You're listening to Teip. Hey, everyone, welcome to our Wednesday release of the podcast, where we're bringing you more information about Bitcoin. What an exciting week for Bitcoin news. We had legendary investor Ray Dalio say, I believe Bitcoin is one hell of an invention. We also had Elon Musk, the wealthiest person in the world, put only one word in his bio on Twitter. And you guessed it, the word was Bitcoin. He also commented that I'm a supporter of Bitcoin and it's on the verge of broad acceptance.
So now that Bitcoin is starting to get a lot of attention, I'm going to have a conversation with a friend who's a money manager and a person who can talk about his perspective of dealing with clients who are trying to buy Bitcoin for the very first time. My guest is Andy Edstrom. He's the author of the book Why Buy Bitcoin Investing Today in the Money of Tomorrow. We cover topics like ETFs. What sizing is appropriate for your portfolio? What regulatory hurdles still need to be overcome?
And much, much more so without further delay? Here's my interview with Andy Edstrom.
You're listening to Bitcoin Fundamentals by the Investors Podcast Network.
Now for your host, Kristen. All right, so like we said in the introduction, I'm here with Andy Edstrom and very excited to have this conversation because, Andy, we've done I don't know how many shows together, other people's podcast, but you and I have never had a one on one conversation like this. So I'm really excited to dive into this person.
I have a great time. I have fun every time we talk, so I am psyched to get into it. Well, let's do it. So here's what I want to start off with is just kind of your opinions on the market in general, not even talking about Bitcoin, but just macro. You want to talk about equities, whatever. But, you know, I'll throw this out there and just kind of hear your thoughts. The Nasdaq did forty three percent last year, which was just insane considering the circumstances of covid and everything else.
The S&P did significantly worse, 16 percent. If you're comparing those two performances, I mean, it's it's almost like they're in two different universes when it comes to investing. So I'm just kind of curious, just some of your general thoughts on that in itself.
Yeah, it's been a strange time in financial markets, to say the least. I've been in markets for about two decades now and it's interesting to observe some of the trends, sort of what's what's different this time, what isn't. I'm of two minds and I'm conflicted. So on the one hand, I feel like the growth trade is pretty extended. In other words, the entire decade of twenty, ten to twenty twenty has been growth, just beating the pants off of value, as you know.
Well, because I remember you've talked about earlier in your earnings and your sort of evolution as an investor, you started as a value investor, Warren Buffett, all that good stuff.
Historically, a decade of outperformance tends to be about as long as it goes for growth versus value. And usually you get a reversion or value will surge back. Sometimes it's in the context of a major market correction or a bear market because growth valuations get extended. You get to 20 and then 30 and 40 and 50 times earnings and then people's rosy assumptions about the growth rates as some of these companies eventually run into reality. Meanwhile, those left for dead cheap value companies finally get bought.
However, we are living through, as you know, a major shift between the industrial age and the information age. And so one has to be cognizant of that potentially being different this time. And so there's this constant struggle in my mind between how long in the tooth is this growth rally and when will we get a reversion to value versus 08? Most of the economic growth is into software and automation and Internet enabled businesses, network enabled businesses and entities like Bitcoin.
And so, yeah, it's it's it's a really tough call. I definitely think that valuations are pretty stretched. I think that investors are doing their calculations, like you talk about, based on near zero or very long term interest rates. And so you get to sort of goofy valuations if you're assuming that the 30 year Treasury is going to yield very, very low single digits in perpetuity. And that's where I think we are right now, makes me nervous.
So, Andy, I came up with a theory just kind of recently as I was looking at the Nasdaq chart and you and I are seeing each other right now and I'm going to share my screen with you so you can kind of see what I'm looking at. And all I'm looking at is a chart of the Nasdaq over the last call it, I don't know, six to seven to eight years. Can you see the chart that I'm sharing with you, Andy?
Yes. So when I'm looking at this and I think everyone's accustomed to this, this narrative that we have six to eight year kind of business cycles, you know, historically and ever since twenty two thousand nine, this thing has been relentless. And the duration of this bull market that we've seen is just unprecedented. But when I look at this chart and I zoom in to various areas and you can see them zooming in for people listening, I'm going to the end of twenty fifteen.
The market started having this. It was kind of throwing a fit and you went through I mean it was a very short period of time. The market went down negative. Twenty five percent and then immediately recovered. Central bankers stepped in. Everyone said that they had unlimited amounts of stimulus and QE that they could add. And that's this was probably around in the February of twenty sixteen timeframe. I remember Draghi came out over and over in Europe and lo and behold, the market takes off again.
Then fast forward a couple of years into the future. We're in twenty eighteen, September of twenty eighteen. The market throws another fit and it drops aggressively this time twenty three percent central banker step in. They say all their things right. We fast forward again in the twenty twenty and we all know the we're all accustomed to this recent fit that dropped 30 percent. They step in with unprecedented stimulus. So my question is this. As I'm describing this and we're looking at this chart, my question is, is the is the new business cycle post twenty two thousand nine one of just total manipulation that plays out in a much tighter time frame, but in which nominal prices just keep going up?
Because when you look at the chart, it looks like that. Yeah, I, I love the phrase it wasn't my original, but recessions are illegal and even you can say bear markets are illegal. I am a big believer in the tail wagging the dog here in the wealth effect being so important in the US stock market, which is now, I don't know, it went from one hundred percent of GDP to one hundred and fifty percent of GDP to I don't know, it's probably like one seventy five.
Now if I had to guess and granted this is the you're looking at the triple Q So this is just the tech sector. But as we know, tech broadly speaking, is now like whatever a quarter of the index, they can't let things normalize. It's it's not allowed. If things did normalize, then anyone with wealth, which is basically a large percentage of population which has a propensity to spend, although granted rich people that own stocks spend less on the margin than than folks that don't.
We'll have a big problem if if prices actually normalize. So I do think that we are stuck in this cycle now. They have to keep stimulating. It's going to be yeah, it's going to be financial market driven pullbacks and recessions that we see in the future. But this is going to be the game until unless and until we get significant quote unquote, inflation and consumer price inflation. Obviously, we see the inflation in assets. But I think that the Fed thinks that it can just keep doing this in perpetuity until finally they get to get a rise in inflation.
So when I say when they say that they're going to deliver inflation, I kind of believe them. We'll see what happens. My concern is you have all these people in money management and the talking heads on CNBC and I suspect everyone's looking for that event where the market sells off for two or three years and drops and has another twenty two thousand, nine or two thousand kind of crash that would include this this 12 year, 11 year bull market, whatever you want to call it, since two thousand eight, two thousand nine time period.
I think everyone's looking for that. But I just don't necessarily buy the idea that it's going to happen. And I think a lot of it comes down to the interest rates. We we haven't had interest rates. They're down at zero. They can't let them drop five percent like they did on all these other previous, quote unquote, traditional boom bust cycles. So it sounds like you agree that that maybe the the cycle is shortening itself so that it happens every year, every two years, and then it's the reflation is just.
And the stakes are too high because because of the amount of leverage in the system, I'm talking about leverage also in the equity markets, also on corporate balance sheets, just on households. I mean, it's everywhere is you know, debt is just a record record levels as a percent of GDP. If they let it unwind, then you'd get a cascading you get cascading liquidations. Right. This was the this was the moment that the Fed had in March.
It was when the Treasury market fell out of bed. And I don't remember if it was just the long end of the curve or was also the the middle of the curve. But basically Treasuries started selling off. And that's that's not supposed to happen, right. Treasuries are supposed to rally when there's risk off. And so if treasuries are falling, when there's risk off, you know that the system is well and truly threatened. I think that the Fed and other central banks have realized that basically a major downturn in equities or risk markets will filter through to credit.
And when the credit market goes, all hell breaks loose. This can't happen. So let's transition into your financial manager. You have lots of experience doing this, and I'm kind of curious when somebody comes to you and they say, hey, I'm interested in buying Bitcoin, you obviously have a response to them. But I'm kind of curious how some other peers or people that are stories that you've heard from other financial managers, what you're hearing them tell their clients, as they say, hey, I want a one percent position or a five percent position in Bitcoin.
What are they? Most people hearing back from financial planners and managers. It's a great question and I think the major problem that a lot of wealth managers face or that they articulate or that they're worried about is I don't have a product that I think is safe enough, compliant enough. Basically, I'm worried about getting sued by my client if I lose money in Bitcoin. My personal view on that, and I think I'm the exception, is that given what I know about Bitcoin, what the valuation potential is, i.e. the upside potential, as well as potentially the value of the hedge against inflation, given how important it is to a client's portfolio, it's hard for me to see how I wouldn't buy it for them, even with an imperfect product.
In other words, it's a business. There's a classic concept in the law. It's usually invoked in law, which is like there's legal questions and there's business questions. Right. And to me, this is like kind of a business question. It's like, yeah, maybe there isn't a perfect product out there, although there are several products that have come to market and that are growing. Basically, there's there's a whole world of options that are now available that weren't there a few years ago.
So there's more. But I would say that's the main thing that people come to me with, that advisors come to me with. They say, look, I can't get it past my compliance department or I don't have the perfect product, so I'm not willing to take the risk. And so they just pushed them to an exchange like cracken and say, hey, do it yourself. Yeah, it's they prefer not to admit that to me, I guess, but I think that's got to be practically what happened is what happens is they probably end up at Coinbase is my best guess in many cases.
Well, you know, I never even really thought of of that challenge for a lot of them from a compliance standpoint, but now that you say, I mean, it makes some sense. So tell us how you think about that from a compliance standpoint. I guess the Holy Grail, well, as we know, the Holy Grail in terms of an investable product for wealth managers or financial advisors, obviously is an ETF and that doesn't exist yet. So next best is an S.E.C. qualified, custardy product, which also does not exist.
So short of that, there are various fund structures out there. They all have their own pros and cons and various amounts of hair on them. There's several sort of direct buy options. I mean, there's DGM has won. The Nidia guys have won. Engleberg has won. There's several out there. And those come with their own hair as well. Then, of course, there have been hedge fund structures around for a long time, limited partnerships.
So we all know there's there's greyscale and that's a trust and it trades at a premium and it's not sort of a normal way financial filer. And so none of these things are perfect. As you know, I'm working with SWANE, which is a private client product. Now, these things are perfect. But I think as an advisor, you say to yourself, well, I want the sort of clearly qualified silver bullet solution and we just don't have that yet.
And I don't think we'll have that. I mean, to me, that happens at a Bitcoin, right? So you probably miss a triple from here if you wait for that. Why wouldn't greyscale fit into a category that would be considered, quote unquote, qualified? There are truss structure, by the way, if you buy it on the secondary, then it does show up on your ten ninety nine form, which is kind of like your normal Burbridge form, although they have a different form if you subscribe it, net asset value.
And that means you're doing subscription documents and qualifications and you're sending wires and stuff to buy in the brokerage account. And they are not sort of qualified as far as I know. As far as I know, no. Basically no asset manager has a as a literally SEC qualified product approved product out there. And so that's kind of the downside as well as obviously the premium to net asset value. I didn't even go through the whole laundry list. I mean, there's three IQ has a fund.
I mean, obviously the SkyBridge guys have come to market with a fund bitwise has been out there actually for a while. Having done all that good research on where's the real transaction volume in in the Bitcoin markets, how much of it is fake. But those are some of the downsides of Grayskull as well as the fees which are which are pretty high. I want to get back to greyscale, but before we do that, what are your thoughts on Gary Ginzler coming in as the new SEC chairman?
Tell people a little bit about who he is and what his background is and then your thoughts on whether some of these regulations are going to change under his watch. So Ginzler comes from comes from the dark side of finance, just like me, he's an ex Goldman partner. I was never a partner at Goldman, by the way. I was a I was a lowly Klebb, as some on the show like to say. And so so he knows the finance world inside and out.
Obviously, he was chairman of the CFTC. I think it was under Obama. And he has taught courses at MIT on on block chain and crypto, quote unquote, block chain crypto. I assumed he understands Bitcoin better than most. And so at least he kinda sorta probably knows what he's doing. I think that he was actually maybe on record about concerns about REPL being a security example, being a security years ago. And so at least he should know what he is, what he's talking about, which is arguably an improvement from some folks, some regulators, let's say people in regulation.
I don't know if I'm going to name names, but it's been kind of a mixed bag in some respects. We've been really lucky. Obviously, we were blessed with Brian Brooks. So I would say that Ginzler is on the net, probably positive for this for this industry and for Bitcoin.
In the show, notes will drop. Gary taught at MIT, taught this course that the and he's talking about it's a twenty four lesson course. Each lesson is an hour long and he goes in depth on how this stuff works. Quite fascinating to you to be able to get an MIT education on the topic from the incoming chairman. It's pretty neat. So over to the greyscale. Why is nobody else able to compete with them in this space? It makes no sense to me that they have so much market share and they don't have any competitor.
What is causing that? I wish I knew all of the discussions between the regulators and the various parties that have fun products now. In fairness, Bitwise has has made a move. They have they now have effectively a similar trust structured product that is trading, although there is an index product and obviously it's heavily skewed to Bitcoin. But of course, it had some holdings in an excerpt which they liquidated quickly after the after the the lawsuit came to light from the SEC, which was a good move in retrospect because price fell further.
But they also have a Bitcoin fund, but it's not yet trading on the secondary. And so if you ask me, like, how come Greyscale was able to bring this product to market and guys like Bitwise couldn't follow soon with a similar structure on just Bitcoin? I wish I knew the answer about that. I've asked the question so many times and I just cannot find an answer from anybody. Yeah. Here's an idea, Presson, which is because Greyscale, I think came to market in like twenty thirteen maybe or fourteen.
It was a while ago. I wonder if there's a change in regime in terms of regulator. In other words, if we had the election of twenty sixteen like for example, I don't mean to single out bitwise, but I'm not sure that they were in the market with a product yet. So if you sort of had if I don't know if Greyscale sort of got grandfathered in under the Obama administration, I don't know. I'm just spit balling here.
Maybe got harder to get through the gates after you had to change it. Administration.
It has to be something like that. Here's what's really funny, so I made this comment on Twitter one time, Barry himself, this Barry Silver, just the guy who the guy running the greyscale and Barry responded to my question, saying, how in the world did these guys not have any competitors in the space?
Barry responded and he said, and you know what? No one's made an offer to us to try to buy us either. And I was just I was just it made my eyebrows go straight up, like, how is that even possible?
How are the black rocks of the world watching his assets under management on this trust just exploding and them not trying to buy it or compete with it or.
I just cannot understand it. And I'll tell you what, if anybody is listening to this and you feel like you have a good inside scoop as to the why. Please, please, I beg you tweet at Andy and myself to let us know so that we can pass it out to the rest of the audience. And people listen and they can all understand the rationale. My impression of Barry and I don't know Barry at all, is that he's been pretty clear about creating a holding company structure in perpetuity, basically, you know, sort of a kind of a Berkshire Hathaway type structure.
I don't know if he's going to ever go public or not, but I think he's indicated that he's taking a long term view on these things. So I'm not sure that people think of him as an asset seller, as a guy who's exiting positions. My impression of him is sort of a long term builder. And so in that respect, sort of doesn't shock me that nobody's made an approach at him to divest, greyscale, not least because RESCALE is so core to their business.
And again, there's I'm not aware of any transparency into into DCG, but I have to imagine that Greyscale is the cash cow that's driving the bus that's that's supporting I mean, that plus Genesis. Right. Plus the the trading desk that's supporting the overall structure. Well, he's getting to make more venture type bets in investments that aren't necessarily going to be cash flow in the short term, but are are supported by these other cash flowing businesses like Greyscale.
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Let's get back into the podcast. So the ticker for what we're talking about here with Greyscale is Gbps. I'm sure most people are familiar with the ticker and he talked to people who were hearing this who maybe have in their accounts. Where is it an advantage? Where is it a disadvantage? Talk to us about the ins and outs, the pros, the cons, everything. So as we know, Bitcoin trades twenty four, seven trades, one hundred and sixty eight hours a week, so GVC only trades 40 hours a week because it trades over the counter on the stock exchange.
So that's a disadvantage in terms of your liquidity and availability. Now, on the other hand, if you're a human like me and not an alien, not being able to trade 24/7 may not be such a disadvantage because sometimes people do dumb things and they try to trade around the Bitcoin position. Right. I like this. That's a double edged it's a double edged sword. When you think about being able to exit a position, if you're talking about your Bitcoin exposure, like, hey, I had to pull some off or like it really moves really quick and I got to get some liquidity, et cetera, et cetera.
If you want to get cash dollars out of Bitcoin, you've got to go through the exchange system. Right. At least as a retail guy. I mean, if you're large, you can go over to OTC desks right over the counter desks. But similar concept, getting your dollars out. As we know with the major exchanges, sometimes they go down, sometimes they have problems with their banking relationships.
They go down. Describe what you're talking about. Some people might think, what do you do? They go down about literally you can't sign into your Coinbase account. You literally can't access access your money. So you can't trade at a Bitcoin into dollars. And also you can't wire money out of your Coinbase account into your bank account. But it's down for how long? Half hour or something is what you're talking. Well, like the Internet addicts, their servers are down, right?
There's their servers are down. I mean, I think the last outage was more than half an hour. I mean, I think it may have been hours, but don't quote me on it. And some exchanges are known for these outages where others aren't. I think that's fair to say, and we're talking about the base exactly, which is kind of shocking considering how long they've been in business, that they don't run a tighter ship anyway. So so that's another potential disadvantage.
And so if you're an investor, you might say, OK, I want to hold the bulk of my Bitcoin in cold storage, which if necessary, I can move to the exchange and liquidate and hopefully wire to my bank account if I have to. But on the off chance that I don't have access, maybe I want to hold some percentage in Bitcoin trust. And that would be an example of a scenario in which you might do that. Another advantage for somebody potentially is they just don't want to deal with an exchange they don't trust or I don't know, they can't somehow they can't figure out the the interface.
I mean, I have older clients that are not very tech savvy, not very computer savvy. It's just easier for them to to hold a security basically in their in their brokerage account. There'd be another reason to to hold it instead. Another reason to hold it, which is maybe not a great reason, is the premium has been pretty persistent historically, although it's been falling lately, there may be opportunities to buy when the premium is quite low and even trade at at a at a larger premium.
You've got to be, I don't know either. Clever, lucky to get the timing right. There have been periods in history when Bitcoin is traded down, the premium disappears, goes near zero basis into the single digits I'm talking about on premium to net asset value, i.e. normally you pay whatever a dollar twenty four dollars worth of Bitcoin. If you buy Bitcoin, trust you BTC. But at times you only get to pay a dollar five, let's say.
And when you get the recovery in the bitcoin price, then often the premium goes higher and you get effectively some extra juice on the upside. Again, that's that's a trade, right? That's not that's not something you want to count on. But there have been times when it's paid off in the future. So long winded. Answer your question. But those are some just some considerations and sort of reasons why one might want to hold the Bitcoin trust, maybe in addition to a core Bitcoin portfolio or as a substitute.
How about from an IRA standpoint? It is a very good perspective, and I personally have one of these L.L.C. structured, self directed IRAs where I can buy Bitcoin outright, basically with an exchange account, but it's a pain. There's a bunch of steps you got to do a bunch of paperwork. It costs a lot of money. I mean, relatively speaking, it caused quite a bit of money. And so there's all those reasons not to do that.
And yeah, it's it's simpler. You got you got IRA money that's already there. You got your whatever your Schwab account, you're interactive brokers counter TD Ameritrade account and you just buy a GBC and much, much, much simpler than going through all the brain damage of the self directed LLC structure that I that I mentioned. Do you have people that come to you and say, you know, I think that fintech is going to be huge? I think that Bitcoin or something like it is going to just revolutionize the way that banking is working.
And I want to have exposure to these companies. I want to own companies that are emerging in this space, but I'm not necessarily interested in owning Bitcoin itself. How do you respond to that person and what kind of guidance do you give them? The framework that I often see is the as is the picks and shovels analogy, right?
Yes, the service providers and part and parcel of that oftentimes is the diversification argument, like, I don't know, Bitcoin's the winners, so I want to own the company that's got exposure to all of crypto.
OK, that was a stronger argument a few years ago in twenty seventeen. Even then, Bitcoin looked pretty dominant, but there was some doubt. Now there is much doubt. So it's a weaker argument, I would say. Now, having said that, when I look at the stock price, I look at the chart of Square. It's pretty impressive.
It is very impressive.
PayPal's done well to not as well on a percentage basis, but arguably that's just because they were already a pretty sizable company. I mean, Square has narrowed the narrowed their lead closed the gap on people in terms of valuation. But yeah, these companies have done really well. So there is a reasonable argument for fintech exposure. There's no doubt that these guys are taking a big bite out of the banking system in general. I get that argument for me.
The thesis on even just digital gold is clearer than that in terms of valuation. But I don't begrudge somebody who comes with that perspective and says and looks at the banking system and says this this thing's a dinosaur. You know, smarter, faster, leaner, software based companies are going to take a chunk out of it. Because because that's true. That's going to continue. All right, so we had a bunch of questions from Twitter that people wanted to ask you, one of the ones that I liked was talk to us about how you think the game theory is going to play out from here.
Yeah, are we talking about just in general in terms of adoption and, yeah, companies and governments and all that stuff I've said before that I think Bitcoin is already one and we can take the easy path through the hard path. And I think we're on the easy path. I think that it gets broad adoption. Adoption.
Why do you think that it's already one first? Explain that to us. Yeah, I just think it's too hard to kill. I do think that it has reached, as Michael Saylor said, maybe set it on your board. It's already reached over one hundred well over a hundred billion dollars in value. And everything that is network native, that is Internet native that has reached that valuation has been dominant. And we're well past that. Right. We're almost even in order of magnitude bigger than that with Bitcoin.
So that's one thing, too, is just obviously when you delve into the network topology and you understand proof of work and and the incentives, I mean, it's it's sort of hard to imagine that something else is going to is going to beat it. Because you have so many miners and so many rigs just globally distributed in that network effect, that it's used and shot to fifty six, and that's what you're saying with that.
Yes, and then, of course, additionally, just the additional layers being built on top of the exchange infrastructure, lightning for micro payments, the wallets, the integration with the major fintech like we're talking about with Square and PayPal, which was relatively recent, all this stuff, I mean, Bitcoin is so, so entrenched. Money is a network, is a network. It's a protocol. So all those reasons, I think that that Bitcoin is already is already the dominant Internet native hard money.
And as we know, when you dematerialize, things like Saler says it'll dominate, basically will dominate the world. So it'll be the world's hard money. And then the question is, well, will people want hard money or soft money? And I take the view that the one hardware savings. Yeah, and that's and that's a fair point, too, which is like, is it money or is it not money today in its current form? Yes, it's a good saving vehicle.
It accumulates value over time. Is it good for transactions? No, it's not good for transactions. Does that matter today? No, not at all. Will it ultimately be transactional money? Yes, if it reaches its potential. And in the meantime, it's just a monetary asset similar to gold, although better than gold, as you know, in several key ways. And so, yeah, I don't in the colloquial definition of medium of exchange across space as opposed to a medium of exchange across time.
I would say today Bitcoin is not good money, but it is an investable asset that is on its way to becoming very good money. In the meantime, yes, it's it's a good store value. I might have lost the thread on the original question us why is it won already? So now getting to how the game theory plays out, I've actually been sort of surprised at how easy the path has been. Relatively regulatory barriers are falling away. I think people in power in the United States and other Western countries and frankly across the globe realize that the thing can't be killed.
And it is real important that the powers that be realized that the thing can't be killed because they probably won't even try. And that seems to be the path we're on. So you've already got obviously you had adoption by individuals, then you had family offices. You had a little bit in wealth management, but not a lot. And then hello, the corporates showed up, the insurance companies showed up. That surprised me. I didn't expect to see insurance companies show up in twenty twenty.
And so who's left? Pensions are left, governments are left. And each of these categories of asset manager or asset holder or investor has its own set of facts and circumstances and limitations, and they have their own timeline in their own adoption curves. So they're all sort of separate adoption curves piled on top of each other. And they all have their own timelines. But there aren't too many filters left or there aren't too many new pools of capital where there's literally zero allocation.
But then again, we're still super early, even with the hedge funds. We're kind of early with the corporates. We're clearly very early with the insurance companies. We're early with the pensions. It doesn't seem to have even started. And with governments, we don't know whether it's started or not. It wouldn't surprise me if it had, but that's kind of where I see it or I see it going. So eventually I think every every entity of any significant size will make an allocation and the rate at which they do that will be different for each.
Brandon Lane wanted us to talk a little bit about why we're seeing so many companies adopt versus money managers that seem to be really kind of fighting it, at least on Twitter. And the ones that I'm seeing, they're fairly negative, but you see a lot of business owners that are all about it. So what's going on there? What's going on, Preston? How come you figured out that you could buy Bitcoin years ago and it started stacking? Here's my here's my answer.
And it's a great question from Brenda. My answer to that is corporates have, for the most part, nothing to lose and everything to gain from adopting Bitcoin. And money managers are the opposite. In a world where I can store assets in a non inflating monetary asset, that's bitcoin store value there. I don't have to beat, quote unquote beat inflation by going to great lengths to have a diversified portfolio and invest in fixed income and invest in equities to beat inflation just to sprint to to standstill in terms of my purchasing power if Bitcoin reaches its potential.
I could just sock it away in Bitcoin. And that will be bad news for the whole investment industry on average in terms of fees generated in terms of assets under management, Bitcoin reaches its potential. It's going to take a big bite out of all these businesses, including mine. So that's my answer is the wealth managers have they have quite a bit to lose. The corporates really don't as long as they're running a tight ship, as long as they're running their businesses, generating cash flows, like you've talked about on this show, and then accumulating Bitcoin and socking away their their retained earnings over time in that manner.
When you think about how a business functions, they've got some type of machine or thing that's generating free cash flows, that's one of their assets. It sits on their balance sheet. It kicks off this free cash flows.
And then what do you do with the free cash flows? You either investment, marketable securities, maybe you buy another one of these machines so that you're producing twice as much revenue and bottom line. But at the end of the day, a lot of companies get get pegged out at a certain point that they can't employ their retained earnings in those profits in an operational way and they have to do it non. And so, like Michael Saylor is a great example of somebody who's like, I'm just plugging this money that I made into the Bitcoin network.
It's not impairing any of the assets that are generating these profits that I get every single month and quarter. And so it's it's kind of a no brainer for him. But the other thing that I think is an interesting point for money managers. I'm curious to hear your thoughts on this, Andy, is I think the volatility piece. You know, I've said that money managers are they're not only managing the money, but they're also managing the clients as much as they're managing the money to try to make sure that the assets under management stay and don't go somewhere else looking for some other manager.
And so when you look at something like Bitcoin that has a ton of volatility, I would say it's more this than maybe even the volatility. It's the narrative that you're in Bitcoin. The position could be point zero five percent. But if that person has this implicit bias of if you're in Bitcoin, you have no idea what you're doing because that's funny money and they pull their funds, that's a catastrophic event for a money manager. So you're spot on that the the optics, as we say, got the optics, has been very tough in Bitcoin.
And so it's a funny thing, right, for my clients as an example, I have made and my firm has made optically bad investments from time to time, and it's always an uphill battle. I'll give you an example. We bought Puerto Rican bonds. I want to say, like four or five years ago. And this was after the whole capital structure basically had fallen out of bed. Everybody thought that Puerto Rico and the various government related municipal entities were going to we're going to fold.
We found a bond issue, several bond issues actually that were guaranteed that were backed basically by one of the bond insurance companies. And it happened to be the bond insurance company that had the strongest balance sheet. I think Toby Carlyle put on this exact same trade, he talked about it on our show, what was then? They really love it. Yeah, it was a great trade because because it was like my recollection is like five and a half or six percent yield.
Triple tax exempt. Right. No local tax. No no estate tax, no federal tax. So on a pre-tax basis, that's like buying a bond depending on your tax rate, yielding eight or nine percent. Pretty juicy. So that was a great investment for us. But, man, we we had some pushback because the headlines were relentless. Puerto Rico's going down. This thing's insolvent. Government's going to have to step in. Bondholders are going to get torched.
All this stuff so similar, similar dynamic with the coin. The good news is, well, there's been two ways to mitigate that. One is, you know, if you bought it and it went up, that always helps. It always helps to be staring at a gain on the quarterly report rather than a loss. Amazing how that works. And the narrative has has shifted, obviously. I mean, it has been a dramatic shift, in my estimation, between even June of last year when Bitcoin was still I don't want to say toxic waste, but let's just say kind of smelly from the perspective of the client.
And now that it's been bought and many smart, well-known, regular way finance people and investors have said they're long or bullish, that has changed narrative significantly. So now in twenty, twenty one, I do actually think we're at a we're in a position where you have to explain not having a position, at least if your client has heard of Bitcoin, which is probably most at this point. And that was not true six months ago. Let's take a quick break and hear from today's sponsor.
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All right, back to the show. Talk to us about position size. So the Nasdaq did for me, the Nasdaq is the benchmark to beat. If you're pretty much investing anywhere, that for me is the thing that you really got to be able to outperform to say you're you're really beating the market these days. And so. Forty three percent last year is just nuts. I forget who what famous investor just produced something like fourteen percent returns last year and I was beating them up on I think it was.
Was it Paul Singer of Singer. It was Singer. Fourteen percent. And I'm saying well I mean that's a significant I mean it's nearly a 30 percent underperformance of the Nasdaq. And so if you would plug in one or two percent of your portfolio in the Bitcoin and you would have. At 14 percent return, what would that have bumped you up to last year? Oh, yeah, well, so what so bitcoin started the year like seven K, if I remember.
Yeah. And then we ended it where we ended like one year or something.
Yeah. I think high 20s. Yeah. So maybe it was like forex. Yeah. So yeah. You made if you had a one percent position then you added 300 basis points to your, to your portfolio. That right. So you had a two hundred or two percent position, then you added 100 basis points or six percentage points. The portfolio which is pretty significant and getting to the sizing because we didn't talk about that with your last question, which is, yeah, sizing is is the thing.
Right. This is a fallacy that I encounter over and over. People say, oh, there's certain assets that are uninvestable. No, actually, there's no such thing as an uninvestable asset. There's only portfolio sizing. Now, as a practical matter, most extremely risky investments don't trade in public markets. So you can't buy you can't put zero point zero four percent of your portfolio and v.c bet a or a risky tech bet B, but with a publicly traded asset like Bitcoin, you can size it as you wish.
And so, yes, one percent, two percent of the portfolio. Kind of a no brainer in my opinion. When you get into double digit percentages, then the client better be really comfortable and they better really understand the volatility involved here. But that's kind of those kind of things that I think about. I quickly did the numbers, so if you had a two percent in Bitcoin position last year and your normal performance on the rest of your portfolio for the other ninety percent was 14 percent.
If you had Bitcoin in there for two percent, you would have had a twenty one percent return. But if Bitcoin, let's say Bitcoin went down by 50 percent, you would have moved from a 14 percent return to a 13 percent return. So it's it's a pretty aggressive difference to the performance and very asymmetrical. I think the number is on an annual basis since Bitcoin has been openly traded. What is it, a. like two hundred percent a year on average?
Yeah, it's in the it's in the two hundred percent range, I believe that's right. Amazing. I mean, and granted, you know, in all fairness, as we know, the the log scale graph is downward sloping over time. So or the percentage gains higher in the earlier years. Yes, they were. So maybe you're averaging, whatever, four or five hundred percent a year in the early years. And so in the more recent years, it's only been one to two hundred percent, but it's still pretty good.
How do you think about when a person comes to you and says, how much exposure of this should I have? I'm sure you're looking at their age in their their risk tolerance and those kind of things. But how would you how would you respond and how would you categorize that type of people that that you would respond to? So you might be surprised about the demographics or the age or how close are you to retirement, and here's why take the extremes.
So when we talk about, quote unquote, risk in the portfolio, we talk about your normal basket of assets. Generally speaking, you've got your stocks, your equities on one end, and then you've got your low risk bonds, your fixed income on the other end. And there's various other asset classes mixed in. But that's kind of it. Those are the main buckets, as you know. So what does a sizeable or significant Bitcoin position mean to a risky client?
Well, it means they want to swing for the fences. They want to make that three hundred percent return in a year or more potentially. So they want an allocation. But now you talk about the low risk portfolio, which is very skewed to bonds. And what is the kryptonite for a bond portfolio? Well, that's inflation and higher interest rates. It's inflation that causes the central bank to raise interest rates potentially. And so if you have a bond portfolio and we finally get significant inflation, then your purchasing power gets torpedoed and you better hold some hard money assets.
I use the term hard money assets for a portfolio and historically that's been gold in monetary metals. But as we know, Bitcoin has characteristics that are more favorable even than gold. And so, yeah, you better hold Bitcoin basically at either end of the risk spectrum there. And so I can make a pretty strong case that that everyone ought to have an allocation. And it tends to be beyond, say, a couple of percentage points in the portfolio, which is effectively hedge.
Then it's more, I'd say, the the folks that have a little bit higher risk tolerance and really understand it and really don't care that much about the volatility, which is a smaller subset. It's those guys that go with a larger with a larger allocation where larger allocation to Bitcoin tends to make sense, in my experience. So what's the number? Let's put it this way. I have I have a very few clients who are double digit percentage exposure, but for the vast majority, we're talking two to three percent, basically.
Yeah, but I mean, based on the numbers we were talking earlier, that's going to have a profound impact on your portfolio, even if you have a small percentage of your portfolio in it. It really will have a profound impact if Bitcoin starts to monetize other risk assets. If we get to that point where people stop viewing Apple as a store of value, buying it for 40 times earnings, and start to think that actually maybe I should park it in this other Internet native store of value asset, and that that is the scenario where actually Bitcoin potentially takes a bite out of the Nasdaq.
You were talking about the triple Q a minute ago, takes a market share bite out of the Nasdaq, accrues to Bitcoin. Will that happen soon? I don't know, but it could happen in a period of years. We'll see. All right, so, Andy, any time we're in a big bull market with Bitcoin, there's a lot of fear, uncertainty and doubt otherwise known as Foud. What is some FUD you're hearing right now that you just want to take a jackhammer to?
I'll tell you what I want to get past is the teather fould blow up Teather Teather, please blow up everybody go go riddim your tethers. By the way, I've never held a tether myself. Not even for a nanosecond have I ever helda I've ever held a single tether. Let's all redeem our tethers. Let's see if it's really bad. And let's just get this thing behind us. Let's get it over with. I'm so tired of it. I think that, I think the the notion that the hypothesis that tether is a major reason for the Bitcoin price going up in the long run seems tenuous, seems unlikely.
And I think that fear among investors, institutional and retail, this overhang basically that comes from the existence of Teather, I think if we removed it in the long run, actually Bitcoin might potentially be better off. And I do sort of get tired of spending time thinking and talk about talking about it. So. Well, there's so many other stable coins out there, most of the exchanges are standing up their own stable coins, but you're still seeing Teather being widely used, which suggests to me that the exchanges that are using Teather in addition to maybe their own stable coin, they don't have a concern or else they'd be redeeming them.
Right. Yeah, you have to say that's right, you have to say that, and in fairness, it's more the offshore exchanges, right, rather than the onshore ones, rather than the US based ones of the Western ones where Teather is prevalent. And some of those guys are relatively fly by night operations, I guess, although, frankly, some of the smaller exchanges have had dropped out over time. They've some of them have gotten hacked. Some of them have disappeared or, I don't know, scammed.
Others have been acquired.
And so I think the field, the remaining field of sizeable offshore exchanges probably want to stay in business and they probably have some idea of the counterparty they're dealing with. And I don't think that they want to. I think they're smart enough to not risk their long term business by taking counterparty risk and risk to their enterprises of this thing going effectively, going poof.
So, look, I'm not saying that tether is fully backs. I don't really know. I don't really have much idea of of of how many dollars are backing the twenty five billion dollars worth of notional tether. But I don't think it's a very significant probability that it will be a big long term risk to Bitcoin.
So talk to us about risks, because everyone, any time I ask for questions, everyone wants to hear, how could you be wrong? What are the things you're concerned about? What are the things that look for? Yeah, well, I think on on Twitter, when you when you asked what questions to talk about tonight, one of the questions that was mentioned, I don't remember who it was, was it basically what would change your thesis? What would cause you to sell?
It would cause you to sell Bitcoin. And, you know, there's a couple of things that come to mind. One is the system stops cranking out blocks regularly. It stops working. OK, well, if it doesn't stop working, what else would cause me to not want to own it? I guess government rectitude, right? Balancing budgets, not printing so much money. Even then, I still think that Bitcoin has a long term value proposition, but maybe it'll take longer to realize.
So those are kind of the two scenarios. Basically, if the thing stops working or if the competition for money or monetary assets gets stiffer. Other than that, it's sort of hard to come up with ideas for for y to y to sell it when it looks so severely undervalued still. How about if and I don't think this is going to be the case, but there's a lot of people that'll say a theory or some other coin starts, the market cap starts really making a run at Bitcoin.
How would you respond or how would you think about something like that? I remember the old flippity narrative from twenty seventeen, right? There's going to Flippen going to overtake the coin. Yeah it's how would I respond to it. If the question is like, what do you do or what do you talk about if the market cap gap starts closing? I think for me it would have to overtake it for a significant period of time for me to be at all concerned about it.
And it would also have to be based on facts and circumstances. In other words, as long as ether is planning to change out there, everything mechanism. Exactly.
The consensus algorithm, until they actually successfully do that, it's really hard for me to see how on a risk adjusted basis, it has a chance of of overtaking Bitcoin really hard to see. And then that doesn't even account for the fact that the block chain is is bloated and it's all run and unfair and there's still clear leadership and all that stuff that make it not decentralized compared to Bitcoin. I guess that if I don't know if there was like a major change in demand, if like for some reason Michael Saylor was like, nope, I was wrong a theory the thing and governments started buying it instead of Bitcoin, that maybe I scratch my head and say, what did I miss here?
But, yeah, it's it's hard to it's hard to see that playing out. What are your thoughts on Plan B stock, the flow model, and he has two models, he has the cross the cross asset model as well, the stock, the flip cross asset model.
What are your thoughts on those? It's been a while since I did my my statistics work back in college, and then even since the CFA program, I've seen the arguments about how well, basically how how you don't have true randomness in the in the variables and in the correlation and that basically the correlation framework is is invalid. So I'm aware of the the critique of the the mathematical critique my friend Corey clip didn't has been has been all over that. And I think the suspect is right about the math.
If the assumption is that, you know, if he's right about the assumption about the randomness among the two variables. So on the other hand, I have to say that stock to flow as a concept seems to be logical. The model may be wrong, but the concept seems right. I can even go so far as to say that it's not bullish enough in the sense that if I know that the stock to flow gold and bitcoin are about the same now, then I struggle.
I struggle to come up with a reason why Bitcoin isn't worth as much as gold or more. And the argument is, well, it takes time. You got to change minds. And gold holders have to be shaken out of their positions over time and bitcoin. But, yeah, if you're if you're looking for the you know, the the strong view on as too far as two effects or not, you are probably going to are probably going to punt.
I think it's interesting. I think it could have a self-fulfilling dynamic in the sense that if people if enough people believe it to be true and if the numbers keep following the pattern and the expectations, there could be a self-fulfilling element to it. So that's one way to think about it. But I don't have a strong view.
So any fold is really kind of hitting it hard on Twitter.
It just with the user community, not with advertising or anything like that. They're offering Bitcoin rewards on any type of transaction. So you're using your fiat money, you get paid your paycheck, you go and spend it with a regular Visa debit card. You go to Target, you go to Wal-Mart, and after the transaction, you're getting Bitcoin rewards. What are your thoughts? Where is this going? Is this is this just the tip of the iceberg on what's to come?
What are your thoughts? I'd love to see it, Will and the full team, those guys are great, they have a great product and it's it's it's one of the wedges into Bitcoin adoption. There is there's all these angles. You can make it easier to buy Bitcoin outright, such as through square cash. You can figure out ways to give people rewards, credit cards or debit cards. And, yeah, the the the idea that Foaled had about finding ways to direct traffic at vendors and then get rewarded by the vendors and shovel Bitcoin into the pockets of users is great.
I mean, it's a great way to accumulate sort of automatically over time. Also kind of reminds me of the you know, the I forget there were a couple of debit cards or credit cards where I guess it was debit cards where you buy something and they they basically round off and give you sort of free money. But here the free money is the good money. It's not the crappy fiat money. It's Bitcoin, it's the hard money. So I love it.
I was listening to an interview with him recently and he was talking about how when people want to redeem the rewards, he these are on chain transactions whenever he clears their accounts and sends it to whatever wallet they've got. And he was talking about how the fees associated with all those payments that he's got to make to when people want to clear out their their rewards while it was getting so high that it was going to force his his adoption into lightning.
And I just found that really fascinating to show and demonstrate how vendors like him, companies like him, are going to have to be forced into something like lightning in order to conduct their transaction. So my question really is around lightning. Where do you see other areas where the incentive structure is going to be in place for them to adopt it? I mean, the clear case is just smaller payments, it's micro payments, and that's been on people's minds, I think, for years now.
I would like to see and I do think there's a good chance that we'll see a whole dynamic where anyone creating content, whether it's podcast, whether it's articles, whether it's videos, whatever tick tock type of stuff, will be able to get paid, able to get tipped via lightning. Wow. And where and where it just becomes it just becomes normal. Basically, if you're a content creator on the Internet, you have your your lightning while you have your lighting setup, you can accept payment in that regard.
And the pools, the liquidity providers that are basically greasing the rails and balancing the channels and lightening in the overall system are going to make that potentially possible. And I like the angle you described for for will unfold and him sort of quote unquote, getting sort of forced onto the second layer. That's all good. That's all good for Bitcoin. It's indicative of high demand on the base layer. And that's a that's a healthy thing. That's a healthy proposition.
Indicates that the base layers is in rude health when there's so much demand that basically lower value transactions get pushed up onto the second layer. I want to talk about the tick tock comment real fast, because people are going to laugh. I have no clue how Tick-Tock works. I just know that there's these young kids. They're taking like videos and stuff of themselves, and then they're making money through doing this, like they get tips, like you said.
Do you know how it works, Andy? Or we just to. Oh, no, I'm just you know, we're I don't have a tick tock account, the only my only access to tick tock is, is people on Twitter obviously sometimes forward their tick tock videos. Do they get paid?
Do you know? I don't honestly know, I do I I have read about in parts of Asia, you want to know, wouldn't you? I was thinking of Korea because Korea has been so smart, phone savvy for so many years and they've had high bandwidth for a long time stationed there. I was I lived in Korea for two years.
Yeah. Yeah. So I had heard the performers in Korea were actually getting paid in real time. And I don't know via what app. I'm not aware that it was via lightning or anything crypto based, but I had heard that that was the thing already in Korea. But don't quote me on it. You know, I think they're compensated and I might be dead wrong about this, but I think they're compensated by likes and basically other people interacting with their account.
They get some type of compensation for that where no other you know, you definitely don't have that with Twitter or anything. So if you're talking about micro payments, instantaneous micro payments, that seems like that would be kind of the platform or a platform like that that it'll evolve into. Totally, I mean, why can't you have streaming money? We have streaming voice and streaming video. Why can't we send very small payments in real time? I mean, it doesn't seem like there's a technical limit to this.
And I'm I'm optimistic that lightning will be the thing that actually brings it to the masses.
We'll see this totally crazy. Andy, you've got a killer book, so killer, you've got you've got 90 reviews in a perfect five star ranking, which I mean, I'm just going to tell you, I have some books that I've published. They don't have a perfect five star ranking. You're very kind. I want to say, by the way, before we talk about that, over the weekend, I hadn't been aware of it prior, but I heard about your book, Diary of a West Point Cadet, and I ordered it and I read it the way it was.
And it was awesome. It was chock full of hilarious stories with life lessons.
Did you actually laugh out loud or did it not take you that far? I laughed.
I laughed about your friend Mitch, who got away with murder until he didn't and then ultimately did. That's a great story.
And if I knew him, let me tell you, if you knew Mitch Wozniak, you just would not believe there's a lot more stories about Mitch that are not told in that book. When we went to flight school and I remember what story told in the book, but so Mitch was an all-American pistol shooter. And while let me tell you, there's some stories of us in Alabama during flight school out in his backyard, shooting a lot of different guns through the years.
Oh, my God. Yeah.
I can only imagine that that the that the PG rated stories that that made it through the editing process is going to be they were down.
They were definitely edited down. All right. Back to your book. I appreciate that, by the way.
No, no, no. So, anyway, it was it was a it was a real easy read and it was a it was a pleasure. So people should check it out. But why buy Bitcoin? Yeah. Is the book and its investment thesis. And it is also, in my opinion, pretty digestible. And yeah, look, I schill it relentlessly, but people have been giving it good feedback. And it was both the thing that I felt I had to write for my clients and for my family and for my friends.
And as long as I was going to write it, I was going to put it out there for the benefit of people who are trying to get their head around Bitcoin. And I guess the unique aspect is I bring some speaking of stories, I have a few stories from for my time on Wall Street, which are relevant to the overall financial system that are that are buried in there. And they're a little bit different than the stories about your friend Mitch, but hopefully some entertainment value as well.
So we'll have a link to that in the show notes. Andy, awesome having you on the show. We definitely need to do it again sometime in the future. And thanks for coming on, Bressan, man.
It was a pleasure. Always happy to do it. Look forward to doing it in the future. And yeah, I guess one final thing. If anybody wants to follow me on Twitter, hit me up on Edstrom Andrew. Hey, so thanks for everybody listening to the show, if you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using. We really appreciate that. And if you have time, leave us a review.
So thanks for joining us this week and we'll catch you next Wednesday. Thank you for listening to Tippi, make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence to access our show notes, transcripts or courses, go to the investors podcast. Dot com. This show is for entertainment purposes only before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcast.