VIDEO TRANSCRIPTION
Understanding Bitcoin's performance is likened to a mountain lake generating energy through a waterfall. Capital flows from high to low energy states, similar to hydroelectric power generation. Bitcoin's value volatility is tied to its energy efficiency and open capital market dynamics, with its appreciation attributed to thermodynamic soundness and utility in the market.
A lot of people in my audience are not going to understand why you can't just store your money in dollars. I have a whole tirade about it, but I'd love to hear why. How do you explain to people why you can't just put your money in a bank account or under your mattress in dollars? The simple answer is the supply of dollars expands about 7% a year every year for the past 100 years. And what that means is. . . That if you want to buy something that is a very scarce, desirable asset that the government can't make more of and that manufacturers can't make more of. If technology and capital and machinery and robots can't make more of it, it's scarce and desirable. Here's an example.
An acre of beachfront property in Palm Beach or a beachfront house in the Hamptons or waterfront. property in Miami Beach. That's a desirable place to live. You can't make more of it. And if you go back 100 years, you'll see that the value of that acre was $10,000. And you go forward 100 years, and that is about $10 million. And for those who are very quick at math, they'll realize that works out to 7% increase in price every year for 100 years. And that's why, you know, that's why people buy houses for $100 million on the beach in Palm Beach. And my house, the house that I'm in right now, it was sold in 1930. And I have the deed on my wall.
And it was sold for $100,000 in 1930. If you put that $100,000 in a vault and you kept it safe and sound for the 90 years, and if you took it out, it would pay. about eight to 12 weeks of my property tax on this house. You literally couldn't keep the house for eight weeks. Go ahead. Let me say it in my way. Tell me if this resonates with you. The reason that you can't store your money in cash is that the government steals your buying power by printing more of it. I find it's very sobering to look at it as theft. Does that resonate with you, or do you think I'm being hyperbolic? No, you're correct.
In essence, the inflation of the dollar supply means that your wealth is cut in half every 10 years if you hold all your wealth in cash. And it's just, it's the rule of 72, right? You divide 7% into 72. That's the half-life of the asset. So the half-life of your wealth is 10 years if you store it in cash. If someone gives you an asset you can invest in that goes up 7% a year. you're keeping up with inflation. You're not getting wealthier, but you're not getting poor. You're just treading water. And if you're beating that hurdle rate, then you're getting a bit wealthier.
So once you understand that, you can see that you can't preserve your wealth for long periods of time in a fiat currency. And the best fiat currency in the world, Tom, is the dollar. But in most other currencies, they inflate at 14% a year. And that means the half-life of your wealth is five years. But in a weak currency like in Turkey or Syria or Iraq or Venezuela or Argentina, it used to be for 20 years, the inflation rate looks more like 28% a year or 30% a year. And we take example, the peso. The peso went from one peso to the dollar.
to a thousand pesos to the dollar over 20 years jesus okay so i don't you know in america you got to keep in mind you're an american you live in the greatest country of the last hundred years america won every war right we were the winner of world war one we got richer we were the winner of world war ii we never lost the war we were the winners of the century Our currency lost 99. 9% of its economic power over the 100 years. But if you went to Nigeria or like Germany, the currency crashed like three times, two or three times, right? In Japan, the currency crashed, you know. In Russia, it crashed three. Last time, the Russian currency crashed in 98. The Brazilian currency crashed completely 25 years ago.
the argentine currency crashed about four times in 100 years so if you're an argentinian and you're 30 years old you already know what it's like to have hyperinflation because you live the entire cycle it's just americans don't and so when you're if you're taking advice from an american business person like warren buffett or charlie munger Well, I mean, they didn't live through the Weimar Republic. They didn't live through the collapse of the current. By the way, the currency collapsed in Venezuela. It collapsed in Argentina. It collapsed in Brazil. It collapsed in Cuba. It collapsed in Russia. It collapsed in every single country in Africa. You see? And so foreigners actually get it a bit better, right? It's like the bank's going to take your money. The currency is going to zero.
The government's going to promise you it'll be okay and tell you to put your money in the bank. Then they're going to inflate the currency, freeze your bank account, crash the currency, and then tell you it's worthless. That's what happened in Cyprus not too long ago, if you want to go and Google that. And so the real promise of Bitcoin is very simple. It's a bank in cyberspace that won't steal your money. And it's an asset that you can store your life savings in that nobody can debase or corrupt. And those are two powerful promises for the first time in the history of the human race. No one ever gave you that, those two promises ever before now.
Yeah, the thing that, and a lot of this started with me getting to know you, researching cryptocurrency, realizing the just absolute devastation that even in America is happening with inflation. understanding this difference that you're now talking about in a really clear fashion that until I started researching you for this episode, I'd never heard you delineate it this way that money is bifurcated into those two elements. You've got the money that you spend, cool, but then you've got the money that you're trying to preserve your wealth over time. When I tell people the way you should think about your house is not something that's going to go up in value over time.
You should think of your house as something that you pay an insurance policy against, the upkeep, the property tax, as a way to match inflation. which is unless your area becomes disproportionately desirable and that does happen. So like Austin went up in value because people just flooded into that area. But for the most part, what you're going to see is actually just keeping up with inflation, that as the dollar is devalued, it looks like the price and the value of your house is going up, but it's really not. Now, I think that's fair. I think that's that's definitely a good way to think of it. Yeah, I think so.
So my own company, when I start talking about this stuff, my employees look at me a little bit like I'm crazy because I'm so aggressive about getting people to understand. And it'll be very interesting to have this conversation with you that ultimately the stock market is gambling. And once you understand that people have been forced to become gamblers based on inflation, that you have to find a way to outpace inflation, otherwise you lose your money. And the really smart among us look at the capital system.
look at the equities market and they go, oh, cool, I have a really complex way that I can find arbitrage basically in these moments where if I find an area of risk that I think I understand better than the next person, I can come in, I can buy that asset, it goes up in value compared to what I can sell it for down the road, and I'm able to sell it for a bigger win than inflation. And that forces everyone to play that game or to just have their buying power stripped away from them. which of course is what happens to the vast majority of call it normal to undereducated.
They're just going to get eaten alive because they don't have the time, energy, or intellect to figure out this relatively complicated game. Okay. So with all of that as the structure of why even the average person should care about this to a screaming degree, there's an idea that you say, but you go by quickly that I think if people understood, it's really going to help them. So you've said, I want to see the entire world recapitalize in Bitcoin.
Now, when you say recapitalize, is what you mean, hey, that part of your wealth that you want to store to maintain purchasing power over time, all of that, instead of being in real estate, instead of being in treasuries, instead of being in equities, that should move over to Bitcoin? Is that what you mean? Yeah, that's a good way to say it. yeah you've articulated that quite well yes recap bill yeah build your house on a firm foundation don't build it on sinking sand don't build it on a swamp build it on a a granite rock on granite on schist and i guess if i could give the math the risk-free rate of the dollar if you're capitalized on u. s dollars and you were to say buy uh treasury bonds.
The risk-free rate is something close to SOFR or the standard overnight funding rate. And, you know, that ranges, but after you, after you get paid that rate and you get taxed on you know, you might get paid 5%, you get to keep 3% after tax. Maybe if you're tax-free, you get 4. 5%, and if you're taxed, you get 3%. So the risk-free rate of return of your capital on that dollar standard is like in the 3% range. The risk-free rate for Bitcoin, as I just described it to you, 29% over 21 years, about 30%. So the way I look at investments is when you're pitching me an investment idea, I say, well, I've got a lot of money in Bitcoin and I'm expecting about 30% risk-free for the next years.
You have to actually pitch me an idea that generates more than 30% plus the risk premium plus the tax efficiency. If you told me here's a thing that will make me 50% a year, but it was going to be taxable, that might be- 40% a year or 35% a year. And I'm like, well, after the risk, it's still not as good as my risk-free rate of 30%. So if you're capitalized on Bitcoin, if you understand it, and if you understand, if you have a long time horizon, if you're going to hold it more than four years, you don't care about the volatility. All you care about is the annualized return. The annualized return-Hold on, because there's a lot of assumptions in there.
So I know a lot of people are clutching their pearls right now about Bitcoin being referred to as risk free. So can you break down for us the difference between that volatility and then how you can have the confidence to look at this and say, no, no, no, the risk is merely a timeline question, because I think a lot of people will take exception to that. Yeah, so, well, the dollar is zero ARR, zero volatility. That is to say the dollar goes up 0% against itself each year. And the dollar is zero volatility against itself each year. So if you're on the dollar, you're living in flat land. And you're a stationary person in flat land, a pedestrian in flat land.
Bitcoin is going up 60% a year against the dollar. How long? Well, since MicroStrategy made its first investment four years ago, it's 60%. But if you stretch back six, eight, 10 years, I think it's also 60%. So like a decade. But you can measure it back a decade and you see it's going up 60% a year and it's 60 volatility. It's a 60 vol against the dollar. So you should think of Bitcoin as an asset. It's like you're on a speeding train going 60 miles an hour. And you've got a flywheel spinning 60 RPM. And the pedestrian on flat land is standing on the plane watching the train go by, thinking this is scary. It's going to suck the auction out of my lungs.
And they're thinking, my money isn't an asset because it goes up 0% a year. So they have a different view toward money than the view of someone on the Bitcoin train. The person with. . .
a million dollars of cash is gonna have a million dollars of cash in a decade a person with a million dollars of bitcoin is going to double their capital every 18 months if they just hold on to it right and so they're going to double it once twice three four four times at that rate right um the volatility it does come down to sorry and i'll let you get back to that but this uh this does come down to a belief that when you look into the future, that the setup that makes it have the 60% ARR is going to continue. Because I look at this and I say the only reason that it has that kind of reward is that it is volatile, that there are question marks.
Because if there were no question marks, everyone would flood in near instantly. It would hit homeostasis and that would be that. And so I do- I think Bitcoin is anything but risk-free, but I do think that the volatility is advantageous for the people who are going to be right about the upside. That's the most fair way to say it. Why do you think the best way to conceptualize this is as risk-free? Howard Marks would say volatility is not risk. Volatility is volatility. A merry-go-round you know, or a carnival ride or roller coaster is volatile. The risk part is if you fly off the roller coaster, right? If the merry-go-round stops working. etc.
So the fundamental risk of Bitcoin is the existential risk of an extinction level event and Bitcoin, right? If space aliens come down and say, we're taking your Bitcoin away from you, right? Then I guess there's risk. If some evil genius finds a way to create a cyber virus that infects and destroys the Bitcoin network instantly irrevocably, that is the risk. So But that's kind of like the, that's the existential risk you take when you get on the airplane. If it crashes, that's the existential risk you take when you cross the street. That's the existential risk you take when you put a piece of food in your mouth.
And I say, and you say, well, can you imagine that hurting me? And I say, yeah, if I put poison in the food, you're dead. Okay. So do you trust me when you trust the waiter when you put the food in your mouth? Right. So yes, there is some risk in life. And the existential risk is that extinction level event. You don't think there's another layer of risk in that, not existential, because you're saying the risk-free return of Bitcoin is 60%. But I think there is, it seems strange to me to not allocate some percentage of, maybe it doesn't grow that fast. Maybe it doesn't remain 60%. You yourself say over the next, whatever, 21 years, it's going to come down. It'll average out over about 29%.
What if that accelerates and the return ends up being substantively less than that? So I get saying that this has a better chance of having a higher annual rate of return than, say, the S&P 500, which maybe we clock at 15%. We say, we might not hit 60%, but we're probably not going to drop below 15%. Therefore, if 15% is our hurdle rate, it's going to be something north of that. But I think where people trip up with your language is this idea of the inevitability of the 60%. What would you say to that? So we're dealing with three concepts, risk, volatility, and performance. Okay. So I've addressed the risk issue by pointing out that there is existential risk in your given network or frame of reference.
And I just want to make that point that once you understand that risk. of being in that frame of reference, then you have to figure out what's the source of the volatility and the performance. And if you don't understand why the asset does what it does, if you don't understand the economic physics involved, then you'll think it's random and you'll feel like the performance is risky. But I want to give you an example of a physical metaphor. I'm a hiker. and I come across a mountain lake, and the mountain lake has 500 trillion gallons of water in it. And yeah, I don't know how it got there, but it's there. The water's chilly, it's clear. And I look down and there's a waterfall coming off the mountain lake.
And the waterfall, you know, it's very beautiful. And it's very turbulent, right? Water is turbulent in a waterfall. Water is not turbulent. and the glassy lake so the the turbulence is volatility right and the and there's waterfall and then i look at it and now if you look and you say i don't know why that water falls downhill you know i don't know if it'll keep falling downhill but i hate the volatility then i guess you can take a selfie in front of the lake go swimming get cold and leave but if let's say you're in not a tourist but you're an engineer So you come across the same lake and you see the waterfall and you see the 500 trillion gallons and you think about gravity and you think about sunlight.
And now I know how the water got there. The water got there because the sun shone on the ocean. The water evaporated from the ocean. It rose up in the clouds. The wind blew it against the mountain. It condensed and it rained into the mountain and the water ran off the mountain into the mountain lake. I know how it got there. And then I think. . . Well, if I create a dam near that waterfall, I build myself a dam, I put a turbine on the dam, and then I drop a billion gallons of water. I channel a billion gallons of water through the dam, drop it 60 feet. And then I plug that into a hydroelectric power plant.
I spin the dynamo, I make electricity. And then if I'm really smart, I run the electric power line to a village down in the valley and I light up the village or I light up the city. Now. . . Someone can come along that doesn't understand physics and they can say, good idea, Junior, but what are you going to do when the water stops flowing downhill? Well, I'm like, uh. . . Well, I actually think the water is flowing downhill because of gravity. Newton solved that for me. And then someone else comes along and says, good idea, Junior, but what are you going to do when you run out of water in the lake? I'm like, well, there's 500 trillion gallons.
And I take out my calculator and a billion gallons or whatever, it's going to last a long time. Like, well, it's eventually going to run out. I say, well, you know, the sun keeps shining on the ocean and the ocean keeps lifting the you know, the water out of the ocean and it drops it on this mountain. And that's why there's water in the mountain. But you're right. There's some kind of natural limit. And I suppose there's a limit to the amount of energy I can pull off of this dam. But it's a large number. It's a lot more than your donkey cart. And it's a lot more than your steam, you know, wood stove. And it's a lot more than your coal power plant.
And maybe it's a lot cleaner than burning, you know, gasoline. So I'm an engineer and you're seeing performance thinking it's random and that's why it's going to stop. And you're seeing volatility and you're thinking it's random and maybe it'll stop. And here with Bitcoin, the reason Bitcoin's performing is A, it's volatile, but B, it's a more energy efficient state. The water is flowing down 5,000 feet because it's a lower energy state.
a thousand feet below the mountain you know it's a it's a low energy state you've got potential energy in the water and it wants to go to ground and that's just physics the 500 trillion gallons of water is 500 trillion dollars and the 500 trillion dollars of assets are sitting in real estate and currency and sovereign bonds and corporate bonds and artwork and equity and They're invested in the stock of a company in Africa that's going bankrupt, right? They're invested in real estate in Cuba, in Venezuela, in Nigeria. They're sitting in a warehouse that's crumbling. It's got a 40-year life. And so entropy and inflation.
that you know you you invested a hundred billion dollars in a war zone and then a war broke out and your money got deval your asset got devalued all of the things going on in the world the war the chaos the competition the inflation the entropy the passage of time the hurricane the covid you know vax vaccine the covid virus all of these things impaired the value of your assets The reason Bitcoin is going up, it's not an accident. It's because capital is economic mass. It is flowing from a high energy state, the mountaintop, to a lower energy state, to a more efficient state. It is steam condensing to water, condensing to ice, giving off energy, just like in any chemistry lab, you would learn this. And. . .
At the same time, there's this volatility driver, Tom, which is you have an open capital market. And on Saturday night, when there's a missile crisis, someone can make a $10 billion short bet, levered up 100 to 1 and panic. And they can do it in Bitcoin. And then on Sunday morning, when the missile crisis has passed and nuclear war did not break out, they can go long and they can reverse the trade. And. Bitcoin is the only asset where you can sell a billion dollars of it in a minute at 100 to 1 leverage and you can buy a billion back in a minute with 100 to 1 leverage on Saturday night and Sunday morning.
If you could do that with your Upper East Side apartment, then property values in the Upper East Side would also be more volatile. And if you could do it with Picassos, that would be more volatile because if people get drunk and they panic. and they short your asset 100 to 1 and change their mind six hours later when they get up with the hangover, you're going to have volatility. So the volatility is a feature. It's not a bug. It's because it's the most useful thing in the world from a capital market point of view. And if it is that useful, then a Bloomberg jockey in Singapore is going to raise $20 billion in capital.
And they're going to make it available for you to trade on Saturday night, or they're going to make $10 billion of credit available to you on Sunday morning because they're getting paid an obscene fee to do it. And once you understand the assets appreciating because it is thermodynamically sound and it represents. .