My guest today is Andy Edstrom from Los Angeles. Andy spent 17 years in the investment world on Wall Street, working for Goldman Sachs and is now a wealth manager at his familiy’s firm West Cap Group. In the course of his consulting work, more and more people asked him about Bitcoin, that’s why he wrote a book about it called “Why Buy Bitcoin – Investing Today in the Money of Tomorrow“. Andy Edstrom recently took on the role of “Head of Institutional at Swan Bitcoin” and as always this interview is no financial advice, please do your own research.
“The banking industry has paid more penalties to regulators than any other industry and by a wide margin, right? It’s I think the figure in the book I have is something like $300 billion in fines paid within the last, I don’t know, a couple of decades, this is a staggering number.” – Andy Edstrom
- The problem with money
- Central banks manipulating money
- Central banks manipulating money
- Paper claims against Bitcoin
- Price prediction for Bitcoin
- Can Bitcoin fall to Zero
- What nobody is talking about in Bitcoin
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ShownotesRecording Date: July 7, 2020
- Book: Why Buy Bitcoin - Investing Today in the Money of Tomorrow
- Swan Bitcoin - get free bitcoin
- Andy Edstrom on Twitter
- Andy Edstrom Website
Anita Posch [00:04:44] Hello, Andy, welcome to the show.
Andy Edstrom [00:04:46] Hello, Anita, thank you for doing an episode with me. I love your show and I'm really excited to be here talking with you.
Anita Posch [00:04:53] Thanks. Great to hear that you're a listener of my show. Your book, "why Bitcoin" was recommended to me lately by Gigi. I did an interview with him, and I thought, okay, that's now the time to invite you for an interview. You're a wealth manager, as far as I know you worked for Goldman Sachs on Wall Street.
That's why I'm interested in your thoughts about our current monetary system and the connections between government officials and corporate banks and how this system in the U S and I guess it's a worldwide system enriched the financial elite. But before, we go into that, please introduce yourself to our listeners.
What's your story? What's does your professional path look like, and what's your current position or project?
Andy Edstrom [00:05:44] Yeah, sure. Thank you, Anita. I am happy to, do the quick version, as you said, I did start on Wall Street. I, you know, I grew up in Los Angeles. I went to college in Massachusetts. I did work for Goldman Sachs for a couple of years. And I've spent 17 years in the investment world that included at Goldman.
It included working at a private equity fund that spun out of the Carlyle Group, which is a large private equity investment firm. I spent six years working on the investment team at a hedge fund investment firm here in Los Angeles called Tennenbaum capital. And then about eight years ago, I got excited about joining my family's firm, which is called West cap group.
And as you said, we do wealth management for a range of individuals and families. It's mainly high net worth. Although, you know, I have a range of clients some have a lot of assets for, for whom I, I manage those investments. Others are younger and starting out and saving and accumulating over time.
One of the things I'm encouraging them to accumulate by the way it's Bitcoin, but we can get to that. And yeah, I wrote the book, you know, I didn't really focus on Bitcoin. I was one of those three three exposures people. Right. First time was 2013. I read about it in the economist magazine. I didn't understand it at all.
So, so I missed it. 2016 I saw an article about actually Ethereum. I think it was the Dao hard fork. I didn't understand that. And it took me until second quarter of 2017, when a few people were, were, you know, pinging me about it, asking, you know, saying, Hey, maybe you should look at this. And that's when I got into the weeds, I fell down the rabbit hole.
I did the, the frequent journey of wow! This Bitcoin thing is amazing to wow look at all these wizzy new, better, faster, cheaper other altcoins to finally coming back to Bitcoin. And it was the coming back to Bitcoin moment when I realized that I need to get my clients in and I'm gonna have to explain it to them.
And it's not the kind of thing you can explain in a couple of conversations. So I'm going to have to write it down. And so I might as well put it in a book and that thus was born the book. Why buy Bitcoin? I started writing it in January of last year when I think Bitcoin was in the low three thousands.
And I published it in early September. And yes, I have been, ever since then, you know, doing podcasts, trying to get people aware about the book and so that's what brings me to, to today. And then of course, you know, I've, I have gotten exposure, investment exposure for my clients, and I am really trying to be a bit of a bridge between the legacy financial world, the dark side for, you know, the dark side on which I was born and migrated over from.
I'm trying to, trying to help them understand what this Bitcoin thing is. just like people all over the world in every country and, you know, in every class and of every race or, you know, persuasion are all trying to do at the same time. So I'm just trying to do my tiny part too, to help educate. The mission is, is education because I, I prefer that people learn about it.
I prefer that they understand the benefits and understand the risks and you know, make a decision to buy it or acquire it or accumulate it based on their specific needs, but also based on the potential and the risks. And I do look at it with an investment lens of course I'm, you know, I'll be the first to acknowledge that Bitcoin is actually useful for transacting.
in some places I know you've done specifically some work on that, but, but it, mine is my book is, is a bit more of an introduction. It's a sort of soup to nuts discussion of the investment thesis, as well as some things that are required like, you know, what, what is money? What is the current state of the world in terms of debt?
Of course, some, some, interesting anecdotes perhaps about the financial system, which you alluded to earlier and the incestuous relationship between Wall Street and government, but, and then of course the, you know, the upside potential on the risks. So that's the book, that's the story. And me recently, so far, then it was a long winded answer to your question, but I hope I covered it.
Anita Posch [00:10:12] Yeah, you did and I had to smile a little bit because in the introduction of the book, you wrote down a warning to readers that the book might cause some psychological discomfort and people might suffer some anxiety. Why did you do that?
Andy Edstrom [00:10:28] You know? Yeah. That was a bit of a tongue in cheek, move. I do have a sense of humor, so, I think it partly reflects that, but honestly, I think that many, many people in the world who had not yet done the work to deeply understand Bitcoin, are, they're not expecting that their worldview is going to be turned upside down.
And so I think that some people walk into it somewhat naively, and they're not prepared mentally or psychologically for some of their most sacred and closely held assumptions about the world to be rejected. Right. There are some hypotheses about the world that we are all taught and we take for granted.
That may be wrong and rejecting those types policies, via, you know, logic, can be, can be difficult for people to, to stomach. So my hope was that the warning would prime people to be aware that: Oh, you know, this is going to, maybe this is going to question some things that I hold dear and so I better be ready for that.
And I hopefully ought not to take it personally or become, I don't know, triggered emotionally because I do want people to engage with the material and I don't want them to have any illusions about, you know, some of these ideas being, being easy to internalize or to accept.
Anita Posch [00:12:02] You also talk about the creation of money, how the current monetary and financial system is working. And I actually also think that this is the most important thing to explain to people how our current system works and then to show the differences to Bitcoin. Can you please explain what the problem is with the money, how it is created today?
Andy Edstrom [00:12:26] Oh my goodness. Yeah,
Anita Posch [00:12:27] Yeah, I mean, it's a big one.
Andy Edstrom [00:12:30] So I think that I will, yeah, I'll see if I can frame it simply. And the first thing I'll say is actually, it's not so easy to frame simply. In other words, I believe that there are underlying characteristics of any thing that makes it good money or not good money.
So whether we're talking about, you know, seashells or glass beads or copper coins, or, you know, green pieces of paper or Bitcoin or anything else, there are underlying characteristics that makes something, you know, more money or less money or better or worse money. I call them the 14 characteristics of good money.
And I talk about those in the book and, and, you know, I can list them here, but that's, I'll leave that aside. So, so there are inherent characteristics of money, but, that doesn't mean that the best money is currently being used as money. And in fact, today we are using Fiat money and the problem with Fiat money, I would say the biggest problem is that it is not scarce at which is to say that governments can just print more and more of it.
And so it loses its value over time. So that's one major problem with the money today. The second major problem with the money today is because the government controls and manipulates it that means that central banks can not only create more of it, but they can also manipulate the interest rate, or I should say interest rates.
And since interest rates are the time cost of money effectively well, manipulation of interest rates has all these second order effects into the economy. And I believe that the biggest problem or the, yeah, the biggest, second order effect, which is problematic is the, is the creation of debt and the sad fact is that when central bank lowers interest rates, yes, it incentivizes people to, borrow, right?
It gives them an incentive to not hold onto money, not save or accumulate wealth in that way. But instead borrow money. And there are other even worse side effects of that one of the major ones being that, that central bank policy causes asset prices to go up, which, exacerbates inequality. It, it basically is a gift to them.
Those who already own assets, whether those are stocks or real estate or any other risk asset. And so there are all these second and third order problems. That are created or that come along with, this Fiat based money system that we've been living with, at least in the United States for, you know, call it 50 years.
Although, although the transition away from hard money like gold, started even earlier than that. But I guess, I guess that's the, the shorter answer I would give. And of course there are layers behind all those assumptions.
Anita Posch [00:15:28] Yeah. I mean the money creation, through debt, I mean, I read part of the book, Debt by David Graeber too. And he says that the debt was, we needed it to grow the economy and, our life standards and everything. How can this work with money that's not inflationary like Bitcoin.
Andy Edstrom [00:15:52] Yeah, I love Graeber's work. My book cites his book, which I've read, I don't know, two or three times, which is no, which is no small thing. Cause as you know, it's I dunno, 500 pages or something and yeah, I like Graeber's framework and I believe him on the logic that, when society is tiny, when nobody moves anywhere, when we all live in tiny settlements, then it's more efficient to just, owe your neighbor, right?
Why endow something with monetary value, when, when I need to trade, you know, some wheat for a chicken and my neighbor has a chicken, but I don't have the wheat. And the neighbor says, that's fine. Just owe me in a high trust society there where I will not leave and not welch on my debts. And my neighbor can trust me because, there's very little specialization and nobody goes anywhere.
That's a very efficient system at that scale. And of course you can't scale up society based on that because in a large complex economy, where, you know, millions of agents are interacting with each other and I may never do a trade with you in kind, okay. It may never make sense for me to barter, my good or service that I produced for your good service that you produce, even if there is some time lag, you know, even, even if we're not doing the exchange simultaneously, it may never happen.
So, so we have to endow a money with value and that happens naturally. So I believe that scaled up complex economies automatically have money. It just happens naturally. However of course, governments or other agents can, can intervene and, you know, basically cause the adoption of a certain form of money rather than another that's always possible, but I guess that, you know, as it relates to Bitcoin, of course, the unique characteristic of Bitcoin is that it is very difficult to control. It has other unique characteristics. But in many ways, Bitcoin to my mind is the best money. You know, for various reasons along those 14 characteristics, which I can get into, but scarcity is a big one.
Inability to be controlled by powerful agents is another one, it's uncensorability or it's, you know, censorship resistant, it's seizure resistance, you know, it's hard for people to take it from you by force, particularly helpful, perhaps in parts of Africa, as you've done some work on. But, yeah, I don't know if I answered your question, but those are, those are some thoughts.
Anita Posch [00:18:25] Bitcoin is the money for the people. So it's, created like by itself, you know, it's not centrally planned. So actually, because I always think, but if the central banks cannot control how money is flowing in a system, in a state, then basically with Bitcoin, we don't need central banks anymore.
There there is no need for a controlling and, like leveling up or leveling down the supply of money in an economy.
Andy Edstrom [00:18:57] Absolutely. I agree with you, you a hundred percent Anita, and I would even take it farther, which is to say, not only is there no need for it, but the, the alleged need, you know, the reason for existence of central banks that was taught to me and probably you and sold to a, to anyone. Yeah. who, who studied this stuff, you know, who studied Keynesian economics, was, I mean, it was a false premise to begin with. I talk about this in the book, which is of course, Keynesian economics, this notion that you can manipulate the money supply and manipulate interest rates is a great idea, in practice or it's a great idea in theory, sort of like a communism is a great idea in theory, by the way, I am not a communist, I'm quite opposed to that system, but the point is that the assumptions that underline the theory are erroneous, and the main assumption, I would say that underlines the theory of central banking and controlling the money supply and controlling interest rates is that you can't stimulate in a downturn, which reduces the harm or reduces the suffering of people, as they're losing jobs or they're losing wealth right in a recession. And then the second piece is you do the reverse in the boom time you take away the, the Punchbowl as was famously said by a, by a former, fed chairman.
You take away the Punchbowl before the party really gets started. Well, it's that second part that just never happens. it just doesn't happen. And it's, you know, I argue that it's partly because politicians are elected on two, four and six year cycles. And so they pressure central banks to deliver the goods, right?
The most, the clearest and most flagrant example today is president of the United States. Who was continuously tweeting basically directly at the federal reserve chairman saying, you know, stimulate lower interest rates, print money, et cetera, et cetera. It's not always that flagrant or at least it hasn't been historically, but suffice to say that government, whether it's, you know, whether it's Congress or the executive, you know, parliament in the case of European countries, can't seem to, to take away the Punchbowl when they should.
And likewise central bankers don't seem to be able to do that either. And the result is there's too much stimulus accumulated over time. Interest rates go lower and lower and lower, which of course they have for the last 50 years, you know, in this, in this country, in the U S they've gone from double digits percentages annually down to almost zero, of course, other parts of the world, like Austria, Austria has extremely low interest rates, perhaps negative at the moment.
I know that Austria has been able to borrow on a hundred year basis, the hundred year bonds for extremely low interest rates. So you get this outcome, which results in huge amounts of debts accumulated over time. And there's all kinds of problems with that. To my mind, one of the biggest is it's simply unjust.
It's effectively a theft. It's a giant theft from, you know, by current generations who are living beyond their means in aggregate. Right. I'm generalizing. Every person's case is different, but in aggregate, they're borrowing to spend today. And the accumulation of that debt over time means that you end up kicking the can down the road and saddling future generations with that excess debt.
And this is a significant problem. It's unethical and it, I worry about how this problem will be resolved in the future.
Anita Posch [00:22:47] You also speak about the fractional reserve banking system and you say in any other business promising full availability of deposits on demand without actually holding the full inventory of such deposits would be considered fraud. Yeah. and then, yeah, I think central banks have been invented because of those financial crisis they already had in early, in like in the 15 hundreds, 16 hundreds, you know? So, now we have the central banks as lender of last resort, which only, like, gives a more of a like safe haven for the debtors like the big companies that get the bailouts or?
Andy Edstrom [00:23:31] Yeah, that's precisely. Right. And this gets into the topic that you mentioned earlier, which is this incestuous relationship between the banking system and the government. And, you know, my view is that every government is at risk of being captured by, or let's say every regulator is at risk of being captured by, the party or the industry that it is trying to regulate.
And there are ways to attempt to limit this and they work to varying degrees, but it's difficult, right? I mean, any parliamentary system, any system with the legislature you know where there were, let's say Congress, people, you know, running for office and they take donations and there are corporate donations, you know, there's always corporate interests in government.
Of course whenever there are elections involved, maybe even more so when there aren't elections involved, that's a whole other topic, but regardless it's in some sense, unavoidable. But my just empirical observation is that the banking industry has captured governments in a clear and egregious way.
And it's, you know, there's all, there's almost too many cases and details to talk about, but perhaps the single most flagrant and obvious case of this is that the banking industry has paid more penalties to regulators than any other industry and by a wide margin, right? It's I think the figure in the book I have is something like $300 billion in fines paid within the last, I don't know, a couple of decades, this is a staggering number.
It's also interesting that many of these fines were paid without the admission of guilt. This is another issue with the prosecutorial system, at least here in the United States, which is prosecutors hate losing cases. They hate going to trial because they want their win rates to be a hundred percent or 99%.
They don't want to take the risk of prosecuting a case, taking it to the end and then losing. And so we get this, we get this outcome, which is that you get settlements, right? You get banks paying money, huge amounts of money. And you can sort of infer it infer in part by the size of the fines, hundreds of billions of dollars in aggregate.
You can infer, you know, what kind of malfeasance was going on, but they often don't admit guilt because the prosecutors are unwilling I don't know, unwilling or unable to take the risk of taking a case all the way to its logical conclusion, but risking, risking loss. And so, so that's one of the outcomes you get.
Of course, the revolving door is a perennial problem, and this is the issue of, executives, you know, working in the banking system, then leaving, going into government, and vice versa. There have been numerous cases including my old you know, the firm I worked at early in my career, Goldman Sachs, yeah, you get a, well, it works both ways.
You get people who come up through governments. And they take care of the banks because they know that when they leave government, when they leave the a regulator, you know, whether it's the SEC or FINRA or the FTSE or anywhere else, they know that there's cushy job waiting for them in the private sector.
And even though the public sector, the government doesn't pay very well. Well, if they, if they rise through the ranks, in government and then hop over to the banks. The banks will pay the millions of dollars a year. So there are numerous occasions where that's happened. And then of course it goes the other way as well the most, well, I don't, I don't know, there've been so many cases, but one of the cases I write about in the book is that of Hank Paulsen, former CEO of Goldman Sachs, who managed to make a career at Goldman Sachs, this was before the global financial crisis of 2008 and 2009. And of course Goldman at the time was actively participating right in bringing that, crisis, basically in causing the crisis and he managed to leave the firm just before the crisis occurred. Right. So he took all his stock. He was, I think, a billionaire at the time, at least, you know, had hundreds of millions in Goldman stock and there's actually a rule I think it's an IRS rule, which allowed him to leave the firm, take his stock and because he took a government job, right, he became treasury secretary he got to sell his stock with all the capital gains and paid no tax, because there's a rule that says, well, you know, we don't want to discriminate essentially against people from industry coming to work for government. And we don't want them to have that conflict, or we don't want them to leave money on the table by, by, leaving the public sector, having to sell stock, you know, to get rid of the conflicts of interest that they might have. So we'll just let them sell the stock and not pay capital gains. So that was so he managed it to reap this, you know, hundreds of millions of dollars windfall with the, you know, aid of government.
And the wind, you know, the, the wealth had been accumulated running the firm at a time when Goldman, but not just Goldman and all the investment banks were actively participating in, in, causing, you know, the financial crisis basically the, that led to quite a bit suffering of people here in the U S throughout the world, you know, people losing their houses, out of work for long periods of time, all that stuff. So that, so that, so that case is to me, particularly galling, and it's also particularly salient because, you know, I was at Goldman when, when Paulson was, was CEO that was before some of the, illegal and unethical activities had come to light nevertheless, it was going on, unbeknownst to me while I was there.
So, so that's, so, so that story has a, I guess, a special place in my heart.
Anita Posch [00:29:44] I can imagine that. And I fear that the situation is not better now. It might be even worse. I mean, because the financial crisis from 2008 and 2009, the foundations of it have not really been solved.
Andy Edstrom [00:29:59] Yes, I agree entirely. There's one thing that has improved and that is the banks have been forced to hold more capital. So their balance sheets were leveraged, which is to say that the major investment banks balance sheets had debts to equity ratios on the order of 30 times in the case of Goldman or even 40 times in the case of Lehman brothers, which, which failed as you know.
And so those leverage ratios have come down. So they're, they're closer to 10 times now. So that's one improvement. However, as you suggest some things have gotten worse. One thing that is clearly gotten worse is, the size of these things, right? We found out the hard way that the banks were too big fail, in 2008, 2009.
And now they're even too bigger to fail. They're much, much larger on average than they used to be, you know, two times or three times. And, you've got banks that have balance sheets that are multiple trillions of dollars each. And, and yeah, so that, so that too big to fail problem has gotten even bigger than it was.
And as far as the revolving door and the capture of a regulatory capture, the issue we just discussed, I mean, I don't, I don't see that that's gotten any better. I dunno if it's gotten worse, but it was already clearly very bad. And, it has perhaps not improved.
Anita Posch [00:31:20] What do you think about, the danger of like paper Bitcoin so that people get to buy Bitcoin that are not really there? They are just like a fractional reserve, you know, like, in Bitcoin lending it could be that there's nothing really behind it, you know?
Andy Edstrom [00:31:38] Absolutely. I worry about paper claims against Bitcoin. I worry about this issue the term is re-hypothecation. Right. Which is where the same Bitcoin that I think I own, because I have a paper claim is actually one that you have a paper claim on also. And I don't know that. And so there aren't, you know, there are too many paper claims against the same Bitcoin.
I do worry. So that's one issue. Yes. Leverage built on top of the base layer. I think that the reality of Bitcoin is that it will happen you can't, you can't prevent the creation of debt, or the multiplication of monetary claims on top of a base money. It's very difficult, to prevent that.
However, however, I do think that, there will probably be more free market forces at work. In the, let's say unregulated Bitcoin economy and people will get burned. You know, people, Bitcoin's history is full of examples of people thinking they held Bitcoin and finding out they didn't because they weren't actually controlling their keys.
So, so there will continue to be cases of that, but people will learn the hard way, and therefore, therefore, it is less likely that you'll have institutions that are, you know, 30 times levered or 40 times levered on top of the Bitcoin base layer. And then on the regulated side, I think that, the regulated Bitcoin economy, as it develops will, and probably should have some sort of regulation that looks like, well, I have to be careful as I choose my words here.
Let's put it this way. If, and when Bitcoin is adopted, you know, on the regular, let's say regulated economy, chances are good that exchanges and Bitcoin banks and Bitcoin lending institutions will be regulated just like the banks are today. Now that's not a perfect system. I actually think that a better world probably would be more of a free banking system where instead of, instead of settling banks with lots of regulation, just prevent them from getting too big in the first place and also, you know, have high disclosure requirements so that people understand what kind of risk they're taking, with paper claims against Bitcoin.
But those are some thoughts. I have about how it could develop it is a concern. It does worry me. It's actually a concern, you know, for my clients, right? One of the things I do is I, I help my clients get access to Bitcoin as an investment. And there's, as you know, there's lots of ways to do that. Or there's lots of vehicles.
But fundamentally, there's only two ways to do that in the sense that one way you control the keys and one way you don't and I try to get them to control the keys. I, you know, I encourage them to get educated, understand, basically how to hold your own keys, you know, whether outright or, or with a hardware wallet or, or with multisig or what have you.
And, you know, that's an uphill battle. Most of them aren't ready for that yet. I am optimistic that yeah, as the space develops, you know, with the help of people like you, educating people and, you know, me and anyone else, you know, doing podcasts, books, writing articles, I'm hopeful that people will learn over time.
And I'm optimistic that some segment of the population that wants to buy Bitcoin as an investment will, you know, come for the, come for the money, maybe come for the greed in certain cases, but stay for the freedom and, and learn, learn, and acquire those skills that are, that are necessary to be first-class Bitcoin citizens, over time.
Anita Posch [00:35:41] Talking about price predictions. I think you made one lately and, you have some ideas about how to estimate, possible, price appreciation in the future. Can you talk a bit, little, a bit about that?
Andy Edstrom [00:35:56] Yeah.
So I think I wrote about it in the book and I think I used the same numbers, when I gave that presentation at the value of Bitcoin conference, which you were also, participating in and, and so the number I have, I think is $400,000 per Bitcoin in 10 years. And that was, I guess I wrote that a year ago, so maybe that's at nine years.
And the way I arrive at the valuation is five major categories of value. And of course the first and most obvious is taking share from gold. I assume that with gold being, you know, today, call it a $10 trillion asset, but 6 trillion of that is the monetary premium. I think that Bitcoin takes maybe a third of that value that market share.
So that's a couple of trillion, taking share from Fiat money, you know, whether it's the dollar, the Euro, the yen, or more likely, you know, first, some of the weaker currencies, you know, in parts of Asia and Africa and South America, that's probably a couple of trillion of value, more, that it takes I think it takes share from offshore assets. I assume a 2 trillion there, which would be 20% of the low end estimate of offshore assets of 10 trillion and really offshore assets probably are somewhere between 10 and 30 trillion. Category four is demonetizing other assets, right? A lot of people hold real estate and other assets just as a store of value, you know, apartments, apartments in New York city in London, probably even Vienna you know, that sit empty they don't generate income. They're just stores of value that rich people hold, by and large. And then the last category is the, is the new applications. This is the, you know, the greenfield, this, this brand new economy that could be built essentially Bitcoin native, you know, it's Lightning Network, it's identity solutions like Microsoft is building that's their ION project. You know, it's potentially micropayments via smart contracts. You know, whether that's via lightning or, or some other, second layer, you know, it's things like Abra, where you can basically own a, get exposure to a basket of assets or currencies or, or anything else which is collateralized, by Bitcoin, you know, and I'm sure dozens and dozens of things that I'm not even smart enough to think of.
So, so all of those things I get to about $8 trillion, the total value. You know, within a decade. And that comes to roughly $400,000 per Bitcoin, which is whatever 40, 40, or 45 times the current price. So, you know, it's a, it's a, it's an estimate. There's a huge range of outcomes, but the way to think about it, at least the way I think about it is it's the order of magnitude.
It's the big picture. It's well, if it falls short, you know, there's estimates even by a lot, there's still huge potential upside. And if, and when it reaches its potential, it'll be a huge factor in the world, you know, that will have many effects and implications you know, societaly, as you well know.
Anita Posch [00:39:08] Sure, but do you think, is it possible that Bitcoin still can go to zero after 10 years of existence? What, what could be a reason for that?
Andy Edstrom [00:39:18] Yeah, what could be a reason? So, so I dedicate, I dunno, I think probably 30 pages of my book to the risks of investing in Bitcoin. Right? So this is like all the possible failure modes, all the possible ways it could go wrong. And I have, I have four categories of risks to Bitcoin. One is technical. Two is political.
Three is economic. you know, four is what I call sociological and psychological. So, gosh, I don't know if I should pick one or two, you know, potential risks or, or failure modes for, for Bitcoin. We could probably spend a whole episode on that. I do acknowledge the possibility that it, that it could happen.
I mean, you could have it, you know, you could have, I don't know, a bug in the code discovered that you know, that that brings the system down. You could somehow have, you know, concerted, coordinated action by governments to, you know, systematically, try to, destroy the, you know, the mining base for the hash rate there are, you know, there are numerous, ways legal, illegal, you know, technological, government based things that could sort of in theory, threatened, threatened Bitcoin. I mean, another one that comes to mind is just the, the game theory and the, and the economics breaks down, right. If we have the halving, and if the block subsidy, you know, falls with time, well, then you better have an increase of significant increase in transaction fees to make up for the losses, you know, will that happen?
Will there be enough security? We don't know yet. I think it's very unlikely that any of these a possible failure modes comes to pass, but there's, I guess a few, there's a few, for you.
Anita Posch [00:41:09] Okay. So you answered my question now because I wanted to ask you if you still, tell your clients to, buy Bitcoin.
Andy Edstrom [00:41:18] Yeah, so, and this, and this gets to the portfolio, the portfolio management and the risk management concept. And this is pretty core to what we do as investors and portfolio managers. And what we say is actually any investment can go to zero. In fact, right? Even the "safest" asset can lose value over time and even lose all of its value, or let's say almost all of its value, right.
You know, if it loses 80% of its value, well, that's not a hundred percent, but that's still a pretty bad. So, so, but if you have a situation like Bitcoin, where the upside potential is enormous. Well, then you accept the loss risk. You accept the risk of going to zero and you just size the position accordingly.
And so in that regard with any asymmetric investment opportunity where the upside far outweighs the downside on a probability weighted basis, well then zero allocation is always the wrong allocation, right? the right, you know, the right amount of risk or the right amount of allocation might be extremely yeah.
Small, but there is essentially, you know, no universe in which having zero allocation to a, to a very favorable asymmetric trade or investment opportunity, there's almost no universe in which you want to have zero allocation to, to that thing. And so that's how we, how I look at it as an investor, it is something. I want to have exposure to it's something I want my clients to have exposure to. And zero is the wrong allocation and you know, the right allocation depends on the facts and circumstances, circumstances, for, for each client.
Anita Posch [00:43:04] A rather general question. What's the thing about Bitcoin that nobody's talking about?
What is the thing about Bitcoin that nobody is talking about?
Nobody knows maybe, a fact or yeah anything that comes to mind that maybe should be talked more about.
Andy Edstrom [00:43:27] Wow. That's such a great question and you know, this, this may sound like a lame answer, but you know, I, I tried to write everything I knew about Bitcoin in this book. And undoubtedly, there are many things I don't know about Bitcoin, but, but the things that I, you know, anything I knew about, basically I tried to put on paper almost so, so I sort of, I spilled almost everything I you know, almost everything I knew at the time, out there. But, you know, I don't know. I guess I can just talk from the perspective of my clients or, you know, people who are discovering it still for the first time, and this is the amazing or supremely ironic feature is still, people don't know what money is, right.
This it's this how many people we're taught Keynesian economics. We're taught, about the federal reserve as just being the way things are and accepting that, and therefore not delving into what are the underlying characteristics of money. And this was me, right? This was, I took a, you know, a good economics, a good economics degree, at least by, by, you know, by reputation.
It served me poorly because I learned that, much of what I had taught or had been taught was either false or misleading. And so I still think that there, the majority of people in and around the financial world, still haven't done the work to understand what is money. And so if you still haven't done that work, it's not too late.
It wasn't too late for me. I only figured figured it out a few years ago after having spent a career in, you know, in finance and investment. And so, yeah, I would say that's, you know, most people still don't understand what is money, I guess that's my answer.
Anita Posch [00:45:32] Yeah, you're right. I mean, I, I never learned about it in school. We did not touch that topic. Never,
Andy Edstrom [00:45:38] Yeah, it was, it was, that's a whole other topic in itself, which is, yeah financial education is, is sorely lacking still. And, so I, so yes, I wish that, there were, I wish the financial education were core, you know, lower levels, right at primary school level. And yeah, the, the shortcomings I was describing in financial education, in my own work at the college level, at the university level.
But, but yeah, I agree with you. There there's a, there's much to be desired at, at every level of education. We need to be teaching people about money and it, it doesn't happen.
Anita Posch [00:46:18] Hmm. Yeah, we're coming to an end now. And one of my last questions is looking a little bit into the future and to your book, you released the book in September, 2019, I think. And since then, I mean, we all know the global economical circumstances have changed drastically, which parts of your book would you need to rewrite?
Andy Edstrom [00:46:42] Oh, great question. So. Yeah. So the way, the way I answer this question is my, you know, for people who read the book, you'll discover that I believe there are several ways out of this excess debt problem, and I won't get into them here, but they all are bad. They're all painful. And the least painful probably is money printing that leads to inflation and inflating away the real value of the debt.
So if you had asked me, when I wrote the book, how long will that take to reach that outcome? I probably would have said, you know, it could be two years or it could be five years or it could be 10 years. But I have no idea how long it'll take and I probably even would have conceited that it could have taken that it could take even longer because it's amazing how long these unstable, that based systems economic systems can last.
Many people have lost lots of money betting on, on the implosion or the destruction of debt based monetary systems, because you know, they've lost money because they make the bet and then it doesn't happen. Right. It takes too long. So what I would say today is I don't think it's going to take 10 years now.
I think that the pandemic has accelerated many things and not, you know, not the least of which is it has brought forward the resolution of the debt problem, because it has itself created tons more debt. As you know, you know, the federal reserve has printed several trillion dollars. There's other central banks, whether it's European central bank or the Japanese central bank, you know, various other, countries have printed a bunch more money and caused the creation of a bunch more debt.
And, so yeah, so the problem looks much more pronounced and much worse than it already was, when I wrote the book and, I guess that I would have to revise also yeah the probability that we end up in a depression type of scenario, which actually we already are. In other words, I could invert it and say, you know, in the book I wrote that I don't think it's likely that we'll end up in a, you know, in a depression because that's too painful.
Well, some would argue that we are in a depression. I mean, governments have as expected, you know, borrowed a bunch of, you know, a bunch more money borrowed more from the future and handed out checks to people and to companies. But you know, as a matter of fact, unemployment is at huge levels, at levels that are, that are, you know, coincidence with or consistent with what we would call a depression.
So yeah, I guess I would have to concede that, That I didn't expect the depression to happen. arguably one happened immediately, although with, with flavors of, with mitigation, mitigating factors, like money printing, like trying to keep people in jobs. So it's not a full blown depression, but it's this sort of strange quasi depression.
Anita Posch [00:49:42] And it's still time to stack some Sats.
Andy Edstrom [00:49:45] Amen.
Anita Posch [00:49:49] Okay. I think that's a good ending for our talk now. Please tell our listeners, where can they find you and follow your work.
Andy Edstrom [00:49:58] Well, of course, since you gave me the stack Sats lead in, I will mention that one of the roles I have taken on recently is head of institutional at Swan Bitcoin and Swan bitcoin is a, you know, is a service for stacking sats. It's a service for, auto stack, you know, dollar cost averaging, linking your bank account, to, to Swan and just accumulating on a weekly basis.
And we're going to get to and when, when, when will it work in Europe?
know. That's the question. I know that's your audience is more of your audience, I suppose, is a, is Europe, although I'm sure you have the significance.
Anita Posch [00:50:36] Oh, also in the U S yup.
Andy Edstrom [00:50:38] audience. So I think that is a possibility I can't, you know, I can't comment on, you know, how or when that might happen, unfortunately.
So anyway, so that's one, you know, SwanBitcoin.com/Andy. If you use that link, you'll, you get a little bit of free, a free Bitcoin, and I will as well and then, yeah, my firm is a Westcapgroup, we have a website that's wescapgroup.com. I should've made the disclaimer earlier that none of this is a financial advice.
And you should do your own research, you know, or have your advisor do it for you with respect to any investment, whether it's or anything else. Please follow me on Twitter. My handle is Edstrom Andrew it's last name and first name. And then if you want to, you know, catching you in my previous podcast appearances. I've got them listed on my website. That's andyedstrom.com. And then of course the book is called "Why buy Bitcoin, investing today and the money of tomorrow" and it's available on Amazon. It's available on Apple, it's available and, you know, through other, book channels as well.
Anita Posch [00:51:36] So many resources, I will put them all into the show notes for you, for the listeners to find them. Yep. Thank you very much. I will put your book book also on my book recommendations page https://bitcoinundco.com/en/books/. Yeah. thanks Andy. It was a pleasure. I hope we'll talk again soon.
Andy Edstrom [00:51:57] Anita. The pleasure was mine. I really appreciate it. And, keep up the good work.