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’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
• 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
• “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

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

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

CryptoStephan Livera Podcast : bitcoin, crypto, decentralization, digital currencies, inflation, show notes, stock market, stocks
Notes By Mostafa Khaled