Preston Pysh, co-host of The Investor’s Podcast (a globally ranked Investment podcast), joins me to talk about his thoughts on investing in Bitcoin. We talk about the category errors and pitfalls that an investor must be wary of when conceiving of the Bitcoin investment thesis.

We discuss:

  • Category errors
  • 80 years of conditioning
  • Investment career risk
  • Psychology and emotions, and how you can manage yours
  • Trace Mayer and the Mayer Multiple

Preston Pysh Links:

Sponsor links:

Stephan Livera links:

Podcast Transcript by

Stephan Livera: Preston, welcome to the show.

Preston Pysh: Hey Stephan, just so awesome to be here. I love what you do. I love your work and excited to be on your show.

Stephan Livera: Yeah man, I’m a fan of your work as well. I know you’ve done your fair share of Bitcoin interviews with legends such as Tuur Demeester and also our now mutual friend PlanB as well. So yeah, so look Preston, I know you’ve obviously got a big focus. You’re a host of the Investor’s Podcast, very well known, very accomplished in that regard. And I think you can really speak to how an investor is typically thinking and how they normally assess these kinds of opportunities. But I think the crazy thing with Bitcoin is it’s different and yeah. So I guess it might be interesting just to hear from your perspective, how did you first tumble down this Bitcoin rabbit hole?

Preston Pysh: It’s funny that you say it that way because I always felt from the very beginning, and I’ve been in the Bitcoin space since 2015 that I was an outsider, even though I came from a finance background into Bitcoin because it seemed like so many people in the space really kind of, maybe this is my own bias, but it seemed like everybody had a hardcore tech background. They were coders and whatnot. And so I just always kind of felt like I was part of the group, but the guy that was the weird one on the side there that came from the finance angle. So it’s kind of neat to see everything kind of merging together now here in 2019 where you’re starting to see all the paths kind of come together. But early on it never felt like that for me personally.

Stephan Livera: Right. And in the early days, I think obviously there was the cypherpunks and libertarian people who were some of the first few people. And then that next sort of wave, which we might call the 2013 and 14 people were sort of like the payments people. Right? But I think one of the challenges with Bitcoin is that it requires, it’s such a multidisciplinary thing, so it’s not easy to just come at it from one angle. You sort of need at least a little bit of each of these different disciplines. What was your experience in that?

Preston Pysh: So it really kind of got me interested was back in 2015 I was seeing what was happening from a central banking standpoint. I was really looking at quantitative easing and saying this just, this does not add up. There’s no way this ends well. I was looking at long-term debt cycles, which we can maybe talk about later on that literally are 80 yearlong cycles that play out in the credit markets that take very long times to come to some type of finalization or some type of fix. And so I’m just searching around just like, how are we possibly going to do another Bretton Woods? Was basically the question I was asking myself back in 2015 and I mean it just was like Bitcoin kind of popped up and I was like, what the heck is this? And as soon as I heard that Bitcoin had a fixed monetary baseline and that it was this protocol based digital currency that you couldn’t create more of it, you basically, through blockchain technology basically fixed the units in the digital space.

Preston Pysh: I was just like, holy moly, this is the fix, right? This could potentially be what it is that I’m trying to understand how this is all going to play out. And for me it just really kind of clicked. It helped that I had a little bit of a background or understanding in encryption. I think for me to bridge the gap into the tech was a little bit faster than maybe some other people in finance that maybe don’t have a little bit of a background in that. So, right from the get go, I was like, this is amazing, this sounds incredible. And I just couldn’t read enough at that point about how it works and more about it.

Stephan Livera: I think to me, the common era that I see, and I call this, it’s just a category error, right? A lot of people who are looking at Bitcoin, they’re not conceiving of it as a money. So they’re conceiving of it like they would a stock or a bond, right? And if I’m a stock investor, I’m thinking, okay, what’s the dividend I’m going to receive from this company? What will the future capital appreciation be in this stock? That is the way I will assess this stock. Or if it’s a bond I’m looking at, okay, what is the interest payment? What is the, again, the capital appreciation that I may experience. And then it’s a whole new world to take someone out of that mindset and then think about it like, oh no, actually this is an emergent new form of money. How do you think about that?

Preston Pysh: Well, you couldn’t have described that any better because you basically described me whenever I first became an investor because I came into investing, I came in with a really simple thesis. It was, who’s the best investor in the world? Let me study everything I can get my hands on and every book that that person’s ever read. And then let me mimic that approach. And so this is back in the early 2000s this is Warren Buffett is the guy, right? And he implements an approach called value investing, where you basically look at the future cash flows that a business could produce. You then do a discount cash flow model based on interest rates. And you say, I think the company is worth this many dollars per share today. And based on that, if I can buy it for $10 cheaper than that price, well then I want to start buying as much of that as I can possibly buy.

Preston Pysh: So what you have in the financial sector is a ton of people who think through what I’ve just described. That’s how they view every single investment. And it’s almost like a dogma within certain communities that that is the only way that you can value something. And so I think it doesn’t help that Buffett’s comments on gold are very negative from the standpoint that he has all these analogies that he’s used through the years that basically says gold is worthless. And so you have that same community that’s saying, well, there’s no cash flow that gold is kicking off and just you can just replicate this argument into Bitcoin and you can see why so many of them have an issue with Bitcoin is Bitcoin’s not kicking off a dividend. It’s not kicking off a coupon like a bond kicks off. And therefore because there is no future cash flow, I can’t discount that cash flow back at an appropriate discount rate to come up with a value today.

Preston Pysh: That’s the end of the thesis. And so I think that that’s why you have such an enormous amount of friction, especially with people in traditional finances because they’re looking at it from that lens or looking at it from that optic. Now what I find fascinating about Buffett’s approach is not all of his investing decisions are based exactly off the model that I described. But I would argue most of the people that follow him in finance would tell you that it is, he also does other investments that he’s looking at from a growth standpoint. So he might buy, let me just give you an example. This might be a bad example, but I’m going to use anyway because everyone’s going to understand it. But early on, let’s say you went and ate at a Chipotle and there was only 10 restaurants in the local community and you are looking at and you’re saying, “Hey, their operations are great. I could see them opening one of these in a town next door.”

Preston Pysh: And then you see that growth rate. Now they’ve got 100 stores and you’re saying not only could they have 100 stores, but I think they could put 400 stores in the country. So you could go out and you could say, hey, I think that there’s a Forex upside to this business regardless of the cash flow, just because they’re going to have that many more stores and the market cap on the overall business is going to go up 400% because of the growth that can still happen based on how many stores I suspect they could put across the country. So whenever you’re looking at investing from that lens, then you could start talking about how Bitcoin could be valued in my personal opinion. And so when you’re talking about a currency, which is what my opinion Bitcoin is, it’s a currency.

Preston Pysh: So when you look at other currencies, what’s the total market cap of the US dollar? What’s the market cap of the yen, what’s the market cap of, you name it currency, the Euro, whatever? And if you think or you buy into the narrative that Bitcoin could become one of those currencies, then the question becomes, well, how big is it today? Is it 10 stores big? And could it become 100 stores? And for me when I’m looking at the value of Bitcoin, that’s absolutely how I’m doing it. And I would argue that most investors consider that approach very reasonable and viable in the value investing space, which I would argue is about half of the investing community. They want to see cash flow as they want to see profits and they want to see that discount cash flow model to come up with what they think the value is. So they’re just having an extraordinarily difficult time looking at this from maybe that lens.

Stephan Livera: Yeah, I really like that explanation because to me it… And I can speak to this world and I can at least understand that world because I went through university finance courses and so on and there they teach you again, these different models and the idea is that you want to try to, you want to assess things in terms of how much return are they giving you versus how much risk and so on. And there’s different ways of thinking about it, particularly as you mentioned the DCF calculating things on NPV, net present value and so on. So it’s just a range of those things. And to some extent I think as we were mentioning offline, it’s like 80 years of conditioning, right? It’s like it’s just people have been in this mindset and I mean to some extent, part of it is, if you look at certain books, right?

Stephan Livera: If you read Stocks for the Long Run by Jeremy Siegel, in that book, I think you mentioned something like 6 or 7% real return over 200 years. And there are certain mantras as well, right? It’s time in the market, not timing the market. And then how do you then sort of take someone out of that into kind of thinking about, oh, okay, how would I invest when that cycle is potentially coming to an end?

Preston Pysh: So I absolutely love your statement, 80 years of conditioning. And the reason I love that statement is because I had briefly mentioned before this idea of a long-term credit cycle. So the person for me that made that idea just etch that in my brain is a guy named Ray Dalio. Anyone in finance knows who Ray is. His personal net worth is anywhere from 16 $18 billion and Ray made a video and most of Ray’s entire investing approach was based on this idea of large credit cycles and business cycles that ride on these larger credit cycles. He made a video, it’s called how the economic machine works. I can honestly tell you this video is 30 minutes long. It’s on YouTube. I’ll give you a link so you can share it with your listeners and I would honestly tell you this has to be one of the most valuable 30 minutes I’ve ever watched in my entire life of a video.

Preston Pysh: And it goes into detail and in a simple way for people to understand what in the world is happening in financial markets and why you’ve seen interest rates go down since 1981 consistently and now the 10 year treasury went from 16% back in 1981 and now today it’s at 1.7% and why that is happening and why it’s taking so long to play out. This video is amazing. But anyway, going to your point of 80 years of conditioning. So you have things like recency bias. Okay? In financial markets, you’ve got to understand cognitive biases and you better understand them extremely well so you just don’t get destroyed. So the first one I would say under this idea of 80 years of conditioning is recency bias. We rely on habits to make us make things easier because few people want to reinvent their lives every single day because we rely on these habit loops that just run in our subconscious of our brain.

Preston Pysh: We just automatically assume that we’re accounting for all the instances and the things that are going to happen to us based on the… Call it the last 10 years or the last 15 years. We think that those are the only type of events that can happen and these two or three standard deviations cannot occur. That’s a huge bias. And so if you’re looking at something that only happens every 80 years or every 100 years, guess what? You’re going to potentially fall victim to that.

Preston Pysh: You have another thing called normalcy bias. Normalcy bias is that, and you hear people say this all the time, “Well, nothing bad’s happened in the last 10 years. So therefore the deduction is nothing bad is going to happen in the future.” Which is totally nuts. But I’ll tell you on Twitter, I can’t tell you how many times I’ve made a comment that’s probably somewhat antagonizing in a way or whatever. And I hear people say, “Well, it hasn’t happened in the last five years, so it’s not going to happen again.” And my response is typically odd, the definition of normalcy bias. But anyway, I think that those are really important for people to think about. And I would really challenge people to go watch this video on these long-term debt cycles because it’s just insane. It’ll make your mind melt.

Stephan Livera: Yeah, fantastic comment. And I think one thing that’s underlying some of that is this perception. And again, this is what we’re taught in finance courses at university. It’s all the government, 10 year bond is the risk free rate. And I think to your point again around recency bias and normalcy bias, we’ve all tricked ourselves into believing that this government particularly the US government, 10 year is seen as the risk free rate. But really is it a risk free rate?

Preston Pysh: Well, think about it like this, let’s just say you’re 32 years old, right? If somebody’s listening to this and they’re in their early 30s, all they’ve seen since they have been of age to participate in markets is that interest rates being around 2 or 3% is normal, right? That’s all you know because you weren’t even part of the 2008 crisis. They’ve all entered the market. All they know is that the stock market just always goes up and that interest rates are always low. And so you talk about normalcy bias and recency bias and these kinds of things. You can see why people just look at what’s happening today with our federal reserve here in the US dropping in a quarter of $1 trillion in the last four days into the repo market. And they’re just like, “Oh, well that’s what happens.” It’s crazy.

Stephan Livera: Absolutely. And so I think the other thing is around how often as you were mentioning the change in a monetary standard, right? Are we going to have another Bretton Woods? And that sort of event may happen every 30 or 40 years, right? Probably the last big kind of event like that is the whole 1971 when the gold window was closed. But again, it’s how can a person think about ways to position themselves for a change in the monetary order?

Preston Pysh: Well, yeah, and I would argue that really the last time the world has had a monetary order that was actually sat down with a bunch of people from a bunch of different countries to have an agreement struck, was really kind of Bretton Woods in 1944. Because what happened in 71 was more of the US basically defaulting on their promise because the promise was we’re going to fix the dollar to gold and therefore if all you other countries fix your currency to the dollar, then the whole world has a fixed baseline of currency and then trade amongst nations can be fair and favorable, right. But through that time in 1944, up until 71, I would argue the adjustment of the money multiplier. And if you don’t know anything about that, just Google it and you can kind of understand how a country can conduct monetary expansion, but do it in a kind of a sly and sneaky way.

Preston Pysh: Through the adjustment of the money multiplier up until we got to a point where we couldn’t back it with the gold supplies that we had. Therefore, we had to come off the gold standard was the breaking point. And then the narrative that was sold was, you don’t necessarily have to have sound money and that works as long as central bankers do not adjust and manipulate it slowly over time. But what we’ve had happen is that it has been adjusted and manipulated over time through the drop of the interest rate. And therefore you have what you have playing out. The default point comes when you can’t go any lower than zero. So that works, you can come off of a gold standard, you could do it all day long, but all the central planners have to, every dollar that they put into the system, they’ve got to take another dollar out and they have to do this consistently over the long period of time.

Preston Pysh: And that, in my opinion, this is all Preston Pysh’s opinion. Over time they would put $1 in and they’d take 50 cents out. Right? And they would do that slowly. And it happened so slow over decades that it never really seemed like it was a thing. And so you can see how normalcy bias, recency bias takes hold because this is happening over an entire person’s lifetime, that they’re not noticing what’s actually taking place and what’s taking place is you’re seeing a very, very slow default. And once everybody’s at zero globally across the board, and we’re almost there, that’s when you have everyone say we need something that has a fixed monetary baseline. We need sound money. And so now what is that? And so that’s to be determined at this point.

Stephan Livera: Yeah. Great points there. And one thing that commonly comes to mind or is often raised at this point is this point of, aren’t these people just a bunch of permabears? Why are you always calling the fire and brimstone? And who’s to say now is the time, who’s to say? Because we’ve had people who are calling the end in 2012 they were wrong for six or seven years at least. So I think that’s one challenge that someone who’s listening might be in their mind thinking, well, okay, yeah, what we’re doing now is not sustainable, but how do we know how much longer it could go?

Preston Pysh: Well, I love that point. And I think a lot of people that might follow my Twitter feed might think that I’m a permabear or however somebody might classify it, when in all actuality I’m definitely not, I’ve been participating in the markets the whole time. But I guess the thing that peaks my interest is all the maneuvering and all the manipulation really is kind of what it is for me. Because every time I see manipulation in the market, I want to say, “Hey, somebody is doing something that’s not right and I want to highlight it so everyone could see it.” But I think when you’re talking about the timing piece, I think that I really don’t think that you’re going to see a major catastrophic failure until you’re truly at the point where all participants, all of these countries are at zero or lower.

Preston Pysh: And I think even then, I think I could conjure up an argument on how central banks could still keep it afloat even with negative interest rates. But, in order to do that they would have to remove all physical currency from the system, forcing people into digital currency. And even that, I think it’s going to be extremely hard for them to control because there’s other options that now have entered the market in the private sector basically. I don’t know if you’d call Bitcoin or any other cryptocurrency the private sector, but that’s I guess how I view it is you have this competition to government currency. And so that’s why I don’t know that they’re going to be able to sustain it when it goes too negative.

Stephan Livera: Yeah. That’s also the other question as well. So great point around the negative interest rates. And I think a common question that listeners might be thinking is why are people essentially giving up their money to borrow, right? Or not borrow. Rather they’re buying these bonds that they know they’re going to lose money on. And the best or most coherent explanation that I’ve heard is that essentially it’s a greater full game. Bonds have an inverse relationship between the yield and the price. And because everyone just keeps buying, pushing up the price, obviously that’s push pressing the yields down and that’s why we’re seeing it push into negative. Is that explanation consistent with what you believe or do you think there’s some other explanatory factors around that?

Preston Pysh: So your description of it being a greater fool’s theory is 100% valid where I would maybe argue it a little bit differently. I think banks have to participate by law at this point and that’s where because you’re not seeing a lot of the negative rates being pushed into the private sector beyond the commercial too big to fail banks. And so I think that’s another factor that makes it so hard to understand the timing of how this all kind of plays out. Because if the banks can kind of shield a lot of the negative interest rates from the private sector of how that materializes into people like you and me and how we borrow money, that’s going to make it run even longer than I think some might expect.

Preston Pysh: But it’s really hard to say or no, I just think that that might be the only argument that you could say that would allow it to even persist longer is that the banks are shielded that in the banks are in cahoots. And I wouldn’t even be surprised that in some countries you start to see banks being nationalized and they’re not even in the private sector at this point because they then become the government. And then I think it really gets mushy at that point.

Stephan Livera: Excellent. Yeah. And so I guess if somebody is listening now and they are coming at it from a more traditional investor point of view and they’re assessing Bitcoin, they may be looking at it from a slightly different argument case or they might be thinking of things like, oh, is Bitcoin on correlated? Or what is the sharpe ratio of Bitcoin? Or potentially they might be looking at, okay, it’s returned quite a lot of the last 10 years or so. Are those some factors in your mind that you think a traditional investor might look at big client and assess it in some way that they might think, okay, it’s worthwhile at least taking a position?

Preston Pysh: So I absolutely think that this is the most exciting point to sell on Bitcoin is really kind of the sharpe ratio matched with the fact that it doesn’t have correlation to all the other assets. I think where you’re having trouble getting traction on it is, first of all, most people in finance do not understand this technology and they don’t buy into the idea that it’s safe at this point because they don’t understand it. You’re never going to think something’s safe unless you inherently understand how it works and how it functions.

Preston Pysh: Now, where I think you’re going to have a psychological bias that overrides that lack of understanding is when a market cap in Bitcoin reaches a level that your typical investor just says, “You know what? Maybe I just don’t understand it.” Obviously people do because the market cap is $1 trillion and so then they’re to say they’re just going to default to the lazy part of their mind that says, social proof has decided that this is something that I need to participate in, and so I think we’re waiting for that to happen and so it’s just going to be a little bit of time before that gets in there.

Preston Pysh: I think the other part from the financial sector standpoint is I think when you get Bitcoin settled derivatives in place, you’re then going to have ETFs that get approved and then you’re going to have vehicles that are so much easier for the day to day investor to just throw 100 bucks or even 1000 bucks or 10,000 bucks at Bitcoin because their friends are making 1000% return last year. Right? That’s going to be, in my opinion, this bull market that’s getting ready to happen that I think we are just starting to experience that I think is going to easily run to the start or basically the end of 2021 is going to be the ETF derivative Wall Street getting on board bull market when we look back at it. And I think most of it’s going to be because we have backed, we have Bitcoin settled, you’re going to ETFs and you’re going to have all these people saying, “It wouldn’t hurt to just have a half a percent exposure.” That’s going to be the narrative that I think you’re going to hear Wall Street saying in about a year from now.

Stephan Livera: Right. Yeah. It’s fascinating how because we’re sort of a little more insider or we have a little bit more connection with it, we’re sort of able to see it beforehand. And part of it is that we realize just how small it is right now and to the points you were making as well. It’s also that point around career risk as well. So I think it may, right now it’s still seen as Bitcoin’s still a little bit of a weird thing, but eventually, once the first few influential people start getting it, eventually hits that tipping point of the career risk goes the other way of if you don’t hold Bitcoin, now there’ll be the question asked of why didn’t you buy some?

Preston Pysh: Yeah, I mean, my personal opinion is that there’s going to be a flippening of that point of view. And I think that there is a lot of career risk for a lot of fund managers at this point because truly when you’re talking about something that has a market cap of, call it $200 billion like Bitcoin is today and you’re calling it a currency. A lot of these professional money managers that are 60 years old, they’re looking at that and saying, “Yeah, right.” That’s absolutely nothing right now. You got individual companies with a trillion dollar market cap and if you’re trying to call that a currency, let me know when it hits $1 trillion and then I’ll take a look at it. So, and that’s a risk that they’re taking but I think that that’s what they’re defaulting at is they’re saying, “I don’t understand the technology, wake me up when it’s a little bit higher. And then maybe I might take a look a closer look at it.”

Preston Pysh: But in my personal opinion, the thing that really got my attention was the sharpe ratio. When I looked at the chart of the sharpe ratio from 2013 and you’re looking at something that has that high of a sharpe ratio with no correlation to anything else. I’m just thinking, my God, that’s the holy grail of an investment that I have ever seen that, I mean, it’s not like the sharpe ratio has outperformed in some parts of the year since 2013 versus other assets. It has absolutely crushed by a landslide every single other assets that existed since 2013, the US stock market, the commodities market, the bond market, any other currency, emerging markets, I mean, you name it, and Bitcoin has outperformed it without even a blemish of a day since 2013.

Preston Pysh: So that’s insane, that’s totally insane. And then you want to combine the fact that there’s no correlation to anything. I mean, it’s just like an investor’s dream. I mean, it’s indescribable, right?

Stephan Livera: Yeah. And I think to me this I think PlanB has shown this really well in some of his graphics as well, where he shows things like, what if you just did literally, if you just did 1% Bitcoin allocation, 99% cash and you still got better return for less risk than going a typical 60/40 stocks and bonds.

Preston Pysh: And that argument, in my opinion, is what in a year from now, I think if you see the market cap go over half a trillion dollars, I think you’re going to start seeing your smarter fund managers say, “Hey, I think even just 1% exposure to this is going to do wonders for your portfolio if this whole central banking narrative blows up.” And I think that the insurance risk of putting 1% of your money in it is going to be the thing that just takes this thing to a whole nother level.

Stephan Livera: Right, and I want to also try and explore a little bit of what might be, whether it’s psychological motivations or whether it’s kind of institutional setup that might be keeping people out of Bitcoin right now. Could it be that some of these professional fund managers and professional money managers are not geared to buy Bitcoin because they might have a mandate that keeps them invested only in say the top stock markets of the world?

Preston Pysh: I think that’s probably some of it, but I’d be willing to bet that how did you describe it earlier the basically the ego risk or the risk of people being worried that they would get it wrong and then that being branded onto them is way more of what’s keeping people out of it at this point.

Stephan Livera: Yeah, that makes a bit of sense to me as well. And I think ultimately from a retail investor point of view, it may just be a point around stagnation, right? So they just sense this idea and potentially there is this question that many people are discussing is this idea of are we becoming Japanified, right? Is the whole world just starting to become a low growth economy like Japan did? And because we’ve got a bunch of zombie companies who are surviving basically thanks to cheap credit. And so in that world they’re looking for a way out or at least some way to get some return. And potentially that’s another angle.

Preston Pysh: So my personal opinion, we are absolutely seeing that across the entire world, what happened to Japan, you look at their market in 1990 it peaked, you saw basically an 80% decline. It’s come up a tad from there. Right? But it’s been struggling. Their interest rates are zero. You’re effectively seeing, which I find this absolutely fascinating. Through their quantitative easing efforts, they’ve had to start buying up their stock market in order to provide enough liquidity into their system. And what you’ve actually seen is the nationalization of the companies in Japan, the ownership, they’ve been buying so much of their equity market that you’re actually seeing. I mean, if you’re looking at it from an ownership and voting rights standpoint, that the government is nationalizing their stock market to just to provide enough liquidity to keep the zombies alive. And that’s truly when you look at the price that’s being paid for these policies and the fact that you don’t have sound money, what it really is, is the zombiefication of companies.

Preston Pysh: And I think the other huge consequence of this is think about it. If you’re exercising quantitative easing and you’re printing a bunch of cash and then you’re bidding the price of bonds into oblivion and paying any price for them because that’s effectively what’s happening, who’s buying those bonds? These bonds are in tranches of billions of dollars. And so the people that are holding those bonds are very wealthy individuals or corporations, very high capitalized corporations that are sitting on these bond tranches. So if you’re taking cash that you just printed out of thin air and then buying those securities off the open market. And remember when you have a buyer and a buyer of endless money on one side and a person who’s selling, guess what happens to the price? It goes up, right? And the yield goes down. And so when you have these large influxes of capital to the few that are holding these enormous securities, what you’re effectively doing is you’re just obliterating the middle-class.

Preston Pysh: You’re stuffing all this money into the hands of people that, and Ray Dalio would call them the haves and you’re limiting or making the game a whole lot harder for the have-nots. And so what you’re seeing by that policy is you’re seeing it represented in politics. I mean, here in the US you have a billionaire versus a socialist running for president. And it shouldn’t be a surprise to anybody because that’s what the policy is producing. It’s producing this polarization effect where you have all the money being stuffed into the hands of the people that have securities that are now the individuals that are now employing that cash flow. And guess what, there’s only so many boats you can buy with the cash that you’re handed. Right? So it goes into buying securities and it goes into buying and bidding up the prices of the stock market.

Stephan Livera: Yeah, I think that’s definitely what we’ve seen in terms of stock market rising and bond prices and bond yields going the other way. So it’s just, it’s become a game of own assets and if you own assets, then you can benefit at least a little bit out of this inflationary system. But it just drives this overall lack of productivity or at least a distortion in the way that the economy gets set up.

Preston Pysh: Well, if you even want to compound it even further, think of it from a corporation standpoint. So if I’m Apple and I’ve got just a treasure chest of money on my balance sheet. I can go out with interest rates super low, which is a consequence of quantitative easing because the government was buying up all the bond market, pushing yields down. I can now go out and I can borrow a crap load of money, billions upon billions of dollars at nothing percent interest rate. And then I just buy back more stock because if my company is returning 10% annually and I buy back more stock, I’m basically providing a larger and more substantial yield to the few shareholders that continue to hold the stock because I’m buying the stock from people that are selling. So I’m basically doing that same thing, but I’m amplifying it because credit is so cheap for the companies that have performed. So it just further amplifies what we were describing before.

Stephan Livera: Yeah, that’s a great articulation of that point. I’m also interested to talk about some of your work with the Mayer Multiple. So now I know this is something that you invented and you coined it after Trace Mayer who essentially came up with it. So for the listeners who are not familiar, what is the Mayer multiple?

Preston Pysh: So Trace, well, let me rephrase it. So back in 2017 Bitcoin was going crazy. The price was just going nuts into the summer and then into the fall and then really kind of right up to Christmas timeframe in 2017 and I’ve participated in enough markets. When you see something literally going parabolic, you just got to be ready because it’s typically going to get really painful in short notice. And so I’m looking everywhere on the net and I’m thinking I’ve got to do something to prove to myself mathematically that I’m making a good decision opposed to an emotional decision that, because at the time I was like, I need to lower my position size. I still believed Bitcoin was going to go long. Right. I think it’s going really long. But in that moment I felt like the buying was outstripping the number of people that could sustain that buying rate.

Preston Pysh: And so I felt like there was an opportunity for a short-term sell, which then I would try to reenter the market. And so I was looking for anything I could find that had some type of statistical analysis or a way of trying to value shorter term holdings in Bitcoin. And so I came across an article that Trace had written and I, to be quite honest with you, Trace was a leading factor of my entry in that Bitcoin in 2015. And so I read an article where he was showing, hey, the current price compared to the 200 day moving average is a great way to look at whether it’s overheated or maybe a great time to buy.

Preston Pysh: But on the article, Trace only had, I don’t know, he probably had eight different examples in time that showed, “Hey, here’s when it’s high, here’s when it’s low.” So I love statistics, I love math, I love numbers. And I was like, all right, I want to do this for every single day that Bitcoin is traded. And so I went and I just pulled some data and I ran a histogram on it and I just plotted it, got a bell curve and then just looked at, okay, what’s in the realm of normal for this multiple and what’s in the realm of two or three standard deviations?

Preston Pysh: And what I found was what was published on our site if you go to it has kind of the way we were thinking about it. I’m really poor at updating it and there’s been a bunch of people in the community that have created tools now that automatically provide you the day to day of what the multiple is. But it helped me, I think I sold my position in December, probably seventh or eighth of December of 2017, which was it was like $18,000 at that point.

Preston Pysh: I then again, used the Mayer Multiple to buy back in this past that basically at the start of 2019 when it was at a 0.5, I reinitiated some of my position and I was able to buy it at 36 $3,700 per Bitcoin. And I kind of suspect there that they having had a role in the timing of how it had to play out. I wasn’t 100% sure after seeing PlanB’s work. Now it’s just for me, much more obvious than it was at the time because it was a lot of intuition. It was a lot of luck. Let me emphasize that, what I did was a whole lot of luck. But I was able to use the Mayer Multiple to help time the exit and the re-entry with Bitcoin. Now I think it’s important for people.

Preston Pysh: My opinion is I don’t necessarily know that this next cycle, assuming we do go through another bull market, which I think we will. I don’t necessarily think that I would sell on the next bull market because I’m afraid that this could be a point where Bitcoin really kind of moves into a whole different level of how it’s viewed as a currency where back then I definitely didn’t think that it was at that point. I thought I felt that you had many more years ahead for it to kind of reach that status. And luckily that was a good assumption because it could have been a bad assumption, I guess at the time. But at the time, that that was my opinion.

Stephan Livera: Right. And I think perhaps you were speaking as well to this idea that at that point in 2017 we didn’t really have lightning network going. We didn’t really have all these ways to kind of easily transact back and forward. I mean, yes there are on-chain transactions, but it just wasn’t at the level, I suppose in terms of broad mainstream understanding, acknowledgement of Bitcoin as a potential currency and as a potential money. Would that be your view?

Preston Pysh: Absolutely. So I remember that December I was at an Army–Navy football game. I’m in a box talking to a bunch of bankers, people that are very high up in the banking sector from… So I went to West point. These were alumni that were pretty accomplished alumni and I remember I brought a Bitcoin and they just looked at me and almost laughed. They were just like, “Yeah, right.” It was kind of like, “Are you kidding? Are you serious right now or are you joking?” And I just kind of looked at them like, “I’m kind of serious I guess.” And I think for me that was really obvious that this was not at a point where anybody was talking about it in a way that they took that serious.

Preston Pysh: I find those conversations are very different now. I still think that they’re not at maturity by any shape of the imagination, but I think maybe another year or two it’ll be an absolute at a point where everyone absolutely understands what you’re talking about. They understand the arguments, they understand whether they have a position or not is unknown, but they’re going to look at it in a completely different light, my opinion.

Stephan Livera: Right. And I think what it would take is perhaps in the next few years, it start to be seen more like a competitor to gold, right? So people compare to gold’s whatever, seven or eight trillion, they might think of Bitcoin in a similar way to that. And I suppose for it to really go to the full way, it would have to essentially get fully financialized, right. So people might even be thinking in terms of debt and credit. In terms of Bitcoin, although I think my view is we’ll see a world with a lot less debt and it’ll be mostly an equity based world. Hypothetically, if we get there and the world is operating on a Bitcoin standard, it’ll be sort of very equity based. What’s your view then in terms of what might it look like in a few years’ time once it’s a little more developed? Will we see a little bit more of these financial products being commonplace?

Preston Pysh: Yeah, I mean I think so. And I think that the challenge for gold moving forward, and I’ll be full and open here. I have gold options. I own gold companies at this point. And even though I own those, which I think they’re very bullish in the next year to three years, I think is Bitcoin, if in fact the narrative that we’re both suggesting is happening plays out, I think you’re going to find people very quickly understand why Bitcoin is more valuable than gold just because of the utility standpoint. And as more and more people would adopt that and use it, I think that everyone’s kind of looking at gold from the side saying so what’s the point anymore? Yeah, it’s held up. I’m being serious. It’s how I would look at it.

Preston Pysh: It’s just like, okay, I can’t go out and go to the store and spend an ounce of gold to buy this, like that’s ludicrous. The storage for gold is ludicrous. The fact that I can’t perform an audit of the gold that I’m holding, if I buy some gold bars and I have them at my house, I don’t know what’s in the middle of those and I’m not going to cut them apart to find out. So by running a full note, I can effectively cut the gold bar apart. When you understand the technology and you understand what it’s replacing, it’s just so obvious why it has so much more utility.

Stephan Livera: To reflect perhaps one of Saifedean’s arguments here is that there is still, I think one point that Saifedean has been making recently is this point that it wasn’t necessarily a technical failure of gold because people did have these other ways of doing it, right? They had other ways like clearing houses and so on. It was more of a political vulnerability that gold had that made it get really centralized. And I think the bind that I’ve heard Saifedean make on this is that also the idea with Bitcoin is that enough other people can run their own full notes such that it just changes the game in terms of people being able to verify the supply and so on.

Stephan Livera: But there is a point to be made there around like liquidity of gold and enough of accustom and history that certain cultures they like to give gold. And so on so it remains to be seen.

Preston Pysh: I mean, no matter what, you’re always going to have people tell you that the analog record and analog tracks sounds better than the digital one, but I think most people know the truth.

Stephan Livera: Yeah, look, I agree. I think ultimately the world is moving to a Bitcoin standard and we’re just early, we’re just trying to help other people see what we see. I’m also curious to ask a little bit around the overshoot and undershoot factor. So coming back to the Mayer Multiple a little bit might be one way to think of it like it’s like a rubber band and it sort of, it gets a bit over, it’s like you’re pulled that rubber band a little bit too far now it needs to kind of pull back. Is that one way you’re thinking of it?

Preston Pysh: Absolutely.

Stephan Livera: Yeah. So I think of it like historically I can’t remember the exact numbers, but I think on your website you were saying historically the average Mayer Multiple has been a little bit above one.

Preston Pysh: Yeah. It’s historically around 1.4. So I’ll just give you an example. So if the price of Bitcoin was $14, everyone get excited, the moving average would be $10. So that’d be a 1.4.

Stephan Livera: Right. And so I think the other thing then is sometimes it, even with this recent kind of crazy run up earlier this year, right? So it was maybe three and a half thousand or whatever at the bottom at the end of last year. And then early this year, around June, during the time of Bitcoin 2019 actually the price is like it was hitting 14,000 in USD terms, which was quite clearly overstretched. Right. So it kind of had to come back down a little bit and sort of wait a little while before it can keep going up.

Preston Pysh: Yeah, and it’s funny because literally on the day that it hit $14,000 I saw the Mayer Multiple and it had touched a point that in the past has really been a very hard layer for it to go through. And I went on Twitter and I said, “Hey this price is really exciting, but it’s probably a great time to stop allocating your fear into Bitcoin and just kind of hold up for 30, 60, 90 days until it kind of comes back down into reality. Because again, I look at it like the number of people that are bidding that price and that are FOMOing are too limited to sustain the rate at which the FOMOing is occurring. I don’t know if I described it real well there, but you need more people to be able to think of it like this. If I came up and I said, “Stephan, you come with me.”

Preston Pysh: And then you grab another person you say, “You come with me too.” There’s a limit to how many people we can grab and take with us in these bull runs. And so when you think of how fast it’s accelerating, think of it like if you’re running 10 times faster than you normally run, we’ll now, you can’t even grab one person. You can only grab one person at half the rate that you were doing before. And so I think that’s kind of what you run into with some of these ramp ups because there was something in the news in this case, I think it was the Facebook announcement that caused all the… I mean, come on, CSPAN was running, everyone’s talking about crypto and it’s like, “This thing never dies.” So everyone started jumping on it like, “There’s something to this.”

Stephan Livera: Yeah. Yeah. And I think a big part of it is the emotions that play into it. So people get caught up and they think, okay, this is it, this is the one guys. And it’s not really obviously. And then on the downside, the same thing can happen there as well. Oh it’s dead, pack it up, it’s all over. So I guess, you run an Investor’s Podcast, you’ve got to learn to stay your emotions or at least be a little bit more objective in that. Do you have any advice for listeners or any thoughts on how they can take that emotion out of it and think in a more objective fashion when they’re investing?

Preston Pysh: So, from an emotional standpoint, I’d tell you that whenever you have your strongest emotions, just do the exact opposite. So whenever I reentered the position in 2019 the Wall Street Journal came out with an article and the headline on the article was, “Bitcoin is dead. This thing is done.” And I was thinking, “All right, here we go.” That’s all I needed. I just needed somebody to tell me like it’s over, stick a knife in it. And then looking at the Mayer Multiple, and it being like 0.5, it was like, “Okay, well it’s time to take a position again because everyone’s thrown in the towel. There’s total capitulation at this point.” And so that would be the opposite of how I felt now, even though that was what I did. That’s not necessarily how I felt.

Preston Pysh: I’m reading the article, I was like, “Oh, this isn’t good.” But this is typically when I’m right is whenever I take a position when it feels so bad. And so on the other side, if you’re taking a position and it feels, oh so good, like you just crushed it. Like you’re up. I don’t know how many percent. Right? And the thing is just running, it’s going parabolic. You’re seeing the whisker just blow it out to the upside. You’re seeing like $1000 moves. I mean, this is a perfect example of what happened in the summer. I got on a flight, I think I was flying to Texas or something like that. I got on the flight and it went from like 11 to 12,000 and I was flying with another person. I said, you watch when we land, it’ll be a thousand higher.

Preston Pysh: And I said, and then it’s going to peak. And so we landed and it hit $14,000. I said, it’s not going much higher. This is it. And so sure enough, I mean it just, because it just can’t, it was like everything in me wanted to throw another 30, 40,000 at it, like when I got off that plane. But I knew that’s the worst time to do something is when it just feels so good. And so you just, you wait and you have to do the opposite of your extreme emotions. And I emphasize it with extreme because you’re going to have these times when you’re like, ah, this feels kind of right. And it might be, but whenever it’s extreme, that’s when you do the opposite. I want this, try to quantify it because you were asking for me to quantify it and that’s much more qualitative.

Preston Pysh: I would tell you from a quantitative standpoint, the Mayer Multiple helps a lot. Another tool that I’ve recently kind of started looking at is this idea of incorporating a moving average combined with an RSI, which is a relative strength indicator. For anybody that runs like a trading view, a charting tool, you can pull these up. It’s really easy. The RSI, you just click on there and it’ll drop it in there. But I found that if you’ve never entered a position and you’re trying to find like that perfect moment that you can take a position and not have your temperament tested, look for the price to be under the 50 day moving average and make sure your charts in days. If you find the price under the 50 day moving average and the relative strength indicator, the RSI is below a 40 kind of below a 40 or a 30, you’re probably going to get a great price and you’re probably going to be able to enter the position and not really have to worry too much about feeling really bad in the next 10 days.

Preston Pysh: You’re probably going to enter the position and it’s going to go in a very favorable direction for you. And for anybody that wants to kind of test that out, I’d tell you to plot 50 day moving average your RSI and look at when the price’s under the 50 and your RSI is under, call it a 30, you’re going to have a hard time finding that to be a bad entry point in the Bitcoin. So if you’re really nervous about it, I tell you to wait for kind of one of those indicators which they’ll happen. They don’t happen a lot, but they happen every year. And I would caveat that with make sure that you’re not… I would tell you to read PlanB’s article on the larger cycles, the larger four year cycles and make sure that you’re not entering during one of those periods of time and they usually last about a year to year and a half. So kind of stay away if you’re trying to enter positions at and during those timings.

Stephan Livera: Right. Yeah. And I guess, yeah, that’s an interesting ways to think about it. And I think, let me now just also represent the BitcoinTINA view of no trading. And you should be very wary of any selling because the price might get away from you and we’re going through a historical time and maybe one of these times it’s going to come and you might think that you’re selling out so that you can buy more cheaper, but actually it’s going to get away from you and now you’re going to have even less Bitcoins. And if we’re moving towards a Bitcoin denominated future, then you might be behind on that. What’s your view there?

Preston Pysh: I think that what you just is probably the most important thing that was said during this entire discussion, right there. And I’m not trying to say that for any reason at all. I just think that when you have something that has this much volatility, which it has 80% volatility in a single year, that it can go down. If you think you’re going to trade that and outperform its sheer performance of 200% annually, you are absolutely kidding yourself. You are totally kidding yourself. I would make the argument that it would be impossible to do, absolutely impossible to outperform somebody who just has a buy and hold strategy. Now, I said that telling you that I sold in 2017, but when I bought in 2015, it was just it was a buy and hold strategy. I wasn’t trading a day to day. The only thing I did was keep adding to the position.

Preston Pysh: I thought I had a very juicy once in a lifetime opportunity to get out and get back in at a better price after I paid taxes, which is just such a huge consideration that people completely forget about. I had accounted for, all right, if it goes down this much and I paid just ridiculous taxes on this, can I still enter with a high level of confidence that I can get the position back and still be ahead? And let me tell you, that was still relatively hard to do and I don’t even know that it would be replicable if I tried to do it again. So your point of buying and holding I think is just boy, I love this Charlie Munger quote. And I know Charlie Munger is not a Bitcoin fan. Rat poison isn’t exact terminology. But generally, Charlie Munger has this awesome quote. He says, “Don’t just do something, stand there.” And you couldn’t get a better quote to represent what you should do in Bitcoin other than just buy and just sit there and enjoy the ride.

Stephan Livera: Fantastic. And I think it may be that a listener wants to use the Mayer Multiple just to time their bias, right? They might just use it as like, “Okay, I’m going to put a little bit more in now. Okay. And wait for good opportunity to buy. Okay. Now I’ll buy a few more now.” That might be one way to think of it as well.

Preston Pysh: Well and it’s exactly how to think of it and that’s why we designed the tool and put the information out there. It was for people that are entering their position, particularly people that are entering their position for the first time. Because the only way I can describe this to somebody is you’re jumping on a rocket ship. It is not going to be comfortable. It might not go the direction that you think it’s going to go after you get on it. But if you can get situated on it and stay on it for, I would argue 90 days, you’re going to find that the thing is going in a direction that is assuming you get the four year cycle timing right, which I think is an important consideration for people to understand. Right now I don’t think it’s too important for people to understand because I think we’re beyond the kind of the bottom of that four year cycle, the bottom part of the four year cycle.

Preston Pysh: But for people listening to this in the future, you’ve got to understand that. And I think that once you get situated and you get on at the tools that I’m talking about are to help you get on that rocket a little easier so that the ride’s not so bumpy in the first 30, 60, 90 days.

Stephan Livera: Fantastic. I think that’s a great way to articulate that. So look, I think we might come to an end there. But Preston, make sure you tell my listeners where can they follow you online and where can they find the Investor’s Podcast?

Preston Pysh: So I’m very active on Twitter. I thoroughly enjoy interacting with the Bitcoin community on Twitter because man, there’s some smart people. I mean, it’s just, it is such a delight to talk with people on Twitter. And I mean, yeah. So you get some people that are very colorful in the way that they interact. But it’s all part of the community that I love. And if you guys want to follow me on Twitter, I’d love to have you as a follower. Just my handle’s just Preston Pysh and our website, the Investor’s Podcast we study all these different investing billionaires. We read the books that they read, we talk about the books that they read. We really try to cover all different angles of finance and we’d love to have you guys check out the show and it’s just at

Stephan Livera: Fantastic. Well, it’s been a pleasure chatting with you Preston, and thanks for joining me.

Preston Pysh: Wonderful to be here. Such a pleasure to be on your show.

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