
November 7, 2020
Preston Pysh on Bitcoin’s Final Cycle | Stephan Livera Podcast
Check out The Stephan Livera Podcast Episode Page & Show Notes.
Key Takeaways
- “I have no confidence in telling somebody that there will be a next cycle” – Preston Pysh
- Trust is essential to fiat currencies survival, it will be broken once the narrative changes to using bitcoin as a new unit of account
- Central Bank Digital Currencies are a rebranding of government currencies with the goal of extending trust
- A negative interest bond is a contract to lose money. It didn’t exist in 2008 and neither did the Bitcoin “purchasing power rocket ship”
- Expect more publicly traded companies to put 1% of their assets in Bitcoin. This will improve their stock performance, and drive even more corporate adoption
- That said, unprofitable zombie companies will be unable to buy bitcoins and “are about to get just decapitated”
- Bitcoin bull runs are brutal, Dollar Cost Averaging (DCA) and regular accumulation is the way to go
- Past $100K, it becomes more important to watch the narrative more than price predictions
- Rather than bans, we could witness governments supporting or even nationalizing mining in their countries
- However, “Sometimes governments do things that don’t make sense” – Stephan Livera
Intro
- Preston Pysh (@PrestonPysh) is the co-host of The Investor’s Podcast
- Read the Podcast Notes from his appearance on What Bitcoin Did Podcast and checkout his Quick Bitcoin Intro
- Host: Stephan Livera (@stephanlivera)
Is This The Last Bitcoin Cycle?
- Predicting the value of a currency or a stock is akin to projecting a hurricane path. You try to understand the left and right boundaries and most probable outcomes
- Bitcoin adoption process (aka hyper-bitcoinization) could be complete as early as this cycle
- “I would say seven and half years would be probably the long end for me”
- Preston estimates a 50% chance this is the last cycle while Stephan gives it a 10% chance
- “I have no confidence in telling somebody that there will be a next cycle” – Preston Pysh
- Bitcoin adoption process (aka hyper-bitcoinization) could be complete as early as this cycle
- Bitcoin’s future price cycles will be related to bond markets losing money, Universal Basic Income (UBI), and money printing, social unwrap, and Bitcoin’s 10+ year track record
- It will have less to do with how the protocol is functioning and the halvings
Pay Attention to Narratives
- Government currencies are based on trust, and it’s only a matter of time before discussing how currencies are broken becomes a household conversation
- As soon as that narrative takes over, people start asking “what can I do to protect myself”
- This is a global phenomenon, with Bitcoin already making new all-time highs in countries with collapsing currencies
- A key indicator is when the media starts discussing if Bitcoin is a new unit of account, or if fiat currencies are doomed
- Those headlines are a real possibility when bitcoin crosses $100,000 and will indicate a break of trust in traditional currencies
- Keep in mind, Bitcoin was all over the news after a measly $2K move
- Those headlines are a real possibility when bitcoin crosses $100,000 and will indicate a break of trust in traditional currencies
- The years leading up to the failure of German Mark provide an important case study
- In 1922, just before the Mark collapsed, newspapers started asking if German businessmen will use other currencies as a unit of account
- “I am paying attention to big bond investors talking about how they are taking a portion of their bond position and reallocating it to act as a hedge against inflation” – Preston Pysh
What Changed from 2008?
- The 10-year treasury was at 5-5.5% before the 2008 crash, it’s below 1% today
- Combined with accelerated money printing and increased debt obligations, expect interest rates to go lower
- There is $6Tr of negative interest fixed income debt, how long can this keep going?
- A negative interest bond is a contract to lose money, compare it with Bitcoin’s warp increase in purchasing power, which didn’t exist in 2008
- To put it into context, Gold did 200-300% post-2008 crash, nothing compared to how bitcoin performs
- Bitcoin is a new technology that follows an S adoption curve with the tipping point likely at the 2.5% mark, after which adoption goes into the hockey stick phase
Central Bank Digital Currencies (CBDC)
- CBDCs are key to extending the life of the current financial system, they are probably in the testing phase
- Government currencies are already digital, CBDC is fancy branding in an attempt to create trust
- The fact remains, currency units in this new system will continue getting debased
- CBDCs allow for quicker settlement for payments. This, ironically, could enable people to exit the system even quicker
- One can argue that CBDCs will lead to quicker adoption of Bitcoin
A Framework for Company Valuation
- Investing in a company is like buying a money-making machine. How much you would pay for it depends on how much money it produces per year
- For instance, if it costs $100K and generates $1000 annually, it means a payback period of 100 years- not an attractive investment
- But consider this, almost the entire stock market is priced at about 2% return or worse
- In other words, “All your market participants that are holding stock today, are signing up to buy a $100K money machine and they are gonna make about 1K-2K per year with their money machines” – Preston Pysh
Case Study: The MicroStrategy Money Machine
- MicroStrategy, valued at $1.7Bn, used its entire liquid retained earnings of $425MM to buy bitcoin
- Keep in mind, few companies have a quarter of their net-worth sitting in liquid cash
- In a quarter, MicroStrategy made $66MM in unrealized gains, double their annual nominal earning of $30MM
- In a year from now, considering Bitcoin’s scarcity and price predictions, MicroStrategy will have $3.8Bn of unrealized gains just from holding bitcoin
- Stack the market valuation on top and it could achieve a $4.3Bn market cap
- It would normally take MicroStrategy 111 years to generate and retain this much profit
- This is completely different to valuing how normal “money machines” work
- An increase in liquid buying power from $0.5Bn to $3Bn is a significant boost in MicroStrategy’s ability to compete, acquire competitors, and expand operations, more so with leverage
Public Companies Bitcoin Adoption
- Similar to Jack Dorsey’s Square, expect more publicly traded companies to put 1% of their assets in Bitcoin
- Apple has $200Bn in liquid cash on hand, a conservative 5% position equals $10Bn
- Bitcoin will have a value premium over traditional company assets, this will drive stock performance and even more corporate adoption
- “Companies will dip their toe in the water, next thing you know they are putting their feet in the water, next thing you know they are standing waist-high in the water” – Preston Pysh
- Companies make strategic decisions regarding what they own as an inflation hedge, and they aren’t concerned with short-term volatility
- That said, some companies will buy at the top and may exit their positions as they feel the pinch
- We could witness a repeat of previous price cycles, only this time its companies instead of individuals
- That said, some companies will buy at the top and may exit their positions as they feel the pinch
- “I think by the time you get into the second quarter of 2021, I think it’s gonna be the talk of talk of who is stacking as much of this stuff as they can” – Preston Pysh
Buying and Securing Bitcoin
- The decision to own bitcoins is slowly happening in board rooms
- The technicalities of buying and securing bitcoins will not be a roadblock for business adoption, companies will find a way
- Similarly, it won’t stop people with significant wealth from owning it
Zombie Companies will get Decapitated
- Since 2008, central banks have kept zombies alive at all costs
- “The amount of manipulation […], is in my humble opinion, disgusting”
- “Part of this thing that we call capitalism is you have to let businesses that don’t add value, that the market doesn’t value their products and services, to fail”
- “That is what creates the creative destruction of something else to rise up out of the ashes and produce something that IS valued” – Preston Pysh
- Competition is fierce in Silicon Valley, especially when it affects stock price performance
- However, numerous companies out there are unprofitable and have no free cash flows and, as a result, they can’t buy Bitcoins
- “If you aren’t stacking them, in my humble opinion, you are about to get just decapitated” – Preston Pysh
- However, numerous companies out there are unprofitable and have no free cash flows and, as a result, they can’t buy Bitcoins
Timing Market Tops and Bottoms
- As bitcoin crosses $30K, traditional money managers will talk about how Bitcoin makes no sense
- They will then be stuck in a loop of waiting to buy the dip, then claiming the dip is tulips crashing
- “For someone who hasn’t experienced one of these bull runs, you haven’t seen nothing yet”
- Every decision will seem like the wrong decision. That said, “You can manage it with some knowledge”
- Study some of the price models and understand price orbits
- For both companies and individuals, Dollar Cost Averaging (DCA) and regular accumulation is the way to go
- Past $100K, it becomes more important to watch the narrative more than price predictions
- Every decision will seem like the wrong decision. That said, “You can manage it with some knowledge”
Government Response
- Raoul Pal argues that because Bitcoin is still too small, it’s premature to worry about government bans
- An alternative possibility is governments will realize inhibiting adoption of a global currency is “literally shooting themselves straight in the leg in a race that they need 2 very strong legs for” – Preston Pysh
- As a result, we could witness governments getting involved by supporting or even nationalizing mining in their countries
- Every government has to ban bitcoin in order for it to work
- “I just don’t see that possibly happening, especially when you look at it in the context of every country in the world has been a victim of dollar dominance since Bretton Woods, since 1944” – Preston Pysh
- All being said, “sometimes governments do things that don’t make sense” – Stephan Livera