TRIGGERnometry - Is Bitcoin Bullsh＊t？ - Mike Green

00:00:00.700 Broadway's smash hit, The Neil Diamond Musical, A Beautiful Noise, is coming to Toronto.

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00:00:30.000 We all want to believe that through some component we can buy into a lottery and change our lives.

00:00:36.780 That's the entire pitch behind the lottery.

00:00:39.340 My concerns around crypto or Bitcoin as it's being presented today is that the emphasis is on that,

00:00:44.620 on the idea of wealth creation as compared to utility.

00:00:48.180 But what I'm not excited about is the rank speculation and, you know,

00:00:51.680 what I would argue is fraudulent selling to retail of here's the keys to how you get rich simply by buying something.

00:00:57.380 And 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.

00:01:05.020 We're social creatures.

00:01:06.480 When 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.

00:01:16.080 You hear somebody say, have fun staying poor.

00:01:19.720 Right.

00:01:19.960 That's not the future of finance.

00:01:22.220 That's somebody trying to trigger your fear of being left behind.

00:01:25.620 This is the future of finance.

00:01:27.800 Well, how much is the future of finance worth?

00:01:30.540 That seems like a lot.

00:01:31.700 I'm going to go with that's a big number.

00:01:33.720 Right.

00:01:35.660 Because Bitcoin is programmatically limited in terms of the number of Bitcoins that will ever be produced.

00:01:42.620 That means at some point in the future, the system has to collapse.

00:01:46.580 Hey, Francis, do you like locals?

00:01:58.480 I live in London, mate.

00:02:00.100 So obviously not.

00:02:01.340 The only pleasure I get from the locals is when we share an intimate moment as we watch a Japanese tourist get trapped in a tube door.

00:02:09.960 That is good.

00:02:11.080 But I wasn't talking about the locals, I was talking about our community on Locals.

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00:03:32.080 Hello, and welcome to Trigonometry.

00:03:36.500 I'm Francis Foster.

00:03:37.800 I'm Constantine Kissin.

00:03:38.940 And this is a show for you if you want honest conversations with fascinating people.

00:03:44.980 Our brilliant guest today is the Chief Strategist and Portfolio Manager for Simplify Asset Management in the US.

00:03:50.940 Mike Green, welcome to Trigonometry.

00:03:53.020 Thank you, Constantine. I appreciate it.

00:03:54.620 No worries. So good to have you on the show.

00:03:57.560 Before 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?

00:04:06.880 Well, 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.

00:04:15.760 The firm I am the Chief Strategist for Simplify Asset Management is an ETF firm based in the United States.

00:04:23.000 I've been doing this for about 30 years.

00:04:24.880 And what I'm most well known for is the work that I've done around derivative structures, alternative investments like crypto or Bitcoin.

00:04:33.400 And 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.

00:04:45.360 Well, it's great to have you on the show.

00:04:47.460 The 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.

00:04:57.240 We'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.

00:05:07.860 So, 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. 1.00

00:05:25.880 What's wrong with that?

00:05:28.020 Well, it sounds like my settings are on my Twitter are wrong because I've blocked all those people.

00:05:33.280 But there's a couple of things I think that are really important to understand as it relates to crypto or Bitcoin.

00:05:42.440 The first is behind any form of narrative or marketing pitch that has to be an element of truth.

00:05:48.840 Right. 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.

00:06:00.320 And 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.

00:06:15.540 Right. That we all want to believe that through some component, we can buy into a lottery and change our lives.

00:06:21.800 That's the entire pitch behind the lottery.

00:06:23.560 My 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.

00:06:32.480 Right. Trying to make people money instead of trying to help people make money in one form or another.

00:06:39.340 And 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.

00:06:54.520 Right. It's the only trade that makes sense in the environment that was there.

00:06:57.980 That 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.

00:07:11.500 Right 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.

00:07:25.680 Therefore, you end up in this very uncomfortable position, as you try to explain to people, well, the math behind that actually doesn't work.

00:07:34.060 Right. 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.

00:07:44.760 The 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.

00:07:55.680 Right. Right. It is what's called a proof of work system.

00:07:58.860 Right. 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.

00:08:06.280 Right. But at the end of the day, what you're paying for is the accounting system in Bitcoin.

00:08:11.420 Now, that accounting system could actually be valuable in and of itself.

00:08:16.340 And again, it is valuable in the context of what Bitcoin was originally designed to be, which is a peer to peer payment system.

00:08:24.980 It allowed people to avoid the rails of the banking system and to conduct transactions.

00:08:30.180 And in turn, the work that was done around accounting allowed those transactions to be proved.

00:08:36.480 Right. That's actually a really interesting and important observation.

00:08:40.560 What 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.

00:08:51.560 Very few people understand that this way the system is set up ultimately requires a continual inflow of the pejoratively named fiat currency.

00:09:04.040 Right. Dollars, pounds, euros, et cetera.

00:09:07.160 You 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.

00:09:18.140 Right. So it sounds like a pyramid scheme.

00:09:19.880 That's what I was going to say. Isn't that very much a pyramid Ponzi scheme until actual utility emerges?

00:09:27.720 Right. So retail transactions, people's decision to buy or sell something on that accounting network could actually theoretically create value.

00:09:36.240 In the same way that the Visa network creates value for Visa shareholders.

00:09:41.400 Right. We could have moved in that direction.

00:09:43.960 But ultimately, we failed to do so because we became so enamored of the speculation around the value of the token itself.

00:09:51.560 It's actually a really important distinction whether the network itself had value as a payment mechanism, which it very clearly did for money launderers,

00:10:02.060 for 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.

00:10:13.900 But that's where it stopped. It never turned into a robust payment system for the rest of us.

00:10:18.400 It never turned into a robust peer to peer transfer system for the vast majority of people.

00:10:23.500 Instead, it became a bunch of speculative nonsense.

00:10:26.680 Very interesting. And you know what?

00:10:28.620 I think instinctively, Francis and I are both kind of small C conservative when it comes to money,

00:10:33.640 because 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.

00:10:43.440 But let me ask you a different question.

00:10:44.960 I know this is sidetracking the conversation slightly, but I can tell you really understand these things deeply.

00:10:52.120 There's a lot of people who are not hot girls on Twitter who are really excited about blockchain as a technology.

00:10:59.320 Can you explain to us what it is and why reasonable people are excited about that part of it?

00:11:05.080 Broadway's smash hit, the Neil Diamond musical, A Beautiful Noise, is coming to Toronto.

00:11:10.800 The true story of a kid from Brooklyn destined for something more, featuring all the songs you love, including America, Forever in Blue Jeans, and Sweet Caroline.

00:11:20.320 Like Jersey Boys and Beautiful, the next musical mega hit is here, the Neil Diamond musical, A Beautiful Noise.

00:11:27.140 Now through June 7th, 2026 at the Princess of Wales Theatre.

00:11:31.340 Get tickets at mirvish.com.

00:11:33.160 So there are elements of blockchain that are actually very valuable, right?

00:11:42.160 So 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?

00:11:54.240 Instead 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?

00:12:10.300 What's called running a node, effectively.

00:12:12.200 Everybody gets to audit all of the transactions that are occurring when they happen on chain.

00:12:17.720 In other words, going through that accounting system.

00:12:19.580 There'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?

00:12:36.400 Now, that can actually have value, and there are many situations in which that becomes quite interesting.

00:12:42.360 Unfortunately, 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?

00:12:55.200 So that process, that process of distributing that database inherently makes it very slow, right?

00:13:04.200 It's like trying to do work where you're constantly seeking consensus, right?

00:13:08.960 We'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.

00:13:19.300 That's very much where blockchain is today.

00:13:21.580 It's just inherently quite slow.

00:13:23.800 Some 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.

00:13:35.780 And 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? 0.58

00:13:43.740 If 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. 0.89

00:13:54.880 They may choose to say that independently.

00:13:56.340 That 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.

00:14:11.360 I 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?

00:14:20.680 Now, ironically, what this means is that I receive, as the shareholder of record for these shares, I receive one penny dividend checks, right?

00:14:29.940 Checks 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. 1.00

00:14:39.440 It costs about 85 cents to write a check and process a check, and that check is being sent to me for one penny, right?

00:14:45.180 Now, that's completely absurd, but it's reflective of the analog nature of the securities industry.

00:14:51.320 There continues to be an over-reliance on paper records.

00:14:54.580 That's true for your mortgage.

00:14:56.560 That's true for stock certificates.

00:14:58.420 That's true for bond certificates, et cetera.

00:15:00.400 All of this stuff doesn't truly exist in digital form.

00:15:04.220 That places limitations on a lot of things that we should be able to do that we currently can't do, right?

00:15:10.020 I'll give another simple example.

00:15:11.720 Most of your viewers would be familiar with the movie The Big Short and the idea of securitization of mortgages, right?

00:15:19.960 Part 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?

00:15:39.860 Wow.

00:15:40.080 That's kind of crazy when you think about it in the 21st century, but it is a legal requirement.

00:15:46.040 If 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,

00:15:57.780 but 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.

00:16:15.860 Your viewers, again, your viewers, again, would be familiar with those terms.

00:16:18.840 So I'm incredibly excited about that world.

00:16:21.480 But 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.

00:16:32.020 Everything 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.

00:16:44.180 Because that's a very exciting world, one of just rank speculation, you know, to me, just feeds the frauds that we've seen.

00:16:52.800 And we're now seeing those, of course, come home to roost.

00:16:55.980 Francis, before you jump in, can I disagree with you, Mike?

00:16:58.440 I 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.

00:17:04.560 But anyway, Francis, carry on.

00:17:06.780 By the way, I actually agree with you.

00:17:08.180 I would probably capture a reasonable cult-sized following over the Internet that would allow me to sell them anything going forward.

00:17:14.900 But yeah, go ahead.

00:17:16.820 But 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?

00:17:29.720 So I think that there is actually functionally very little difference.

00:17:34.360 They are, at the end of the day, they're just algorithms that set a certain protocol for behavior, right?

00:17:40.360 So Bitcoin, as I mentioned, is really just a token that is compensating people who are doing accounting for the Bitcoin system.

00:17:47.520 Ethereum, now that it's moved to what's referred to as proof of stake as compared to proof of work,

00:17:53.060 is moving to a slightly different dynamic where the Ethereum token is actually a requirement similar to posting U.S. dollars as collateral.

00:18:01.200 It's a requirement for posting collateral on the Ethereum network, right?

00:18:06.480 So I don't think that there's actually that much difference.

00:18:11.460 They're all protocols that are basically just code.

00:18:14.820 The question is, what is the utility of that code?

00:18:18.160 What is the utility of that protocol?

00:18:20.760 Ethereum has its flaws.

00:18:22.540 It has significant flaws.

00:18:23.760 And ultimately, I'm somewhat skeptical about whether it will end up winning or not.

00:18:28.700 But it at least attempts to make things useful, right?

00:18:33.020 Things like the introduction of smart contracts, the introduction of proof of stake or the use of proof of stake that basically says,

00:18:39.760 I'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?

00:18:50.200 So I'm basically putting my money where my mouth is in that process.

00:18:54.860 That'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?

00:19:04.460 You know, those radically different components.

00:19:07.720 Ethereum is theoretically designed for building.

00:19:11.500 The biggest challenge that you have in Ethereum is that it is, again, relatively slow and relatively high cost at this point.

00:19:17.280 So, 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.

00:19:29.560 Can you explain to us what actually happened?

00:19:31.680 Was it that people lost confidence or was there something else going on?

00:19:36.560 So there is something else going on, and this is actually, this overlaps with the work that I do in broader markets.

00:19:44.200 What you're actually describing is a byproduct of a system that exhibits a economic property called inelasticity, right?

00:19:52.060 So you can think of elasticity like rubber band, right?

00:19:54.600 Things are very flexible.

00:19:55.860 They change a lot.

00:19:57.460 Most models of markets assume a high degree of elasticity.

00:20:01.100 In other words, for significant changes in supply and demand, price doesn't change all that much.

00:20:07.540 An inelastic system is one in which the price changes a lot for small changes in supply and demand.

00:20:14.140 In the case of something like Bitcoin that has a fixed issuance schedule, right?

00:20:18.980 So you've heard terms like the halving of Bitcoin, et cetera.

00:20:22.420 The supply is fixed.

00:20:23.980 A continuous supply is generated of new Bitcoin that is available.

00:20:27.900 The existing supply of Bitcoin doesn't change.

00:20:31.600 Therefore, an increase in demand ends up causing a significant increase in price, right?

00:20:39.620 We can run through this model very quickly.

00:20:42.660 You know, Francis, let's pretend that you and I are effectively the market for Bitcoin, right?

00:20:47.500 I own Bitcoin.

00:20:48.640 You want to buy Bitcoin.

00:20:50.460 Offer to buy my Bitcoin.

00:20:53.180 Yeah, I will offer you $15,000 for one Bitcoin.

00:20:56.960 No, I'm hodling.

00:21:00.240 I'm not going to sell to you.

00:21:02.920 Now you have to get Bitcoin.

00:21:04.420 You've told your investors you're going to get Bitcoin.

00:21:06.600 You're an institutional investor that just launched a Bitcoin fund.

00:21:10.640 You need that Bitcoin.

00:21:12.140 Come on, bid up.

00:21:14.300 So I'll offer you $18,000 for one Bitcoin.

00:21:17.460 No, I'm not selling it to you.

00:21:18.760 Keep going.

00:21:21.200 Okay, $22,000.

00:21:23.680 That's not anywhere close to the right answer.

00:21:25.460 Let's keep going up.

00:21:26.240 I'll sell you one for $20,000.

00:21:29.100 Okay, so there we go.

00:21:30.880 That's actually what ends up happening is exactly that.

00:21:34.740 Most people choose to refuse to sell as that new demand comes into the market.

00:21:40.080 Prices exhibit inelasticity.

00:21:41.900 In other words, rise significantly.

00:21:43.440 That increase in price, in turn, lets people think, oh, my gosh, something really valuable must be going on here.

00:21:49.960 Why would I sell?

00:21:51.220 I'm actually incentivized now to hodl, right?

00:21:54.540 These guys are right.

00:21:55.720 Bitcoin is going to go to a million, right?

00:21:58.320 And then suddenly, Konstantin shows up and spoils the party by saying, well, gosh, I got some Bitcoin at $12 back in 2011.

00:22:07.100 At $22,000, I'll sell some.

00:22:10.240 Okay, now the story's over.

00:22:11.720 The price begins to collapse.

00:22:13.140 That's exactly what happened in 2021.

00:22:16.200 And it was tied to the growth of the institutional story, this dynamic that I was referring to before.

00:22:24.260 Bitcoin is the dominant trade.

00:22:26.180 It's the best of the inflation trades, right?

00:22:29.340 Number go up.

00:22:30.440 That phenomenon is what we experienced in 2021.

00:22:35.660 Because there were so many people, Mike, who were evangelical about this, who were saying, you know, this is the future of currency.

00:22:43.600 This is, you know, you've got to jump on the Bitcoin train now.

00:22:47.340 If you don't, you're missing out.

00:22:49.500 And then it collapsed.

00:22:50.780 Do you think that we've kind of seen the end of Bitcoin as the, you know, the way they marketed it as a future of currency?

00:22:59.140 Or do you think it's still got somewhere to go?

00:23:02.800 So I hope that it's over.

00:23:05.220 I think, unfortunately, it was a fundamentally flawed theory that propelled its growth and its adoption.

00:23:12.620 This idea that you could replace states in terms of, states meaning governments, in terms of the role of currency.

00:23:21.400 All right.

00:23:21.500 So this is part of what my early debates on Bitcoin tried to educate people on is what money actually is.

00:23:27.560 As crazy as it sounds, money is a byproduct of debt.

00:23:31.960 Money is the legal tender that is used to cancel debt contracts.

00:23:37.060 That's what it actually means.

00:23:38.700 Mike, explain that for the ordinary person, because I think to most people that'd be quite confusing.

00:23:42.800 So if you look at a US dollar, and I can't speak to a British pound because I don't know the answer to this.

00:23:48.340 I don't have one directly in front of me.

00:23:49.680 It has the same statement.

00:23:50.980 I know what you're talking about.

00:23:51.280 It has the same statement.

00:23:52.100 This is legal tender for all debts, public and private.

00:23:56.700 The ultimate debt that is created is the government saying, you have to pay taxes.

00:24:01.620 And the only thing that we'll accept for the payment in taxes is the US dollar, the British pound, the euro, etc.

00:24:07.940 The 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.

00:24:19.560 Right.

00:24:19.960 That suddenly creates demand for the currency.

00:24:22.920 People have a reason that they need it.

00:24:25.720 Render unto Caesar what is Caesar's.

00:24:28.660 Right.

00:24:29.020 That is really what is going on with currency.

00:24:31.800 It 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?

00:24:48.760 That's what currency actually is.

00:24:50.920 It is that which cancels debt.

00:24:53.320 There is no native Bitcoin debt.

00:24:55.480 There is no native Ethereum debt.

00:24:57.360 There is no mechanism for enforcement other than saying you can't participate in the Bitcoin network or the Ethereum network.

00:25:04.480 And 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.

00:25:19.260 Now, 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.

00:25:36.360 Those situations do exist.

00:25:38.560 But understand, one person's freedom fighter is another person's terrorist.

00:25:42.300 If you're using the Bitcoin network to hide money from your government, you're breaking the law.

00:25:48.260 I'm not going to make a statement as to the moral appropriateness of this if you happen to be in Lebanon or Iraq or anywhere else, right?

00:25:56.240 Like, take your poison.

00:25:57.920 Many places have terrible governance.

00:26:00.320 But this is a way of skirting the law.

00:26:02.760 And 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.

00:26:12.480 Well, 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.

00:26:25.260 I was like, death and taxes.

00:26:27.280 Like, the government's going to get involved no matter what.

00:26:29.560 You can build whatever you want.

00:26:31.080 The government will find a way to tax it and to control it.

00:26:34.880 Speaking 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.

00:26:46.980 Can you shed some light onto those and what those are about?

00:26:49.860 Sure.

00:26:50.240 So what you're referring to is central bank digital currencies.

00:26:53.080 Yes.

00:26:53.280 Again, addressing this idea that the system that we have right now is analog, right?

00:26:57.600 It's not digital in its underlying construction.

00:27:00.060 A move to central bank digital currencies is both an opportunity and a threat.

00:27:06.260 And the reason why I say that is from an opportunity standpoint, it creates all sorts of functionality like what we're referring to, right?

00:27:15.300 So 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?

00:27:35.280 You as an individual could securitize your own mortgage, for example, right?

00:27:39.960 I'm not suggesting that's necessarily going to happen, but that type of opportunity would exist.

00:27:46.120 The issue with digital currencies, as done by central banks, is that they also represent extraordinary risks of privacy intrusion.

00:27:56.240 It 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?

00:28:04.920 That thing we have in our pocket where I've got physical paper certificates.

00:28:09.740 The government traditionally was limited in their ability to debase or reduce the value of that by conducting centralized activities, right?

00:28:18.480 They want to reduce the value of the dollar I have in my wallet.

00:28:21.920 The only way they can do that is by large-scale printing of dollars that are then distributed from the government, right?

00:28:29.280 That has an indirect effect.

00:28:31.460 When 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.

00:28:42.060 Now, that's a very scary proposition.

00:28:44.420 It's also a very scary proposition to think about the potential for the government to monitor every single transaction that I do, right?

00:28:53.840 And 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.

00:29:09.440 It 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.

00:29:25.060 If 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?

00:29:43.560 It hurts our society and it hurts the economy in that process.

00:29:48.180 Well, how does it hurt our society?

00:29:50.640 Sorry.

00:29:51.600 Oh, I think it's incredibly important that people are actually able to convey signals of what they want, right?

00:29:56.620 That's what the invisible hand of capitalism is all about.

00:30:00.940 You 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.

00:30:14.720 But that's actually, you know, there's an incredibly important economic signal that's coming through when people engage in that behavior, right?

00:30:23.700 I'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.

00:30:33.440 So, 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.

00:30:47.700 What happened there?

00:30:49.220 Because 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.

00:31:01.100 How did that, how does that happen?

00:31:04.080 Well, I think it's effective altruism, isn't it?

00:31:08.460 Gave away all his money in the day.

00:31:10.420 Gave away all his money.

00:31:12.040 That was his plan all along, wasn't it?

00:31:13.800 No.

00:31:16.320 I think, again, it speaks to this general question of what does worth actually mean, right?

00:31:24.240 And what is true value?

00:31:26.720 We often inhabit a world where people will say things like, well, gold is money.

00:31:30.360 Gold is real value.

00:31:31.640 Well, 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?

00:31:40.340 It historically had value because governments designated as the mechanism that could be used to pay those taxes,

00:31:46.300 otherwise you went to jail, were beaten over the head by a soldier, and had your food taken away, right?

00:31:54.700 This is the same game that we played with Bitcoin.

00:31:58.020 When you talk about what is the value of FTX, there's two ways of thinking about that value.

00:32:04.040 One is it has an intrinsic cash flow associated with it.

00:32:07.580 It 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?

00:32:18.180 An 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.

00:32:27.360 It 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?

00:32:38.220 That 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?

00:32:50.080 Another 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?

00:33:03.020 Now, there could be any number of reasons why people decide that they need to buy something.

00:33:08.180 You've got a wonderful poster behind you on the wall.

00:33:11.200 There are scenarios in which your fans would decide, I have to have that poster, right?

00:33:16.860 I'm willing to pay $1,000 for that poster.

00:33:19.360 There's things that you could do that would potentially enhance the value of it.

00:33:22.300 You could sign it.

00:33:23.240 You could make it a limited edition of $1,000 or $5,000 or $10,000.

00:33:27.220 And 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?

00:33:41.700 That type of speculative finance is what drove the value of FTX.

00:33:47.560 It's that other people wanted to buy it.

00:33:51.240 Other people wanted to get a piece of Sam Bankman-Fried.

00:33:54.780 And this was venture capitalists.

00:33:57.340 This was high net worth individuals.

00:33:59.120 This was family offices, all of whom with very limited due diligence stepped in to give money

00:34:05.440 to Sam Bankman-Fried at a valuation that created these billions and billions of dollars.

00:34:12.120 Once he's exposed as a fraud, guess what?

00:34:15.340 Nobody wants to give him money anymore.

00:34:17.160 And that value collapses.

00:34:19.760 And that's really what he's talking about.

00:34:20.200 Because there's no real value there, right?

00:34:21.800 He's not creating a product.

00:34:23.320 There's no cash flow associated with it like an iPhone.

00:34:26.520 Right.

00:34:27.680 Wow.

00:34:28.460 So, Mike, I love how brilliant you are at explaining these, what are, to most people, complicated things in a very simple way.

00:34:37.080 So, let me, riddle me this.

00:34:38.780 Why do all these capitalists, venture capitalists, and all these other people who deal with this every day,

00:34:46.760 who are very smart, certainly a lot smarter than me, et cetera, 1.00

00:34:49.980 why do they buy into this shit? 1.00

00:34:52.040 Because I wouldn't. 1.00

00:34:52.740 Well, because they're smarter than you.

00:34:57.580 That was a joke.

00:34:59.160 Yeah.

00:35:00.620 The unfortunate reality is, I mentioned that this has now been kind of 15 to 20 years in process,

00:35:06.520 and potentially even longer than that.

00:35:08.720 You know, we have seen repeatedly that the mechanisms that are in place for rewarding individuals

00:35:14.160 for the decisions that they make reinforce that.

00:35:17.100 A venture capitalist receives a percentage of the excess returns that are generated over and above the cost of the initial investment.

00:35:27.300 So, in an environment in which people are encouraged to separate the value of something from its cash flows

00:35:33.620 and instead treat it in some variant of like, well, anything has value as long as other people are willing to pay for it,

00:35:40.000 which traditionally would be referred to as the greater fool theory or Ponzi financing, right?

00:35:45.880 When you've been rewarded for that, the institutions grow up and flourish.

00:35:50.100 They reinforce that type of behavior, and that's very much where we are.

00:35:54.100 Unfortunately, I would argue that most venture capitalists or many venture capitalists have not lived through a cycle

00:36:00.500 in which they have to critically examine why did Google work?

00:36:04.880 Why did Microsoft work?

00:36:06.820 Why did Apple work?

00:36:08.100 Why did Amazon work?

00:36:09.220 Instead, they've largely been rewarded by the activities of those companies that are now protecting their moats.

00:36:15.900 So, Google, for example, has purchased over, I believe it's 1,500 companies over the last 15 years since it went public.

00:36:23.660 Largely, not to, you know, generate cash flows in those businesses, but to protect its existing golden goose in search

00:36:32.000 and prevent competition from emerging, right?

00:36:35.100 That's made it incredibly profitable to build things that simply have the threat of displacing Google,

00:36:41.340 of the threat of making Google's core business less attractive.

00:36:45.600 By funding that, they're creating conditions under which, for Google, it's just more profitable to say,

00:36:50.600 you know what, forget it, I'll just buy it.

00:36:52.040 Let's just make it go away.

00:36:54.140 Right.

00:36:54.600 And that's the story of Silicon Valley for the past 20 years.

00:36:57.400 Well, so just coming back to the FTX thing and the fact that a venture capitalist,

00:37:05.760 but am I hearing you correctly that basically from a venture capitalist perspective,

00:37:09.480 all they're doing is essentially buying into this Ponzi scheme on the basis that Ponzi schemes can make you money in the short term

00:37:16.960 and they're going to get a slice of that revenue, basically.

00:37:20.620 Correct.

00:37:21.080 With no recourse against them if they don't.

00:37:23.880 Right.

00:37:24.020 If I sell that company to Google, the fact that it never generates profitability,

00:37:29.420 that it quietly disappears, right?

00:37:31.220 And think about any number of technology companies that have splashed onto the excitement pages,

00:37:36.860 you know, let's take obvious ones, you know, Yahoo and Tumblr and all this sort of stuff

00:37:41.880 that ultimately end up having almost no value whatsoever.

00:37:45.900 Once they're acquired and purchased by something, it doesn't matter anymore.

00:37:50.020 I got my 20% carry.

00:37:53.340 Wow.

00:37:54.820 That's pretty effed up, man, isn't it?

00:37:57.040 It's a very messed up system.

00:37:58.920 And again, that truth, the fact that the system is effed up, right?

00:38:03.360 A technical term in finance.

00:38:06.220 That effed up system creates and it facilitates the narrative that people have,

00:38:10.800 which is nothing has any value.

00:38:12.860 Nothing has any meaning.

00:38:14.220 Nothing means anything.

00:38:15.920 Right.

00:38:16.040 And it's a huge societal ill that people are not in a position to critically examine these

00:38:21.780 assumptions.

00:38:23.100 We're social creatures.

00:38:24.780 When you think about the behavior in the Bitcoin marketing story, it was all designed to appeal

00:38:30.980 to the fear that we have of being left behind.

00:38:34.040 You're not going to make it.

00:38:36.500 Right.

00:38:36.860 Well, why do the zebra herds all turn right for the most part?

00:38:41.780 Because there's safety in a crowd.

00:38:45.080 Right.

00:38:45.240 Some fraction of the population.

00:38:46.740 I'm unfortunately in, you know, structurally wired differently.

00:38:50.180 So that my bias is to say, hey, wait a second, why is everybody turning right?

00:38:54.800 Now, in nature, that means I probably get eaten by a lion.

00:38:57.900 But I happen to inhabit a regime in which I'm given the luxury of critically examining many

00:39:06.140 of these things.

00:39:07.100 But most people just have not had the training or skill set or interest to develop those

00:39:14.200 capabilities.

00:39:14.700 And I understand why.

00:39:15.880 I actually think it's incredibly important that most people broadly do what they're told.

00:39:21.560 Right.

00:39:21.700 And I've annoyed any number of people, my wife especially, with my refusal to do what I'm

00:39:26.220 told.

00:39:27.540 Right.

00:39:27.720 But that's just part of how we're wired.

00:39:30.260 And it's important for people to understand when it makes sense to argue and when it makes

00:39:35.340 sense to say, hey, why are we all doing this?

00:39:37.760 And sometimes you just got to go along.

00:39:40.600 Right.

00:39:40.800 We like it's very difficult for people to separate those two.

00:39:43.980 So when marketing is designed to exploit that, you hear somebody say, have fun staying poor.

00:39:51.220 Right.

00:39:51.760 That's not the future of finance.

00:39:53.960 That's somebody trying to trigger your fear of being left behind.

00:39:58.420 Right.

00:39:59.960 Well, so with FTX, what did they actually promise?

00:40:05.480 How did they get so many people to invest in them?

00:40:08.520 How did they become this huge organization?

00:40:11.340 Well, again, define huge organization.

00:40:16.160 Right.

00:40:16.380 The number of employees at FTX was relatively limited.

00:40:20.000 They managed to occupy a penthouse basically in the Bahamas as an office.

00:40:27.180 So this is not a giant organization in the classic sense.

00:40:31.000 It was a giant organization in terms of the valuation.

00:40:35.640 And that valuation was pretty straightforward.

00:40:38.320 Right.

00:40:38.600 This is the future of finance.

00:40:40.380 Well, how much is the future of finance worth?

00:40:42.880 That seems like a lot.

00:40:44.300 I'm going to go with that's a big number.

00:40:46.280 Right.

00:40:46.420 So 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?

00:41:01.320 Things have become more expensive.

00:41:03.620 Wages have stagnated for the past 10 or 12 years or however long it is.

00:41:07.520 And they saw crypto as an opportunity to not necessarily gain the system, but to get rich and to find a way around those problems.

00:41:18.840 It's like a lottery ticket.

00:41:20.340 It was absolutely a lottery ticket, but it was a very special type of lottery ticket.

00:41:24.980 Right.

00:41:25.460 It was a lottery ticket that required you to do a little bit of work to actually be able to find where to buy it.

00:41:31.600 Right.

00:41:31.800 It was one that they could explain how you're unique and you're special because you've navigated these shoals.

00:41:38.640 You've educated yourself.

00:41:39.840 You've done the work.

00:41:41.500 Right.

00:41:42.000 It's not like going to the gas station or petrol station and buying a lottery ticket.

00:41:46.560 This one, your grandmother couldn't figure out.

00:41:48.920 Right.

00:41:49.100 You're special.

00:41:50.800 You've figured out how to gain access to it.

00:41:53.100 Of course, I deserve to make a lot of money because I'm special.

00:41:57.680 By the way, my mom and dad told me how special I was my entire life.

00:42:01.080 And I've got the trophies to show it.

00:42:04.340 Right.

00:42:04.880 And this just proves it.

00:42:06.880 It plays in perfectly to the millennials.

00:42:09.920 Wow.

00:42:10.760 You know what, Mike?

00:42:12.080 We've talked, as I said, about crypto with a lot of people, but I don't know.

00:42:16.240 Maybe you are playing my tune and we are, Francis and I started the show called Trigonometry

00:42:21.720 because we also often refuse to go with the herd.

00:42:25.600 But everything you're saying makes absolute perfect sense to me.

00:42:28.920 And you know why?

00:42:29.960 I grew up in Russia in the early 90s when the Soviet Union collapsed.

00:42:34.440 And you've got to understand nobody in the Soviet Union had any financial training of

00:42:38.000 any kind, really.

00:42:39.500 And then the Soviet Union collapses and you've got this supposed free market.

00:42:43.520 And this thing comes on the screens of every television.

00:42:47.880 You didn't have advertising in the Soviet Union.

00:42:49.880 Suddenly you're these full color, interesting scenes playing out on your screen.

00:42:55.100 And these guys talk about this system called MMM, Triple M.

00:42:59.580 I don't know if you're familiar with it.

00:43:01.200 And basically...

00:43:01.400 I know.

00:43:01.780 Yeah, this was one of the original scams, if I remember correctly, in Russia.

00:43:06.360 Well, right.

00:43:07.100 So what happened was, you know, these guys would come on your screen and go,

00:43:10.800 oh, mate, I went down to the thing yesterday and I bought, you know, 10 rubles worth.

00:43:15.400 And now it's worth 100.

00:43:16.480 And I told my mate and he went down.

00:43:18.260 And every day you'd be bombarded with these messages.

00:43:21.120 And my dad happened to be financially literate.

00:43:23.340 So every time as a young kid, I'd ask him what's going on.

00:43:26.120 He just said to me, it's a scam.

00:43:28.100 And I'd be like, yeah, but my mate at school, he said that his dad bought it and he did well.

00:43:32.140 And my dad would be, it's a scam.

00:43:33.620 And this went on for like months.

00:43:35.740 And eventually, of course, it turned out to be a scam.

00:43:38.620 And every time people talk to me about Bitcoin or crypto and they go, well, look, you know,

00:43:43.600 this is what happened.

00:43:44.440 And I've always got that memory in the back of my head.

00:43:50.680 And everything you're saying just makes so much sense because, you know,

00:43:56.740 it isn't physically possible for this to be or be true in the way that people, the marketing

00:44:02.640 side says it is.

00:44:05.640 Yeah.

00:44:06.160 And unfortunately, that, unfortunately, that is, that appears to be true, right?

00:44:11.940 I want to be very clear that everything I've expressed is my opinion and my analysis of

00:44:18.000 this system and of what we have experienced for the last several years.

00:44:24.980 It's possible I'm wrong, but I don't, I have yet to see.

00:44:29.700 If you're wrong, how are you wrong?

00:44:31.200 If you were wrong, how would you turn out to be wrong?

00:44:33.500 So if I were wrong, my expectation of how I would be wrong is a major government making

00:44:39.300 an incredible mistake and choosing to back its currency with Bitcoin in a manner similar

00:44:45.800 to what was historically done with gold.

00:44:48.460 And that's one of the reasons I spoke up because it would be such a terrible choice.

00:44:54.340 Gold actually is, I'm going to piss whatever fraction of your audience I haven't already

00:45:00.380 pissed off by saying like gold itself is really just a mineral, right?

00:45:05.560 Or a metal actually be more accurate.

00:45:07.300 And it fills a relatively unique role on the periodic table because it's non-reactive.

00:45:13.200 It's non-toxic.

00:45:14.600 It doesn't tarnish.

00:45:15.760 In other words, it doesn't oxidize, right?

00:45:17.780 It doesn't poison you when you pick it up like mercury might.

00:45:21.140 It doesn't, you know, fall through your, eat through your pocket and fall to the floor

00:45:24.860 and disappear on you, right?

00:45:26.660 It actually has unique properties as a metal that can be used in that manner, just like

00:45:33.840 silver, just like copper, just like tin, and just like nickel, all of which have been

00:45:39.860 used throughout history as metallic coinage, right?

00:45:43.140 There's nothing unique and special about gold.

00:45:46.640 But governments chose to peg their currency to gold because they wanted to place limitations

00:45:52.420 on the behavior of individual men or Congress to radically change monetary schedules, right?

00:45:59.820 So the idea was very straightforward.

00:46:01.640 You need to have a set quantity of gold.

00:46:04.720 That was an important message.

00:46:06.520 And it was an important limitation on the behavior of governments, particularly in an environment

00:46:11.340 in which information was very hard to obtain, right?

00:46:14.980 We didn't have instantaneous communications over the internet, et cetera, right?

00:46:20.120 But it also approached its limitations as populations exploded.

00:46:23.500 What that meant was one of two things.

00:46:25.620 Either the quantity of gold per person was going to collapse, or we were going to decide,

00:46:30.820 okay, we're going to break the message of this.

00:46:32.920 We fought through basically the first 40 years of that with a series of deflationary episodes,

00:46:38.400 basically from about 1880 until the 1920s, where the global population is exploding,

00:46:43.420 and yet the supply of gold is not rising in a similar fashion.

00:46:48.500 That led to deflationary conditions.

00:46:51.220 It led to economic stagnation.

00:46:52.920 It led to war-like behaviors, et cetera, right?

00:46:55.500 All sorts of things and problems emerge when people are forced into unplanned and unanticipated

00:47:01.440 scarcity on those dynamics.

00:47:04.160 Bitcoin takes that dynamic and adds an additional wrinkle to it.

00:47:08.860 Because Bitcoin is programmatically limited in terms of the number of Bitcoins that will ever

00:47:14.960 be produced, that means at some point in the future, the system has to collapse.

00:47:20.860 The behavior of a Bitcoin system, if you were to build it like a video game and run it forward,

00:47:26.320 ends with one person owning all the Bitcoin, right?

00:47:30.680 That's the way the system ends, almost like the dynamics of entropy in the universe.

00:47:37.200 Gold had an interesting feature to it, which is if shortages of gold emerge, the price of gold rises.

00:47:44.720 That encourages people to devote resources to mining.

00:47:48.520 It encourages people to devote resources to recycling.

00:47:51.460 It theoretically causes people to melt down jewelry or silverware, et cetera, to provide additional

00:47:59.540 supply into the market, right?

00:48:01.800 It encourages new technology.

00:48:03.460 What actually fixed a lot of those problems for a temporary basis was a new form of refining

00:48:08.080 gold that allowed the treatment of types of gold that were previously not available.

00:48:12.260 By the way, the same thing is happening in nickel and in some types of copper today, where

00:48:16.340 higher prices are encouraging new technological innovations.

00:48:19.360 Bitcoin takes that away.

00:48:21.980 It robs the system of that reward to human ingenuity.

00:48:25.680 And so in so many ways, it's worse than gold.

00:48:29.540 That's a pretty staggering statement to make.

00:48:32.300 But not only is this not the future of finance, but it is the byproduct of people who fundamentally

00:48:37.580 did not understand what they were doing.

00:48:41.000 Mike, the thing that always struck me with Bitcoin as well, what you're saying is incredibly

00:48:46.220 illuminating, is the way it was marketed, is the marketer, the way they marketed it, even 0.99

00:48:53.020 the origin story was, excuse my language, fucking ridiculous. 0.96

00:48:58.040 There was this Japanese inventor who created these Bitcoin and then he disappeared. 0.98

00:49:04.100 I'm like, come on, are we all like 14 years old again?

00:49:07.180 Well, it's, again, if I'm going to sell you something, right, I have to be thoughtful about

00:49:15.240 what is the origin story that I'm going to create.

00:49:17.360 So I'm going to tell you that there was a man who was actually a god who was sacrificed,

00:49:24.800 you know, died for our sins, then came back.

00:49:27.540 Like, we have no evidence of this. 0.56

00:49:28.780 We know broadly that these things are somewhat ridiculous in their story, that there's a

00:49:33.260 godlike figure in the sky.

00:49:34.960 But remember, we are a society that requires that narrative, require that explanation to

00:49:41.100 get us to turn right when the lion threatens us, right?

00:49:45.260 As it's heard, we have to follow those behaviors.

00:49:48.260 There's a book called The God Gene that effectively posits that some people are wired to follow

00:49:53.680 those instructions.

00:49:54.720 Well, you have to give them that story.

00:49:56.460 You have to give them the why.

00:49:58.000 Why are you doing this?

00:49:59.240 Because Satoshi Nakamoto said so and it was good.

00:50:01.920 Mike, absolutely brilliant.

00:50:07.940 Look, I'm enjoying this conversation so much.

00:50:10.200 And as Francis said, illuminating is exactly the right word.

00:50:13.340 Do you mind if I ask you some sort of political and cultural questions or just because it strikes

00:50:20.340 me that you'd have an interesting take, but I understand someone in your position might

00:50:23.240 not want to talk about it.

00:50:25.680 I reserve the right not to answer, but I'm happy to answer questions.

00:50:29.940 No, it just strikes me, and I know that, am I right in thinking you've worked with Peter

00:50:33.700 Thiel as well? 0.94

00:50:34.560 And he's obviously someone who speaks on those issues too.

00:50:38.360 Yeah.

00:50:39.340 Yeah.

00:50:39.860 So I managed Peter Thiel's personal capital for a couple of years.

00:50:43.120 Right.

00:50:43.700 So I'm curious what you make of what's happening in society more broadly.

00:50:49.000 And is it in any way connected to some of the stuff we've discussed today?

00:50:53.340 You know, the cultural shifts we've seen in recent years with Advent on social media and

00:50:58.160 so on.

00:50:59.140 Do you have any thoughts on everything that's happening in the cultural sphere?

00:51:03.380 Yeah.

00:51:05.240 So I think there, I think unfortunately that there are incredible overlaps, right?

00:51:11.060 If I draw a Venn diagram of why this sort of thing works and what's going on broadly.

00:51:15.520 That's why I asked you.

00:51:16.420 I had the sense that you'd have something to say on this.

00:51:18.960 Yeah.

00:51:19.120 So I do think that they are very deeply linked.

00:51:23.060 I would actually, you're over in the UK, right?

00:51:26.080 Is that right?

00:51:27.560 I would encourage people to check out the work of Ole Peters, O-L-E space capital P-E-T-R-S,

00:51:34.740 right?

00:51:37.020 There's a broad school of theory in economics that says something along the lines of the market

00:51:45.160 is always making the right choice.

00:51:47.640 And the most important thing for us to do is to reinforce the signals that come from

00:51:52.720 the free market.

00:51:53.700 And that in turn leads to a rise in meritocratic outcomes and an improvement of skill and capability

00:52:00.500 in society.

00:52:02.240 That story has unfortunately largely morphed into a variant of social Darwinism.

00:52:08.320 Those who are rich are rich because they deserve to be so.

00:52:11.560 Instead of those who are rich might very well be rich because Google fell for a story and

00:52:17.900 ended up buying out their company at a valuation that made no difference to Google whatsoever,

00:52:21.740 but provided generational wealth to that individual.

00:52:24.860 Once you've achieved that generational endowment, you can then proceed to change your behavior

00:52:29.940 of investment to one that allows you to place a series of bets that have no individual

00:52:36.720 consequence, but have option-like characteristics that allow you to enhance that wealth.

00:52:42.860 Peter, brilliant in financial analysis and cultural analysis, I would argue largely figured

00:52:50.400 out that that is the primary benefit of being involved in venture capital, that it allows you

00:52:55.280 to make a series of option-like bets that potentially have a thousand times payoff with very little

00:53:02.020 consequence, right?

00:53:03.200 You're able to construct your portfolio as a series of diversified call options that in turn,

00:53:09.260 each one underperforming has very little impact on you, but one winning causes an incredible home run.

00:53:16.660 But that's really only something that can be done by somebody who has already gotten lucky.

00:53:21.700 And we fail to consider that dynamic of luck.

00:53:25.580 Now, the work of Ole Peters takes, in my opinion, goes a step further than the work of, say,

00:53:31.240 Piketty and Sayez, which is this whole dynamic of, you know, R minus G, it's R greater than G, 0.99

00:53:36.860 et cetera, that, you know, wealth concentration is a function of the returns on capital and the

00:53:42.940 scaling dynamics associated with that.

00:53:45.260 I don't actually think that that's necessarily true.

00:53:47.920 I think what, unfortunately, we've entered into is a system in which the creation of those bets,

00:53:53.720 the wealth created by those bets, and the participation in those systems has increasingly

00:53:58.980 moved into a narrative, and Peter very famously wrote exactly a book on this,

00:54:03.560 Zero to One, about the power of monopolies, right?

00:54:07.380 Starting in the 1980s in the United States and broadly, the rest of the world tends to follow U.S.

00:54:12.720 behavior on these things for fairly straightforward reasons.

00:54:16.180 It is the world's largest economy.

00:54:17.660 It tends to hold the dominant role.

00:54:18.960 It's the world's largest military.

00:54:20.020 That sphere of violence it offers, as those in Iraq and Afghanistan discovered, can be quite 0.99

00:54:24.360 disruptive to the rest of the world.

00:54:27.720 You know, so people broadly followed us in this.

00:54:30.420 We stopped fighting monopolies.

00:54:32.900 We stopped saying, hey, that's actually evidence of market power.

00:54:36.120 That's a bad thing.

00:54:37.760 We also stopped saying, guess what?

00:54:40.160 You as an individual happen to win the lottery.

00:54:42.720 And therefore, you should be subject to a degree of what I would not argue are punitive taxes,

00:54:48.320 but actually a recognition that you created a windfall by virtue of participation in the

00:54:54.320 system that people are ignoring, right?

00:54:58.280 I mean, the fact that I invented Google, and I'm being very broad in these terms, understand.

00:55:04.100 One, I didn't invent Google.

00:55:05.700 Two, I have no particular knowledge of the individual components associated with that.

00:55:10.660 But Google fundamentally benefits from the protection of the intellectual property rights

00:55:16.980 that it has by the U.S. government.

00:55:19.480 It should be paying extraordinary taxes for the windfall that's created from the participation

00:55:25.040 in that system.

00:55:26.900 And instead, we've moved to an environment in which the narrative has been captured that

00:55:30.720 says, well, Sergey Brin is so brilliant, and his creation of Google was so profound that

00:55:35.720 if we just left him with more of the money, he's probably going to do it again.

00:55:39.120 The evidence for that is zero.

00:55:41.820 And again, in fact, Ole Peter's work would suggest that the evidence in the system is

00:55:46.400 that we have a negative distribution for skill versus luck.

00:55:52.280 In other words, a system that was built purely off of luck would do a better job of describing

00:55:58.080 the current distribution of wealth and income in the United States than one that was actually

00:56:02.600 matched to skill.

00:56:03.360 And so I think that there's a very fundamental flaw in our economic system, our treatment

00:56:08.820 of success, our resentment of, quote unquote, punitive taxes for the extraordinarily wealthy

00:56:16.980 and well-performing because none of us really wants to participate in society as it's currently

00:56:22.440 constructed.

00:56:23.000 We're all kind of libertarians at heart where it's, you know, I'm successful because of my

00:56:29.160 capabilities, but that person is unsuccessful because of their bad choices.

00:56:34.980 It's not because I'm exploiting the system in one way, shape, or form.

00:56:39.980 And unfortunately, I mean, I'll give a very firm example of this.

00:56:44.040 I look at the technology companies like Apple, Google, et cetera.

00:56:46.840 They have been found guilty of intentionally enforcing non-compete contracts and non-solicitation

00:56:54.240 contracts for their employees, right?

00:56:57.800 Apple turned to, in a, you know, in a pure collusion behavior, turned to its competitors

00:57:04.280 and said, you can't try to hire our employees, right?

00:57:08.000 That impoverishes their employees on a relative sense, enriches Apple shareholders.

00:57:12.660 It's behavior that is illegal everywhere in the world, and Apple paid basically sofa change

00:57:18.380 as a penalty for it, right?

00:57:20.640 Every single one of these technology companies that I refer to apparently does most of their

00:57:24.800 business in Ireland.

00:57:26.400 Why?

00:57:27.000 Because it's a tax arbitrage that they're able to take advantage of, right?

00:57:30.820 Is it almost required of their managers to exploit that arbitrage?

00:57:35.560 Of course, because they should have their interest, the interest of their shareholders at heart.

00:57:39.140 But as a government, the United States should not be encouraging that, and the government

00:57:43.640 of the United States should be penalizing it, candidly.

00:57:47.460 Mike, because what you're describing earlier on, I mean, that's the American dream, isn't

00:57:52.020 it?

00:57:52.460 Isn't that what we're all buying into?

00:57:56.040 You mean... 0.97

00:57:58.000 I'm successful because of me, you're a failure because of you.

00:58:02.020 You know, and I succeed on my own merits.

00:58:04.900 That's the beauty of America.

00:58:06.300 That's the dream.

00:58:07.140 A man can pull himself up by his bootstraps and be whatever he wants.

00:58:11.820 Yeah.

00:58:12.060 So unfortunately, the evidence for that is increasingly untrue.

00:58:15.840 And the systems that we've put in place have increasingly encouraged extreme success as

00:58:21.160 compared to the more modest success of the individual, right?

00:58:24.920 We've also moved to an environment in which we presume that signs of success are goods unto

00:58:32.500 themselves, right?

00:58:34.280 So a college degree is perceived as the objective as compared to adequate educational training

00:58:41.840 to allow me to take advantage of the opportunities that exist in the environment today, right?

00:58:47.400 The college degree is a mechanism increasingly for signaling, I'm a member of an elite class.

00:58:53.500 You should consider me for this employment opportunity, right?

00:58:57.600 And we've taken away the market signals that would be associated with those degrees and

00:59:02.600 the quality of those degrees if people actually had to contemplate the real costs associated

00:59:08.280 with it.

00:59:09.240 Going to Harvard is an objective in and of itself, not the Harvard education.

00:59:14.420 And in fact, I would increasingly argue that the Harvard education is separated from the

00:59:19.340 Harvard degree, right?

00:59:21.480 I have a daughter who's at the University of Pennsylvania.

00:59:23.920 Cheating is rampant.

00:59:26.540 Because kids are more focused on the grade than the actual education.

00:59:32.360 And if that's happening at the elite schools, imagine what's happening at the second rate schools.

00:59:37.660 Well, that makes perfect sense.

00:59:38.760 And I suppose in terms of your point about monopoly power is something I've been thinking about

00:59:43.580 for a long time.

00:59:44.700 I imagine a big factor in that is what we saw with Sam Backman-Fried, where you're giving

00:59:50.520 lots of money to politicians to shape policy to match what you're trying to do.

00:59:54.520 And I imagine, I mean, I don't have to imagine, Google and Amazon and all these other powerful

01:00:01.120 monopolies in their markets.

01:00:03.480 The reason they are not losing power and accumulating more power is that they know how to spread that

01:00:10.000 wealth around and make sure that they get the right policies from government.

01:00:15.460 Konstantin, I couldn't have said it better myself.

01:00:17.320 You are 100% correct.

01:00:19.760 Well, on that happy note, Mike, listen, I have to say it's been one of my favorite interviews

01:00:24.620 we've ever done on trigonometry because you've just pierced straight through a lot of the things

01:00:29.780 that I think are confusing and perhaps deliberately confusing for people, certainly for me.

01:00:34.840 And I've really enjoyed it.

01:00:37.680 And I really appreciate your time.

01:00:39.760 As always, we'll do a couple of questions from our supporters that only they will get

01:00:44.160 to see the answers to on our local site.

01:00:47.780 But before we do, we've got one final question for you, which is, what is the one thing we're

01:00:52.700 not talking about as a society that you think we should be?

01:00:57.780 Well, so while I've done a lot of work in the crypto space and spent time talking about

01:01:02.100 that, the area that I'm most concerned actually is in what's referred to as passive investing

01:01:07.040 and the emerging monopolies around those behaviors.

01:01:11.460 Again, theories of markets, theories of economies have led people to believe that in many situations,

01:01:18.640 the right choice is not to actually try to invest, not to try to select investments, but

01:01:24.080 simply to mirror what everybody else is doing.

01:01:26.620 The theories that underpin that are at least, if not significantly more flawed than the theories

01:01:33.940 that describe the economy.

01:01:35.560 I was referring earlier to the work of Olay Peters was referred to as the efficient market

01:01:40.400 hypothesis.

01:01:41.080 This idea that all information is out there and simply, you know, mimicking everybody else's

01:01:47.800 behavior allows me to participate without running the risk that I underperform, right?

01:01:54.560 Unfortunately, markets don't work that way.

01:01:58.460 Markets are not driven by information.

01:02:00.280 Markets are driven by transactions.

01:02:02.380 There is no such thing as a passive investor.

01:02:04.840 The theory behind passive investing describes passive investing as someone who never transacts.

01:02:11.020 Well, the firms that are engaged in passive investing and index type investing transact every

01:02:17.600 single day.

01:02:18.520 Vanguard, BlackRock, between the two of them, receive somewhere around $3 billion worth of inflows

01:02:23.180 every single day.

01:02:25.000 Their behaviors are increasingly structurally affecting the signals and behavior of the

01:02:30.380 investment markets that we see.

01:02:32.520 Simple theories often decry that as being tied to the Federal Reserve or other central banks.

01:02:38.920 Increasingly, those models are at odds with what I would describe as the reality of how markets

01:02:44.620 behave from a structural framework.

01:02:46.200 And that actually creates extraordinary risks for us as a society, because when retirement

01:02:52.860 systems fail, and ultimately that's where this system is heading, it's creating a liquidity

01:02:57.300 crisis that I would argue is accelerating as we speak.

01:03:01.280 That crisis almost always signals the end of democracy.

01:03:05.280 As Constantine, you saw this happen in Russia.

01:03:07.900 When the pension system fails, that's when you move to an authoritarian system.

01:03:12.280 Wow.

01:03:13.860 Wow.

01:03:14.760 Well, it's been a happy interview.

01:03:18.320 Mike, listen, we really appreciate your time.

01:03:21.040 It's been absolutely fantastic.

01:03:22.500 If people want to hear more of your thoughts, is there a place they can go to do that?

01:03:26.380 Um, I mean, the most disappointing version of that would be to go to my Twitter feed, which

01:03:32.560 is at profplum99, P-R-O-F-P-L-U-M-99.

01:03:38.240 Confusingly, I look like the character Vecini from The Princess Bride.

01:03:43.760 Before anyone asked, one, I never anticipated being well-followed on Twitter.

01:03:47.840 And two, the reason I chose Vecini is because I constantly try to remind myself that the perception

01:03:53.280 that you're the world's smartest man is doomed to lead to your own demise in some ridiculous

01:03:57.760 game where you didn't really understand the rules of the game that were being played.

01:04:02.340 Um, you can find a little bit more of my stuff by Googling these types of podcasts and interviews.

01:04:08.100 Occasionally, I'll write on my Medium profile.

01:04:11.340 Um, and the last thing is, is that if you're interested in very esoteric discussions around

01:04:15.940 market structure and options, um, the derivative dynamics around that, you can check out the

01:04:21.160 work of tier one alpha, T-I-E-R-A-L-F-A-L-P-A-J.com, which, um, I wrote a morning note for.

01:04:32.100 Fantastic.

01:04:32.620 Well, I'll be sure to follow you on Twitter right after this, uh, stay with us because

01:04:36.380 we'll ask you a couple of questions for our locals, but thank you for being here.

01:04:39.460 And thank you guys for watching and listening.

01:04:42.040 We will be back very soon with another brilliant episode like this one or Raw Show.

01:04:46.840 All of them go out 7pm UK time.

01:04:48.940 And for those of you who like your trigonometry on the go, it's also available as a podcast.

01:04:53.980 Take care and see you soon, guys.

01:04:57.400 Danny Fandango asks, I believe the prevalence of successful scams in the crypto space is indicative

01:05:03.360 of the individuals who are drawn to it and therefore is indicative of the lack of real value

01:05:09.320 of Bitcoin.

01:05:10.400 What do you say in response?

01:05:16.540 I love shopping for new jackets and boots this season.

01:05:19.740 And when I do, I always make sure I get cash back with Rakuten.

01:05:23.640 And it's not just fashion.

01:05:24.700 You can earn cash back on electronics, beauty, travel, and more at stores like Sephora, Old

01:05:29.960 Navy, and Expedia.

01:05:31.420 It's so easy to save that I always shop through Rakuten.

01:05:34.460 Join for free at rakuten.ca and get your cash back by Interactee Transfer, PayPal,

01:05:39.320 or check.

01:05:40.040 Download the Rakuten app or sign up at rakuten.ca.

01:05:43.460 That's R-A-K-U-T-E-N dot C-A.

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TRIGGERnometry - January 26, 2023

Is Bitcoin Bullsh＊t？ - Mike Green

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