#624: Building the Bitcoin Banking Stack with Adam Back and Sean Bill

You've had a dynamic where money has become freer than free. You talk about a Fed just gone nuts. All the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be.

Gentlemen, thank you for joining me. Of course. Thanks for having us on. Adam, I was just saying I'm woefully embarrassed. This podcast is almost eight years old and this is your first time on the show. Oh, okay. This is, but it's an exciting time. Yeah. And you really dedicated to podcasts. It's been a lot of years, a lot of episodes, right?

It has been. cool i think we're approaching 700 which is crazy to think wow that is impressive the uh no we're talking we had a new all-time high today yeah bitcoin doing bitcoin things just as we were on stage uh at the talking hedge asset manager conference uh trying to explain to them why they should put bitcoin in their fund allocations yeah we were discussing it before we hit record and i i saw turz tweet look like oh yeah it was at the event too yeah so 50 held up they have bitcoin in

their personal account but only two percent or four percent of the funds very few that actually

had allocated to bitcoin so a lot of them are believers at a personal level but they haven't been able to sell it within their institution you know so they own it themselves uh but they haven't quite gotten the boards to agree yet so which was a similar situation i was in in 2019 when i first proposed it you know i had my experience with bitcoin i had a very good experience and was trying to convince the pensions in california that they should be looking at

adding bitcoin to the portfolio yeah it was great to hear some of your background last night sean so sean for those of you who are watching uh is the cio at blockstream now yeah i am really excited to have both of you here because i've got into bitcoin in 2013 and nerded out uh on the tech side of bitcoin distributed system mining full nodes the layered stack that's been built out and so i followed probably all the work that you guys have done at blockstream since you've been around

And it's been really cool to see everything you've done from the block stream satellite. I've broadcast some transactions through that before it's a Jade, um, uh, CLN or excuse me, core lightning. Now, um, the, uh, liquid. And now over the last few years, really sort of leaning into the financial eyes part of Bitcoin, the Bitcoinization of finances. I like to, um, to reference it. And so Adam, like,

How's that transition from being hyper tech, like research focused towards a more financial perspective on Bitcoin been? Well, actually in our 2014 kickoff meeting, you know, with the founders sitting around a big whiteboard, we were trying to forward cast what we'd have to do to get a Bitcoin layer two for, you know, settlement of assets and Bitcoin working. And one of the risks, you know, so we thought we'll build the tech and other people issue the assets, but like, well, they might be lazy.

They might not do it. If that happens, we'll have to do it ourselves. So there was a lot of situations like that, actually, where you would think there would be lots of people building applications, but many people are really just more in business development. And the technology is basically a website and a database and a Bitcoin core wallet on a server or something like that. So we actually ended up building a lot of middleware and getting into asset management.

There's a couple of earlier steps.

One was the mining note. So we're doing hosting and mining in our own account. and when it was public that we were hosting, initially Fidelity was the launch customer. They kept coming back to us and saying, no, we need some hosting. They looked around and decided that we were the best. We were like, no, no, we're prop mining. We don't do hosting. But they persuaded us to host them and then we're like, okay, maybe we should expand and host for other people. And then that became news.

And so then a lot of Bitcoin has contacted us and says, you know, I've got like a dozen miners. Can you host them for me?

and of course if you're if you're hosting for thousands of customers that's a whole you need a support team somebody has got two miners and one of them's crashed or failed they're very upset right so it's half their revenue whereas somebody's got you know 10 000 per client it's just part of the you know maintenance cycle like a big data center disks fail one percent a year you replace them when they die they're all raid it doesn't matter right so it's kind of that phenomena

So we try to figure out, well, how can we help people do this without creating that pain point? And so we designed this mining note concept where it's kind of socialized so that collectively, they look like one of the enterprise customers. And then we put a 10% buffer in it so that we would eat the first 10% of equipment failure so they wouldn't get the drooping hash rate as miners failed due to age for the onset. and we also figured out how to try and make them a unified market.

So, you know, we're selling more tranches into the market. This started in 2021, a three-year product. And, you know, there were some people on the launch tranche and then some people three months later. So what we do is look at how many Bitcoin it had mined in the first three months. We buy that and then match it with a 33-month contract for the next one. And so economically equivalent, neither dilutive or anti-dilutive for the buyer.

And therefore they could trade in a unified market, even though there were eight sales tranches over the first 12 months or something like that. And that market, you know, was using, initially using liquid security tokens

with Stocker, a European company that does the securitization, I mean, the legal part of it, the setup, right? So they're licensed Luxembourg Security Fund managers, and they were the share registration and the enrollment for it. And initially people were OTC trading in a telegram, but they'd get scammed. People would pretend to be somebody, take the Bitcoin, not deliver the contract all the way around.

And until Sideswap appeared, which is a Sideswap, a Swedish company that built a trustless trading platform on Liquid. And it's a great form of innovation because it just appeared out of nowhere. We'd never heard of them, and they have a functioning trustless market. And we said, that's cool. Can you add support for the security tokens? And they quickly did that. And after that, that was the go-to place. Nobody got scammed anymore because it's a kind of trustless trade.

So you've got AtomicSwap, and it's actually a central order book, but it's non-custodial. So what you're doing is you're signing a limit order, uploading that to the server, and then going offline. and if somebody, they match your price, they can take it. And if somebody compromises the server, all they can do is pay the asking price so it doesn't really have that custody risk anymore. And subsequently they added Jade hardware wallet support for the limit order approval.

So you actually have your, you know, if you're trading Bitcoin for stable coin, all the assets on your hardware wallet, set up a limit order, you want to buy Bitcoin if it dips to here, go offline. If you get off a flight or come online again, And, you know, it might be swapped or it might not, but you can be offline when that happens without custodial risk, which is, you know, maybe getting on for the safest way in terms of custody risk factors to trade in a kind of Bitcoin area.

So that was our start. And then later, I was talking with Ted Demister about what became Admin Capital. And so, you know, when he decided to bow out of that, I was like, well, that was a cool

thing you had going and maybe Blockstream could be a new home for it. So we kind of took it on. Didn't really get to starting it, but we were seeing some sort of market gaps, which every Bitcoin is aware of. Shortage of dollars, dollar interest rates are super high, funding rates are very high for margin trading. And yet, on the other hand, there are massive pools of fixed income taking what have been really low interest rates for a while.

so we figured that's so our approach is just to try and fix any problems that come up that's why we're like doing all the things right and so we recruited Sean Bill because who better to get out of that institutional money than the guy that was you know a hedge fund manager but then for a while inside the pension fund trying to find you know trying to get it passed and trying to find asset managers that were passing due diligence so he's been both sides of the fence

and he knows a lot of these guys and you know quite well known for having the first uh you know being the cio of the first pension fund to put

that could on a balance sheet in 2021 so here we are which we're that's what we're in texas for to go to a few different conferences uh you know meeting with and talking and socializing with that that crowd yeah and sean you were explaining it last night the uh the effort to get bitcoin on the balance sheet of the pension and the story is pretty funny there's some collateral damage but uh yeah yeah so i mean you know for viewers that maybe aren't super familiar with pensions you know

generally speaking these are uh for the most part either corporations or public entities and so i was working with public entities and so that means it's taxpayer dollars right and so the folks uh that are uh running that money are tend to be very conservative because it is taxpayer money and uh so um you know when i was looking at bitcoin i thought geez you know this is a really interesting asset the correlation at that time was extremely low uh this was before you know paypal or cash app

or you know allowing people to get in and out easily and we got a little bit more of a kind of risk on risk off correlation that happened there for a while um but before that it was like you know pretty much zero to 0.15 um so and then of course it had a lot of volatility so i was like looking at it i'm like i inserted it in my mean variance optimizers to look at my portfolio i'm like gosh everywhere you put it in it helps it makes a better risk adjusted return and um

so when i was playing around with it i thought okay you know what would be like a reasonable uh kind of first you know approach to this to try to socialize this idea uh with the pension boards and you got to remember pension boards have half the board is usually labor unions and half is the sponsoring entity that's the taxpayer entity and um and so you have generally speaking a very much older crowd on the pension boards so they're not going to be familiar with bitcoin at all

right and um so i went in i was like i kind of did some test messaging kind of tried different

things out like you know okay you know this is digital my whole boston you know let's pull that back uh let's try uh you know digital gold oh got a couple gold bugs on the board that are really interesting gold and like they're actually listening and paying a little bit of attention and so kind of started with that as kind of the idea like okay you know obviously digital gold would vastly understate the potential of bitcoin but you know to start and just kind of

get the conversation going it was something that they could latch on to and understand so that's kind of where we started we started with that conversation and we did that for like about a year and a half and we brought in a lot of other outside experts because it's always good for credibility if you have other outside people coming in so we had a lot of folks like dan morehead and mark usko and anthony pompiano and different folks that would come in once a quarter

just to kind of you know give an update on what they're thinking on digital assets and bitcoin and then um uh eventually uh we were able to you know i made my formal request you know to put uh one to three percent in got shut down uh i think i might have brought it back one more time got shut down again and i was like okay you know this is okay uh it took me six runs to get high yield added to the the portfolio right because that's how conservative they are uh but eventually i got

high yield in and i was like uh so then uh skybridge um the fellows over there troy gajewski ray nolte and anthony scaramucci had asked me uh if i would be interested in seeding a bitcoin fund and uh i thought oh that's interesting you know i i knew it would not pass the board um so i said well you know we are your largest lp in the united states and you know our limited partner agreement allows you to put up to 15 into discretionary ideas and bitcoin could be

your discretionary idea and you know if you chose to do that i will write the memos to try to provide coverage for you to think that this is a sound decision and that's how we originally got in we went in through skybridge the assets were custodian at fidelity digital assets and i think the initial allocation between the healthcare trust and the pension was about point uh point 45 45 basis points half a percent and that was i think 17 000 on bitcoin at that time that was 2021 when we actually

got it in we started in 2019 but it took quite a while and then the opportunity came to try to kind of backdoor in and it's uh you get just when you consider the state of a lot of these pensions like

underfunded and totally understand the conservative nature of the boards and the investment committees but when you look out at the landscape of what's happening in markets particularly with debt and with bonds specifically like tlt underperforming massively uh recently how to as a bitcoiner as an investor trying to convince these pensions as well there's something like whenever i'm talking to some of these people it's like do you the lack of urgency around bitcoin

which has been around for 16 years best performing asset over that period like at what point does it become obvious and i think it's definitely um changed a lot i mean like you know so i did a presentation at the state association of california retirement systems in 2022 and just talking about how we did it at santa clara how did we get you know bitcoin into the portfolio and that was you you know, you know, definitely a lot of skepticism at that time. You know, certainly not a lot of

questions from the audience or anything. When we were there last week, they invited us back. They said, Hey, there's a lot of interest in Bitcoin. We'd love to have you come back and talk a little

bit about, you know, an update on that last thing that you did in 2022. And so Adam and I went out there and Adam did a session And you know I think we had probably five or 600 people in that which was pretty much everybody at SACRs that came out for that conference So that trustees that the investment officers the consultants you know we they all there And it was one of the most highly attended sessions

And the second day, because the first day was kind of like just a high level talk about Bitcoin. And then the second day we went into kind of how it fits into a portfolio.

and we got like i think 30 35 questions which i was told was like more than all the other sessions combined which was it was a lot of questions like i mean you know and you know and these are folks that you know they don't want to you know they're they're uh kind of uh a little more conservative about asking questions in public right because they they're supposed to be fiduciaries they have to know what's going on and so we're really excited to see them actually kind of break out

and say, hey, you know, okay, we want to know. Like, what's the answer to this, that, that, and this, you know. And it went on. We had a lot of questions from folks. And they were, like, reasonable questions. Like, they clearly spent some time learning to be able to develop and articulate those questions. So it was interesting to see. But still, you know, the overall flavor is it's still early.

You know, they're grappling with things that, you know, we probably saw in 2013 or 2014 in terms of, like, what will be discussed on a financial news show back then. So they're still feeling their way around in an early stage.

But I think ultimately that just indicates that it still is early, right? Well, on that point, Adam, where we stand today, new all-time high, under 9,000. Has Bitcoin exceeded your expectations of where it would be today? Is it right in line? Is it underperforming where you thought?

Well, I mean, you know, I'm a permable, so I'm always astounded that it's not, you know, 10 or 100 times higher because, you know, like you were just sort of indicating, you know, why don't they see it? It's obvious. You've been in it for so long. What would it take for them to see reality? But, you know, I think if everybody saw it, the addressable mark, I mean, it would already be 100 or 200 trillion asset class rent.

And so the fact that people are still struggling with it and at different stages of their Bitcoin journey is what makes it cheap today. So, I mean, I genuinely think like the 100,000-ish mark is cheap because, you know, we had 69,000 in the previous cycle and then that second all-time high, 74.5. That was a long time ago and there's been a lot of money printing since then. So 100, it's not that high. And there is a lot of things that have changed.

you know, the BlackRock ETF, the Spot ETF, which is a good reference for, you know, people from institutional world that BlackRock is there. And they're even talking about recommended allocations to portfolio managers in the 2% range. That's a lot of cover for those guys to, you know, not get fired for copy, copy in that suggestion, right? And then you've got post-halving BlackRock

ETF absorbed two times the mined Bitcoin per day. MicroStrategy absorbed two times. There are other strategy companies, there are individuals, dollar cost averaging through, you know, River, Swan, Unchained, all these companies. And, you know, we're still only a hundred thousand. I'm like, who's selling? How is this possible? It doesn't quite add up to me. You know, there's

all this, you know, repeat buying and, you know, the price is still only a hundred thousand. So I think, you know, ultimately, of course, going back last year or two, there are a lot of bankruptcies from the excesses of DeFi

and the things that got contagion via Three Arrows, Genesis, and the firms are unfortunately affected by that and FTX and all that stuff. So those bankruptcies sold a lot of Bitcoin into the market. So that definitely contributes to the bear market. But I think pretty sure that's all washed out now. And actually, FTX is paying back different tranches of investors over time. So I think there was another tranche the last day or two.

So that may have contributed to the pop, which is, you know, that bankruptcy presumably sold this Bitcoin around $25,000. Now people get their money back and they're like, well, I can buy it back at four times the price, but I guess I better do it. It'll be five times or more soon, right? So they kind of, they're back in market buying back.

Because the bankruptcy, the FTX bankruptcy is saying they did a good job and they, you know, they got 100% of the money back or maybe a little premium on top, including interest. but not a Bitcoin basically didn't because they sold it, pushed the market down while they're doing it. Right. So it's kind of bad job from Bitcoin perspective. Yeah. I saw earlier this week, they sold, uh, the FTX stake in Anthropic, which was at a pre-seed valuation. Wouldn't be worth multiple billions today.

Got one right on that one. Yeah. Do you feel like this is a different,

a different cycle when you factor in BlackRock, nation states, individual states, the corporate treasury play? Yeah. I mean, there are some people who are drawing a diminishing return inference, but I think that they're reading too much into it. We don't have many samples in terms of the number of halvings for a trend.

And the prior one was influenced by a lot of external factors, COVID, supply chain, quantitative easing, wave of bankruptcies, the contagion.

And so, you know, technology sometimes goes through S-curves where things get steeper and the sheer, you know, volume of systematic buying by new entities that weren't there a few years ago and the regulatory improvement, like all these different regulations have improved and the kind of institutional cover of some of the bigger entities that people would reference. You know, in the IT world, you'd say nobody gets fired for buying IBM.

In the institutional world, you don't get fired for following BlackRock's recommendation, right? So it's a blue chip brand name there. So I think that's a lot of things.

And the Bitcoin treasury company phenomena is picking up pace. You'll see one or two announced every week or two now. So they're all in the game and you see some established public market companies in different countries saying, oh, we're going to buy a billion of Bitcoin and we're going to raise and buy 500.

so you know that that could snowball and there is only so much bitcoin being mined there's only so much bitcoin on exchanges so you know when uh you know we new wave of demand meets uh of mathematical scarcity there's only one possible outcome right yeah yeah and like to add to those factors like i think you look at what's going on this week japanese bond yields blowing out U.S. bond yields blowing out here. 10 bips today on the 30-year. Yeah. That's a big move in bond land.

It's a big move, over 5%. Yeah. 10 years over 4.5, I believe, last I checked. And this is like a trend. I've been saying this on the show for like the last six months. Like when I think of sort of one of the bigger themes for this cycle, obviously nation-state adoption, corporate treasury adoption is top of people's minds right now.

but i think the recognition of the credit system and the incumbent financial world being relatively weak and my hope and i am inclined to believe that more and more people are going to believe this is that they recognize bitcoin is super collateral this idea of bitcoin being introduced into structured credit products to improve a credit return and in doing so actually manufacture the soft landing that jenny yellen and many others were talking about not too long ago it's like

literally recapitalizing the the credit stack with bitcoin as collateral so it sounds like a lot of things sean's been working on in a in prime meridian and blockstream yeah i mean we're

definitely um you know big believers that bitcoin represents you know pristine collateral and so when we're going out um kind of you know actually you know part of the genesis of why do you create data fund right blockstream is really uh you know a technology service provider to the bitcoin ecosystem has built so much of this software that this community uses and we're trying to think well how do you get dollars into this ecosystem right and you know um because there's a you know there's

been this massive creation of value with bitcoin you're over two trillion dollars in market cap and folks have so much bitcoin wealth that they've accumulated but it's not easy really to borrow we have our folks here at unchained that help with that um you know but it's still a very niche market and so when we started thinking about well how would you bring dollars into the market so that people don't have to sell the bitcoin so they could just borrow against it or what have you

and there's also not just individuals but there's corporate treasuries now right you know there's a lot of bitcoin treasuries that were funded when bitcoin was 20 000 or 25 000 or 30 000 now it's 100 000 and these these runways have extended out from you know an 18 month runway to five years so they're in a great position to borrow against their bitcoin not have to sell it and so when we thought about that we're like okay the natural long in bitcoin is going to be the

emirates right the oil countries uh saudi arabia the uae countries or you know the u.s um pensions pensions foundations endowments they're all naturally long dollars and so what would they how would how could we facilitate bringing them into this market well we need to create a fund that is something that's in a form that they're used to that they understand that is you know we go through and check the boxes that we have an institutional quality product for you that you

can count on is not going to be two guys in a basement in hong kong you know fooling around uh you know so we um we kind of approached it from that framework and otherwise you know our activities you know we could just do them out of blockstream treasury you know for bitcoin oriented activities um but for dollars because you know blockstream has probably one of the original bitcoin treasuries going back to 2014 and you know the company keeps its balances we you know

eat our own dog food and are very much a bitcoin first company so only really raising dollars when need it um so so you know that was the problem we were trying to solve for was what's the vehicle that makes it really easy for these folks to come in and provide dollar liquidity to the bitcoin ecosystem which we think will get the flywheel turning faster help people stay long their bitcoin help companies like unchained when you know when bigger you know companies are coming and

try to help them with finding capital and to just try to accelerate and catalyze that yeah because you can see when and see it begin to form like we're we're invested in battery finance

and i think we're i know we're supporting them because i think a product like that needs to exist to create a forward-looking duration curve because i think a lot of people may be spooked particularly at an institutional level about bitcoin's historical volatility but if you look like a product where you're doing sort of dual collateralized commercial real estate and bitcoin with a 10-year duration and if that scales um whether it's commercial real estate

dual collateralized or just like a five-year just pure bitcoin collateralized lending product for

dollars yeah you can begin to create like a forward-looking duration curve where it's like okay i've a pretty good amount of certainty that 95 of the bitcoin locked in these wallets is not going to get margin called or whatever um or they're not going to get off sides on their loan and so you know that's off the market so that's to suppress yeah volatility to a certain extent yeah

and i had the opportunity to meet andrew from battery um in london we were on a panel alan farrington put together a conference and sam cartwright who was a consultant who kind of got the first uk pension into bitcoin and they kept it anonymous they haven't given the name out because you know it is you know these things are very controversial like he's where we were five years ago in the us they just got it into the uk um but i met uh andrew and he was you know tell us a bit

about the product that battery is super interesting so this idea that you know you may have a commercial loan that also has bitcoin as you know part of the collateral stack is basically like from a fixed income background we'd say it's a collateral enhancement or a credit enhancement right you're attaching additional enhancement with bitcoin and then that can really change the whole risk profile of the underwriting of the loan that you're that you're trying to provide so it's super interesting

i think it's just you know i think batteries at the forefront of this i think you know blockstream we're trying to help facilitate those things and um i think we're still very early days but i think you know people are you're seeing glimpses of what can be done there yeah and this makes some

people uncomfortable do you think this conflicts with these cypherpunk ideas ideals that bitcoin has grown up on? Well, I think some of the value proposition is basically the scope of permissionless internet money. And you see that in the emerging markets in the countries with high inflation, a lot of retail payments, a lot of lightning payments. So I think that's kind of a value driver. But ultimately, people are going to want to restructure finance using Bitcoin because it offers a lot.

And, you know, other than these few, I mean, if you look at the Bitcoin market today, it's actually, you know, most of the exchanges are custodial, spot markets, there's perpetual futures, high leverage options, dated futures, that's about it, right? Bitcoin lending, that's interesting.

But it's really only with, it's only recently the interesting structured finance around Bitcoin that's come to market. And I think, you know, Milo and Battery are an example where they can make a Bitcoin mortgage, which is low risk or even non-liquidation basis with a shared risk profile because they're also interested in Bitcoin upside.

So they're willing to do a kind of shared upside formula with a different, you know, you pick your poison rate in terms of your mix of how much deposit, how much collateral, what interest rate, but, you know, there's a shared interest from the structural lender.

It's a very interesting formula. And I think there are lots of other opportunities around that to reimagine the world with Bitcoin and the financial system. So I do like the collaborative custody model.

So it takes out the kind of rehypothecation risk of the centralized lenders, which is kind of how we got into the current mess with the fiat world. It's got a lot of leverage in it, a lot of rehypothecation, and ultimately instability potential, right? So if we can restructure how the world works. Now, different parts of the world are more or less structured, right?

So the emerging markets, don have mortgages they don have kyc uh so like people working for cash week by week and say for them being able to get access to global finance is a big deal About 50 of the world working population is informal They don have a bank account they have a contract to work for cash So just to get access to the global financial market is huge.

So, I mean, I think if you look at, you know, for people around when the internet was first starting, like as a teenager or something, you could see that, you know, originally there wasn't much going on, no applications, no social media, but, you know, scroll forward a few years and there were, you know, oppressive regimes overthrown basically with instant messaging coordination and people were able to publish freely in competition with the

official line. And, you know, even Western countries grappling with a concept that people compete with mainstream media. And, you know, so the internet had a huge impact. So I think we're still, you know, and if just the internet and the ability to communicate and publish does that, what do you think like bearer hard money is going to do for the world? It's early days and it's going to change a lot of things. I mean, people like fix the money, fix the world, which is your

sign up there. And I think that's the case. And I think it just, it takes time. But part of that is, you know, re-imagining and restructuring finance and lots of aspects of human organization around this new hard asset class.

And I think a lot of what makes it work is that wholesome incentives matter and they seem to scale really well, better than you would expect so far, right? That it's influencing all kinds of people in businesses, in fund management, in banking, in politics, in diplomats. So any of those people can invest in Bitcoin and it changes their mindset. So I think hard money actually matters. and even a few countries at this point, right? Bhutan, El Salvador, Abu Dhabi, buying their sovereign reserves.

So I'm interested to see, you know, the full implications. Yeah. You call it wholesome incentives, otherwise known as weaponized greed by some other people. Well, there's Gordon Gekko, right? Greed is good. Greed for Bitcoin is good, yeah. Number. That's the essence.

And in terms of like, because this institutional adoption, particularly like pensions, Cause I think especially as it stands, say in America, there's ton of CalPERS, Illinois state pension, a bunch of others, woefully underfunded. You're looking at how much debt the government's printing. And you look at the amount of people, I think CalPERS alone serves 2 million pensioners. Yeah. And it's a big problem.

People believe that they're going to get something at the point in time where they go to retire. and anybody who's objective uh and just looking at the numbers of a lot of these funds it's like

it's not looking good it's a little tricky i mean so you know i'm pretty familiar with california because i was a trustee for the city of san jose's pension board and i was uh sat on the hedge fund selection committee for san francisco employees retirement system and was the cio of santa clara vta's pension and so kind of got a chance to get up close and i you know got you know chance to talk to the folks that run CalPERS and CalSTRS and what have you. And actually some of them are Bitcoiners.

Some of those folks are in those chat channels talking about Bitcoin. So they, they are aware, you know, now when you go to the unfunded liability question, it's very interesting because in the California constitution, you cannot break a contract on a pension. So, you know, California taxpayer is on the hook. Either way, if they fall short 200 billion or whatever the number is, you know, the California taxpayers taxes are going to go up to make up that shortfall.

They won't break the contract with the employee. So, you know, that I think really heightens the awareness of the folks that are trying to run those pensions. Like, OK, you know, we've got to try to figure out how to gradually dig our way out of these unfunded liabilities.

and uh uh you know my proposition in 2019 was that you know if you got you have a relatively unusual and unique opportunity here for an asymmetric risk reward uh you know if we can put one to three percent into bitcoin and it's at seven thousand dollars and it goes to a hundred thousand dollars you know we could uh at two percent we wipe out the unfunded liability and we talked about that in our meetings and we said okay if we're wrong maybe we lose 50 percent So that 2% goes down to 1%.

And we can make that back in six weeks on the rest of our portfolio. So I think, you know, I do still think that Bitcoin has a tremendous more, way more upside.

So I don't think it's too late. We put a chart up today in our conversations with the Texas pensions that showed Bitcoin, you know,

as a percentage of the total market capitalization of financial assets. And it's $2 trillion versus $900 trillion. it's just this tiny little orange dot right and so like you know you're not too late to get into this and actually starting with a position just getting off zero as pomp likes to say just get off zero right and just dip a toe in and get yourself involved and you know i think anyone that's you know in the pension space can definitely you know probably very very quickly understand the

idea of comparing Bitcoin to digital gold. And if we just kind of start with that, that's a 10X from here, if we just get parity with gold, right? So that could still make a big impact in their portfolios. And so that survey we did, that tour put on Twitter, you know, about half the audience owns Bitcoin personally, but only about 3% of the audience, the institutions that they represent

own Bitcoin. And that's including fund to funds, you know, multi-strap funds, pension funds, college endowment funds that are there uh it's it's still very very early from institutional and then the one other point i'd make on that is that my perspective when i was um cio was that this is a great way for the kind of joe blow every man and woman uh to get exposure to bitcoin because like i represented you know as a cio i had bus drivers you know train operators uh folks

that you know maybe we're making 40 50 000 a year um we had the firemen and the policemen you know and uh generally speaking those guys you know they're pretty stressed out and when they get home they're not like doing research on bitcoin um so like the way for them to get access is actually through their pension to have participation and so i thought it was a super cool way to kind of really get bitcoin into the masses and to really so there's this controversy like oh you know

institutions coming into bitcoin that's we don't want that we want it to be for people

well the the institutions really are just representing those folks it's their retirement accounts and stuff and so you're just buttressing their retirement you're chipping away at those unfunded liabilities you're strengthening their pension plans and you're actually helping them achieve their goals and you're helping the investment teams achieve their goals and you're helping the trustees you know which are the ultimate ones that are most accountable for those pension plans, you know,

take action to help kind of reduce those unfunded liabilities. So I think there's a really strong pathway for Bitcoin and pensions. Yeah. I mean, how incredible would that story be that Bitcoin saves the pensions?

And I believe you're touching on this last night, but I think as Bitcoiners that are in it, I think we have to be, have a heightened sense of awareness of the sort of public perception of Bitcoin if it does go up significantly and other people get left behind whether or not we believe that we just did the research,

understood the system, and allocated our money accordingly based off of good information and others didn't, and therefore we should benefit from that. That will not be widely recognized. So, again, that's why I'm very passionate about this intersection of Bitcoin and pensions, Bitcoin and credit, because, again, I think it's a way to get people passive exposure that they may not even be aware of that can help.

yeah i mean i'm always enthusiastic to see bitcoiners trying to do something to help other people right and so surprising how many people that were involved early in bitcoin decide to do something right you know it's like dustin trammell it was one of the first people mining bitcoin in 2009 got bored after his laptop was heating up for a few months i went off and did something else before I had a price. Came back years later and decided he had quite a lot of money.

Started a VC fund to fund Bitcoin startups. Your managerial partner at 1031, doing similar kinds of things, right? Putting Bitcoin capital to work, trying to build the ecosystem. So it's not just the asset, but you need technology, you need business development, you need business models to solve some of these financial problems. So you mentioned battery. So 1031 is helping with that.

For mortgage use cases for Bitcoin, structured finance. There's lots of opportunities like that. So it's really good to see people looking at the bigger picture of how the world evolves with Bitcoin as part of it to help everybody, basically. Yeah, and sometimes I feel like I have to pinch myself because it seems like it's all come together and we're definitely in our bubble and we're living it every day.

But whether it's on the capital market side or the tech side, we were talking about hash pools before we hit record like the emergence of all these second layer solutions whether it's lightning liquid arc now these chami and mints that you can squint and you can see the cypherpunk banking stack of the future being built out right in front of us and it's almost like we just need to get through this transitionary period of recapitalizing the world

with better collateral and then just sort of transition to a better banking stack built on these bitcoin primitives yeah i mean just the removal of reduction and the influence of money

printing allowing more people and more parts of society to opt out of the hidden tax of inflation and historically in developed world we haven't really felt it that much because it's you know they call it two or three percent it's probably three four or five percent you don't feel it but i think since kovid it's hard to avoid feeling it because it's 25 money supply inflation and

And it just feeds into everything and you can't avoid seeing it. And probably the asset price inflation for real estate and things like that is even worse. And it's going to stay elevated probably for a decade with financial repression. It's not easy to see how the major governments that have this really high debt burden can get their way out of it. I mean, they basically have to inflate their way out of it, plus or minus, because they can't afford to refinance it.

Scott Percent explicitly admitted that earlier this week.

yeah and if you think about that you know uh you peel back that onion so who benefits from financial repression right and inflating your way out of assets and well be guys like us sitting around the room that own a home that have a 401k that are benefiting from you know the uh where does the money go when they print it it goes into the financial markets and the real estate markets and stuff like that so this uh gap between the haves and have nots gets wider and wider as a result of

to these central bank policies of zero and, you know, ZERP and QE for that went on for so long.

And, you know, again, Bitcoin is this kind of really unique opportunity for, you know, the people in El Salvador or the people in Honduras or whatever that don't have access to owning real estate or financial assets, but they can still buy Bitcoin and they can offset that M2 money growth or at least protect themselves against that growth. So I think it's just a very powerful tool for folks in terms of the global democratization of access to finance.

And just actually the basics of being able to actually save money on your phone and be able to have an account, have a Bitcoin account, and actually be able to put your savings into that rather than, say, the Mexican peso or whatever else they're using down there.

uh which you know a dollar is depreciated 25 i don't know what's going on with the emerging markets i haven't actually spent a lot of time on that it might be worse i don't know might have to ask tether yeah yeah this is actually happening down there yeah and so you

know so that brings up a great point so you know i mean kind of a tangent but you know stable coins and tether and this this whole thing about stable coins i mean it's i think it's uh if you can combine Bitcoin as your savings tool with Tether for your daily, you know, expenditures or what have you. Perfect. Right. I mean, spend the fiat, get rid of the fiat, you know, and when you have extra fiat, convert it into Bitcoin and let that grow. And, and then you, you know, you have a real

good formula for these folks that are in emerging markets. And it's also easier for them to ship

money back home. Like if you look at like, you know, you know, folks that are shipping money from the u.s back down to honduras it can be between six to thirteen percent fees for those uh those those transfers right um so you know if you can do it with a lightning or bitcoin or tether or whatever and cut that fee down that's real money on 200 bucks you know you could be sending you know 20 bucks so that might be going to western union yeah and even a layer before that you

mentioned alan farrington earlier i know we've talked about this but like jesus de soto wrote about like what is the problem the number one problem with emerging markets it's not like it is the money and sometimes the political environment most importantly like the inability to have and preserve property rights which bitcoin sort of gives you out of the box with private public key cryptography and i think that is often lost and underappreciated by bitcoiners particularly

with a lens on the emerging world which is we just unleash a technology that gives them any property rights that they can then build better economies and systems around yeah

core fundamental building block that uh maybe previously wasn't accessible that now is and or since you know 2009 um and uh yeah you can't underestimate the impact of that right like uh you know for a somebody that owns a bodega and you know maybe uh i was holding their their excess savings in the local currency and watching that you know depreciate uh they can now just convert that into bitcoin and then maybe it actually appreciate for them yeah you know

yeah i mean interesting question you you hear from time to time is um you know once bitcoin is is fully adopted and presumably the adoption curve slows down.

Everybody that wants an allocation has an allocation. And, you know, then the question people ask is, well, should you reallocate? And I like no like this this is a perfect savings vehicle right If you earn like a fraction of a basis point of the supply of Bitcoin you have command of that fraction of that addressable market of like savings assuming that Bitcoin is at that point demonetized a lot of monetary premiums in real estate and other assets.

And so you have dependable money where you can park savings and preserve its spending power, where today you have to work and you have to be a really successful hedge fund manager to outpace the inflation effect, right? And most people are not going to do that. And there's a lot of luck in there for them. So it's risky for them, right? So they're sort of chasing high risk things to try and get a return. That's where you get a lot of excessive gambling kinds of things going on

when the interest rate's really low and the inflation's high. So I think that means that ultimately you've got a new environment where you have a hurdle rate, which is just put your savings and that, and you don't have to worry about it. Whereas today, it's very risky out there to even hold on to your money.

So when I was managing my personal savings and investments in the early 90s, I was very aware that in the UK at the time, that's when I was living in the UK, they have two indexes, the consumer price index, which they would claim was like 2% or 3%, and the retail price index is like 5% or 6%. But everybody knew that that was manipulated, and the real number was much worse.

And so if you're not outperforming that, you've got this seconded feeling that your savings are actually going backwards, and you're trying to fight to hold onto your savings, right? So Bitcoin actually provides a solution to that in the long term, right? I mean, in the short term, you get the adoption curve. so that that increases the pie but even once it's fully adopted i think the prospect of a hard money and of course gold has some of that right so famously you know things that you could buy

a thousand years ago for gold are like approximately in the same region which is amazing kind of data point right roman times you get a good tunic today you can get a good suit yeah that kind of thing right well how did that work but yeah maybe it's sort of there's some kind fundamental right there's a certain amount of usage and scarcity so yeah so the prospect of that being able to depend on that is super valuable i think it should it should really be considered a

human right to preserve the value of your savings right i mean you you work for it and then somebody's sort of stealing it from you by systematic hidden taxes it's quite pernicious it really is until think in you've been in a you've been in the game uh for quite a while uh cryptography open distributed systems and last night you were mentioning uh digicash and and why that failed

uh do you think we can really get the cypherpunk banking stack like what's been fascinating to me over the last two years it's really uh watch the emergence of the interoperability of bitcoin lightning e-cash mints arc liquid begin to form and and again you can squint and i i've been fascinated with e-cash mints particularly fatty mint and cashew um it's been really cool to see how quickly cashew as a protocol has developed over the last couple of years like comparing

what you observed in the 90s and how um digicash failed versus what we're seeing today Well, it's a kind of free banking type of concepts. And how Finney was, I mean, he was very early in making some grand pronouncements or like speculation about Bitcoin. December 30th, 2010, I believe.

Yeah. So I think already in like 2009, he talked about the addressable market. Like a day after the network launch, he's like, oh, maybe the addressable market is 200 trillion. Like, wow. Like ahead of the curve, right? And I mean, today we're still at a lofty goal, but it's much more plausible now, right? It's one more 100X and we'll get there. Yeah, yeah. Yeah, I mean, 10X for gold, another 10X for the addressable market. Yeah. Let's give it a few years. We'll get there.

And the price is set at the margin, and there's a lot of kind of things in flight that haven't had their effect yet, right? So I think it's like a super interesting moment here. But yeah, I think one of the other things Hal Finney was talking about was a prospect. I think this was on Bitcoin Talk, of a kind of free banking area where you'd have competing chomel and mints that would be denominated in Bitcoin, but with some different trade-offs.

And effectively, Fetty Mint and cashew look like they're that thing, right? And the other kind of organic thing that's transpired is that lightning seems to have emerged as the glue between the different layers. Because it's something that you can connect to everything. So you can kind of pull some money out of cashier or fed him in, put it into a lightning wallet, convert it into liquid, convert it into Bitcoin. So you've got this kind of atomic swap between lightning and everything.

So it's become the kind of internet of money connection for the different layer twos, which is called C-Evolve. Yeah. I'm talking about like wholesome incentives. the cash you protocol implemented multi-path payments for lightning. And I thought that was really cool.

They're calling the multi-nut payments, but that's one of the problems that exists with cash you specifically being a single mint operator, as opposed to Fetty man with the Federation. Is that how you know that the mint operator is, is not acting maliciously. In fact, as you can never know, but can you create incentives to make sure that they're acting in the favor of the people using the Mint. I mean, the Fetty Mint argument is that now you need a collusion for that.

So you only have to trust the set now. So it's got sort of similar model to Liquid actually. And the Fetty Mint, like the original protocol was something that worked on in a Blockstream research group. And then the tech guy that went over to the startup was like a former Blockstream guy. So it's like pretty cool to see people, you know, building wallets and applications and using things. And actually with Liquid, it's a slightly different trade-off,

which is you have generally a set of exchanges and people anyway operating businesses as part of Federation. It's a kind of public list of people that are members of Liquid Federation or operating nodes.

Whereas Fetiment hit on this community concept, which we didn't see coming. It was a pretty popular concept. and it feels more kind of hands-on, like you too can participate and start one, right? It's kind of a more community vibe. That's pretty cool. Yeah. Do you think we're going to get a free banking system on Bitcoin?

I mean, it's, I think we've got the makings of it and it is, you know, even where there are custodians, I think the fact that Bitcoin is assayable and people expect to be able to withdraw and deposit and have it audited or be able to verify, show me the coins, show me the proof of reserves. It's promising.

So it would be a bad outcome if rehypothecation creeps in. But so far, I don't think there's a lot of, and you get some kind of implicit rehypothecation from derivatives.

you know you people who think they own a bitcoin who actually own a perpetual future or something but actually i think economically even there there isn't really much um sort of side contract paper bitcoin because it's almost nobody that wants to be short bitcoin for any period of time so for everybody with a you know for 99 or whatever the percentage is of people that have a perpetual future or dated future there's some basis trader who's bought a physical he's

collecting a dollar yield, who's bought a physical Bitcoin so that he can dare to short it to provide the leverage for the other guy to go long. So it's sort of, in fact, the sort of hard money and the volatility is driving almost no fractional behavior, even like at the edges, right? Yeah.

That's fascinating. And going back to like multi-institutional, multi-sig and institutions, like when I look at Bitcoin from a protocol and layered perspective, like the rails, which institutions are using to facilitate their business,

like they need to be upgraded. Right. And like, so, it's probably not the pitch to make the institutions right now, but I think over time, like going to institutions, be like, Hey, this is when you're actually like custodying assets on behalf of customers, you should do it this way it's cryptographically verifiable and much more efficient yeah so like moving on yeah i mean it's we're hoping that you know liquid can use the bitcoin technology base

to deliver that and say there are a few interesting is a bit over three billion of assets on liquids including the mining notes we were talking about but also about 1.8 billion of promissory notes in Mexico, which are small business loans. It's financed by a couple of big US banks. And those are, it's basically solving a problem, which is previously those notes were handled with paper

an error-prone way in Mexico. And so it's kind of a DocuSign workflow thing where you get a resellable certificate representing the note. And they're customised, right, so they're not fungible, interchangeable.

But the people that place the loans can resell them. So it's solving a problem, and it's generally bringing on about 100 million a month of new loan flow into Mexico. So it seems to have hit a sweet spot for demand from the Mexican small business and individual loan and for the US banks that are financing it as a kind of nice risk reward trade-off.

And some securities like MicroStrategy shares and some other shares. So it's very interesting to see it play out because it feels very Bitcoin-like. And of course, it's a security, so the share registration agent in the case, I mean, not for the promissory notes because that's the institutions holding those. but for the shares there is a share registration agent which is Stocker the Luxembourg company and there is a custodian

Britannia Securities that has the underlying shares but you know once you enroll you can transfer you can pay somebody with you know a hundredth of a microstrategy share which is about four dollars or something right so you can split a lunch bill and it's like oh yeah have a few fractions right and you can do your ticket to the sailor train yeah Yeah. You could do a cash OTC, you know, his, his, his 10 bucks. Give me a couple of those.

And then you can do this kind of trustless limit order thing. And actually the price, so it's mostly using Sideswap, but there are other platforms that can do similar things. And that has, so it's a Bitcoin pair, right?

So people are trading micro strategy as a kind of relative value trade where they will buy it with Bitcoin and sell it back to Bitcoin. when it swings higher. So it's convenient pricing to actually trade it in Bitcoin, but they also have a facility to do stable coin pairs in the same model. And I guess the unique selling point for it is a 24 by 7 market.

So it doesn't close at an inconvenient time, particularly with, depending on where you are in the world, some of these things are really awkward to trade. Like from Europe, the Metaplanet one, like the market opens at 2 a.m., what are you going to do, right? So with the 24 by 7 trading, it makes the market. And actually, even though it's a fairly new market, there's a micro strategy ADR, like a foreign listing in a Frankfurt exchange, 8 a.m. to 8 p.m. Central European.

And the side swap market in CMSTR, which is like a security note, it's almost matched the Frankfurt weekday volume on a weekend when the Bitcoiners got busy and they saw an opportunity. So very interesting to see that market evolve and move. Because Bitcoin is 24 by 7 global, right? So to kind of drag the shares that Bitcoiners care about into the, you know, bearer e-cash feel trade settlement in the world. I think it's a good example, like the Mexican small business loans.

you know, uh, there's that saying in Silicon Valley that to get somebody to use your product, it's gotta be 10 times better, right. To get somebody to switch in Mexico is just a great example, right? Because in the U S we have some basic rails that work and function. So, you know, 10 X in that is, is not easy. Uh, Mexico, uh, you know, we still have a very large unbanked

population. You still have, you know, relatively disorganized capital markets. You still have this paper process of you know trying to get transactions settled and so for those folks you know it's a great use case where you can increase the efficiency the settlement time security of

the transaction the monitoring the oversight the reporting all these things come together when you go on to liquid for these emerging market countries so i think we'll probably see a lot of folks in these emerging markets be the first movers and adopters over, say, the Western developed markets as the solutions there do improve their outcomes 10x. Yeah, and I think this is a testament to two things.

Number one, timing's important. I feel like liquid's gotten ragged on a lot in the past, but I feel like right now the timing, liquid makes a lot more sense to people. and then on top of that it's just like the the sort of macroeconomic factors and the technology are like right at the point where it's like okay this makes sense to to adopt well i mean i think you know having talked to a lot of bitcoiners many of them are not interested in capital markets and

shares and trading and investment right they're like everything else is a shit coin apart from Bitcoin, right? Fiat, shares, IPOs, stocks, bonds, it's all a shitcoin. They just want to hold the Bitcoin, right? So, you know, they're not the audience actually for that kind of thing, right? And so, I mean, there is a segment of the Bitcoin world, which is speculative. I mean, it makes volatility worse, actually, the excessive leverage at times, but ultimately they are

delivering liquidity, at least. So if you need to, you know, close a position or do something, you can do that efficiently and I

think the other kind of The unforeseen use case that Liquid emerged into is this nodeless lightning model, which the Aqua Wallet, that's what I stumbled across. The genesis of that one was Boltz Exchange had a cool submarine swap, like a trustless swap, to add and remove balance from a lightning channel with a UTXL on-chain. And then the first wave of JPEGs, NFTs, caused a sustained high period of fees, and they

basically had to pause service because it is disruptive to their business. And during those couple of weeks, they were trying to find a solution. So they rapidly hacked up Liquid Bitcoin Atomic Swap into on-chain Lightning. Liquid wasn't impacted by this. And so for the people that were using that service to rebalance Lightning channels for businesses or power users, like, oh, actually, Liquid is better. It's faster, it's cheaper, it's a little bit more privacy.

so after the jpeg wave wore off and the fees came way down it was sticky they kept using liquid for the rebalancing and um because there's only part of the solution ranks you still got to establish the channel in the first place which will be difficult with those fees but then what what happened after that is samson moe with the aqua wallet uh he was jan 3 now right he had the idea to implement a lightning wallet that actually isn't a lightning wallet it's a liquid wallet

and every time you know if you want to send lightning called a bolts exchange api it gives you a liquid address and you paste in the address of the person that wants to receive and on the other way around you you know you give out a lightning address which is actually a bolts exchange server and you receive a liquid bitcoin so the balance is kept in liquid bitcoin and

and it turns out it has some interesting trade-offs, which is as a natural side effect, you can receive lightning payments when you're offline because the Bolts Exchange server is online. You get a kind of slight advantage that all that Satoshi has of it because it's custodial that they can manage channels effectively, right?

So what the liquidity in Bolts Exchange is, the Bolts Exchange guys own Bitcoin liquidity and yet, so you get the advantage of that centrally managed liquidity with Adams TrustX, it's a atomic swap. So you're sort of trading the lightning hot wallet risk for the liquid federated risk, but it's giving you something back. And for a wallet integration,

it actually turns out to be an even simpler way to integrate. So just call in APIs, and you've got a little bit of key management. It turns out to be an even simpler lightning integration. And so a few other companies followed that, Bull Bitcoin, Peach Bitcoin, Wallet, and now Breeze has a second, so they provide SDKs for many different wallets and they added, they've got their existing model with Greenlight, but they added what they call nodeless lightning.

So they coined that phrase, but it's that model which is now proven popular. One of the things that it simplifies is the need for LSPs. So you don't need inbound liquidity to start because you can just use Boltz exchanges. so you can kind of immediate you've got immediate instant gratification fast start no kind of who pays for the LSP

liquidity yeah so go yeah some downsides so I mean you've got that different trade off and the minimum fee is a bit higher because you're basically paying for a liquid fee and so you know the NOSDA tipping somebody wants that that's not going to work so well because you know the fee is going to exceed the tip right but you know you can use a different type of wallet for that use case, but for the general, you know, 50 cents plus it works, works great. Yeah. Again, it's timing.

Like I feel like we just need to touch and smash these things together. Well, I mean, I love that kind of innovation because I, I'm not a believer in like planned innovation. Like people are going to solve problems that arise and react to interesting building blocks around them. And it, and it sort of kind of evolves biologically. So it was one of those. so it's really interesting to see that evolve yeah shifting gears here but because i have to

bring it up because i'm fascinated by c but you started your career on cbot sean yep yeah um yeah so i i started investing when i was about 12 years old um started buying stocks and then by the time i was in college i was trading commodities i'd stumbled into the commodity world my senior year of high school and uh that's a kind of another side note because uh i was really into

junk bonds in high school. And so I had sent proposals for takeovers on Harley Davidson to George Roberts at KKR, Colbert Graves Roberts, and some other folks, and was really focused on high yield markets. And then that all just went away with what happened with Michael Milken and Rudy Giuliani. And so then I was visiting my folks in Indiana, because I was a senior,

I was a senior high school, and they had gotten transferred. And so I was finishing my senior year in california and um my mom's like you gotta get a haircut you know like and so i went to the barber shop and these farmers were talking about speck and soybeans and they're like oh you know i

had whatever my five thousand dollar maintenance margin and i just made like you know seventeen thousand dollars yeah i was like i was like oh like this this is interesting i was like i was like excuse me fellas where where did they trade soybeans and uh so they they uh told me about the

the Chicago board of trade. And so I had seen like a little bit on TV with the futures markets, but really, you know, uh, not really thought much about it, but then I was like, okay, this is interesting if they had, so I went, went down to the Chicago board trade, my mom,

uh, and saw the gallery there of the floor. And I was like, I was sold. I was like, oh my gosh, this is like raw, pure capitalism. And I was like, this is it. Like I was already, you know, really interested in economics. And I was like, you know, I'd seen free to choose with Milton Friedman and some of those, those video series. And so when I got out of college, I went to work at the Chicago board of trade. And so it was kind of funny.

I had I started at Prudential Prudential beige because I wanted to get back to California originally from college. And I had a Bloomberg terminal. First time I'd ever seen a Bloomberg is this little beige box with this little little funny little keyboard but now i could see like 68 different commodity markets around the world so i could be charting these things and so i just started trading you know left and right on

the commodities and then i had a couple of uh blow ups uh where i've been short coffee and into a dock worker strike and things like that and got caught in limit up moves and you know and so i said to my dad i said geez you know it's like uh i kind of kind of feel like i need to go to chicago to learn this business and uh he says well he's like okay he's like you know you want to leave that job you know it's a good job yeah i was like yeah i think so and he's like well how much

money do you have i was like oh i got a 500 credit limit because i just got my first credit card out

of college you know i had 500 in the bank i said i might need to borrow a couple thousand bucks from you to kind of get going in chicago i said oh no he's like you'll be fine he's like there's a ymca and Chicago Avenue. He's like, you just go move into the Y. If you really want to do it, that'll be just fine.

So I went to Chicago with a thousand bucks in my pocket and it was paying 168 bucks a week for rent at the YMCA And the YMCA back at 40 Chicago Ave in those days was basically either people with an addiction issue

or middle-aged men going through a divorce. And so, you know, it was a really interesting experience for me. And it really put a lot of fire in the belly. So I went down to the board of trade and just started handing out resumes because back then they didn't, you know, cell phones and things like that were not very common. And, you know, the AOL and CompuServe were kind of the online at the time. And so I just handed them out, just handed out my resumes and I had a switchboard.

And on my resume, it had the YMCA and then the switchboard number because, you know, cell phone was very expensive. And so I came back and they were like, oh, you got 13 calls from, you know, different board of trade folks. And one of them was Refco.

and so refco was very famous I had been an intern at the White House for President Bush 41 I spent nine months in Washington DC kind of in 1992 and so refco was very famous for having managed Hillary Clinton's money and so I knew immediately I heard the name I'm like oh okay these guys I'm like this is interesting and so I I went in there and so I had immediately had a Indiana alumni that brought me in John Newhouse. His son is actually a venture capitalist and pretty

active in digital assets. And Mr. Newhouse offered me a job at the same salary as what I was making

in San Francisco. I think it was 28,000 bucks back then for clerking in the Eurodollar pit. And then I went in to meet with the Refco guys. These guys were old school commodity traders.

uh you know there were two of them uh jim fritz and and john rabb and uh they said well this guy had like the gravelly voice because he's a smoker and they they drank a lot and uh the ceiling was like yellow from all the smoke it was kind of crazy like uh they really smoked a lot in chicago and i've been out of california i'm not used to that and uh i go in there and he's all uh I said, well, he's like, we saw your resume and I saw that you had interned for President Bush 41. Fine, man.

But that you now live at the YMCA. It's like, we thought we have to bring you in just to hear the story.

And so I ended up chatting with those fellas. And I said, well, I have this offer from John Newhouse over at Newhouse Trading. He was a very well-known commodity trader. I was like, do you think you guys could match that? And they're like, nope.

like if you want to work for refco everybody starts at the same spot and has to work their way up it's all merit and i was like oh i was like okay so i had one friend who was in the hedge fund business this guy chris kang who worked for mark strome and mark strome was one of the first hedge funds to create hit a billion dollars under management at that time and so i called chris king collect from the ymca and uh he picks up the phone and he had a very foul mouth he was like yeah just really

They swore every other word. And he's like, what are you calling me collect for? He's like, they just announced this on the speaker over by intercom. He's like, they're going to, they're going to put me in the closet. He's like, what the hell are you doing? It's like, dude, I got a question for you. I got this offer from Refco. It's $5.65 an hour or new house trading, $28,000. He's like, well, he's like, you dumbass.

He's like, hey, but you've wasted my time on this. He's like, you already know the answer. He's like, you should take the Refco job. I was like, oh, shit. I knew it, but I needed to hear from a buddy that was in the game. And so I took that job. And then I think it was like two weeks later or three weeks later, they put me aside. They're like, hey, we just wanted to see how much you want the job. We're going to move you up to 28.

And so that was kind of my introduction to the Board of Trade Culture.

You know, I describe it a lot. It was like being in high school. you know as a lot of friends you know working with each other and trading with each other and very strong camaraderie on the floor and it was a fantastic learning experience because if you think about futures and the built-in leverage you know it's um i would describe it's like driving a formula one car you you have a small twitch of the of the steering wheel and all of a sudden you're into the wall, right?

So you really have to be laser focused. And by being laser focused with that kind of leverage, you learn faster.

And then just by being down on the floor, the exposure to the folks that you're learning from is just incredible, right? So I learned how to chart from Tom Dennis and Ron Vander Hayden, who worked for Richard Dennis, who was like one of the original pioneers of trend following and momentum trading and futures. And so it was just a, it was a fantastic learning experience. And, you know, after about four years, I was like, okay, I think I've learned everything I can learn, you know, in Chicago.

And there was also kind of a kind of an idea circulating within Chicago that it would be going electronic.

And it took much longer than I ever would have thought. But you could kind of see the writing on the wall that it was coming. It was going to all be electronic trading soon. And so I was like, okay, I think, you know, I've learned what I can learn here.

and i went back to california and got in the bond trading side of things no i uh brought that up selfishly because i i'm jealous because i worked at a managed futures fund in west jackson out of college and all a lot of my co-workers were ex-cbot traders and they would just talk nostalgically about the days on the floor wonderful atmosphere and yeah compared to like i lived in new york for many years too and like new york finance compared to like chicago new york's like fast to quick and

a bit aggressive chicago's like salt of the earth yeah i would say one's very transactional and one's more relationship driven you know uh whereas also i would say you know i kind of always viewed i had

offers to go to new york for pretty obscene amounts of money to be honest and uh i'd go visit i was like man this is like a dormitory for worker bees like i don't want to live in new york like uh no offense to the new yorkers but but i'd rather be visiting new york you know um it's uh it's a different culture yeah you know another point to bring up cbot too you mentioned this last night like commodity traders like bitcoin like very natural in those markets and

you brought up like uh doc strike up in the coffee port i was following obscure funguses in brazil on the coffee plant to figure out what was happening in those markets but we uh we own barges the company i worked for refco you know tom ditmer was the founder and um he sold out in 98 i believe but um but you know he was a farm guy from iowa like middle class guy who had made a billion dollars for himself trading commodities and he um uh owned barges that we would run up and down the

different rivers and it was all just like market intelligence like you know if they broke even on the barge they were happy um on the panamexes we had panamex vessels down in new orleans that we

we would uh do for shipping freight or you know grain and so that was really just intelligence gathering so to know when the Chinese were coming in to buy wheat we'd get the calls for booking

freight oh okay let start let start buying calls on out of the money calls on wheat you know and uh back then you know uh Kamai trading doesn uh have the same rules as stock trading so you could you could trade all that stuff and uh you know and back then you know commodities trading doesn have the same rules as stock trading so you could trade all that stuff And you know the biggest traders the most successful traders I met in Chicago

were the spread traders that were doing relative value trades. And those are the most consistently successful traders. So it was super interesting, just kind of observing the different types. So you had your floor trader, your local,

you had your kind of swing traders that were upstairs, you had these spread traders, these kind of you know trend followers and just you know so many different types yeah the uh the turtles the turtles so i have great stories about the turtles i mean uh so tom dennis richard dennis he's the one that created the the turtles richard dennis and so i just i just was new to chicago didn't know anybody at all i was living in the ymca i didn't really want to go back there so i

would hang out on the board of trade floor after it closed and uh you know come down to me and tom And Tom Dennis and Ron Vanderhagen would be doing their charts by hand on the books back then.

They had the little trade books, you know, for, then you'd have to fill in the days, high, low, close, open, all that. And so I just approached these guys. I said, hey guys, I'm like, listen, newbie here. You know, could you tell me how this charting thing works? And like, what should I be doing here? And so every day we just, you know, we charted the markets. And, you know, I kind of learned these things that I was sure the turtles all were getting exposure to.

but you know like you know you start from the right and read to the left and so you want to overweight the current price activity versus the historical price activity uh you know we want to pick our pivot points based on if we had a a let's say a uh reversal off a high rather than picking the absolute high day we want to look for the day where it opened on the high and closed on the low where the sentiment shifted right and make that as our point for connecting the dots and so then i

got to meet tom de marc and we were you know tom de marc's an amazing technician and then steve nissan who's the widely accredited with bringing candlesticks to america and took his classes i worked with sheldon natenberg who wrote the book option pricing and volatility theory you know larry mcmillan came in to teach classes for you know another options guru had a lot of friends you know at o'connor associates and swiss bank corp that were that were trading options.

And so it was just a very great place to learn the markets

and to get a lot of exposure very quickly. And, you know, definitely gave me a massive advantage, I think in the fixed income world when I switched over, because what we started looking at was we would trade, you know, Polish five-year, five-year forwards versus Euro five-year, five-year forwards on a swaps on a spread basis. And, you know, we'd be using our technicals, you know, on custom indexes on Bloomberg. nobody was playing that game.

And so it was like, you know, you just had this huge edge over the, these folks.

And, you know, we're trying to figure out what those things look like in this space, in the Bitcoin space. But I think that, you know, the board of trade, you know, if I could send kids back in time to kind of cut their teeth there, I would do that all day.

Yeah. No, it's, again, it had gone completely digital the time i left college and so like everybody was just talking nostalgic about it but the reason i bring it up too is because like these um these sort of market structures and tools need to be built for bitcoin i think much of the fascination around potential futures contracts has been focused on the mining industry like how do you create a market for hash rate futures block space futures

fee futures whatever it may be and i think that's one nut that has not been so successfully cracked at scale for for bitcoin and if it is cracked could be massive for not only the mining industry but bitcoin in general because you think of whether it's uh a union strike at a coffee plant or a fungus somewhere in brazil bitcoin has different things like a china mining ban a winter storm here in texas or a very hot summer up in north dakota whatever it may be yeah yeah adam and i were

bouncing some ideas you know because back when we were in the commodity markets we had the open interest the commercial open interest that you could track right and you know so in say like corn for example you know there's a natural short to the market um would be the commercial right and so uh you know as they're expecting uh if they if they expect that uh you

know a normal average crop they'll have their short position to hedge out their exposure but let's say they think that all of a sudden the crop is going to be much smaller than expected they will close out those shorts and you could track it on the open interest and so we're trying to think like who's the natural short for bitcoin and like there's really not like uh necessarily other maybe miners could you could say could it be a position where they could be a natural short

where they could short bitcoin today with the expectation they're going to cover that short with future production of Bitcoin from the mining activity. But that's kind of the only one I could think of, because I was trying to figure out who could you track and how could you, because sometimes the commercials are the smartest players in the game and you want to understand what they're doing and how they're moving their position. But yeah, we were kind of noodling on that.

Who would be naturally, well, it's been very challenging to be naturally short the Bitcoin market. Yeah, that's kind of dangerous, right? Yeah, very dangerous, right? You have to, I mean, really the only guys I think that I could think of could be a miner that could actually take that chance. Yeah. And, you know, if they can avoid it, they're going to try to probably avoid it. Right. So it's not necessarily good for tracking purposes. But yeah, there's a lot of interesting elements.

I do think that the reason you see these large proprietary shops out of Chicago that are trading Bitcoin, so like DRW and some of these folks, is that lineage back to the futures markets.

i think that bitcoin you know because you know perps and stuff you have built-in leverage and you know you can trade uh you know trade that stuff pretty aggressively and it does feel and look a lot it trades a lot like what a futures trader would be used to trading yeah you know so it would be a very natural i think evolution for those folks to go into that space i'm a little surprised to be honest that there aren't more of them in there agreed or something but i think

who is the natural short like even if a miner could do it with hash rate growing unless you're reinvesting in your asic fleet and able to keep a commensurate amount of overall hash rate percentage that just gets riskier over time with um with variance risks that gets introduced

and yeah not a good natural short anyway at least they could um you know they can mine bitcoin to to replace it, whether the price goes up or down, they're still accumulating Bitcoin. They might accumulate more or less depending on what the hash rate does if the price is down. But for most people, borrowing Bitcoin is like a super bad idea. Yeah. I know we got to get going here soon. Any predictions, thoughts, expectations for the rest of the year for Bitcoin? I don't know.

It's just kicking off today, right? It's a new all-time high since last was in February. So presumably this is not a one and done, right? So this could be the start. Are you a mega candle? Well I don know about that but I just think that I mean the mega candle theory okay I think you started it So it just that you could see a daily candle that was right And of course, that gets easier to achieve as the price is higher because it's a smaller percentage.

So we've had quite a few days of half of that, like 5,000, excessive 5,000 moves in a day or closes with 5,000 moves. So, you know, maybe we'll get one of those, one of these days. I think they might almost have been like a swing intraday in that region. So we'll see.

But I mean, in terms of, you know, where the market gets in this cycle, I think it's becoming harder to predict because you can see the last cycle was, you got this, you know, a new all-time high at the end, which never happened before, you wouldn't see coming. and I think there are a lot more different participants in the market now who are persistent buyers and apparently the ETF buyers are a bit more sticky.

So Warren Buffett would call good investors that buy more if the price falls and they don't panic sell. They keep it for the long term, kind of value investor outlook. I think ETF buyer is not generally a day trader, right? There's like, put something in a pocket for five years, right? So that's probably good for the market structure. And a lot of the institutional investors have a longer-term outlook, like pension funds, sovereign wealth funds.

They're not generally day trader type of people, right? So that affects the money multiplier for how much capital in needs to move the price a certain amount. And I think the other thing is, you know, they see a lot of news flow that looks very positive and different institutions are talking about announcing that they're going to offer products future tense. But in practice, those institutional or financial institutions offering Bitcoin-related products to their clients are slow movers.

They've got policies and training materials and guidance that they've got to get through before they actually turn it on or turn it on to a different segment of their users. So I think that's still going to land, and it's not here in a big way yet. Sean, anything from you?

well i think um you know you know at this point i mean like the etf buyers are accumulating maybe 500 000 a year versus 165 000 of new minted uh coins so i think that uh you know when i looked at bitcoin years ago i thought boy it's it's it is something that can go very hyperbolic very easily just because there's such a small float and you know there is this tendency for folks that do buy it to sit on it and hold it and take it out of circulation for all intents and purposes

so i think if there's any surprises they'll be to the upside uh on magnitude um you know we were looking at metcalf's law and some of those things for you know the you know for conversations with pensions and that would definitely get you into the 200 000 plus area sooner than later um but i think it's also pretty pretty fair uh you know it's not a stretch to say that bitcoin could reach parity with gold uh you know if it's not this cycle definitely next cycle um and that would

that would imply something closer to a million dollars a coin so i think that i'd be pretty comfortable going on the record that we will finish the year somewhere in the 200 plus area and i think that if there's a a surprise move it's going to be to the upside uh particularly with all these state reserves and strategic reserves and if these people start buying bitcoin and you know we have the corporate treasuries that are hoovering up bitcoin right with the

bitcoin treasury strategies so i just think like you know the risk is uh uh definitely to the upside um i i feel like the 64 000 72 000 area really held well on this last pullback and the pullback was a little more shallow than i think you know people would have anticipated i think you know as the market caps going up uh we had a chart that we were showing the pensions where as market caps going up on bitcoin the volatility is coming down pretty steadily and get that off glass node and

what have you um but uh uh so i i think that you know the there's the risk is definitely skewed to the upside and that's where i'd be cautious like okay like again don't short whatever you do heard it here first million dollar bitcoin but i'm kidding yeah well you were talking about the uh uh bell curve yeah fat tail yeah so that that falls into it you want to explain that yeah well yeah we can we can put that chart out on twitter or something uh so if you look at like a bell curve

distribution of the monthly returns on s p and bitcoin uh what you'll see on that bell curve is that uh the right tail or the right side of the bell curve has got a very fat tail a lot of months with outsized upside performance with bitcoin um so that is uh you know again just kind of illustrates that tendency for bitcoin to surprise to the upside on returns the left side of the tail has got a little bit fatter tail but it's not not nearly as proportional as the right that's

definitely skews positive in terms of return profile yeah that's why many people yourself include it's like time in the market with bitcoin yeah time because the number of days it moves yeah drastically or right right that's that that's an interesting data point right the if you're if you are out of the market for the 12 best performing days in a year bitcoin loses money every year so that's a good reason to hold and not try to time the market because the odds are

against you yeah yeah i think that's really really good point for listeners and you know people that are you know just not market advice in any way but i think in general uh take the warren buffett approach and let your bitcoin compound the other thing we were talking about in between talking to the pension guys is that um a lot of professionally managed funds do rebalancing like every month every quarter and because of what you're trying to do with bitcoin that's not what you want to do

you're trying to get to the asymmetrical return so you need to stay there for five years or something right otherwise you're doing it wrong 20 of your portfolio at one point right i mean if keep rebalancing every time it has a month it's not it's not helping you it's not doing the job yeah and that's i think we really have heard this uh in california and texas when we're visiting with pensions you know there's a very strong uh cultural uh bias towards like okay we

are going to rebalance quarterly at a minimum and we may actually rebalance monthly which of course with bitcoin you you really want to avoid that you know with your investment policy statement you want to make a provision in there that you're going to let the bitcoin run um you know to have its full potential impact to the portfolio uh with everything else you know stocks bonds all that stuff it's good idea to rebalance quarterly but with bitcoin we think that you want to let that

one have a much or if you're going to rebound stretch out as long as you can maybe it's once a year be bold let's be bold yeah yeah the times call for boldness everybody out there listening yeah sean and adam this was an incredible pleasure thank you for joining me thank you for having us thank you for having us on enjoyed it i mean most people listening to this know what block stream is but go check out block stream if you haven't already so thank you guys and uh let's have a

fun night yeah thanks peace and love freaks