[00:01:38] Preston Pysh: A lot of the humor was, I felt, directed at me as I was learning how to play cricket for the first time there on the beach. How’d you go? What a disaster.

[00:01:48] James Check: It’s a different sport. Someone actually asked, who am I following for Australia?

[00:01:51] Who’s going to win the Australia India test? And I’m like, beer brewers. They’re the ones who are going to win in that environment.

[00:01:57] Preston Pysh: Yeah, it was, it was fun though. The, the, it was weird as I was, it’s not called pitching, I was bowling. And I had to keep my arms straight and I’ve, I played baseball there, as a kid growing up and so like some of the stuff was just very strange.

[00:02:11] But anyway, we won’t bore everybody with our cricket stories here. Okay, so here’s where I want to start off. There’s big giant consolidation. We made a new all time high prior to the halving event. And then Bitcoin went through this long consolidation period for about six months, seven months or something like that.

[00:02:28] During this period of time, we saw the ETFs continue to stack more and more Bitcoin relentlessly, what felt like every single day without any outflows. But yet the price kept going sideways and even like slightly down there for maybe call it the first three months help people understand how something like that’s possible.

[00:02:47] What was happening from a OTC over the counter exchange side, how people understand all these mechanics that are happening in the background. Cause I think there was quite a few people that were frustrated there for the first half of call it 2024.

[00:03:01] James Check: Yeah, absolutely. I think this is a really important thing to factor in when we talk about market structure and how markets just operate.

[00:03:07] It’s obviously buyers and sellers. So if your price isn’t going up, it means you have sellers. Now, what I think is really important to understand is a couple of different elements here. The first one, let’s just look really, really big picture. In 2021, we got above 1 market cap, and we tried to maintain that twice, and we got rejected pretty savagely.

[00:03:28] right, we had the first 50 percent sell off in mid 2021, and then we had the 2022 bear market. We’ve just spent seven months consolidating above 1. 2 trillion, and every single dip was actually bought. So we do obviously have a pretty meaningful amount of very serious demand. We have proven that Bitcoin belongs above 1 trillion.

[00:03:47] And in fact, now it belongs above silver, right? 1. 7 trillion. So it kind of shows that there was something going on in that, what I call chop solidation range. And really, I started writing the newsletter as we, I think it was about the mid April. So pretty much most of the check on chain newsletter has been just exploring that chop solidation phase.

[00:04:04] Yeah. So I think it’s really important to understand who is buying, who is selling. First things first, in order to maintain a trillion dollar asset, yes, retail has a role, But retail is becoming smaller and smaller and for many Bitcoiners, you probably notice now we’re at 88k and you look at how much you can buy with your same dollar, you’re like, wow, it’s substantially less, right?

[00:04:24] So you’re getting that, I think, American HODL calls it the, what is it, the bit life crisis, where you realize I’m probably not making meaningful changes to my stack anymore. So in order to maintain this kind of level and move to 10, 10 trillion, you need big money. So in my view, who was underneath?

[00:04:40] It was a sophisticated pool of buyers who were allowing the market to sell to them. They’re not smash buying like most people do. You just hit the green button and just put sats in your wallet. A lot of people, these institutions, they wait for the market to come to them. And we actually, I think the best illustration of this was the German government.

[00:04:56] They sold 40, 000 Bitcoin in a week after the market had already sold off. So the market kind of pre priced it in and then the market rallied as they market sold 50, 000 Bitcoin. How on earth does that happen? You need someone who’s just allowing to absorb it. Now on the top side of that, so you’ve obviously got ETF inflows and we did have the occasional outflow, but it was usually followed by a buy to dip inflow.

[00:05:19] For the most part, there’s a lot of Bitcoin for such a long time. And the reason that I know this is you can, I mean, the chain doesn’t lie. And one of the beautiful things about on chain data. You cannot spend a coin that is old and is in a lot of profit unless you bought it a long time ago and didn’t move it.

[00:05:38] And what we saw is through this chop solidation period up until about mid September, we were seeing days where it was like a hundred million dollars of profit by old coins every single day. And that in September just tailed off to almost nothing. So this is this, oh geez, you’ve got to remember that these long term holders, if you’ve been around the market for seven, eight, 10 years.

[00:06:00] You actually need a inflow of demand. And this is why we see long term holder supply climbs during bears and it decreases rapidly when the market is rising because they know that there’s this influx of demand. If you’ve got a billion dollars to get off, you need a billion dollars worth of buyers. And they don’t show up at the ass end of a bear market.

[00:06:18] They show up when we break all time high and everyone’s super excited, or you’ve got an ETF that allows institutions to come in and soak that up. There’s a lot of these dynamics in play, but ultimately you’ve got big money who’s selling from the old days and to them, 70k, it feels low for people who have been in for five years, but for these guys, they bought it 200 bucks, right? 70k is life changing for them.

[00:06:39] Preston Pysh: Yeah, it’s now right now, here in November, mid November, it kind of feels like a lot of that. That selling pressure that was there for maybe the last six months has really dissipated. we have president that was just elected here in the United States. That’s very pro Bitcoin even has hinted at doing a strategic reserve.

[00:06:58] Are you seeing on chain metrics that are suggesting that these older wallets are, have really tapered off? And if so, how much of that have you seen to kind of gauge that metric by?

[00:07:10] James Check: Yeah, so I think the way to think about this, the rally that we’ve seen, yes, the Trump win is obviously being like the catalyst, but the shop solidation phase, if we didn’t have seven months of coins changing hands, moving to new buyers, if we didn’t have that, you wouldn’t have the spring of, it’s basically just the match hitting the tender, the tender and all the firewood was poured in that seven month period.

[00:07:31] And I like to say it was already baked in the cake. The financial media will go and say, Oh, look, Trump presidency. That’s why the market rallies. Like, no, the market rallied because we ran out of sellers. And these guys spent seven months selling. Suddenly people like, I’m done. I’m good. I’ve sold my, all my coins.

[00:07:45] And there’s a metric that I like to look at called the sell side risk ratio. And basically what it looks like, or we call it realized profit, realized loss. You buy a coin at 10k, you sell it at 50, you’ve locked in a 40, 000 realized profit and obviously vice versa for losses. We don’t care about whether it’s positive or negative, we just look at the amount of coins that are locking in a large delta from their acquisition price and we compare it to the size of the market.

[00:08:08] So as an engineer, disturbing force in the numerator, size of the object you’re trying to move in the denominator. Now, what we saw is at the end of this chop solidation, there was basically no realized profit and no realized loss. Everyone who was going to cash in for any reason, fear or greed has basically tapered off.

[00:08:25] So you’ve got this like equilibrium. The market was ready to move somewhere else. Now, that can be up or down. And strangely enough, this metric, purely on chain data, right, only looking at UTXOs, exactly the same shape as options implied volatility. They are the same chart. So we can actually get a read on what the options market’s doing when they go to sleep and no one’s pricing in volatility.

[00:08:45] There’s also no profit or loss getting locked in. So investors are like, all right, I’m ready. And then the market moves, it either goes down, right? And they panic and they, puke out coins, or it rips higher and they start taking those profits. So on this rally, it’s very early in the piece. But really, it’s kind of like the spring was so coiled when these things go, I mean, I would expect it probably keeps going, we’ll hit a pocket of supply at some point.

[00:09:08] But so far, it just keeps seems to want to keep going.

[00:09:10] Preston Pysh: Yeah, it does, doesn’t it? I think your point on the supply suffocation is so important, not only just for like what kind of played out this year, but maybe even more importantly, what played out, once we got below 20, 000 and like everybody was running for the hills and your buyers at that point were so strong handed, like those coins that were being sold sub 20, 000.

[00:09:32] I would be shocked if any of them come back onto the market anytime soon, because those buyers were the psychopaths, right? They were the people that were really kind of setting that floor and what I think is missed on so many, especially that kind of show up right now. And they’re looking at the price at 88, 000 and who knows it could go to a hundred thousand plus within weeks for all we know.

[00:09:53] And they’re looking at that and they’re saying, Oh, all these buyers are showing up and I’m looking at it. And which is true. But I’m looking at it and I’m saying, no, the psychopaths that sucked up all the supply for the last two, call it two years, is the reason that you’re having these moves that just seem ungodly.

[00:10:09] Like they just, they’re moving so quick and people are saying, how is that even possible? And I think it’s a huge testament to the strongly convicted over the last two years. I’m curious to hear your thoughts.

[00:10:18] James Check: Yeah, absolutely. And I think the way to think about this is everybody has a station and I’ve been trying to normalize a lot of my conversations that people sell because, and I know they sell because I can watch them every single day selling.

[00:10:28] And the way I like to frame it up is it may not be your stop. So for me, my goal, like personally, why do I save in Bitcoin? First of all, because we all save in Bitcoin because it makes a hell of a lot of sense. But for me, my inflation rate is the Australian housing market. So for me, I’m buying Bitcoin to outpace the Australian housing market, which it is a pretty dramatic rate, no less.

[00:10:46] So for me, at some point in the future, there will be five to 10 percent of my stack that will be at my price. It will achieve my goal. And I’m going to use my savings to improve my life. For some other guy from 2013 who bought at 200, 70K is his, for me, it could be 250K. That’s his equivalent delta.

[00:11:04] So, people will peel off small chunks to improve their life. And I think pretending this doesn’t happen is objectively wrong because we can see it happening. And, some of these guys have been around for such a long time. And on your point about the 20K level, you’ll often hear on chain data talk about short term holders, long term holders.

[00:11:22] Really, it’s all about when do they buy. And if we’re talking about short term holders, where people who bought in the last five months, statistically speaking, when a coin’s been held for five months, it usually stays put for a long time. Usually only comes back late stage in the bull. Short term holders, when FTX blew up, the people who bought in the last five months, Usually we say short term holders are speculators, but that is the one instance where they’re not.

[00:11:44] They are the people who stepped in front of, I mean, the narrative was that Bitcoin was dead for a decade. Those guys aren’t speculators. They are around for the long term. And you can assume that those coins are actually going to reach long term holder status. So you start to think it’s all about human psychology, human behavior patterns, and what’s so great about on chain data, and Bitcoin especially.

[00:12:03] It’s so organic and we always make the same decisions as a collective society, people in markets. It’s why price charts in the 1920s look exactly the same as today because we all move as a herd. And Bitcoin is kind of unique because you have this really high quality hodler base. And then you’ve got the volatility, which brings in the speculators and the new money.

[00:12:22] And we get to a hundred K. And, the other line I like to say is that, if you’re, if you’re shilling Bitcoin driver, you’re probably early once he shills it back to you it’s pretty getting pretty steamy.

[00:12:32] Preston Pysh: You mentioned this idea of people having a certain price that they’re able to kind of change their life or they’re able to buy things.

[00:12:39] Maybe they’ve been saving for, how do you think borrowing and lending the maturation of borrowing and lending potentially changing some of this? Because there’s a Let’s say somebody invested early, they got 20 million and they want to buy a million dollar house. And they’re like, I don’t want to sell a million dollars worth of Bitcoin to go buy the house.

[00:12:57] I want to borrow against my Bitcoin. I want to go out, buy the house because everybody knows the name of the game. You never sell your best performing asset. You borrow against your best performing assets and you buy things. If a person, and I use those numbers of one to 20, Because that type of person, even if Bitcoin would go down by half, they still have plenty of money to continue to make the payments on what they borrowed.

[00:13:19] They’re doing it in a responsible way based off of, that kind of math. I don’t know. Does that have an impact on the value of Bitcoin or the lack of volatility moving forward against scarce and desirable things? Against fiat, it’ll continue to go insane, but against scarce and desirable things, does it start to?

[00:13:40] Maybe act a little differently than we’ve seen simply because we don’t really have very mature borrowing and lending markets for people to do these types of things up until now.

[00:13:48] James Check: Yeah. I think this is absolutely a market that will develop because there’s a huge demand for it. Right. Bitcoin really is the pristine collateral.

[00:13:55] If you just think about this from the perspective of the lender, They know that if you need to get liquidated, they will find liquidity, right? Even if they’re selling at midnight in the US, they’re going to find some guy in Europe or some guy in Japan that wants to buy it. So you’ve got this perfect liquidity profile where it can be sold 24 seven.

[00:14:10] It really is the pristine collateral in that sense. So I do think that’s going to become a really serious market. I think the banks will get involved in it because it just, it makes so much sense. And there’s all sorts of considerations, right? So, if you’re selling, you’ve obviously got to pay the tax man.

[00:14:25] That’s all pain in the ass, right? That’s a basically a drag. In many ways, you don’t want to sell your best performing assets ever, with which Bitcoin consistently proves it is. but also it comes down to personal preference, right? There’s some people who just don’t want to deal with the stress of a mortgage, right?

[00:14:39] They just want to own something outright. And I think that’s another thing, right? As Bitcoin appreciates and more Bitcoin is, some of you will start to see a green number in your portfolio and you go, that’s actually pretty sizable. And if you think about these OGs who’ve been around since 2012, they may just want to diversify into, they don’t want to just buy some gold.

[00:14:56] They may want to buy a house. They may want to buy some stocks. They just want to kind of exit out so they can just diversify. Because once you’ve done, What Bitcoin is going to do, which is, if you hold long enough, it tends to change your life. Once you’ve reached that point, you move into capital preservation mode.

[00:15:10] And, for me, there’s a couple of questions I saw in the, on Twitter asking me why I hold gold. The reason I hold gold is very simple because my goal is to buy a house and it may come a time when I find the house I want to buy and I need money for a deposit. I may not want to sell my Bitcoin because it’s either ripping to the upside and I’ll be disappointed if I do, or it’s in a nasty bear market and I’m actually in buy mode.

[00:15:30] So the gold is there to just give me that purchasing power. That’s not fiat when I need it. And then I’ll deal with the rest of the principle when Bitcoin has achieved whatever goal I needed to achieve. So really I’ve kind of pre sold my Bitcoin as gold, but I want to take the volatility out. And I put out a tweet six months ago, eight months ago, where I said unpopular opinion.

[00:15:50] And believe me, it was unpopular. There’ll be a lot of Bitcoiners that sell some of their stack for gold this cycle. And I do believe that’s the same energy. People just want to have. Less volatility because the vol has already achieved their goal. So they go into capital preservation, not capital growth mode.

[00:16:08] Preston Pysh: How about derivatives being stood up on top of the ETF products? So this is something that I think is just rolling out now, when we look at equity markets and you look at the ability to go out and buy a leap on, call it micro strategy or something like that, this has tremendous speculative forces.

[00:16:26] That I think many might be underestimating that haven’t even showed up to the ETF yet. And we have like the best performing ETFs ever in the history of financial products launched in wall street. According to, to say that where I’m, I’m using the market cap that was achieved here in less than a year, better than anything that’s ever been launched.

[00:16:46] And it’s not even with derivatives on top. So. How does this change the game? And then in addition to that, how is this impact your ability to kind of look at, the UTXO set of, Bitcoin, if you’re running your own node and doing data analytics on the on chain?

[00:17:03] James Check: These are both fantastic questions. So on the derivative side, The way I wrote a piece recently called paper Bitcoin, because you see through this chop solidation range, by the time we got to the end of it and everyone’s reached like peak frustration, we got to this point where people like, Hey, they have to be suppressing the price.

[00:17:18] They’re suppressing the price. Right. And suddenly like, as soon as you rally that no one’s suppressing the price higher, it goes away. so what I think is really important to note is that derivatives are an absolutely essential, unstoppable, and expected part of a maturing asset. And what I think a lot of people say is that, yes, there are going to be volatility capture strategies.

[00:17:37] There’s going to be all those different dynamics that will change and evolve Bitcoin’s volatile profile. However, if you’re putting yourself in the shoes of a big money manager, you want to allocate a billion dollars, two billion, ten billion, right? And you’re not Michael Saylor. If you want to allocate that kind of money, you need to hedge risk.

[00:17:51] Because a lot of these guys, they can’t do the 20%, 40%, 50 percent drawdowns. Because their clients will fire them. So you’ve got to think about it from the perspective of in order for this market to mature and evolve, to put on a billion dollar position, you need to be able to hedge a billion dollars worth of risk.

[00:18:08] And it may not be like at the money. You may just need, just don’t want to do a 40 percent drawdown. I don’t want to do a 20. So you need to buy insurance. So when these options go live on the ETFs, I think they’re going to serve us a huge demand, which is that there’s no volatility in markets anymore because the stock market just grinds boringly higher and you get the occasional vol spike down.

[00:18:27] Bitcoin is volatile in both directions. This is really what Saylor is capitalizing on, volatility in both directions. And volatility, as he says, is vitality, right? Brings energy back to markets. So I think that if you can hedge that risk, someone else can speculate on that risk and really what are derivatives.

[00:18:43] They’re a tool to transfer risk from, in the old days, the farmer to a speculator. He wants a stable income. Think about this from the perspective of a miner. They want a stable dollar income because that’s what their costs are done in. They can do a covered call strategy and some speculator can come in and bet on it going higher and take that risk away from the miners.

[00:19:01] If you’re an asset manager, you can buy put options and some other guy can speculate on upside, right, and sell those options to you. So it’s really a risk transfer mechanism. And without a big liquid derivatives market, you can’t have big money allocate. So it’s a bit of a chicken and the egg thing, right?

[00:19:18] So if you want to go higher, retail can’t do it. And in fact, if you look at on chain retail balances above that 10 Bitcoin have been flat for the last 12, 18 months, retail just can’t stack hard enough 10 trillion. Big money can. But they require derivatives. Now, your second question is actually really, really important.

[00:19:36] I get probably one of the ones I get the most, which is how does all this off chain trading affect on chain data? So this is probably the most important question for people to wrap your head around. When you’re doing a population survey, you don’t survey everyone, right? You survey a statistically significant subset.

[00:19:53] So what I would say is in all my analysis, you’ll see me look at ETFs. I’ll look at derivatives. I’ll look at spot markets. I’ll look at on chain. I’m surveying 6 different segments of the market and saying, what are these people doing? And I mentioned before sell side risk looks exactly like implied volatility and options.

[00:20:10] There’s another metric you use called SOPA, which is the amount of profit or loss getting locked in. It looks exactly the same as futures funding rate. And that is because we are surveying a portion, in this case, the entire UTXO set. And the idea is that if we’re getting a signal of lots of old coins taking profit.

[00:20:26] They’re probably doing it in a bull market, and then you’ll go and look at funding rates, and while those guys are taking fat profits, there’s another guy who heard about Bitcoin from his Uber driver going levit long in perpetual swap markets, paying a high interest rate. You’re getting two different samples.

[00:20:42] And when they align, you’re saying, Hey, now I’ve got a really, really clear picture. So the quick answer is these things evolve all the time. However, you have to look at all these markets together. And more often than not, they actually speak the same language. And really, that’s my job is just stitching those markets together.

[00:20:57] Preston Pysh: Interesting. So this is an interesting question I saw online from somebody they said, a lot of people have the opinion that technical analysis is astrology for men. I’m kind of curious your thoughts on just technical analysis in general, because you see a lot of this, you see a ton of this in Bitcoin where people are like, Oh, you got this head and shoulders pattern.

[00:21:15] You got this pattern and whatnot. And I want to hear your opinion. I’ll tell you my opinion afterwards, but I want to hear your opinion first.

[00:21:22] James Check: Yeah, I mean, I hear this all the time, right? And, it’s funny because a lot of the technical analysts look at on chain analysts and be like, oh, you guys are just doing astrology.

[00:21:29] It’s like, bro, we’re analyzing the same thing. What are we actually analyzing? Humans. We’re analyzing humans. So when we talk about on chain data, what is on chain data? It’s obviously the ledger that’s inside Bitcoin, but it’s actually All of our decisions, every time you’ve said, Hey, I’m going to buy Bitcoin.

[00:21:44] Like I look at myself back in 2019, I started buying Bitcoin seriously. Cause I’m like this monetary system is in a world of trouble. It’s not here yet, but it looks like it’s coming. So my actions of buying and accumulating those coins was me expressing my macro view. Me as just a single individual, there’s many like me saying, Hey, I’m going to keep buying this thing because I think this is what’s coming.

[00:22:04] Suddenly, long term holder supply starts climbing. Oh, look, suddenly we’ve got a supply squeeze, as everyone says, right? These are all the collective decisions that we make getting printed into the Bitcoin ledger. And I think this is the ultimate thing, right? the interest rates change, JPAL’s mood changes, right?

[00:22:19] Markets change. All this stuff is variable. Our a hundred thousand year old brain hardware is completely unchanged. We will always respond to fear and greed, and even the most hardcore ler, and again, some people will probably disagree with this, but even the most hardcore ler, I’m in a cranky portfolio up to 200% profit, 500, a thousand.

[00:22:39] No, you’re not not selling it. What about 2000, right? What about if Bitcoin just goes to $10 million tomorrow? You gonna sit tight? You’re gonna do nothing. No way. Right? The vast majority of people, you’re gonna respond to fear and greed, because we’re hardwired to do so. And this is why technical analysis, it’s just looking at fear and greed plotted against time with a side of capital and leverage on change the same.

[00:22:59] We’re just looking at human beings making decisions. And this is what paints those patterns, right? And as those patterns become, people understand them and they look at them, then they’re going to respond to them differently. And then that will change people’s behavior. And it’s, it’s just human beings making decisions at the end of the day.

[00:23:14] Preston Pysh: So, as a person who got my start in value investing, technical analysis was like a curse word for any type of value investor and, I used to just literally roll my eyes at it. And it’s interesting because my point of view has changed pretty significantly through the years, but I will say this. I think that technical analysis can have some merit if you’re dealing with really large market caps.

[00:23:38] So like on the S and P 500 or Nasdaq or Bitcoin, now that it’s, a pretty sizable over 1 trillion market cap in size, I think it’s more useful. I’m not saying it’s like super predictable, but I think it is useful to kind of look at and marry up against other things that are maybe more fundamental in nature.

[00:23:56] And I think it can be used if you’re dealing with large market cap sizes, especially if you’re Pairing it with fundamental attributes or things that you’re assessing,

[00:24:05] James Check: But I think one more layer to it is I think too many people come in expecting on chain and technical and anything to predict the future.

[00:24:12] And I’m a huge advocate. Just drop the word predict from your lexicon when you’re dealing with markets. It’s just not useful. So when people say, what’s your price prediction, it’s like, I don’t know, I’ll guess the same as the other guy. No one knows. So I’m a big advocate for no one knows the future. I can’t predict the price.

[00:24:26] But what I can do is prepare for it. And that’s how I like to frame a lot of my analysis. Like, look, the market could go, yes, it could go up, down or sideways, right? A very generic answer. But what I can control, I can’t control whether it goes up, down or sideways. I can control what I’m going to do. Yeah.

[00:24:41] Right. The only thing I can control is my decisions. And I put out a piece, it would have been probably halfway through the chop solidation. Things started to get a bit grim and I basically put out a piece saying, 47k, there’s going to be, you can imagine the financial media. They’re going to be telling you that it’s over.

[00:24:56] Every bear under the sun’s going to be saying, look, I predicted this whole thing, blah, blah, blah. And I’m, my view was if we get anywhere close to that, we got to 49 on the yen carry trade. If we get anywhere close to that, this is where the bulls will most likely mount their strongest defense. So am I going to make my decision up here at 60 4K that if we get a four handle, I’m a buyer, right?

[00:25:16] I’ve made my decision long ahead of that event so that when it happens, not, it could happen, it might happen. If it, if it does, I’m gonna step in and be a buyer. I’m gonna be there with the bulls in the trenches putting a line in the sand because that’s where I expect something to happen.

[00:25:30] Even if we don’t get there. I’ve pre-thought about what if we do. So I wake up one day, I see a four handle, I know exactly what to do. I empty the bank account rather than panic and go, holy, what do I do now?

[00:25:39] Preston Pysh: Yeah. My concern for technical analysis on the smaller cap size is a whale can just move markets, like way more than people I think give it credit for.

[00:25:49] And I know we’re not talking about equity markets here, but like some equities, small cap equities are 50, a hundred million dollars in market cap size. And if you’re a whale, let’s say you’re multi billionaire, you can come in there. You could create a head and shoulders pattern very easily on a company that’s that small.

[00:26:05] And you’re just going to get totally played. You’re going to get totally wrecked because maybe the person wanted everybody to sell, sell their bags, and then they step in and buy, goblets of it because maybe they knew something that the company’s about to do or that they just have a bullish opinion because of whatever reason.

[00:26:21] And so I think you got to be really, really careful with technical analysis, especially if what you’re looking at is under a billion or under 5 billion, I think probably be my threshold personally to like, really not take it serious at all. And I think probably over 50 billion, it starts to get way more interesting and maybe way more useful for people to kind of pay attention to.

[00:26:40] James Check: But, and I think just to touch on that, really, call back to the derivatives discussion we just had, if you are a big entity and you want to allocate a billion dollars, you need a billion dollars worth of people to sell to you and vice versa. So sometimes if you’re a buyer, you actually need to create the sell side to paint the chart so that people do panic and sell to you.

[00:26:57] So this is one of the dynamics. But there’s also in the, now that we get these derivatives come in, there’s going to be periods of time where all these options get sold, right? Cause if you’re a seller of options, you’re essentially insuring somebody else and you have a limited upside, the insurance premium, but an unlimited downside.

[00:27:13] So if the market starts to test those levels, you’ll hear people talk about put walls and call walls. It is usually easier to go into the spot market to help defend. So you don’t get called, right? So you may actually want to, and you’ve got all of these entities doing it. Okay. And I think if you kind of contemplate the, the spot market as like, we’re fighting with sticks and stones and then you bring in derivatives, there’s machine guns on both sides, but you got to remember both sides have machine guns and you’re right.

[00:27:39] The bigger they get, the more firepower everyone has. So it’s much harder for this guy to come in and just like push the price around because there’s a bunch of other guys trying to push the price in the other direction and everything just scales up.

[00:27:50] Preston Pysh: Yeah, totally agree. Eddie had a question that I liked here.

[00:27:54] Are there any headwinds for Bitcoin in the coming year or two? I mean, I’m assuming you think we’re going well over a hundred thousand, probably, 200, 300, 000 or whatever in the coming year, I would guess I’m kind of curious what headwinds could prevent that from playing out or concerns that you see, because right now everything seems so dang bullish, especially with the presidential election and.

[00:28:17] Bitcoin, treasury, all the nation state adoption, which I also want to get into. But what would be the headwind that would, prevent a lot of this from happening?

[00:28:25] James Check: Oh, there’s, I mean, there’s been, and I think, Peter Dunworth had a great line at the, the Bitcoin alive conference in Sydney this year.

[00:28:32] And it was okay. I think Bitcoin would have been about 68 K or something at the time. And he goes, you got to understand that a 60, 70 K Bitcoin. The risks of what could have happened, right? Go back to 2018, Bitcoin 6k. There’s so many ways it could have died. Go back to 250 in 2014. So many ways that it could have died.

[00:28:51] yes, the price is 70k, but when I’m talking to somebody who’s, only just there, I’ve missed it. It’s like, no, you haven’t missed it. You’ve missed it. All the risk that has come out of the market. Exactly. You’re paying for a significantly de risked asset. Wow. So in many ways, right. And I think, Rick Rule has a good saying, I’m going to get this wrong, but he basically says is like, there’s like the risky returns and then there’s the short returns, right.

[00:29:13] And the risky returns or the, the likely returns. That’s in that high risk. It’s very volatile. You got to take on some hodler mentality, but then there’s a period of, it’s just so likely to go up from here because there are so few headwinds. Now, when we talk about what are like the really big ones, the one that I, and again, it’s a very, very early idea.

[00:29:33] There’s kind of two things that I’m currently thinking through, and I don’t have a fully formed view on this, but there’s a concern that I have late cycle where we get too many people trying to copy sailor. It’s been one of these things where, what did it take to get an 80% draw down in 2022?

[00:29:49] You had mass fraud. You had de-leveraging every, like just a complete implosion GBTC unwind. Like you really have to have a GFC style event, I think to get another 80% draw down. But let’s now imagine that get like the moment the GameStop, the headline comes out, the GameStop is now buying Bitcoin to save its zombie self.

[00:30:08] That’s where, like, I’m gonna look at, I have no question. I’ll look at all my on chain charts and be like, guys, look, everything was flashing like a Christmas tree, hot red, and now GameStop’s buying, like, I think we’re done, right? So that, that’s one thing that I think is a, is a real risk, just simply because they won’t have the stones that Michael Saylor does.

[00:30:24] He’s just a different animal, right? He’s got a different, different, character over there. That’s one. And the only other one, which is a extreme left tail risk and very, very unlikely to happen. A lot of people are saying the ETFs don’t have the coins, right? Oh, Coinbase isn’t custodian. It’s like, guys, the risk is not the Coinbase doesn’t have the coins.

[00:30:41] The risk is that they currently have two and a half million of them. They got way too many. Now they’re going to have all the security protocols you can imagine, but the big existential risk that I’ve just been pondering, and again, very, very low probability, just imagine that Coinbase had some issue with their custody set up.

[00:30:58] The risk is there that the market then goes, institutional market goes, okay, digital scarcity can not be safely custody. And that is just the, the ultimate existential risk. Sure, Bitcoin will continue, the network will continue to plug on, but it’s going to be really hard to repair something like that.

[00:31:14] Again, very, very small risk, not even a headwind, right? I wouldn’t factor this in, but you’ve got to think about in terms of risk, low probability, high consequence. You just factor those tiny things in.

[00:31:24] Preston Pysh: So speaking of Michael Saylor, just the other day, MicroStrategy comes out. They say that they have acquired another 27, 200 Bitcoin, valued at 2 billion.

[00:31:36] And this was the interesting thing that I saw is that, Michael then said that they have grown their Bitcoin stack by 26. 4 percent year to date. So the question as a person, as a value investor and as a micro strategy shareholder, I’ll disclose, how do you value this company? There were some people in the comments saying, you’re this person that doesn’t think that it should trade more than one times the, the treasury value.

[00:32:03] But if the treasury is growing at 26. 4 percent on the year, How do you think through, like, what is an appropriate premium over that NAV of their treasury? Like, how do you value it? It’s so different than any kind of equity we’ve ever looked at before.

[00:32:17] James Check: Absolutely. And that’s the thing, right?

[00:32:19] So, first things first, I’m not a one, one MNAV, I think that was the question. I’m not a one MNAV bear. In fact, I think MicroStrategy is going to just be an extreme, it has been an extraordinary stock. The fact that they took out their, All time high from way back, that alone is telling you the story.

[00:32:33] So I think the way I was, and I think the comment that they’re referring to, I put out a tweet. A lot of people talk about the multiplier effect, right? How much, when you put a dollar into Bitcoin, how much impact do you have on the market? There was this study way back, 118x Bank of America put out. I couldn’t, if I just look at the ETFs, right?

[00:32:51] And that’s like a small subset, 10, 20 percent of the market, only the ETFs. And you say they’re the only buyer. And then you compare the buyer side from them versus the amount of the market cap change. Even then you get a 32 X multiple. I couldn’t in my wildest dreams, get it to be 118 X. It’s just absolutely wrong.

[00:33:09] Preston Pysh: What do you mean by, okay, explain that to us. What you mean by that 32 X.

[00:33:13] James Check: Yeah. So the concept here is they’re called like a multiplier effect. How much, when you put a dollar of Bitcoin, a dollar into Bitcoin, you’re a buyer or a seller, right? Either direction. If you put a dollar in, how much does the market cap change?

[00:33:24] Does it go up by $5, $2, a hundred dollars? And this is the concept of like capital in equals, how much in market caps, like a liquidity adjustment type factor. Yeah. And a lot of people spout this 118 XA hundred x multiplier. It makes no sense. There’s no way I can justify it. What I believe is more closely aligned is it’s usually somewhere between five to three is kind of the typical range during bear markets actually gets very low.

[00:33:49] So you need like 10 to get a 1 change in market cap to the upside. So this is a supply overhead. There’s too much supply. You need more capital to come in to move it. When you get to the absolute zenith of bull markets and the market’s just ripping higher, that’s a low liquidity environment. The highest it’s ever been very, very briefly was 8x very, very briefly.

[00:34:09] So, you can kind of think about that when the market’s getting too illiquid, you’re probably getting closer and closer to the top. So that was the context where I say, okay, well, let’s look at Michael sailors. We’ll look and look at micro strategy. They’ve got about 38 cents worth of Bitcoin per dollar of market cap.

[00:34:24] So just objectively speaking, every dollar that’s gone into micro strategy so far, right. In terms of getting its market cap to where it is, if you put a dollar in right now, Sure. You’re giving him money to buy Bitcoin in the future, but just big picture, he’s got 38 cents and then there’s a 62 cent premium.

[00:34:38] So that’s where that MNAV concept came from. It’s actually, I’m not sure you’re not talking about micro strategy performance at all. I’m saying how much does micro sale is buying impact the Bitcoin market. Now, if you fund his next bond purchase or equity dilution, yes, he’s going to go and buy one to one BTC, but over the long arc of time, as of today, it’s 38 cents premium.

[00:34:58] per Bitcoin, right? So that was where that came from. Now, in terms of how do you value this company? I mean, to me, you’ve obviously got this kind of anchor at the bottom, which is the Bitcoin value and the 62 cent premium at the end of the day, that is its own market. And I almost think about MicroStrategy like a call option.

[00:35:14] And I think That’s probably the right way for people to think about it is it’s more like a call option. And that premium is the vol. That’s your vol premium. You’re paying for sailors ability to continue to add more Bitcoin to be stack. There’s a little bit of expectation of like, well, how much is the next guy going to pay for this thing?

[00:35:30] Right? How much is this going to grow? How much is Bitcoin going to grow? So it’s like a vol So in a way you almost have to go into like second derivatives of volatility to really understand this thing. And that’s why I think it’s going to be so interesting because no one has a model for this. So as a result, I mean, I would not be surprised if that premium goes significantly higher.

[00:35:46] Yeah. And then goes through periods where it’s just cradles. And I think that’s where that’s what he’s doing, right? He wants volatility to bring people into these markets.

[00:35:54] Preston Pysh: Yeah. Yeah. So like in my situation, so I bought it. Sub nav, there was a brief period there in like January of 2024 where the price dropped below the, the treasury value.

[00:36:05] I thought it was absolutely bananas that it did, and so I went out and bought leaps about call options that were two years in duration. I think they mature in December of 2025. And just kind of load it up on them. I’ve had debates with people because the premium above the treasury value has gone like three X at some points, like very high above it.

[00:36:24] They’re like, what are you doing? Like, why are you still holding these things? Like, that’s outrageous that it’s trading that much higher. And I guess for me, I’m looking at it and I’m saying, yeah, but like, that’s an opportunity for Michael to transmute that premium into more, take that common stock, sell it into the market.

[00:36:40] Take the cash by Bitcoin with it. And it’s just going to turn into Bitcoin if I continue to hold, because I still have effectively more than a year left on the call option. And so it seems like with this recent announcement, that’s exactly what he’s doing. another 27, 000 Bitcoin to show up on the balance sheet, and then that’s going to get bit into the price.

[00:36:59] And so instead of, and I have this in a tax advantage, in the United States, we have these IRA accounts. So that’s where I have it all is in this IRA account. And so the selling normally I would be concerned of realizing the tax, which would force me into holding it, but I don’t even have that issue where I’m holding these, but I’m just continuing to hold it because I kind of feel like it’s going to be similar to like a GameStop scenario as Bitcoin continues the rip.

[00:37:25] So. Because my underlying thesis is that it’s going to get wild here in the coming year with the underlying Bitcoin price. I think that the micro strategy premium is going to continue to, I mean, it’s going to be the most violent wild ride ever, but I think that three X isn’t outrageous. I think of that in the coming year, it could go five, maybe even 10.

[00:37:45] I don’t know, but I don’t think three is it peaking out by any shape of the imagination. If say Bitcoin rips to a quarter million, a coin on the underlying. I’m saying all this because I want to hear your opinion. Is that crazy talk? Would you agree? And I know some of this is very speculative on my part to sit back and continue to hold when I have something that’s 3x the nav, but I don’t know.

[00:38:07] I think there’s a lot more to go. I think it’s only going to get crazier. So do you think that that’s a good approach? Do you agree with me?

[00:38:14] James Check: It’s a good question. And I have to admit that I, I haven’t done the work to actually fully understand this thing. I’ve actually, it’s, it’s the top of my to do list is to sit down and actually have a think about this.

[00:38:23] So I don’t really have any edge when it comes to micro strategy. What I do think if I was to just like ballpark, if I, if I was given a bunch of the stock and said, well, when would you sell this thing? My view would be to look at things from like a relative valuation, right? And I think the world is increasingly like when you can’t do the math, when the math is too complex, they just look at the relative value.

[00:38:40] Let’s just bring this to the, to the crypto universe where it’s probably pretty obvious. People look at something like Solana and go, well, could that be 25, 30, 40 percent of Ethereum? What could a theory could a Bitcoin? And they just think about things in terms of like relative value. So if MicroStrategy starts getting up into the S and P 500, and then you start, there’s obviously gonna be inflows there.

[00:38:59] And then it starts like getting up to these valuations was like, Oh, should it really be at 15, 20, 30 percent of Apple? I just think that there’ll be like ceilings there that people almost the lowest common denominator, what’s that kind of level? That’s where people will ape in. And that’s also where I think big institution would say, all right, that’s, that’s probably enough.

[00:39:18] This doesn’t make sense, but the truth is I just haven’t done the work, the edge, but I do think looking at it as a call option with that vol premium on top, that’s kind of the closest I’ve got thus far.

[00:39:28] Preston Pysh: Yeah. And I think to your point, that’s why I think at the end, it’s going to get absurdly violent on the premium over there because you are, you’re going to have all these, say it goes to five X the nav in the summer of 2025.

[00:39:41] I think you’re going to have all these short sellers that are going to come in and say, all right, this is enough. This is crazy. Like this thing’s being traded for. Call it X, billions at that point. That is also going to be the thing that if Bitcoin pumps higher, all those people are going to get blown the hell up and it’s going to shoot it very, it’s not going to stay there long, but it’s very briefly going to maybe go to, I don’t know, seven X, 10 X.

[00:40:06] I don’t know. But it’s going to be very GameStop like, I think by the mid to late 2025. And I guess I’m just gonna sit around and enjoy the hell out of it. And then I guess when it gets to absurd levels, I’m going to try to time that the best I can to just turn it into Bitcoin or whatever. I don’t, I really don’t know.

[00:40:26] Kind of what to do with it. But I do think that that insanity is on the horizon. I don’t think we’re close to that right now. I think we’re like, this is my, this is like nothing where we’re at right now. And if people are listening to this in the future, we’re in November of 2024, I think by summer to fall of 2025, MicroStrategy is going to be, but it’s going to be totally mind bending what happens with it.

[00:40:47] James Check: No, I fully agree. And I think it actually aligns with I listened to a small podcast with David Dredge, who’s a volatility guy. And it really, it hammers something because a lot of people like, Oh, the options and derivatives are going to change and they will, they will change Bitcoin’s vol profile.

[00:41:02] But at the same time, that doesn’t necessarily mean it’s going to get less volatile. It actually could get more volatile. And what he was saying Is obviously as a volatility guy, he gets asked all the time and, about Bitcoin, he goes, I like the asset. But the problem is that most people who own Bitcoin are hodlers.

[00:41:16] They’ve literally got their income. They put their own cash on the table. They’ve bought this thing. Their risk tolerance is very, very high. They’ll take this thing down 80%. They’ll hodl through whatever the upside looks like. It’s when the big institutions who are betting some other guy’s money with a bailout behind them, and they’re willing to take risks so that the average person isn’t.

[00:41:35] He goes, that’s the kind of tail risk that interests him because now he can take the large baggers of people blowing up. And it’s really important to remember the derivatives, as I said before, it’s like both sides are fighting with machine guns and the side that’s wrong gets run over. And what happens in late stage moves, also after chop solidations, when you get these periods of like the market goes quiet.

[00:41:55] People become complacent. They keep selling risk and then the risk explodes. And that’s really how Bitcoin trades. You get these big moves to the upside and anybody who was short or long, depending on which way it goes, gets completely wiped out. And you get this towards late stages as well. The reason you get these giant wicks to the upside is everyone goes, it’s overvalued.

[00:42:13] I’m going to short this thing. And in order for them to close their position, they’ve got to buy it back. And they actually create the top. The shorts getting blown out is what creates the top. And this is the thing, so many people, they could be right. Bitcoin could be on the verge of a bear market, but they’re not going to be there for it because they blow up their account and then it goes into a bear market.

[00:42:31] Preston Pysh: So this is the other concern that I have with this particular trade and investment. I don’t know even though what word they use, whether it’s speculating at this point or investing or what, but this is the concern that I have. First of all, I’m sure you have an opinion on a super cycle, right? This is my concern with where things are going.

[00:42:51] When I look at the fixed income market and how jacked all of this is, I think we continue to have cycles unless that macroeconomic backdrop of the fixed income market is looking dire. And it’s like, well, nobody can buy these things. I mean, we’re already like. They’re only issuing short duration paper because nobody’s willing to buy the long end of the curve.

[00:43:12] And I don’t even think anything’s crazy right now. Like if it starts heating up and it starts getting wild and we’re looking at Bitcoin ripping to, and I’m just going to say crazy numbers here, let’s say Bitcoin’s at a million a coin and you have Silicon Valley bank, like debauchery playing out in banks and long duration treasuries across the globe.

[00:43:33] The last thing you want to do is try to market time Bitcoin saying, Oh, here’s the top because the four year cycles do like, I’m not doing that. That’s crazy talk. What am I going to buy with the Bitcoin at that point? Fiat, get the hell out of here. Right? So I guess there’s a multi kind of question here.

[00:43:49] So like your opinions on the super cycle and kind of what I just described. And then going back to the micro strategy thing, because the timing, I was talking about these calls in December of 2025. If all of that’s playing out and Bitcoin’s ripping to a million a coin or whatever, you have this company that’s, squatting on at what percent of the overall total, between one to 2%, one point a half percent or something.

[00:44:11] One and is crazy. Yeah. One and a half percent of all the, and let’s just say this is turning into a narrative and it’s becoming very real that it’s the new global settlement layer and this company is squatting on 1.5% of the total supply of that. So now I’m looking at it, I’m saying, well, what kind of damage could a guy like Sailor do out there?

[00:44:28] With proper economic calculation and security analysis to gobble up scarce and desirable equity at a time where he’s got all these chips, he’s got one and a half supply of all the chips in the world. Is that a company I want to sell? Probably. Well, I don’t know because then you get into, And I, I’m sorry, I’m just going on and on, but these are the things that I guess it doesn’t keep me awake at night.

[00:44:52] I sleep really well. But these are the questions that I am toying with right now, a year in advance from maybe things getting really spicy in the market. And I guess my concern for micro strategy then becomes a nationalization concern if he squat. Which is, I think, I think a non trivial reality. Right. So, okay.

[00:45:10] What are your thoughts on. Okay. I know there’s a lot there. Sorry. This question is, this is a terrible question for people. I’m selfishly asking you these questions because I really, really respect your opinion and your critical thinking. So, yeah, take it away.

[00:45:25] James Check: Yeah, so I think the, the concept of the, I mean, the, the, the super cycle, right?

[00:45:28] I think the, the best way that I ground this for myself, you’ve probably all seen that. I think it’s Mermican capital of the gold price in, in Weimar, Germany. I’m not saying that this is going to be, hyperinflation like that, but the macro trend is that this asset goes from zero to millions, right?

[00:45:43] That’s, that’s kind of the absolute value. But on a monthly rate of change, it’s going to be all over the place. It’s going to be chopping around like crazy. I think that’s the best way to think about this. And why does this happen? Well, there’s, first of all, macro forces move at glacial pace and then they move all at once.

[00:45:58] And then they go back to moving at glacial pace and the governments of the world, they need to step in. This is why they put those, alphabet soup programs in place to kind of stabilize everything. And so no one really wants the world to go into complete and total tailspin. So they’re, they’re always resistant.

[00:46:14] They’ll always come back and go, Oh, well, maybe I’ll buy some dollars again. I got to get out of dollars. Oh, maybe I’ll get back into dollars. And there’s this like toing and froing. And how do you know this is true? How many people have you convinced to buy Bitcoin? People listening. It’s not many, right?

[00:46:26] Because most people don’t understand the problem. It takes so long for people to understand this thing. And as a result, you’ll go through these speculative bubbles and then you’ll get the kind of pullback. And if you kind of think, well, what is the super cycle zoom out, look at the Bitcoin price on a log scale.

[00:46:41] We’re in it right over the macro scale. It is a super cycle, but the idea that we’re not going to have some kind of a meaningful bear market at some point, I think is, is slim, right? Even gold goes through these as well. And I actually did an exercise the other day. I zoomed out and looked at the gold chart, full history on log scale.

[00:46:57] And it’s funny, the eighties, right? It’s like a decade and a half long period. Looks exactly like Bitcoin in 2018, 19, up into 20. It looks exactly the same and then it just rips to the upside, right? So obviously Bitcoin does this on a more compressed timeline because it’s digital. It’s the internet. It’s new.

[00:47:13] Preston Pysh: I just, I want to push back, James. Yeah. I want to push back. So what happens when country X, Y, and Z just announced that they also have a million Bitcoin treasury strategy because they want to compete with the United States?

[00:47:25] James Check: Yeah, no, it’s a great question. I think the idea here is that Bitcoin reprices. It goes through these periods of consolidation and then it just reprices to a new level.

[00:47:33] And then what is the BAM21? These were periods of like macro scale, sideways chop. It’s trying to refine, do I belong up here? Let’s say that Bitcoin goes to 10 trillion, right? It starts to really. eating into gold’s lunch. You’ll probably see a significant, chop solidation, let’s call it, on a macro scale as it goes.

[00:47:52] Well, is it 10? Is it 7? Should it briefly touch 5? Wait, no, it’s 8. Oh, okay. Hang on. It is actually 10. And then away, away it goes again. So I look at bear markets as this like process of hodlers cashing out, other people stepping in. So the super cycle, it’s going to be interrupted by all these, these kind of pullbacks where people go, hang on a second, maybe it doesn’t belong up here, but then others will step in and go, no, it actually does.

[00:48:13] But we’ve also got to remember that nation states and companies will also buy the top. The same journey that you as a HODLer have gone through, nation states and companies are going to do the exact same thing, because that’s just how markets work. And because Bitcoin is so new, so novel, you can have all these volatility structures built on top, derivatives, micro strategy, right?

[00:48:32] GameStop eventually buys it. Like how the hell do I value any of this stuff? I think we’re still going to get all of this chopping around as the market contests. And tries to work out how do I value 21 million fixed digital units? No one knows the answer. That’s why the price keeps moving around, right?

[00:48:49] So to me, I think it’s all part of the journey. I’m certainly in the camp where I don’t transfix and say it’s going to top in 2025, or it’s going to hit this price. For me, I’m just looking at when are the conditions right to set a top? When are the hodlers selling the most? When are the Uber drivers buying the most?

[00:49:04] And when I’ve got all these conditions in play, I go, now I’m going to check the calendar and the price and say, all right, guys, it’s probably a bit steamy. It doesn’t mean Bitcoin is going to stop its journey. It just means that, it probably not going to go up for a couple of months.

[00:49:15] Preston Pysh: Love it. What would be the implications if some Bitcoin moved out of Satoshi’s wallet?

[00:49:21] James Check: Oh, great question. So technically speaking, at some, and I’m sure there’ll be some devs out there that can probably correct me on this, but technically speaking, over a long enough time horizon, Satoshi’s coins will move. And the reason why they’ll move is that they are the lowest level of the, in terms of the cryptographic security that kind of keeps them in play, they’re the lowest level.

[00:49:37] So eventually, it could be 50 years, 100 years, it could be 1000 years. Eventually we will crack that cryptography, right? If you run this experiment for long enough and humans survive long enough, eventually those coins will move. So are we in that environment?

[00:49:53] Preston Pysh: Hold on. Hold on. Okay. So you’re saying that the way that the keys were generated, they’re not as secure as keys that were generated today.

[00:50:00] Help me understand this argument.

[00:50:01] James Check: Well, this is the thing, right? So, and again, I’m not technical. It’s been a long time since I’ve kind of rethought through this process and kind of learned all the technical details. Okay. But the reason why there’s like, there’s a hash, then there’s a double hash, and then you’ve got these different script types and segwit and all these things, those earliest keys, the least hashed, let’s just call it for ease of ease of understanding, they’re the least secure format of Bitcoin keys.

[00:50:25] Now, technically speaking, because Satoshi sent that first transaction, when you send the transaction to Hal Finney, you’re essentially putting a piece of information in there that, People can actually use and say, well, that’s, if you crack that cryptography and again, all cryptography is, is math and it’s based on assumptions.

[00:50:40] Now, the idea is that these cryptography is so complex that supercomputers billions of years to even get close to it. But if you’ve got the lowest level, at some point, you run the human experiment of the Bitcoin experiment long enough. At some point, those coins will move, right? Because everything breaks eventually, right?

[00:50:57] Technology continues to push forward. So it’s a possibility. Is it something that I factor in? Absolutely not. But, it’s, it’s one of those things where you’re going to have people looking for Satoshi forever. it’s one of the great mysteries of the world, to be honest. I don’t expect them to move, and I do consider them to be lost.

[00:51:11] And I did actually see a question on people asking how many coins are lost. Yeah, yeah. My best estimate is between 18 and 21 percent of the supply. And we can never know. We can never actually know whether a coin is lost. Technically, lost is wrong because the key may eventually get found, right? So it may actually stumble across the key.

[00:51:28] but obviously loss is what most people understand. Dave Puell and I did a, it was like a 120 page report called Coin Time Economics. We studied on chain data looking at how long people have held their coins for. So imagine this scenario, you withdraw your supply, right? And you lose your key immediately.

[00:51:44] You’re the only person in the world that knows those coins are lost. But now it sits there for two years. Ah, he’s just a long term hauler. Five years. Ah, he’s got diamond hands. Ten years. That coin could be lost. Fifteen years. Twenty years. Suddenly, it’s lost. So we basically designed this weighting function to say, well, the longer a coin is dormant, the more likely it is to be lost.

[00:52:02] And it’s a really simple model, but we came up with somewhere between 18 and 21%, which leaves us, for round numbers, about 16 and a half million that are left likely to move.

[00:52:12] Preston Pysh: Wow. Yeah. Interesting. Last question I got for you, the BTC power law, stock to flow, all these things that people love to talk about.

[00:52:23] What’s your opinion on all this kind of thing?

[00:52:25] James Check: Yeah, I think in many ways, these models, they’re just models. And I think they’re very easy, they’re very memetic. People like them because they just basically, they’re an arrow that points higher. And people look at that and go, Oh, look, I’m gonna get rich.

[00:52:36] For me as an analyst, I find them extremely non useful, right? At the end of the day, what am I going to do with it? This thing’s just telling me it’s going to go up. Okay, cool. But if it’s trying to predict the top or it’s trying to predict the floor, it’s like, well, I would personally, the way I frame is like, well, the top will probably happen when a whole bunch of hodlers have sold a stack of coin and there’s just not enough demand.

[00:52:58] So for me, sure, it may happen on the level where the power law is there, but am I going to base my analysis on that? No, I actually want to look at the mechanics of what’s happening. I’m an engineer, right? And to me, it’s a little bit in the, maybe the astrology for men is probably the better way to describe it.

[00:53:13] For me, I want to look at the actual mechanics. Show me the sellers. Show me the lack of buyers. Show me the illiquidity. Show me the excess of leverage. That’s the condition that creates a top. Now I can make an informed decision. It may align with the power law. It may not. Same for bottoms. Show me when every speculator under the sun is gone.

[00:53:30] I only want to see hodlers. In the trenches when they’re the only people left, who the hell is going to sell this thing? And that’s the way I like to look at it. So I know people like it and that’s fine. Go and use your power laws and stock to flows. But just in the back of my mind, I’m like, what am I going to use this thing for?

[00:53:46] I’m sure I’ve got plus one standard deviation of 500, 000. Of course, I’m going to be in range. Like it doesn’t help me as an analyst.

[00:53:53] Preston Pysh: Yeah. This current cycle that we’re in, how far out more do you think it goes? It seems that you think that we’re just going to continue to have cycles. How far out do you think this one that we’re in right now might extend any idea?

[00:54:06] And you don’t have to say a price if you don’t want to, but like, where do you think we’ll kind of potentially go with this?

[00:54:11] James Check: Yeah. So I’ll give you a little bit of a wishy washy answer, but I’ll explain the mechanics as to why I think that is. So I believe we’ve now entered the euphoria zone and right now, these are all just, yeah, yeah.

[00:54:21] So the way I frame it up is obviously we’re trying to simplify the world, right? So people can kind of understand. When we get above the previous cycle all time high, which I know technically we did in March, but we didn’t really, right, if you actually plot where the all time high was, we chopped around below it for most of the time.

[00:54:36] Preston Pysh: And in M2 inflation adjusted terms, we didn’t get there. Okay.

[00:54:40] James Check: Yeah, there’s a whole lot of ways you can think about it there. In terms of a 2020 I’ve actually got a bunch of charts. I did a really fun study actually called Inflationary Illusions, where I looked at, how people, what people see, which is the price, and what people feel.

[00:54:53] And I think what people feel is probably your 2020 dollar, your purchasing power from back then. And yes, we only had like a 26 percent drawdown, right? The yen carry trade was 32, but for the most part, it’s about 25, 26 percent through all of this chop solidation. But if you factor in the inflation adjusted and, we all know CPI. So I said, two or three X CPI, it was actually about a 40, 45 percent drawdown in your 2020 purchasing power. And that’s how people feel, right? It got really bearish considering we’re only 20 percent below the all time high, but people, Super bearish. It’s because a 70, 000 or 50, 000 Bitcoin ain’t what it used to be.

[00:55:28] 50, 000 Bitcoin back in 2021 was way more valuable than 50, 000 Bitcoin today. so, remind me, what was the previous question?

[00:55:36] Preston Pysh: I was just kind of curious, like how the time wise, how much more could it run and like, yes.

[00:55:42] James Check: So, the euphoria zone. So the reason why this move higher, I believe puts us in the euphoria zone. And if you don’t believe me, go and look at Google Trends for Bitcoin, right? It has ticked high. We’re now at, it’s just one of those things where people become interested. You’ll start getting phone calls. You’ll start getting messages. The euphoria zone is when the people who were not around at 15k and 20k, when the Uber drivers are starting to get the call, right?

[00:56:04] That’s what this really looks like. And generally speaking, and for those who haven’t been through a bull cycle before or you entered in 2021, this may not kind of make sense, but I know I’ve been around since the 2017 top. So 2021, by the time we got to that November all time high, I was very happy.

[00:56:21] The green number was very good, but I was tired. I was tired. You’re checking Twitter all the time. You’re checking the price all the time. Meme coins are shooting through the roof. You’re like, I can’t make heads or tails of any of this, which is what we were talking about before with MicroStrategy.

[00:56:34] There’s only so long the market can do this before it just runs out of actual steam. Investors can’t do this forever. So in my view, and just historically speaking, that euphoria zone goes somewhere between six to 18 months. So I know that’s a very broad range, but. The point of it is the market just can’t keep going.

[00:56:52] It cannot keep going up. Eventually it hits a ceiling where people get exhausted. Now in terms of a price, my long term target is parity with gold, which is 10. 8 kilos. And we just crossed one kilo per Bitcoin, which is pretty, pretty smick, right? And flip silver. so really the long term is we’re going to go to 10.

[00:57:09] 8 kilos of gold and that’s kind of where we flip gold and then who knows where it goes from there. so that’s kind of , my long term target. In the near term, I have a bet with Danny and Pete on, for two, I said 250k. And the reason I went 250k is I knew Pete was going to go long at like 300.

[00:57:24] Danny’s in the middle at 280 and I get everything under 250. So I’m very optional. I’m keeping my options open. But I also think markets move much slower than people expect. That Mermican capital chart, it’s going parabolic forever.

[00:57:37] But it’s going to have pullbacks. It’s going to have swings. And it’s going to take months.

[00:57:41] And as these options go live, those months will get longer and it will be more frustrating and more boring, but it’s consolidating and saying, well, do I belong as a two and a half trillion dollar asset? Do I belong as a four trillion dollar asset? Maybe not three. Okay. Back to four. The market’s going to find its level.

[00:57:57] It’s not lower in my view. But it’s going to go through these ebbs and flows and just being aware that that’s how it works and not believing the green candle forever, I think puts everyone in a much better stead.

[00:58:08] Preston Pysh: I love it. Can’t thank you enough, James. This was awesome. It’s long overdue. I’ve been an admirer of your work.

[00:58:13] I really want to talk about how you kind of came onto the scene about two years ago with some of your ETH takes, which was what actually initially got me really interested in your Twitter feed. But we’ll talk about that at another time. We need to try to do something like this quarterly cause I thoroughly, thoroughly enjoy just hearing your deep, critical thinking on many different topics.

[00:58:33] And I just want to thank you for coming on. Give people a handoff where they can learn more about you or anything else that you want to highlight.

[00:58:39] James Check: Yeah. Thanks, man. No, I’d love to do that. And, I try to keep things real. Of course I would rather be, impressed to the upside, right?

[00:58:46] You don’t try to predict things. You just, to my view and my thesis was with, so I’ve started my business check on chain with my best mate and, so you’ll find it at checkonchain.com. We just do a Substack newsletter and really that the focus in our pitch is that where your Bitcoin personal trainer, ’cause we know that a lot of people came in.

[00:59:01] You come into Bitcoin, you think you’re a trader, you lose a bunch of money. You realize, okay, I’m not a trader and I also have no idea what I’m doing. You become hodler and then you realize I want to hold this thing forever, but it’s not easy to hold this thing forever because it’s volatile. And what we try to do is help people prepare for what could happen.

[00:59:16] So they have a decision framework ahead of time, but also holders just want to know what’s going on. We get a big green candle, a big red candle. They’re not selling. They’re just like, I want to understand why this happened. That’s really the market we try to address.

[00:59:28] Preston Pysh: Yeah. Love that. We’ll have links to it in the show notes.

[00:59:30] James, thanks so much for your time, sir.

[00:59:33] James Check: Thanks, man. It’s been a pleasure. Cheers.

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