Kind: captions
Language: en
right A lot of people in my audience are
not going to understand why you can't
just store your money in dollars um I
have a whole tie rate about it but I'd
love to hear why how do you explain to
people why you can't just put your money
in a bank account or under your mattress
in dollars the simple answer is the
supply of dollars expands about 7% a
year every year for the past 100
years and what that means
is that if you want to buy something
that is a very SC desirable asset that
the government can't make more of and
that manufacturers can't make more of if
technology and capital and machinery and
robots can't make more of it it's scarce
and desirable here's an example um an
acre of beachfront property in Palm
Beach or or a beachfront house in the
Hamptons or waterfront property in Miami
Beach that's a desirable place to live
you can't make more of
it and if you go back a hundred years
you'll see that the value of that acre
was
$110,000 and you go forward 100 years
and that is about $10
million and for those who are very quick
at math they'll realize that works out
to 7% increase in price every year for
100 years and that's why you know that's
why people buy houses for hundred
million do on the beach in pal Palm
Beach and my house the house that I'm in
right now it was uh sold in 1930 and I
have the deed on my wall and it was sold
for
$100,000 in
1930 if you'd put that
$100,000 in a vault and you kept it safe
and sound for the 90 years and if you
took it out it would pay
about 8 to 12 weeks of my property tax
on this
house like you literally couldn't keep
the house for eight weeks go ahead let
me say it in my way tell me if this
resonates with you the reason that you
can't store your money in cash is that
the government uh steals your buying
power by printing more of it I find it's
very sobering to look at it as theft um
does that resonate with you or do you
think I'm being
hyperbolic no you're correct uh in
essence the inflation of the dollar
supply means that your wealth is cut in
half every 10 years
if you hold all your wealth in
cash and and uh it's just it's the rule
of 72 right you divide 7% into 72 that's
the half life of the asset so the half
life of your wealth is 10 years if you
sort in cash if someone gives you an
asset you can invest in that goes up 7%
a year you're keeping up with inflation
you're not getting
wealthier but you're not getting poor
you're just Treading Water you know and
if you're beating that hurdle rate then
you're getting a bit wealthier so you so
once you understand that you can see
that you can't um you can't preserve
your wealth for long periods of time in
a fiat currency and the best fiat
currency in the world Tom is the dollar
but in most other currencies they
inflated 14% a year and that means the
half life of your wealth is five years
but in a weak currency like in Turkey or
Syria or Iraq or Venezuela or Argentina
it used to be for 20
years the inflation rate looks more like
uh 28% a year or 30% a
year and we take example the peso the
peso went from one peso to the dollar to
a thousand pesos to the dollar over 20
years
Jesus okay so I don't you know in
America you got to keep in mind you're
American you live in the greatest
country of the last 100 years America
won every war right we were the winner
of World War I we got richer we were the
winner of World War II we never lost the
war we were the winners of the century
our currency lost
99.9% of its economic power over the
hundred years but if you went to
Nigeria or like Germany the currency
crashed like three times two or three
times right in Japan Japan the currency
crashed you know and Russia it crashed
three last time the Russian currency
crashed in 98 the the Brazilian currency
crashed
completely uh 25 years ago the Argentine
currency crashed about four times than
100 years so if you're an
Argentinian and you're 30 years old you
already know what it's like to have
hyperinflation because you live the
entire cycle it's just Americans don't
and so when you're if you're taking ADV
from an American Business person like
Warren Buffett or Charlie
Munger well I mean they didn't live
through the Yar Republic they didn't
live through the collapse of the current
by the way the currency collapsed in
Venezuela it collapsed in Argentina it
collapsed in
Brazil it collapsed in Cuba it collapsed
in Russia it collapsed in every single
country in
Africa you see and so foreigners
actually get it a bit better right it's
like the you the bank's going to take
your money the currency is going to zero
the government's going to promise you
it'll be okay until tell you to put your
money in the bank then they're going to
inflate the currency freeze your bank
account crash the currency and then tell
you it's worthless that's what happened
in Cyprus not too long ago if you want
to go and Google that and so the real
promise of Bitcoin is very simple it's a
bank in cyberspace that won't steal your
money and it's an asset that you can
store your life savings in that nobody
can debase or corrupt and those are two
powerful promises for the first time in
the history of the human race no one
ever gave you that those two promises
ever before now yeah the the thing that
um and a lot of this started with me
getting to know you researching
cryptocurrency um realizing the just
absolute devastation that even in
America is happening with
inflation uh and under understanding
this difference that you're now talking
about in a really clear fashion that
until I started researching you for this
episode I'd never heard you delineate it
this way that uh money is bifurcated
into those two elements you've got the
money that you spend cool but then
you've got the money that you're trying
to preserve your wealth over time uh
when I tell people the way you should
think about your house is not something
that's going to go up in value over time
you should think of your house as
something that you pay an insurance
policy against the upkeep the property
tax as a way to match inflation which is
unless your area becomes
disproportionately desirable and that
does happen so like Austin went up in
value because people just flooded into
that area but for the most part uh what
you're going to see is actually just
keeping up with inflation that as the
dollar is devalued it looks like the
price and the value of your house is
going up but it's really not now I think
that's fair by the way I think that's
that's definitely a good way to think of
it yeah I think so my thing my own
company when I start talking about this
stuff um my employees look at me a
little bit like I'm crazy because I'm so
aggressive about getting people to
understand and it'll be very interesting
to have this conversation with you that
ultimately the stock market is gambling
and once you understand that people have
been forced to become gamblers based on
inflation that you have to find a way to
outpace inflation otherwise you lose
your money and the really smart among us
look at the capital system look at look
at the equities market and they go oh
cool I have a really complex way that I
can find Arbitrage basically in these
moments where if I find an area of risk
that I think I understand better than
the next person I can come in I can buy
that asset it goes up in value compared
to what I can sell it for down the road
and I'm able to sell it for a bigger win
than inflation and and that forces
everyone to play that game or to just
have their buying power stripped away
from them which of course is what
happens to the vast majority of call it
normal to undereducated they're they're
just going to get eaten alive because
they don't have the time energy or
intellect to figure out this relatively
complicated game okay so with all of
that as the structure of why even the
average person should care about this to
a screaming degree um there's an idea
that that you say but you go by quickly
that I think if people understood it's
really going to help them so you you've
said I want to see the entire world
recapitalize in Bitcoin now when you say
recapit capitalize is what you mean hey
that part of your wealth that you want
to store to maintain purchasing power
over time all of that instead of being
in real estate instead of being in
treasuries instead of being in equities
that should move over to bitcoin is that
what you
mean yeah that's a good way to say it
yeah you've articulated that quite well
yes recap build yeah build your house on
a firm foundation don't build it on
sinking sand don't build it on a swamp
build it on a a granite rock on granite
on shist and I guess if I could give the
math the risk-free rate of the dollar if
you're capitalized on US Dollars and you
were to say buy uh treasury bonds the
risk-free rate is something close to
suur or the standard overnight funding
rate and you know that ranges but after
you after you get paid that rate and you
get taxed on it you know you might get
paid 5% you get to keep 3% after tax
maybe if you're taxfree you get 4 and a
half% and if you're tax you get three so
the risk-free rate of return of your
capital on that dollar standard is like
in the 3% range the risk-free rate for
Bitcoin as I just described it to you 29
% over 21 years about
30% so the way I look at Investments is
when you're pitching me an investment
idea I say well I've got a lot of money
in Bitcoin and I'm expecting about 30%
risk free for the next 20
years you have to actually pitch me an
idea that generates more than 30% plus
the risk premium plus the tax efficiency
if you told me here's a thing that'll
make me 50% a year but I it was going to
be taxable that might be 40% a year or
35% a year and I'm like well after the
risk it's still not as good as my
risk-free rate of 30% so if you're
capitalized on bitcoin if you understand
it and if and if you understand uh if
you have a long time Horizon if you're
going to hold it more than four years
you don't care about the volatility all
you care about is the annualized return
the annualized return lot of assumptions
in there so I know a lot of people are
clutching their pearls right now about
Bitcoin being referred to as risk-free
so can you break down for us the
difference between that volatility and
then how you can have the confidence to
look at this and say no no no the the
risk is merely a timeline question
because I think a lot of people will
will take exception to
that yeah so well the dollar is zero ARR
zero volatility that is to say the
dollar goes up 0% against against itself
each year and the dollar is zero
volatility against itself each year so
if you're on the dollar you're living in
flatland and and you're you're a
stationary person in flat land a
pedestrian in flat land Bitcoin is going
up 60% a year against the dollar how
long well since micro strategy made its
first investment four years ago at 60%
but if you stretch back 6 8 10 years I
think it's also 60 % so like a
decade but you can measure it back a
decade and you see it's going up 60% a
year and it's 60 volatility it's it's a
60v against the dollar so you should
think of of Bitcoin as an asset it it's
like you're on a speeding train going 60
miles an hour and you've got a
Flywheel spinning 60
RPM and The Pedestrian on flat land is
standing on the plane watching the train
go by thinking this is scary it's going
to suck the you know the auction out of
my lungs and uh they're thinking my
money isn't an asset because it goes up
0% a year so they have a different view
toward money than the view of someone on
the Bitcoin train the person the person
with a million dollars of cash is gonna
have a million dollars of cash in a
decade a person with a million dollars
of Bitcoin is going to double their
Capital every eight 18
months if they just hold on to it right
and so they're going to double it once
twice three four four times at that rate
right um the volatility really does come
down to sorry and I'll let you get back
to that but this uh this does come down
to a belief that when you look into the
future that the the setup that makes it
have the 60% ARR is going to continue
because I look at this and I say the
only reason that it has that kind of
reward is that it is volatile that that
there are question marks because if
there were no question marks everyone
would flood in near instantly it would
hit homeostasis and that would be that
um and so I I do I think Bitcoin is
anything but risk-free uh but I do think
that the volatility is advantageous for
the people who are going to be right uh
about the if people are right about the
upside that's the most Fair way to say
it um why do you think the best way to
conceptualize this is as
risk-free Howard marks would say
volatility is not risk volatility is
volatility right a merry-go round you
know or a carnival ride or roller
coaster is volatile the risk part is if
you fly off the roller coaster right if
if you if the marry go around stops
working Etc um so the fundamental risk
of Bitcoin is the existen potential risk
of an extinction level event in Bitcoin
right if space aliens come down and say
we're taking your Bitcoin away from you
right uh then I guess there's risk if if
some Evil Genius finds a way to create a
cyber virus that infects and destroys
bit the Bitcoin Network instantly
irrevocably that is the risk so but
that's kind of like the that's the
existential risk you take when you get
on the airplane if it crashes that's the
existential risk you take when you cross
the street that's the existential risk
you take when you put a piece of food in
your mouth and I say and you say well
can you imagine that hurting me I say
yeah if I put poison in the food you're
dead Okay so do you trust me when do you
trust the waiter when you put the food
in your mouth right so yes there is some
risk in life and the existential risk is
that extinction level event after you
don't think there's another layer of
risk in that not not existential because
you're saying the risk-free return of
Bitcoin is 60% but I think there is it
it seems strange to me to not allocate
some percentage of H maybe it doesn't
grow that fast maybe it doesn't remain
60% you yourself say over the next
whatever 21 years it's going to come
down uh it'll average out over about 29%
what if that accelerates and the the
return ends up being substantively less
than that um so I get saying that this
has a better chance of having a higher
uh annual rate of return than say the
S&P 500 which maybe we clock at 15% we
say nah ah we might not hit 60% but
we're probably not going to drop below
15% therefore if 15% is our hurdle rate
it's going to be something north of that
but I think where people trip up with
your language is this idea of the
inevitability of the 60% what would you
say to that so we're dealing with three
concept risk
volatility and
performance okay so I've I've addressed
the risk issue by pointing out that
there is existential risk in your given
Network or frame of reference and I just
want to make that point that once you
understand that risk uh of being in that
frame of reference then you have to
figure out what's the source of the
volatility and the
performance and if you don't understand
why the asset does what it does if you
don't understand the economic physics
involved then you'll think it's random
and you'll and you'll feel like it's RIS
the performance is risky but I want to
give you an example of a physical
metaphor I'm a hiker and I come across a
mountain lake and the mountain lake has
500 trillion gallons of water in it and
yeah I don't know how it got there but
it's there the water's chilly it's clear
and I look down and there's a
waterfall coming off the mountain lake
and the waterfall you know it's very
beautiful and and it's very turbulent
right water is turbulent in the
waterfall water is not turbulent in a
glassy lake so the the turbulence is
volatility right and the and there's
waterfall and then I look at it and now
if you look you say I don't know why
that water falls downhill
you know I don't know if it'll keep
falling downhill but I hate the
volatility then I guess you can take a
selfie in front of the lake go swimming
get cold and leave but if let's say
you're not a tourist but you're an
engineer so you come across the same
Lake and you see the waterfall and you
see the 500 trillion gallons and you
think about gravity and you think about
sunlight and now I know how the water
got there the water got there because
the sun Shone on the ocean the O the
water evaporated from the ocean it rose
up in the clouds the wind blew it
against the mountain it condensed and it
rained into the mountain and the and the
water ran off the mountain into the
mountain lake I know how it got there
and then I think well if I create a dam
near that waterfall I build myself a dam
I put a turbine on the dam and then I
drop a billion gallons of water I
Channel a billion gallons of water
through the dam drop it 60 ft and then I
plug that into a hydroelectric power
plant I spin the Dynamo I make
electricity and then if I'm really smart
I run the Electric power line to a
village down in the valley and I light
up the village or I light up the city
now someone can come along that doesn't
understand physics and they can say good
idea Junior but what are you going to do
when the water stops flowing
downhill well I'm like uh well I
actually think the water's flowing
downhill because of gravity new Newton
solved that for me and then someone else
comes along and says good idea Junior
but what are you going to do when you
run out of water in the lake I'm like
well there's 500 trillion gallons and I
take out my calculator and a billion
gallons or whatever it's going to last a
long time like well it's eventually
going to run out I say well you know the
Sun keeps shining on the ocean and the
ocean keeps lifting the you know the
water out of the ocean and it drops it
on this mountain and that's why there's
water in the mountain but you're right
there's some kind of natural limit and I
suppose there's a limit to the amount of
energy I can pull off of this Dam but
it's a large number it's a lot more than
your donkey cart and it's a lot more
than your steam you know wood stove and
it's a lot more than your Coal Power
Plant and maybe it's a lot cleaner than
burning you know gasoline so I'm an
engineer and you're seeing you're seeing
performance thinking it's random and
that's why it's going to stop and you're
seeing vol ility and you're thinking
it's random and maybe it'll stop and and
here with Bitcoin the reason bitcoin's
performing is is a it's volatile but B
it's more en it's a more energy
efficient State the water is Flowing
down 5,000 ft because it's more it's a
lower energy State 1,000 feet below the
mountain you know it's a it's a low
energy State you've got potential energy
in the water and it wants to go to
ground and that's just physics the 500
trillion gallons of water is $500
trillion dollar and the 500 trillion
dollars of assets are sitting in real
estate and currency and B and Sovereign
bonds and corporate bonds and artwork
and equity and they're s they're
invested in the stock of a company in
Africa that's going bankrupt right
there's in they're invested in real
estate in Cuba in Venezuela in Nigeria
they're sitting in a warehouse that's
crumbling it's got a 40 useful 40-year
life and so entropy and inflation there
you know you you invested a hundred
billion dollars in a war zone and then a
war broke out and your money got Deval
your asset got
devalued all of the things going on in
the world the war the chaos the
competition the inflation the entropy
the passage of time the hurricane chain
the covid you know vac vaccine the covid
virus all of these things impaired the
value of your assets when the reason
Bitcoin is going up it's not an
accident it's because capital is is
economic Mass it is Flowing from a high
energy State The Mountaintop to a lower
energy state to a more efficient state
it is steam condensing to W condensing
to water condensing to ice giving off
energy just like in any chemistry lab
you would learn this and at the same
time there's this volatility driver Tom
which is you have an open Capital Market
and and on Saturday night when there's a
missile crisis someone can make a 10
billion short bet levered up 100 to one
and panic and they can do it in Bitcoin
and then on Sunday morning when the
missell crisis is has passed and nuclear
war did not break out they can go long
and they can reverse the
trade and bitcoin's the only asset where
you can sell a billion dollars of it in
a minute at a 100 to one leverage and
you can buy a billion back in a minute
with a 100 to one leverage on Saturday
night and Sunday morning if you could do
that with your upper east side apartment
then property values in the Upper East
Side would also be more volatile and if
you could do it with picassos
that would be more volatile because if
people get drunk and they panic and they
short your ass at 100 to one and change
their mind six hours later when they get
up with the
hangover you're going to have volatility
so the volatility is a feature it's not
a bug it's because it's the most useful
thing in the world from a capital Market
point of view and if and if it is that
useful then a a Bloomberg jockey in in
Singapore is going to raise 20 billion
in capital and they're going to make it
available for you to trade on Saturday
night or they're going to make1 billion
of credit available to you on Sunday
morning because they're getting paid an
obscene fee to do it and once you
understand the assets appreciating
because it is thermodynamically sound
and it
represents for