Charles Edwards (03:11):
Anything which comes into supply and demand, so four or five years ago I thought technical analysis was rubbish. I actually was at a John Bollinger presentation. I left halfway through because I just thought it was hocus-pocus and the irony is that it’s not. There are limitations to every method of investing and analysis you do, but there’s a lot of power in different information. I try and consider now anything from the technicals, momentum, fundamentals, onchain, sentiment, whatever you call it. I think all this information, any information is just input into a supply and demand calculation at the end of the day, which supply and demand set the price for any asset.

Charles Edwards (03:52):
I would argue with, in value investing it’s the same thing when you’re discounting cash flows and trying to come up with intrinsic value. You’re basically saying, “At this price, if it’s worth $10, below that the supply of that dries up.” Because no-one’s willing to sell it. Because within a margin of safety of course, why would you sell it when the business is worth more? So you know that when you buy below that, there’s a statistical probability that there’s an upward pressure in price. I try to take that same approach to Bitcoin and basically consider anything which would set that, from whatever it be, onchain to price behavior, to different fundamental inputs or just even correlations with the stock market as well.

Preston Pysh (04:32):
Talk to us about some of these metrics that you’re talking about because back before the halving event, you and I… And to be honest with you, I took the idea completely from you, but I was just talking about it a lot, which was the Hash Ribbons. This was an idea that you had talked about. There are many other ideas that you’re using various metrics for, so talk to us through some of these metrics. Maybe start off with the Hash Ribbons, and whether you find it valid today, or it’s only valid at certain points in the four-year cycle? Talk to us about some of that stuff.

Charles Edwards (05:02):
Hash Ribbons is probably one of the most known for one of my early indicators and still today, I think, probably the best long-term buy signal for Bitcoin. I just try to come up with an approach to find out when a capitulation event in Bitcoin had ended. Every cycle is usually 80 or 90% down draw on the Bitcoin price and there’s been three or four of those type events. What I was trying to do with Hash Ribbons in particular is identify when that was over to get the best buy opportunity. It turns out that what or when the price drops from the cycle peak, say 20, 30, 40%, at some point the inefficient miners start to struggle to be profitable or they find other opportunities; maybe with higher profit margins in other old coins or in other business ventures with their equipment so they start to shut down. Particularly the miners with higher electrical costs.

Charles Edwards (05:52):
The average bitcoin miner, which would cost around 3.5 cents per kilowatt. It varies widely. Some miners can do it for a cent and they’ll be fine no matter what, and some are like five cents or six and they will struggle when these events happen so they’ll potentially turn off. Some will shut down completely, go out of business and maybe sell off their Bitcoin to get out of that, and that’s where you have that real collapse in price. Another 30 or 40% type collapse. When that is over and they make a left for the efficient miners and difficulty adjusts down, it makes things a bit easier. Things start to bottom out and creep back up, and when you see that reflected in the hash rate and then also, even better, it matched with some price momentum, it’s a fairly great buy opportunity. That is like a bottoming of, I suppose, the supply. In general, with a lot of the metrics I look at, it’s much easier to identify undervalue and bottoming, than it is to identify tops.

Charles Edwards (06:47):
I can talk about that a bit more later, but it is… Well, I’ll say it now, because when you… It’s like intrinsic value with a stock. When it’s under that price, you know you’ve got a good deal, whereas if the value… If the stocks were $10 but it’s now $50, you don’t know if it’s going to get it to a $200 or back to $10.

Preston Pysh (07:06):
Because of the emotional piece that’s driving it, it’s too hard to determine emotionally how much more-

Charles Edwards (07:13):
Yeah, it’s easier to identify the fair value, but not when the overvalue is over, I suppose. So with Bitcoin, in particular, it’s a one or two-percent reduction reliably. So the upside potential is if demand in stocks is huge so it can go do massive, historical levels of overvalue action very quickly, and it’s harder trying to find the top. I’m not saying you can’t do it. It’s just, you can do it much more accurately with the bottoms because you know that the supply’s gone and this is where it usually start to trend up. So if it tops, there are the metrics that we’re looking at like HODL waves, which is basically a metric of what percentage of the Bitcoin miners have been holding Bitcoin for more than say two years? Because it has been the baseline so the longer terms mining money and if they’re selling or buying, it’s very interesting. From tradings and discounts, of Grayscale trading for example. The stable climb prints of the supply of Tether, in particular, USDT.

Charles Edwards (08:09):
Another one I really like I wrote an article about as well about a couple of years ago, Dynamic NVT; so Network Value to Transactions, so it’s like a paid ratio for Bitcoin. That one in particular, when they get into an overextended red zone, it’s often a good time to take up some risk. Same with the main model, which has actually worked really well the last few months, which I know you’re a big fan of, and that’s been about to run for 2.5 hours. That high leverage area, it depends on your time horizon, but it’s a good idea to manage risk. So probably, I should come with all these metrics. It really depends on your time horizon. So if you’re investing for five-years plus, there’s basically only one metric, which is buying more.

Charles Edwards (08:49):
Obviously, not investment advice, but any metric you look at, one to two cycles onwards, it almost says everything is undervalued for Bitcoin, that you’d be struggling to see it under 200,000 in five, six, seven years time, and you spending a huge anomaly, or black swan type event we cannot foresee right now. When I tweet or one of the articles I write, it’s usually looking at that wonderful year period or monthly level period of how can we try and manage those big down drawers of 80% and when’s a good time to buy? So that’s another time horizon where a lot of these measures that I just talked about I think are valuable. And then if you want to gain more high frequency, which is some of the tradings that we do at Caprioli and buying and selling on the hourly top level, it’s a different set of data. It’s a completely different supply and demand model.

Preston Pysh (09:38):
So somebody who would hear the previous part that we were talking about, as far as it being difficult to understand a top because of the emotional aspects of the market participants. I think a person would hear that and say, “Well, the same thing could be said about a bottom.” But I suspect your answer goes to the electrical cost and minor stepping in. But I’m curious how you respond to something like that, considering you should expect the exact same thing on the bottom?

Charles Edwards (10:05):
I suppose the demand is infinite, relative to the current price, so they can get 100 X, whereas the supply isn’t, that’s probably the highest level summary. But you’re right, production cost is a great metric for that because it’s looking at the electrical cost of mining bitcoin and the number of Bitcoin per day to calculate what is the price to mining bitcoin. And once bitcoin price goes below that, it starts making sense to start shutting down your operations. There’s kind of two levels of production cost, and [inaudible 00:10:36] in the article I wrote, considers more generally business costs. So it might be a rent and warehousing profit margins everything, but even below that, there are electrical costs. So that’s the price at which you literally wouldn’t they just turn off your bitcoin mining rigs because the price of Bitcoin has broken that threshold. That has never happened historically until March of 20 last year, where we dipped under it for a few hours and you had the ultimate buy Signal ever at 3.5, $4000.

Preston Pysh (11:04):
It’s hard to believe that was less than a year ago.

Charles Edwards (11:06):
In three days, a year ago, and that was a 70% drop in a day, which is happening all the time for Bitcoin, an extremely rare that time of the cycle. So an unusual event. So when you get into this, whether there’d be Hash Ribbons or production costs or extreme levels of undervaluation there, the Bitcoin and considering where we think this is going particularly in the macroeconomic environment we’re in, it’s a great buy signal statistically.

Preston Pysh (11:36):
So Charles, you’ve written an amazing article on this whole idea that you’re talking about as far as the electrical cost and there being almost like a floor to the Bitcoin price based on these electrical expenses that the miners are producing. What’s the name of the article? And then is there any other highlights that you would point out from that?

Charles Edwards (11:55):
I think that would be Bitcoin’s production cost, as the article, yeah Medium, so I’ve got a few articles there which go through all of the metrics we’re talking about here in greater detail. So, yes, feel free to check that out. And then any questions people can shoot them through.

Preston Pysh (12:10):
Are you firmly of the opinion, so when you look at the price chart and you see that it almost is like a perfect representation of Metcalfe’s law, especially when you look at the base at the bottom of the price action over the last decade, you’re of the opinion that the miners and the energy to mine the Bitcoin is setting that floor. Would that be a correct assumption?

Charles Edwards (12:34):
Yeah, it plays into Metcalfe’s law and also the Lindy effect and the domination that Bitcoin now has in this market. So you’d be a bit more questionable maybe about these theories four or five or six years ago. But now, it’s very clear, [inaudible 00:12:48] in your point, I was spoken about as well, that Bitcoin is the clear winner in this decentralized monetary space. So you can, I suppose, trust in these metrics a bit more. You see, it recently when we broke out a trillion dollars and Bitcoin is the fastest-growing asset to get to that faster than Facebook and the Internet and these other metrics.

Preston Pysh (13:08):
Do you see that production cost pulling in governing the top of the price, or do you feel that maybe the price could just keep on running and it could become a dominant global currency without the price, the energy costs pulling it back down into a lower level?

Charles Edwards (13:26):
Yes, I think you go through cycles, I think right now the production costs are not very useful for us because we’re so far above it. The energy value is also less valuable, that’s around 25,000. But the main thing with those metrics is its main reverting to the energy in particular, so that is a model which maps the energy input in joules almost 1:1 to bitcoin. So it assesses the hash rates, the mining hardware efficiency, and supply growth rate of Bitcoin. And basically, you calculate it all out and it’s just joules of energy in and multiplied by a price multiple. And you get the energy value. Their prices may revert to that consistently for the last 10 years, it’s, I think, certainly very powerful in my opinion.

Charles Edwards (14:06):
But it comes back to intrinsic value, like your value investing approach when the price’s below it, it’s a great buy. When it’s above it, you’re in a little bit, maybe extended territory, and need to be more careful or it provides less value. Historically, though, the last cycle’s prices extended pretty consistently. Four to 500% above energy value at the top, it doesn’t mean it will this time, but that’s the regions where you want to be a bit careful. We’re now about twice energy value, and the things to look out for there when hash rates and energy value just start to drop, that’s when you probably want to start either managing risk or definitely not be buying when you’ve seen a network drop.

Charles Edwards (14:44):
And that’s just one element. So does the hash rates, which gives you an insight to the miners that you might see institution start unloading coins on the exchanges or the multiple might be really high as well. You really want to get a confluence of factors to line up and give you an insight as to whether the top may be in. But yeah, certain metrics are more useful when you’re near fair value. So production cost, energy value, and other metrics are better when you’re extended or maybe more valuable, such as many multiples or the Dynamic NTV ratio.

Preston Pysh (15:17):
Talk to us a little bit about your opinions on the macro backdrop, particularly in the past year, and how you think that kind of plays into the Bitcoin narrative?

Charles Edwards (15:28):
So I think [inaudible 00:15:29] probably got a pretty similar view to you, in that probably the best [inaudible 00:15:35] and his views on these cycles. So, yes, a strong believer in what he writes about where we are, that we’re near the end of 100-year debt cycle. And it’s a period where there’s a lot of debt restructuring, potentially currency collapse. And in the midst of that, we have Bitcoin appearing as the perfect candidate. So I think that plays into Bitcoin’s hands. Same time, even before last year or last year recession was pretty obviously going to happen. A lot of the macroeconomic factors were screaming towards it, such as the yield curve inversion, which is a perfect hit rate. And you’ve now got this situation where we’re at the end of a huge cycle, we’ve got recession, we’ve got lockdowns and a struggling economy, with GNP down, stocks rallied and gold is still down from 2008. And so when I look at it, the macro, you see the economy doesn’t look very healthy.

Charles Edwards (16:26):
It’s propped up with continual monetary stimulus and you see stocks flying high. So I’m not here to say that stocks are overvalued because it’s hard to say that when you’ve got this much printing, people need to put their capital somewhere. And that’s either gold, bitcoin or stocks. Obviously, we think Bitcoin is a great choice there, but it’s hard to know where that trend ends. I think the optimistic scenario is the beautiful deleveraging that [Dahlia 00:16:53] talks about, where we hopefully have some great policies implemented, debt reduction by government, which lines up perfectly with monetary printing. But I’m personally not saying that. I don’t know if you’ve got any insights there for us some.

Preston Pysh (17:07):
Yeah. No, I’m with you, I think when you’re looking at that, you’re just saying… I think this is where Ray gets the most grief from a lot of his followers is I think people say this whole beautiful deleveraging thing that you talk about at the end. How does that work again?

Charles Edwards (17:22):
Yeah. It seems very optimistic. I’d love it to be true, but I think that it’s going to… They can’t stop printing. So the question is if they’ll implement policies to manage the debt down, which I am not saying. So for me, at some point, it feels like it’s going to buckle in terms of people… There’ll be switching point, we’re seeing Bitcoin every day with a price appreciation will be somewhere. There’ll be some point where we’ll be like, “This money’s worthless,” like it has happened at the end of every debt cycle.

Charles Edwards (17:48):
And there’s probably a more clear, obvious hyper-inflationary type event, which I think we’re seeing now in asset inflation, but not really in day to day living so much yet. So what does that mean? I think for stocks, it means there’s probably going to be a lot of volatility to the upside for sure, that if things collapse also potentially to the downside, as we saw in Weimar, Germany and some of other inflationary cases. The Bitcoin, I think it’s great in the long term because it’s the obvious contender to fiat currencies right now.

Charles Edwards (18:20):
In the short term, there is some risk in large down draws or collapses like we had in March last year. So it really depends on its high rise. And if you can’t handle volatility like that, if 30, 40, 50% drops, which could happen if the stock market drops 30% tomorrow, then Bitcoin’s probably not for you. But if you are willing to accept that it’s possible and stick around for a number of years, probably going to be a great option to navigate in this economic situation.

Preston Pysh (18:48):
So Charles, what are your thoughts on this cycle that we’re currently experiencing in bitcoin? I’m assuming you believe in these four-year cycles, but give us your thoughts on that and then where do you see us right now in this bull run that we’re currently experiencing?

Charles Edwards (19:04):
There’s probably two parts for this cycle and where we are now. So coming into this year, I thought we were going to get to one or 200,000, at least I wouldn’t be surprised if we touched the 300. And that’s based on about a year ago, long term forecast with energy values, pretty simple regression, but also a number of other metrics. You look at whether we start to flow, for example, or different things. Even Fibonacci sequence is amazing how closely and there’s something else. This thing is crazy, but how closely the long term and low time frame price action of bitcoin matches into different golden ratios sequence, so almost every Bitcoin top is about 17 to 18 times the Fibonacci retracement of the prior top.

Charles Edwards (19:47):
So that puts us around 300K. Yes, all the metrics kind of point to that region. And I think we will get into most likely 200K and possibly higher. And from there, the bounds are overly dependent on economic stimulus. I think the 25% inflation we’ve now had, which we never had before in terms of monetary printing, will ratchet that up and more than 25% factor. So the price appreciation we’ve had just in the last few months of Bitcoin is significantly faster in 2017 when there was maybe arguably more hype at that time, but closer to 2013, and I think the speed maybe contributed or probably contributed from the institutional buy and the hedge against that monetary inflation.

Charles Edwards (20:34):
So I think we’re going to that region, but I would adjust that based on new information that may come out in the months, if we’re going four or five trillion stimulus. So who knows what in the next six, 12 months that will probably impact it by significant ways. In terms of the cycles, I think we’re still on the four year cycles for now. So a learning for me has been in investing and trading to be careful of this time is different. So it’s easy to do that, particularly in hype and mania, and top of cycles, “We’re never going to crash again and bitcoin is the new thing.” Usually if it statistically happens one way, that those odds will continue. So a good example is the hash ribbons, for example, we had a buy Signal in December and we’ve had four buy Signal since I release that. And they’re all up between 150 and 600% since that was released without any change.

Charles Edwards (21:28):
With the one in December, there was a good narrative going around it because the end of the wet season for their miners and the Chinese miners, during the wet season, they relocated across the country, use hydropower because that’s cheaper. And then after that, they relocated and also turn on and off their rigs to do that. And that causes hash rate to drop and you then get another buy signal. So there was speculation and even I had a little bit of, I suppose, nervousness about the strength of it because of that not being really a capitulation type event.

Charles Edwards (21:57):
And whether or not that narrative is true, it doesn’t really matter because it worked. That may sound simple, but the hash ribbon or the hash rate assesses the entire network globally, sort of says it’s all factors and that’s the beauty of it in identifying those opportunities to buy. So what I’m trying to say in that story is that you should just trust the data until the data proves otherwise or unless the narrative is backed by some really strong data, like the 25% monetary inflation we have now, which will probably impact some metrics. So it’s better to kind of potentially use something which may work, which has historically worked really well until it maybe doesn’t work out well then it is to abandon a certain narrative.

Charles Edwards (22:37):
So with that strong interest, I think the focus will probably continue or that we should be very careful at the end of it for a large drawdown because even if we have widespread institutional adoption, a lot of the large holders of Bitcoin have been around for five, 10 years. And even if it’s self-fulfilling behavior, you will see that their movements of coins and how they react to these metrics and things will drive outcomes and it can be self-fulfilling. That said, I’ll revise that if we get massive stimulus or some kind of economic meltdown situation or change of events. But for now, I would bet on the four-year cycle. Looking at further like 10, 20, 30, whatever years. I think those cycles will diminish. So the depth of them, it will kind of approach more of an exponential curve.

Charles Edwards (23:25):
So instead of the big dips, you get shallow dips and so on. Because of two reasons, I think the impact of each of the miners reduces their relative share of supply and also the net impact of any individual holder or entity reduced. So historically, the Bitcoin has been really retail-driven, maybe speculation-driven. Now, we’re getting more institutions in, the coin share is getting more distributed. So all of these factors, I think, reduce the impact of capitulation events or massive sell-offs or the impact of an individual party, I suppose. And the other key factor is that all of the key components of Bitcoin, a novel and preprogram as we know, the supply model, hash rate model, difficulty, whatever metric it is you want to look at the chain, it’s all there for analysis.

Charles Edwards (24:11):
And I think, in the long run, a lot of it is having priced in or so obviously it wasn’t [inaudible 00:24:16], wasn’t priced in, and we had a huge appreciation. But at some point, whether it’s five, 10, 15 years or whatever, maybe or one year, these events will get more and more priced in by institutions, I believe. And by the public in general and expectations. Maybe it will start to flow any model and that will smooth in the volatility side. In the long run, I think actually, bitcoin has a history of being considered volatile and risky. But that’s probably the least risky asset in the future, in my opinion, and it may be the least volatile asset in the long run as well.

Preston Pysh (24:48):
Charles, do you see a possibility that a melt-up in Bitcoin could happen after a certain threshold is breached just as far as adoption rates go? So we all talk about these four-year cycles because that’s what we’ve seen to date. But is there a certain point in the future where trust breaks down, erodes from the traditional system and there’s this all-at-once flood into Bitcoin that causes the price to melt up, and then it just really never comes back from that. It just keeps on running. Almost like a German paper mark chart from the 1920s.

Charles Edwards (25:23):
Exactly, that’s the one event I do think about, as I mentioned before, how do you… This volatile event may happen in the market because of a lack of trust. And it is probably a breaking point with people that I don’t want any of this currency. I think we’re quite away from that. But it could definitely happen. It’s an event that happens once every 100 years. And we’ve never seen it on a global scale, on digital assets. So it’s almost impossible to predict. It’ll probably be obvious when you’re in it. It’s a tough one to answer. I think at some point, obviously, leading Bitcoin to long-term growth in the adoption. But I don’t know if that event would be two years, 10 years, or 20 years away. But I think with every day that we have economic conditions right now and monetary stimulus right now, it gets closer.

Preston Pysh (26:09):
Let’s talk about the contango trade, so this is something that you’ve posted about I’ve seen you post about what’s going on there. First, explain what contango is, and then talk us through why you think that this trade exists. Because I find this trade to be kind of mind-blowing, especially considering your cost of storage for Bitcoin is literally nothing or near nothing. And when you think of contango in the oil market, a lot of the time it comes down to the price of storing the oil because there’s been an oversupply that starts getting built into the future prices. But this is a strange one. So explain what it is and then give us some of your thoughts on it.

Charles Edwards (26:49):
Yes, I think you’re talking about the long and short thread I posted about. So the one I specifically wrote about and there’s a number you can do but this is the one I know a bit more about. If you had bitcoin and you just want to make it interest-free rate or return on that, you can deposit it with a loan institution, BlockFi or Nexo, whatever it may be. There are lots of them now and you get 50% of that capital back. You got 10 Bitcoin, you get five back and with that, you can then short it on a perpetual futures contract. This is what I look at. And they historically have an average funding rate of 0.01% a day. So it’s roughly compounded 12% a year. And that’s the baseline rate. But that rate varies. So it will often be above or below that. And it depends on the markets.

Charles Edwards (27:35):
If it’s a bear market, it might be below because it’s based on the positions that traders are taking. But in a bull-run right now and has lots of demand for Bitcoin, a lot of people speculating on price increases. It gets really high. So 10 times higher or five to 10 times higher is not unusual. So if you do that trade, you would deposit your 10 bitcoin, you get five back for free, so to speak, with some interest rate to pay five to 10% a year. And then you assure that, or the entire amount on a petrol contract and you get somewhere between 12 and probably 50 plus percent interest-free on that trade. There’s this platform risk that the exchange goes down, you lose your coins. All those, I would argue, smaller risks that we have today. But in terms of the actual trade itself, it’s zero risks. And you lock in somewhere between 12 to 30 plus percent interest on your coins.

Preston Pysh (28:35):
So in this, you’re locking up coins. You’re taking the 10 that you originally started with, you’re locking those up, you’re getting five back, then you’re putting those into the market and you’re doing these activities that are putting coins into escrow, instead of letting the coins come into the underlying buying and selling market, which in my opinion, is driving, is an increased bid on the price because of supply, the suffocation of the coins. Do you see it the same way or do you think that it’s still net neutral or is this kind of a narrative you disagree with?

Charles Edwards (29:13):
Yes, so you’re saying that because people are locking in their bitcoins, this applies less and not just pushing price up a bit more. Is that what you’re saying?

Preston Pysh (29:20):
Yeah, I think it’s actually almost like a second happening event.

Charles Edwards (29:24):
Yeah, it could be. I don’t know if that trade is that occupied yet. Probably I think it is on an institutional level and obviously, it’s a very attractive trade. So if it isn’t now, it will be even more in the future. So I think there’s a valid answer to that. And it’s hard because that’s one component of lock-up. There are other lock-ups of just huddlers buying. [inaudible 00:29:46] and its balance sheet. There are various levels of lock-up. So for that sort of supply-side, it’s great to look at things like the auto waves or the net flow of coins from exchanges.

Charles Edwards (29:57):
So, which just gives you a bit more of a macro view of that phenomenon of supply drying up that you talk about. So a good example, I tweeted as well not too long ago about Coinbase is about 15,000 coins going out a week, so somewhere between a half billion a week, which is pretty obvious institutional buying. So we’re definitely seeing that supply being sucked out of the system, at least over the weekly and monthly level. So a lot of it… I don’t know the extent, but a good portion of it could be going into that trade.

Preston Pysh (30:28):
What are your thoughts on the exchange, the number of coins that are being pulled off the exchange because relative to the previous four-year cycle. I mean, the quantities are drastic. It’s kind of crazy to see the amount of coins coming off the exchange. Do you have any thoughts on that?

Charles Edwards (30:43):
Yeah, it’s really it’s been really bullish. I think the rate has slowed down a little bit in the last weeks. In particular, in the hotter waves, the percentage of people who have held Bitcoin for more than two years has kind of peaked near to the intermediate level and come down. And normally that drop happens around mid-cycle. So 30 to 50% through the cycle, which I’d argue is roughly around are now based on historical cycles anyway. And when that kind of starts to steepen, it indicates people selling out. So it’s a change of hands, right? I think a lot of it’s going to institutions that will probably have a stronger hand, but that trade is not as strong for me right now as it was three to four months ago when it was just straight down. It may continue to do that, but it seems to slow down for the time being on the shorter time horizon.

Preston Pysh (31:34):
So a lot of people on Twitter were wanting to know, what are the big metrics you’re looking at, for where we’re at right now in the cycle and probably the next two or three months from now?

Charles Edwards (31:44):
We’ve talked about hash ribbon, energy values, [inaudible 00:31:50] Dynamic NTV, so we touched on that. It’s a network value of the consumer market, kind of like the market divided by the transaction value. So essentially, what value is thrown to a network, kind of like a P-ratio. And when that gets above the two-year Bollinger Band, it signifies overvalue. So the pricing network is significantly higher than the historical level from a transactional perspective. So we touched into that recently the other day as well as the main multiple, when we had that 30% drop. So that’s a good one to watch. Stable coins are also good, large inflows or outflows in that, it can trigger the same or the opposite reaction of price. So I think a good description of that is when there’s a large demand for in particular USDT, which is the biggest one at the moment, the US dollar stable.

Charles Edwards (32:37):
It indicates that people are either de-risking from crypto and getting out of it and into the US dollar, or there’s a lot of new entrants coming in. So a common onboarding way is to convert the US dollar straight to USDT, for example. So what does that mean? People usually get out of Bitcoin, all kinds of whatever it may be when they’re concerned or there’s fear and they want to do risk. And that often lines up with a bottom or a local price bottom. So when you say large relative increases in USDT or other stable clients versus Bitcoin, it’s actually a good indicator that there could be some appreciating bitcoin, whether it be from the new demand or from the sort of bottoming factor of existing players. And as vice versa, you can use that as well as an indicator when the talking process may be shorter term or probably less reliable as a Grayscale Premium.

Charles Edwards (33:28):
So we’re seeing lately that I think right now it’s about the price of Grayscale stock is about 5% on the Bitcoin price. So there are only a few data points there. So I didn’t worry with it. But every time it’s been under 5%, which has only been three times, I think in five years, the price has done very well over the coming months. So we’re in now negative 5%. So I would suggest the next few months should be really good. And again, that’s just an indicator with a few data points. But that’s why it’s really important to combine a number of these metrics to get you an overall picture of what’s happening. So they’re the ones who probably really pay attention to right now is NVT main multiple USDT and different premiums.

Preston Pysh (34:12):
What are your top three lessons that you would tell somebody younger, just about trading or value investing, just investing in general? What are your top three tips?

Charles Edwards (34:24):
That’s a tough one on the spot. Yeah, I think you have to love it, and if you really want to do it seriously yourself and not get someone else to do it, so you can probably come back to the office [inaudible 00:34:39] just fine index if you’re not going to spend all your time with us. But if you really love it then definitely go for it, and I think the more reading and researching you can do, the better. So your podcast is a great start. Lots and lots of books, buffet books, trading books and just being a sponge and all the information out there. I think getting locked up in a camp of, “I’m only valet investor, I’m only a technical trader, or I’m only this.” It blocks you out to all the ideas that are out there.

Charles Edwards (35:06):
And it did for me for years. And now, logically, you might say that doesn’t make sense, that this would lead to this price doing that and therefore I can’t pay. And that’s how you block it off mentally. But as soon as you say, “No, let’s open that up. Why could it be or maybe it is just because it’s statistically is.” Just being open-minded to everything, and all information will give you a huge advantage over everyone else who usually locks himself into one camp.

Preston Pysh (35:34):
I totally agree with what you just said. Totally agree, like if I could have thought that I would be posting a chart on Twitter that had the MACD five years ago, I would have laughed at you out. I said, there’s absolutely no way that [crosstalk 00:35:49]. Yeah, but here we are.

Charles Edwards (35:53):
Most of the people who shoot you down or disagree with your ideas say, “That’s crazy, that doesn’t happen, or it’s like this,” any closed-minded attitude like that is not going to help you grow in investing, I think. Particular in this world where every bit of data and information out there is now valuable.

Preston Pysh (36:11):
We interviewed Bill Miller pretty early in our podcasting time, and that was one of the things I kind of distinctly remember after we were done talking to him because he was talking about incorporating technical indicators and things like that. And I just, I remember walking away from the interview just kind of like, “Wow, I’m kind of surprised that here I am talking to this legend of value investing.” And he was talking to us about things that I just really was not expecting him to be bringing up. I share your sentiment so much there, Charles. I really like that. Okay, what are your thoughts on DeFi, decentralized finance? And if you want to talk about the NFT stuff, feel free.

Charles Edwards (36:50):
I’ll describe it is my expertise is in Bitcoin, and it’s basically my whole life, so I don’t take it with a grain of salt that even though I spend my whole life in crypto, it’s so deep. You need to be an expert in different areas. But I think it is a huge amount of value in DeFi to be honest, in the long term. I think right now what I was seeing is very similar to the 2007 ICO phase, where you got tons of new tokens and models and most of them will fail or go to zero.

Charles Edwards (37:19):
And I think it’s two huge problems that any individual project has. If it’s genuine in that, it’s a startup and business model in this area, in itself is really hard. And then actually decentralizing that and handing over complete power and everything to a network is even harder. So doing a bunch of them, the chances of success are very slim. And Bitcoin’s anyone’s really done it today before decentralized. But having said that, the concepts that have come out of it, I think are really powerful. So even Bitcoin fails, you could say 10 or 20 or 30 years later, it might be a bit gold with different models that broke down because you couldn’t get a digital money, in which was, there was only one version of it. And I think we’re seeing it now in NFT, for example, where you can have millions of copies of it on different chains. So it doesn’t work now, in my opinion, but I think it will in the future in some format, which maybe we can’t consider right now.

Charles Edwards (38:14):
But the DeFi so Dalles in particular, is a decentralized autonomous organization, really interesting to me. So the idea that a business can be sort of tokenized, decentralized and run by voting as opposed to having a command and control the CEO person in charge. I think that model with AI on top where people just find a general direction or a general concept, I think that would be a really powerful feature. I don’t know what networks that would run on, maybe it’s Ethereum, maybe it’s one of those newer polka dot, or whatever it may be, other networks, maybe it’s Bitcoin eventually. But the concepts of it, I think are really sound. I would be very careful, and to invest it now because your chances of success are extremely small. In terms of NFTs, I’ve struggled with them.

Preston Pysh (39:04):
Let me go back to that other comment you just made. And it’s mostly because of the probabilities that you assign to all these potential arrays of outcomes. You just don’t have any type of confidence in any one of them.

Charles Edwards (39:17):
Basically, I don’t have any confidence at any of the bitcoin is being properly decentralized and having a genuine model to build an infrastructure that works like this sustainable into the future. There are some tokens that I find interesting, like stock like tokens, like Nexo I’ve written about in the past where they’re trying to model a stock. They pay a dividend. Most of the other tokens that they’re trying to get value from voting rights and token bands. And I’ve tried doing a lot of different valuation approaches on token bands, I couldn’t find any which justified the values of this bitcoin in the past. I think the dividend model is interesting where you try to tokenize a stock essentially, but there is a trust element and securitization regulation element, which is probably missing in the audit element. So it’s the Wild West and the probability’s assignment success is extremely low.

Charles Edwards (40:08):
But if you do get one of them or two of them, you’re going to do extremely well, I think. NFTs, I struggle with the concept of it because of the duplicity of synchronizing art, basically digital art. And I think the value of any… Even if you’ve got a great piece of artwork which is worth millions on one of these chains, I think the value of that artwork is intrinsically linked to the chain. So there are dozens of different crypto chains out there. Which one will survive? Probably most won’t and maybe it will be bitcoin, or NFTs in the future, we don’t know.

Preston Pysh (40:41):
And on that topic, so just so folks know this NFT stuff, this is non-fungible tokens is what we’re talking about, where the idea is like, let’s say you create a piece of digital art, through encryption, maybe as is websites are sharing that piece of art that the person who actually owns the digital asset, they could somehow be stream some type of a value in the future for the use or the utility that it provides on the Internet. So I think a better example is a kind of music. So if a person would create a song, that person who created obviously owns it. As people listen to it, they get streamed money, they get streamed SATS, Satoshi, for the use of somebody listening to the song.

Preston Pysh (41:27):
And if you’re dealing with an internet that has where the platforms where this music is getting streamed, can determine who’s listening to it, who the owner of the song is through that nonfungible token, then this streaming of value can then come back to the owner of it. My issue is the same as yours, Charles, which is just we are ways to the left of that being reality based on how the internet is currently the architecture of the internet and the encryption that is provided and the platforms, how they would interact with these tokens. I mean, we’re way far away from this being a reality. That’s the concept.

Charles Edwards (42:11):
Yeah, that was well described, I agree. I think there’s a really intelligent and life-changing concept in here and probably the music streaming or art credibility sharing and maybe there’d be a way to say, if you’ve copied this art, you can’t or, to link it to shut down the network of [crosstalk 00:42:30].

Preston Pysh (42:30):
Where it’s like 20 SATS or whatever it to have a copy of this JPEG or whatever.

Charles Edwards (42:35):
Exactly. I can see a future where it’s basically tokenized in everything, putting a price on everything and giving the owner some ownership in that revenue model. And I can see that being happening in the future. But like I said, the way the world works so far away from that and the probability of an individual change being successful, and is really low. Obviously, that’s where the reward is as well. Like, if you can get it now and it ends up happening, you’re going to do amazingly well. But it’s super low probabilities, [inaudible 00:43:05].

Preston Pysh (43:05):
The copy-paste element of media is just way too easy. I mean, Okay, it’s a song. I could just grab my external recorder and record it or it’s a picture, I can take a picture of the picture. I just don’t know how any of that will be enforced in the future. But, hey, you never know.

Charles Edwards (43:25):
Yeah, exactly. I agree with you.

Preston Pysh (43:28):
Going back to one of your points there, one of your lessons, keep an open mind. You never know. I want to talk a little bit more about this GBTC premium. You hit on it a little bit earlier that it got to a negative five of the value that’s actually inside of the trust. You said this has happened, I think you said three times previously in the last five years.

Charles Edwards (43:50):
Sorry, it’s been under 5%, so positive 5% rate for the last five years and it got as low as I think, negative 10% a few days ago, and now, it’s negative five.

Preston Pysh (44:00):
Yes, I think there’s a lot of people concerned about what does this mean now that it’s gone below the value that’s actually on the underlying. Is this a trend that you see persisting in the future because they’re now getting competition? What are some of your thoughts on that?

Charles Edwards (44:17):
To be honest, I’m not sure. I think the competition factor could be a relevant narrative that is suppressing it a bit, but I think that it comes back to my point of this time is different when you got a relative undervaluation. It’s usually a good time to buy. And when you got overvaluation, it’s usually a good time to do risk. So when that premium is being as high as 20, 25%, historically, it’s actually been a good time to today risk or to… There’s been some kind of local type in bitcoin, whether it be just for a couple of weeks or not until that resets. But it gives you a good indication of sentiment towards the asset. I haven’t analyzed it in any doubts as to why it’s so low right now because for me it’s an interesting metric, but it only has a few data points. But nonetheless, it’s probably a good idea to go with the data and not the narrative. So the data says it’s undervalued, it’s probably good by.

Preston Pysh (45:12):
So, Charles, when I think about a hurdle rate, that’s near impossible to outperform bitcoins at the top of the list, especially over the last year, and your fund has outperformed this hurdle rate, correct?

Charles Edwards (45:26):
To be clear, our model algorithms, which we call Trend King, has, so last year, we got 680% with no leverage, some more than double behind vinyl and the fund that’s excited to say that we launched the US fund for Accredited Investors two weeks ago. So that’s newly launched. I can’t give you any data on that, obviously. But yes, today we’ve been doing pretty well.

Preston Pysh (45:52):
How long have you guys been active and then I’m kind of curious, backtesting results prior to the time. So this 680% that you said is the last 12 months?

Charles Edwards (46:04):
That was still 2020.

Preston Pysh (46:06):
That was for 2020, okay. And then when did you guys launch the fund?

Charles Edwards (46:11):
It’s been a big evolution, so we’ve grown very quickly, it started as we had these indicators, and then it has been a subscription model which people, it has been independently tracked. And we’ve got that’s where that 680% comes from. And the last six or so months, we’ve been doing some managed accounts and now we’ve launched the fund. So yeah, we’ve grown quickly now, managing over 40 million.

Preston Pysh (46:37):
And if a person wanted to, do they subscribe to Trend King, how does that work?

Charles Edwards (46:43):
As a business, we work with high levels investors, so if they’ve got a license to manage their assets if it’s 100,000.

Preston Pysh (46:54):
I’m kind of curious when you run the model of your Trend King back during the market peaked in 2018, went through the big sell off the 80% correction that everyone’s well versed on. How did the model perform in backtesting during that period of time.

Charles Edwards (47:11):
Pretty well.

Preston Pysh (47:12):
I [crosstalk 00:47:13], but what were the numbers?

Charles Edwards (47:16):
Well, the first thing is you should take better results with a grain of salt. Live performance is the better metric, in my opinion. Drawdowns of 30 to 40% aren’t unusual in this sort of model, is there’s always some drawdown. You can’t have a perfect model. But, yes, it performs pretty well. The returns we’re getting in real life are pretty comparable to the backtest results.

Preston Pysh (47:41):
You basically doubled, so it was down 80 %, you were down 30 to 40%. Am I reading that right?

Charles Edwards (47:49):
I wouldn’t light it up, so there’s a lot of the profit we make in those cycles from shorting as Bitcoin is falling. So the volatility we get is often at different times to when Bitcoin is experiencing volatility or it can be in a different direction.

Preston Pysh (48:05):
Got it. So, Charles, what is a tail risk that concerns you the most?

Charles Edwards (48:11):
This probably to me, and I know you’ve spoken about a lot of the podcast so I look forward to this. It’s the regulatory risk which of an outlaw, arguably, and then it’s the potential hacking risk or breaking of the value of the chain in some format, whether that be a 51% attack or, some super-computing, quantum computing outcome. I know there’s plenty of evidence against that. I’m not saying that high probability by any means is an outlier, super low probability events I don’t really worry about, but I think there’s still some validity to them. So we’re seeing everything move in the exact opposite direction. As you’ve spoken about your podcast, where it’s being integrated, particularly the US, into financial systems, its banks allowed to use it, companies are holding it, and a longer and longer that goes on, the harder it is to outlaw, and then for any individual country to outlaw it, it’s just a negative for them.

Charles Edwards (49:05):
The only thing I can see is if there is this cataclysmic event or hyperinflation event, which we talked about earlier, where you get sort of mass adoption or change, would it be possible for the G7 or G20 to all align and say, “You can’t have this anymore or we’re going to buy it off from you like the US did with gold.” It’s super unlikely, right, or how they could unite and do that is super unlikely. But it comes back to being open-minded, I guess there’s always that small chance that could happen. So that’s probably the highest risk, I would say, even though it’s very small and seems improbable now. We never thought a year ago would be locked down for a year.

Preston Pysh (49:46):
I don’t want to turn the risk into a positive. I’m just kind of curious how you would think about this. Let’s say a major country does ban it like the US. Let’s say the US would ban it. I think that’s probably the best risk scenario you could get it. Do you find that in the short term there is a massive price hit? But then, like we were discussing earlier, the energy cost for all the remaining countries that haven’t banned it, that energy costs that the miners supply or that floor that bottom that we suspect is being supplied by the miner production cost, would it just bring the price back to whatever?

Preston Pysh (50:24):
We’re thinking, let’s say, 100,000 is where we think the production cost is now based on the stock, the flow, the US comes out and bans it. The price takes a massive hit initially. Maybe it doesn’t, but let’s just walk through that scenario that the price would take a major hit through a situation like that. Does that production cost that the miners supply bring the price back up to that 100,000 level, regardless of the country, the mega country that bans it?

Charles Edwards (50:49):
I think, in short, it depends on the extent, so for something like the US, I mean there is going to be a big hit because they’re such a big player, such a big player in this in the space and the integration so deep globally. And there’s also a lot of mining in there now. So the production costs of all that stuff just got switched off overnight would drop. So the production costs may drop 30, 20, 40%. Who knows? And the value would probably drop in line with that. It depends when and where in a cycle that would happen. So I think it would be a price hit. It’s just an individual country, I don’t think that’s going to matter any more long term. Like I say, I think they’ll be a hit short term, whether it be three, six, 12 months. But unless everyone denies the incentive structure of Bitcoin is aligned to that, it’s better for the other countries if they support it. So it’s hard to see this playing out unless there’s a unified against it, which we’re just not seeing any indication of right now.

Preston Pysh (51:48):
Okay, Charles, the last question, what is the thing that you look at on Bitcoin that kind of is the most impressive thing to you or the thing that you think so many people miss that is the secret sauce or something that just stands out to you?

Charles Edwards (52:05):
It’s nothing special for me because it’s just the supply model, the halving event inflation model, having a supply model where it’s now on par with gold and it will be the hottest asset in the world. And the way that that is so decentralized, fungible, and instantaneously transactable people miss the power of that because they just see the volatility. But they don’t realize that if Bitcoin is going to be a success, that we think it is, and all signs show that it’s going this direction and it does become a reserve currency or at least equivalent with gold. We’re heading towards 10 or 100 trillion dollars or more.

Charles Edwards (52:44):
So you can’t go from zero to 100 trillion or we’re one trillion, you can’t go 100 X without volatility. So people dismiss it because of that volatility. But it’s an essential ingredient of getting there. It’s like any startup going from zero to a billion dollars, except this is the biggest asset in history, doing the same thing. So I think that’s what people miss. They dismiss it because of the volatility, but the power of it in being the future currency and reserve asset of the world is you just can’t ignore it, I think, especially in this environment today.

Preston Pysh (53:19):
Charles, I really enjoyed chatting with you. I’m glad we were able to do this face-to-face here on Skype at least. And man, I’ve been following you for a while and can’t thank you enough for making time to come on the show. Give people a handoff to some of your stuff, and then I’m going to have all of this in the show notes. I’m going to have your energy article there, Bitcoin’s production cost article in the show notes, but give people a handoff to some other stuff.

Charles Edwards (53:44):
Thank you so much, Preston. It’s always great to catch up and talk about Bitcoin and the market dynamics, and it’s been a pleasure to be here. You can follow me on Twitter, it’s @caprioleio. So name our business Capriole, and our website is the same, capriole.io. You can reach out there and happy to chat.

Preston Pysh (54:03):
Charles, thanks so much for your time.

Charles Edwards (54:05):
Thank you, Preston.

Preston Pysh (54:07):
Hey, so 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. So thanks for joining us this week and we’ll catch you next Wednesday.

Outro (54:22):
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