I’ve owned Bitcoin for a while.  

If you’d like to read about how I came to initially own Bitcoin that is here: https://deanorolls.com/2019/12/27/bitcoin-btc/

It has become a substantial part of my investment portfolio.  I’ve done a good deal of research on it over the years (substantially more since I began owning it).  I like to take the time to collect my thoughts on important areas of my life.  In this document, I intend to collect all the things I’ve spent the past year ‘noodling on’ to constantly reflect on if I still want to own it.  If you are interested in learning about Bitcoin this might be a decent cheat sheet on some of the things I’ve thought were most important recently. Enjoy!

Ray Dalio is a billionaire hedge fund manager and all-around smart guy.  I enjoy Ray’s work because he is thoughtful in how he allocates capital while considering debt cycles in the process (which I believe is important).  At the end of January, he released his thoughts on Bitcoin.  Dalio’s Bitcoin take is much like many peoples who are not experts on Bitcoin.  He, like most people, is trying to figure out this new asset (potentially asset class).  His thoughts also mirror many opponents’ thoughts on Bitcoin (I’d call them skeptical).  I, like Dalio, am not a Bitcoin expert but I do follow the space and seek out opinions of proponents and opponents to form my own opinion on this important asset class (and I think it is important).  I thought I’d take a stab at addressing his thoughts on some shortcomings.  

I continue to try to listen to all sides on whether Bitcoin is the holy grail of money.  I continue to find the Bitcoin Maximalist to have very solid arguments and the detractors to have very weak arguments.  I believe that is because the Bitcoin Maximalists have invested significant time and energy into understanding the technology while many detractors have not (but it doesn’t stop them from offering opinions).  So, that said, I continue to believe Bitcoin is everything it claims to be.  It is, in my opinion, a huge part of the future of money.  I believe it is a very exciting space to research.  I also believe it is a very important asset/asset class that is worth the time to research.

My Bitcoin Portfolio Allocation

Nassim Taleb says “Don’t tell me what you think, tell me what you have in your portfolio.”  If you look at my portfolio, you’ll see I do believe Bitcoin is very important.  I’ve owned Bitcoin since December 2019 when I opened a starter position (1% of the portfolio).  During the first 9 months of 2020, I added fairly significantly to this initial position (getting it up to 10% of my portfolio).  The overall position has grown in value since then as the price of Bitcoin has risen.  I intend to HODL (hold on for dear life?!?) this position, come what may. 

In early 2021 I also decided to convert my savings to the Bitcoin Standard (minus short-term liquidity needs of less than a year).  This is a separate position and not tracked as part of the investment portfolio I track on my website.  I add to this account each month if I come in under budget.  For a decade I’ve hated saving money.  Work hard, save money, have an emergency fund, and then a 6+ month emergency fund.  All of it has been dead money.  It sits there earning nothing and getting debased away by the ravages of inflation.  I just didn’t do it.  I stayed pretty much fully invested in my long-term portfolio.  This has been somewhat stressful but has worked out (it just as well could have not worked).  Now, I get excited when I’m under budget because I get to roll that money into my ‘sound money’ savings account.  I recently plugged this account into the ability to earn income on this savings.  I haven’t done the math but in about half a month I’ve earned more on this money than I have in the past several years (maybe a decade).  The price of Bitcoin will likely ebb and flow (potentially wildly) but over time its value is sound.  I’ll keep ‘stacking sats’ in this account and likely hold (er…HODL) them.  But if the overall market gets dislocated and I desire to transfer some of this money into my long-term investment portfolio I’ll do that.  That is the plan.  Wait for blood in the streets and do my buying.

This document started as a couple of notes on Dalio’s Bitcoin document.  It wound up much more involved.  This happens with my stupid brain!  With the growing importance of Bitcoin in my financial plan, I believe I need to put down in writing some of my current thoughts on where I believe Bitcoin is and where I believe it is heading.  This will help me determine if I need to make any changes to my allocation/portfolio.  If I find compelling reasons for me to change my base case (and I might) I would want to react to that.  I also find doing this is usually helpful later down the road. 

Dalio’s Take #1 – Better Technology Will Come Along

Dalio’s first point about Bitcoin having a fixed supply (a good thing) but cryptocurrency in general not having a fixed supply (maybe a bad thing) is true.  He indicated that another better cryptocurrency would come along and displace Bitcoin at some point.  He says this is because Bitcoin is a technology and that better technology will come along (it always has in the past).  He also said that Bitcoin has delivered its goal for a decade.  My take on this is that if better technology is identified it will be absorbed into the open-source Bitcoin code and become part of the Bitcoin protocol.  Bitcoin is not a fixed protocol, it is open-source and can/will adopt changes to make it harder, smarter, stronger, faster (if those attributes need to be improved).  The last great example of this happening at scale was the block size debate back in 2017.  The protocol split (hard forked) and holders of the pre-split version received both (kept the old version and received the new version).  One version (today’s Bitcoin) ‘won’ and retained its value ($932 billion today) while the other version Bitcoin Cash lost and became worth much less ($9 billion today).  Protocols to solve the transaction speed issue are now being layered on top of the base layer Bitcoin protocol (second-layer protocols like the Lightning Network).  These protocols attempt to solve the problem this fork tried to address (in a different way).  Right now, there is almost $1 trillion in capital sitting on the Bitcoin network protocol that will ensure that the protocol maintains its leadership position.  That is an enormous amount of money backed by some of the smartest technologists on earth.  This is a network effect in action.  Bitcoin is already too big to ever lose its first-mover advantage.  Sorry, not sorry!  So, I disagree that newer, better technology will come along and displace Bitcoin.  If some better technology does come along it will simply be coded into the existing protocol in some feasible manner.  Bitcoin is the first mover, network effected, superior technology that has been doing everything it set out to do since its inception.  I believe it will ultimately win as THE cryptocurrency champion (it might have already done so).

Dalio’s Take #2 – Governments Will Ban It

Dalio also argued that governments will likely not easily ‘give up control of money’ and that the more successful Bitcoin is the more likely it is that governments around the world will ban it.  Many smart people I listen to share this opinion (as it is the primary reason they are not investing in the asset).  To me, this is a legitimate and valid concern for sure.  No one knows what governments will do when/if they feel threatened with losing control.  Wars have been fought over less.  Of all the arguments people make for not owning Bitcoin this is the one that I give the most weight.  It could happen.  Look to recent history for examples and you’ll find the US making it illegal to own gold in the mid-1930s.  If you owned it you turned it in and they gave you US Dollars for it (or you could break the law and keep it).  In a situation like this with Bitcoin today I’d imagine that the worst-case scenario would be the government going this route and outlawing Bitcoin.  They’d say it is now illegal to own it and pay you some sum to turn it in.  If they had not already ruled it to be an asset and issued tax rulings on how it is taxed (as an asset) during a sale I wouldn’t believe this.  If that were not the case, I’d say they’d just outlaw it without any redemption option.  In my opinion, since they’ve already ‘legitimized’ the asset I don’t believe they’d revert to this draconian treatment.  The government has already said it is a real asset so I just don’t see them reversing course at this point.  By the way, remember there is $1 trillion in holders who’d be against this (many very smart, highly experienced technologists included).  There are also a lot of capital gains in a trillion-dollar asset value for the governments to tax too.  For all these reasons if this is the most legitimate argument against Bitcoin, I do not see it being as big a problem as some might.

That is the worst case.  I think we are well past the worst case.  There are already all kinds of legislation in place regulating Bitcoin and the financial institutions that are building products using Bitcoin.  The regulators are further solidifying the Bitcoin protocol with each new piece of legislation they pass.  More is coming every day.  Many, many of the smartest technologists on earth are driving this change.  The best-case scenario is the regulation continues to solidify and become more and more clear as time passes.  With each new rule and regulation, the protocol gains steam.  As more and more mainstream institutional players enter the space the protocol gains steam.  This is the path I believe we are on.

Dalio’s Take #3 – Too Volatile

Dalio’s Bridgewater associates (Rebecca Patterson, Dina Tsarapkina, Ross Tan, Khia Kurtenbach) list volatility as a reason not to recommend it as a store of wealth (for large institutional investors).  Of course, Bitcoin is volatile!  Name any emerging asset that is not (like a new stock).  What happens when a brand-new asset (even asset class) emerges and goes from a $0 market cap to $1 trillion in market cap in 13 years.  Note that there has never been an asset to do this…ever!  Will there be ups and downs along the way…of course!  Look at the largest stocks on the planet.  Did they have upset and downs?  Absolutely!  Each had many huge 60%+ drawdowns as they rose to be the biggest stocks on earth today.  Does that volatility mean you should not have owned them?  No, you’d be stupid not to own them.  But you have to have a long time horizon and must be ready and able to hold throughout the ups and downs.  HODL!  I fully intend to do just that.  I’ve allocated the amount of capital to the asset class and now it sits in the coffee can.  I’ll wait a decade and see what happens.

The way I understand how the volatility eventually subsides is via time.  As the amount of money inside the Bitcoin protocol grows, as the technology use cases emerge, as liquidity continues to grow the volatility will drop dramatically.  By the way, by the time that happens the market cap of Bitcoin will be many times what it is today (thus the price will also be many times higher).  Shy away from volatility at your own risks.

FUD (Fear, Uncertainty, and Doubt)

Moving away from Dalio’s papers there are several other points that opponents bring up regularly (commonly referred to as FUD).  Most of this has been debunked repeatedly in ways that I no longer give these topics much thought.  I’ll spend some time discussing a few notable ones that I’ve noodled on over the past year.

Once you hear an argument that makes sense and one that dispels a particular FUD you can’t unhear it.  You’ll never worry about that one again.  Work to understand all the bad things that could happen and to understand if they actually could happen.  Usually, FUD comes from a person who doesn’t understand what they are talking about and has not done enough research before they start spewing their dogma.

Shitcoins! – There are currently over 8,600 other cryptocurrencies besides Bitcoin.  I’m sure some of these might have utility but I do not spend any time trying to understand any of them.  In my view, Bitcoin is THE cryptocurrency that has already won the race (as the best store of value).  It is the largest in terms of market value and is the only one to exhibit the characteristics of perfect money.  It is the only one that I believe has value as a store of value.  Maybe something like Ethereum (the second-largest cryptocurrency in terms of market value) also has value.  Perhaps this will be an error of omission on my part.  If it is, I’m fine with missing out on something that I’ve not invested the time to understand.  There is only so much my tiny brain can absorb.  That said I am positive that 99.9% of the 8,600 listed cryptocurrencies are complete garbage…shitcoins!

They’ll Just Make More – I’ve heard many otherwise smart people say this.  They say that at some point they’ll create more Bitcoins to add to the current 21 million Bitcoin that are defined as part of the protocol.  One of the main reasons that Bitcoin has value is due to the limited, pre-defined supply.  Changing the rules would destroy the core concept of the entire thing.  No one is ever going to do that…not miners, not node operators…no one.  In fact, at some point, maybe soon, the world will convert to talking about Bitcoin in its smaller denomination–SATS (satoshis).  Each (1) Bitcoin is divisible down to 8 decimal places (100,000,000 satoshis).  When the price of Bitcoin becomes too large for our tiny brains to comprehend, we will simply talk in satoshis terms (a smaller number we’ll be able to better comprehend in daily life).  Today with Bitcoin around $47k it takes $1.00 to buy 2,131 SATS.  If we ever need to further divide a Bitcoin or satoshis the protocol can be easily updated.  No new Bitcoin will EVER be needed or created.  When I hear otherwise brilliant people start with this FUD I stop listening immediately.  They don’t even understand the first thing about Bitcoin.

No Intrinsic Value – One knock against gold, silver, and Bitcoin is they have no yield.  Sure, they have stock-to-flow and people prescribe value to them.  But most high finance types define this as lunacy since no asset without cash flow should logically have intrinsic value.  I own all three.  I understand the high finance types arguments.  I have just as many good arguments to own them even without any intrinsic value.  That said, today, the ‘no intrinsic value’ argument is no longer true of Bitcoin. There are legitimate ways to earn very attractive yields to what can be earned in cash and equivalent type assets today.  A Bitcoin holder can put their Bitcoin upon a centralized or decentralized lending network and earn a yield on the balance.  There are peer-to-peer lending networks that are over-collateralized that currently pay very generous yields and have basically no risk to 1) lose your Bitcoin investment or 2) not get paid back.  Bitcoin holders can also put their Bitcoin into a Lightning Network channel for it to be used to provide liquidity to process transactions on the Lightning Network.  The transaction fees they earn from these transactions provide yield for this investment.  Again, there is no way to lose your Bitcoin investment.  If you don’t want to be your own bank on a peer-to-peer network or deal with building out a Lightning Network channel you can go a more centralized route and loan your Bitcoin to a centralized player who will do all that extra work and collect the fees.  You’ll be paid a smaller portion of the fees (but with much less work).  A centralized solution is less work but carries with it financial institution risk.  You will want to make sure you understand how your centralized institution is using your Bitcoin (and any risk of losing your Bitcoin you might have).  Regardless, these products/solutions essentially eliminate the “Bitcoin has no intrinsic value” argument because the intrinsic value is based on an asset’s cash flows.  Well, now Bitcoin has cash flows.  I have a portion of my Bitcoin working in these types of solutions and for the first time since 2008, I am earning a yield on my savings account (which I converted to Bitcoin).  Additionally, as people in today’s traditional fiat-based financial system see that they can opt into an alternate system that is functioning like a real financial system should (along with risk-free rates of return that are not centrally controlled) money will flow from the broken fiat system to the Bitcoin protocol’s system.  Raoul Pal and Preston Pysh talk about a ‘wall of money’…I believe it is coming.

51% Attacks – “All the miners are in China and the Chinese government will take over all the miners and implement a 51% attack on Bitcoin and destroy it”.  Insert any nefarious actor into this equation (people also say this is how the US government will shut down Bitcoin when it decides to).  Simple, just take over a bunch of miners…done!   The best discussion I have heard on this topic was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 14.  The guest, Marty Bent & Harry Sudock, talked about the logistics and huge costs associated with pulling something like this off.  They also talked about all the ways the Bitcoin protocol is designed to fairly easily handle a situation like this.  By the way, if someone tries this and fails, they are left with the massive cost of pulling off the attack (and will likely not be successful).  Oops?!?  They described how the network is controlled more so by the nodes than by the miners (and how this had already been proven when push came to shove in the past).  The miners are responsible for mining/solving blocks (solving a puzzle) they then present the completed puzzle to the nodes and once all the nodes agree that the miner’s ‘puzzle’ is put together correctly and according to the standard’s protocol the block becomes part of the blockchain and the miner receives their Bitcoin reward.  In a 51% miner attack when a large group of miners are presenting incorrect blocks (puzzles) to be inspected to break down the network, the nodes would simply not accept them.  The nefarious miners would have done all the work but would not get paid for it.  It would be a financially devastating failed attack.  Not to mention the people pulling off the attack would have to organize >51% of the mining resources to all prepare to attack at the same time in a coordinated way.  Theoretical, maybe.  Likely, next to impossible.  Even if it did happen it would quickly be shut down by the node network.  Remember there are a bunch of smart people with around $1 trillion of their money on this protocol.  They will fight to defend that…and most likely win.

High Energy Use – The ESG crowd love to dish on the Bitcoin blockchain mining’s enormous energy usage.  Mining rigs working to solve the next block to receive their Bitcoin reward as payment are extremely power-hungry.  The major mining operations have traditionally been built in areas with the cheapest power available in size.  The best discussion I have heard on this topic was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 14.  The guest, Marty Bent & Harry Sudock, talked about the large power needs and how the mining industry was working to solve this issue.  Stranded power is the solution and the mining industry is actively moving rapidly in this direction.  The power they’ll be using in the future is 1) power that is not available to be used today because it is too far away from where it is needed or 2) wouldn’t be used anyway and would be completely wasted.  They even talked about how communities will develop around these mining operations where humans have previously never inhabited.  There are an enormous number of these sites across the globe.  The impacts on how our society will live in the future are enormous.  A more theoretical concept that addresses this issue even without using free/stranded power is when you compare the amount of power used to ‘build’ monetary energy on the Bitcoin Network and then think about how much power it takes to run the same amount of monetary energy in the current system (with all the financial institutions, buildings, and people moving around, etc).  Bitcoin winds up looking pretty efficient (especially as it grows).  Harder, Smarter, Faster, Stronger!  Nothing will be able to compete with monetary energy flowing over a global network.

Correlation – Along with Bitcoin’s volatility, correlation of returns is an issue opponents bring against Bitcoin.  Many people who own Bitcoin own it to hedge against money printing (as a store of value due to fixed supply).  Many also claim it should perform like gold and not be correlated to other asset classes.  This should technically be true but now that all asset classes have become highly correlated Bitcoin has not proven to be any different than other asset classes.  When markets and asset classes are getting obliterated Bitcoin is right there alongside them.  Many say this makes Bitcoin worthless since it doesn’t help at all in the portfolio since it provides no help in terms of correlation (as it should).  My take on this is when markets correct sharply there is nowhere to hide these days.  When sharp drawdowns have occurred in markets in recent times, these drawdowns are dragging all asset classes down with them.  Markets are highly correlated right now, in my opinion, due to liquidity issues laid on top of a broken fiat monetary system.  If the base of the system is being manipulated (money and interest rates), then the price of everything it is based on will also be broken.  I worry very little about correlation in the short term and believe that a longer-term view is important.  Bitcoin has proven highly uncorrelated with other assets/asset classes over the long term.  I believe that will continue to be true.  Again, holders must be prepared to weather any short-term volatility.  Don’t be leveraged and zoom out the chart!

Cyber Hornets / Bitcoin Maximalist

Over the past year, there have been some great discussions by proponents of Bitcoin (the Bitcoin Maximalist AKA Cyber Hornets) that have further solidified my belief in the protocol.  I’ll spend some time discussing a few notable ones that I’ve noodled on over the past year.  If I could only listen to these particular podcasts and guest over and over again, I’d be good with that—this is my shortlist. 

I guess I consider myself a Bitcoin Maximalist.  I’m not smart enough to be a Cyber Hornet.  I guess this section of this writeup where I will recollect important things I’ve learned from true Cyber Hornets is my contribution to someone who might be learning about Bitcoin.  If you want to quickly cut through the noise, I’d recommend these resources (and people) to come up to speed quickly from the brightest minds in the space.

Plan B’s Stock To Flow Model – This was on Preston Pysh’s The Investors Podcast – Episode 260 in September 2019.  I’d been following Bitcoin and cryptocurrency to this point for several years but had never allocated any capital to them.  This discussion and model got me noodling hard on Bitcoin.  It is actually what finally got me to pull the trigger.  This model based on the stock-to-flow of other scarce assets (like gold and silver) was one of the first models that I’d seen that seemed to make sense in coming up with what Bitcoin (a digital scarce asset) might be worth.  Of course, a model is just that and you can build a model to tell you about anything you want it to.  But this model made sense to me and it was better than anything I’d seen to date.  I think the Stock To Flow Model covers almost every important aspect of ‘math’ involved in the Bitcoin protocol (time, scarcity, halving, and difficulty adjustments).  Perhaps the model has become a self-fulfilling prophecy at this point but I read somewhere this week that the different colored dots charted have not strayed more than one standard deviation from the model’s price target since its inception.  Plan B seems to have hit the nail on the head.

Preston Pysh’s Late Night YouTube Live Streams & Podcasts – About a year ago (late March and early April 2020) Preston Pysh tweeted that he was going to live stream from his home to talk about current market conditions.  He’d been making good points in his regular weekly podcast on several topics so I decided to listen in.  He did four or five live streams (that lasted one to two hours each).  The more I listened to him talk the more I thought he was onto something.  He is the reason I got more aggressive with my position in 2020.  By May I began to take my position from 1% to a 10% allocation by the end of August.  I tried to soak up everything this guy was saying because he seemed to have a very good understanding of both the Bitcoin side as well as how it might play with other macro investing topics.  Preston’s Twitter feed, YouTube feed, and podcasts have been an invaluable source of knowledge as I’ve come up to speed over the years.  You’ll see his podcast show up over and over in this shortlist.  In late 2020 he spun up his Bitcoin Fundamentals podcast which has been one of the best shows I’ve listened to consistently.  On episode 8 of his Bitcoin Fundamentals podcast he had Luke Gromen and Lyn Alden on to discuss macro topics and Bitcoin.  I also seek out these two names whenever they show up on the podcast circuit.  Of all the macro folks I listen to they seem to always be on track with their takes.  Both have bullish base cases for Bitcoin.  Hearing them together along with Preston provided a great deal of clarity on where all this is headed from a macro standpoint.  This is an important aspect that many of the normal Bitcoin Maximalists don’t fully understand.

Robert Breedlove / Preston Pysh – The first episode of Preston Pysh’s Bitcoin Fundamentals podcast was great.  Robert was one of his guests on those late-night live streams.  My sons and I listened to this episode driving to Thanksgiving.  It talked about how Bitcoin is near perfect money: divisibility (not divisible), durability (doesn’t decompose), recognizability (fully recognizable), portability (completely mobile), scarcity (predictably scarce).  This was a great podcast.  I’d later run across Robert Breedlove in 2020 when he did the best Michael Saylor interview I’ve heard to date with The Saylor Series on YouTube.  I feel like Michael Saylor is like Noah with his Ark.  He is telling everyone what is going to happen and is busy preparing himself.  People just look at him like he is crazy.  I continue to believe he has excellent takes on everything in this space.  Robert Breedlove was an excellent choice to host this extended interview with him.  Preston Pysh also interviews Michael Saylor on his Bitcoin Fundamentals podcast – Episode 5.  If you want a teaser of what the Saylor Series covers start there.

Jeff Booth – Deflationary World – Jeff was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 3.  Jeff’s book is called The Price of Tomorrow: Why Deflation is the Key to an Abundant Future.  He discusses how technology is deflationary and it is making everything cost less.  He juxtaposes this against the current inflationary monetary environment/policies.  He sees no path where these two forces work together.  He believes technology ultimately wins and that Bitcoin (non-inflationary money) is the perfect monetary system for this environment (and our only alternative).  I think Booth has it dead correct on how the technology is headed and the money is headed.

Raoul Pal – Irresponsibly Long – Around mid-September Raoul began tweeting that he was “irresponsibly long” Bitcoin.  In mid-October, he did a video where he outlined his thoughts.  It was called “The Bitcoin Life Raft: The End of Monetary & Fiscal Policy As We Know It” and was on his RealVision channel.  He talks about how a wall of money is coming and how nothing will stop it.  When it came out, I think it was the first time I put together how big the opportunity that Bitcoin encapsulates.  This video made me want to sell everything in my entire portfolio and put it into Bitcoin.  Of course, I didn’t…but I sure thought about it.  Ha!

Michael Saylor / Robert Breedlove – The Saylor Series – This is no small undertaking.  It is a 9-part YouTube video series.  I added up that the 9 parts were right at 16 hours total.  It was worth every minute.  Saylor is one smart dude (literally a rocket scientist).  The early part of the series is great with the comparisons of various new history-changing technologies that came into being throughout history.  This history lesson alone and Saylor’s fairly unique telling of it is quite fascinating. 

Apex Asset

Saylor then turns their discussion to why Bitcoin is THE apex asset.  It is always awake (you can instantly move money anywhere on earth at any time…5x faster than any other asset on earth).  It’s an octopus (it cannot be shut down without killing the entire network).  It works everywhere (trades worldwide in all currencies all the time).  By the way, no asset in human history can do all that.  NONE!  Hard Stop!  It is Harder, Smarter, Stronger, Faster than anything on the planet!  For this reason, Saylor sees absolutely no way it doesn’t take over and eat the existing system. 

Instant Immediately Verifiable Wealth Transfer

Saylor then talks about Bitcoin being the only immediately verifiable near-instant transfers of wealth the world has ever seen.  He gives the example of moving a large sum of money in a variety of ways.  He uses the example of moving $100 million in gold from one country to another.  He talks about the time and expense involved in a transaction like that being enormous (weeks or months and many, many thousands of dollars of expense and a lot of guys with guns).  He then talks about the same transaction with fiat currency in the traditional banking system and how it is faster but still with substantial cost and latency (day or days and several thousands of dollars of expense).  He then talks about performing the same transaction using Bitcoin and how the cost is a few dollars and the amount of time it takes is measured in minutes.  By the way, it is also nearly instantly verifiable to all parties (and the entire blockchain).  He talks about how this is the future of money since everything flows to the fastest, cheapest, safest method.  Since Bitcoin is 100x faster than gold and 5-10x faster than the next best method available today (fiat + banking system) it will win.  It can’t NOT win (it already has)!

Best Store Of Value

Saylor initially was not a Bitcoin proponent.  He later became one and has invested a substantial portion of his company’s future into Bitcoin.  What changed?  He began to zoom out (using a 100-year timeframe) and asked himself where he could store his company’s money to best store its value over time.  Zooming out helped him cut out all the short-term noise and helped him determine which asset class is the best store of value.

  • Real Estate = Short-term (and maybe longer term) real estate is impaired (due to COVID).  Real estate is illiquid, immobile, requires work (maintenance, renovation, restoration, etc.).  It is taxed annually and also upon a transaction, and it has very high transaction costs.  Over 100 years the real estate will go up in value (no question) but the annual taxes will also rise and eat up massive cash flow (real estate is not a closed investment).
  • Bonds = Bonds are liquid, mobile, and have low transaction costs.  They are fine as a store of value as long as rates continue to go lower (and thus the value goes up) AND you sell.  With interest rates near the zero bound we are now at a lower bound and need negative rates for this to continue.  He believes we will get this (already have in some places).  Why would anyone want to own a bond with negative yields for 100 years?  It beats the heck out of me (and Saylor)!  Additionally, with interest rates as low as they are on bonds, inflation will erode any returns you earn.  These days, bonds are ‘certificates of confiscation’…of your wealth!
  • Stocks = Today stocks are fairly risky because of high (even bubble) valuations based on cash flows.  These valuations are attained due to low bond yields and compromised value of the fiat currency (creating asset inflation).  Since the amount of money you ultimately make on a stock investment depends largely on the price at which you buy the stock this is problematic.  Stocks also have taxes layered upon taxes.  The company’s revenue is taxed as sales tax, cash flows are taxed as income tax, expenses are taxed as employee taxes, trade is taxed as a tariff, plus regulatory fines, etc.  The other major issue with stock is stock issuance (which creates dilution).  This includes new shares of existing stock as well as new stock issuances (IPOs new flow).  He talked about how companies constantly misallocate capital with things like mega-mergers and how these rarely work out well for shareholders.  Regardless, these are THE method of choices for CEOs to allocate capital.  He talks about how even the indexes face massive dilution as companies come and go and merge and spinoff.  He illustrates this by asking how many companies have been around for 100+ years and how many new companies go public each year.  All this new issuance erodes the value of the indexes.  I believe stocks are the best long-term store of value of all the asset classes available…before Bitcoin.  How Bitcoin changes that I’m still grappling with.
  • Gold = Gold is illiquid, immobile, has huge transaction costs (try moving a substantial sum across earth quickly), is not easily verifiable, and deflates at 2% per year (new flow).  Gold’s low stock to flow, however, has helped it to do its job for thousands of years (as a sovereign store of value).  Saylor believes that Bitcoin is an upgraded digital gold and renders gold useless.  He talked about how we used to build ships and buildings out of wood until steel came along.  Then to advance we used the new, superior steel.  He believes fiat is wood and Bitcoin is steel.
  • Fiat Currency = Fiat currencies are liquid, mobile, have low transaction costs, and trade tax-free.  But they also have no cap on new supply being injected into the system.  Therefore, as new units are created (new money supply or sovereign debt) all the prior units are worth less (debasement).  This is happening today at an unprecedented level.  When the money is debased it disrupts everything that relies on stable money (economy, asset prices, etc.).  We are seeing this happen before our eyes.
  • Bitcoin = Bitcoin is liquid, mobile, has a capped supply, has the lowest stock to flow of any asset ever created, and has extremely low transaction costs.  It had no income/cash flows (although new technologies now exist that are making it possible to earn income from your Bitcoin investment).  Bitcoin has no tax implications if it is never sold.  It is only taxed if it is sold and at the more favorable capital gains rates.  Saylor believes one should buy it and never sell it and borrow against it (if needed) to fund necessary items (thus incurring no taxes).  Additionally, in terms of being a ‘never sell asset,’ he talked about how in the future with smart contracts Bitcoin can carry on after a person’s life like a digital Will and trust rolled up into one.  It can keep on using its monetary value doing with the money what the owner wants it to do forever…based on code on the network.  Due to these traits Bitcoin is the best asset to hold over an extremely long timeframe.  As a money replacement Bitcoin takes away all the negatives of traditional money so it is the perfect money: divisibility (perfectly divided and not further divisible), durability (doesn’t decompose and always available), recognizability (fully recognizable), portability (completely mobile), scarcity (predictably scarce).  There is no attack surface.  As a store of value Bitcoin is the best way to store one’s ‘monetary energy’ over 100+ years (as it eliminates all the negatives associated with other asset classes).  This is why Saylor is ‘all in’ on Bitcoin.

Jack Maller – Strike on the Lightning Network – This was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 7.  Jack had been making news for several weeks before this podcast.  The podcast was the first long-form interview I’d heard him give.  He was talking about his company, Strike, and the problems they intend to solve.  It was jaw-dropping.  The power of the technology he was describing was one thing and mind-blowing.  The power of the solution and the impact it could have on users’ lives is equally mind-blowing.  I got emotional listening to this interview at times.  This technology makes the world a better place.  The technology is built on top of the first layer Bitcoin protocol and shows the power of second-layer solutions (and also how unstoppable they are).  I won’t go into it.  Just listen to the interview.  [insert mind blown.gif]

Michael Saylor – Bitcoin For Corporations Conference Michael Saylor’s company, MicroStrategy, hosted a conference to give the playbook for how companies can convert their treasuries to a Bitcoin Standard (like MicroStrategy recently did).  Michael Saylor’s opening keynote with Ross Stevens was a pretty eye-opening hour of where Bitcoin is headed (and how fast a wall of money is coming).  Ross Stevens talked about the activities and progress his firm NYDIG has made over the past few years.  He talked about how in the early days no one would even really talk to their company but that now institutions are deeply interested and coming…quickly.

Marty Bent & Harry Sudock – Bitcoin Mining & Energy Use – This was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 14.   I’d never heard of either of these two gentlemen before this podcast but the things they talked about were also jaw-dropping.  These guys were talking about actual current implementations of technologies I’ve only heard people opine about in the past.  I left the discussion thinking there are people out there TODAY building the rails for a new global monetary system and no one even knows it.

  • Bitcoin mining technology using stranded power. Communities rising in far-flung locations near currently stranded power.  WTH?!?
  • Lightning Network micropayments (to convert traditional subscription models to micropayment models) and Internet 402 Payment Error (that few even know about).  One or two companies on earth (that are worth a lot of money) thrive on a subscription model.  What happens when the ability of micropayments scale to be able to convert all those subscription models to a new micropayment model?  The way we use technology will change radically.  It will likely reshape the way we consume content to a more decentralized methodology (where we pay for our consumption as we consume).

This and other recent podcasts I’ve listened to remind me of when I read Bill Gates’s book, The Road Ahead.  He talked about how this new thing called The Internet would change the world.  I remember thinking that will be cool.  25 years later and many of the things now exist and they are cool.  As I listen to these extremely smart technologists talk about emerging uses of technology that are being built out as we speak, I’m left to wonder what it looks like 25 years from now.  Regardless, it is coming.

Max Keidun – Decentralized Peer To Peer Lending – This was on Preston Pysh’s Bitcoin Fundamentals podcast – Episode 15.  Max Keidun is the CEO of the HODL HODL platform, which is a decentralized peer-to-peer lending platform that runs on the Bitcoin protocol.  If you ever wanted to be a banker, here is your chance.  I was blown away at 1) the power and safety that the HODL HODL platform contains (with its three-key system), 2) the ability one has to earn superior yields on their investment capital, and 3) the safety of an over-collateralized loan for the lender.  They thought of everything…and they are still thinking!!!

Preston Pysh – Supply Is Being Locked Away – Anytime I can listen to this guy talk (especially if he is being interviewed) I stop drop and roll.  On March 4th he was on the Once Bitten podcast (episode 121).  He lays out how all this works with great clarity.  I didn’t hear one thing he said that I disagreed with.  He has it COLD in my opinion!  It is fitting that after a year and a half of listening to all kinds of things and wise individuals that as I’m putting all those thoughts on paper that Preston does this podcast.  In it, he perfectly sums up how all this likely plays out.  If I had to boil the hour down it is ‘supply extinguishment’.  Halving reducing miner reward (and new supply), institutional holders with long-term time horizons stepping in and buying (and subsequently locking down this supply into long-term cold storage), derivative markets where you have to lock up the Bitcoin to open positions taking supply off the market, overcollateralized lending locking up Bitcoin into escrow in amounts greater than the loan, Lightning Network nodes locking up Bitcoin to provide liquidity on the Lightning Network payment system.  Bitcoin supply is being gobbled up in all kinds of ways.  My takeaway from this discussion is that it has only begun.

We Are Still So Early

Bitcoin just passed 13 years in existence and $1 trillion in market value.  A bunch of individuals owns it (but by no means a majority).  I read somewhere that there are 100 million wallets.  In a world of 7 billion people that is barely a bit over 1%.  From an institutional perspective, a couple of progressive public (22), large private (5), and ETF like (16) companies (according to bitcointreasuries.org) now hold $67 billion worth of Bitcoin on their corporate balance sheets.  A few hedge funds and other institutional players have exposure to it in various ways (mainly limited to their mandate).  No major investment companies have meaningful exposure to it at this time.  No major government or central bank has meaningful exposure to it.  A few VC-backed (or completely private companies) have built meaningful businesses using the Bitcoin protocol or layers of technology on top of the Bitcoin protocol.  The price has zoomed recently. 

My take is that the technologists are building tools and systems as we speak on the Bitcoin protocol that will be able to replace the entire financial system we have today.  I don’t think it will but I also don’t think the existing financial system and legacy players escape what is coming.  They can in no way compete with an open-source protocol the likes of Bitcoin that operates at lightning speed and for a fraction of the costs.  Even the newest fin-tech companies that are eating the traditional financial companies’ lunch today are already being disrupted.  Their products today cannot compete at all with what lies ahead.  These are the guys disrupting today (and they are just getting started and already being disrupted)!?!  It is scary how behind typical financial companies are in this environment.  I honestly can’t look at a single large publicly traded stock in the financial sector today that I see winning against this thing.  Who knows how that all plays out?  

All I know is we are still so very early in all this.  About once a month I listen to a podcast where an entrepreneur or technologist talks about something being built on the Bitcoin protocol and my jaw drops.  I absolutely cannot imagine what happens in the coming decade.  If you think Bitcoin $50k is high I don’t think you’ve seen anything yet. 

I’ve probably listened to 50+ hours solid of some very smart people talk about Bitcoin over the past year that I’d consider being top-quality content.  I’ve listened to much more on top of that.  Regardless, the best minds I know are people like Michael Saylor, Preston Pysh, Robert Breedlove, Jeff Booth, Raoul Pal, Plan B, Luke Gromen, and Lyn Alden.  I’m especially thankful for the contribution these people have made to the Bitcoin community and my understanding.

I believe people who are not taking the time to gain an understanding of an emerging asset class that has grown from $0 to $1 trillion in 13 years and represents some of the most exciting technology to ever exists on our planet are doing themselves a disservice.  If someone is managing money professionally for others and not doing the research, I’d consider it negligent. 

I’ll continue to listen to all sides.  But so far, I keep finding myself listening to the people who have done the research.  They continue to have better takes than people who have not done the work but who still loudly blast their opinion. 

I’ll continue to learn more…but for now…HODL!

Joey Dean (3/9/2021)

PS – If you’d like to read about how I came to initially own Bitcoin that is here: https://deanorolls.com/2019/12/27/bitcoin-btc/

PPS – If you have thoughts that are pro or con on Bitcoin and would like to discuss them (or know of a good resource to read or listen to) please reach out.  This topic is fascinating and I enjoy learning more about it. I noodle on all this regularly on Twitter @deanoroll5 (https://twitter.com/deanoroll5) and on my website https://deanorolls.com/investing

Published by deanorolls

Well, if I told you that you wouldn't need to go to my website...now would you?!?!

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