← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
Top Crypto Insights for Building Wealth in a Volatile Market | Michael Saylor (Replay)
01:37:17
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- [00:00]
A
If you work in university maintenance, Grainger considers you an MVP because your playbook ensures your arena is always ready for tip off. And Grainger is your trusted partner, offering the products you need all in one place, from H vac and plumbing supplies to lighting and more. And all delivered with plenty of time left on the clock. So your team always gets the win. Call 1-800-GRAINGER visit grainger.com or just stop by Granger for the ones who get it done.
- [00:31]
B
I'm Jake Stauch, co founder and CEO of Servil. We built Servl to automate the IT work that slows companies down. Onboarding, password resets, access to applications. My laptop stopped working. While employees wait for help, their real work is put on hold. It desperately wants to automate this work and that's why they need Serval. You just tell Serval what you want to automate in plain English and it's built. No drag and drop workflows, no expensive consultants. Employees get unblocked and IT teams go from drowning in tickets to building what actually matters. With Cerbal, it becomes the AI engine powering the entire company. This is a new way to run it. We guarantee you'll automate 50% of all tickets and we'll prove it to you in a free four week pilot. Go to cervel.com tickets that's S-E-R-V-A-L.com tickets. Hey everybody. Welcome to another episode of Conversations with Tom. I am here with somebody whose logic has had a profound impact on how I think about Bitcoin in particular and investing in general. The one and only Michael Saylor. Michael, welcome to the show.
- [01:51]
C
Thanks for having me, dude.
- [01:52]
B
So you are the founder and CEO of MicroStrategy. You went to MIT at one point, you almost became a fighter pilot. And a misdiagnosis 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 face 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.
- [02:51]
C
Sure. You know, So I started a company when I was 24, and we didn't have a lot of resources, I guess I took out, like, a $5,000 furniture loan, and then I employed my first employer, Dupont, to give me $250,000 contract. And then I asked for, like, 100,000 in cash up front. And my negotiating technique was they said, we don't normally do it. And I said, well, I don't have any money, and so I can't build the software you want unless you give me the money up front. And 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 that much capital, you know, you can't. You can't do anything. So we were using. We were 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, 750,000 a year, and then we grew it to 950,000 the next year. 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 in C, so we didn't even have the programming skills to build the software. It was like 1991 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. It was one of the first graphical interface development tools. And we took that product and we plugged it into our simulation engine. And you know that friend I told you about, friend, competitor was a former professor from MIT, and so he had the Ph.D. and he had all the knowledge, and I was just the kid trying to grow a company. So in his wisdom, what he said was, like, everybody knows that you got to use Excel. If you use a spreadsheet, you can't use Wings. Excel is the winner. 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 that. Take the safe 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 my 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 $2 million company and we became a 4 million dollar company. Then we became an $8 million company and then a $16 million company. And right around the time we were $16 million company, he was still a $1 million consultancy because he hadn't taken the risk and he was not at risk. He had no existential threats, whereas we had a $16 million company with threats, which was Excel was going to squeeze Wings out of the business. And so the answer was we rebuilt our product on a Microsoft base. 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 good software engineering company that I know uses C. They don't use Visual Basic, and so you're not going to get taken seriously. And I said, well, I have people that can figure out how to do it in Visual Basic and they can't figure out how to do it in C. So we did it the other way. And then we doubled to 32 million and we doubled to 64 million and he saved 1 million. And at 64 million, we had this existential risk, which is we needed to code part of our software in C. But we, of course, were 64 times bigger than we had been and we were 4x bigger than we were when we started. So we hired a lot of people and we started coding it in C. And he still had a secure consulting company that was a million dollars with no risk. And, you know, and 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 it doesn't do that. And we thought, well, you know, well, 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 that 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 it went on. And 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 the difference between being a technology company and being a services company. Services companies don't take risks and they don't pursue architectures. Technology companies need to take risk. And of course, eventually the mobile wave hit and we rebuilt our software to run on iOS, and then people said, well, you're crazy, Android's the winner. So we built our software to run Android, and eventually we had software running on PC operating systems, web operating systems, Android and iOS operating systems. And then of course, eventually the web browsers changed to Chrome, and in plugins, we built something that supported plugins. If you sign up for technology, I think you got to have this model in your head that you're a snake that's shedding its skin every three, four years. Or a really good model in nature for growth under pressure is a chambered nautilus. And a chambered nautilus is this creature that grows under deep sea pressure 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 and is using its previous work as the structure to support the next piece of work. And so if you look at the design of a chambered nautilus, what you see is nature's solution for growth under pressure. And I think that's how technology companies work. You're just always growing. You can't abandon what you've done, but neither can you can you not move forward and not take risk and not branch off in a new area. So there's this very interesting dynamic dance 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
- [10:47]
B
the middle, the friction between those two. This is the very thing that makes you so compelling to me, and 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 into Bitcoin, 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 put on the story that you just told to really build your credibility. And then we're going to go, because my audience probably really 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 through insane storms, including the dot com crash, including the 2008 crisis, including Covid. So it's. I think you said at one point you actually went through a 98% loss in shareholder value and still managed 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 credit it to is not only your ability to sort of analogize something like 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 principles. 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.
- [12:36]
C
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 an entire university full of very bright people, but intellectually fearless people. My freshman classmates, one of them started a computer company and launched a Pac man competitor and got a cease and desist letter from Commodore Computing, the game company. Another one designed hardware that went on the space shuttle. You know, another one 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.
- [13:26]
B
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?
- [13:32]
C
My. My first material science class. The professor comes out, and we're literally all freshmen. It's the first. The first hour of our. Of our time 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. He says, you know, I'm a consultant to NASA and this tile burned off the space shuttle on reentry 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? Okay, I was valedictorian of my class or I'm an Eagle Scout or whatever, but they're all thinking, was this in the readings? You know, did I not read this? 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 guy in the front row raises his hand and he suggests that maybe he ought to try to, you know, reverse the lattice composite or, you know, or ask a question about the nature of the material and where it was on 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 ourself. And then we realized he just asked us the 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 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 education consists of rote learning. You read something, you read the answers on 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 to reason from first principles. So what are first principles? A grasp of math, a grasp of the scientific method, you know, a grasp of, you know, elements. At some point you have to build a building, you have to choose an element. Will you 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, and if you don't know anything about material science, then you certainly can't put one thing together with a structure and make it stand or not stand. So engineering in general is about learning enough math, enough science, and enough engineering technique in order to construct a mechanism that's going to work under whatever the circumstances is you need it to work. I think that's what it means to reason from first principles. You have to be willing to take a clean sheet of paper, like, literally a clean sheet of paper. Like, for example, I tell you, design something that flies, you get wood, okay? Design something that flies, you get a metal. Pick the Metal? Well, 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 if I tell you design a plane that flies in high winds, that's a different design. Something that works in cold. Right. 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 the speed of sound? Right. What if I change the density of the air? How about run a marathon? How about run a marathon at the top of Mount Everest? How about stay alive for a day at the top of Mount Everest?
- [17:57]
A
If you work in university maintenance, Grainger considers you an MVP because your playbook ensures your arena is always ready for tip off. And Grainger is your trusted partner, offering the products you need all in one place, from H VAC and plumbing supplies to lighting and more. And all delivered with plenty of time left on the clock. So your team always gets the win. Call 1-800-GRAINGER visit grainger.com or just stop by Grainger for the ones who get it done. When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery. So you can keep your facility stocked, safe and running smoothly. Call 1-800-GRAINGER Click grainger.com or just stop by Grainger for the ones who get it done.
- [18:57]
B
If I were going to string those together to give people an overarching sentiment of what unites those. And tell me if you think this is crazy. What I explained to people is you have to understand the physics of the situation. Like 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 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 way that it works. So tensile strength of the 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, well, I know that this will work because this is a function of 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, you understand literally the physics of that situation.
- [20:09]
C
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 know enough to know that the amount of lift you generate is different if the density of the air is different. If there is no air, try generating. Right. Like human beings rise through channeling energy. So fire was pretty elemental. Okay, how about D? Does that burn or 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? Design an oven. How about, you know, we wouldn't have made it without bows and arrows, missiles, right? Probably the most elemental thing is 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 the light, happy, shiny soft rock. Maybe the sharp flint rock. That will do the job. Now design an arrow. You want a long arrow, a short arrow. 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. Fire the arrow. Now, should I create a bunch of randomly different sized arrows? Probably one of the arrows works better than the others, right? So after I fire 100 arrows and I pick the 87th arrow, then I'm going to manufacture 10,000 arrows of the 87th arrows, length and width and make up and you know, and then put the right arrowhead on it and 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 sail? Channeling wind energy. You ever create a sailboat? One sail, two sails, three sails. What kind of sail? Different shape of sail. How do you make the sail? How high should the sail 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 100ft long, it goes faster. That's a crucial. Right. If I make the boat 10ft wide and 40ft long or 50ft long, well, it goes slower. But on the other hand, it carries a lot more stuff. Right. And there's something called hull speed. What you'll find is that there's a maximum speed at which you can push a hole through the water. It's not a function of the energy you use, it's a function of the shape of the hull. Right. Common sense. Create a square shaped boat. Right. Harder than a needle shaped boat, which has the fastest hull speed? When the aspect ratio is 1 to 100, you go fast. When the aspect ratio is 1 to 5, you go slower. When the aspect ratio is 1to2, you go slower. What's the best aspect ratio? Depends on what you're trying to build.
- [23:42]
B
Right.
- [23:43]
C
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, it might be a matter of life and death. So look, I think the big thing that happened with regard to bitcoin this year is that bitcoin is the first point in human history where engineering impinged on economics. Up until this point, people didn't really embrace the idea of energy theory and engineering theory and math and sciences as being integral to the way that a monetary asset function. You know, it used to be money was, you know, seashells and tokens. And then we have this, you know, we have gold and we have coins and then we have general agreements and the like. And Bitcoin was the first time when we created a digital monetary asset, a pure digital token on a pure digital network that actually respects the laws of conservation of energy. I say it's sound money, but that's the same as thermodynamically sound money, which is conservation of energy, which means mathematically proper.
- [25:15]
B
We'll get to that in a minute because those are like really deep concepts that even I, after being in this for a while, 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 works better. And it takes a lot of experiments, 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 layperson 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, and 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 you're as ignorant before as you were after. But at least you have, if you have a good consultant, you have 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 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 had 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 to like, whoa, this is real. And as a person and as the CEO of a company, I'm going all in. How does that change happen?
- [28:05]
C
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, a V shaped recovery. And so we put those two together. You had an L shaped recovery, Main street just shut down, and then you had a V shaped recovery. And we call that a K. But if you decompose it. And I was very sensitive to it because on one hand, in 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 manufacture software that does things. So what I saw was 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 zero and the expansion of the M2 monetary base, the money base, you found that you were actually 25, 30% 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 had a billion dollars and you did nothing for the entire year, you had $1.3 billion at the end of the year. On the other hand, if you had a Main street company and you're generating, let's say, $100 million a year in cash flow, and you're valued at a billion because of the cash flow, you would have to be generating 130 million after a year to be valued the same. Because the value, the assets that the money buy is being devalued by 30%. If the currency is devalued at some rate and the money supply expanded to 24% last year. So you could use that as your metric, or you could use the S&P 500's return as another metric, but clearly the currency devalued, which means that if you're a Main street company, you had to work 20% harder to get nothing. And if you're a Wall street company, you had to work, you had to do nothing to get 20% better. And so what I saw was a shift in balance of power and a shift in wealth. And it was pretty disturbing to me, too. 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.
- [30:55]
B
So the average person, I think, struggles with that because they're like, well, I'm getting my stimulus check. What do you mean? How's this going down? Cost of bread is the cost of bre bread. I'm all good.
- [31:04]
C
I think there are some fundamental misnomers or understandings of the world that people miss. And the most pernicious one is the idea that inflation equals cpi, which is Consumer Price Index.
- [31:21]
B
Average Shit.
- [31:22]
C
The idea there is a number for inflation. Inflation is only 2%, or inflation is 1%, or inflation might be 3%. Okay, that's just a mistaken idea. What is inflation? Inflation is the rate at which the things you want to buy are going up in price. And what are the things you want to buy? Well, you might want to buy pizza, you 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, it might not go up in price as much as if 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 if 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 scarce? What if I want season tickets to, you know, the baseball game? What if I want health care? What if I want early retirement? They're all things you can buy. You can buy assets, you can buy luxury service. 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. Ad finance right? Streaming YouTube. What's that? What's the inflation rate on streaming YouTube? Ad finance right, 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. If we want to make that simple, I live in a town and there's a thousand houses, and I and I double the amount of currency in the town, and everybody wants a house. What's the price of houses due right if the only thing I can buy is a house, and if I double the amount of currency, then the price of the house must go up. Probably go up by two, but maybe not exactly by two, but it goes up. If I increase the amount of money, 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 gradient or the change in price for everything you might want to buy. 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, then the price of restaurants and movie theaters aren't going to go up. If I. If I make it illegal or inappropriate to go on a cruise and fly in 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 $1,000 and you can go and you can buy stocks, then the price of stocks go up. Now 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 close 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 live 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 where do they buy them? Well, you know, Hampton's real estate went up 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 up 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. It's not a scalar. A vector means you can calculate for a thousand different products, a thousand different numbers, and they change every month. So I could 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 than in Brooklyn. And it's different in Brooklyn than in upstate New 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 hyperinflated. 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 3, 400%. So the cost of scarce art, 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 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.
- [37:30]
A
When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery. So you can keep your facility stocked, safe, and running smoothly. Call 1-800-GRAINGER clickgrainger.com or just stop by Granger for the ones who get it done.
- [38:00]
C
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% marketing. Right? I mean, the more if I spent $2 billion on a factory to stamp out widgets that have a variable cost of 10%, right? Then 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 100, don't you think that the value of the Mona Lisa would go up, assuming that lots of wealthy people wanted it? That gets you to the interesting theory of economics, right? If I want to really understand anything in the engineering world, I need to use vector calculus 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't 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 and calculus in general. And pretty much every sophisticated thing that flies or floats, it's all based upon calculus. And you just can't solve the problem without that math. So that's the problem of inflation.
- [39:43]
B
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 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, you're now paralyzed. Especially when that's confounded by marketing, essentially. So cool. So we've got inflation as sort of problem number one. 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 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.
- [41:08]
C
Yeah, the company was valued at like one times revenue plus cash. And I said, well, I have 500 million in cash, why don't we get more credit? And the answer is cash is trash. Like it's Ray Dalio's quote, cash is trash. Well, why is cash trash? Well, if the money supply is expanding at 7% a year, then the risk free hurdle rate is 7%. If you don't generate more than 7% yield on your cash, then it's devaluing. So from 2010 to 2020, the money supply expanded to 7%. So all the cash you're holding is losing 7% of its value, assuming you have a 0% interest rate or 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, and somewhere 15, 20 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 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 zero in treasury yield, then you're looking at cutting your treasury purchasing power in half in three and a half years. Whoa, okay. Now that's not trivial. 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 at 7% a year, then the S&P 500 index better yield 9 or 10%. If it yields 10% and the money devalues at 7%, you're 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 bought a bond at 4% yield and the interest rate got taken down to 3.5, 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, it trades up again. When the bond rates get, or the Libor, you know, the short term bond rate and interest rate goes to zero, 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 problem that anybody that works for a salary has, which is I general out of cash. And the currency is being devalued every year. The real question is what's the rate at which it's devalued? And let's do the thought experiment. What if we didn't print any more money? What if the inflation rate, the monetary inflation rate, not the cpi, but what if the money expansion rate was zero? In that case, the currency is also an asset and it's a store of value and a medium of exchange at the same time. That's a complete Austrian economics like deflationary economy, where we call it hard money or sound money. The closest thing to that would be the gold 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. In 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 7% a year and now it's like 20% a year and 15 to 20% a year. And you got to figure out is it 15, 20 or 25. But if it's 15 to 20, the currency is weakening 1 to 2% 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 or a 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 renminbi. And then you have an asset component which you use as a store of value over the long term. 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 and to a certain extent, Bonds, Right. How do you store your value over the long term? Well, 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 10% a year, the S and P does. And if the market, the economy is not healthy, the Fed will lower the interest rates by 50 basis points and 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. It used to be overnight money was 550 basis points, Tom, before the great financial crisis. And then they cranked it down from 550 to 500 to 450 to 400 to 350 to 300 to 250 to 200 to 150 to 100 to 50 to 0. And now we have, you know, the bankers 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 work, 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 their epsilon. So companies that grow faster than the rate of monetary inflation, faster than the 7%, they could hold value. A company growing 20%, like Google, Facebook or Amazon, they all hold value. In fact, they accrete value. Why? Because 20 is more than 7. Right. So it's plus 13% a year. Right. What happens to all those, all the other companies, which companies in the s and P500amounted to all the indexes, to all the gains? It was big tech, right? Big fang stocks were the winners. Everybody else treads water because if you're growing at 7% and the money supply is collapsing at 7%, you're net zero. And how else do you get around it? Well, you can go borrow a lot of money, leverage up, buy back half your stock and get your cash flow per share up. But what happens when you're fully leveraged, 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 in 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 grow 30 or 35% a year because the hurdle rate just jumped. Now you're pushed out on the risk, on the risk curve here. You got to take massive risk as a company to grow that fast. You got to do acquisitions. 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. Look at it from the point of view of an investor. They can invest in the s and P500 index or the NASDAQ, and those were all up like 40% year over year or 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 spiked down. You saw it when we flood the market with liquidity, initially, that makes stocks go up. But let's take the example of Zimbabwe and Argentina. If I keep doing it for 10 years, what happens to those stocks? They don't go up. 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 100 million in cash every year for the next decade, but I tell you there'll be 10 times as much money in the economy in a decade. That $100 million of cash will only be worth 10, 1/10 as much in a decade. So 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 a 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, correct 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, in the year 2020, the peso is going to trade 150 to the dollar 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 Argentine companies making pesos. No, 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 at 3 to 1,3 pesos of the dollar, and then buy dollars, because the dollar is going to go up by a factor of 50. So what you're doing is you're financing in 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 Lebanon went from 150 Lebanese lira to 7. It 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 lira while it's 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 buy something tangible that won't lose 80% of its value overnight. Buy a boat, buy 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 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? Well, bitcoin is the strongest asset the human race has ever invented. It's like gold with none of the defects of gold.
- [54:12]
B
So define what the defects are. Why? Why is it the greatest monetary invention?
- [54:19]
C
So I buy a million dollars of gold, okay? If the price goes up, the gold miners, first of all, the gold miners are going to create more gold and dump it on the market. If I could eliminate all gold mining forever, if I could wave a magic wand and make it impossible to mine any more gold, my million dollars of gold will hold its value better because it'll be scarce. But gold miners are inflating the value of the supply of gold by at least 2% a year or so. And then if the price doubles again, investors will invest in more gold miners 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 melt their jewelry down, convert it 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 call it scrap gold, right? And then after that, bankers will issue gold warrants 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 gold will start to sell some of their gold to manipulate the price down, right? And all of these. And ultimately, if it goes up enough, someone will club you over the head and take your gold, or a hostile regime will take your gold, or a politician will pass a law taxing your gold, right? 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 any more gold, and then you make it possible to take custody of your gold personally off of the exchange or off of the bank. So that way the bank can't hypothecate it or re hypothecate it. Miners can't inflate it, investors can't create any more gold miners. And then you make it possible to move it from here to Switzerland or Singapore in an hour for a nickel. And that way, if you don't like your bank or don't trust your bank, if the 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, can you? 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 know, can you move to the Cayman Islands and bury your gold underneath your hut in the Cayman Islands and be safe about it? Not likely. Can't even get it through the airport. Right. So the problem with other properties and gold is the simplest example. But the problem, 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 stack 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, you can see the problem, of course, is the debt is devaluing rapidly. The land in California can be taxed and is not movable. You know, the building in New York is 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 are you going to hide your building? Right. Buildings get property taxed. There's a very famous story about a bunch of luxury yachts sitting in Sardinian port. And the locals decided that it wasn't fair that all these people were rich people were sitting on their yachts in the port, spending all this money, but they weren't paying enough taxes. Now, they were putting millions and millions of euros into 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 that port. And everything was happy. And all the restaurateurs and the hotelers and the entertainment people in the port, they were all happy making tons of money off the yachts 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. Everybody left. Because yachts are floating capital. It just moves. It's floating property. Right? So it's a very visible example, right? Why it's not that smart to put an unfair tax or an extreme tax on a yacht if people can float the yacht to the next port, you know, 100 miles to the left. So one would be discouraged from taxing stuff that floats. On the other hand, taxing A building that's buried, you know, 100ft down in the bedrock, that's easier. You can't move the building. So Bitcoin represents the apex property rights of the human race, mind you. I'm not disputing the ability or the, you know, legitimacy of a government to pass a tax. At the end of the day, they can tax your gold, they can tax your stocks, your bonds, your 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 you're a 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 have Bitcoin, it's interesting to wealthy people everywhere on earth, right? You can liquidate a billion dollars of bitcoin on the weekend in any currency, anytime. Try liquidating a billion dollar building. That's three year process, right? So it's liquid, it's fungible, it's desirable. And so that's what makes the asset valuable. And it's the most difficult thing to impair. 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 US Bank. On one day they simply passed a law converting it all to pesos, and they converted everybody's account to pesos in the country. And the next day they devalued the peso, 10 to 1. And 24 hours after they'd done that, I had 100,000, whereas I had a million before. And they did it, I mean, they did it quickly and easily to everybody in the country. Now, in theory, 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 a court in the 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 the governments of all the world will just confiscate 90% 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 2% a month right now. So all you got to do is wait between five and 10 years, and you're going to lose 90% of your money if it's in a currency or a currency derivative, and they don't even have to pass a law.
- [63:29]
B
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, 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, or finance in general. I'd always bet on myself as an entrepreneur. So I understand how to build business. I understand how to create wealth. But maintaining it is like a whole nother 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 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 why? Because that's like the argument if I'm that average person on the street, I'm like, yo. But literally last week this lost like 30 or 40% of its value. So that's terrifying. So why would I be better off in that than, you know, even a bond with a negative yield, at least like I'm bleeding to death more slowly than the 35% loss or whatever that I just took over the last week?
- [65:41]
C
Well, bitcoin's the best performing asset for the past decade. And it's, you know, it's 100x better than gold and it's 10x better than equity portfolios. So the volatility is the price you pay for the performance that you get. And oftentimes the best investment idea isn't the most comfortable investment idea. I think if I told you there's 100% certainty you're going to lose 7% 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 100% probability that you're going to lose 20% of your money over the next year and half of your money over the next three years, Well, I mean, you might think you need to move faster. 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 to 03 months, which is kind of what it did in Zimbabwe and Venezuela. Or what if I told you we're going to have 95% inflation? I think the unofficial inflation rate in Argentina is like 85% this year. What if I told you we're going to have hyperinflation? Everything will be twice as expensive next year. Now, how long would you wait before you took a risk? If I really want to 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. I mean, that really, what is the word? Focuses one. Right? Right. It strengthens one, stiffens one's 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, you have to understand how big your problem is. And the second thing is one of time horizon and what's your aspirational goal? For example, if you don't aspire to change your lifestyle one iota, you know, you're gonna watch Netflix. Let's take a stream. You're gonna live in your parents basement, watch Netflix, order Domino's pizza and stream YouTube video for the rest of your life. Do you have an inflation problem coming? Probably not. If you wanna, 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 and have a, 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.
- [68:39]
B
Same with education. If I plan to send those kids to school, I'm really in trouble.
- [68:43]
C
Yeah. So it really comes down to what is your aspiration and that that determines your hurdle rate. I mean, what you want determines your inflation rate and your inflation rate determines your hurdle rate. And that makes a difference, 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 wooden ship. Okay. And 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 sails 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 started the journey dies on the trip. Whoa. Okay. So, you know, we talk about volatility is bitcoin, bumpy is crypto. We're just talking about bitcoin. Yeah, 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 leaving Europe. So why'd they do it?
- [70:05]
B
So you're saying that the bold are the ones rewarded if you choose correctly.
- [70:11]
C
Right. I mean, the ones that move too soon, you know, 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, in the 1600s, on the other hand, by the mid-1717s, by 1736, you know, people had been living in North America and you had Philadelphia and you had Massachusetts, successful colony and the like. So if you choose the right decision or make the right decision at the right time, you can have a better life. But there's still risk, right? So why did 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 property rights are a nice to have. Property rights are nice to have. The same way that that fat on your frame or an insulin are nice to have. If I strip away your insulin, you're a type 1 diabetic. You can't form fat. If you can't form fat, you can eat all day long and 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 to store property means I can go three months without a job and not starve and live a life. There is no hope for a civil life without property. So, you know, 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, taking a wagon train 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. It's like, yes, it was a bumpy ride. There was 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 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 clear the thing, you know, and build a house for you and give you running water and hand the keys to you and 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 entrepreneurial spirit or just the human spirit. You know, what about immigrants? A nation made of immigrants? People went from a country where they had nothing to a country where they could have stopped something. That's the story that you see over and over again. Is the volatility? Is there a risk? Yeah, always, Right. Is there opportunity? Yeah. When do you leave? Look, I mean, the rich first sons of the nobles in Europe didn't come. It was the poor disenfranchised, the people that didn't have a choice that came. Right. The Protestants left Catholic countries, the Catholics left Protestant countries. The poor left every country. Those who were hoping for a better life came. And if you're sitting wealthy with lots and lots of stuff and a comfortable lifestyle and a comfortable portfolio, you might not see the same impetus. Right. You wouldn't have the same inspiration to do something.
- [74:32]
B
It's interesting. So the humanitarian side 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 were 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 gen 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 buy into 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 very hopeful. You know, when you talk about the beginning of the pandemic was this wealth transfer to people that basically owned bonds and assets, and now with hopefully the 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, four years and beyond, suddenly it actually becomes a story of growing. I think it's like 200% year over year, which is pretty thrilling. How far does when you think about this being sort of the apex property, how much goes into just 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.
- [76:23]
C
You know, 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 or moving 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 planet and settle on a better earth, but I can move a billion people to cyberspace. Bitcoin is property in cyberspace. It's 21 million city blocks in cyber Manhattan. The people that move there first, right, get to buy the land cheapest and then event, 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? 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 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 Alibaba and Ant and WeChat kind of branched off from Facebook and Google and Amazon. So there might be some other digital dominant monetary networks or dominant monetary networks. But bitcoin is 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 continue to be the dominant one for as long as we live. So what makes it dominant? Well, I mean, clearly the architecture is 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 the stability and the security. And so it's based upon the architecture. 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. 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 an opportunity for people that have little, that have little to lose and much to gain. 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 that's the best property, right, you're ever going to get. I think it's a technical imperative for the same reason you've got 8 billion mobile phones that will 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. Are you worried about losing your life savings? Clearly, it's more valuable. So it's a technology imperative for an Apple and Amazon and Google and Facebook and companies like square and PayPal and Binance 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 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 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 dollars 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.
- [81:06]
B
What do you say to people that say the pushback I've seen on Bitcoin is. Hey, guys, sorry. I get why you're excited about it, but it's Netscape of crypto. And, you know, just as a technological layer, it was early. Cool.
- [81:20]
C
Yay.
- [81:20]
B
Thanks for sort of proving the model, but this is never going to last. People will build something way better.
- [81:27]
C
Yeah, well, Netscape didn't make it to a trillion dollars in 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 Netscape or AOL or anything from that genre. Those things never got to 1/100th right. I think Netscape, you know, at its peak, you know, was maybe 1 20th, 1 30th, 1 40th of what we're seeing in three front of us right now. And the difference really is there is no other, there is no technology and architecture that's appropriate to replace it. The solution to the issue of long duration asset or long duration safe haven store of value is a very secure crypto asset network. And so, 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 converts energy into a very specialized SHA256 hash function. So in order to attack that network, it would take extraordinary time and effort and energy and resources. It's pretty much the most secure thing we've got in cyberspace.
- [83:10]
B
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.
- [83:18]
C
The actual cost is, you know, nominally 0.1% 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 overall energy generated in the economy is like 160,000 terawatt hours and the wasted energy is 50,000 terawatt hours in. 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 is 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 charged at charging stations. That are charged with fossil fuels. So the environmentalists 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 Shaw 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 and the people, right? We don't, you know, we don't have an application, an 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, they just need it during the day to run their air conditioners. Air conditioner is 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 in the air conditioning is off. And so you level out energy consumption on the grid, thereby 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 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 newsflash, 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 a city. What are you going to do with it? Well, 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 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 a turbine into your waterfall, you plug bitcoin mining into the turbine, and now you have cheap energy 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 here. People just don't. They don't understand, right, just how powerful bitcoin is as a force for energy sustainability.
- [88:50]
B
Yeah, I would agree with that. Like, 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've fallen for a narrative. And until Elon Musk, who's 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 so into the world of clean energy could be against it?
- [89:28]
C
I think we've got a lot of education to do. The industry hasn't published transparent statistics about the nature of the energy usage in bitcoin mining because the bitcoin miners are very decentralized and so encouraging transparency and gathering all the data and publishing it. That will be helpful because there's a good story here. I think 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 either, because the Bitcoin network never increases the number of transactions and the energy usage is unrelated to transactions. And in fact, the energy usage is decreasing exponentially as the transaction scale and efficiency. Exponentially. Exponentially. But the model was flawed, and so people picked it up and no one's published a better model, so we need to. And if you only spend an hour thinking about it or spend a few hours, you might not understand the nuances. 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. The latest generation of miners generate 5x as many hashes for the same amount of electricity. So in fact, energy consumption decreases 80% per exahash.
- [91:11]
B
Whoa.
- [91:12]
C
It's massive. And then after the next halving, 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, or transaction cost is only scaling with the log of the price. I mean, most people can't do the logarithmic math in their head, but if you, if you actually. And they don't know the ratio between transaction fees and block rewards. But, 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 120, falling to 70, falling to 40, falling to 20, falling to 10, falling to 7 basis points, going to 6 to 5, eventually getting to 5 basis points. Points. And as it's falling to 5 basis points of the overall monetary energy in the network, the energy mix is rotating 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 probably proportionally more from the technology of the hashing miners than it is coming from raw power. And so there's a lot of things going on there. You know, if you're a journalist, you just write clickbait, 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 used to. To run bitcoin miners. And so that became a very colorful story. What about all of the hash rate?
- [93:16]
B
Well, it also got pretty colorful when 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 later, you introduce him to miners in the US that are really making strides into being green. I'm curious one, why not? If somebody's coming at you like that, why were you so generous? Is it that you see yourself as an ambassador to bitcoin and it didn't makes sense to get into a pissing contest, or is there something else going on?
- [94:07]
C
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 Elon 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, 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'd love to hear from you and can we work together? And he said, I would love to work together, and I'd love to meet the miners. And 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 it's 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 bring everybody together in order to talk about your issues and solve your problems in the most transparent, responsible fashion we can. So he was enthusiastic to meet them, they're enthusiastic to meet him. We shared everything that we're doing. They shared what they're doing. He shared his concerns, we talked about solutions. And I think lots of good will come of it. I think that the miners will now have a platform to communicate just how sustainable they are and their goals for sustainability. I think we can put together clear metrics and models for the future that communicates to the mainstream investors and mainstream media and anybody else that's interested in what's going on. And I think that ultimately it's constructive and a way for us to all go forward together in an environmentally friendly, appropriate fashion that everybody can get behind.
- [96:50]
B
I love it. Michael, man, seriously, I can't thank you enough, A, for coming on the show, but B, for being 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 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've taken hours to be with me. You've done this countless times to put this information out there. I watched your debate on gold. I mean, it's just 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 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 to get more of your insights?
- [98:04]
C
The best place to follow me is on Twitter at michaelsaylor. And then if you're interested in bitcoin, bitcoin is hope. So go to hope.com h o p e 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, but I think it's a complicated new subject and it merits, you know, information like you're conveying on your podcast here.
- [98:33]
B
Dude, thank you, guys. Trust me when I say that you're going to want to spend as much time with Michael Saylor as possible. I fly forced all of my family to set up wallets so that I could send them money myself so that they could buy crypto. 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. Michael has 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. It feels like. 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 consistent. 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 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 and subscribe. And until next time, my friends, be legendary. Take care.
- [100:18]
A
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