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Hey everybody. Welcome to another episode of conversations with Tom. I am here with somebody who's a logic has had a profound impact on how I think about Bitcoin in particular and investing in general. The one and only Michael sailor. Michael welcome to the show.
Thanks for having me, dude. So you are the founder and CEO of microstrategy. You went to MIT at one point, you almost became a fighter pilot and a miss diagnosis has granted us all a very interesting public CEO to watch and I want to actually start with that story. There's something about the way that you faced massive disruption that I find, really interesting. So I want to start with the beginning of microstrategy. There was sort.
Of you versus another guy going head-to-head with your ideas. I think started companies at relatively the same time and he kept telling you that you were doing things wrong and you would make an adjustment and it would have a material impact on your business and you just kept going with that facing what you referred to as these existential threats and the way that you handle existential threats, I find incredibly informative. So if you don't mind starting there, that would be really interesting.
Sure,
you know, so I started a company last 24 and we didn't have a lot of resources. I guess I took out like a $5,000 Furniture alone and then I employed my my first employer Dupont to give me, 250 thousand dollar contract. And then I asked for like, a hundred thousand in cash upfront and and my negotiating technique was they said we don't normally do it and I said,
While I don't have any money and so I can't build a software you want less. You give me the money up front and that that negotiating strategy only works once in your life but for me it worked and so they wanted what I had to offer and so they gave him the money. So we started with not that much capital.
And when you don't have the much Capital, you know, you can't, you can't do anything. So we were using we're building computer simulations based upon an existing piece of software that I had. And it was limited, but we did what we could and we grew the company to like 750 thousand a year. And then we grew it to 950,000 the next year and we and we saw an opportunity to plug into a graphical interface.
And the idea was give computer simulations to Executives to predict the future. And the problem was It was kind of delphic. They couldn't figure out what the assumptions were so we thought well maybe we can actually create a piece of software that lets them plug in the assumptions and of course we couldn't afford to write it and C++. So we didn't even have the programming skills to build the software. It was like 19.
91 or so. So we found a product called Wings which was like an Excel spreadsheet, but it had its own scripting language and graphical interface or is one the first graphical interface development tools. And we took that product and we plugged it into our simulation engine. And, and, you know, that friend I told you about friends /. Competitor was a former Professor from MIT
And so he had the PHD and he had all the knowledge and, and I was just the kid trying to grow a company. So, in his wisdom, what he said was, you know, like everybody knows that you got to use Excel. If you use a spreadsheet, you can't use Wings Excel as the winter and my response was. Yeah, it might be the market share leader, but it doesn't have the functionality. The technology just doesn't work for me so I can either use Excel and fail like take the, take the
A choice and fail or I can try something new and succeed.
And he goes well, you know, long term that's not going to work. I said well you know we all know that eventually Excel will crush them. Like all mine business school case, studies say that. So I said, yeah. But short term, we're going to fail. So we got to do something. So we built the product with wings and it was a screaming success and the company doubled and we became a two million dollar company and we have a four million dollar company.
He became a six and eight million dollar company and then a 16 million dollar company. And right around the time I was 16 million dollar company. He was still a $1,000,000 consultancy because you hadn't taken the risk and he was not at risk. He had no existential threats, whereas we had a 16 million dollar company with threats, which was, was Excel, was going to squeeze wings out of the business. And so the answer was we rebuilt.
Our product on Microsoft Bay. So we started using Visual Basic and Microsoft Technology.
And at that point we were 16 times bigger than that consultancy. He said, you know, every every good software engineering company that I know uses C++. They don't use Visual Basic, you know? And and so you're not going to take it seriously and I said, well, you know, I have people that can figure out how to do in Visual Basic and they can't figure out how to do it and C++. So we did it the other way and then we double 232 million and we doubled the 64 million.
And he said 1 million and we had 64 million. We had this existential risk, which is we needed to code part of our software and C++, but we of course, we're 64 times bigger than we had been, and we're four x bigger than we were when we started. So we hired a lot of people and we started coding it and C++ and he still had a secure consulting company that was a million dollars with no risk and you know,
It went on like that. The next thing was we adopted, you know, the internet and we started building our software to run on HTML and people said, well, you know, like no big company uses HTML. It's a risky thing and it might not be secure or doesn't do that. And we thought, well, you know what, we can't give the software to 20,000 people unless we try this and so maybe we'll try to figure out the problem. So the result was initially, we built it and not
so many people used it and then we built it and people use more of it and then we built the third version and everybody used it and then the people that hadn't built the internet version got squeezed out of business and then then you know then it went on and
But at this point, right? The company is like 200 times bigger than the million-dollar consultancy which is still not at risk, but it's a difference between being a technology company and being a services company. Services companies don't take risks and they don't, they don't pursue architectures technology companies need to take risk and of course the eventually, the mobile wave hit and we rebuilt our software to run on iOS. And then people said well, you're crazy Androids the way.
So we built ourselves. What are on Android? And eventually had software running on PC operating systems web operating systems Android and iOS operating systems. And then of course, eventually the web browsers change to Chrome and in plugins, we built something to put supported plugins and if you sign up for technology, I think you got to have this model in your head that you're a snake that shutting its skin every 3-4 years.
Or I mean a really good model in nature for growth. Under pressure is a chambered nautilus and a chambered nautilus is this creature that grows under under deep-sea pressure and it and it builds a shell. And of course the shape of the chambered nautilus is this spiral because the creature is rebuilding the next Shell to be twice as big as the last shell and turning in on itself as using its previous work, as the structure to support.
For the next piece of work. And so if you look at the at the design of a chambered nautilus, what you see is is Nature's solution for growth under pressure and and I think that's how technology companies weren't you just always growing. You can't abandon what you've done but nor neither can you can you not move forward and not take risk and not
Not Branch off in a new area. So, yeah. So there's this very interesting Dynamic dance between between respect for the past and integrity and architecture versus the opportunity and the challenge of the future.
And you're living in that zone in the
middle. The the friction between those two. This is the very thing that makes you so compelling to me in the way that you think through problems and compelling in a way where I have taken your advice and invested a substantial portion of my entire net worth in debate coin, not by force of personality. But by the way that you can walk people through the logic of how to think through a problem, and the one sort of Capstone that I'll
On the story that you just told to really build your credibility and then we're gonna go because my audience probably doesn't know a lot about crypto in general. They may not know a lot about you yet and the Capstone I want to put on is you are if not the longest serving CEO of a publicly traded company in your industry, one of certainly the top and you know in an era where CEOs and public companies, you know, are constantly like in fear of losing their job, you've navigated.
Gated through insane storms, including the.com, crash including the 2008 crisis, including covid. So it's, I think you said at one point, you actually went through a 98 percent loss in shareholder value and still manage to keep your job. So, just understanding how profoundly difficult that is now. I will credit it to something and then you can tell me if I'm crazy. What I credited to is, not only your ability to sort of a knowledge of
Is something like the, the chambered nautilus, but that you think from first principles, and that's what I found. So compelling in your analysis of Bitcoin is just reducing it down to First principle. So, one would be great for you to Define what first principles are. So that people understand that. And then for the rest of the interview, we sort of build on how that plays out in crypto.
Yeah, I think probably the most valuable thing that I learned from MIT was to think from first principles,
And to be intellectually, Fearless MIT is just is an entire University, full of very bright people, but intellectually Fearless people my, my freshman class mates. You know, one of them started a computer company on launched a Pac, Man, competitor and got a cease and desist letter that are Computing, the game company. Another one designed Hardware that went on the space shuttle, you know?
Another one, I used to like, rip down and fix his own cars for fun on the weekends. And they were, they were just capable people that weren't afraid to do something. And what does
that mean to be intellectually? Fearless, like you're not afraid of looking stupid. You're not afraid of breaking something. What is that? My
my first Material Science class, the professor comes out. And we're literally all freshmen is the first the first hour of our of our time and in the class and maybe
It's like a freshman year class like freshman year first semester, so it's early. So the professor walks on the first lecture and he holds up a tile. I says, you know, I'm a consultant to NASA and this tile burned off the space shuttle on re-entry last week, so they have a problem. They don't know why they flew me down to talk about it so they gave me the tile. We had a deep discussion, they're still not sure he says. So here's the tile. What do you guys think?
And, you know, everybody looks at each other and these are like, 18 year olds, right? Where okay, I was valedictorian of my class or I'm a eagle scout or whatever but they're all thinking was this in the readings, you know, I did, I not read this and, and there's this first, you know, horrifying thought right that I should know the answer but I don't and then the light bulb goes off and you know, one one guy, the front Road raises Hannity and He suggests that maybe
Ought to try to, you know, reverse the lightest composite or, you know, ask a question about the nature of the material where it was in the space shuttle and then he posits a theory and then the rest of us go wow, that Professor actually expects us to think for ourselves and then and then we realize he just asked us to question that he doesn't know the answer to that. NASA doesn't know the answer to that. No one in the world knows the answer to
It's not in the back of the book and then the second thought is not only. Is it a truly truly unique question. He actually has confidence that maybe we can reason our way through it to figure out a methodology to solve the problem. So I would say that a lot of you education consists of rote, learning, you read something, you read the answers in the back of the book. You try to remember what the answers are and then you regurgitate them back. But there's a point in your life when you have
After reason from first principles. So what our first principles, a grasp of math, a grasp of the scientific method, you know, a grasp of, you know, elements. Like at some point you have to build a building, you have to choose an element where you use choose steel. Or will you choose bronze or will you choose gold? Or will you choose silver, or ceramic, or whatever? If you don't understand the math of civil engineering, if you don't know anything about
Cereal science then you certainly can't put one thing together with the structure and make it stand or not stand. So, Engineering in general is is about learning enough math, enough science. And then enough engineering technique in order to construct a mechanism that's going to work, right? Under whatever the circumstances is you needed to work. I think that's that's what it means to really.
Even from first principles, you have to be willing to take a clean sheet of paper.
Like a literally a clean sheet of paper like a for example I tell you design something that flies you get wood.
Okay, design. Something the Flies. You get a metal pick the metal. We don't design planes with steel. Why? It's the perfect metal for everything except flying. It's just too heavy to fly. You will never ever successfully design a plane with steel without aluminum. You will never design a metal plane, it's just not happening. So, so if I tell you, a design, a plane that flies in high winds, that's a different design designer. You know, design something that works in cold.
Right. If, if you're unable to Divine the impact of the change in the material design, something that flies on the moon,
But it's different flying on the moon than flying on the Earth, right? What if I change the gravitational constant? What if I change this? The speed, you know, with of sound, right? What have I change? The density of the air. How about run a marathon? How about run a marathon at the top of Mount Everest about how about stay alive for a day at the top of Mount Everest?
If I were going to string those together to give people an overarching sentiment of what unites us and tell me if you think this is crazy, what I explained to people.
You have to understand the physics of the situation, like the the whole thing about flight, you have to understand, lift to understand. This is about using. And trust me, when I say, I don't know the actual physics of flying, but the sort of ballpark idea is you've got thrust, you've got the wind hitting underneath the wings. So weight is going to become an issue. The amount of thrust that you have is going to become an issue. And when your thrust exceeds the you know, effort that you need to get that lift then you fly and if you fail to do that, then you crash. And when you understand this is
About recognizing the, the way that it works. So, tensile strength of the, you know, object you choose to build, your building is going to determine the amount of weight that it can hold things like that. And once you understand that foundational layer. Now you don't have to necessarily follow a book. You can just think, why know that this will work? Because this is a function of, you know, strength weight durability. And once you get the parameters that you're operating under, now you can build something that's new.
Because you just don't, you understand? Literally the physics of that
situation. I think engineering is the discipline of constructing mechanisms to channel energy.
And so you have to understand a bit of math, you got to understand the basics of physics you fly and you generate lift but you got to you got to know enough to know that the amount of lift you generate is different. If the density, the air is different. If there is no air, try generating a bride like
Human beings human beings rise through channeling energy. So so fire was pretty Elemental. Okay, how about does that burner? Does that not burn, right? I give you two things. Can you burn a rock? Can you burn some wood? All wood doesn't burn the same? Can you burn grass? Yeah, design an oven. How about? You know we wouldn't have made it without are bows and arrows missiles, right? Probably the most Elemental thing as you need to hunt from a distance.
Okay, so design a bow.
Design, an arrowhead.
I give you four rocks, choose the one that makes the best Arrowhead, okay? Kind of common sense, right? Not not the light, Happy Shiny soft rock. Maybe this sharp flint, rock that will do the job. Now, design an arrow. You want a long hair or short hair. You have some ideas but then there's also experiments, right? How long should the arrow be? Okay, we'll make it this long fire. The arrow. Now, make it this long fire, the arrow again. Now, make it this long.
They're now should I create a bunch of randomly different sized air has, probably one of the arrows works better than the others, right? So after I fire a hundred arrows and I picked the 87th Arrow, then I'm going to manufacture 10,000, arrows of the 87th arrows, length and width, and makeup. And you know, and then put the right arrow, head on it and then manufacture it and pretty soon. You don't have to go and wrestle with the gorilla or a bear in order to get dinner.
So it goes on right? I mean what's the sale channeling when into wind energy? You have a create a sailboat one sale to sales three sales what kind of self different shape of sale. How do you make the sale? How high should the sale be right? So there's an entire set of engineering which is just common sense. Can you imagine that? There's a shape of a boat that goes through water better than a different shape of a boat?
Okay, there's laminar flow, you know. Oftentimes you know there's there's the ratio if I make the boat one foot wide and a hundred feet long, it goes faster, that's a crucial right? If I make the boat 10 feet wide and 40 feet, long or 50 feet long, well it goes slower, but on the other hand, it carries a lot more stuff.
Right? And and there's something called Hull speed. What you'll find is that there's a maximum speed at which you can push a push a hole through the water.
It's it's not a function of the energy use. It's a function of the shape of the hole, right? Common Sense, create a square-shaped Boatwright harder than a needle shaped boat, which has the fastest whole speed. It's when the aspect ratio is one to a hundred, you go fast. When the aspect ratio is 1 to 5, you go slower when the aspect ratio is 1 to 2
You go slower once the best aspect ratio, depends on what you're trying to build. Right. What should you once you figure it out? Make more like that. Does the material matter? Yeah ever. See a boat with rocks, doesn't float as well, you know. Yeah, everything matters. How do you solve the problem right through being methodic?
Is it important? Well, might be a matter of life and death. So I look, I think the big thing that happened with regard to bitcoin this year, is that Bitcoin is the first is the first point in human history were engineering and pens. Non economics up. Until this point, people didn't really embrace the idea of energy Theory and Engineering Theory and math, and sciences is being integral to the way that a monetary asset function.
you know, used to be money was you know, seashells and tokens and then and then we have this general, you know, we have gold and we have coins and then we have General agreements and and and the like and Bitcoin was the first time when we created a digital monetary asset, a pure, a pure digital token on a pure digital Network,
That that actually respects the laws of conservation of energy. I say it sound funny but that's the same as thermodynamically sound money, which is conservation of energy, which means mathematically proper,
we'll get to that in a minute because those are like, really deep Concepts that even after being in this for awhile struggle, with some of those definitions. But so now I want to help people understand. So, we're talking about boats and arrows and there's a certain type of arrow that
Better. And it takes a lot of experimentation. There's a boat, and a certain type of boat, some of which you could probably think your way through, like, even just as a lay person looking at a square boat. It seems like, okay, something doesn't feel right intuitively. And then I think it was a Portugal Army that at one point like, took over the world, because they had longer trees, which meant that their boats were faster. And so you get to a point. What I want people to understand about the way you approach the world is, you get to a point where you can know nothing about it. And say, hey, somebody tell me which boat to buy and your
Or as ignorant before, as you were after, but at least you have, if you have a good consultant of the right boat, but when you yourself can reason from first principles, now you can act at a moment of tremendous uncertainty. Now, the reason I care about this probably important to articulate that to you. When covid kicked off, I had a moment of panic for because I first of all, I started not poor, but I was broke so I start broke, I utterly transform my life.
I work in the inner cities, a lot because I'm in manufacturing or I was. And so, I see these incredible people that are destitute, because in my opinion, they don't not all of them lack intelligence because intelligence is evenly distributed. So in any neighborhood you're going to sort of find the same distribution of IQ. But what you won't find is the right frame of reference. They don't think in the right way and because they're not thinking in the right way they get stuck. So I become obsessed with how do I convey mindset to people? So they can think
Through novel problems and solve it in a way that allows them to get out covid hits. And I'm like, whoa, the monetary system is blowing up. I'm super scared for other people that the basically, they have no sense of how to invest, or if inflation is going to go, crazy, like, how to protect against that. And so I start bringing on financial experts and none of them could talk at the street level about like, what does the guy do? That's making $52,000 a year. What does that guy do? And none of them
Add an answer and then I come across you and you've got this idea that we're having a once in a thousand year opportunity, with Bitcoin. And I'm like, I've got to get people to understand how you have come to that, how you have come to that conclusion through first principles and then like, we can get to sort of the what they should do. So walk through how you go from that sort of early tweet that you just sent off as a whatever saying, you know, Bitcoin is never going to be anything too. Like whoa, this
As real. And as a person and as the CEO of a company, I'm going all-in. How does that change happen?
Well, the catalytic event is the pandemic and the events that took place in March of 2020 and what you saw was Main Street shut down
It literally shut down and came to a grinding, Halt, and Wall Street had an initial panic and a rapid recovery of v-shaped recovery. And so we put those two together. You had an l-shape recovery Main Street, just shut down. And then you had a v-shaped recovery and we call that a k, but we, but if you decompose it and I was very sensitive to it because on one hand and my personal life, I'm an investor
And in my public life I run a Main Street company. I run a software company that has people that manufactures software that does things. So what I saw was if you had
If you had a large portfolio of stocks or assets and you went into this pandemic after the FED, ended up expanding the money supply with the interest rates going to 0 and the expansion of the M2 monetary base, the money base, you found that you are actually 25-30 percent wealthy or doing nothing.
You could have done nothing the entire year, as long as the only mistake you could have made is do something right? If you, if you had a billion dollars and you did nothing for the entire year, you had 1.3 billion dollars at the end of the year.
on the other hand, if you had a Main Street company and you're generating, let's say a hundred million dollars a year in cash flow and your valued at a billion because of the cash flow, you would have to be generating a hundred and thirty million after a year to be valued the same because the value the assets that the money by is is being devalued by 30%, if the currency is devalued
You'd at some rate and, you know, the money supply expanded to 24 percent last year so you could use that as your metric or you could use the S&P 500 return as another metric. But clearly the currency devalued which means that if you're a Main Street company you had to work twenty percent harder to get nothing. And if you're a Wall Street company you had to work. You have to do nothing to get 20% better. And so, what I saw was a
Shift in balance of power you know, and a shift in wealth and it was a pretty disturbing to me too. You know. It's like you don't want to be the dentist working for a fixed amount of money that's getting 20% less valuable every year.
So the average person I think struggles with that because they're like, well, I'm getting my stimulus check. What do you mean like, how is this going down cost of breads across the bread? I'm all
good.
I think there are some fundamental misnomers or, or understandings of the world that people miss and what and the most pernicious. One is the idea that inflation equals CPI,
which is consumer price index, average
shit. The idea it's a number that for inflation. Inflation is only 2% or inflation. Is 1% or inflation? Might be 3%. Okay. That's just a mistaken idea.
To what is inflation. Inflation is the rate at which the things you want to buy or going up in price and what are the things you want to buy? Well, you might want to buy pizza, you want might want to buy Netflix, but you might want to buy a house, you might want to rent a house, but if you want to rent a house in might not go up in price as much as you want to buy a house. What if you want to buy a house in the middle of Manhattan? It might go up in price differently than a house in the middle of Kansas. What am I want to buy food? What if I want to buy energy? What if I want to buy a Picasso? What if I want to buy something really scary?
What if I want season tickets to, you know, the baseball game. What if I want health care? What if I want to early retirement, they're all things. You can buy, you can buy assets, you can buy luxury serve. You want to buy a Rolex? You want to buy a Maserati or a Porsche luxury goods, or do you want to buy commodity goods? And there are some things you don't have to pay for right there. Add Finance right, streaming YouTube, what's that, what's the inflation rate on streaming YouTube? Ad Finance, right? So,
So the inflation is, is the cost of stuff. If the money supply is expanding, that means the currency is devaluing in a closed system. We want to make that simple. I live in a town and there's a thousand houses, ni ni double. The amount of currency in the town and everybody wants a house. What's the price of houses? Do? Right person? If the only thing I can buy as a house and if I do
The amount of currency, then the price of the house must go up, probably go up by two, but maybe not exactly by 2. But it goes up. If I increase the amount of money, if I get, if I raise, everybody's salary by a factor of 10, and I keep the number of houses constant, one might presume that the price of housing will go up. How will inflation actually take place? Well, there's a different coefficient for price, for the price grading of the change, in price for everything you might want to buy.
Bye. And it's different at every point in time. So for example, if I put you in lockdown and I make it illegal to go to the movies and I make it illegal to go to a restaurant and the price of restaurants and movie theaters aren't going to go up if I make it illegal to or inappropriate to go on a cruise and flying an airplane, then the price of cruise tickets and movie theater tickets and restaurants, they just don't go up because you can't buy them if you want to, there's no velocity.
On that money. Okay, what can you buy? You can buy stocks, you can buy crypto.
Right? So what you know, what does go up? Well if I give you a thousand dollars and you can go and you can buy stocks then the price of stocks, go up
Now, what happens, what happens next. Well, so everybody gets locked into their apartment and they decide, they really want a house with grass. So what happened next? Well, 12 weeks after the lockdowns, the price of like, Suburban, housing went up and people started trying to buy houses, they said this is unprecedented. We've never had so much demand for houses in the suburbs of New York. Well, that's not a surprise. You know, what if your choices if I
The parks in the cities and, you know, and and I close your office. Then why wouldn't you move out into the country? And look at a house with green grass, right? You're not the utility. You're not missing out on a restaurant. You're not missing out on a park. You're not missing out on your job. So rational human behavior causes people to take their money and go buy things they want.
And what are they buy them? Well you know Hamptons real estate went up and in price 50% Palm Beach, they go to the places where they want to go did the price of land in the middle of North Dakota go off by 50%, not so much. It's not, you know it's not a scarce desirable asset by people stampeding.
So so what is inflation? Inflation is a vector is not a scalar. And Vector means you can calculate for a thousand different products, a thousand different numbers and they change every month. So I can give you a thousand different numbers 12 different times a year, and it would be different in every city. Everybody can figure out that in Minot North Dakota. It's different than Manhattan and it's even different in Manhattan and Brooklyn and it's different in Brooklyn than in Upstate New York.
York. So inflation is varying by Time by space and it's varying by every item. And if you want to calculate the inflation index, you have to construct a market basket of goods and services and assets that you would want to acquire,
And then I can give you the rate at which, that market basket of goods and services and assets is changing every month or every week. And of course, that would be different for every person. So, what happened after the lockdowns? Well, we got hyperinflation in some things bonds. Hyper-inflated cost of bonds doubled in three weeks. Whoa, that's hyperinflation, equities inflated, you know, they were up 40%, you know.
Year over year, you know, cryptos inflated Bitcoin was up three, four hundred percent. So, the cost of scarce art, the Scott, the cost of luxury, real estate, all of that stuff inflated, you know, or hyper-inflated, what didn't inflate things that people can't buy and, and I can define a market. I could Define a Market Basket of things that don't go up in price by definition too.
Right? If I Define a Market Basket of Highly manufactured goods that have very low variable cost.
Right. Like what's the price of your streaming YouTube video or what's the price of some manufactured box of macaroni, that's 5% food and 95% getting right? I mean the more man, if I spent two billion dollars on a fat on a factory to Stamp Out, widgets that have a variable cost of 10% right then, inflate, that I've already sunk the cost in the factory. Those things don't inflate at the same rate as
If there's only one Mona, Lisa in the world. And if I increase the amount of money in the world, by a factor of a hundred,
Don't you think that the value of the Mona Lisa would go up, assuming that lots of wealthy people wanted it and that that gets you to the Roy, the, the interesting theory of Economics, right? If I want to really understand the anything in the engineering world, I need to use vector vector calculus, right or vector math. I would never use arithmetic. You cannot solve the problem of fluid dynamics with arithmetic. You can't design a boat, you can't design a
Plane, you can design a nuclear reactor and you can't design a bridge with arithmetic. Well, a scalar like oh, inflation is 2%. That's arithmetic, right? You know, adding it up right? Isaac Newton. Gave us the calculus of variations, you know, and calculus in general and pretty much every sophisticated thing that flies, or floats, you know, it's all based, upon calculus and, and
You just can't solve the problem without that math. So that's the problem of
inflation, okay? So, let's inflation is our problem, but we have the confounding variable of the average person is being told by sort of the mainstream media by the government. Hey, inflation's, not a problem. They look at their basket of Netflix, and bread, and whatever, and it all seems fine. They're getting their stimulus. Check, there's no worry. But the reality of inflation is completely different. And we're now seeing a break in the narrative from
Um the government saying, well actually inflation is you know whatever twice what we thought it was and that may be just the tip of an iceberg that's coming. So inflation is a problem, in two ways. One, if you pour money into the system, inflation is going to go up on a certain set of items. And then number two, if you're confused about what inflation is because it is not simple. Arithmetic. Your now paralyzed especially when I was confounded by marketing, essentially so cool. So we've got inflation is sort of problem. Number one, your you, you often use
The analogy of, you know, if you have a boat that has a leak in it, you've got a real problem and if you know that inflation at some level exists, you've already got a problem. So when did you begin to think? Okay, I've got this. In fact what I'm really the the part that I find so intriguing about your story is when you turn to Wall Street and we're like I have a profitable company. It is wildly profitable and yet Wall Street does not like it dear Wall Street. Why do you not like my company and the answer to this is so
Revealing.
Yeah, the company was valued at like 1 times Revenue plus cash and I said well I have I have 500 million in cash, why don't we get more credit and the answers cash is trash like it's real. You is quote cash is trash? Well why is Cash trash? Well if the money supply is expanding at 7% a year then then the risk-free hurdle rate is 7%. If you don't generate more than seven percent yield on your cash, then it's
Valuing, so from 2010 to 2020, the money supply expanded is 7%. So all the cash you're holding is losing seven percent of its value. Assume you have a 0% interest rate. R is 0 yield on the cash. So you can imagine the traditional world. You invest your cash at 3%. Treasury yields and you get a minus 7, and it's like a minus 4% and divide 4 into 72. And, you know, in somewhere
Fifteen, twenty years out, you're going to lose half of the shareholder value in the treasury. If you do that.
People might hold their nose but after March of 2000, the money supply is expanding at 24%. The interest rate is zero. So now you have to put a forecast in place at what rate will the money supply expand. If it expands it 20% a year and you're going to generate 0 and treasury yield, then you're looking at cutting your treasury purchasing power in half and three and a half years. Whoa, okay now that's not trivial. So
So, you have to find a way if you're going to, if you're going to have assets to get over the hurdle rate, another way to say it is, I have to invest it in a strategy, which is going to appreciate faster than the money is devalued. If, the money is devalued its 7% a year, then the S&P 500 Index better yield nine or ten percent. If it yields 10 percent and the money devalues it 7%, your plus 3, you can save money in an S&P 500 Index Fund.
You can't save money with bonds unless unless you're buying bonds and the interest rates keep getting reduced. If you if you bought a bond at 4% yield and the interest rate got taken down a three and a half the bond trades up and when the interest rate goes down to three it trades up again. And when it goes down to two and a half the trades up again when the bond rates get or the Libor, you know, the short-term bond rate and interest rate goes to 0. You can't take it down anymore. So bonds won't hold.
Value either. So now, you're in a conundrum. I have a lot of assets, but I'm not beating the hurdle rate and the hurdle just tripled
This is the problem that a company that's cash-rich has and it's a it's a problem that anybody that works for a salary has, which is, I General at a cash and the cat, the currency is being devalued every year. The real question is what's the rate at which is devalued? And in that, let's do the thought experiment. What if, what if we didn't print any more money?
What if the inflation rate, the monetary inflation rate? Not the CPA I, but what if the money expansion rate was zero and that case the currency is also an asset and it's a store of value and a medium of exchange of the same time. That's a complete Austrian economics like deflationary economy where we have call it hard money or sound money. The closest thing to that would be the goal standard. If the government said you can exchange,
Your money for gold at any time and we'll keep gold equal to the amount of money. And we won't print any more money. Well, that puts you on a hard money standard and that case you could just store your money in a bank and it would be more valuable in the future. Not less valuable. When the government goes off the gold standard and we went off the gold standard explicitly in 1971.
Now, the currency is losing some percent of its purchasing power every year because it's being inflated away. And what's the number? Well, it was about seven percent a year and now it's like 20% a year and 15 to 20% a year. You know, and you got to figure out is it 15 20 or 25? But if it's 15 to 20, the currency is weakening one to two percent a month when it gets to be 40 to 50. It's collapsing. That's Argentina.
Or worse. So you've either got a country where the currency is weakening our country where the currency is collapsing. When that happens, now, you have a decomposition. The money is broken into two components. You have a currency component, which you use, as a legal medium of exchange like the dollar, or the Euro, or the Yen, or the room MB, and then you have an asset component, which are used as a store of value over the long term.
Money, our US Dollars have ceased to be a store of value for at least the past decade since the great financial crisis. So what people did was they stampeded into ETFs and index funds, right? And to a certain extent bonds right, how do you store your value over the long-term? Well if I if I take money and I buy a mixture of stocks and bonds that will store my value, because if if the economy is healthy, the bonds, the stocks go up by
Percent a year, the SP does. And if the market the economy is not healthy, the FED will lower the interest rates by 50 basis, points in the bond, will trade up. And so that works for how long it works. Watch the interest rates for the last decade. It works until you crank the interest rates down to zero. The it used to be overnight. Money was five hundred fifty basis points Tom
Before the great financial crisis and then they cranked it down from 550 to 502 for fifty to four hundred to three, fifty to three hundred to 250 to 200 to 1, 50 to 100, 250 to zero. And now we have, you know, the banker say I'm not even thinking about thinking about raising interest rates so that breaks bonds as a store of value, unless you go negative interest rates and stocks stocks worked except for the fact that
You know what stocks worked in the past decade, Apple, Amazon Facebook, Google. A big tech company that grows 20% a year Top Line. When Apple stopped growing 20%, a year Top Line. They fixed it by taking on massive amounts of debt buying their stock back and leveraging up there EPS. So, so companies that grow faster than the rate of monetary inflation, faster than the 7%, they can hold value a company growing 20% like Google, Facebook.
Walker Amazon, they all hold value. In fact, they accrete value y, because 20 is more than seven, right? So it's plus thirteen percent a year, right? What happened? What happens to all those, all the other companies, which companies in the S&P, 500 amounted to all the indexes to all the gains. It was big Tech, right? Big fangs, stocks where the winners everybody else, Treads water because of your growing at 7% and the money supply
I is is collapsing at 7% your net zero and how else do you get around it? Well, you can go borrow a lot of money, leverage up by back, half your stock and get your cash flow per share up. But what what happens when you fully leverage, which is like, where they are right now, you can't do it anymore. So what's the problem right now? The problem today is the currency is being devalued at 20% a year, not 7% a year, right?
I turned up the Heat and the frying pan and the second problem is some stocks could hope to grow 20% a year, like the minority 5% of them could grow. 20% a year for the past decade. What? Percentage of stocks can grow 30% a year,
Because now you got to go 30 or 35% here because the hurdle rate just jumped. Now you're pushed out on the risk, on the risk curve here, you got to take a massive risk because the company to grow that fast, you got to do Acquisitions, you got a-you got to burn the candle on both ends. You got to take on massive new leverage. This is squeezing value stocks, don't work, right? I mean it squeezes, you out of the value stock trade, because if the company is reliable,
And it's growing its cash flows 5%, a year and the money supply is expanding at 20%. A year, cash is trash back to my story, right? Why is Cash trash? Because I had a value stock with a lot of cash and the money supply is expanding looking from the point of view an investor, they can invest in the S&P 500 Index or the NASDAQ and that those were all up like 40 percent year-over-year, something, you know, or they could hold cash and get zero percent.
Nobody wants to hold cash and so they might as well just take it and put it into something else. Now long-term, you can get a bump on equities. When you have a boost when interest rates, get Spike down, you saw it. When we flood the market, look with liquidity initially that makes stocks go up, but let's take the example of some Bob way in Argentina. If I keep doing it for 10 years, what happened to those stocks?
They don't go up right. The problem over time is stocks are valued based upon the discounted value of the cash flows or at least in part. And so if I give you a company generating, a hundred million in cash every year for the next decade, but I tell you they'll be ten times as much money in the economy and a decade that hundred million dollars of cash. Will all be worth ten one tenth as much and a decade. So you the discount rate is jumping which means the value of the
Cash flows into the future is collapsing.
The road to serfdom is working exponentially harder, for currency, growing exponentially weaker. And so how do you solve the problem and the solution to the problem is you convert your assets from a weak currency, that's inflating into a strong currency or a strong asset if you will. That is deflating
Right. The simplest example is, I'm a wealthy business person in Argentina, and the peso is trading. 3 to the dollar 3 pesos to the dollar. And the year is 2003. And now I can go forward and I tell you, well, and the year 2020, the peso is going to trade a hundred and fifty to the Dollar on the, on the blue Market or the black market that's going to be the real rate. So what's your best strategy? Work? Hard invest it diversify into other.
Find companies making pesos know your best strategy is convert all your existing Pesos into dollars and get it out of the country and your next best strategy is forward Finance. Your cash flows and convert those into Dollars, get them out of the country and your next strategy is sell equity in your ranch or your business in pesos in 2003 and 3213 pesos to the dollar and then by dollars because the dollar is going to go up by a factor of 50.
So what you're doing, is you're financing and a weak currency and then you're converting into a strong currency, and that's pretty obvious. If you lived in Zimbabwe or if you live in Lebanon, went from a hundred and fifty Lebanese. Lira to 707, went from 1500 to 7500 overnight. Whoa. So it means you lost 80% of your money if you had it in a Lebanese bank. And so the answer of course, is convert your
Wallace 1500 to the dollar into Dollars before the devaluation.
Right now. What can you do? If you're a modern business person, right? If I can't convert to Dollars, the next best thing is by something tangible that won't lose 80% of its value overnight by boat by land.
Traditionally people bought other tangible assets gold, right? Something like that. But if you buy an asset which is valued based upon its expected future cash flows that are in that collapsing currency, that doesn't work for you. Like you could own every good business and in Venezuela. How's that going to help you when the Venezuelan currency collapses by a factor of a million? It won't
Okay. So what's Bitcoin will Bitcoin is the strongest asset the human race has ever invented. It's like goal with none of the defects of
gold so Define what the defects are. Why why is it the greatest monetary invention?
So, I buy a million dollars of gold.
Okay, if the price goes up the gold miners, first of all, the gold miners going to create more gold and dumping on the market. If I could eliminate all gold mining forever. If I could wave a magic wand and make it impossible to mining more gold, my million dollars of gold will hold his value better because it'll be scarce, but gold miners are inflating. The value of the supply of gold by at least two percent a year or so. And then if the price doubles again investors will invest in more gold.
Nurse and they'll create more capacity to mine coal. So you'll create capacity to mine gold. You'll mine the Gold. You'll crank up the rate at, which the gold mines function after that people with gold. Jewelry will not do jewelry down converted to gold bullion and sell it, right? If the price of gold went up by a factor of 20, you would be like, converting all your gold stuff into gold bullion because it seems like a good idea. They called scrap gold, right? And then after that Bankers, will issue gold.
Lawrence and gold and gold paper and gold. Derivatives and they'll sell them short without the gold because they can speculate in it. And they don't have to have a one-for-one coverage of gold to the gold derivatives and so that's called hypothecation and rehypothecation, okay? If it keeps going up, the government's holding goal will start to sell some of their goal to manipulate the price down, right? And all of these. And in fact and ultimately if it goes up enough summer,
Club you over the head and take your gold or a hostile regime, will take your gold or politician. Will pass a law taxing your gold, right. There's there's a lot of ways you lose gold because it's physical.
How do you cure the problem?
Right? I mean here's how you cure the problem. You make it impossible to mine anymore, gold. And then you make it possible to take custody of your goal. Personally off of the exchange or off of the bank. So that way the bank can hypothecated or rehypothecation, it miners can inflate. It investors can create any more gold miners and then you make it possible to move it from here to Switzerland or Singapore and an hour for for a nickel. And that way if you don't like your bank or don't trust your bank if
State of New York passes, a law taxing it, you move it to the state of Wyoming.
You know, if the government passes a law taxing, you know, the the ownership of land in California, you can't move the land out of California Kenya. If you have million dollars of gold in a bank and in a vault in New York City, you know, there's only a couple of places you can move it. You can move it to London if you have six months, okay? So you're going to be subject to the law of London or the law of New York. Can you actually move to your favorite island or you?
Can you move to the Cayman Islands and bury your gold underneath your Hut and the Cayman Islands and be safe about it? Not likely can't even get it through the airport, right? So, so the problem with other properties and gold is the simplest example. But the problem the the challenge or the analogy holds with any property, I give you a bunch of money and I tell you you want to keep it and give it to your grandchild.
Do you buy a building in Manhattan? Do you buy a ranch in California? Do you buy a stock of gold bars? Do you buy shares in a company? Headquartered, in San Francisco? Do you buy bonds issued by a government or company? Or do you buy Bitcoin?
and you can see the problem, of course, is
The the debt is devaluing rapidly the land in California and can be taxed and is not movable, you know, the building and New York's not going anywhere. It might be valuable to a rich person that lives in New York. What about a rich person lives in Beijing? Do they want your building in New York?
How you going to hide your building right buildings? Get property taxed?
There's a very famous story about in a bunch of luxury, you know yacht sitting in Sardinia and port and the locals decided that the that it wasn't fair that all these people were rich, people are sitting on their yachts in the port spending all this money, but they weren't paying enough taxes. Now, there are putting millions and millions of euros and of the economy.
But they came up with the idea that they were going to put a tax on the yacht on the value of the yacht. And so they, you know, they passed a yacht tax. That would have cost people millions or tens of millions of Euros. If they stayed in the that port, and everything was happy, and all the restauranteurs, and the hotel, ours and and, and the entertainment people, and the port, they were all happy making tons of money off the yacht's until the day.
Before the tax went into place and the morning that the tax went into place. The port was empty and the economy died, every left because Yachts are floating Capital, it just moves, it floating property, right? So it's a very visible example, right? Why? It's not that smart to put a an unfair tax or an extreme tax on a yacht. If people can float, the yacht to the next Port you know a hundred miles to the left. So
One would be discouraged from taxing stuff that floats on the other hand will taxing a building. That's buried. You know, a hundred feet down in the Bedrock. That's easier. You can't move the building. So Bitcoin represents the Apex property rights of the human race. Like I'm not mind you, I'm not disputing the ability or the, you know, legitimacy of a government to pass the tax, at the end of the day, they can tax your goal, they can tax your stocks, your bonjour.
building yourself your income whatever they want, but the point really is
You're a lot more likely to tax the stuff that you walk past, you know, every day on the way to work.
And your lot and legitimately, you can move yourself and you can move your property if it's crypto to another jurisdiction, but you can't legitimately move a ranch in California. So your property rights are stronger and the value of the property is higher.
Right? You have a valuable thing in Manhattan. It's interesting to other wealthy people in Manhattan, but when you are, Bitcoin is interesting to wealthy people everywhere on earth, right? Is you can liquidate a billion dollars a Bitcoin on the weekend in any currency. You know, any any time try liquidating, a billion dollar building.
Right as three-year process, right? So it's liquid, its fungible is desirable and so that what that's what makes the asset valuable and it's very, it's the it's the most difficult thing to impaired.
Tom, once I had a million dollars seized by the Argentine government, here's how it happened. I had a million dollars in a bank in Argentina in dollars and it was a u.s. bank on, on one day, they simply passed a law, converting it all the pesos and they put, and they converted, everybody's everybody's account two pesos in the country. And the next day they devalued the peso 10 to 1 and 24 hours. After they, you know, done that I had
100,000 whereas had a million before and they did it. I mean they did it quickly and easily to everybody in the country.
Now in theory, that if it had been property, they would have had to pass a law seizing, 90% of the property of everybody in the country.
That would not be so popular right to seize the property and if they wanted to seize 90% of the property of everything in the country, they would have had to subpoena Court in New York or Delaware and get my appearance right. And there would have been three, four five years of lawsuits going on. And if you really wanted to take something, you have to kidnap everybody and take them to jail and sweat their private keys out of them and that's not very practical, right? So at the end of the day, it's not
Likely that, that the governments of all, the world will just confiscate.
Ninety percent of your of your crypto assets or your Bitcoin, but in fact it's a foregone conclusion that they're definitely going to compensate 90% of your currency.
It's happening at 1% a month or two percent a month right now. So all you got to do is wait between five and ten years and you're going to lose 90% of your purchase of your money. If it's in if it's in a currency or a currency derivative and they don't even have to pass a
law.
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So when all of this kicked off, I'm a relatively bright guy but when all of this kicked off, I told my and this being covid, I told my money manager. I said, look I want to be as close to my money being buried in the backyard as humanly possible. And she just kept saying, you don't understand inflation. Like this is going to be a problem. Like your money will go down in value and I was like, I get it, but I feel like it's happening slowly enough that I've got time to like
Like get my head together. Like, this is so disruptive and so, you know, Bill Gates predicted it. So I won't say it was unpredictable, but it was so surprising and unlike anything I had ever lived through. I just didn't know what was going to happen, and I didn't understand money markets, well, enough for Finance in general. I'd always bet on myself as an entrepreneur. So, I understand that bill business, I understand how to create wealth, but maintaining it is like a whole another thing that honestly, I know a little bit about now. I knew nothing about it then, so I just kept saying, look, get me as close to buried in the backyard as I can, then I come across you.
And you talk about hurdle rate and then I was like, oh my God, this isn't something. I've got 30 years to figure out. This is something I have four years to figure out to get to like a halfway point to where I've already lost. 50% of my wealth. So I was like, whoa. Now I have to take action so now I start researching like crazy. Okay. Is it going to be crypto? Is it going to be specifically Bitcoin? Is it going to be something else? And this idea of creating basically turning sunlight into
ooh, cryptographically protected money is a very interesting idea and so I'd like to know now so those are all the reasons why like there's you can protect yourself from the government. But you have a compelling argument as to why I should be willing to stomach sort of short-term volatility and white because that's like the argument. If I'm that average person on the street I'm like yo literally last week this lost like 30 or 40 percent of its value. So that's terrifying. So
Would I be better off in that then, you know, even a bond with a negative yield? At least, like I'm bleeding to death more slowly than the 35 percent loss, or whatever that I just took over the last
week. Well Bitcoins, the best performing asset for the past decade. And it's, you know, it's a hundred X better than gold and it's 10x better than Equity portfolios. So the volatility is the price you pay for the performance.
Is that you get?
And oftentimes, the best investment idea is in the most comfortable investment idea. I think, if I told you there's a hundred percent certainty, you're going to lose seven percent of your money, over the course of a year. You might think. Well, you know, I have a decade before I lose half of my money. I have time to think about it. That's that's the status quo when monetary inflation 7% if I told you there's a hundred percent probability that you're going to lose 20% of your
Over the next year and half your money over the next three years.
Well, I mean, you might think you need to move faster. What well what if I told you you're going to lose all your money? What if I told you the currency is going to collapse the zero and three months which is kind of what it did in Zimbabwe and Venezuela or what have I told you we're going to have 95 percent inflation. I think the unofficial inflation rate in Argentina's like 85 percent this year. What have I told you? We're going to hyperinflation.
Everything will be twice as expensive next year. Now, how long would you wait before you took a risk?
I can, you know, if I really want to, you know, get you to jump out of the pot, right? I could just make it simple next Tuesday, I'm seizing all your money.
Or you can spend it between now and next Tuesday, right? What I mean, that really, what is the word focuses? One, right, right, it strengthens one stiffens one spine and focuses one. If I just made it very black and white. I'm just going to take all your money next Tuesday, or you can spend it between now and then. So how do you actually get comfortable with the volatility? Well, I think first, you have to get
Have to understand how big your problem is.
And the second thing is one of time Horizon. And what do you, what's your aspirational goal for example.
If you're if you don't aspire to change your lifestyle one iota and you know you're going to watch Netflix, let's take a stream. You're going to live in your parents basement, watching Netflix, ordered, Domino's Pizza and stream, YouTube video for the rest of your life. Do you have an inflation problem coming? Probably not.
If you want to, if you want to buy your own house, you have a bigger inflation problem because housing went up, 15%, if you want to get married, buy a house, have three kids. And if you know, if you want to take expensive vacations on have a house on the lake, you have a big inflation problem. Guess what? Luxury homes on. The lake went up in price a
lot. Same with education. If I plan to send those kids to school, I'm really in trouble.
Yeah. So it really comes down to what is your aspiration and that, that determines your heart.
Rate me what you want, determines your inflation rate and your inflation rate, determines your hurdle rate, and that makes it different. I think, in terms of historic metaphors, I mean, there's plenty. For example, my family came to the United States in 1736 on a warden ship.
Okay, and if you, if you want to go study, those voyages, they spent eight weeks. Have you ever tried? There's not a single person that's like, probably got in a wooden ship with three sales for eight weeks to cross the North Atlantic in order to come to America. The mortality rate is like 2 to 5% on that trip. The mortality rate to go from Europe, to the Far East is like 35%, it's insane. Like one out of three people that
To the journey dies on the trip. Whoa, okay so you know we talk about volatility is Bitcoin. Bumpy is Crypt, what did you like about Bitcoin? Bitcoin is Bumpy, what else is Bumpy, Wooden Ships and 15-foot Seas. If you want the definition of a rocky ride, the rocky ride was was leaving Europe. So why'd they do it.
So you're saying that the Bold are the ones rewarded
if you choose correctly.
Right? I mean the ones that move too soon in all went to certain colonies, you know, that on the Potomac River and the James River and they died, right? So there's a lot of early settlers took arrows in their back, you know, on The Sixteen hundreds, on the other hand, by the mid-17th, 1700 by 1736, you know, people have been living in North America and you had Philadelphia and, and you had Massachusetts successful colony in the like. So if
Choose the right decision or make the right decision. At the right time, you can have a better life but they're still risk.
Right. So why did the people come from Europe? They came for property rights and civil rights, right? They either couldn't exercise their religion or there was no hope for them. All the property was owned by someone else and you know, property rights matter if I a lot of people don't realize this, they think that they think the property rights are a nice to have property rights, are a nice to have the same way that that fat on your frame or an insulin, or a nice to have if I strip away your
Your type 1 diabetic. You can't form fat. If you can't form fat, you can eat all day long, you're going to starve to death. It's not a nice to have to store to store energy over time. Fat is an organic energy, battery, and property is a social energy battery. So being able store property means I can go three months without a job and not starve.
And live it and live a life. There is no hope for a Civil Life without property. So now people went from Europe to the US for property, when they got to the east coast, they went West. It's in the American ethos. Was there a bumpy ride taken a Wygant rain over the Rocky Mountains, you ever fly over the Rocky Mountains and look down before they had the railroad and before they had the highways, and then you ask, how did people actually cover the turf? It's like
Yes, it was a bumpy ride, there's volatility along the way, you know, I think the risk and the discomfort today of owning Bitcoin is a heck of a lot less than the risk and the discomfort of getting in a ship or getting on a horse or, you know, getting on a wagon or walking, right? Or settling and doing what you need to in order to secure your civil rights and your property rights and your freedom.
But there is an analogy. The only way you make the volatility go away is you make the opportunity go away. The, the reason you went West was because people weren't living there and you wanted thousands of acres to yourself to live a better life, right? And when you got there you found that. There was no one that had come before you to you know to clear the thing, you know and build a house for you and give you running water and hand the keys to you.
Do your bidding because, you know, you were going to a new place. That was where the opportunity was. So I think it's very, it's very quintessential to the American Spirit or the or the entrepreneurial Spirit or, or just the human Spirit, you know what about immigrants, a nation made up of immigrants. People went from a country where they had nothing to a country where they could have something.
That's the story that you see over and over again, is the volatility is there a risk? Yeah, always right. Is their opportunity. Yeah. When do you leave look that? I mean the rich first sons of the Nobles in Europe, didn't come? Yeah, it was the poor disenfranchised. The people that that didn't have a choice, that came,
Right that the Protestants left Catholic countries, the Catholics left Protestant countries, the poor left every country those who are you know hoping for a better life came and you know if you're if you're sitting wealthy with lots and lots of stuff and a comfortable Life Style and a comfortable portfolio, you might not see the same impedance, right? You wouldn't have the same inspiration to do something.
It's interesting. So the
Terry, inside of this is one of the things that I find more. Fascinating about the Bitcoin movement, there is something very encouraging about the fact that all the people in my life that came to me with this saying, Tom, you really have to look at this where young people, you know, the level of awareness that they have had that. And I have a lot of employees that sort of straddle are they the low low end of Jen? Millennials are they the upper end of gen Z? You know, I guess it depends on where you split it, but they're sort of
Early 20s. And you know, they're looking at this as like, hey, this is, this is the opportunity, our generation has been looking for. There's finally, a moment where we can really capture some upside, we're young enough that if we sort of invest poorly, it should be fine that we should be able to make this money back up. They bind to the ethos of only invest what you're prepared to lose. You know, these aren't guys that are doing things on Leverage and so that is is very hopeful. You know, when you talk about the beginning of the pandemic was this well transferred to people that basically owned bonds and
It's and now with, you know, hopefully this sort of prolonged and I think that's an important thing to note is yes, there's volatility to Bitcoin in the short term. I've heard you say, if you're looking at a number in anything less than a four-year increment, it's just noise. And that once you extend out to four years and Beyond suddenly, it actually becomes a story of, you know, growing I think it's like two hundred percent year over year, which is, you know, pretty thrilling how far does when you think about this being sort of the Apex.
property how much goes into just the the fact that it's taking sunlight and turning it into something that's cryptographically protected and how much of that stance is that this evens, the playing field,
Anyways I think a Bitcoin is like that shining City in cyberspace where billions of people will eventually want to live.
Right, instead of moving from Europe to America, removing from the old world, to the new world, or whatever, or moving from the planet to cyberspace. We can't move to outer space yet. I can't get a billion people off the planet and settle on a better Earth, but I can move a billion people to cyberspace. Bitcoin is property, in cyberspace is 21, million city blocks in cyber Manhattan.
The people that move their first, right? Get to buy the land cheapest and then of you know, how many people will eventually want to live there well unlike Manhattan where there's a limit. There's really no limit. Why wouldn't everybody want to live there, right? I mean I don't know that there won't be other cities in cyberspace that might meet other needs. I mean I suppose if the Chinese you know made it illegal to own Bitcoin but there was a Chinese Bitcoin, there might be a Chinese version of Bitcoin.
In cyberspace kind of like Ali. Baba you know, and Anton and WeChat kind of branched off from Facebook and Google and Amazon.
So there might be some other digital dominant, monetary networks, or dominant monitoring networks. But Bitcoin is the greatest, the greatest monetary Network that the human race has ever developed. And it's certainly the dominant one right now and it looks like it's going to be continued to be the dominant one for as long as we live. So what makes it dominant? Well, I mean clearly the architecture is
So proof of work or in other words, throwing up a wall of encrypted energy, right? It's all of the crypto hash power that's channeling energy through the hashing function, which creates creates the stability and the security. And so it's based upon the architecture
But but ultimately the appeal of it is that it's an open permissionless protocol that everybody on Earth can engage in anybody, can mine it anybody? So anybody can contribute security to the network and anybody can run their own node, and anybody can own it and then any company can plug into it. And so there's nothing that open there is no there is no monetary protocol or asset or currency that is so
Open as the Bitcoin asset and so that's what's driving its value right now. It's it's an opportunity for people that are that have little that have little the lose and much to gain. It's also it's an opportunity for everybody though. I mean, the way I think of it is it's a moral imperative, a technical imperative and an economic imperative.
Morally, it's an imperative because it's the best. Hope for 8 billion, people to secure their property rights. If I give you a $50, Android phone, you can carry around in the Android wallet your property and no bank or no hostile regime can seize it.
And we've never and that's the best property, right? You're ever going to get? I think it's a technical imperative for the same reason. You got 8 billion mobile phones there. We'll all have property and so what's more important, storing your photos and your videos on your mobile phone or storing. All your money, all your life force on your mobile phone. I mean, you're worried about losing the photos, you took on your iPhone, you worried about losing your life savings, clearly, it's more valuable. So so it's a, it's a technology.
Imperative for an apple and Amazon, and Google and Facebook and companies like square, and PayPal and binding. Us and coinbase are already extraordinarily Successful by embracing it, you can see that right now. And finally, it's an economic imperative because there's 500 trillion dollars worth of Fiat derivatives cash and bonds and stocks and real estate. That's valued based upon cash flows. And all of those things are being devalued at 1% a month, something. So we can go back and forth.
Fourth over. What's the rate of currency expansion? But
You know, it's not that hard to see that. This is a 25 to 50 trillion dollar a year problem for anybody with assets on Earth. It's very rare that you find a technology that's the solution to every rich person's problem and every poor person's problem simultaneously.
What do you say to people? That, that say the pushback I've seen on bitcoin is hey guys, sorry, I get why you're excited about it but it's the Netscape of crypto and, you know, just as a technical
Logical layer. It was early. Cool. Yay. Thanks for sort of proving the model but this is never going to last people will build something way better.
Yeah, well, Netscape didn't make it to a trillion dollars and market value in 10 years, right? If we calculate the amount of monetary energy on the network, Bitcoin would be more successful than Google Facebook, Amazon, apple or Microsoft, in fact, it would be more. And it's, you know,
Much more successful than then Netscape or AOL or anything from that. Genre those things never got to 1/100, right? I think Netscape, you know, at its peak you know, was maybe one 20th, 130th one-fortieth of what we're seeing in front of us right now. And
The difference really is, there is no other, there is no technology and architecture. That's that's appropriate to replace it. The solution to the issue of long-duration asset.
Or long-duration. Safe, Haven store value is a very secure crypto asset Network and so Bitcoin is the single most secure network in the world. It's the most secure database in the world. It's the most secure asset in the world. The way that you make it secure is through the extraordinary decentralization combined with the way that it that it converts energy into very special specialized sha-256, hash function.
So in order to attack that not work, it would take extraordinary time and effort and energy and resources. It's pretty much the most secure thing we've got. And so I've our space
and what about people that, look at that and go. Yes, cool. You've built this amazing protective layer, but it comes at the cost of the environment.
The actual cost is, you know, nominally point, one percent of the energy used in the world but the economic
Value of the energy is not even 10 basis points. It's like three basis points. So you're talking about like it's almost if you put it on a sheet of paper, it would be like a couple of dots but you can't even see it.
The the overall energy generated in the in the economy is like a hundred and sixty thousand terawatt hours. And the wasted energy is 50,000 terawatt hours and Bitcoin is 120 out of 50,000 wasted energy. So it really is insignificant as an energy load on the environment.
But if you dig a bit deeper, you'll find that actually Bitcoin is much cleaner energy than all the rest of the applications cars Planes Trains automobiles. It's pretty obvious planes use fossil fuels, there's no hope for them. Not to bitcoin, doesn't Bitcoin has actually something that runs on electricity. It doesn't run on fossil fuels, you know, most cars still use fossil fuels, and even electric cars are charge the charging stations that are charged with.
Fossil fuels. So so the environmentalist ultimately are going to focus upon the energy grid and if they want to shut down, fossil fuels or change the Energy Mix away from coal or something. They'll do that. Bitcoin is the highest value application of energy on a wholesale basis that we have in the world. There's nothing.
Nothing more valuable, there's no more valuable use of energy than Bitcoin. The latest generation of sha-256, miners, they will generate almost 45 cents, a kilowatt hour in value, which means you can take them anywhere on Earth to the North Pole. You can put a nuclear reactor on the North Pole and run and run Bitcoin mining from it. You can plug them into wind generators, a thousand miles out into a desert. You can plug them into geothermal on an island like Iceland and you can generate
45 cents, a kilowatt-hour. The typical residential electricity cost is 13 cents. A kilowatt-hour industrial usage. In the first world is 11 cents, a kilowatt hour and all that energy has to be co-located with the factories in the people.
Right. We don't you know we don't have an application and Industrial application of energy like Bitcoin that you can put anywhere on Earth. So what's the result? The result is that Bitcoin is used to recycle stranded energy or wasted energy if you have if you have a hydroelectric Dam and you have a lot of energy but you don't have people to use it. Well, the dam is generating energy year-round, but the people don't need it. But maybe a few months a year, or maybe they don't need it in the evening.
Needed during the day and run their air conditioners like air conditioners. A great example of a cycling energy. Use Bitcoin is perfect a perfect energy battery because you can run it at night while the people are asleep and the air conditioning is off. And so you level out energy consumption on the grid there by driving down the cost of energy for everybody on Earth.
And for any any plant that would otherwise be decommissioned. You have a use for it if you don't want to decommission it. And of course, as you can imagine the sun shines in the desert where people don't live and the wind blows in places where people don't live and volcanoes, you know, and geothermal energy exists where people don't want to live. Those are three sources of energy. They're all sustainable renewable energy, but
If you know anything about a power engineering, you know, you can't move electricity more than 500 miles on a grid.
Period. It's a hard stop, a hard limit. If you happen to find geothermal energy, more than 500 miles from Manhattan. We don't need it and a news flash. We've already got too much energy, right? So even if you found geothermal energy in the middle of Central Park, we still don't need it. And so what if I told you Tom, I've actually got infinite free sustainable energy and it's a thousand miles away from
City.
What are you gonna do with it? Well, then I mean, the only obvious thing to do with is Bitcoin mining. So Bitcoin is migrating to the ends of the Earth to the most sustainable energy, which is also the cheapest energy, which is also the greenest energy and, and it's a solution to the problem of. How do we catalyze sustainable energy? How do we get green? It's also a solution to every country's problem, you know, you're in the middle of Africa with a waterfall and no industry.
What's your best? How are you going to lift your people out of poverty? You plug that, you know, turbine into your waterfall, you plug Bitcoin mining into the turbine and now you have cheap cheap energy plus, that's green that's plugged into a clean. Hard currency exporter. That pays taxes, that elevates you out of poverty. That's environmentally friendly.
So I think it's a good story or people just don't they don't understand right? Just how powerful Bitcoin is a force for for energy sustainability.
Yeah I would agree with that like the the attacks upon it from an environmental standpoint are Relentless and to be honest I just sort of brushed them off based on the facts that you've given it seemed like wait people just don't understand the narrative or they don't understand the facts. They fallen for a narrative and until Elon Musk who sort of the king of
Clean energy for the love of God, came out and expressed concerns over the environmental impact of Bitcoin. How is it possible? If everything that you just said is true that somebody's so into the world of clean energy could be against
it. I think we got a lot of Education to do. I'm the the industry hasn't published transparent statistics about the nature of the energy usage and Bitcoin mining because the Bitcoin miners are
Decentralized, and so. And so,
Encouraging transparency and Gathering all the data and Publishing it that will be helpful because because there's a good story here. I think that that the mining the energy usage is not well understood for example. Three years ago, someone thought that energy was used in transactions and then they thought since energy is used in transactions. If we scale up the number of transactions, eventually Bitcoin will boil the ocean and that wasn't true. Why?
There because the Bitcoin Network, never increases the number of transactions and then the energy usage is unrelated to transactions. And in fact, the energy usage is decreasing exponentially as the transaction scale inefficiency exponentially, but the model was flawed and so people picked it up and no one's published a better model. So, so we need to and if you only spend an hour thinking about it or spend a few hours, you might not understand the
Isis. So I think that the industry needs to do a better job of transparently communicating. The current usage of energy and transparently communicating how it's going to change over the next 20 years.
Bitcoin energy usage. For example is exponentially falling that the latest generation of miners generate 5x as many hashes for the same amount of electricity. So in fact, energy consumption, decreases 80% / x, a hash. Whoa, its massive. And then after the next having it gets cut in half again.
The protocol keeps cutting it in half every four years and the technology advances are doubling it every year or more, right? And so if I double every year and I cut in half every four years and the transactions, the transaction efficiency is on our transaction cost is only scaling with the log of the price. I mean, most people can't do the logarithmic math and their head, but if you, if you actual and they don't know the
Ratio between transaction fees and block rewards. But once you figure it out, let me boil it. Down to the summary, it's 200 basis points of the value on the network today. Falling to a hundred and twenty
Falling 270 falling. 240 falling, 220 falling, 210. Falling to seven basis points. Going to 625, you know, eventually getting to five basis points.
And that and as its falling to 5 basis points of the overall monetary energy in the network, the Energy Mix is rotating from from more fossil fuel to less fossil fuel and at the same time, the energy intensity is falling because the security on the network is coming proportionally. More from the technology of the hash,
Hashing miners, then it is coming from raw power.
And so there's there's a lot of things going on there, you know, if you're a journalist you just right click bait, right? And I think that they came across, there might be an example of one power plant. That was a fossil fuel power plant, that was that was used to run Bitcoin Miners. And so that became a very colorful story.
Well what about all of the
highest-rated? What else? I got pretty colorful when went on Twitter, you and Elon Musk were sort of going back and forth and I'm actually really impressed by the way, and I don't know if this speaks to your vision into stoicism and having stoic values, but the fact that Elon was razzing, you may be the most generous interpretation on Twitter about sort of your views on bitcoin and energy and all that. But then like, I don't know, three or four days.
Or you introduce him to minors in the u.s. that are really making strides into being green. I'm curious. What one, why not? If somebody's coming at you like that. Why were you so generous? Is it that you see yourself as as an ambassador to bitcoin and it didn't make sense to get into a pissing contest, or is there something else going on?
Well, first of all, I think, Elon believes in the power of crypto for human freedom and sovereignty
And sound money. I mean, he understands the importance of the underlying technology and he also believes in Bitcoin, that's why he bought billions of dollars of it, right? So he believes that and so we all agree on 99%, right? The power of technology to make the world a better place, the power of sound money, the power of responsibility, the importance of freedom and property rights, the importance of decentralization, we all agree on that. And so
Ilan has concerns that we should be the good guys which means make sure that we pursue it in a sustainable fashion. That's good for the planet. And so you know he wants to encourage everybody to be on the right side of the energy debate so there's not a lot of transparency and I think the industry was not as organized as it could be.
So I said to him, have you met the miners? They love to hear from you. And can we work together? And he said, I would love to work together. I love the meet, the miners. And so so when people agree with you on 99% of your agenda and they have concerns and Bitcoin has either real or imagined energy issues, right?
They're either real. Someone could fire up a Coal Power Plant, and someone and people don't care for that. And then imagine maybe people are worried that is going on more than it is going on, or they're worried about the future. So the mature responsible thing to do when you have real and imagined problems is to is to bring everybody together in order to talk about your issues and solve your problems. You know in the most transparent responsible fashion, we can sew
So he was enthusiastic to meet them, they're enthusiastic you meet him, we shared everything that we're doing, they shared what they're doing. He shared his concerns, we talked about Solutions and and I think lots of good will come of it. I think that the miners will will now have a platform to communicate, just how sustainable they are and their goals for sustainability. I think we can put together, clear, clear metrics and models for the future that communicates to the mainstream.
Investors and mainstream media and anybody else is interested in what's going on. And and I think that ultimately that's its constructive. And a way for us to all, go forward together in and in an environmentally friendly appropriate fashion, that everybody can get behind.
I love it. Michael men, seriously, I can't thank you enough for coming on the show but be for being a an ambassador for this moment where if this really is
That sort of once in a thousand year opportunity for people to get into something early that could become, you know, the dominant protocol in, in a shift where money becomes technology and as somebody who is just so hungry for the average person to have that kind of opportunity for you, to take the time to boil this stuff, down to, First principles to walk people through this. I know what you have a company to run and yet you have taken, you know, hours to be with me. You've done this countless times.
Put this information out there. I watched your debate on gold. I mean, it's just that the number of things that you're doing to help people understand what this is. And then, obviously, ultimately, it's up to everybody to determine their risk tolerance. And you know what, they're willing to do. But, dude, I just I'm Blown Away by your willingness to engage this community and, you know, give people a way to Think Through the problem. So, thank you for that and where where can people follow you?
You to get more of your
insights, the best place to follow. Me is on Twitter, Michael underscore sailor. And then if you're interested in Bitcoin, Bitcoin is hope so. Go to Hope.com, H, ope and I post everything on Hope.com and so thank you, Tom, for giving me a platform. I do think it's an opportunity to improve the lives of billions of people and but I think it's a complicated new subject and it merits, you know information like you're conveying.
You're on you're on your podcast here,
dude. Thank you guys. Trust me when I say that you're going to want to spend as much time with Michael sailor as possible. I forced all of my family to set up wallets so that I could send them money myself so that they could buy Crypt. I wouldn't even send them crypto. I made them go buy it themselves so they could understand how the process works. They could decide what coins they wanted to get. But this really like this, I Michaels already said everything that he's going to say, you should definitely trust him over me, but I will just say this really
Feels different. This really feels special. This feels like a moment. It feels like a movement. That's the right way to say it. Feels like a movement and there is nobody and I mean, nobody that I've seen in the space. That is a better voice for that movement than Michael. I cannot encourage you enough to go spend, I'm not kidding 10 hours watching his videos, you will be richly rewarded. You will have somebody walking through first principles about why this stuff makes sense, and I get it if this was your first introduction, it's hard to wrap your minds around it. He's very
Assistant. You're going to hear those things over and over and over and eventually it's all going to make sense. And you'll be armed enough to make your own decision. But please research this stuff, I beseech you just because I'd like to see other people succeed, I beseech you to research, even if you walk away saying, it doesn't make sense for me. I just don't want people to miss this opportunity, out of ignorance. So, thank you guys for rocking this one. I consider this a very special episode again, Michael. Thank you. Amazing to have you. And guys, speaking of things that are amazing, if you haven't already, be sure to subscribe.
Till next time, my friend's be legendary, take care.
