lot of those points across and describing the protocols is what we wanted to get across in that section. And obviously some of the big news recently in this in this kind of domain is tap root assets on lightning. And we now know, like we saw it, was you in El Salvador when they announced that Tether's going to be on lightning? I was not. No. It was like, the first time I wasn't down there. So how big a deal do you think that's going to be?

I think it's going to be a really big deal. I think that, you know, I don't really have a creative take on why it would be a big deal. I think that stable coins are valuable. Lightning is an incredibly seamless way to settle collateral. And it's probably the most efficient mechanism for settling collateral today. The problem is that what is that collateral that we want to settle and being able to use something like tappered assets to move stable coins over the Lightning Network. I think there isn't a better way from a technical standpoint that you could do cross-border

payments. But the actual adoption of all of that is another question because adoption comes down to what are people using today. It's just what's easy. What's easy. And then how do we integrate that? Like, how did Tron become the biggest settlement layer for stable coins internationally? And it's just like, because they were in the right place at the right time.

and they're, you know, using centralized architecture to do it. Okay. I'm just conscious of time. Last thing that I want to touch on is the venture side. So you did a deep dive in the report onto all the venture firms in Bitcoin. Do you want to go through that? Yeah.

So that was me. The regulatory section is my favorite section. But the venture section is my second favorite section. And it was 1A1Z we partnered with. They had, they've done two really good reports. so far. One was they did a deep dive into who is actually funding open source development of Bitcoin and who's funding core. And it's a really good report they put together. So we read that and we got put in touch with them and we're just like, hey, we're a venture fund, but we want

in our Bitcoin ecosystem report to put an overview of venture firms, you guys would be a great third party to work with. And they were already thinking about doing it as well. So we're like, yeah, let's do this. And, you know, so it's pretty much all them in terms of what they do. did. We just had a little bit of influence over like, or not influence, but more like just helping them with certain aspects of it. And, and yeah, they did a really good job, but there's a bunch of interesting kind of like novel data. And they surveyed all the different Bitcoin VCs and tried to like define all of it. I think they, you know, they, from their interviews, they kind of like the two big takeaways that I looked out of it qualitatively was like most of the firms kind of

support stable coins, which I think is a really interesting controversial area, uh, with in the Bitcoin versus crypto type argument. When you say support stable coins, what do you mean? Like, they kind of believe that it's okay to include stable coins as part of an investment thesis. Because a lot of firms that you're talking to as a VC, they're supporting, like, you, a lot of Bitcoin-only businesses are also supporting stable coins because of how much it's demanded by consumers.

Like, yeah, we don't want to get into this whole gambling market crap. And, like, we're trying to focus on, like, legitimate long-term adoption. and like stable coins have kind of proven themselves within that category. So from like how we think about businesses is we want it to be something that's, you know, very long term valuable and there's going to be a sustainable nature to it. And like stable coins are kind of aligned with that. There's a bunch of ideological type criticisms with stable coins and yaddiata, which we can get into.

But nonetheless, like that was kind of an interesting takeaway that they pulled out. I think another thing was that, you know, tokenizing. assets and utility tokens from crypto are like a highly controversial subject to them. Like if those things come to Bitcoin, are you investing in it? And that was pretty controversial. There's so like there's 15 firms. So far they raised about 550 million and they've invested in 183 companies cumulatively since like 2019.

So that's a pretty interesting data point. How much cross investment is there? Like how many is that? How many deals are just the same like venture firms investing in the? the same company. So it's hard to describe that in a very simple way, but that's like the coolest thing they did in this section is they took portfolio company information and they tried to create crossover matrix across all the different firms to say how many people are overlapping with other people and who are kind of the most unique. So there's a chart in the report around that. That's super, super cool.

Yeah. Yeah, it's a really interesting section. There's a bunch of data that it just hasn't been found before that's coming out in it. Very cool. Well, we've only really like scratched the surface on the report, go and read it. Is there anything you want to touch on before we close out, though, Eric? I think you get, follow my team in the report. They're all, their Twitter, if you read this, they're all listed in there. They're really smart guys and they worked really hard on it. And yeah, give us a shout on on Twitter because we had a lot of late nights that we put into it. You got a shell, Epoch. Oh, yeah, and Epoch. This is Epoch. That's our neon sign back here, if you're watching on video. And yeah, we're one of the venture firms.

And we're investing in Bitcoin companies. We love to talk to founders or people that are kind of like interested in this space. And yeah, we think we're kind of at this big inflection point right now. There's a lot of really cool companies that we can be looking at. All right. Well, thank you for the time, Eric. Really appreciate that. Danny Knowles.

Thank you very much, man.