Preston Pysh (00:07:52):
Was that way earlier than you anticipated?

Tuur Demeester (00:07:54):
Yeah. It’s one of those things that you want to predict. For the longest time, I’d be like, “Oh, yeah. That’s for 2020,” but you say that in 2014, it’s like a million years away, but it’s like, “Damn! It’s 2021 and it happened.” Then the ramifications, other countries that are thinking about it now. All of a sudden, the IMF is scrambling and the world bank like, “Oh, no! Our charter says this and now we got to do this.” It’s incredible.

Preston Pysh (00:08:22):
Talk to people about that because I’m not sure that everyone is tracking that comment that you just made about the IMF having to honor.

Tuur Demeester (00:08:30):
There’s a guy in academic who wrote in 2013. In 2013, he wrote, “I think it’s the IMF. The IMF is responsible for protecting national currencies against speculative attacks, which basically means you go long a strong currency and you go short the small fiat currency of one small nation.” In order to do that, to protect against those attacks, the IMF acquires strong currencies so that they can play the other side of the band, protect whoever is being attacked.

Tuur Demeester (00:09:03):
So, in 2013, a paper, a PDF, and a peer-reviewed paper appeared that suggesting, “Well, one day, the IMF should buy Bitcoin because people are going to use Bitcoin to do these type of attacks,” which is basically you borrow the fiat currency and you buy Bitcoin with the borrowings, which is the microstrategy strategy. That’s what Michael Saylor is doing. He started doing that on national, that’s what I mean with the ramifications. All of a sudden, Bitcoin has entered the sphere of nation states. So, these kind of scenarios are now very real and becoming very serious, and that’s like, “Wow! Is IMF going to have to do that?”

Tuur Demeester (00:09:43):
I think the world bank is something similar where their charter says that they support whichever the legal tenders are of all the countries. So, now, they have to offer support for Bitcoin as well. So, it’s interesting. I mean, of course, I think they’re going to wiggle and they’re going to try and change the rules and knowing politics, that’s probably going to happen, but we have our field day like leaning back and eating some popcorn watching them trying to wiggle from under this.

Preston Pysh (00:10:11):
So, the one I really want to ask you about is very current right now. We’re about to have a negative 25% difficulty adjustment, and if you would have told me last year at this time before the halving event that we would see a negative 25% difficulty adjustment in the “middle portion” of this bull cycle, I would have laughed in your face and said, “No way.” Then if you would have told me that negative 5% and negative 15% adjustment proceeded it, I would have really laughed at you, but then I probably would have known what happened, which was China completely outright banned mining.

Preston Pysh (00:10:50):
So, what are your thoughts on this? Do you think that there’s more pain to come as far as more hardware to be shut down? We’re almost approaching a 50% difficulty adjustment from the top, which makes me feel like most of the pain as far as the hashing has occurred, but is there more? Was there more hashing in China than what we had thought?

Tuur Demeester (00:11:15):
Yeah. I mean, it’s so interesting how I’m just thinking of this. You could argue there’s actually a parallel with 2013 here because we rallied to 270 bucks and then we crashed down to $80. I’m trying to remember what the catalyst was, but it was fear, uncertainty, doubt about I was going to Silk Road, but somehow it feels like that was later.

Tuur Demeester (00:11:38):
So, the story is that during 2013, we rallied, I mean, it was all the way down at 30 bucks, $270 down to 80, and then we were in the doldrums. For the longest time, we were trading between $90 and $150. Then by the end of the year, so before the year was over, we rallied to $1,100, almost gold parity.

Tuur Demeester (00:12:01):
Since the beginning of this bull, I’ve been wondering, “Huh, is it possible that we could get a replay of that where first there’s enthusiasm and then somehow the story gets a bit broken and people are all of a sudden worried?” So, I think, weirdly, people were comfortable with the fact that there was so much mining happening in China. It was a reason to be worried, but it had been there for so long. I think there’s just, right now, people just don’t know what it means. I think that is what the market is saying. We don’t really know what this means, but it’s a big change, and we’re really worried.

Tuur Demeester (00:12:35):
The reality is this is an amazing stress test for Bitcoin and it’s just the network is, of course, 100% uptime. Actually, if you look at it in dollar terms, the fees aren’t really that affected. It’s still $5 to send a Bitcoin even though there are way less blocks per day being mined than before. The miners are having a field day. The non-Chinese miners are having a massive increase in profitability in revenues.

Tuur Demeester (00:13:02):
So, I forget what your additional question was, but to me, this is just another stress test, and overall, it’s a great thing for Bitcoin. I wasn’t expecting it, but it’s like what you want in general is for all the governments to play all their cards, and this is China playing their cracked down cards.

Preston Pysh (00:13:20):
I don’t think there was a question. I think I was just rambling about the current situation. So, yeah, just getting your thoughts on it. Some people are throwing out some really crazy scenarios like, “Is China turning off all of their hardware and then going to turn it back on, a 51% attack?” I’m rolling my eyes, but I’m curious what you think about some of those.

Tuur Demeester (00:13:42):
Sure. Yeah, yeah. Well, I mean, first, in general, one thing that I think is very underappreciated is how difficult it is for governments to nationalize an industry. There’s data about this. If you look at the oil industry, it’s not incredibly difficult to keep an oil rig operation running. It requires know-how, but it’s not crazy difficult to keep it running, but the track record is horrendous like Venezuela. When countries nationalize an oil company, the production tends to go down by 50% over the next few years, and it’s for all kinds of reasons, bureaucracy. It’s just general. The same if you have a train company that’s private and then it gets made public, the efficiency just plummets.

Tuur Demeester (00:14:29):
So, no doubt the same would happen if you nationalize Bitcoin mining, the efficiency. Look, how easy would it be to just have some mining rigs disappear all of a sudden or so many scenarios to think about. Also, the profit motive is gone. If you’re just being paid a fixed wage no matter the profitability of your firm, why would you care how well everything is maintained? So, nationalization, yeah, and then more specifically this scenario, I mean, it’s just not what, I think, we would get different information. We would see … Right now, we are getting real information that real rigs, they’re trying to move them to Kazakhstan, and they’re trying to move them to the US, and we see the photos and the videos, and it’s just very strange that China would do it in such a weird way.

Tuur Demeester (00:15:17):
If you want to nationalize, you nationalize. You don’t shut it down first to then reboot it up. It doesn’t make sense to me. I’m open to the possibility, but it doesn’t make sense.

Preston Pysh (00:15:27):
For me, it’s just the government is fearful of what it might mean.

Tuur Demeester (00:15:31):
I think what it is is that we have evidence going back to 2014. China is fearful of capital flight. They’re fearful capital flight. Their RMB is not very strong. It was very, very strong for 20 years, extremely strong as the dollar, and then in 2014, you saw these devaluations, the cracks, the chinks in the armor, and then they had a big devaluation in 2015. Of course, the political, with Hong Kong and stuff, there’s a lot of this, really, like a dictator more and more and more than a pro-free market guy. So, the big money is wanting to get out of China. So, that’s been happening for five, six years now, and Bitcoin mining is a great way to do that, right?

Tuur Demeester (00:16:13):
You pay with RMB the electricity bills, and then the Bitcoin are offshore Bitcoins, right? You can move them anywhere. So, I think that’s the real motivation. They’re never going to say this publicly, but I think that’s what’s behind this.

Preston Pysh (00:16:27):
If you’re bullish on Bitcoin and you hear something like that, you become very bullish on Bitcoin.

Tuur Demeester (00:16:32):
There’s macrotraders who first got involved in Bitcoin back in 2016 just based on this story alone. They’re like, “Capital flight is happening out at China. People are using Bitcoin. Therefore, I’m long Bitcoin.” That was their only thesis for a long time.

Preston Pysh (00:16:50):
Yeah. I find it fascinating to see it play out to have all the on-chain data or the hash rate, the difficulty adjustment demonstrating that this is, in fact, happening.

Tuur Demeester (00:17:03):
It’s one of the most objective indicators of how much hash rate was actually present in China. I think rather than it being more, I think it’s actually less than what people thought it was. A lot of the reports are saying 70%, but I remember hearing even Bitmain diversifying away from China back in 2018 because they were cracking down on exchanges and, of course, if you have a brain you know the next step could be mining. They’ve been diversifying away from China since 2018, so the hash rate has been dropping. So, I think 40%-50%, maybe between 30% and 50% was actually mining in China.

Tuur Demeester (00:17:40):
The minus 50%, you also have to take it with a grain of salt. You got to look at the moving average. You’re always going to have spikes one way or another. So, I don’t think you can exactly take the top and then look at the exact bottom now.

Preston Pysh (00:17:53):
Yeah. I think that’s a good point. I’m expecting we’re going to go into this next two-week period and I think we’re going to start to see the difficulty plateau, and then maybe even start to recover for what’s a much smaller adjustment.

Tuur Demeester (00:18:08):
It’s going to be hard, the recovery, because miners are trying to move to Kazakhstan, but apparently, supply there is very, very tight, electricity supply. Then, of course, if you want to move to the west like Canada or the US, you got to pay import taxes on the machines, and it might take three, four months to even physically move everything. Then additionally, we are having a semiconductor chip shortage globally.

Tuur Demeester (00:18:31):
Recently, there was a report that Bitmain cut down their order of chips by $300 million just because some seed didn’t have the capacity. So, it doesn’t matter if you have a lot of money, you’re just not getting the chips allocated to you because there’s a global shortage. So, because of that, I agree. I think the difficulty is going to plateau for a while, which is great for the existing miners. The people who are not in China are very happy, of course.

Preston Pysh (00:19:00):
What are your thoughts on the hardware centralization and how much is being manufactured in China and what this means?

Tuur Demeester (00:19:07):
I’m not very deeply informed about that. I do think that it seems that with the geopolitical tension that the US is really trying to get more production capacity of chips outside of their regular center now because China’s influence sphere has a lot of chip capacity, and that’s a bottleneck, potentially. So, I do think, in a way, Bitcoin mining is similar to what Bitcoin mining is doing to local electricity places, where it’s growing the pie and making the network more robust like in Texas, for example, by adding new capacity to the net, you basically have a bigger buffer for things. If all of a sudden there’s another fuller vortex or another problem, then prices spike in the network, miners just switch off their Bitcoin miners and sell excess electricity to the network that would not have been there had they not been mining there, right?

Tuur Demeester (00:20:05):
It’s hard for people to … They often think that the existing electricity capacity is a static piece of pie and that Bitcoin is just coming in and just snagging big pieces of it. That’s not what happens. It’s excess capacity that’s being created. So, I wonder if maybe similarly with the chips because Bitcoin is creating extra demands, maybe over time it’s going to diversify production of chips as well, making the global supply more robust, but that’s speculation. So far, it’s probably very tiny, the Bitcoin demands compared to cellphones and whatnot.

Preston Pysh (00:20:41):
Do you think companies like Bitmain are going to try to move outside of China for a lot of their production in order to not be a victim of maybe a further crack down from the Chinese government?

Tuur Demeester (00:20:53):
You mean for chip production?

Preston Pysh (00:20:55):
Well, the chip production I know is happening outside of China, but as far as the actual rigs that are being manufactured?

Tuur Demeester (00:21:04):
I don’t know that. I mean, I think that maybe your risk is relatively limited because how long are all the components really in China to assemble it and ship it out? So, it’s a trade off. I think, in general, I’m reminded of this, you might know it even, I went to the GATA Gold Conference. It was called GATA Gold Rush 2007. It was in London. Ironically, it was the peak of the gold price at the time. There’s a lot of exuberance. Anyway, it’s a big gold conference.

Tuur Demeester (00:21:34):
I know it’s the first time I got to speak to actual gold miners and people investing in gold mines. I remember this one guy saying that a pattern that he’d seen over and over the decades is that people would go to these very shady jurisdictions, banana republics, for lack of a better word, and have dollar bills in their eyes because they saw that in certain areas that the oral grade was super high. All of a sudden, you would find, I don’t know, 15 grams of gold per ton with super yields.

Tuur Demeester (00:22:03):
So, it would be like, “Oh, man! Let’s fund the gold mine,” because you can calculate how much you could make. “There’s billions of dollars on the ground there. It’s amazing. Let’s do this.” Time and time again, over and over, they would get victims of their own success because if it did well than mine, the local politicians would just boycott you whether deliberately or not, but you would just get caught up in bureaucracy or somebody would take over your mine or just something inevitably would go wrong, and that’s why most of the gold mining capacity is still in US and Canada and Mexico because they’re more stable jurisdictions.

Tuur Demeester (00:22:37):
So, I think there’s an analogy there for Bitcoin mining where even if, I don’t know, there’s massive capacity somewhere, you’re still going to want to go to the jurisdictions that give you the long-term security, not exactly what you’re talking about.

Preston Pysh (00:22:53):
Talk to us a little bit more about your comment there with Texas and the energy adding and being advantageous to the grid, and when you do, I’m curious if you think that politicians are starting to figure this out. It appears like it’s happening at a local level, but I’m more interesting at a federal level and at a national level whether this understanding is starting to set in.

Tuur Demeester (00:23:19):
I’m not sure. I mean, yeah, in Texas, I think it’s definitely working to bring that story because it’s totally valid. So much of what’s being produced here is way in the west where there’s just very, very scarce population. So, you’re not taking anything away from the big cities. You’re just creating excess supply, like new supply instead of gas being flared as being converted into Bitcoin mining.

Tuur Demeester (00:23:44):
Then if you avoid flaring and you do have to set up the capacity to make electricity, which that is making the pie bigger, but, yeah, on a national level, I don’t know. I feel like something can be so crystal clear and so logical from our point of view, and if somehow the political winds blow differently, it just gets blown out of the water. People ignore it. They’re looking at their constituents and what they’re going to vote for and they’re trying to, in a way, front run what they think people are going to think.

Tuur Demeester (00:24:14):
So, I don’t know. I think it’s going to be a hard battle with the mining. In a sense, it doesn’t really matter because if local politicians are going to vote against Bitcoin mining, the capacity is we’ve seen it. This is the perfect example. Capacity is just going to move elsewhere. China is the biggest, probably in the next, we might not see a move like this in the next century, the next 100 years for Bitcoin mining. Where is ever going to Bitcoin mining be so concentrated? 50% of the capacity is going to move in a matter of months. That is not going to happen again I don’t think.

Preston Pysh (00:24:46):
Yeah. I agree with you. Similar to Michael Saylor and how demonstrative him putting Bitcoin on his balance sheet was, if it’s valid, if why he’s buying it explodes the price or it totally punishes the price, I think you and I both agree as to which two of those scenarios it’s going to play out. You’ve got the template of exactly what that means for a business as opposed to a business putting 1% of Bitcoin on their balance sheet. It’s just so demonstrative.

Preston Pysh (00:25:16):
I think what also is happening, which is really surprising to me that you’re seeing it in this 100% way, you have China who had the largest amount of hash rate in Bitcoin literally just divorced itself from the network. I think as this year progresses and we get into the end of the year, 2021, you’re going to have that exact same thing play out for a nation state as to the benefits or the penalties of not participating in the network, which is just amazing to me that you’re seeing it at such scale because if they only banned one province or however their districts are broken up over there, it would not have hit the same way that it’s going to hit.

Tuur Demeester (00:26:02):
Speak of David versus Goliath, I mean, we’re talking tiny El Salvador against China, right? That’s the two examples that are most in everybody’s mind, right? Who’s going to win?

Preston Pysh (00:26:15):
Isn’t that ironic that you’re seeing pretty much the smallest country in the world and the largest country in the world population-wise, and especially hash rate-wise play out and, boy oh boy, what an example this is going to be as we get through the next 12 months.

Tuur Demeester (00:26:30):
Well, I think that it also shows the brittleness. Giant empires have this weird, they build up this brittleness, where they assume they know how to deal with the threats, but when they face a new kind of threat, they can get it so wrong, but they have this habit like they’re so big, they can just smash their fist on the table and just get rid of it.

Tuur Demeester (00:26:53):
I think this is really a major miscalculation, and then people pushback when I suggested it, but it reminds me of Spain in the 1500s, 1500-1600s when they were the largest empire on earth. They had untold amounts of colonies and income from their colonies and, still, they managed to just lose it all in a matter of, I don’t know, 100 years? There was, of course, inbreeding and problems like data, local and political problems internally, but a lot of it was just they were just arrogant and just massively taxing their own merchants putting up all kinds of crazy restrictions and so the merchants would literally abandon ship. They would just go elsewhere or just give up.

Tuur Demeester (00:27:37):
So, in a way, they can just shoot themselves in the foot and I think that’s potentially what China is doing also with the crack down in Hong Kong and stuff. If you chase out your billionaires, who’s going to be motivated to start the next startup?

Preston Pysh (00:27:52):
Yeah, and if there’s one thing I’ve learned about Bitcoin is it’s almost like it enjoys the cuts to its skin. Many times that somebody tries to attack it, it’s almost like-

Tuur Demeester (00:28:02):
It’s like water, right? It just goes wherever there’s least resistance.

Preston Pysh (00:28:06):
Yes. Exactly. What are some of your thoughts on mining, in general? So, we are talking about a little bit on the energy grid bit. I’m just curious, in general, some of your thoughts on mining.

Tuur Demeester (00:28:18):
I think right now, mining is really interesting because we talked about the semiconductor shortages, the hash rate redistribution because of China. Basically, existing miners are an interesting value proposition, I think, because one of the challenges for mining was back in 2013, you would put in an order, you would have so much risk, basically. You’d put in an order as one single individual for a couple of $1,000 and then you would order a machine and it would arrive six months late if at all. So, just crazy risk.

Tuur Demeester (00:28:50):
Then you have the cloud mining guys. They would say, “Okay. We’re the middleman. Now, we’re going to place those orders. We’re going to aggregate them,” but they also had the same problem of these delays and stuff. Now, we actually have miners that have built up real capacity that’s actually deployed and they’re building on-ramps for investors to then participate in a much more risk-sensible way.

Tuur Demeester (00:29:15):
If you look at classic, for example, say that you have 2,000 Terahash, for example, working, which should be a bit over $200,000, something like that, to put deploy that. You can mine about a Bitcoin every two months at the current rates, one Bitcoin every two months. So, on an annualized basis, basically, you get your money back in way less than two years’ time. Of course, I’m not saying that’s going to keep being this way. Although when the difficulty rates drops, the proposition gets even more attractive for the existing miners.

Tuur Demeester (00:29:49):
So, I’m positive on what’s going on there. I think it’s in an interesting time. We’re in the doldrums a bit with Bitcoin. So, yeah, I’m excited. I mean, I’m mostly involved with Blockstreams. I know mostly what they’re doing in the mining space, but I think it’s an interesting time for … because what are you diversifying Bitcoins? It’s one of those perennial questions if you don’t want to burn your reputation on a shit coin or something.

Preston Pysh (00:30:15):
So, this is an interesting idea as far as because so much hash rate was taken off the network, and it’s going to take so long for it to come back on. There’s nothing about the transition to another geographic location is going to be quick. Some people are saying multiple quarters until a lot of this hash rate gets back online. Does that extend the bull cycle out longer before it hits its peak than what we’ve maybe seen historically? Because historically, the peak hits about 70,000 blocks after the halving event, which is call it a year and a half timeline after the halving, historically, and I know there’s not a lot of data points here as far as these four-year cycles, but what are some of your thoughts on that?

Preston Pysh (00:31:01):
In addition to that, what we see after the peak hits is all this hashing keeps coming online after it has already peaked because there’s fat margins like the margins you’re describing. So, miners are incentivized to keep bringing more and more hash rate online, which really gets super competitive and it drives the price to this homeostasis stock to flow price point. Does all of that get pushed out further to the right because of this big China ban and hashing is going to take a lot longer to come online?

Tuur Demeester (00:31:35):
I mean, you could make the argument that there’s a bunch of Bitcoin that are being sold now that otherwise would not have been sold just because the miners are needing liquidity to get out of this quagmire. I don’t know. I need to think about what it means if the whole cycle would be affected by it. I still feel like there’s, however many billion people on the planet, I still feel like those are going to be more of a driver of the whole price dynamic than the miners are going to be even if they sell a lot.

Tuur Demeester (00:32:02):
If people think it’s undervalue, they’re just going to pile in and buy. I’m pretty optimistic, still, about the 30,000. It’s going to be the height of irony if this gets aired and we’ve broken below it. I’m still pretty optimistic that we may really hold this level. Maybe we’ll drop. I have a big scare in drop to 23,000 for a week or something, but I think it should recover pretty quickly. So, yeah, I think it’s more up to the overall market to decide where the price is going to go and how fast, then that miners will make a difference.

Preston Pysh (00:32:34):
So, I just realized stock to flow wasn’t even a thing the last time you and I talked. So, what are your thoughts? Do you buy in to some of it, all of it, none of it?

Tuur Demeester (00:32:44):
I think some of it. I think I need to review my notes on it because I remember being critical on the beginning and then I didn’t know to check my notes again on what exactly was I skeptical about. I think there’s a few variables that are just not taken into account in it. Also, if you tweak the variables of it, all of a sudden, the price goes to infinity. So, there’s a few things there that I’m not sure about. If everybody buys into it, it’s going to invalidate itself because models do tend to do that. If they become too popular, the market just invalidates over time.

Preston Pysh (00:33:18):
That’s my thesis is that I think it’s going to continue to be fairly valid until Bitcoin basically takes over as this global settlement layer, and then the model is invalidated at that point.

Tuur Demeester (00:33:31):
Yeah. Well, you’d have to look at stock to flow versus gold or something because then it’s true. In dollar terms, any model is just going to … The noise, it’s like Chernobyl, right? I mean, if you get high inflation, there’s just so much noise that it doesn’t make sense to look at a chart anymore. I started looking at charts in commodities terms rather dollar terms. Those make a lot more sense to me now than dollar denominated like real estate or bonds. It doesn’t say anything to me if I look at a dollar denominated chart.

Preston Pysh (00:34:01):
Don’t you think that Bitcoin and gold are just two totally different animals as far as their terminal point, where they’re going? I think in the midterm, sure, I think there’s a lot of comparison there, but when you’re looking long-term like 10, 20 years from now, I don’t really see them being a similar creature, if you will.

Tuur Demeester (00:34:24):
I agree. I was just thinking, how do you, as a trader, I mean, if you do medium term crazy, you got to trade against something. So, I think gold is interesting because there is going to be, even if Bitcoin keeps outpacing gold, there’s going to be a trading range or something like that. That’s what I mean.

Preston Pysh (00:34:41):
This article was mind-blowing. I think you wrote it in 2017. It’s called the Bitcoin Reformation.

Tuur Demeester (00:34:48):
Oh, I think that’s 2019.

Preston Pysh (00:34:48):
Was it 2019?

Tuur Demeester (00:34:49):
Yeah.

Preston Pysh (00:34:52):
Really? Anyway, the article is incredible. I’m going to have this in the show notes. First of all, I’m curious if there’s anything that you wish you would have added to this article or maybe changed and give people just an overview as to what the article, the basis of the article, and then there’s a couple of things that I wanted to ask you about it.

Tuur Demeester (00:35:14):
So, the piece is, and it’s weird, it started out with me just I wanted to know more about Belgium, where I’m from, so I just started reading a bunch of history, and I thought this has nothing to do with Bitcoin. Then, finally, I was like, “Man, this is so interesting what happened 500 years ago when the book printing became a thing.” The price of books dropped from a years’ labor to the price of a chicken over 100 years’ time. That never happened before. Also, so many technological innovations were happening that allowed for global navigation of boats and sailing.

Tuur Demeester (00:35:48):
For a long time, you could sail to another continent, but the challenge was always how you get back. If you go to a new territory, how do you get back? So, you needed more advanced navigational tools. Then also in terms of doing business internationally, you had the invention of double entry bookkeeping, which allowed for the metiches and actually large multinational companies.

Tuur Demeester (00:36:10):
So, those things came together during what’s now called the Protestant Reformation, and it gave voice and it gave power to a new group of people that had not have that chance before. Those are the merchants, people were later called seed beggars. They had all kinds of derogatory needs with them. Basically, they’re able to use their knowledge to create international businesses and create a new basis of wealth. There was a big wealth transfer that started happening away from the clergy and the land mobility towards people that basically were invested in equity more. They had to start building these companies and people had shares in them. You had the first barns and the first proto life insurance in contracts and things like that.

Tuur Demeester (00:36:54):
So, as I read more about this, it’s like, “Man, this so much sounds like what’s happening today, not only with Bitcoin, but also with the internet, for example, also literally dropped the cost of information by the same range even more, even more radically going from the price of entering a library or going to a university or the early internet connections to how cheap data is now.

Tuur Demeester (00:37:17):
So, I started looking specifically for parallels. So, one of them is this technological catalyst was a big parallel, and then also having a group of people who are willing to stake their lives and reputations on this thing, which back then was the merchants, and now I would say is in the report I said the millennials. Actually, I wish I had said the Bitcoiners because I do think you need to not only live and work in the digital sphere, but you need to actually move your wealth there as well to really live in cyberspace, so to speak or cyberspace.

Tuur Demeester (00:37:52):
One other aspect that is a parallel is that people had the ability to withdraw. They have the ability to defend themselves against very large forces because that’s the thing. If you’re smart, you want the upside, but you also want a fallback option if things go wrong. So, back then, you could do that by, I mean, the Dutch, of course, they could flood their fields if the Spanish came. So, they used water as a defensive mechanism, but, also, you could use the boat and go to England or go to the US. So, you had all these fallback options against the biggest empire in the world, which was Spain.

Tuur Demeester (00:38:28):
So, similarly, I think, today, cryptography plays that role. That is the thing that allows us as individuals, we don’t have armies, but we can just not share our password or we can store our password, chunk it up in different countries, in vaults, and to multisig and all that stuff. So, there’s a mote there that’s building that’s really powerful.

Tuur Demeester (00:38:49):
That was the thesis is that, basically, we are now going through the Bitcoin reformation and it’s going to change society in many, many ways similar to the Protestant Reformation brought freedom of religion, for example, freedom of speech, things that we take for granted now were really claimed 500 years ago. I think we’re going to have new things that emerge from this big revolution.

Preston Pysh (00:39:12):
One of the ideas that you talked about near the end of the article, and this is a 17-19-paged read if I remember right. It’s fairly significant, but you talked about Bitcoin as liquid collateral, as basis for lending and derivatives. This is when the derivatives market, when you wrote this is just starting to emerge and become a thing. I’m curious as to your conviction or just misconceptions at the time of writing to how you see it now.

Tuur Demeester (00:39:47):
Well, I haven’t delved very deep into the Bitcoin derivatives market, how it’s evolving. I do understand that more and more insurance companies are getting involved, but then, again, derivatives are a prerequisite because what a derivative is is just a bet, right? It’s basically a contract that is a bet on a certain event happening at a certain time in the future. Basically, that allows companies to hedge their risks in a much better way than you could do if there’s only a spot market.

Tuur Demeester (00:40:14):
So, for example, airline companies use a lot of derivatives to hedge the oil prices, for example. So, similarly, if you want large companies like life insurance companies, those companies could get really involved in Bitcoin. They need that ability. So, that’s why I was so excited we’re seeing this derivatives market grow, and it’s going to reel in the blue chips of the world to really get in there and then get involve at the largest commodities produces, for example. They can start Bitcoin mining. There’s so many ways that traditional companies can get involved. So, no, I wouldn’t change my thesis. I think it’s playing out like I thought it would.

Preston Pysh (00:40:56):
How about on the lending side, the lending borrowing side?

Tuur Demeester (00:40:59):
It’s growing massively. If you think about it, in the fiat world, which is how we grew up in, it’s literally the air we’ve been breathing for all our lives, the thing that had value was our labor, which is our income expressed in fiat currency. What’s the other thing again? Maybe your house, you’re using house as store value to borrow against, use that as collateral, and then wealthy people would use their equity portfolio.

Tuur Demeester (00:41:24):
My thesis is that those stores of value are vulnerable to political wins and because politics is going to get way more chaotic in the next decade or so. I think people are going to want much more reliable and verifiable types of collateral. Bitcoin is brilliant in that sense because even gold is very hard to audit. For example, the fed, we haven’t gotten an audit of the fed since I think 1953, right? It’s very difficult and expensive, and even if you have an audit, can you trust it?

Tuur Demeester (00:41:57):
Whereas Bitcoin, anyone can spit up note and look on the blockchain and check if this address actually holds that balance, et cetera. Now with Taproot, we’re having even more possibilities in that realm. So, that’s my thesis as to why Bitcoin is such fantastic collateral. Of course, I mean, now, Michael Saylor has come and saying, “Don’t ever sell your Bitcoin. Just use some of it as collateral, borrow against it. It’s going to go up in value, and then you borrow more to pay the interest, and you’re set. You don’t have to ever sell because it’s such good collateral.” So, to me, that’s such a ringing endorsement, and there’s, of course, many more who were starting to use it that way.

Preston Pysh (00:42:36):
For a person who’s coming into Bitcoin for the first time and probably paying really close attention to the price action, I like to say, “Hey, take a look at the user account.” I know Michael Saylor refers to the user account a lot. He’s like, “Hey, we’re at this many users right now.” If you’re comparing that to the internet when it first stood up or in year 1990 or 2000, I can’t remember what the equivalent is.

Tuur Demeester (00:42:59):
I think it’s in the ’90s, something like that, 1995-1996.

Preston Pysh (00:43:03):
So, do you think that trend of adoption in users is the thing that somebody who’s buying this with a long-term lens that’s the thing to really focus on and pay attention to as opposed to the daily gyrations of the price action, which is extremely volatile and difficult? Is there anything beyond that that you think would be important for a new entrant to Bitcoin to really focus on?

Tuur Demeester (00:43:29):
I mean, my first spreadsheets comparing Bitcoin adoption with internet adoption back in 2013, I think that’s the main thing to watch. It incredibly is help up, right? Indeed, we went from being … Bitcoin was like internet in 1990-1991, and now we went all the way up to 7%, which was in 1995. Interestingly, I don’t know, you could look at what percentage of the population does it take for a revolution to spark, right? I think it’s similar. People say 3%-5% or something like that, that’s enough to make big change happen in society. So, we’d be seven.

Tuur Demeester (00:44:08):
Back in the internet, internet 1995, that was the tipping point, 7% adoption of US households. So, US households, 7% of them were using the internet in 1995. So, yeah, I think we’re past that tipping point. If you look at adoption curves, there’s always that slow beginning and then that tipping point, and then it speeds up. So, I think that’s what this is. I think it’s incredible to think, but I think adoption is going to speed up from here on then.

Tuur Demeester (00:44:33):
Of course, a lot of people are going to own Bitcoin that don’t even realize they do because if your insurance company owns Bitcoin or your pension fund owns Bitcoin, you’re exposed to the price. You’re exposed to that asset.

Preston Pysh (00:44:45):
So, are you telling me you subscribed to the super cycle? Is that what you’re saying here?

Tuur Demeester (00:44:51):
My thesis so far is that we are still in a 2013 replay, and so that this the equivalent of we went to 65,000 back down to 30. That’s roughly the equivalent of going to 270 back down to 100, and then a bit of doldrums six months or so, and then it 10x or something like that, right? So, if we do 10x from 20,000-30,000, we’re talking about 150,000 to 400,000, somewhere that range.

Tuur Demeester (00:45:17):
I mean, it’s starting to get weird because we have so much dollar inflation, right? So, what does it even mean to dream of a $300,000 Bitcoin two years or three years down the road? How much inflation are we going to have had by then? 50%? I mean, who knows how much value the dollar will have lost by then in terms of purchasing power?

Preston Pysh (00:45:38):
Well, I think that you subscribe to the idea that if they’re going to debase by that much on M2 money supply, what’s going to stop them? What’s the backstop at that point? They’re going to have to accelerate from there based on everything that we know about macro markets and fixed income markets. How are they going to control it, I guess, is my point. If they’re adding that much more pruning into the system over the next four years, five years, what comes after that for the five years that follow that?

Tuur Demeester (00:46:11):
If there’s any reading recommendation, although there’s maybe other accounts that are a little bit more accessible, but there’s a little book written by Andrew Dickson White. It’s called Fiat Money Inflation in France. So, he’s basically talking about, it was originally published in 1876, but it’s a very short little book and he just talks about what happened with the money leading up to the French revolution, and it’s uncanny how many parallels there are.

Tuur Demeester (00:46:40):
Literally, QE, quantitative easing, they did it, and then the economy revived and everyone was like, “Wow! This is amazing,” and then there was another crash, and they did it again, and they did it again. The succession of the QEs was ever more close to each other. Eventually, they blew up the currency. I think this is the path that we’re on is we’re to think about it because the dollar is supposedly the strongest currency and the US is the strongest economy, but, no.

Tuur Demeester (00:47:07):
I mean, this is the path we’re on, and maybe they’re going to do a 180 and come up with something to back the dollar magically, but France tried it, too, right? They confiscated the lands of the church and they’re like, “Now, we have [inaudible 00:47:20] and these are really backed by real land.” Of course, you couldn’t redeem it but it was supposedly backed by it. So, they’re going to really have to back it by Bitcoin or something real redeemable to have a chance at preserving their currency, the value of their currency.

Preston Pysh (00:47:36):
Because the root cause, the issue is is that they’re not allowing the market to normalize, right? They’re not allowing the companies that should be blowing up and going bankrupt and then there’s assets getting bid back into the market at ridiculous cheap prices for somebody to gobble up. They’re not letting that happen, and especially after you do it for decades of not letting the market be free and open to purge itself from misallocation. You then get yourself into this really gigantic mess that nobody politically wants to be responsible for by implementing sound monetary policy.

Tuur Demeester (00:48:20):
One aspect I think that it’s understandable why it’s underappreciated by the market and most people, but I think it’s important to look at is that the amount of interventionism is going to ramp up, and we’ve already seen that. A lot of people think, “Oh, 2020 was the exception,” but, no. To me, this is just a continuation of 2008. People were incredulous. These giant bailouts, this is crazy. Whereas in 2020 it was like, “Of course, we’re going to have bailouts.”

Preston Pysh (00:48:48):
You’re right. You’re right.

Tuur Demeester (00:48:49):
It’s just a matter of how many of trillion. Then, of course, we’re having, well, not really rent controls, but it’s more like eviction bans, eviction bans, all kinds of market interventions. They’ve even, I think in California, they’ve forced insurance companies to keep insuring people that don’t even pay the insurance against fire and natural disaster.

Tuur Demeester (00:49:12):
So, all of that intervention, I think regular investors underestimate the effects of that on their portfolio over time because you are invested in a company that could be facing headwinds regulatorily in a heartbeat. All of a sudden, there’s some regulation and then that stock snaps in half, and it stays that way or you’re invested in real estate. All of a sudden, there’s rent controls. Weimar, Germany, lots of rent controls. You could rent an apartment literally for the price of an egg. You could rent it for a month for the price of an egg because they capped the rents.

Tuur Demeester (00:49:45):
So, these are all things that … and that’s why it’s so appealing to try being an asset that you can just hold on throughout all the crazy, you just hold on to it, you don’t move it, you don’t sell it, and then once things start normalizing, your purchasing power is intact and high versus somebody who’s been trying to skip from hot potato to hot potato. They’ve gotten burned over and over.

Preston Pysh (00:50:08):
I think what you just described is really the why behind why we’ve always seen these kinds of things and the way that they end throughout history. If I was going to describe it in one word, it’s austerity doesn’t work politically. You were describing how the political spectrum has shifted over the last decade plus and how it has become politically unpopular for anybody to believe in austerity being the correct choice to solve the problem.

Preston Pysh (00:50:46):
10 years ago, there were still advocates out there saying, “Hey, we got to be responsible here. We can’t just print this money. What are you talking about? We just cant bail these banks out.” Now, you literally have people spray painting the doors of politicians that just say, “Give me my money.” It’s both parties. It’s not just one party or the other.

Preston Pysh (00:51:05):
So, because austerity requires people to be responsible for actions that have been decades, these actions that we’re asking, I mean, if you’re 30 years and somebody is saying, “Well, we just need to do austerity,” that 30-year-old is looking at that politician or whoever and saying, “I was a kid when these decisions were made or I wasn’t even born when some of these decisions were being made and you’re telling me I’ve got to be responsible.”

Preston Pysh (00:51:30):
They’re saying, “Get the heck out of here.” They’re not buying it for a second. So, I think that’s really the why behind these things always feel the way they do is because no one is willing to go through the austerity measures that are required to normalize it over time.

Tuur Demeester (00:51:47):
It’s understandable because these bubbles have been blown up for-

Preston Pysh (00:51:51):
Decades.

Tuur Demeester (00:51:52):
… you could argue since 1971, right? I mean, this is-

Preston Pysh (00:51:53):
I would even go further.

Tuur Demeester (00:51:54):
… longer than most people have been alive.

Preston Pysh (00:51:55):
Yeah. I would even go further than that because the whole reason we came off the gold standard is because they were manipulating the ledger of gold to currency in the system, the money multiplier.

Preston Pysh (00:52:09):
Hey, I want to get your thoughts on a couple of other things here. We’ve had conversations on this show about your opinions on Ethereum, specifically, versus Bitcoin, and you were one of the people that, to be quite honest with you, earlier that I really looked up to as I was just learning everything and saying, “This guy here is somebody I really admire his critical thinking, and he’s a pretty staunched Bitcoiner without Ethereum being part of how he sees the end state.”

Preston Pysh (00:52:38):
You even wrote an article. I forget which article it was in. You basically said this is going to be a binary outcome, that Bitcoin is going to win or something like Ethereum would win, but it’s not going to really be both. I think a lot of people out there disagree with that idea. I’m curious if you have changed your thought on that outcome, and then what are your thoughts on some of these other tokens that are now competing Ethereum to try to become the decentralized application layer. Just all your thoughts on this stuff because it’s been a while.

Tuur Demeester (00:53:14):
Yeah. About Ethereum, I’ve actually changed my thinking somewhat in the sense that there might be a way that they can maneuver themselves to basically become part of the fiat system. If they can get some support on the national level or higher, like the international fiat financial level, like the IMF level or whatever because the central banks have a PR problem. They want to create a digital currency, but it’s totally unclear what problem they’re trying to solve. They already have digital currency. The dollar and everything is digital already, and they’re clearly not going to have a decentralized thing. So, then what exactly are they offering?

Tuur Demeester (00:53:52):
So, there’s a small chance that Ethereum could get co-opted by some nation state or some super national financial institution, and that it has a longer shelf life because it has that political protection, but if that doesn’t happen, I think it’s unlikely to live beyond 20-30 years and have any success because it’s ultimately dilutive. It’s a political system.

Tuur Demeester (00:54:21):
If you’re going to move to proof of stake, you’re basically saying proof of work down the toilet and then the Ethereum foundation have said so much about a month ago. I think they put out a statement like, “Hey, we’re really doing this, this wasteful proof of work money,” which is they created Ethereum miners who make their living supporting the network and now they’re saying, “Guys, you’re fired,” which I think is a horrible … Anyway, so they’re doing that and they’re moving to proof of stake supposedly, which is a political system where people get to devoting is not linked to doing any kind of work, but it’s just linked to how many Ether you have.

Tuur Demeester (00:55:03):
So, it’s basically ruled by the rich. People who are rich in Ether, they get to decide what rules are going to be made. Of course, now they’re saying, “Oh, but Ether is a hard currency, and we’re never going to have inflation.” It’s like I want to wait and see. What if there’s a bit of a bear market for Ethereum and big holders are shifting on their chairs and they’re thinking about selling? Well, why wouldn’t they approve a resolution that says, “Oh, we’re going to increase inflation so that you get more Ether-staking rewards,” which, by the way, isn’t that what happened in 1980 with the US dollar?

Tuur Demeester (00:55:40):
1970s, we had inflation, then Velcro came in and said, “Hey, you guys, I’m going to make you love the dollar. We’re going to create these government bonds that have very high yields so that you can stay in the dollar and you can stake the dollar and get annual rewards of 15%, maybe even 20%.”

Tuur Demeester (00:55:58):
That gave a second life to this problematic currency, which is now running out. So, that’s my thesis about Ethereum proof of stake is that, ultimately, it’s very brittle having a political system to defend the protocol. If you look at Ethereum’s emission schedule, it looks like a squiggly line. It looks so random. It’s because it’s big because of all these hard forks and these random political decisions. It looks like a federal reserve interest charts to be honest.

Tuur Demeester (00:56:27):
So, I think that is just very clearly a different animal. It’s like what Michael Saylor say like a sharp duck that lives in the trees. It’s not digital gold. So, in terms of competing with Bitcoin, I think it’s competing with the existing fiat system, and it could have a potential future in that realm.

Preston Pysh (00:56:47):
Yeah, but that doesn’t solve the issue at hand that we were talking about earlier, which is a monetary system that forces responsibility.

Tuur Demeester (00:56:57):
That’s scarcity by definition.

Preston Pysh (00:57:00):
I think the other piece to the proof of stake versus proof of work is if you go out and buy a new rig today versus if you bought one four years ago, eight years ago. Your ability to capture coins if it’s four-year difference, it’s a four-year based on Moore’s Law, you basically have four times the processing power of somebody that purchased a rig from four years ago. So, the advantage comes to the new entrant into the protocol versus the person who arrived first soaked up all the tokens and is the “rich person” in those two different scenarios.

Preston Pysh (00:57:38):
I think that that is a really profound piece to Bitcoin, especially as you think about Moore’s Law and how it has an exponential piece to it because I’m just comparing a four-year period. If you do an eight-year or 12 years, what you’re doing is you’re really having a profound impact in an inverse of a first mover advantage with proof of work.

Tuur Demeester (00:58:04):
I literally tweeted this today. I said, “Bitcoin is a freemium model. The basic product huddling is almost 100% free. The fees are only charged once you start making transactions.” So, there’s this powerful flywheel effect where new users get onboarded with low friction and long-term users, they happily pay the fees that will sustain the network. That’s the other side. There’s mining, which is like that, but also just getting involved in Bitcoin, it’s literally free to buy some Bitcoin and hold it for 10 or 20 years.

Preston Pysh (00:58:37):
The fee burden is really being paid by the people that are moving significant amounts of Bitcoin because when we really understand Lightning, and I think where a lot of it is going, I mean, you can see this in El Salvador right now. The cost for them to be doing their coffee transactions, which are immediate, which when we had a conversation before the summer of 2017 wasn’t even a known thing that we would have immediately clearing transactions at near zero fee. That’s a reality today. That’s happening.

Preston Pysh (00:59:10):
In fact, I would make the argument that’s the main reason why El Salvador is tapping into Bitcoin is for the network first and using the rails to maybe just conduct a USD to USD or be it USD to Bitcoin to USD transaction where the two participants from their user interface don’t even really realize that they’re using Bitcoin to conduct the USD to USD, what appears to be a USD to USD transaction. What that enabled already today is mind-blowing, and I think when the media, you got this guy from Johns Hopkins, Hankey is the guy’s last name, he’s there bashing it.

Preston Pysh (00:59:52):
I think I don’t want to speak for this guy because I’m somewhat disgusted by his analysis and his depth of research, but when he’s out there making these claims that Bitcoin is really dangerous to El Salvador, he’s talking about the volatility and the price action as a store value piece and completely ignoring the second layer.

Tuur Demeester (01:00:15):
He doesn’t even mention Lightning.

Preston Pysh (01:00:17):
Doesn’t even mention Lightning, which is what the country is primarily using it for today. So, it’s very frustrating to see. Then of course, the media just, the regular media just runs with it. For people that are in the space and really understand what’s happening, you just want to bang your head against the wall.

Tuur Demeester (01:00:33):
The latest incarnation of the old man yelling at the clouds.

Preston Pysh (01:00:38):
Yeah. Exactly. So, what are your thoughts on, we were talking about Ethereum. So, this whole Ethereum 2.0 thing.

Tuur Demeester (01:00:44):
2.0, yeah.

Preston Pysh (01:00:45):
Yeah. I mean, it’s beyond overzealous as far as the technical challenges that they’ve got to overcome. What are some of your thoughts on that?

Tuur Demeester (01:00:54):
I mean, it’s weird how … It’s not weird because I think it fits the pattern, but they have a pattern of coming up with ways that they’re going to scale the network that are totally blue sky thinking like, “Oh, yeah, here’s a thought.” It’s like they’re coming fresh out of a brainstorm session like, “Oh, we’re going to scale with …” I mean, I even forget the buzz words anymore, but there’s a graveyard of buzzwords that they have of things that they were going to plasma and they were going to do … What was the other thing? I’ll find the word, but there’s a bunch of things that they were supposedly going to do. Whereas Bitcoin has always been, literally, this is going back to Hal Finney, I think, in 2011 secondly are scaling, right? I mean, you scale in layers and that’s modular scaling. It’s just how things make sense.

Tuur Demeester (01:01:42):
So, Bitcoin has been extremely consistent in that sense. Forget about the B-cashers. They never got in the first place, and they were never serious developers either, but, yeah. The latest things, it’s just a novelty-based network, and they just always look for something new that they would not a lot of thought about the long-term ramifications of what they’re doing other than, “Oh, but we’re listening to the market.”

Tuur Demeester (01:02:05):
It’s like, “Yeah, but you’re not Facebook. What are you talking about? Do you want to build a protocol that people are going to use 20-50 years from now or do you want to just raise capital with some fancy buzzwords?” I really think the latter is happening. Proof of stake has been tried. Dude, this is the old thing. This is what they tried in the ’90s. This the thing that was discarded and so all this voting stuff is totally brittle. Proof of work was the big innovation, and you’re just throwing that.

Tuur Demeester (01:02:37):
That, to me, knocks down the credibility of people immediately if they don’t recognize the fundamental innovation of proof of work. The people involved with Cardano, for example, very negative about proof of work, to me, that’s almost like an instant disqualification like, “Thank you for making my due diligence so easy. You’re not getting something.”

Preston Pysh (01:02:57):
The irony is it strengthens the grid, and if you’re not finding the cheapest electrical expense possible, and especially if you interpolate that out to 20 years from now, if you’re not finding dirt cheap, next to zero cost electricity, there’s no way you’re going to be competitive in the mining process of Bitcoin. It’s just not going to happen. I mean, just look at how much has progressed since you and I started doing this stuff years ago. The progression, the trendline towards cheap, clean, renewable energy automatically happens naturally. You don’t need a bill. You don’t need anything politically to shape it in that direction. It’s just going to move in that direction.

Tuur Demeester (01:03:38):
Also, we have Darwin on our side, right? I mean, we have the handicap principle in nature, which is animal species will develop traits that are inherently costly to do. It will require a lot of energy like a peacock with its feathers or the bees going all the way up in the air until they’re the ones that win the race and get the queen. Why is that? It’s because it’s very hard to imitate, and it’s very hard to fake, right? You can’t fake proof of work. That’s why it’s so valuable.

Tuur Demeester (01:04:06):
I asked [inaudible 01:04:07] “What is your analogy for proof of stake?” He comes up with some hostage scheme. He’s like, “Oh, yeah. Back in the day with the kings, they could hold some people hostage and then exchange them.”

Tuur Demeester (01:04:20):
It’s like, “Oh, that sounds so stable. That sounds such an amazingly stable system.”

Preston Pysh (01:04:26):
I definitely have a bias towards Bitcoin over Ethereum and all these other protocols as well. I want to be fair, but I also want to use the critical thinking where it’s required to discuss why both of us don’t necessarily see how this works long-term. People disagree they can go out there and do their own research to come up with arguments against what we’re saying, I guess.

Tuur Demeester (01:04:50):
One final word about that is that I would say the real stress test for Defi, decentralized finances, has not really happened. I mean, come on, be honest. We have not have a government crack down on Defi. So, we just don’t know. We don’t know how robust it is. I think it’s actually very brittle probably, but that’s the bread and butter of Ethereum is all that stuff. So, we’ll have to just wait and see how robust it really is once there’s a serious, I don’t know, some kind of judge who makes an order or some government or something.

Preston Pysh (01:05:24):
What are your thoughts on Defi on Bitcoin in a second or third layer kind of thing because you were talking earlier about how you think it’s important for things to scale in stacks, layers with the base layer being this impenetrable mote of a store value being first and foremost and then everything being build on top of that. So, where do you see Defi going with Bitcoin?

Tuur Demeester (01:05:49):
I think I’m pretty much aligned with [inaudible 01:05:50] on that one. I think smart contracts are always part of the roadmap for Bitcoin like Satoshi tried to put them in the main chain. I think people will later realize it’s better to have it on higher layers. I mean, Lightning is a smart contract layer on top of Bitcoin. Let’s not forget that. So, yeah, Defi is totally going to happen.

Tuur Demeester (01:06:09):
I think the liquid network is cool. I think it is fundamentally a different trade off. Security-wise, that makes a lot of sense. It’s a great settlement network. It’s faster, but it still has a lot of security and it has that privacy that I think is needed. That was one of the things that made me long-term skeptical about ERC-20 contracts and things like that is the level of transparency, the amount of front running that can be done with those things.

Tuur Demeester (01:06:35):
In the financial space, you need private transactions. You just need it. People cannot do business peacefully if they don’t have that. So, really excited that we’re getting there.

Preston Pysh (01:06:47):
So, with ERC-20 on Ethereum, are you able to see that and front run it?

Tuur Demeester (01:06:52):
As far as I know, maybe something changed more recently, but as far as I know, yeah, you can see the tokens on the network.

Preston Pysh (01:07:00):
So, for people that might not know what the ERC-20 acronym is, this is creating tokens. You can even make a security token. You can make a token however you want, but on Ethereum, it’s called ERC-20. What Tuur is talking about is on the liquid network, which is built on top of Bitcoin. This is a Blockstream one-

Tuur Demeester (01:07:18):
It’s open source code, but Blockstream pretty much came up with it and put together the consortium of companies that run the servers.

Preston Pysh (01:07:29):
So, you can come up with your own token through liquid and what Tuur is talking about is on liquid you can front run the transactions because they have this almost like a veil of secrecy in the way that the code works that you’re not able to see how they’re being transacted.

Tuur Demeester (01:07:48):
When they validate a transaction, they don’t even know if there’s tokens in it or not. That’s the level of privacy. It’s not even like they don’t know how many. It’s that they don’t even know that there’s tokens being moved in that transaction, in that block.

Preston Pysh (01:08:02):
So, Tuur, what are some of your thoughts on just stable coins? Tether, specifically, I’m sure everyone wants to hear your thoughts on Tether, but stable coins in general.

Tuur Demeester (01:08:11):
I think it’s exposing some of the real problems with the fiat network. I once accidentally ran into a Bitfinex CEO and he told me that he was involved with international trade for a long time before Bitcoin moving assets and money around the world, producing real products and then selling them internationally. So, one of his big frustrations was always that it was so hard to move money around in the world, so so hard, of course not between US and Canada, but once you’re talking about jurisdictions that are way further apart.

Tuur Demeester (01:08:46):
So, the whole support of the whole Tether idea was that. It’s just solving that problem and I think they’ve done that pretty brilliantly so far. It’s like a lot of the blame that’s supposedly on Tether’s shoulders is like, “Well, yeah, it’s imperfect because they are using imperfect rails.” They’re using the fiat rails to try and create something that’s more effective. I don’t know exactly the composition of what’s backing Tether. I mean, I know the percentages. People are talking about this, but I don’t know exactly what kind of bonds they have and stuff like that to back it.

Tuur Demeester (01:09:23):
I think it looks like a pretty stable model. I think if they have problems, it will probably more be on the regulatory side that somebody decide to go against it and freeze bank accounts or things like that. Yeah, I mean, I think it was a pretty brilliant solution to a genuine problem is how do people move dollar value between exchanges or around the world quickly and inexpensively.

Preston Pysh (01:09:44):
Last question for you. Talk to us about generating alpha in this space.

Tuur Demeester (01:09:50):
Yeah. So, it’s one of the questions that always come back. It’s like, “Okay. Once I have Bitcoin, I can …” I mean, it’s like Warren Buffett, “I can’t funnel them. I can look at them, but how do I get more value out of them? How do I get a yield out of them or some kind of return?” That’s what they call Bitcoin alpha. You use Bitcoin as a performance benchmark and then you want to outperform it year by year. It’s challenging because, well, first of all, on the surface, it looks very easy. It’s like, “Oh, yeah. Just go to these loan guys, and lend out your Bitcoin and they’re going to give you a yield,” but when you’re really trying to be responsible and have long-term thinking and really try to not lose your Bitcoin, I think due diligence is hard. It’s hard to do due diligence.

Tuur Demeester (01:10:31):
In a way, it’s like a black box. You lend out your coins and something magical happens behind the scenes, and then you get more coins back. It’s like how do you know if something goes wrong, right? I mean, it’s a very, very young ecosystem. Most of those companies are only a few years old.

Tuur Demeester (01:10:45):
So, I’m using a lot of words to say that it’s challenging, and I think, I mean, one of the things we’re working on with Blockstream is to actually create products that have a conservative yield that don’t aim for like, “Oh, we’re going to give you 10% guaranteed every year,” or something like that, but that have a conservative yield and that are really respectful to how precious Bitcoins really are.

Tuur Demeester (01:11:06):
One of the things I think that Blockstream does really well is that because they’re a full stack company, they’ve existed since 2014 is that they can do proper due diligence in a 360 degrees way. So, that’s why I’ve been really excited, too. I’m an advisor and I sold my company to them to work with them is that they just have such knowhow on what questions to really ask to dig in to finding things that are more transparent than average, for example, things like that.

Tuur Demeester (01:11:34):
So, I think, I mean, I’ve been saying this for a fear years now, but I think Bitcoin alpha is the next frontier. Who cares about dollar-denominated profits? You want to make your Bitcoin grow over time. That’s what really matters. That’s the benchmark to think about.

Preston Pysh (01:11:49):
I completely agree with you and I think that once that becomes less risky or that the market participants feel like their Bitcoin that they’ve worked so hard to be able to secure can be lent in a way that they feel like they can see in a very public way the collateral and they understand the mechanics and they’re able to audit the mechanics of how the yield is being generated in a very open way. I think that it’s just going to have massive implications for how everything on the planet starts to be values, especially equities.

Tuur Demeester (01:12:25):
Yeah. Also, you don’t have to rush into this idea. You can borrow. I did a little back of the napkin calculation. I think as long as you don’t borrow more than 2%-3% of the value of your Bitcoins at any time in terms of you borrow 2% of that value in dollar terms and you use it for every day life. Say that your income is not enough. Instead of selling Bitcoin, you can go that route. You possibly could do that forever. If you keep the percentages that low, you can just roll over your loans and the Bitcoin appreciation takes care of the interest and the new loans.

Tuur Demeester (01:13:03):
Of course, it’s very speculative for me to say that, but I think, roughly speaking, it has held true historically. So, it could hold true in the future as well, especially with accelerating inflation.

Preston Pysh (01:13:13):
Yeah, and based on how much you have starting out.

Tuur Demeester (01:13:18):
2% is relative, right? So, it’s like no matter how few you have-

Preston Pysh (01:13:21):
Oh, I see what you’re saying as far as the principle that you’re talking about, yeah. I got you. Well, Tuur, this has been amazing. You just got to promise me one thing that when I call you in 2025, you’ll still do the interview with me.

Tuur Demeester (01:13:36):
That’s a promise.

Preston Pysh (01:13:38):
I really enjoyed talking with you. You had a huge influence on me whenever I was first starting out learning about this stuff and just building conviction, just reading the stuff that you wrote through the years and I know that that’s true for a lot of people out there. It’s really exciting for me to have a conversation with you and to catch up and we need to do it more often and probably more often than 2025.

Tuur Demeester (01:14:03):
Well, I want to say the gratitude is mutual, not just you but in general to people that I get to interact with because I do this for myself, too. Engaging in this conversation is what helps me understand things better, and that in turn helps with conviction and making better decisions. I’ve become such a better investor by engaging with other people. So, it’s such a blessing. It’s incredible.

Preston Pysh (01:14:28):
All right. Well, Tuur, give people a handoff. I don’t know if you have anything that you want to give a handoff to, but if you do, give them a handoff to where they can find you. I know you commented earlier about the one day Twitter opening.

Tuur Demeester (01:14:41):
So, yeah, if you hear this podcast on the day of publication, just go find my Twitter account. You should be able to just follow me. If it’s on another day, just find my Twitter account and do the request, request to follow. I can’t promise, but I’m going to try to approve everyone I can. That’s pretty much it. Sometimes I publish a medium article, but that’s rare. I’m working on a long form thing. It will probably be a book, and it’s probably way down the road, but there’s more coming, but that’s down the road.

Preston Pysh (01:15:11):
All right. The one and only Tuur Demeester, thank you so much for coming on the show.

Tuur Demeester (01:15:15):
Thanks, Preston.

Preston Pysh (01:15:17):
Hey, so thanks for everybody listening in 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 (01:15:31):
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