Preston Pysh (00:08:29):
We have Elon Musk, goes out, buys a billion dollars plus, puts it on his balance sheet a couple of months back. I think his cost basis is still lower than where we’re at right now at $44,000 a Bitcoin. Jack Dorsey talked about how Bitcoin creates this massive incentive structure for renewable energy, Elon replies to Jack Dorsey saying he agrees. And then out of nowhere, this past weekend, I think it was before the weekend started, Elon comes out and says that he thinks that there are energy concerns with Bitcoin, he says that he’s working with Dogecoin developers to make DOGE better. He’s watching something that, as of last night, he said he still has all of it on his balance sheet except for that 10% that he sold. He still has it sitting on his balance sheet, but all of his comments are causing the price of Bitcoin to plummet even though it’s sitting on his balance sheet, the price of Tesla is plummeting.

Preston Pysh (00:09:48):
I’m trying to wrap my head around why? I’m just asking myself, why would somebody go out and do this? Even if you did believe this stuff, you’d think you’d be quiet about it as you do more research. We all know Elon is not your typical person, especially while on Twitter. But talk us through how you’re interpreting all these mixed signals. It’s so strange to me. But Lyn, take it away. What are your thoughts?

Lyn Alden (00:10:23):
If you look at his history with Bitcoin, even before he bought it, he was flirting with Bitcoin while talking about Dogecoin. And back in December, he tweeted… I think he phrased it as, “Bitcoin is almost as BS as fiat.” And I remember because one of my friends highlighted that and he’s like, “Oh, he’s going to the Bitcoiners angry.” And so I just put a meme out there that was basically how… Basically that We Need to Poo meme where he looks slumpy and then he’s in a toxin. So I wrote, “Slumpy versions being long, Bitcoin and Tesla,” and the more sophisticated version are, “Long, Bitcoin; short, Tesla.” For a while, there’s been a lot of pro-Tesla, pro-Elon feelings in the Bitcoin community for a while, and I’ve always been somewhat out of consensus in the sense that maybe it’s because I come from a little bit more of a value investing background.

Preston Pysh (00:11:23):
You and me both, Lynam.

Lyn Alden (00:11:24):
Exactly.

Preston Pysh (00:11:25):
I’m laughing because I’ve always had the same opinion. I never got Tesla, but I was a Bitcoiner, and I felt like such an oddball.

Lyn Alden (00:11:33):
Yes. I was always critical of Tesla. And it’s not one of those things… There’s obviously good engineering happening at Tesla, but it’s more about the fact that he tends to over promise and under deliver, and slower than his initial forecast. If you go back and look at his timeline for when automatic driving would be here and things like that, right?

Preston Pysh (00:11:57):
Yeah.

Lyn Alden (00:11:58):
Basically, he’s inherently a marketer at heart and he seems all over the place, especially on Twitter. And so I think it’s one of those things where it’s really important, I think, for the Bitcoin community not to get caught up with hero figures. I actually think Peter McCormack phrased it best, basically single-person worship is like centralization. However he rephrased it, you’re basically relying on the opinion of one man, that’s when you’re going to run into issues.

Lyn Alden (00:12:29):
And so overall, there’s a lot of theorizing about why he changed his opinion. One is just his opinion changes a lot on a lot of things, and so I wouldn’t necessarily say there’s a reason for it. If there is a reason for it, it’s possible that, for example, because Tesla’s involved in renewable energy credits, that he got a tap on the shoulder from someone, for example, or the company did; the adults in the room, I guess you could say, and that they had to change something up and change their opinion of the energy environment. It’s really hard to say because we’re not necessarily working with the standard CEO here.

Jeff Booth (00:13:06):
Here’s a different way to look at it. This is actually the best thing on the planet for Bitcoin. It is proving why decentralization matters. So if you look at Satoshi white paper and everything else, the root problem with conventional currency is that trust is required to make it work. And central governments have to erode that trust. And so as somebody gains more and more power over you, or over your finances or anything else, the rest of society is up to women fancy of that person. And even if that person is… We’re all trying to read in what he’s thinking. I personally believe that he did get a tap on ESG and it became, “Okay, I have to softly backpedal, I won’t totally go out, but I have to softly backpedal to be able to protect credits and everything else.” That’s what I believe. I could be totally wrong.

Jeff Booth (00:14:07):
It could be he’s just learning, and you know how people learn and then they go into altcoins and they’re all over the map because they don’t really understand it. So he could be just a very powerful person learning publicly, and crazy markets all the way through. It actually doesn’t matter on each of those standards. What matters is, it’s proving the thesis on why decentralization is the most important gift to humanity, because it pushes the power to individuals rather than centralizing power.

Preston Pysh (00:14:48):
So, he had… And I’m assuming, Lyn. Do you agree with it there?

Lyn Alden (00:14:52):
Yeah, I agree. And I think it’s a shame that… It’s interesting because we’re seeing a lot of interesting news get overshadowed by the Elon thing. For example, I’ve been covering the fact that NYDIG has had a number of interesting announcements lately where they brought over the executive from Bridgewater, they’ve announced partnerships with banks basically to bring Bitcoin to banking. That’s more signal to noise stuff where, for example, the network effect continues to strengthen. Obviously, for people following Taproot, that’s obviously making advancements as well.

Lyn Alden (00:15:32):
And so you actually see the underlying technology getting better, you see the network effects getting better, but then on top of that, we see we have the crazy price action and the charismatic personalities and then the Twitter wars, that’s the stuff that’s getting, of course, 90% attention.

Lyn Alden (00:15:46):
And that’s fine because that’s what’s going to dictate people clicking on articles. Of course, that’s going to get written about a lot, and that’s what’s going to cause people to freak out because that’s what the price action’s doing. But I think for people that are looking at this as more than a tactical trade, it’s really about monitoring the fundamentals, just like I would with any other type of investment.

Preston Pysh (00:16:07):
Two other things that he brought up that I think is important for us to address because we probably have a ton of people that are listening to this that have just got into space in the last 90 days or a hundred days, and they might not even be ahead in their position based on how much it’s gone sideways lately. The one thing that Elon brought up is he was talking about miners in China and how this is a centralized thing. So, Lyn, I’m sure you can crank this one out of the ballpark as to addressing how this is FUD.

Lyn Alden (00:16:39):
Yeah, there’s a couple… One is the energy FUD and one is the centralization FUD, and they’re two different ones. And so basically with the centralization, we saw from 2017… the differences of opinion there between different parts of the community as the ways Bitcoin’s designed is that really the nodes have the power. And so the partial centralization of hash rate is not really the key factor there; it’s really about, is there a central development team that can override miners and nodes? No. Is there a cabal of miners that can push changes through? No.

Lyn Alden (00:17:16):
It’s really about the decentralized node network itself. And that’s also why the Bitcoin community is so adamant about keeping nodes simple to run so that the average person can verify the entire blockchain and basically be involved in the consensus over time. And so miners of course have a large role, but just because one country has majority of hash rate doesn’t necessarily give them control over the blockchain.

Lyn Alden (00:17:42):
And then the second one is the energy FUD. There are pros and cons there; there are parts of things that are merit. So there is a big mining area in China. Some of it is the hydroelectric overcapacity where they go there, that’s basically the cleanest, freest energy you’re going to get because they’re really tapping into renewable energy, but otherwise be wasted because overbuilt in certain areas, especially during the wet season. But the other factor is you do have provinces in China that are more coal-heavy, and so that is a fact, but then over time, especially because China has actually moved in some ways to try to discourage mining in those jurisdictions, a lot of Bitcoin proponents are in favor of trying to do actions to decentralize the mining a little bit more, bring them more towards North America, bring it to cleaner resources where possible.

Lyn Alden (00:18:34):
But overall, it’s one of those things where the way it currently works… I think there’s a couple of issues. One is, people assume that the energy consumption is going to be as exponential as the price increases, but the way that the block subsidy halving works, that’s not how it goes in practice where the energy scales better than the price action over time. So there’s that. And then two, just the fact that even though you have individual cases where, say a bunch of coal mines Bitcoin, the overall structure of how Bitcoin works is it’s really optimized to go around the world and soak up wasted energy and basically overbuilt energy. And so the overall big structure of the type of energy that Bitcoin uses is really a net positive.

Lyn Alden (00:19:21):
And it’s the fact that a lot of people criticizing Bitcoin’s energy use, they start with the axiom that Bitcoin is useless and; therefore, energy spent on it is a waste, whereas, for example, we don’t really question energy spent on wash machines or Christmas lights. Whatever the case may be because we know that there are varying degrees of use for them. And so people that really know how Bitcoin works and know why it’s valuable, they know that one, the energy spend is worthwhile, and two, basically that over the long run, the basic, the incentive structure is actually pretty attractive for energy, rather than this giant exponential increasing environmental dream.

Preston Pysh (00:20:02):
There was one other… I’m sorry to interrupt you, Jeff. Go ahead.

Jeff Booth (00:20:09):
What Lyn said is all true, but here’s the thing; I actually think Bitcoiners don’t do themselves enough favor with that argument because it’s hard to understand. You’re fighting the wrong battle; you’re comparing what uses more energy and Christmas lights or this and everything else. Or it helps promote renewable, which is true. But on top of that, ask anybody, does it explain how climate is solved through an inflationary monetary system? So, you have to have growth forever, and you’ll debase your currencies to get that growth forever, so it’s not real growth. And so you keep growing. How is that aligned with finite resources on a finite planet? It isn’t. So if you start there, where Bitcoin by forcing…

Jeff Booth (00:21:10):
What’s happening is, as we move to more and more things becoming in the cloud or digits or information, really simple examples if you take music, we used to buy CDs and we had limited music where you drove to the record store to buy the CDs and everything else. And there were a whole production schedule and distribution choosers, who, out of the musicians, could be able to supply us music. So a whole bunch of people was blocked by access to even find us because of the high cost of distribution.

Jeff Booth (00:21:44):
Now we have unlimited music for $10 a month. And we don’t buy things. So GDP is a bad measure because as more things become information, we get more for less, and that’s declining GDP as we get more for less. But if you have a system that requires higher and higher GDP to pay back the debt that you can’t pay back, you have to keep on manipulating the system. And it’s not just a little bit of manipulation. People think, “Okay, after this, manipulation will be over.” Just like they thought in 2008, after that manipulation, it’ll be over. Everything’s good again. Because one system is totally opposite to the other system, it requires ever more manipulation forever to be able to do it.

Jeff Booth (00:22:36):
And the negative consequences of that action, quite simply, to say, should the lumber prices be what they are? Should oil prices be what they are in COVID? They are a result of money printing. They’re not a result of the natural supply and demand market, they’re results of creating more demand out of money printing. And the by-product of that, if it’s people storing value in their houses to buy more lumber and everything else, which is net positive for a growth economy, but it’s not congruent to…

Jeff Booth (00:23:17):
By the way, I don’t know if I love the answer of what I’m saying, but I would love anybody just to ask Elon, how are you going to fix the climate through an inflationary monetary system?

Preston Pysh (00:23:32):
Hey, one other thing that I wanted to highlight beyond the two points that Lyn brought up, which was the energy and then the centralization argument, the other thing that I think Elon was bringing up with his recommendation of how he was going to amend Dogecoin with the developer tweet, he was talking about making the clearing times faster for the transaction so you don’t have to wait 10 minutes.

Preston Pysh (00:23:57):
I’ll say my comments and see… I’m assuming you guys agree. A, we already have The Lightning Network, which clears immediately; Bitcoin Lightning Network, the fees associated with the Lightning Network are near meaningless, and yet he’s out there talking about this technical solution with Dogecoin. I was just confused. It was like, “There’s no way that he doesn’t know this,” right? Or I’m not sure.

Jeff Booth (00:24:32):
I think you might give too much credit. I think there’s a whole bunch of Bitcoin communities that… And I get it, on, “He’s doing this to manipulate stock, he’s doing this for control of Dogecoin,” and everything else. That might be right. Or, “He’s doing it to gain more power or influence.” That might be right, too. But I don’t think… It just might be he doesn’t know. He’s busy with so many other things and you’re asking him to be an expert without…

Preston Pysh (00:25:10):
Yeah. For sure.

Jeff Booth (00:25:10):
And he hasn’t gone down to the sand on all of this stuff, and he’s promoting… And he sure doesn’t look like an expert on any of these things. And that’s the thing with Bitcoin; there are so many smart people in the space that want real answers, want the truth. And so if you put something out there that flies in the face of it, you’ll be attacked. We’re going to need to be careful about that. We need to be careful of everything being price action because the importance of the network is far greater than price action. I understand how price action is a part of it, but the real importance for where we’re going as a species is way more important than the price action.

Lyn Alden (00:26:02):
I’ll second all of that. And what I was going to say with your initial question that I think that Elon should look into The Lightning Network because there has been a ton of development on that over the past couple of years. Obviously, we have a lot of apps coming out that are making use of it, but then also there’s the work that Lightning Labs does to basically provide a lot of those apps but the technology allows it to function. We’re getting more and more network effects and usability in that network over time. And it’s one of those things where… My base case is that Elon just doesn’t know and that I think people give him too much credit, assume he is a genius anything he touches, whereas I will say, using myself as an example, I cover multiple asset classes. I cover multiple stocks within the equity universe, let alone what multiple commodities are doing, what central banks are doing, what different countries are doing.

Lyn Alden (00:26:53):
And so studying Bitcoin over the past couple of years has been a large project to spin up on and to be able to contribute and basically educate other people on it and make sure that I’m not saying stuff that I don’t know. That’s basically involved a very, very large chunk of my time to really go down that rabbit hole and understand it. And while I’m doing that, I’m still balancing all these other asset classes that I’m monitoring for literally thousands of readers and maintaining awareness of that. And so for me, when I got into Bitcoin, Lightning was one of the things that I was aware of. Basically, I knew it solved certain problems, but I never…

Lyn Alden (00:27:33):
That was one of the later things that I dove into after getting the base layer figured out. So, if he’s keeping track of what’s happening at SpaceX, what’s happening at Tesla and whatever happens in his personal life. And then he’s getting into cryptocurrencies and Bitcoin and Dogecoin, because now he’s distracted Dogecoin, so what degree of research has he done, for example on Lightning? And also, has he spun up on the fact that he’s basically presenting certain arguments about block size and things like that that have basically been debated for five years now by people that are deep into this industry? And basically just seems to lack a knowledge of history about where some of the decision points were made, how we got to this, how some of the different forks turned out.

Lyn Alden (00:28:21):
My base case is that he just hasn’t really spun up on that particular area in a way that maybe he should have before making that billion investment in the asset class.

Jeff Booth (00:28:30):
True.

Preston Pysh (00:28:30):
You do all those things, Lyn, but you also write in an encyclopedia on inflation on a Tuesday morning and blast it out.

Lyn Alden (00:28:40):
Well, that’s an example of something that it took two weeks of writing, and then it comes out on a Tuesday [crosstalk 00:28:45]

Preston Pysh (00:28:44):
That was a Tuesday morning. Don’t give me two weeks. I don’t believe it.

Jeff Booth (00:28:50):
But to just build on Lyn’s point and go to other people, not as deep in the Bitcoin community, who have some of the same mistakes as they go through their journey. I would say it’s most, including me going through it in the beginning. Michael Saylor, look at his tweets on Bitcoin before he gained conviction. So part of the thing as you start to go down into the sand, you get smarter and smarter and smarter. He’s just doing that publicly and everybody thinks he is already a genius and knows all the answers.

Preston Pysh (00:29:25):
Jeff, what are the board conversations going to sound like after all this Elon stuff? Do you see it changing? Do you see people putting a lot of credence in some of that FUD that’s been put out there? Or is it just like, “Okay, well, that’s that guy’s opinion. Let’s have the conversation we were intended to have?”

Jeff Booth (00:29:45):
I would say almost zero. It hasn’t changed at all. In fact, this conversation is accelerating. Actually, even Elon on this forces the truth to come out and more and more questioning on it. And there’s been a lot of this from really smart Bitcoiners that have come out, and it deserves an answer. How does an inflationary monetary policy handle climate? Deserves an answer. If you don’t have an answer, and you’re just, “Oh, look over here. I’m selling cars,” tell me how, and if you don’t have an answer, and that’s how I think about it, then I’m a long Bitcoiner until I see something different that has…

Jeff Booth (00:30:36):
And then here’s another… I was asked this question recently on why Bitcoin and why not Ethereum, or why anything else? When we go into the protocol and what this is, I think there’s a unique set of circumstances that built Bitcoin to this point. And so, let’s take a look at a whole bunch of the other coins, which I don’t really look at all. Why am I a maximalist? Not that I couldn’t make money on some of the other coins in the short-term, but I need to know enough about them to be able to make money, and I don’t know enough about them.

Jeff Booth (00:31:19):
But why am I maximalist on Bitcoin? It’s because of two things; one, that the network effect on Bitcoin and where it is. And I do not think a smaller coin could ever get passed and brought enough adoption out of government before it was shut down if it was gaining enough adoption. So we have a point in time that Bitcoin is big enough and has been flown under the radar for long enough, that could actually bring power-

Preston Pysh (00:32:01):
That still has decentralization.

Jeff Booth (00:32:03):
… Exactly. That has decentralization. And I think if it didn’t win, and that’s actually why I’m against a whole bunch of other coins, if it didn’t win, then things will be centralized. And so-

Preston Pysh (00:32:20):
And then you’re back to square one, because then [crosstalk 00:32:22]

Jeff Booth (00:32:23):
… Then you’re back to square one. And in the world we’re moving into, so it’s not the world we came from, centralization in the world we’re moving into, if essentially you can control… Centralization means it ultimately eventually is on a paradigm of dictatorship because if technology is deflationary, and exponentially more so, and more and more, and you run an inflationary policy against that, what it means is you’re aggregating more and more power in the state. Over time, that turns into…

Jeff Booth (00:33:09):
I often ask myself, why in Russia doesn’t everybody just revolt? Why doesn’t everybody stand up and say, “I’m done with this. We’re going to have free and open elections and everything else?” And what ends up happening is a very small minority will, but most people won’t. They’ll go to the short-term safety for their family, they’ll make the case that, “I’m just going to stay quiet.”

Jeff Booth (00:33:41):
Now think about that scenario with centralization, with robotics and AI, and think about how different that power is. So if people won’t stand up in a system where you can still find anonymity and find a way to stand up, rally enough people around you to stand up, people won’t do that now, or they historically won’t, or not enough people to overthrow a government, how would that look with where we’re going with technology? So, decentralization and putting this power into empowering individuals and where we’re going, I think is critical for humanity. I think it is that big a deal.

Jeff Booth (00:34:31):
And that’s actually why… The truth is, I don’t think anything’s going to stop Bitcoin no matter what where we are right now. But when I see a bunch of FUD or altcoins are trying to… everything else that could hurt people as a result of this big innovation and why it’s so important, that’s why I’m only Bitcoin. That’s why I would defend that network because it matters that much. I don’t need it for my wealth.

Preston Pysh (00:35:08):
Lyn, what are your thoughts on that?

Lyn Alden (00:35:09):
I think it’s one of those things where… People always often criticize Bitcoiners as being all or nothing. And it’s like an immune response system where it’s one of those things where it normally it’s a good thing. Sometimes in individual cases, it’s a bit much here and there, but overall, that’s an important part of what’s kept Bitcoin going for as long as it has, and that hardcore focus on keeping Bitcoin decentralized, maintaining the network effect, that’s an important thing to play out. So I do think that overall, education is a really important thing to keep doing for people. And it’s one of those things where it’s important not to take for granted the idea that Bitcoin will succeed. It’s going to succeed based on the development of the community and the network effect over time, and that involves people calling out FUD where they see it, sharing education where they see it.

Lyn Alden (00:36:06):
I try to do my part by tackling different subjects and writing about them for both the retail and institutional audience. And so, for example, I think that… One of my views is that… One of the more significant risks for Bitcoin is the ESG narrative. And I think that’s because… People often talk about state attacks, but state attacks can come wrapped in other types of attacks, you can have a state attack that’s wrapped in an ESG concern. So, it is true, for example, that we see a lot of companies around the world are shifting more towards trying to emphasize their ESG abilities. And like anyone else, I’m in favor of trying to make the world as clean a place as possible, who is trying to have the best governance as possible, social concerns.

Lyn Alden (00:36:54):
But sometimes those can be… The things they optimize for are not… You can have a thing of greenwashing rather than being truly green, for example. So I’m certainly in favor of cleaner energy but I’m not in favor of things that are greenwashed; things that make you feel good, but don’t actually move the needle. And so I think that’s one of those things that can apply to Bitcoin where if people don’t… make sure people are familiar with the details of how Bitcoin uses energy, that people can get carried away with that sort of FUD. I think it’s good to keep educating people on it.

Preston Pysh (00:37:27):
What you’re really saying is you think that there could be a coordinated effort amongst policymakers to ban proof of work and proof of stake is the only thing that that is allowable? Is that what you’re getting at?

Lyn Alden (00:37:44):
That’s one of the things that’s possible, but you can have less extreme versions of that. You can basically make it so that if you have Bitcoin on your balance sheet, that’s damaging to your ESG score or that basically, you’re on the wrong side of renewable energy credits, for example. Things like that. Whereas for example when you have research being put out by ARC, for example, there are areas where I’d agree or disagree with ARC on different subjects. But one of the things they, I think, are great on is putting out open research about different topics. And they’ve put out research about Bitcoin’s energy usage and Bitcoin’s energy efficiency. And so I think it’s one of those things where you can have soft or hard attacks where you use one narrative to push another narrative.

Lyn Alden (00:38:27):
I was asked the question before in an interview, do I think Bitcoin’s energy concerns are a problem? And I said, no, but that I think the narrative around Bitcoin’s energy concerns could be a problem. And that was actually shortly before Elon’s turn on this. In this, I end up being an oddly specific example of how the narratives around that can be a concern even though the underlying technology and energy use, in my view, does make a lot of sense.

Jeff Booth (00:38:56):
That is exactly, I think, what’s happening. If I talked to a lot of… I’m involved in some of the ESG companies, but here’s the difference today in some of them; they’re hitting a point of inflection where they’re cost-competitive to existing and better cost. That’s when ESG moves. And again, it reinforces the cycle. And so I come back to the principle thing, you would argue that that’s good for the environment; a winning technology that is both clean, green and it’s cheaper than their existing alternative. But that, I think, is more deflation. And so I keep coming back to, so you’re going to print a whole bunch of money to be able to make prices go down more, to be able to print a bunch of money? So the system itself, to Lyn’s point, I do agree with that. The attack vector becomes a lot of people believe that Bitcoin is a problem for energy, is a problem for the environment. And that becomes the attack factor on Bitcoin.

Preston Pysh (00:40:13):
Lyn, what are your thoughts… If you were going to break it down simply for people that are listening to this, they hear us say the proof of work, proof of stake, they’re new to space, can you summarize the difference between the two, and then talk about how these ESG concerns pop up between the two different methods of implementing the protocols, validation, and security?

Lyn Alden (00:40:39):
Sure. Now, basically, the way the blockchains work is that you have to put up something of value to verify the blockchain, to have your vote matter, in a way of speaking. And with proof of stake, you’re basically using your existing units of that blockchain, in some cases, you’re risking them, in order to select which version of the blockchain is valid. And with proof of work, you’re contributing energy, you’re basically taking electricity and you’re solving hash functions. And then you’re voting on which blocks are valid blocks. And if you end up choosing a block that ends up not being the longest chain, you’ve wasted that work. And so there’s an incentive to make sure you’re voting for the correct… that you think is going to be the longest and most valid chain.

Lyn Alden (00:41:28):
There are different consensus mechanisms, and I think the argument against proof of stake is essential that the existing system is proof of stake. Not necessarily in a little sense of blockchain, but in the sense that basically, if you own chunks of the system, you have more say over the functioning of the system, whereas proof of work is more… What gives gold value over the long-term is that it’s essentially proof of work. Basically, someone dug through literally tons and tons and tons of rock in order to basically collect one ounce of gold. And basically, you’ve taken a ton of energy and condensed it into one ounce of rare metal. That’s the original proof of work.

Lyn Alden (00:42:09):
Bitcoin is the digital proof of work. And so overall, there are two different systems. In general, proof of work systems goes in to use more energy, whereas proof of stake system, say you take Ethereum’s case where it starts with proof of work, but then they’re trying to become proof of stake, so it’s more self-referential. And so technically, that can be a lighter functioning system, but you’re giving up some of the benefits of decentralization and all these other things that are the key part of why these blockchains are useful technology.

Lyn Alden (00:42:48):
Because as soon as you have a non-centralized blockchain, what you essentially have is a decentralization theater, you have a really expensive database, more or less. There’s basically a less efficient version of a fully centralized database. And so when it comes to decentralization, it’s almost all or nothing; either you have sufficient decentralization, where it’s believably decentralized, or you have varying shades of inefficient databases.

Preston Pysh (00:43:18):
And if you move into a proof of stake after a proof of work has mined a meaningful amount of the overall supply and you’re moving towards a proof of stake, and you don’t have full nodes that can be run by anybody at a very cheap cost, the issues that you’re describing comparing it to the existing system that we have today, where the people that hold all the wealth are the ones that get to make up the rules, I think it only amplifies itself in that type of scenario that I just described where you have a few people that are literally running data centers, call it 10 years from now, because the block size is so large that somebody can’t just take $200 and run a full node at their house. I think it becomes even more concerning. And I’m assuming.

Lyn Alden (00:44:13):
Exactly. I think a really good example is 2017 Bitcoin. When debates were being had by expanding the block size, originally you had a lot of big players on board with expanding the block size. You had a lot of the big mining pools and you had a lot of the big exchanges. And if that was a proof of stake system, that change would have had a higher probability of going through and being made, even if it was against the majority of users. With Bitcoin design, the nodes really have the final say on a lot of things. Despite the fact that you started with a pretty significant consensus of some of the power players, they were not able to push those changes through.

Lyn Alden (00:45:00):
That’s, in my view, one of the big tests of decentralization and proof of work and why there’s a big importance of running a full node accessible and making that a widely distributed thing, because otherwise what you’re basically building is a PayPal. We already have that. And so that’s how some people are thinking about it. Whereas if your starting point is you want to make a decentralized base sediment layer, a truly decentralized one, then Bitcoin pretty much nails that, and all these other ones in many ways are missing the point and they’re replicating these decentralized things that we already have.

Jeff Booth (00:45:38):
Lyn, that point, if you’re trying to compete against Bitcoin and you’re an entrepreneur that wants to do something else and so you see Bitcoin success, you spin up as something else that looks different, that uses different energy, that you’ve convinced people that this is a better mousetrap. That’s actually the exact point. That’s what you would do as an entrepreneur, that’s what all the entrepreneurs in that are doing, but the problem is it’s all centralized. It all becomes centralized.

Lyn Alden (00:46:08):
Yep.

Preston Pysh (00:46:11):
Hey guys, what were your thoughts… Stanley Druckenmiller had a massive CNBC interview last week. I think most have forgotten about it because of all the Elon stuff, but this was a massive interview and the stuff that he was saying… Joe Kernen on Squawk Box, he stopped. He’s like, “Are you really saying what I think you just said?” And he was like, “Yeah, I am.” I’m curious to hear some of your thoughts on that one.

Lyn Alden (00:46:39):
For people that are familiar with Stanley Druckenmiller, because he’s not as much of a household name as, say, Warren Buffet is, but for anybody in macro, Stanley Druckenmiller is the Tom Brady of the macro. He’s the GOAT of macro, he’s the guy with the 30-year track record of no down years, just this insane macro forecasting. And he’s really good with… Currencies and bonds are his main forte, but he dabbles across multiple asset classes. And the reason he’s got such a strong reputation is he can trade multiple types of markets: bull markets, bear markets, different currency regimes, all sorts of stuff.

Lyn Alden (00:47:19):
As an older investor now, he’s not one of the people that, let’s say, been on Bitcoin from the beginning, but he was like Paul Tudor Jones, one of the macro people that were open enough to have a non-zero allocation of Bitcoin, fairly early for someone with billions of dollars of asset to manage, where once became big enough to be on his radar where he could buy a little bit without moving the price too much. And actually, even when he bought into it, he still found that… He basically said he was still moving the price and so that actually limited how much he could do.

Lyn Alden (00:47:52):
But overall, he gave a really good interview where he talked about the changing of the dollars reserve currency status, he talked a lot about the fiscal issues that we’re facing right out of the Luke Groman playbook, coming from Stanley Druckenmiller on a bigger stage. And also, he gave an interesting comment about Bitcoin’s network effect compared to some of the other tokens in the sense that he’s undecided about which blockchains will win some of these smart contract or payment platform things that are happening. And he thinks there’s a good chance that some of the current leaders get displaced by newer entrants at some point. But he was also from that he thinks as a store value, that it’s really, really hard to unseat Bitcoin. And I think he’s done pretty good research on Bitcoin’s network effect in that area compared to the whole array of all coins out there.

Preston Pysh (00:48:51):
How about his comments on the dollar, Lyn?

Lyn Alden (00:48:55):
It’s one of those things where… I certainly like it because it’s stuff I’ve been talking about for the past few years now, which is essentially that with the current fiscal situation of the U.S. and the fact that they don’t really have much of a choice other than to maintain negative real interest rates on their debt under the current structure of how much debt is in the economy and how default works and things like that, well, they’re trapped in that system. He’s inclined towards thinking that we’re in a major dollar bear market. He sees a somewhat inflationary outcome and he thinks that as we look out 15 years or so, the current reserve structure… Basically, the foundation of our monetary system is going to shift away from the dollar to the sense that it’s not really the epicenter of the system that it currently is now.

Lyn Alden (00:49:48):
And I think there’s nuances where him and I might see things a little bit differently, but overall, he’s on that dollar bear somewhat inflationary outcome, which is the way I’ve been seeing things for a while. He gave an interview a little while ago, I think it was two months ago, and I included some of his quotes in my… I think it was my February newsletter or March newsletter, because I think he’s been doing really good commentary on some of the things we’re seeing in terms of fiscal policy, monetary policy, broad money supply growth, the inflation versus deflation debate. I think he’s been pretty sharp on that in the past six months or so.

Preston Pysh (00:50:27):
Guys, Caitlin Long, I don’t know if you guys saw the post that she had recently on Tether. Do you guys have any thoughts on some of her comments there?

Jeff Booth (00:50:37):
Didn’t see that one, Preston.

Preston Pysh (00:50:40):
Lyn, did you happen to see it?

Lyn Alden (00:50:43):
I think I saw part of it, but I had so many things on my plate. One of the concerns with Tether is they released documents about its backing and it’s still rather opaque and unclear backing, you could say. And so it’s one of those things where… I’ve used stable coins, but I personally don’t use Tether, just I prefer some of the other stable coins, the more regulated stable coins for periods of time where I use stable coins. I put out a tweet that just… It kind of referenced Tether, where I pointed out that if you deposit money in the U.S. banking system, it is 46% backed by treasuries and cash, and then the other 54% is of a variety of loans and things like that. That’s basically how the U.S. banking system works.

Lyn Alden (00:51:39):
And that’s actually above average. Over the past several decades, the average cash and treasury backing was more like 30% and the rest was a variety of more risky loans, because that’s what banks do. And so things can always be phrased or framed in negative ways where you make something sounds scary. In Tether’s case, I’ve never been on the board. I fully trust what they’re doing over there, but at the same time I think it’s…

Lyn Alden (00:52:06):
Some of the concerns are overblown in the sense that what has really structurally-moved markets is big pools of capital buying Bitcoin, moving it off exchanges into cold storage and just causing a supply constraint, whereas Tether is heavily used in the day-to-day trading of it as a unit of account. And so basically, if we were to see a problem with Tether, I think it would turn out a lot like this Elon event where you’d have these periods of volatility and periods of big problems and structures markets, but it doesn’t change the underlying technology and network effect of Bitcoin itself.

Jeff Booth (00:52:48):
I totally agree with that.

Lyn Alden (00:52:50):
Here’s a question for you, Jeff. This is from Lloyd Robinson. He asked, “I heard Jeff on SALT Talks a few months ago. He was asked several times how Bitcoin fixes are inflationary monetary system. I don’t think the interviewer got a satisfactory answer and neither did I. I would love to understand how Bitcoin fixes this so I can explain it to others.”

Jeff Booth (00:53:12):
Again, technology provides efficiency, and in a normal world, that would be deflationary. So a free market and technology would equal deflation. The only reason that doesn’t equal deflation is because we have a monetary policy that won’t allow it to. And that’s actually in this inflation-deflation debate all the time. We live in a macro… Overall macro backdrop is exponentially deflationary. And so when people ask, well, when is it going to be inflationary? When’s it going to be… Because that’s not what they experience, because they experience the system that is printing more money, that’s making prices go up. Bitcoin isn’t deflationary in itself, it allows for the free market to work, which would allow deflation. And as it allows deflation…

Jeff Booth (00:54:19):
If there were growth, if there were more real jobs, if there were more growth of things without monetary policy, then you would grow. That would expand. But if more things went to technology essentially saving our time, that would naturally be broadly shared with humanity instead of concentrated. So the same thing why Google and Facebook, Amazon, Apple, everything else are able to concentrate the gains as much as they are, besides the network effect, or the concentrate is the same reason that the billionaires concentrate out of the printing of the money. And so what’s happening is if I simply said, a free market, as long as you’re not continuing making mistakes, unless you’re growing huge new industries that are replacing more jobs than are lost, then that free market must… Essentially if you said human innovation is getting better all the time and you’re adding more, then that must equal deflation over time.

Jeff Booth (00:55:37):
We don’t see it normally because we never lived in a world that’s moved as fast as it’s moving today. And so you could hide inflation, and the policy response to what we’re talking about didn’t have to be as big. Today, the policy response on where we are on this train has to… And that’s what I talked about in my book. It has to grow exponentially to offset what’s happening with technology.

Jeff Booth (00:56:13):
One more thing. When we used to measure economists’ models and everything else when they’d say deflation is made up, and it is true; of demographics, that would be a big part. There’s deflationary [inaudible 00:56:27] pressures, or that when you off shore all your production to China. And so all of these things matter in the overall, but they matter less and less compared to technology. As technology is exponentially increasing its impact on our world and more and more of the base layer is moving to technology, that base layer requires a natively digital currency that won’t allow for manipulation, because otherwise, the manipulation equals more centralized control, centrally planned to market.

Preston Pysh (00:57:08):
Lyn, you came out with your article on Ethereum, and it had a lot of readership. I think you laid out some amazing things in there that would take… We could cover that for an hour and a half. In fact, I reached out to Vitalik to come on and have the discussion. We didn’t hear anything back from him. And maybe we need to just do a whole episode on your Ethereum article. I’ll have it in the show notes for people to look at and read, because it is amazing.

Preston Pysh (00:57:36):
But with all that said, when we look at the price action of Ethereum compared to Bitcoin over the last, I’d say two months, it has aggressively outperformed Bitcoin. What do you think’s going on? And do you see a situation where even though you’re making all these fundamental arguments, which I completely agree with, do you see this having the capacity to achieve a higher market cap in the coming six months or a year moving forward? I’m curious to hear if any of your analysis have changed based on how the market’s valuing it and just some of your thoughts.

Lyn Alden (00:58:21):
That’s a really good set of questions. For people that aren’t aware of it, I basically analyzed Ethereum. It was somewhat of a critical analysis. So it wasn’t super favorable towards Ethereum. There’s a couple of points where… I try to be fair as possible, so if it’s doing something interesting, I say, “Okay, this part’s interesting.” But the net overall case was rather critical on why I prefer Bitcoin as an investment. And it really comes down to decentralization, that I ultimately view Ethereum more like an equity where in a sense, people that are buying into it are betting on the development team being able to push out updates and structure to how they want to basically make the system that they envision rather than a decentralized digitally native form of money, which is what Bitcoin is.

Lyn Alden (00:59:14):
Historically, whenever we have these alt seasons happen… Generally, there’s one big alt season per Bitcoin halving cycle. And you started to get this inverse relationship between quality and price action, where literally the worst coins do the best, the best coins do the worst. And so the funny thing is you can characterize this Ethereum bull run as though it’s… Basically, some people are saying, “Does that mean it’s fundamentally improving?” And it’s one of those things where even though Ethereum outperformed Bitcoin, if you go down the quality spectrum, you have even smaller coins outperforming Ethereum. So the fact that Ethereum Classic outperformed Ethereum year-to-date, does that mean that Ethereum Classic’s network effect is gaining on Ethereum’s network effect? I would say probably not. Those technical details, they never perfect this on Ethereum, not Ethereum Classic.

Lyn Alden (01:00:06):
You have Dogecoin, right? Dogecoin has certainly had a surge in popularity, but for anyone who knows the… People that have shared their experiences of running a full node for Dogecoin or how that actual network functions, or what kind of development crickets have taken place over the past couple of years, basically what we’ve had is an inverse correlation between price action and quality year-to-date. And that’s happened in previous bull markets. And it’s one of those things where after I wrote my Ethereum article… I even wrote in the article that I wouldn’t be surprised to see it outperform Bitcoin on the bull leg of the market. I’d be more concerned about how it does along with other alt coins on the bear market portion of the cycle.

Lyn Alden (01:00:52):
And because I have a research service… I cover Bitcoin frequently, but I’ve occasionally touched on Ethereum for a broader picture. And I keep reiterating for a while now that… I was like, “Okay, if it breaks over this level, that’s very bullish for the price action.” Then a couple of weeks later, I’d give another update and say, “Yep, it still looks bullish with price action.”

Lyn Alden (01:01:11):
And I kept reiterating why, personally, I think Bitcoin is the more structurally sound protocol, but that you can separate fundamentals from price action and say, “For people that follow Ethereum, here’s what the price actually looks like; it’s bullish. But just if you want to go that route, be really careful because there’s…” I kept reiterating that I have concerns about decentralization and the underlying use case or the reason for existence of the protocol compared to Bitcoin, which I view as a more sound investment.

Jeff Booth (01:01:45):[inaudible 01:01:45]. Can I build onto that? Because I think there’s an important part.

Preston Pysh (01:01:50):
Yeah.

Jeff Booth (01:01:51):
Today, a network effect is when the value to each user gets stronger and stronger from a network effect. There are a lot of people in the late ’90s to early 2000s that mistook network effects for eyeballs. So they were buying more eyeballs thinking it was a network effect and that growth would always be there. But if it’s not making that network better for all users, then the network effect doesn’t exist.

Jeff Booth (01:02:16):
So now, let’s look at a time period and say, “Lightning wasn’t there five years ago and Ethereum was there.” And then the whole NFTE craze came on. Actually, there is value, and if people think there’s value on Ethereum because NFTE is driving a whole bunch of more people on it. Let’s examine that for what it is. I totally agree with Lyn, by the way, on it could outperform in the short-term, but not in the long-term.

Jeff Booth (01:02:53):
Now let’s look at the NFTEs, which is driving a whole bunch of their rate of growth on Ethereum. I look at the NFTE market like I would look at Groupon from a business. Remember Groupon?

Preston Pysh (01:03:07):
Mm-hmm (affirmative).

Jeff Booth (01:03:08):
Groupon created an incredible business by getting everybody to buy the one thing. And so they had one great deal that everybody bought. But the only way to scale that business was to add more things. And as they scaled, it just became more and more noise. And then nobody cared about the one thing anymore, because it was noise. And then there was so many other competitors that did the exact same thing. When I look at NFTEs on top of the primary source of value in the growth rate today of Ethereum, that’s what I look. So I discount that growth because it’s not a stable business over time. I’m not questioning that NFTEs can’t have value, I’m questioning how much value compared to what they will have if everything is digitized and I get to buy something that I get to say it’s mine.

Jeff Booth (01:04:05):
And so today, there’s a whole bunch of people thinking, “Wow, that’s going to be a staggering business.” And I think they’re overvaluing it like they overvalued Groupon then fell to the floor. And apart from that, and this is where [Druck Miller 01:04:20] and I agree, that technology might just be built on to Lightning Network on the base port protocol or something else based on it. It didn’t exist before, but now it’s starting to emerge. And so what’s being built on top of Bitcoin on the network is just in its infancy. And we’re going to see a whole realm of things tied into the base protocol.

Lyn Alden (01:04:50):
One thing I was going to say is the example of stable coins, and that’s something I have covered a little bit in my Ethereum article and elsewhere, which is that some of the earlier stable coins were tied to the Bitcoin network. And then when you had Ethereum, you started to have them move over to Ethereum because it was cheaper and it made for that sort of thing. And then now, as Ethereum’s got more expensive, you’ve had stable coin usage spill over onto TRON, of all things. And so the problem with utility protocols is that when you start sacrificing certain variables, basically you’re making things more efficient in exchange for centralization. Then another protocol come around and make things even more efficient, but with more centralization where basically… until it just approximates the database.

Lyn Alden (01:05:40):
That’s what we’re seeing in the stable coin space, where it started out with the smaller transactions, they have a more incentive to move to cheaper chain, because if you’re doing a hundred dollar transaction, you can’t pay $50 for a transaction, but if you’re doing a $10,000 transaction, then you can. But as the fees get higher and higher, a bigger chunk of the uses spills over onto that other protocol. And same thing’s happening with Binance. It’s another kind of a decently-sized network effect that is coming into that space. And this was outlined in John Pfeffer’s paper several years ago where utility protocols essentially have to compete on price. And so the network effects are not going to be as strong there as they will be for something like Bitcoin.

Lyn Alden (01:06:30):
I’ve spoken with John before and he’s paying pretty close attention to this industry. I think he has really, really good points on that. And I generally agree with that paper where even if you do get some degree of network effect in the utility protocol space, which for example, Ethereum has for a number of years, that doesn’t necessarily translate into long-term token appreciation because your reason for existing is going to be constantly threatened by cheaper, more centralized competitors.

Lyn Alden (01:07:06):
And whereas Bitcoin doesn’t really have that problem because the entire point is to just be a decentralized store of value, then you can build other things on top of it to make it a better and better payment network and a smart contract network or whatever the case may be if people want to add those features. So, for example, The Lightning Network is obviously a really good use case there that basically strengthens Bitcoin, but that the underlying protocol has a lot more defenses against competitors compared to those utility protocols.

Preston Pysh (01:07:36):
In your article, you were talking about Infura with your Ethereum article, and on the website for Infura, this was the quote that you put in the article. It said, “It can get expensive to store the full Eth blockchain, and these costs will scale as you add more nodes to expand your infrastructure. As your infrastructure becomes more complex, you may need full-time site reliability engineers, and dev op teams to help you maintain it.” And that’s today. Those statements are being made today, and that’s why they’re saying that a person should outsource that to them to manage. And I’m just thinking to myself, “How is that something that in the long-term is going to remain decentralized?” And [crosstalk 01:08:26] Go ahead, Lyn.

Lyn Alden (01:08:27):
Well, especially as you move over to Ethereum 2.0, because they’re running into scaling just like Bitcoin would without Lightning, for example, where they can only handle so many transactions, fees get very high on Ethereum. But unlike Bitcoin… Bitcoin, the average transaction size is pretty big, so it can withstand pretty high fees. And when you need a smaller transaction, smaller fees, that’s what Lighting Network’s for. In Ethereum, you’re doing more complex transactions. For example, if you’re doing different swaps and things like that, you’re paying very, very high fees. And so there’s a strong incentive to spill over onto cheaper chains. So theorem 2.0 is trying to scale, it’s trying to do more on the base layer.

Lyn Alden (01:09:13):
So, they’ve changed the roadmap a number of times, but basically you can have different types of nodes and different types of… Basically, almost like an army of different nodes where certain things are validating certain parts of the blockchain because nothing is big enough to validate the entire blockchain unless you’re running a data center. And so that just… Again, it becomes a rather centralized entity. When it comes to blockchains, there’s two types of centralization to worry about; one is the technical decentralization which is what you get for example if Infura goes down, you’ve run into blockchain wide issues, for example. That’s a technical centralization issue.

Lyn Alden (01:09:55):
And then, two, would be developer centralization where, say one foundation or one team has the capability to push through changes more easily and change monetary policy or change designs. Whereas if you have something that’s more inherently decentralized, it requires true consensus to support. They overlap, certainly. There’s two types of centralization, but they are slightly different in the risks involved.

Preston Pysh (01:10:26):
Guys, that’s all I have for tonight. And I know we went late. Lyn, Jeff, both you guys, I reached out to you today to record this and you both said yes, and I can’t thank you enough. Give people a handoff to where they can learn more about you and some of the links and all that stuff we’ll have in the show notes. But Lyn, go ahead and fire away.

Lyn Alden (01:10:48):
I’m at lynalden.com. I’m also active on Twitter @lynaldencontact. And a lot of my work is public, so people can check that out. And I cover Bitcoin, I cover a bunch of other asset classes. I cover macro in general. So basically, whatever asset class you’re into, hopefully, my work can help people out.

Jeff Booth (01:11:06):
My best place for me is @jeffbooth on Twitter.

Preston Pysh (01:11:11):
And Jeff has an amazing book, The Price of Tomorrow. We’ll have a link for that in the show notes as well. Guys, thanks so much for making time.

Jeff Booth (01:11:20):
Thanks a bunch.

Lyn Alden (01:11:21):
Thanks for having us.

Preston Pysh (01:11:23):
Hey, thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. And if you have time, leave us a review. Thanks for joining us this week and we’ll catch you next Wednesday.

Outro (01:11:37):
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