00:00:30.000We all want to believe that through some component we can buy into a lottery and change our lives.
00:00:36.780That's the entire pitch behind the lottery.
00:00:39.340My concerns around crypto or Bitcoin as it's being presented today is that the emphasis is on that,
00:00:44.620on the idea of wealth creation as compared to utility.
00:00:48.180But what I'm not excited about is the rank speculation and, you know,
00:00:51.680what I would argue is fraudulent selling to retail of here's the keys to how you get rich simply by buying something.
00:00:57.380And I got to tell you, very few tears are being shed right now for my lack of participation in the Bitcoin network or the Ethereum network.
00:01:06.480When you think about the behavior in the Bitcoin marketing story, it was all designed to appeal to the fear that we have of being left behind.
00:01:16.080You hear somebody say, have fun staying poor.
00:02:11.080But I wasn't talking about the locals, I was talking about our community on Locals.
00:02:17.040You mean the one where you get phenomenal behind-the-scenes content when you get to ask incredible guests like Jordan Peterson, Brett Weinstein, Bill Burr, Sam Harris, Adam Carolla, Heather Hying, and others your questions?
00:02:36.820Not just that, you can get supporter-only benefits like trigonometry mugs, monthly calls with other top supporters, and even a regular meal with me and Francis.
00:02:46.420You also get phenomenal behind-the-scenes footage of our trip to America where we met a whole host of incredible guests and gave ourselves terminal indigestion.
00:02:58.460We're also starting to do monthly giveaways for locals only.
00:03:01.760The first one will be signed copies of Andrew Doyle's new book.
00:03:04.940Plus, you get access to an incredible community of like-minded people who share memes, have fun conversations, and most importantly, you get to make new friends.
00:03:17.680You can support us with as little as $7 or about £5 a month, or give us more for the higher-tier benefits.
00:03:53.020Thank you, Constantine. I appreciate it.
00:03:54.620No worries. So good to have you on the show.
00:03:57.560Before we get into it, tell everybody a little bit about who you are, how are you, where you are, what has been your journey through life that leads you to be sitting here talking to us?
00:04:06.880Well, I had asked you actually the exact same question before we got started, but I have been an investor in mutual funds, hedge funds, and now ETFs.
00:04:15.760The firm I am the Chief Strategist for Simplify Asset Management is an ETF firm based in the United States.
00:04:23.000I've been doing this for about 30 years.
00:04:24.880And what I'm most well known for is the work that I've done around derivative structures, alternative investments like crypto or Bitcoin.
00:04:33.400And in particular, the opportunities that you can, the opportunities that investors have to incorporate those types of investments into their portfolios to improve returns over time.
00:04:45.360Well, it's great to have you on the show.
00:04:47.460The main reason we wanted to talk with you is Bitcoin and crypto, because we've had one or two people on the show who are very enthusiastic about it.
00:04:57.240We've also had one or two people who are less enthusiastic, and I know that you have some skepticism, not necessarily about Bitcoin or crypto itself, but about the way it's been marketed and promoted.
00:05:07.860So, you know, if I open my Twitter account, it's going to be about three messages down before there's a hot girl talking about how you should put all your savings into crypto immediately to make your life better and to have better sex and whatever else it is that Bitcoin offers everybody, allegedly.
00:05:28.020Well, it sounds like my settings are on my Twitter are wrong because I've blocked all those people.
00:05:33.280But there's a couple of things I think that are really important to understand as it relates to crypto or Bitcoin.
00:05:42.440The first is behind any form of narrative or marketing pitch that has to be an element of truth.
00:05:48.840Right. And so people are understandably very frustrated and very upset at the levels of intervention in monetary policy, the perception that the system is stacked against them.
00:06:00.320And something like Bitcoin that has, quote unquote, performed extraordinarily well, where the price has risen to the point that people who made relatively small investments have experienced life changing degrees of wealth is naturally seductive to people.
00:06:15.540Right. That we all want to believe that through some component, we can buy into a lottery and change our lives.
00:06:21.800That's the entire pitch behind the lottery.
00:06:23.560My concerns around crypto or Bitcoin as it's being presented today is that the emphasis is on that, on the idea of wealth creation as compared to utility.
00:06:32.480Right. Trying to make people money instead of trying to help people make money in one form or another.
00:06:39.340And the reason that you're talking to me is, is I got involved in debates around Bitcoin sometime in early 2021, as I increasingly began to hear from my clients the language that had somewhat become universal, which is it's the dominant trade.
00:06:54.520Right. It's the only trade that makes sense in the environment that was there.
00:06:57.980That was fully embraced both within the institutional community and it was embraced certainly within the retail community, that this was an opportunity to buy something that was simply going to make you rich simply by virtue of buying it.
00:07:11.500Right now, in many ways, it's important to identify that that type of identification, something that makes you money without you having to do anything other than buying it, by definition is a security and therefore passes what's called the Howey test.
00:07:25.680Therefore, you end up in this very uncomfortable position, as you try to explain to people, well, the math behind that actually doesn't work.
00:07:34.060Right. So what Bitcoin really is, is it is compensation that is paid to the accounting firms that manage the database behind Bitcoin database is called the blockchain.
00:07:44.760The accounting firms are called the miners. And all they're doing is, is they're performing very complicated, but ultimately pointless math to compete to build the next block in that blockchain.
00:07:55.680Right. Right. It is what's called a proof of work system.
00:07:58.860Right. The idea of mining is similar to you getting down with your pickaxe and knocking away little pieces of rock in order to generate gold.
00:08:06.280Right. But at the end of the day, what you're paying for is the accounting system in Bitcoin.
00:08:11.420Now, that accounting system could actually be valuable in and of itself.
00:08:16.340And again, it is valuable in the context of what Bitcoin was originally designed to be, which is a peer to peer payment system.
00:08:24.980It allowed people to avoid the rails of the banking system and to conduct transactions.
00:08:30.180And in turn, the work that was done around accounting allowed those transactions to be proved.
00:08:36.480Right. That's actually a really interesting and important observation.
00:08:40.560What it has morphed into is a speculative asset in which people are competing to buy in the secondary market, this token, what we call Bitcoin, that is used to compensate the miners.
00:08:51.560Very few people understand that this way the system is set up ultimately requires a continual inflow of the pejoratively named fiat currency.
00:09:04.040Right. Dollars, pounds, euros, et cetera.
00:09:07.160You need to actually have a continuous flow of money into the Bitcoin network in order to keep that accounting system robust and in order to keep people doing it.
00:09:18.140Right. So it sounds like a pyramid scheme.
00:09:19.880That's what I was going to say. Isn't that very much a pyramid Ponzi scheme until actual utility emerges?
00:09:27.720Right. So retail transactions, people's decision to buy or sell something on that accounting network could actually theoretically create value.
00:09:36.240In the same way that the Visa network creates value for Visa shareholders.
00:09:41.400Right. We could have moved in that direction.
00:09:43.960But ultimately, we failed to do so because we became so enamored of the speculation around the value of the token itself.
00:09:51.560It's actually a really important distinction whether the network itself had value as a payment mechanism, which it very clearly did for money launderers,
00:10:02.060for those who were in third world countries and trying to evade punitive banking systems and punitive government behavior absolutely has value in in those areas.
00:10:13.900But that's where it stopped. It never turned into a robust payment system for the rest of us.
00:10:18.400It never turned into a robust peer to peer transfer system for the vast majority of people.
00:10:23.500Instead, it became a bunch of speculative nonsense.
00:10:28.620I think instinctively, Francis and I are both kind of small C conservative when it comes to money,
00:10:33.640because when we looked at Bitcoin, it was always that feeling of like this is a bubble that's going to burst probably many times because of the speculative element of it.
00:10:43.440But let me ask you a different question.
00:10:44.960I know this is sidetracking the conversation slightly, but I can tell you really understand these things deeply.
00:10:52.120There's a lot of people who are not hot girls on Twitter who are really excited about blockchain as a technology.
00:10:59.320Can you explain to us what it is and why reasonable people are excited about that part of it?
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00:11:33.160So there are elements of blockchain that are actually very valuable, right?
00:11:42.160So or elements behind the thought process, which is that instead of having to trust the single holder of record, for example, Visa saying, yes, we show that you made this transaction, right?
00:11:54.240Instead of having to rely on Visa to accurately capture that information and accurately report it to me, in other words, be a trusted intermediary, blockchain takes the idea of that database and spreads it out over anyone who wants to participate, right?
00:12:10.300What's called running a node, effectively.
00:12:12.200Everybody gets to audit all of the transactions that are occurring when they happen on chain.
00:12:17.720In other words, going through that accounting system.
00:12:19.580There's some interesting components of that because the removal of trust from a system establishes a component of a series of transactions of record that are very hard for people to argue against and very hard for people to change, right?
00:12:36.400Now, that can actually have value, and there are many situations in which that becomes quite interesting.
00:12:42.360Unfortunately, the blockchain technology as it exists today is largely way too slow and way too limited in order to accommodate all the transactions that people are claiming it's useful for, right?
00:12:55.200So that process, that process of distributing that database inherently makes it very slow, right?
00:13:04.200It's like trying to do work where you're constantly seeking consensus, right?
00:13:08.960We've all been parts of organizations where meetings are the primary form of activity, and everybody tries to come to consensus, and we recognize that nothing really interesting gets done.
00:13:19.300That's very much where blockchain is today.
00:13:23.800Some second and third generation blockchain technologies are beginning to emerge that allow this concept of a distributed database with limited areas of trust that actually become quite robust and quite interesting.
00:13:35.780And again, there has to be an element of truth in order to get people to buy into something, to get people to participate in a scheme, right?
00:13:43.740If I were to turn around and tell people something completely absurd, like the sky is purple, and therefore the world is going to end tomorrow, people could very simply look at the sky and say, well, it's not purple, therefore the sky is an idiot.
00:13:54.880They may choose to say that independently.
00:13:56.340That dynamic of having an element of truth is really critical, and there are a lot of truths behind this idea of digitization of documents, this idea of digitally native securities.
00:14:11.360I often show people, I don't happen to have it on my desk right now, but my mother purchased for my children stock certificates, physical stock certificates, right?
00:14:20.680Now, ironically, what this means is that I receive, as the shareholder of record for these shares, I receive one penny dividend checks, right?
00:14:29.940Checks written out in my name for one penny, which drive my wife completely insane, and I'm forced to cash at a cost to the system of probably several dollars.
00:14:39.440It costs about 85 cents to write a check and process a check, and that check is being sent to me for one penny, right?
00:14:45.180Now, that's completely absurd, but it's reflective of the analog nature of the securities industry.
00:14:51.320There continues to be an over-reliance on paper records.
00:15:11.720Most of your viewers would be familiar with the movie The Big Short and the idea of securitization of mortgages, right?
00:15:19.960Part of the reason why securitization is this fancy special word is that to build a residential mortgage-backed security, that securitization, requires on average somewhere around 3 million paper documents to be held and physically maintained by the issuer of that piece of paper, right?
00:15:40.080That's kind of crazy when you think about it in the 21st century, but it is a legal requirement.
00:15:46.040If we were to move everything to truly digitally native securities, not only would I be able to do that individually because I no longer have to hold 3 million paper documents in a storage facility somewhere,
00:15:57.780but I can also start to do that in which various performance components, various distribution dynamics, the waterfall that was described so well in that movie The Big Short, all of those can be embedded in things we call smart contracts.
00:16:15.860Your viewers, again, your viewers, again, would be familiar with those terms.
00:16:18.840So I'm incredibly excited about that world.
00:16:21.480But what I'm not excited about is the rank speculation and, you know, what I would argue is fraudulent selling to retail of here's the keys to how you get rich simply by buying something.
00:16:32.020Everything I just described involves me creating something, you know, changing the system significantly so that more people have access to the ability to create new stuff and do new things.
00:16:44.180Because that's a very exciting world, one of just rank speculation, you know, to me, just feeds the frauds that we've seen.
00:16:52.800And we're now seeing those, of course, come home to roost.
00:16:55.980Francis, before you jump in, can I disagree with you, Mike?
00:16:58.440I reckon if you said the sky is purple and the world's about to collapse in the current age, there's a lot of people who would go along with that.
00:17:16.820But so that being the case, what is the difference as far as you're concerned, if there's any difference between Bitcoin and the rest of crypto like Ethereum, et cetera?
00:17:29.720So I think that there is actually functionally very little difference.
00:17:34.360They are, at the end of the day, they're just algorithms that set a certain protocol for behavior, right?
00:17:40.360So Bitcoin, as I mentioned, is really just a token that is compensating people who are doing accounting for the Bitcoin system.
00:17:47.520Ethereum, now that it's moved to what's referred to as proof of stake as compared to proof of work,
00:17:53.060is moving to a slightly different dynamic where the Ethereum token is actually a requirement similar to posting U.S. dollars as collateral.
00:18:01.200It's a requirement for posting collateral on the Ethereum network, right?
00:18:06.480So I don't think that there's actually that much difference.
00:18:11.460They're all protocols that are basically just code.
00:18:14.820The question is, what is the utility of that code?
00:18:23.760And ultimately, I'm somewhat skeptical about whether it will end up winning or not.
00:18:28.700But it at least attempts to make things useful, right?
00:18:33.020Things like the introduction of smart contracts, the introduction of proof of stake or the use of proof of stake that basically says,
00:18:39.760I'm willing to run the risk of losing X amount of Ethereum tokens or U.S. dollars, et cetera, if this turns out not to work, right?
00:18:50.200So I'm basically putting my money where my mouth is in that process.
00:18:54.860That's, again, quite different than the dynamics of speculation as to whether or not Bitcoin is going up in price or down in price, which makes me very sad, right?
00:19:04.460You know, those radically different components.
00:19:07.720Ethereum is theoretically designed for building.
00:19:11.500The biggest challenge that you have in Ethereum is that it is, again, relatively slow and relatively high cost at this point.
00:19:17.280So, Mike, there was a period, I remember during the pandemic, I think it was 2021, where all of these cryptos spiked and then it suddenly crashed.
00:19:29.560Can you explain to us what actually happened?
00:19:31.680Was it that people lost confidence or was there something else going on?
00:19:36.560So there is something else going on, and this is actually, this overlaps with the work that I do in broader markets.
00:19:44.200What you're actually describing is a byproduct of a system that exhibits a economic property called inelasticity, right?
00:19:52.060So you can think of elasticity like rubber band, right?
00:23:52.100This is legal tender for all debts, public and private.
00:23:56.700The ultimate debt that is created is the government saying, you have to pay taxes.
00:24:01.620And the only thing that we'll accept for the payment in taxes is the US dollar, the British pound, the euro, etc.
00:24:07.940The minute you actually make that statement as a government, and as a government, you have the monopoly on force that allows you to say, if you didn't pay your taxes, I'm going to put you into this thing we call jail.
00:24:29.020That is really what is going on with currency.
00:24:31.800It is declared as legal tender for debts, both public and private, within that circle of the monopoly of violence, right, where the government controls the resources that allow you to enforce this, whether this is a court system or the physical army or anything else, right?
00:24:57.360There is no mechanism for enforcement other than saying you can't participate in the Bitcoin network or the Ethereum network.
00:25:04.480And I got to tell you, very few tears are being shed right now for my lack of participation in the Bitcoin network or the Ethereum network, because there's almost nothing useful I can do on them other than money laundering, drug dealing, various forms of sex trafficking, etc.
00:25:19.260Now, I understand how offensive that feels to the person who has transferred money to their relative in a developing country or the person in a developing country that has used the Bitcoin network to shield their hard-earned savings from an abusive government.
00:26:00.320But this is a way of skirting the law.
00:26:02.760And in developed countries like the United States or the UK or Europe, right, that's lawbreaking, and you should expect it to be treated as such.
00:26:12.480Well, that's one of the things that I always, as someone who's not an expert by any means in this area, I sort of heard people running around and going, well, you know, crypto allows you to sort of take government out of the thing.
00:26:31.080The government will find a way to tax it and to control it.
00:26:34.880Speaking of government, one of the other things I hear the sort of crypto enthusiasts talking about a lot is these big, scary digital currencies that the governments are working on.
00:26:46.980Can you shed some light onto those and what those are about?
00:26:53.280Again, addressing this idea that the system that we have right now is analog, right?
00:26:57.600It's not digital in its underlying construction.
00:27:00.060A move to central bank digital currencies is both an opportunity and a threat.
00:27:06.260And the reason why I say that is from an opportunity standpoint, it creates all sorts of functionality like what we're referring to, right?
00:27:15.300So if each token, which is what the U.S. dollar or British pound is referred to, is natively digital and basically built into the system so that it's constructed as such, each use of that token in turn is going to natively be in that digital system and open up all the opportunities that we were talking about before, right?
00:27:35.280You as an individual could securitize your own mortgage, for example, right?
00:27:39.960I'm not suggesting that's necessarily going to happen, but that type of opportunity would exist.
00:27:46.120The issue with digital currencies, as done by central banks, is that they also represent extraordinary risks of privacy intrusion.
00:27:56.240It creates the opportunity for the government to do things to the money that you think of as being in your, to steal from the crypto phrase, cold wallet, right?
00:28:04.920That thing we have in our pocket where I've got physical paper certificates.
00:28:09.740The government traditionally was limited in their ability to debase or reduce the value of that by conducting centralized activities, right?
00:28:18.480They want to reduce the value of the dollar I have in my wallet.
00:28:21.920The only way they can do that is by large-scale printing of dollars that are then distributed from the government, right?
00:28:31.460When you move to that digital dynamic, you actually open up the risk that if I do something that the government doesn't like, they literally reach into my wallet and take that money away from me.
00:28:44.420It's also a very scary proposition to think about the potential for the government to monitor every single transaction that I do, right?
00:28:53.840And this is actually my biggest complaint about CBDCs is that the government appears to misunderstand the opportunity and importance of having anonymized transactions because they don't actually respect the price signals that it receives.
00:29:09.440It may be morally repugnant that I choose to buy drugs or that I choose to hire a prostitute or that I choose to watch pornography, but that's actually the price signal that's sent by that demand is actually an important signal to the economy.
00:29:25.060If we choose to weigh down that price signal through moral statements that that's not okay, I'm going to reduce your social credit score by virtue of your personal behavior in the privacy of your own home, that damages the signals that are received by society, right?
00:29:43.560It hurts our society and it hurts the economy in that process.
00:29:51.600Oh, I think it's incredibly important that people are actually able to convey signals of what they want, right?
00:29:56.620That's what the invisible hand of capitalism is all about.
00:30:00.940You know, I would hope that I've made life choices, that I'm not in a position that I need to purchase drugs to deal with the mental distress associated with my day-to-day existence or to use pornography or to hire a prostitute.
00:30:14.720But that's actually, you know, there's an incredibly important economic signal that's coming through when people engage in that behavior, right?
00:30:23.700I'm conveying a system of wants that is actually very valuable into the economy and can encourage people to create less harmful and more effective substitutes.
00:30:33.440So, moving on now, we've talked, we've spoke about the crash and obviously the collapse, I think it's FTX and Sam Bankman-Fried.
00:30:49.220Because this was a billion-dollar company, a crypto exchange, and overnight it lost all its value and he went from being a billionaire to literally owning nothing.
00:31:31.640Well, again, gold is really only valuable to the extent that you can use the brick to hit somebody over the head and steal their wallet or food, right?
00:31:40.340It historically had value because governments designated as the mechanism that could be used to pay those taxes,
00:31:46.300otherwise you went to jail, were beaten over the head by a soldier, and had your food taken away, right?
00:31:54.700This is the same game that we played with Bitcoin.
00:31:58.020When you talk about what is the value of FTX, there's two ways of thinking about that value.
00:32:04.040One is it has an intrinsic cash flow associated with it.
00:32:07.580It is a profitable business that provides goods and services that people value and that the company is able to provide at lower cost than what it sells to the market, right?
00:32:18.180An Apple iPhone would be an obvious example to something like that, where it's something that people now increasingly treat as an indispensable part of their daily existence.
00:32:27.360It costs them somewhere in the neighborhood of $400 to manufacture, and they're able to sell it to us for somewhere in the neighborhood of $1,200, giving them margins of around 65%, right?
00:32:38.220That math is very straightforward and simple, and if they're able to repeat that over and over and over again, the company generates a series of cash flows that I, as an investor, can then consider worth a certain amount, right?
00:32:50.080Another way to think about it, and this is the one that we've largely entered into in the last, give or take, 15 to 20 years, is the value of something is simply a function of what somebody else will pay for it, right?
00:33:03.020Now, there could be any number of reasons why people decide that they need to buy something.
00:33:08.180You've got a wonderful poster behind you on the wall.
00:33:11.200There are scenarios in which your fans would decide, I have to have that poster, right?
00:33:16.860I'm willing to pay $1,000 for that poster.
00:33:19.360There's things that you could do that would potentially enhance the value of it.
00:33:23.240You could make it a limited edition of $1,000 or $5,000 or $10,000.
00:33:27.220And those would all potentially add value to somebody who's interested in purchasing it and being able to say, look, I have this trigonometry, NFT, we'll call it, right?
00:33:41.700That type of speculative finance is what drove the value of FTX.
00:33:47.560It's that other people wanted to buy it.
00:33:51.240Other people wanted to get a piece of Sam Bankman-Fried.
00:40:46.420So do you think part of this, of the explosion of crypto comes from the fact that we have a generation who are going to struggle to get on the property ladder?