Preston Pysh of We Study Billionaires joins me on the show to talk about what Bitcoin’s final cycle might look like. How would we know if we’re going through the final cycle? How likely is it? Will corporates buying bitcoin be weak hands or strong hands? What about governments trying to shut Bitcoin down?
Preston Pysh‘s Links:
- Twitter: @PrestonPysh
- We Study Billionaires
Prior episodes:
- SLP109 Preston Pysh – How To Think About Bitcoin as an Investor
- SLP181 Preston Pysh – Bitcoin as Numeraire
Sponsors:
Stephan Livera links:
- Show notes and website
- Follow me on twitter @stephanlivera
- Subscribe to the podcast
- Patreon @stephanlivera
Podcast Transcript:
Stephan Livera:
Preston welcome back to the show.
Preston Pysh:
Hey, Stephan. Always great to be here.
Stephan Livera:
Preston. It’s always a pleasure to chat with you. And today we’ve got a few interesting themes that we can chat about. I think some of the discussion recently has been around this concept of, well, Bitcoin has these four year cycles, and what’s the likelihood that this is the final cycle. What would the final cycle look like? And now we can make, you know, some of these different arguments for and against, and maybe we can explore some of those ideas. But I guess high level, how are you thinking about that idea?
Preston Pysh:
Well, I think the most important thing is that whatever idea you got, you better hold it pretty loosely. Because there’s no way to really, especially where we’re at right now to have any idea one way or the other. But I think it’s fun to kind of tease out the various courses that it could take. I know whenever I’m thinking about the value of a business, I’m always kind of using an analogy of a hurricane path where you’re, you’re trying to project where it’s going to make landfall five days in advance and with a stock or currency like Bitcoin, you’re trying to understand what that left and right boundary would be for your model and then where your most likely is. And so I love teasing out things like that and trying to consider what the environment might look like as we kind of move forward.
Stephan Livera:
Excellent. I love the idea of trying to think, well, what’s the boundary left and right. So if we were to think in a Bitcoin context, what do you think the left and right would be? So I guess in this case it would be something like what’s the earliest you could imagine the hyperbitcoinization process completing versus the latest. What do you see that as?
Preston Pysh:
You’re saying, like it going all the way, like, yeah. Total global adoption I think in the early side, I think it could be this incoming cycle, this four year cycle that we’re currently in. I think it could happen within this cycle. I think on the long end, I’d be surprised for it to go more than this cycle and the next one. So, you know, I’d say seven and a half years would be probably the long end for me. And I think there’s a lot of people that would disagree with that.
Stephan Livera:
Yeah. I think a lot of people would, there might be a lot of people who would say, ah, surely Preston, it can’t be that early. Right?
Preston Pysh:
Yeah. I think you’re, you know, I don’t know if you asked a hundred people. I think most of them would probably say, Oh, it’s going to be longer than that. And for me, the reason why, I guess I’m more bullish, I think it could happen faster is just because I think that the backdrop of everything that’s happened is just so dire, particularly the, fixed income market, currencies around the world. I just, I don’t know how they’re going to be able to keep the trust glued onto what’s happening. I don’t know how that’s possibly going to happen for more than seven years or seven and a half years.
Stephan Livera:
Right. And I think part of that for me comes down to, well, I think I’ve experienced in this, in following the Austrians and Goldbug who have been saying the same thing for a long time. And I mean, I consider myself a student of Austrian economics, obviously. But the awkward position that many find themselves in is criticizing the current system and saying it’s unsustainable. And yet they find a way to keep the party going, right. So for example, people in 2008 and 2009 were saying, Oh, look, this is not a good thing. And then here we are with, you know, at all time highs on, you know, stock markets and things like that. So how do you sort of marry those two ideas?
Preston Pysh:
So going back to 2008, your ten year treasury was at five, five and a half percent before the 2008 crash. So you had a lot of interest rate left on even the Ten tear. The yield curve in 2008, beginning of 2008 was flat. So I was saying five, five and a half percent. It was somewhere in that range, but it was across the entire duration of the bond yield curve. Today you’re nowhere near that. I mean, you’re, you’re pressing down below 1% on the 10 year treasury and, and we’re seeing the printing accelerate. So I don’t know how they’re going to be able to keep the lid on that going any higher, especially the way that the, on the fiscal side, they keep obligating money and debt obligations. So, you know, I don’t know how they’re going to allow interest rates to go up.
Preston Pysh:
They’re going to have to keep them depressed and down. And so I think that that’s really the big part to all of this, that and it’s just not here in the US most of the rates around the world are negative. And you didn’t have any of that in 2008. You didn’t have any of that prior to 2008. So that’s where this gets very different and significantly different. And if people aren’t thinking about that, that piece of it, I mean, come on, think about it. If you have a negative interest bond, you’re signing up for a contract to lose money, you’re signing up for a guarantee to have less money. So I just don’t know how long that charade can last. And I mean, we’re at the tune of negative $16 trillion dollars of negative interest debt out there fixed income debt.
Preston Pysh:
So how long can they keep that charade going? And, and I think this is the part that I think is really important to consider. In the past you didn’t have this thing that looked like a rocket ship of buying power right next to it. Right. So 2008, yeah. You had gold and gold went up initially with the crash gold got punished, just because it’s a liquidity squeeze. Right. But as soon as they pumped all the liquidity and the Fiat units back into the system, I think gold did 200 or 300% from there. Right. It went way up, but that’s nothing, absolutely nothing, a speck compared to what I kind of expect out of Bitcoin in the coming year, as far as a percent in nominal Fiat terms, how much it’s going to go up. So when you you’re comparing something, that’s a guaranteed contract to lose money to something that is, I don’t even know if a rocket ship is the right term. I mean, it’s like a warp, it’s like a buying power warp. What I suspect we’re about to see. And so how can the market keep trust in something when that’s the contrast, right.
Stephan Livera:
Yeah. And so I guess maybe the only other point would just be something like, well, you know, maybe they manage to keep us in financial repression for a little while longer. Right? So people, they just sort of try to keep the economy in a sort of stasis. And we have this sort of Japanication or zombified companies that are just kind of lurching forward, but they’re just not, they’re not really doing really well, unless the, unless they’re the obvious kind of standout, Amazon and Google and so on. But we just have a whole heap of companies who are just kind of staggering forward, I guess that’s perhaps one scenario. What do you think about that possibility for sustained financial repression?
Preston Pysh:
I think that’s exactly what they’re going to try. They’re going to have to, in order to try to keep things calm. And I mean, that’s how these, these types of situations now, granted, we’ve never had it on a global scale, but we’ve had it on a national scale. All many, a times throughout history, it’s exactly what they try to do. They try to print, they try to provide that liquidity. They try to choose the least bad option that’s out there amongst all bad options. And I think that’s exactly what they’re going to try to do. That’s what they’ve been trying to do since really 2008.
Stephan Livera:
Yeah. And perhaps the other aspect of it is also how much will they be able to corral people into the central bank digital currencies or the they’re their own little controlled contained system that enables them to carry on the financial repression for a little bit longer and keep the party going just that little bit longer?
Preston Pysh:
Well, I think to do that, they have to have something that’s probably already in the works or in a testing phase. I don’t know how familiar you are with government acquisition work as far as procuring and standing something like that up. But my experience is that it’s pretty darn slow. And now we’re talking about doing that for a currency that cannot fail and cannot have mistakes. If that system is going to somehow rise to the occasion, I would suspect it almost already have been built on top of that. And I think more importantly than that, let’s just say it did exist today. They’re still going to debase the units inside of that protocol or whatever you’d want to call that system that they’d have. I mean, it’d be a closed loop system that they’d be controlling the units.
Preston Pysh:
They have to continue to debase it simply because the habits of those elected officials, not just in the United States, but all over the world is to spend money to debase the currency in order to promote the cost of their goods and services to be lower than everybody else. So that’s not gonna change. So whether you’re using a digital current, I mean, we already are using a digital currency that they’re already manipulating the baseline too. So the fact that they’re gonna put a fancy branding on it, calling it a cryptocurrency or whatever. I mean, that’s pretty much all I see the difference being is that it’s a different branding that ironically or unironically, depending on how you’re looking at it, they’re doing that to create trust, right. Why else would you call it something different other than to garner trust, which implies that the system that has been used does not have trust. So I find that really interesting.
Stephan Livera:
Yeah. And it just seems a little bit of cargo cult science, right? So that people are talking about Bitcoin, and then you see, you know, the ECB and these big central banks come out and talk about, CBDC like, it’s a big new innovation when really it’s essentially lipstick on a pig. So it’s a funny way. It’s a funny world that we’re living in that that is part of the conversation now. And, you know, Jerome Powell is openly talking about CBDC and how they want to do some research on it before they come out with anything on that. And it’s just a very funny thing.
Preston Pysh:
If anything’s Stephan, if anything, it speeds it up because now you get faster clearance of settlement times than what you had before. So if they’re now doing digital currencies and doing it through a blockchain, or, you know, if it’s centralized, can we even call it a blockchain? But they’re gonna speed up clearance times of being able to pay people. The people are then going to be able to transfer that into whatever else they want to put it into. So if they want to move it over to Bitcoin, they can just do it quicker. So one could make the argument that they’re actually going to accelerate the speed of adoption to a truly decentralized protocol that is acting as a form of store of value, which is Bitcoin.
Stephan Livera:
Yeah. I’d like to see definitely more and more people come into the Bitcoin world. Obviously, I think you and I, and many of my listeners are obviously already there in terms of wanting a Bitcoin Standard and so on. I guess maybe one idea that comes to my mind also is my friend Vijay Boyapati . And he’s spoken about this idea around waves of adoption, right? So every wave it each time, you can access more people, right? So in the early days it was cypherpunks and, you know, drug markets and libertarians, and then it became kind of macro people. And in over time, it’s kind of that circle of users is growing. And so it’s kind of like each wave there’s only so many people that you can attract in because there’s only so many people who are mentally ready to take that leap to, to buy a Bitcoin and to hold it and to use it and do all these things with it. So I guess probably in my view, that’s the strongest argument I can think of why this coming cycle, let’s say the next year or two is not the final cycle. However, I, I’m curious what you think in terms of people being mentally ready take that Bitcoin orange pill?
Preston Pysh:
Well, at the end of the day, it comes down to trust. When do we feel like you’re going to have such a headline in the news and trust is so eroded that it’s a commonplace discussion in every single household around the world that people are saying, Hey, these currencies are broke. And this other thing over here that just keeps gaining value seems to be the solution to this, that day is going to come. And it’s just a matter of when it’s going to play out. So for a historical reference, you can go back and you can look at Germany in the 1920s when it had its hyperinflation event. And when you look at the chart and anyone can Google this just type in Germany, 1920s, Gold mark price chart. And when you see the chart, it just goes parabolic. It has a lot of growth early on, and it really kind of started in 1918. You had a lot of growth. Let’s just say 1 Gold mark when compared to Papermarks, one of those in 1918 through 1918 was around the, a one. And it went up to about a five then by 1998, a year later the end of 1919, you were at about 10. Then by the end of 1921, really kind of getting into 1922, it got up to a hundred and you still didn’t have this scenario where the Germans were saying, this is hyperinflation.
Preston Pysh:
They were just saying this, our currency is just getting crushed, right? They, they still felt like it could be salvaged at that point in 1922. And this all started in 1918. And so you went from a debasement of one to a hundred, right. But where it really started coming off the tracks is whenever it started getting up to a thousand and then the 10,000 Mark after it went from one to 10,000, which took one, two, three about a five and a half years when it passed through that 10,000 Mark is when it really came off the rails. And I pulled up a this is obviously translated from, a newspaper, from a Frankfurt newspaper in 1922, as this passing through like the 10,000 Mark occurred. And this is what was written back then.
Preston Pysh:
“German economic life is dominated by a struggle over the survival of the Mark. Is it to remain the German currency, or is it doomed to extinction during the past few months, foreign currencies have replaced it as units of account in domestic transactions to a wholly unforeseen extent, the habit of reckoning in dollars, especially as established itself, not only in our internal accounting practice, but above all, as the method of price quotation and trade industry and agriculture.” When I’m trying to think about what are going to be the cues of this thing, potentially going all the way. I think the cues are something that we’ve talked a lot about. I know you and I Stephan in this past year, and that has really kind of become a theme in the Bitcoin community, especially on Twitter, which is this unit of account. When I think whenever you start seeing CNBC discussions, wall street journal articles with this in the headline, that is Bitcoin, the new unit of account is the dollar dead.
Preston Pysh:
Is the Euro dead. Those kinds of things in the news, if Germany is any indication of, of where that separation occurred, where all trust was lost, that’s what the headline sounded like right as that happened. So I think that that’s an important consideration. That’s what people need to be paying attention to because as soon as that narrative starts to take hold and it’s commonplace in financial news and business, you better believe people are thinking about what can I do to protect myself. Do I think that those headlines could happen this summer in a year from now? I do. I think that those headlines could happen, especially if we watch Bitcoin go to a hundred thousand, I don’t know how the financial news, I mean, you’re seeing how they’re handling this recent run, right? Like it just hit 13,000 and it, and it came from like 11,000 and it was all through the news.
Preston Pysh:
Paul Tudor Jones was on squawk box. They’re talking about how much he likes it and all this kind of stuff. That move was nothing. I mean, you were in the game in the 2017 bull run, right? Like this is what we’ve seen here in the last year is nothing. And if, history is any indicator as to how much this is going to run in the coming year, watch out and get ready for those headlines. And I kind of suspect if those really start to take root, the trust is the part that I’m really paying close attention to. I’m paying close attention to big bond investors talking about how they’re taking a portion of their bond position and reallocating it to act as a hedge against inflation. Those kinds of things are going to be the things that really are good indicators as to where this is potentially going on this, on this incoming run.
Stephan Livera:
So, yeah, that’s a really interesting way to parallel to look back into Germany, the history and a great book. I’m sure you’ve read also is When Money Dies by Adam Ferguson and that’s a really interesting cultural shifts and things that were happening during that time period. So at one point the internal depreciation of the mark was lagging behind it’s fall abroad. And so Germany was actually a Haven for tourism, right? And so it’s kind of a funny cultural phenomenon, I guess, that we’ll see. And perhaps we see this in other countries around the world also where they are going through currency trouble in the first few years, it actually is a really cool place for tourists to go because they can go there and get really fantastic service, best hotel, excellent restaurants, all for very cheap. But then later it gets worse and worse, but I think it’s different in this sense, because there’s a few different factors here because firstly, we’re looking at a global phenomenon here as opposed to just what’s going in one particular country. So in your view, how does that change it? For example, if it’s happening in a more global context, people could argue that. Okay, fine. I just, I won’t use my local Fiat money. I’ll just use the US dollar instead.
Preston Pysh:
Yeah. And I think that that’s where this might even be more profound because the narrative isn’t just going to be in a single country, you’re going to see the narrative just slowly trickle through the countries that are finding their currencies collapsing first. So Turkey, Argentina, you can go on there’s, there’s a bunch of them Venezuela. When you look at these price charts, in terms of their Fiat currency, Bitcoin’s already making new all time highs, right? My opinion is, this continues to play out, those price charts are going to be commonplace amongst all nations. They’re all going to be looking at these price charts and saying, why is every single currency on the planet getting debased relative to each other, right? It’s going to be a crazy experience. And it’s going to be something that the news stories are going to start in some of those locations. And they’re just going to compound and proliferate around the globe as this continues to amplify.
Stephan Livera:
And so I think as people in those countries that are already hitting Bitcoin all-time highs in their local currency, they’re going to start thinking, at least some of them will start thinking about Bitcoin and holding Bitcoin and so on. But then that opens up the question around technology, ease of use, how easy is Bitcoin to use and secure today versus that versus the necessity, right? So when someone really, really needs something, they’ll go and spend the time to learn. But you know, Bitcoin today can be difficult to correctly secure and do all these things. What’s your thought there on the level of technological progress with Bitcoin and the ease of use the user experience versus the necessity?
Preston Pysh:
When you look at the, the general population, most people don’t have any type of positive earnings power, your typical household, not just in the U S but literally all over the globe. They’ve been conditioned into spending whatever they’ve got as fast as they can. And then if they can borrow beyond that, they will because they’ve been incentivized to do, to act that way, where you look at the locations where free cash flows are being generated in any type of meaningful way, it’s on businesses income statements and then being plowed into their, into their balance sheets. That’s where the meaningful amount of movement of free cash flows is actually at. And like we talked about oh my gosh, probably six months, nine months ago, Stephan, that’s where I’ve kind of suspected is gonna end up. And so we’re starting to see that.
Preston Pysh:
I don’t think we’re seeing it in any kind of meaningful way. We’ve seen a few companies that have done it in, in meaningful ways, but as far as collectively in publicly traded businesses you’re just now starting to see that become a point of discussion in boardrooms. And, you know, when you think of it from a technical standpoint, how hard is it to secure Bitcoins or have some company secure them on your behalf? I don’t see that as being any type of roadblock for this incoming cycle, because when I’m thinking about how companies are going to buy these, I mean, it’s just it’s kind of a non-issue as far as I’m concerned. And then on the individual level, the people who, have a significant amount of money, they’re going to figure out a way to stack them. I don’t think that that’s going to prevent somebody who has any type of meaningful money to put into it is gonna stop them from doing it.
Stephan Livera:
You’re right to point out the distinction there between individuals and companies, and also in these high inflation environments, if we look historically, as you mentioned the 1920s Germany, or if we look at Zimbabwe, for example, more recent historical example, we can see examples where people try to protect themselves against the depreciation of their of their currency and potentially of their net worth. And so they, they look at things like buying real assets or potentially taking out loans in the local currency, which is in some sense, kind of going short. And so listeners, you can check out my recent episode with Russ Lamberti and Philip Haslam. And we talk about their book When Money Destroys Nations. But those are some examples that individuals and businesses can undertake to try and protect themselves. Do you have any thoughts around, with the most likely ways that people will do this? I mean, is it just going to be kind of like a Michael Saylor style, just buy Bitcoin and hold it in the treasury?
Preston Pysh:
You know, that was, I think his example was not the common one for a publicly traded company for private companies I could see that all day long, but for a publicly traded company he was in a unique position where he has an ability to out vote everybody. So he can do bold things like that, but most publicly traded companies don’t have such a concentration of voting rights. So I think what you’re going to see is a much more Twitter. I’m sorry. Paypal, like, I’m sorry. Again, I misspoke again, Jack Dorsey Square. The that’s how I think you’re going to see more of these publicly traded companies rollout is the way that square did it, where they, they didn’t take a huge position, but they took an initial position where they purchased a, what was it, 4,709 Bitcoin. So they had a $50 million basis.
Preston Pysh:
I think it’s up to about $60 million today, as far as its value. I think that’s what you’re going to kind of see to be much more standard as the year goes on. And I think as you get more tech companies that do this, and I definitely think there will be more tech companies that do this, we just saw the PayPal announcement that they’re going to start offering it. Now, whether they put it on their treasury or put it on their balance sheet or not, that’s, you know, yet to be seen, I would suspect that they will, but as that continues to play out, I think you’re going to see companies that start off by dipping their toe in the water. And then next thing you know, they’re going to be putting their feet in the water. And next thing in they’re standing waist high in the water. And most of it’s going to be just because of the performance that it gives their stock is just going to be unprecedented. We’ve seen what’s happened with Michael Saylor’s company. And I think that that is just literally the tip of the iceberg as to the performance that you’ll start seeing out of MicroStrategy here in the coming year.
Stephan Livera:
And it does also open up that conversation around whether people will start buying MicroStrategy shares to have some exposure to Bitcoin also. Yeah,
Preston Pysh:
I think that, I think a lot of investors don’t have access. Like they, their only access is through GBTC. They don’t necessarily want to go create their own. They don’t want to go to like a Kraken or whatever, because it’s just too much work. They don’t necessarily think that they understand it. So they’re just looking at an easy solution that they can do through their existing trading account. And so they’re gonna, they’re gonna find investors that are just going to plow into things like MicroStrategy to get some type of exposure to it. Now, as my opinion is as the cycle matures and we really start to see the price run, I’m not so sure that people are gonna be so lackadaisical in their way that they’re gaining exposure to it. I think they’re going to take a much more active approach, but yeah, that’s kinda how I see it.
Stephan Livera:
Yeah. So they may dip their toe in the water with this kind of orange coin exposure without actually holding any and then eventually learn, okay. I actually need to learn how to take custody myself and do all those more advanced things to sort of truly do Bitcoin. But another question that came to my mind as well is when companies are buying Bitcoin, there is that question of whether they will be strong hand holders or whether they will be weak hands who sell at the first sign of trouble. Do you have any thoughts on contrasting whether an individual who’s an individual HODLer who’s ideologically, or just interested in Bitcoin and is hardened through time versus a company holding where perhaps they will face pressures from their board or their senior executive management and directors and so on. Who will say, Oh, I want to cut my losses and run that kind of thing. Yeah.
Preston Pysh:
I don’t see them be trading it. Like you’ve seen people on Twitter that trade it. These decisions are very strategic. These companies, the boards, they meet, they’re looking at things that they can buy and hold for through a long period of time. If they’re taking a position to have an inflation hedge, they’re looking at that as something that’s taking years to play out. So they’re not gonna, they’re not going to just buy it. And then a couple months later offload their position. They’re buying it to hold it for a long period of time. Just like Michael Saylor said, I plan on holding it for a hundred years. I, yeah. I don’t see them trading around it hardly at all. I think when they take a position, they’re going to hold it. They’re going to see how it plays out through the quarter, maybe two quarters to see how it, how it matures. And then if they’re ahead in the position, they’re probably going to be looking to maybe even increase their position.
Stephan Livera:
Yeah. So it’ll be that, that dip the toe in the water and then decide to take a bigger position. I suppose, though, if this ends up not being the final cycle as it were, and I’m just picking numbers out of, out of the air, right. I’m not saying this is going to be the top and so on, but let’s hypothetically, let’s say it gets to like 150,000 and you know, a whole bunch of companies I’ll try to buy in there. And then it peaks at 200,000 and then it crashes down to whatever 40,000 or 50,000. Right. Again, I’m just picking random numbers just for the sake of discussion, but then would you say it, like some of those companies who may have bought in at 150,000 and now really feeling the pinch, because now it’s down at 50,000.
Preston Pysh:
Yeah. Think That could change their exposure for sure. Because the time frames, if it’s anything like previous four year cycles that plays out in longer than a year’s period of time. So you could see companies that would jump ship and sell their coins and just go through the process, but just more on a, on a more macro level, it just be a fractal of what we saw in the previous four-year cycle. Only instead of it being individuals, it could be companies. Yeah.
Stephan Livera:
Yeah. Although there’d be some, although to that point, the companies who are earlier in into it now, for example, Michael Saylor in that scenario would still be very much up on his investment.
Preston Pysh:
The value, you know, if I was going to get into talking about the value of businesses, because I was seeing a lot of comments on Twitter about this is like, how do you value a MicroStrategy when they’re sitting on so much Bitcoin? And especially when you compare it to how much free cashflows they’re kicking off, how do you value that as a stock and people are buying it to gain some exposure to Bitcoin, but how much exposure to Bitcoin and like all those things. And you don’t mind me getting into this part of just going in this direction. Do you, Stephan.
Stephan Livera:
let’s do it. Yeah.
Preston Pysh:
So when I, when I think about value and, and this is something that I’ve noticed in the community, a lot of people are technically oriented by price charts when they’re looking at things and not necessarily looking at a company and doing, you know, a strong analysis as to what the value is that the company is actually able to produce in the marketplace and then compare that relative to all the other companies that they could invest in.
Preston Pysh:
So when I’m doing this, example I think what I’ll do just to kind of illustrate this, I’ll talk about MicroStrategy before Bitcoin. And then I’ll talk about MicroStrategy after Bitcoin to kind of compare and contrast the valuation process. So the way I like to talk about valuation, whenever I talk to somebody, who’s just learning it for the first time. I like to use an example of a money machine. So let’s say that I was going to sell you a money machine. Most people, when they hear that they get all excited. I’m like, okay, sure. I’ll I’ll pay anything for that. Right? But the question really comes down to is how much money is the money machine producing in a year’s period of time. If I’m going to sell you a money machine, let’s say, I sell you a money machine for a hundred thousand dollars. Your immediate question should be, well, how much money can it print in a year? And if I come back to you and I say, Oh, the money machine can print a thousand dollars a year. That’s it, right? It’s a money machine, but it only prints a thousand dollars a year. Is that a deal that you want to take?
Stephan Livera:
Payback period of a hundred years, no.
Preston Pysh:
Yeah, after 100 years. And that’s a 1% return right. On an annual basis. And that’s assuming and we’re obviously making this really simple that like all the costs and everything, we’ll just say that it, it, it never breaks and all that kind of stuff, but yeah, your payback period’s a hundred years. So now if I would come back to you and say, well, it produces $30,000 a year now, it’s much more appetizing for you to take on this ownership of this money machine for a hundred thousand dollars. And so when you’re thinking about a business, I always like to use that example because that’s what a business is. It’s a money machine. At least if it’s doing its job, right, it should be a money machine. That’s printing a certain amount of money every year. So when we look at MicroStrategy and we use that same exact example, and we say, well, how much are you paying for the MicroStrategy money machine?
Preston Pysh:
And today, if you were going to buy every share out on the market, it’s $1.7 billion to own all the shares. And so then the following question is, well, how much money is the money? Is the MicroStrategy money machine producing every year in the answer is about $30 million roughly right? Every year it changes a little bit, but around $30 million. So what’s fascinating is in the example that I previously said, where you’re buying a money machine for a hundred thousand dollars, and it only produced a thousand dollars a year MicroStrategy, you could buy it for a hundred thousand dollars. And instead of getting a thousand, you’re getting $1,700 a year based on the price and based on the net income or the profit that the company is producing.
Preston Pysh:
And so a person would hear that and they say, Oh my God, that’s pretty crappy, right? Like that, that’s not that good, but what a lot of people that aren’t intimately involved in the stock market don’t realize is that’s pretty much how the entire stock market is priced right now. It’s priced at that multiple of that kind of return about a 2% return is what the us stock market is priced at. It might even be worse right now after COVID all your market participants that are holding stock today are signing up to buy a hundred thousand dollar money machine. And they’re going to make about a thousand to $2,000 a year with their money machine. It’s going to take a hundred years for those money machines to basically retain the earnings that you’re buying them for. Now, what’s fascinating about Michael Saylor’s company is he’s done something very different than everybody else. And he went out and Michael was sitting on a tank load of free cash flows of retained earnings at this point, right.
Preston Pysh:
He had $425 million of retained earnings, liquid retained earnings, his balance sheet. Let me tell you folks, not too many companies that have that type of market capital at $1.7 million market cap have, you know, a quarter of it sitting in like cash and Michael did. And so he goes out there and he buys he not only does he go and buy some Bitcoin, but he literally goes and buys like all of his liquid cash. He goes and buys completely all that Bitcoin. Now his company goes and you know, since buying it, which what’s it been a quarter, three months, Stephan, would you say that this roughly I’d say a quarter, so in three months now, granted, this is unreliable gains. So they could go down, but today he’s already made an unrealized gains, $66 million in three months. Okay.
Stephan Livera:
Double the annual normally.
Preston Pysh:
Exactly Right. His bottom line for the years, $30 million, and he’s already doubled it. So you had a company that was, that was making 30 million a year, right? It was, it was basically making the $1,700 in the money machine example and he’s tripled it. Okay. So instead of getting a, we’ll just round it up and say he was getting a 2% return. Now he’s getting a 6% return as a analyst, as a security Analyst, how do you value a company?
Preston Pysh:
That just tripled their bottom line in a quarter? Right? So if we were really gonna do this as an annualized thing, you’d multiply that by four. It’s not triple it’s way higher than that. Right now we’re doing all this public math. So I gotta be careful, but that’s some serious stuff to think about now, when we think about, well, where would the company be in a year from now based on what you and I know about scarcity and the having and all that kind of stuff, and kind of what we suspect is going to play out here in the coming year. I’m just going to tell you, in my expectation in a year from now, Bitcoin’s going to be at a hundred thousand dollars. That’s my opinion, right? I could be way off, but if that scenario was true, Michael Saylor is going to have $3.8 billion of unrealized gains in just his Bitcoin alone.
Preston Pysh:
Okay. $3.8 billion that would take his company 111 years to produce. As far as profits, all the assets on his balance sheet, minus the Bitcoin that’s sitting there, it would take those assets, those people performing the, those jobs 111 years to produce that much bottom line profit and retain it. How do you value something like that? I don’t have a good answer for you but I can tell you it’s drastically different than how you’re valuing everything else in the marketplace, because everything else in the marketplace, you’re buying the money machine for a hundred thousand dollars. And you’re only making a thousand or $2,000 for every company, pretty much in the entire stock market in general terms like the S and P 500 and such. So, you know, we’re where do I expect his company to be in, in a year from now? Well if the calculation we’ve got for the Bitcoin is right, and it’s $3.8 billion, then you stack on top of that, how the market was valuing that $30 million stream of cashflow before you come up with around a 4.3 or $4.5 billion market cap valuation which would put it at about a $430 share price in a year from now at a minimum for me at a minimum, that’s how I would be thinking about the value of that business that I would expect to see in a year from now at a minimum.
Preston Pysh:
So it’s pretty interesting because normally when you’re valuing a business, it really comes down to how much are they putting off the bottom line on their income statement? And then the assets are just kind of looked at very differently. When you start getting into the balance sheet, typically you’re looking at a business that’s failing, and you’re going to try to repurpose or resell the assets and try to recuperate more than what you paid for them in the book value. But man, it’s a really interesting time in security analysis because I kind of suspect the companies that are sitting on these big balance sheets on these big Bitcoin balance sheets are going to start to be looked at more closely and with more of a premium, than the traditional assets of the company that they typically produce on the income statement side. And boy, we’ve never seen anything like that. It’s really exciting as a person that likes to study this kind of stuff.
Stephan Livera:
Yeah. I think that you gave a really great explanation there, Preston, and I think maybe expressed in another way, people, sometimes people who are looking at the stock market and thinking, okay, what sort of stocks am I buying typically? Or a common one is CAPE right? Sickly, cyclically adjusted price to earnings ratio. And typically if the market is already very high then people have, they logically their future expectation for the return possible by investing in stocks is quite low. And that might potentially be what causes them to start looking in these, looking at other possibilities, such as buying Bitcoin directly, or looking at companies that are taking this kind of approach. Wouldn’t you say?
Preston Pysh:
Yeah. Well, think about if what we described as true, as far as Bitcoin’s ability to run, think about how much leverage he’s going to have to just do acquisitions of competitors, because you don’t have to have the full amount to buy out a competitor. You just have to have a portion of that. And if you’re sitting on that much liquid buying power 3 billion plus for a company that used to only have half a billion, I mean, that is a significant difference in their ability to compete. Now let’s just change gears. And I mean, MicroStrategy it’s a tiny company compared to the Apples and the Amazons and all these other big tech companies that are literally on hundreds of billions of dollars that they could drop into the market. So like Michael Saylor just bought $425 million worth of Bitcoin.
Preston Pysh:
Apple could step in and literally take a $10 billion position in Bitcoin. And it would be viewed as a conservative. I think it’d be viewed maybe not as conservative because that would be, would that be 5% of their, I don’t know how much marketable securities are currently sitting on. I know it’s over a hundred billion, like Berkshire Hathaway would be, I know there’s a little bit better. They’re slightly over, I think they’re at $150 billion, a marketable security. So if they step in and they take a 10 billion, which I don’t suspect is going to happen with Berkshire, but just for the numbers purpose, right? They come in with a $10 billion position that’s less than 10%. And I think Apple’s is even higher than that. So those companies have the capacity to do that. They also have the technical prowess of people sitting there on their staff that can figure this stuff out.
Preston Pysh:
You and I can look at this technically. And it makes sense to us, if you don’t think that some of the smartest programmers sitting at Google and Amazon and other places, aren’t going to take a closer look at this stuff as companies like MicroStrategy and many other start stacking it on their balance sheet, we’re all crazy because they are, and boy, they’ve got the money to throw at this thing. And so I think it’s going to become, I think by the time you get into the second quarter of ’21 I think it’s going to be the talk of talk of who’s stack. And most of this stuff is as much as this stuff as they can and putting it on their balance sheet.
Stephan Livera:
Yeah. So I think I don’t know the exact numbers, but I think just from a quick search, it looks like Apple has something like 200 billion in cash on hand. And so, I mean, if they were to buy it, what is that, 10 billion? That’s.
Preston Pysh:
5%. Yeah. Yeah. That’d be fine.
Stephan Livera:
So it would be quite a reasonable amount for them to buy. So I guess my next question to you precedent is what kinds of companies are well-placed like, is it that as, I think, as you mentioned earlier, MicroStrategy were uniquely well-placed in that Michael Saylor has a high ownership share of the company and thus can have a little bit more leeway in how he runs the show. I guess the counter might be something like some of these larger companies they’re more like the Titanic. They just can’t turn that quickly.
Preston Pysh:
Yeah. I think that, I mean, if there’s one thing that Silicon Valley has showed us, it’s that there’s a lot of blood in the water and everyone’s sniffing each other’s tails and they’re also innovative, but at the end of the day, maybe they really aren’t and they’re just trying to keep pace with everybody else. So I think if one of them starts doing it, then all of them are going to start doing, doing it. And then it’s going to maybe get a little competitive, especially as the performance and what it’s doing to their stock price and whatnot is reinforcing of the decisions that were previously made. So I think that a really important consideration with all this is you have to have free cash flows, period. If you’re a company which half of them out there are not profitable, maybe even more now that we’re through COVID, that was pre COVID.
Preston Pysh:
Half of the companies don’t even make a profit. If you’re not making money, you’re either selling things to come up with money, to allocate into this, or you have positive free cash flows, right? So the companies, and this is where I think this is really exciting because the big issue that we have is since 2008, the zombies have been kept alive at all costs. I mean, the amount of manipulation that has happened by central bankers, not just in the U S all over the globe to keep zombie companies alive is in my humble opinion. Disgusting part of this thing that we call capitalism is you have to let businesses that don’t add value that the market doesn’t value their products and services to fail. That is what creates the creative destruction of something else to rise up out of the ashes and produce something that is valued. One of the things that I’m so excited about with Bitcoin is that if you’re not, if you’re not making free cash flows and you’re not profitable, well, guess what? You can’t freaking buy it, right? You can’t buy it. And if you’re not stacking them in my humble opinion, you’re about to get just the capitated. I mean, I look at Michael Saylor’s company, he has no issues whatsoever of something like that happening to him. But when you look at some of these other companies that aren’t producing a bottom line, they’re going to just get clobbered.
Stephan Livera:
Yeah. So it’s certainly going to be very kind of polarized then between the, those able to invest in Bitcoin and those not able to invest in Bitcoin, maybe one other point is that let’s say at a professional money management level, there might be people who are reluctant to buy into a crazy bull run. So for example, you know, people might be like, yeah, they’re wanting a deal. They don’t want to be buying into something that they feel like they basically, they don’t want to be risking that they’re buying the top. Right. So I guess what are the kind of main ways that people would try to manage that.
Preston Pysh:
Can manage it with some knowledge? I mean, you, you pose such an awesome question because I can see this thing running through 30,000 and people just being like, this is not right. This makes no sense you’re traditional money managers. So they’re going to be like, this is idiotic. This isn’t backed by anybody, you know, all the, all the 2015 arguments that we’ve all heard, they’re all going to be saying them ad nauseum. And they’re gonna be saying, well, I’m going to wait for the next dip. And then the next step is going to happen. And you know, what’s going to happen in their mind. They’re going to say, well, maybe these were the tulips right after when the dip plays out, then it’s, then it’s becoming tulips. And then it has just a snapback next around the 40,000. And they’re just like, Oh, I’ll buy the next one.
Preston Pysh:
And then it just keeps playing out. And then they just keep sitting on their hands and they never do anything. And for somebody who’s never experienced, one of these bull runs, and we were saying earlier, you hadn’t seen nothing yet. When these things start to run like that, and they’re moving, you know, this one’s going to move in and multi thousand dollar, 5,000 kind of days there, especially at the end, people are just going to, they’re not going to know what to do, because they’re going to feel like whatever they do, it’s going to be the wrong decision. And it’s just going to keep going up. And so I don’t know what to tell those money managers, other than you might want to study some of these models and kind of understand where these, these price orbits. I don’t know if anybody else is using that term, but that’s what I started calling it.
Preston Pysh:
They might want to understand where those are at to manage their risks. Now, if this thing starts running over a hundred thousand, I honestly don’t know what to tell you at that point, I’m just going to stop doing interviews and I’m probably not going to talk too much on Twitter or anything, because I honestly don’t know what to tell a person. If this thing starts running over a hundred thousand, I would tell you to pay attention to the news headlines and what all the talking heads are saying. And if people are talking about the failure of Fiat currencies ad nauseum, well, maybe it’s going all the way, but I just don’t know. And that’s going to be, I think that’s going to be the really hard point for people to know whether they should buy or not. I think anything below that, I mean, I know I’ll keep buying.
Stephan Livera:
Yeah. It’s really mirrors the process for many individuals, as you were saying. That was a process of, for a lot of people who spoke to me, even in the last, you know, 2017 and stuff, people would be like, Oh, is this the right time? Like, I’ll just wait. You know? And they would just, you know, they would constantly trick themselves and just basically play themselves. Whereas now I think at least amongst the let’s call it the hardcore Bitcoiner set, I think they are more set on the idea of dollar cost averaging and auto stacking and regularly accumulating and so maybe that is going to be a similar kind of story where maybe it needs a cycle where companies make those kinds of mistakes. And then in the next cycle, that’s when they’ve kind of figured it out. Oh, okay. Actually the way you do this, is you just regularly accumulate little chunks over time, and that’s kind of how you manage it?
Preston Pysh:
But you’re assuming there is a next cycle.
Stephan Livera:
Yes, I am.
Preston Pysh:
I mean, that’s the, that’s the part that I, I have, no, I have no confidence in telling somebody that there’s going to be a next cycle. Could there be, of course, of course. I mean, I’d put the odds at 50%, right. That we, that we do another one, but could it go all the way this time? Absolutely. Absolutely. So, I mean, yeah, it’s going to be a hard one. And I think when you look at into these adoption, S-curves, that’s another important thing to think about is, you know, the magic percentage is two and a half percent, and then you start getting into the hockey stick section of these adoption curves. And, let’s not fool ourselves. This is something that is going to be globally adopted. If it continues to provide the value proposition that I just don’t know how that’s going to get impaired between now. And when I think this thing’s going to start getting to the two and half percent mark it’d be, it would be, it would be insanely painful to see it go through a hundred and say, well, I’m going to wait for the next cycle. And then it goes to a million. I just, I mean, I don’t know what to tell somebody it’s going to be, it’s going to be some very, very hard decisions to be made in about a year from now for a lot of folks.
Stephan Livera:
Yeah. That’s a really hard thing to think about. I think for me, I’m probably like, I’m probably more like 90 10. I think it’s 90% chance that it’s, you know, this is not the final cycle, whereas I guess you’re more that kind of 50, 50 level, you think it’s 50% chance that this is not the final cycle.
Preston Pysh:
I think that it’s going to have way less to do with the, how the protocol is functioning. Everything to date has been based on the four year cycle and how it’s executing Fiat currency. I think that on this next one especially as it goes up into the, these really high numbers that have a deep psychological effect on a lot of market participants, you combine that with the fact that it’s been around for more than a decade. At that point, you combine it with the fact that the bond market is contracts to lose money. You combine it with the idea that universal basic income is not going away. And that everyone’s just getting these checks in the mail all over the globe, every single country they’re on a race to devalue. You have social unrest, you have all these things that the trend is suggesting are only going to get worse. And the name of the game for currency is one word it’s trust. I don’t know. I really think it’s grossly underestimated that it could go all the way in the next cycle.
Stephan Livera:
Yeah, definitely.
Preston Pysh:
Yeah. I’m definitely open to both scenarios.
Stephan Livera:
Yeah. Yeah. I mean, absolutely. I think this is kind of a, it’s kind of difficult because here’s the other thing. What about government reactions? Right. So as an example, Raoul Pal has spoken about how, when you, if you ask him about the government risk and stuff like that, he sort of said, Oh, look, it’s not at the size yet that I would even worry about that, but let’s say, you know, it in this, during this next cycle, it starts to get to that size. Are there actions that a government could take to potentially slow the adoption of Bitcoin? I think it’s unlikely at this point that they could, I think it’s highly unlikely that they could kill it, but is it possible that they could take some action that slows the adoption of Bitcoin such that it staves it off into the future? Or perhaps there might be some forcing factor in the sense that because Bitcoin exists, it might force government to change on their side as well, and find some way to be less inflationary. Maybe they would try to modify the financial system to try to sort of keep people inside it and give them some level of carrot or incentive to stay in the fiat world, as opposed to coming into the Bitcoin world. What’s your view on that kind of idea over this next cycle?
Preston Pysh:
Just flip it on its head and just say, what if governments are trying to, cause come on we can’t kid ourselves, these government officials are gonna realize that if they, if they start to do things to inhibit its adoption and it becomes global money, they’ve literally just shot themselves straight in the leg, in a race that they, they need two very strong legs for. Would we potentially see the exact opposite play out of what you just described? And I think that that’s when I think about the game theory, I mean, the last thing you want to do is if you see something that looks like it’s emerging as a new unit of account for the world, and you’re saying, ah, I’m gonna I’m going to gimp myself out for this race, this epic race of proportions. I don’t know that that’s going to be necessarily how it’s handled. I mean, when you look at how all the legal implications of this are being handled right now, they’re kind of suggesting the opposite of what you said.
Stephan Livera:
I agree with you there. I think the recent OCC news and some of these other kind of milestones that we are reaching, I guess we could say it’s very well possible that we start seeing governments get more involved in say Bitcoin mining and having their own Bitcoin mining operations or legally, and officially having support for that kind of thing where they want to try and promote it within their own country. And we’re seeing that already in some countries around the world just not in like many countries, but yeah.
Preston Pysh:
Maybe mining operations start to get nationalized, sorry to interrupt you there. But yeah, maybe that’s maybe that’s what they start.
Stephan Livera:
Yeah. That’s, that’s also a possibility. I mean, w we we’ve heard those rumors of things going on in Venezuela like that, or I think other countries as well, potentially Iran,
Preston Pysh:
The challenge is you can’t, everyone has to do the same thing in order for that scenario to work. And I just don’t see that possibly happening, especially when you look at it in the context of every country in the world has been a victim of dollar dominance for the last, since Bretton woods, right? Since 1944, they have been a victim of dollar dominance when one entity has been able to just benefit from that currency, driving everything for that many years. And now they’re starting to see that system breaking down. I kind of suspect that you’re going to see all the other countries in the world going at this as hard as they possibly can.
Stephan Livera:
Yeah. Look, I think I agree with you that it’s in their incentive that you want to, you see this thing coming and you can’t stop it. So you might as well try to have some and have power within the Bitcoin system. Perhaps maybe the only other thing I can think of is that sometimes governments do things that don’t make sense, you know, like even if they do make sense, even if it would make sense for them to support it. I think we will see at least some governments that really come out strongly against Bitcoin. And then it becomes a game of jurisdictional arbitrage. I think it becomes about going to those places that are supporting Bitcoin, because they know they can’t stop it. But for those people who are stuck in a country that is very anti Bitcoin or putting out a lot of rules and regulations that basically stop the adoption or criminalize it and things like that, it’s going to be a difficult journey for them.
Preston Pysh:
I totally agree with you on that. I think if there’s one thing we can count on is that there are going to be countries that really get this wrong and which ones they are. I have no idea.
Stephan Livera:
That’s a tough one to think about. But potentially those small or medium countries might have more of an incentive to, because they’re the ones kind of punching up, right? They’re the ones who have more of an incentive to try to support this thing and to try and ride the wave. So maybe they’ll be the ones to try and have tax incentives or some other kinds of citizen incentives for people to come and set up a Bitcoin business or set up Bitcoin mining there. And maybe that’s something we see. But I guess for me, it just feels too early. You know, like, even though we obviously, you and I are very bullish on Bitcoin, we think it’s going very high, you know, medium to longer term. I just, for me, it just feels too early for all of that to be happening in the next year or two, you know, to me it feels more like kind of next cycle is when we might start seeing some of those things. But I guess that’s my view.
Preston Pysh:
And yeah, I would agree with that. This is going to be, if it would play out in this short duration timeframe, like I’m saying here in the next three years, three and a half years, I think that that would be a real shock to the system. And I think it would be very painful for a whole lot of people. Is that what I want to happen? I don’t know what it is that I want to happen. I just want to see there to be a fair standard for all market participants around the world. That’s what I ultimately want, but I don’t know necessarily the best way to achieve it is fast or slow. Do you rip the band-aid off quickly? Do you rip it off slowly? Not that it’s going to be a choice. I just don’t know what’s going to be better for most people around the world, but I do think that there is a possibility that it could be faster than what we might be than what the market sentiment would be suggesting.
Stephan Livera:
I guess if there were to be indicators that you thought, okay, it’s not going to be this coming cycle. What would those kinds of indicators look like? Like, would there be any kind of maybe irrational exuberance indicators in your mind, or do you think those are actually just indicators as you were saying, Oh, what the US dollar killer kind of aspect?
Preston Pysh:
Well, I think if you don’t have the price go to the levels that we were talking as far as like a hundred thousand plus, somewhere in that range, I think if you don’t have some of those numbers being hit within the timeframe that we’re talking, then I definitely don’t think that you’re going to see it play out on this cycle. Like for example, let’s just say the price went up to 30,000 and then came back down and to some low number, like 15,000 or whatever. There’s no way that something like that is going to drive this to become global money with a move like that. I think you’re going to need some something in excess of a hundred thousand dollars.
Stephan Livera:
Yeah. That’s a fair comment. And it also comes to when people compare, say Bitcoin and gold, right. And I think for Bitcoin to be comparable with gold, I think off the top of my head, I think I saw this number, someone posted, this number, I think it was 400 or five around 500,000 for Bitcoin to be comparable with gold. And so I guess that would have to be the level before it even really reaches the same significance as gold.
Preston Pysh:
Yeah. And I’m not so sure that, that it hitting parity with the market cap of gold would be the trigger. I think the trigger more just kind of the news cycle that’s associated with the marketing that’s associated with the abrupt price movement. I think that’s what kind of has the potential to destroy trust. It all comes back to that word trust. If everyone’s losing trust that they’re going to be able to retain their buying power, you can see people do some very crazy things. And fear-based, decision-making FOMO to a T that’s the thing you got to really watch closely and how much that drum beat is being beat and how fast this thing is moving, I think is a really key component of whether it’s going to be able to do this or not.
Stephan Livera:
Yeah. So I think those are some really fascinating comments and I’ve really enjoyed chatting. Preston, did you have any kind of closing thoughts on some of the themes we’ve touched on this episode?
Preston Pysh:
You know. The one thing that I really try to do is just try to educate in my Twitter account, the first thing that I have pinned, there is a one page paper for people that if they hear Bitcoin, or maybe they have a family member that’s that is skeptical or whatever, I tried to put the really important or the essence of what Bitcoin is trying to achieve, which is a global peg amongst some other things. I tried to put that in this one pager so that it’s not too long and people just kind of throw it in the corner, but that they’ll actually take the time to read the one pager. Anyone can download it, amend it, change it, whatever you want, however you think would get through to family members. I would just encourage people to take a look at that.
Preston Pysh:
It’s just right there on my Twitter. First, tweet that sits there. And I think that we’re, we’re entering a time. That’s going to be really important to pay close attention to what the companies are done, because I think they’re the ones that are going to be able to make the market move in. This really abrupt fashion is when they start stacking onto their balance sheet because they’re sitting on so much capital for a lot of these, these large tech companies, that’s going to be an important thing to watch. And then I think it’s going to be important to watch the headlines, like I was talking about, like, going back to the thing that I read from Germany in 1922, something like that is, is what you’re going to be hearing. And that’s going to be the thing that would eventually maybe really kind of take this to a whole different level.
Stephan Livera:
Well, I really enjoyed chatting with you Preston, and it was very really enjoyable and listeners make sure you follow Preston and subscribe to his podcast. Preston, where can listeners find you
Preston Pysh:
Really? The best place is just on Twitter. You can Google my name. Preston and last name, Pysh. I have a podcast called we study billionaires. We talk a lot about the asset valuation, stock valuation kind of like what we were doing there with MicroStrategy and just really an honor to be on your show. Stephan, I really enjoy conversations with you. You do such a fantastic job.
Stephan Livera:
Thank you, Preston.