Preston Pysh  0:47  

There has been a lot that has happened since the last time we talked. The last time we talked, I believe was in 2017 during the meteoric rise of Bitcoin and many other crypto coins. After we saw a peak, at least Bitcoin peaked in December of 2017, we’ve had about an 80% decline in the price of bitcoin. I think It got down into the mid-3000 range or something like that. 

But since that bottoming, which probably happened a few months ago, Bitcoin has had a little bit of a surge here. I think it just hit over $6,000. My question to you, Tuur is, I think everybody who’s listening to this is wondering about this question – Why is Bitcoin still relevant today?

Yeah, and why does it remain relevant throughout these rallies and crashes? We’ve seen several of them. The first one was in 2010. The second one was in 2011. There were two in 2013. We had a major rally and crash in 2014. And then the one that most people are aware of now is the 2017 cycle. 

Tuur Demeester  1:20 

Rather than ask, “Why is Bitcoin relevant?” I would kind of turn it upside down. I’d wonder, “Do these crashes take away from the value of Bitcoin, and why are they happening?” 

Bitcoin is relevant because it has the promise of being a digital store of value. Not only for millennials, but it’s definitely very appealing to millennials. It’s something that for a long time, since cryptography became something that private individuals could work with and academics started developing onto that, and then in combination with the rise of the Internet, this idea of a digital cash or digital gold has been out there as a challenge for scientists. 

Going back to the ’80s, there were ideas and plans to try and make this work. Bitcoin was the first time that all the pieces came together in a very elegant way to make it a reality. Now we do have. I’m kind of excited that I found this word.

Bitcoin is now a denarian currency. It’s over 10 years old. It is quite amazing if you think of it. We’ve had almost zero downtime during that time. It’s never been stopped. There has never been reorganization of the ledger to censor transactions or to rollback transactions for nothing. 

There have been exchanges that were hacked and that tried to get old transactions to be reverted. They just never happened. It’s as good as gold in that sense. Transactions are real and they’re reversible, but then it has all these additional benefits of the digital world. We’ll talk about it more, I’m sure. 

The gist of it is that Bitcoin is relevant because it’s a politically neutral store of value. That’s the promise of it. It could become a reserve asset. And so much of the world’s prosperity is built on this ledger that gold was. Gold was a scarce measuring stick for value. It allowed you to store value and then later deploy it however you saw fit as an entrepreneur or as an investor. 

Bitcoin kind of restores that idea. We kind of lost our way with fiat currencies that can be debased. They’re very effective because you can send them around the world easily. They can just continually be debased and so they’re losing that feature of store value. And so, that to me is what’s so attractive about Bitcoin.

Preston Pysh  4:54  

For somebody who’s hearing your response to why it’s still relevant today, they might get lost in some of the technology talk, or they might get lost in some of the other aspects of how we can just talk about all this technical stuff immediately. When you talk to somebody with Bitcoin, it gets to be a very technical conversation. 

But what I think is really interesting is when you take a step back and you say, “What is it fundamentally that Bitcoin is solving?” Why would a person own Bitcoin as opposed to owning gold? What is it that Bitcoin brings to the world that we don’t already have with the currencies that exist?

Tuur Demeester  5:29  

If you look into the white paper that was published in 2008 to basically explain what Bitcoin was about. In the introduction, Satoshi Nakamoto, that pseudonymous creator says and I quote: “Commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” 

He goes on to explain how the fact that we have to trust a third party comes at significant cost and significant risk to savers, or to people that want to transact digitally. He says “online”, but globally, all the money is digital. We’re talking about this huge market.

One of the main problems that has emerged for people that want to save or store value, it’s really hard to know how scarce the money is these days. There’s this aphorism, I forget who wrote it, but it’s like, “Money is scarce. And if it’s no longer scarce, it’s no longer money.” There is definitely that breaking point. We’ve seen at some point, things break down and get pretty bad. 

How do you create a system that is provably scarce, where I have a digital token but I can’t just copy it and send one the Stig and another to Preston, even though originally only had one? How do you kind of prevent forgery? Bitcoin is this really elegant solution to that problem. 

The basic idea is that rather than you having to trust like, “Hey, this is a real coin, believe me. I’m some kind of fancy bank, and you just have to trust me. I will only ever create this much inflation. Trust me.” Rather than having to do that, I can just look at the actual protocol and see the rules that are embedded in that. And then I can see how many computers in the world are choosing to run this protocol. 

And then when it comes to 1 bitcoin, am I sending the same Bitcoin twice? How do I know what the valid transaction is? Presumably, only the first time you spend it, that should be the valid time. The second time, you’ve already spent it, so it’s no longer in your wallet. 

The way you can verify that is by looking at the ledger that has the most cumulated work embedded into it. It’s something that seems wasteful on the surface, but actually serves a very deep purpose that has to do with security and not having to actually trust an authority. 

Stig Brodersen  7:45  

Tuur, it’s interesting that you would say that. For a person that hears this and might not have a background in computer science or understand programming, you say that you can look at the protocol to verify the system and build a trust in the system. But most people including myself, would have no idea how to do that. We’re probably not looking to spend the time learning how to do that. How should we think about all of this?

Tuur Demeester  8:10  

Yeah, that’s a great question. I’m not a computer programmer either. I definitely had to ask myself that question. How do I trust a trustless system that I cannot verify myself? 

The way Bitcoin does that, or kind of helps people trust it is that the entire code base is open source, so anybody can look at it. There’s the explicit invitation to do so. That means that for the past 10 years, hackers around the world, computer scientists and operational security experts have been explicitly invited to audit this.

There are instances of investors who’ve hired teams of hackers to try and break the system, and to try and kind of find a loophole. Of course, there’s also a financial incentive to do so. As the value of the ledger increases, the financial incentive increases to find the bug that allows you to drain the account so to speak. That strengthens my trust over time.

It’s like that with a lot of things in life. How do you trust the internet world? Well, you use it every day. But also, you rely on certain proxies. How do you know that this gold coin is real? You can pay someone who’s an expert that can really verify it.

The fact that is out there and is an open source, it’s an invitation to the world. Like, “Hey, I’m the champion. Beat me up if you can.” Where now, you could call it a $100 billion bug bounty on Bitcoin, like, “Hey, if you can crack this, here’s the bounty. It’s right here. Just get it.” 

Obviously, you cannot crack all the accounts of Bitcoin, but even just one, there are accounts out there that have easily over 100,000 Bitcoins. That’s way over $100 million sitting in one one Bitcoin account. I think it’s testament to the Bitcoin protocol and the continual conservative improvements that it’s very reliable and trustworthy.

Preston Pysh  9:54  

Trace Mayer has just a great discussion on network effects. One of the reasons I like this so much is because whenever I talk to people about Bitcoin, one of the first things that they say is, “Well, if these people created the the code for this, whoever they are, how do I know that they just can’t go back and change the code to adjust it?” 

Right now, the selling point on Bitcoin is that there will only be 21 million coins. No more, no less. It’s gonna get to 21 million coins. You have a fixed monetary baseline. Therefore, it can’t be debased. But how do I know that somebody can’t go in there and adjust the code?

Tuur Demeester  10:26  

You can absolutely do that. Charlie Lee did it in 2011 when he created Litecoin. He just took the code base. He was like, “Hey, let’s tweak this little rule.” Now, we have a coin with [an] 84 million coin supply, rather than Bitcoin’s 21 million. 

You can totally do that. The challenge is that if you change the basic rules of Bitcoin in your new codebase, and you start running that software, it’s not going to talk to the other nodes. The other nodes are going to reject it because it doesn’t adhere to the same rules. 

It’s kind of like a Babylonian problem. There’s no limit. There’s over 1000 old coins out there. They’re all iterations. But like the Bitcoin network, it never listens to those nodes. 

The only changes that over time have been accepted by Bitcoin nodes are changes that restrict rather than expand the rules. I don’t know if that makes sense. But it’s a little bit like state legislation. At least in theory, it can make more specifications as to what people can do, but it shouldn’t violate the constitutional rights that are maybe across the Federation. 

You could call the Bitcoin Core protocol as a sort of constitution. You can either propose a “hard fork” to change the constitution. For the past 10 years, it has always been rejected by Bitcoin savers because they don’t want to see the value of their coins being diluted. That’s a hard fork. That’s always been rejected.

What has been sometimes accepted is more specific rules. Those are called “soft forks” where you can narrow things down a bit, smoothen the edges, and make things more efficient, as long as it doesn’t violate the core ideas of what Bitcoin is about. 

For example, the 21-million supply and the 10-minute block times are the very basic things that are hard coded into bitcoin. It’s true. Technically, anyone can change the rules, but it’s kind of like saying, “Well, you speak English and speak speaks English. What if I change English and make it into a new language?” Wouldn’t that mess up your day? 

You’re like, “No, because I would be on my own on an island with my new fangled language, and you guys would just choose to keep talking English.” It’s kind of like disqualifying yourself. If you change the rules, the conversation is over.

Stig Brodersen  12:39  

That’s a great and very relatable example. What if the community wants to change something in the open source code? It has happened multiple times before. What is the process of proposing and then implementing changes?

Tuur Demeester  12:53  

There is a mature process that has developed over time. It was very much inspired on how open source code bases are adjusted and upgraded, even though nobody’s really in charge of open source projects such as Linux, and things like that. Responsibilities are named in that ecosystem, but it’s still not controlled.

It just means that somebody helps facilitate the process. Usually GitHub is used. If you have a proposal to make a change in Bitcoin, it’s called a Bitcoin improvement proposal. That’s subject to peer review for a while. And then, finally propose it to several core developers who have a very long experience. It’ll go through significant review to make sure that we’re not changing the Constitution. We’re just trying to make things a bit more efficient, for example. 

Eventually, it gets merged into a new release of Bitcoin. That releases basically just propose to the world. Some developers are like, “Hey, here’s a version of Bitcoin that we think is a little better. Feel free to give it a run.” It’s a very gradual adoption process. 

You’re not really encouraged to assume that change on day one. But because it has efficiency improvements, there is this economic incentive, especially for miners and professionals to run the latest version, which is the most efficient version of the software. 

But of course, they don’t want to expose their customers to vulnerabilities. They might do internal testing as well. One example was the soft fork that merged SegWit into Bitcoin. That allowed the block size to grow from around one megabyte to theoretically up to four.

Bitcoin’s capacity increased. The transaction size shrunk, which means that the average fee that you have to pay to the network is also going to be lower. That’s valuable for exchanges and miners. 

It was like a two to three-year process, where finally over 50% of the transactions are now SegWit transactions. It’s a very slow process. I think that’s good.

Preston Pysh  14:43  

I don’t really mean to get into a lot of the technical stuff. I think it’s important for people to hear some of this, especially if they haven’t paid attention to Bitcoin since 2017. That’s one of the interesting changes that have occurred since back then. It is this SegWit update. 

What it’s allowed is what’s called “Lightning Network”. In the most simplistic way you can describe this, what is the Lightning Network? Why is it important? 

Tuur Demeester  15:08  

The simplest description would basically be that you go out with your friends, you go to a bar, and rather for the barman to register every single one of your transactions with a credit card, he just keeps open a tab and just closes it at the end of the night. 

Another word for this is payment channel. You basically, for small amounts of transactions, you defer it to another layer. It’s a smart contract layer. Basically, it keeps track of all these tabs and then occasionally settles with the Bitcoin main chain. 

Bitcoin main chain transactions only have a capacity of about three to five transactions per second. They are expensive, right? They can cost $0.50, or sometimes several dollars. Lightning solves that. It allows for very fast, huge volumes of transactions, but still denominated in Bitcoin.

Preston Pysh  15:57  

Let’s say I completely understand and trust Bitcoin. I understand that you’re being incentivized to hack the system. As you said, it’s been running for more than a decade, and it hasn’t happened yet. Having said that, why would I trust the new system? Why would I trust the bot in there?

Tuur Demeester  16:13  

It’s not entirely trustless in that sense. It’s just a metaphor to kind of show that we’re deferring. It’s somewhat less robust than the Bitcoin main chain, but it’s still very much lower trust. It’s still what you could call a “decentralized layer.” 

If you have a balance on the Lightning Network, you cannot be stolen from very easily. I mean, Bitcoin is the most secure database on the planet. That is a very high bar. Lower that bar a little bit to allow for very fast transaction settlements, at the core, it’s still a trustless solution. 

Preston Pysh  16:46  

You would describe the security risk on lightning to be way less than the security risk on an exchange, such as coin base. Do you think that that holds a lot more security risk?

Tuur Demeester  16:57  

I don’t feel confident to say that. That’s the problem with trusted third parties. Sometimes they are trustworthy. Sometimes they do a great job. Having to secure your own lightning node, that’s on you. That’s for you to take these precautions. 

And also, the software is still in very early stages. It’s kind of like I’m more talking about the promise of the protocol rather than the way it is today. In the long run, rather than saying, “What’s more secure?” I would say, “It’s more permissionless.” 

Imagine someone in India who wants to buy in-game credits on their phone. They can use a lightning wallet. They don’t need to have any bank give them permission first.

Preston Pysh  17:34  

Let’s say that I’m worried about the debasement of my currency. I might live in, say, Turkey. I’m considering whether or not I should hold gold, or Bitcoin, or perhaps both of them. They have the same argument about a predictable and fixed monetary baseline. How do you think through what I should own in my portfolio in that case?

Tuur Demeester  17:53  

Demographics, surveys, and then all the data point in the direction that Bitcoin is being adopted slowly. Right now, it’s only at maybe 5% adoption globally. That’s probably even overstating it, depending on how you look at it. 

It’s going through this adoption curve, which means that the value is going to increase by a lot, if I’m right about that. On top of that, we have this demographic tailwind in the sense that millennials just absolutely love Bitcoin. The early adopters were mostly millennials. 

Right now, if you look at the appetite from investors, it’s mostly millennials. Right now Millennials are, I think in their maybe late 20s, early 30s, kind of on average. In about 10 years, in 2029, their collective purchasing power is going to supersede that of Generation X, as well as the baby boomers. That’s going to be the largest earning generation.

My hypothesis is that the gold that they inherit, part of that is going to be sold, and Bitcoin is going to be bought by millennials. And of course, you don’t have to inherit the gold. You can also think about how to protect your portfolio against systemic risk. That’s when gold and other liquid assets with low third party risks come into play. 

That would be my case for why you want to own some Bitcoin. It’s going to complement gold. Maybe we’ll talk about this more, but Bitcoin has a lot more functionality. Literally, I mean, technical functionality than gold. It really can become the internet of money. 

It’s natively digital and that makes a big difference versus gold. If you want to make gold part of the digital world, you have to build a gold bank. And then all of a sudden, you’re talking about trusted third parties again.

Preston Pysh  19:33  

This might sound kind of funny for a person who has as much experience as you have in this field. Whenever I’ve had conversations with people that know nothing about Bitcoin, I hear them often say, “Oh, well, it’s $6,000 a coin. I’m not going to buy one of those.”

Slam this one out of the ballpark for us. Let people know that it’s divisible, and all that kind of stuff.

Tuur Demeester  19:53  

Yeah, so saying that one bitcoin is too expensive because it’s $6,000 today, that’s kind of the equivalent of saying, “A 400 ounce ingot of gold is too expensive because it’s over half a million dollars today”.

We’re talking about a fungible good. It’s almost infinitely divisible. You can just as much buy .01 bitcoin. It doesn’t matter. It’s still claiming a bit of real estate on Bitcoin Island. 

Bitcoin Island is 21 million coins. Whatever that surface is. You claim your stake and it doesn’t really matter how small that is. It doesn’t have to be a one-coin stake.

Preston Pysh  20:30  

Can I go out and buy .007 bitcoins if I want? 

Tuur Demeester  20:34  

Yeah. For the moment Bitcoin is divisible up until 100,000,000th of a Bitcoin, that unit is called a Satoshi. Yeah, you can theoretically, probably even in practice, can buy 100,000,000th of a Bitcoin. 

With the Lightning Network, you actually can. There was a competition recently. Somebody sold an art piece, which would be given to the person that managed to pay the least amount of Bitcoin. 

In Lightning, you can actually go below one Satoshi. I forget the amount, but somebody calculated that the value of the winning bid was lower than the price of one grain of sand.

Preston Pysh  21:10  

I don’t even know how that would be possible if the protocol was set up for, what is it 10 to the negative eighth unit you can go down to? How in the world can you do that on Lightning that you go below it?

Tuur Demeester  21:21  

Well, it’s the same thing with the tabs, right? Even though you have a one cent coin in your wallet and that’s supposed to take the lowest denominator, the bartender can agree to keep a tab for a lower amount.

Preston Pysh  21:33  

Yeah, that makes sense. Oh, that’s cool. 

Stig Brodersen  21:36  

Another question that is often asked to Preston and me, [and] I’m sure you hear that a lot too, Tuur: Why Bitcoin? There’s so many other coins out there. How do we know that Bitcoin is the coin that will prevail and maintain the position as the top currency in terms of market cap?

Tuur Demeester  21:53  

I would be hypocritical if I said, “Oh, just trust me. It’s Bitcoin.” Obviously, don’t trust me. Do your own research. I guess my suggestion would be to look at the developers involved in Bitcoin, such as their pedigree. It’s at a totally different level compared to any of the other alt coins. These are people that have actually built the internet. These are the people that are now building on Bitcoin.

I would also say to consider this perspective on Bitcoin. What Bitcoin is about, we can talk a lot about the technicalities and things like that. But at its core, what Bitcoin does is it converts electricity into financial reliability. All the work and all the mining that goes into Bitcoin is building a moat around it to make it immutable, and to have this decentralized consensus. 

Once we’ve come up with a mechanism to do that reliably, why would we need 10 different protocols to do that? Bitcoin has shown that it has been around for over 10 years now. It has the Lindy effect, I believe. It is what Nassim Taleb talks about that often. 

It’s phenomena that as time progresses, they become only stronger lodged into the human consciousness and in society. And so the fact that it’s around for 10 years already, it predicts that it’ll be around for a lot longer. In terms of brand value, you have to consider that too. 

In my mind, it’s really the .com of the space compared to .org, .net, or .ru. There is no physical reason why .com domain names are 80% of the entire domain name market. Why the value of for example, pizza.com or investing.com is going to be literally 100x that of the next domain name at times, or at least 10 times higher. 

The reason that it does have a higher value is kind of a self-fulfilling prophecy. It’s just that if you buy a .com domain name, it signals to the world that you are making a long term investment. You believe in your business. That you’re not just going to go for a quick scam. I believe it’s similar in Bitcoin. 

Whereas, the actual protocol may only be a little bit different from the next old coin. The fact that Bitcoin has kept its integrity for 10 years. It has not changed its rules as the largest by far. I would have to look up the percentages, but probably around 90% of the electricity in the world that’s used for mining coins is going to Bitcoin. 

It’s definitely above 70%. It has that huge firewall around it. The fact that it’s slow to change is actually its core virtue. It’s the fact that you can rely on it. It’s almost like an element on the periodic table where it has these features that are just never going to change. That’s what will allow the world to build on it. Those would be some suggestions of areas for people to look in. 

And then finally, maybe also consider if people talk about features and say, “Oh, but this coin has that feature that Bitcoin doesn’t.” Consider that digital protocols are developed in layers. 

You start with a core basic bottom layer that has one feature. New layers are added on top of that in a stack. People talk for example about the internet protocol stack. TCP/IP is only a part of that. 

The same goes with Bitcoin. If the core protocol is reliable, then you can reliably build new layers on top of it. That’s what’s happening with the Lightning Network, with these federated side chains, and other things that are happening. All those features that people are saying, “Oh, but my old coin has that.” That’s all going to come to Bitcoin.

It just needs some time. That’s something that the market is learning. It’s an incredibly rich ecosystem. We don’t need to invent a new Bitcoin to have the next fancy feature because it can be embedded in higher layers.

Preston Pysh  25:35  

Bitcoin is a protocol. For people that are not Computer Science majors, when you say TCP/ICP, and you’re talking about the protocol layer that the internet runs on, and Bitcoin is a protocol, help a person understand what a protocol is.

Tuur Demeester  25:51  

A protocol basically is just a way of doing things. The fact that all around the world we use similar shipping containers, you could call that a protocol. That’s just a universally accepted standard way of doing things. That’s what sets apart a unique design such as this architect’s building my home uniquely. 

For me, that’s what sets that apart from a protocol which is going to be universal. Language is a protocol too. The fact that we’re talking in English, even though we’re probably sitting on different continents right now, it allows us to move information around. It’s the same with these shipping containers. It’s one piece, or one element of the entire supply chain of the world. 

The fact that it is so uniform and reliable is so important. That’s the interesting thing about protocols. Sometimes their inertia and their immutability is the strength of it. The fact that very simple things like bolts are uniform around the world. There are just so many examples of that. That to me is the intuitive way to think about protocols. 

Stig Brodersen  26:52  

Let’s shift gears here. Tuur, back in 2017, when you had a huge surge in the price of Bitcoin, the vast majority of the investment banks on the big financial players did not allow people to purchase Bitcoin through their platforms. A lot has happened since then. What is the most important development over the past two years for the Bitcoin community?

Tuur Demeester  27:13  

We’re making incredible inroads in that sense. I call it “Bitcoin’s financialization,” where more wrappers are built around it. More financial institutions are integrating it into their operations.

2017 was a very modest start. We had LedgerX with their physically settled Bitcoin futures. CME, which is also a Bitcoin futures product. That was a big announcement. 

It took until 2018 until ICE, the company that owns the New York Stock Exchange announced a data product that was related to cryptocurrencies. They also have a Bitcoin futures platform called Bakkt. It’s going to go live later this year. 2018 was also the year where Goldman Sachs invested in cryptocurrency custodians. We also had TD Ameritrade backing a Bitcoin futures platform. 

This year is quite stunning. We have the fidelity of all players. $7 trillion in assets under management have already soft launched digital custody. They are becoming a Bitcoin custodian.

The Nasdaq is launching Bitcoin futures. Northern Trust is going to provide cryptocurrency custody, probably also this year. I mean, these are the on-ramps that large institutions need. 

They also need Bitcoin insurance. That’s also coming. Traders need more sophisticated products, which is exactly what’s being provided. This is really huge. This is happening in the bear market. The fact that these on-ramps are going live despite the price being down 70% really shows that there’s long-term commitment from these very large institutions.

Preston Pysh  28:43  

For a person that’s looking at this with maybe a skeptical point of view, they’re saying, “Oh, you know, this sounds great, but I can’t go to the store. I can’t go to the mall. I can’t go to the gas station and buy something with Bitcoin.” How is that potentially changing in the future? When am I going to be able to pull out a card, swipe it and pay with Bitcoin?

Tuur Demeester  29:05  

I think unfortunately, in the early years of Bitcoin, it was very often promoted as e-commerce. They think that this is the new e-commerce currency. A lot of Silicon Valley startups started excitingly building payment systems on Bitcoin. It was just too early. It’s only the Lightning Network that allows for these fast payments. 

Before that, we basically had a very clunky system that’s way worse the PayPal. It was slower. It was maybe more reliable, but definitely not as performant as PayPal, or let alone Swift, or something. 

I think it was kind of putting the cart before the horse, trying to expect a Bitcoin to be a payment network. What we have seen is this massive growth in reliability and usability of the core features of Bitcoin, which is digital gold idea and reliable custody.

There’s so many better hardware wallets out there now. You can really be your own bank. For Bitcoin to become attractive as a payment currency, it has to grow more on the ladder of growing into becoming a money. 

People often say, “Well, money has four features.” I think it’s actually more accurate to say that money evolves in four stages, rather than it’s either zero or one, it’s actually a process. Money always starts out as this collectible that doesn’t have anything else going for. It’s just something interesting that people want to own. 

The next phase of money is store of value. People want to own it because other people consider it. The next stage to some extent, is used as a settlement mechanism as a payment. And then the final stage is the unit of account. It’s so embedded. It’s so universal that people think about it. It’s like a language, right? It’s like that’s the final stage of languages if you speak it.

And so to me, people paying in Bitcoin and thinking in Bitcoin, that’s really whatever you imagine the potential future of Bitcoin will be in the final stage. That’s what Jack Dorsey is talking about: “This is the currency of the internet. That is going to be that last stage.” 

I would say, don’t get distracted by critics who lambasted it, saying that not a lot of stores are accepting it, or something. I would say, look at how many family offices own this. 

Fidelity did a survey recently. 22% of their family offices own it. Out of the 400 that they surveyed, 50% of them said that they plan to own. These are the numbers that matter in my opinion. Is it used and seen as a store of value around the world? 

Stig Brodersen  31:28  

You had billionaires like Mark Zuckerberg of Facebook, and Jack Dorsey of Twitter and Square who are really into cryptocurrencies. Specifically, for the two of them, talk to us about the idea of decentralized applications that have crypto coin tethered into the protocol layer.

Tuur Demeester  31:47  

Yeah, it’s really interesting that you mentioned Jack Dorsey and Mark Zuckerberg. To me, they represent kind of opposite sides of a spectrum. You’re right. They both want to be involved in what we call the “cryptocurrency space”

Jack Dorsey is very explicit about being a Bitcoin believer and wanting to help Bitcoin become a standard. He wants to integrate Bitcoin, obviously and eventually with Twitter. But for now, it’s Cash App. It has about 7 million users. It’s actually one of the best places to buy Bitcoin. I think they have a $10,000 weekly limit, or something like that. 

And then on the other hand, there’s Mark Zuckerberg, who has hired a team. A lot of which comes apparently from PayPal to create what I believe is basically a digital token backed by dollars. That’s what’s called a Stablecoin. 

The idea is a little bit like China, where people bank and transact often through their social media accounts. I think the idea is that people are going to use Facebook for financial transactions between friends, or maybe even have your employer pay you using Facebook, and things like that. 

To me, that just means that Zuckerberg is trying to market share away from banks and financial processors. It doesn’t really mean that he’s competing with Bitcoin. This is just something internal, something that already was happening. 

The whole FinTech evolution of startups is trying to beat them. They often succeed in being more efficient and cheaper than banks. That to me is very different than Jack Dorsey who’s saying that this open source protocol, I love it. I just want to integrate with it as much as possible. I think that is a lot more bold, to be honest than what Facebook is talking about.

It’s a bit unfair to say that Facebook is going into cryptocurrencies. That is a bit weird to me. Amazon already has a $1 back token. You can buy Amazon coins, and they’re just almost 1:1 trade for dollars. You can buy things on Amazon with that, or gift it to people. It’s kind of old wine in new bags, I think.

It doesn’t mean that it could become big like Apple Pay, or something like that. But it’s much more FinTech than cryptocurrency.

Preston Pysh  33:50  

Tuur, for people who are listening to this and are saying, “Hey, you know what this interests me, I’m going to learn some more about it, and whatnot.” I think the number one thing that would be on that person’s mind would be, how are you valuing Bitcoin today? How are you coming up with a value for this currency that has never been done before? Talk us through how you think about that.

Tuur Demeester  34:13  

For several years, I did not understand when investors asked me this, “How do you value Bitcoin?” I’m like, “What do you mean?” Obviously, it has value because it could disrupt all these markets. But that’s not what they mean. They mean that relative to its current adoption, is the bitcoin price over valued, or is it undervalued? Is it higher than it should be, or lower? 

We really invested a lot of time trying to come up with a good answer. To me, the way to value Bitcoin is you first identify what its core uses are, and then you try to measure that activity. You look at how the price evolves relative to that activity.

To me, the core use case of Bitcoin is saving. It sounds a bit weird because it sounds so passive. But really, Bitcoiners call it “HODLing.” You just hold your Bitcoin. The idea is that it’s a store of value. It’s serving you every day. By being liquid, you have that optionality of being able to sell it every day. 

The very cool thing about the Bitcoin blockchain is its transparency. Not that you can see all the identities of who’s using it, but what you can see is the age of the transaction. You can see how long people have been holding on to their coins, or how briefly. 

It’s a little bit like, imagine if in the gold world, you could identify very large amounts of gold after being immobile for say, 100 years. If a very large amount of gold all of a sudden started moving, that should mean something. That’s a significant event. 

You can aggregate those things. We have a measure that we call “liveliness.” You can see the extent to which Bitcoin is being meaningfully used as a savings settlement platform. We have one measure derived from that, that we call “unrealized profit and losses.” That’s basically the aggregate amount of unrealized gains or losses. 

We can track that over time. And so then, we can start identifying the sentiment of the market. For example, in late 2017, we had huge unrealized profits. All these investors had basically paper profits. 

And then finally, as the market declined, we had a capitulation in November 2018. During which, that unrealized profit turned into an unrealized loss. That was really painful. It was very palpable in the sentiment in the market. That’s one measure. 

Of course there’s many others, but those are the two main ones that we lean on. The other one is what we call “HODLer Net Position Change.” It answers the questions: Are bitcoin whales in the aggregate accumulating more bitcoin? Are they saving? Are they dissaving, moving and selling the coins? 

Using that, we can identify periods of overvaluation and capitalization. And then right now, we believe we are in accumulation. We think that this is the accumulation phase. It is the last phase of the bear market. 

Maybe you can link to this but we put out a report that’s called “Bitcoin in Heavy Accumulation.” The case is that the bottom is likely in, and we’re currently trading at a range between 3,000 to 6,500. Once we break out of that, that’s going to be the start of the next bull market.

Stig Brodersen  37:10  

Very interesting. We’ll definitely link the report “Bitcoin in Heavy Accumulation” in our show notes. For us primarily looking at the stock market, it looks very volatile to look at Bitcoin. 

This recent, you call the 80% drop from 2017 to the end of 2018 is not as unprecedented as many people might think. If you do follow Bitcoin, this is more of the rule than the exception. Tuur, could you please walk us through the various bull and bear markets for Bitcoin?

Tuur Demeester  37:43  

We actually have a drawdown analysis in our report as well, where we kind of put it all together in a table. I’m reading from it right now. The numbers are actually higher than we suggest. When measuring a bull cycle, you start from the bottom of the previous cycle, and not from the previous top necessarily.

For example, the percentage game of the first one is almost incalculable. Based on what we saw, it was almost 1,000,000% just because Bitcoin hardly had a price early on. 

But then in the second bull market, which ended in late 2013, the percentage gain was 51,000%. In the most recent bull market, which ended in late 2017, the total gain was 9,500% from the bottom. It bottomed at about $150. We went all the way up to close to 20,000. 

What’s interesting about these drawdowns is that they become more shallow. Just like you heard, the percentage gains, even though they’re obviously astronomical, lower over time. 

We see the same thing with the drawdowns. They also become more shallow. That to me is a sign of this maturation process. Bitcoin is cyclical.

But if you think of it, all commodities have cycles. Oil, copper, gold, have cycles. What I think is happening is that Bitcoin is slowly maturing into a full fledged commodity with these very long cycles. 

The amount of days per cycle has increased in Bitcoin, and the downturns are becoming more shallow. For example, the first crash of Bitcoin in 2011 produced a down turn of 92%. In the second bear market, we had a drawdown of 85%. And the most recent one was 84%, which is very close, of course, of the last one.

I think this ICO mania in 2017 pushed prices higher than they would have gotten if it was just kind of “boring Bitcoin.” I think the drawdown would have been less.

Preston Pysh  39:34  

Very fascinating. Anything else that you think would be pertinent for a person who really doesn’t know a lot about this field? I guess I call it a field because it encompasses so many different aspects of currency, to network effects, or to encryption. 

I mean, you could just go on and on on all the things that this movement kind of has going on. What do you think would you say to a person who has never looked into this before? What would you say to them?

Tuur Demeester  40:03  

I would suggest buying an insignificant amount of Bitcoin. I’m not even talking about an investment. Just buy a very little bit. What it tends to do is that it gets people. It becomes something on your radar. You kind of follow it a bit more. You become more interested.

It’s a really interesting experience to actually have Bitcoin on your phone, for example. It’s like this weird thing, which all of a sudden, I have something on my phone that I could send anywhere in the world – to you, or to anyone without somebody in the middle, without counterparties.

It’s a really powerful experience. I think that would probably help people understand where some of this passion comes from. I think it’s pretty clear that there’s just lots of passion. You could say zealotry, even in the Bitcoin space.

Stig Brodersen  40:48  

What’s the biggest risk an investor in Bitcoin faces today? 

Tuur Demeester  40:53  

In my opinion, the biggest risk that an investor faces in the Bitcoin space today is counterparty risk. It means that you store your Bitcoin with a custodian, with an exchange, and then they get hacked. There is no FDIC insurance. There’s no bailout. It’s gone. That is the biggest risk. 

That has scared people in the past. It will continue to scare people. It’s just the flip side of the coin of Bitcoin, where you create a trustless system that has no central banks. That also means that you have to take responsibility, and think about how to store your coins.

Preston Pysh  41:26  

If my mom was listening to this, she’d say, “Well, Tuur, you just said that it can’t be hacked.” Go into the difference between the protocol getting hacked and an exchange, just so they kind of understand what you mean by third party risk.

Tuur Demeester  41:38  

It’s the analogy of gold banks in the 19th century. The fact that gold is a reliable store of value, it doesn’t mean that you cannot lose your gold if your local bank gets robbed. 

Preston Pysh  41:50  

Tuur, I just want to give you the opportunity because you pump out some just incredible content. Your writing, when you post an article, your Twitter feed, they’re just incredible. Where can people find you if they want to learn more about you? 

Tuur Demeester  42:05  

I would say just Google my name. The first result is my Twitter page, and then have a sticky tweet on top of that. I don’t think you even need a Twitter account to see that. That links to our latest report. It’s 15 pages. It’s been read over 20,000 times around the world.We can see where the downloads come from. It’s so fun to see these extremely remote places in Africa and beyond reading it. 

We really put a lot of effort into it. It took us several months. It’s widely circulated in institutional circles as well. 

Preston Pysh  42:34  

We just love having you on the show. The reason we love having you here is because you are so balanced in your perspective on how you see things in this space. We just look forward to the next time that we invite you to come back and have another conversation. 

If things go the way it’s looking, it might be sooner rather than later because I’m sure if the price continues to go up, there’s going to be a lot of people interested in this. They’d want to learn more. Thank you for your time today.

Tuur Demeester  43:01  

It’s always a pleasure. Thanks so much, guys. 

Stig Brodersen  43:03  

All right, guys. That was all that Preston and I have for this week’s episode of The Investor’s Podcast. We’ll see each again next week. 

Outro 43:11  

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