This post was last updated on July 11th, 2019 at 08:15 pm

Part 1

Part 2

Subscribe: iTunes | Stitcher | Google Play | Overcast

[ez-toc]

Description

In this episode, I am joined by Tuur Demeester from Adamant Capital. We discuss investment strategies for accumulating BTC and generating returns against BTC (rather than USD).

While most investment strategies focus on generating returns in US Dollars, Tuur focuses on generating returns in BTC. He measures his success against Bitcoin, which over the course of Bitcoin’s short history, is a much higher bar for generating returns as an investor. There is a growing number of crypto fund limited partners looking for funds denominated in BTC, and which charge fees based on returns in BTC.

Our deep dive into investing for Bitcoin accumulation will be covered in two parts and split into four chapters:

Chapter 1: Why one would invest to accumulate BTC vs. USD

Chapter 2: How Bitcoin accumulation investment methods differ from methods for generating returns against the US Dollar

Chapter 3: The methods of investing for Bitcoin accumulation

Chapter 4: Tuur’s unfiltered thoughts on Ethereum and his take on the future of Bitcoin

In part 1, we focus on chapters 1 and 2. In part 2, we cover chapters 3 and 4.

Topics Discussed In These Episodes

How Tuur got involved in the Bitcoin and cryptocurrency community

Tuur’s interest in personal freedom

What led Tuur to take a leadership role

Tuur’s explorations around freedom, sovereignty, and location independence

Tuur’s preference for the United States

How Bitcoin enhances mobility

Tuur’s transition from Adamant Research to Adamant Capital

The philosophical case for investing for Bitcoin accumulation

The purpose of accumulating Bitcoin versus accumulating fiat

The tax advantages to denominating in BTC

Why diversification matters

Instances of investing of really hard assets at scale in the hopes of accumulating more of that asset

Proof of stake

How investing for Bitcoin accumulation is different than investing for USD accumulation

Shifting thought about assets in terms of fiat currency to assets in terms of cryptocurrency

The difference between investing against a Bitcoin benchmark versus accumulating more BTC

The infrastructure and services available to people who do invest for Bitcoin accumulation

The fundamental strategies for Bitcoin accumulation

How a person can accumulate Bitcoin without exiting their position in Bitcoin

How a person can accumulate Bitcoin without exiting their position in Bitcoin Taking part of the value of your Bitcoin out as a loan

Trustless ways to borrow or lend BTC

Active strategies around Bitcoin accumulation

Trustless ways to borrow or lend BTC Active strategies around Bitcoin accumulation Strategies for alt-coins

The reasons for using active strategies with alt-coins instead of USD

Tuur’s stance on Ethereum

Whether Bitcoin will develop faster payments, faster settlement times, smart contracts, decentralized finance

Links Relevant To These Episodes

Quotes

“My interests have been more about personal freedom. It’s only gradually that I discovered that in order to really be sovereign, it’s important that you take care of yourself financially.”

“Part of me is drawn to that just being accountable, held accountable by reality in the markets, and of course, performance.”

“It’s one thing to have a gold deposit and you can use that to borrow against it, but life insurance policies, it’s not in your favor, even without taxes, to liquidate your life insurance policy. But it does have real value so you can borrow against it.”

“I would say, first of all, don’t do it with all your Bitcoin, because you aren’t going to be rewarded for taking risk, which means that the risk is real, you can end up on the wrong side of that; so don’t do with all the Bitcoin.”

“In my view, fundamentally, there’s always going to be risk, but if you get a return on your investment, then means that’s a premium for the risk that you’re taking; and that cannot be undone.”

“I think Bitcoin is going to be like the Internet of money; it’s really going to be very huge. It’s just that, because it’s this modular ecosystem, you just really have to understand the phase that we are in.”

Part 1 Transcript

Welcome to Flippening, the first and original podcast for full-time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruptions. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and [00:00:30] do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Today, I am joined by Tuur Demeester from Adamant Capital. Before Adamant Capital, Tuur was the Editor in Chief for Adamant Research, a global macro investment research firm. In this episode we’re going to discussing investment strategies for accumulating Bitcoin and generating returns against Bitcoin. While most investment strategies focus on generating returns in [00:01:00] US Dollars, Tuur focuses on generating returns in Bitcoin, and he measures his success against Bitcoin. Of course, if you followed the growth of Bitcoin over time, you’ll note that this makes for a much higher bar in terms of for an investor. While I won’t comment on Tuur’s fund specifically, I should mention that there is a growing number of crypto fund limited partners looking for funds denominated in Bitcoin, and which charge fees based on returns in Bitcoin. [00:01:30] Tuur’s general approach is in line with this philosophy.

This two-part deep dive is broken up into four chapters. In chapter one, we explore why one would invest to accumulate Bitcoin rather than in USD. In chapter two, we discuss how Bitcoin accumulation investment methods differ from methods for generating returns against the US Dollar. In chapter three, we consider the methods of investing for Bitcoin accumulation. Finally, in chapter four, we close our conversation with Tuur’s [00:02:00] unfiltered thoughts on Ethereum and his take on the future of Bitcoin. In this segment, which is part of one of this two-part series, we’ll be focusing on chapters one and two. Part two, which comes out next week, we’ll provide chapters three and four.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by Nexo. Here’s a word from them:

Nexo is the world’s largest & most trusted crypto lender offering automated instant crypto credit lines, which allow you to use your crypto (e.g., Bitcoin, Ether, or XRP) as collateral to get cash in over 45 fiat currencies & stablecoins without selling your cryptoassets.

Nexo also offers interest earning accounts yielding up to 6.5% per year for stablecoins & Euros. Interest is paid out daily & you can add or withdraw funds at any time.

Nexo is also a strategic partner of exchanges, OTC desks, traditional & crypto funds helping them earn interest on idle stablecoins & fiat. The company’s growing portfolio of structured institutional products includes fully collateralized continuously rebalanced swap agreements allowing counterparties to effectively manage their balance sheets.

Check them out at Nexo.io

This episode is also brought to you by the Nomics API. If you need an enterprise-grade crypto market data API for your fund, smart contract, or app, or if you need historical CSV dumps of trading [00:03:30] data from top exchanges or even obscure ones then consider trying out the Nomics API. Our API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. If you found that you or your developer have to spend too much time cleaning up and maintaining datasets, instead of identifying opportunities, or if you’re tired of interpolated data and want [00:04:00] raw primary source trades delivered simply and consistently with top-notch support and SLAs, then check us out at nomicsapi.com. Finally, if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com

Okay, back to our regularly scheduled program. Here’s part one of my conversation with Tuur Demeester from Adamant Capital. Enjoy.

Clay: Before we dive in to the big conversation that we’re going to have around investing for Bitcoin accumulation, I think we’d be doing a disservice to the listeners without discussing a little bit your origin story, both with regards to your involvement in the Bitcoin community and the cryptocurrency community. [00:05:00] Could you share a little bit of your path with us?

Tuur: My initial interest was philosophy and then from that came philosophy of law, which is really the study of what does it mean to have order in society, and what is just and what is right; those kind of questions and then really applying it throughout history. And that’s tied into economics too, there’s this intersection between the two. I started studying business cycles. I also did translation work there, I founded the Rothbard Institute in Belgium, sorry co-founded. [00:05:30] We came together starting in 2005, 2006. And then eventually, I was more and more intrigued by like, “Well how do I apply these ideas for myself?” Because as I was diving into financial history and the history of banking, in particular, I started becoming kind of scared at how fragile things were.

Then 2007, the rumblings started off this credit crisis. Eventually, I decided I was going to dedicate a lot more effort to [00:06:00] try to figure out how to stay safe, how to invest intelligently, having this knowledge of the financial system. And so, the kind of basic truth that I still hold and that I think discovered back then was that in order to be protected during a serious financial crisis, be it a deflationary or an inflationary crisis, where you want to be invested in is in liquid assets with low with third-party risk. That’s how I became [00:06:30] a gold aficionado starting in about yeah, 2007, 2008. But I kept looking for something, I wanted to find things that were out of the box because history never exactly repeats, it rhymes, but it doesn’t exactly repeat. Is the answer really just gold and gold mines, just like in the ‘70s?

I was traveling in Latin America, part of that was really to figure out, “If there’s a big euro crisis, maybe I want to be more mobile.” And I work online anyway. That’s how, in 2011, I [00:07:00] discovered Bitcoin in Argentina. Friends of mine were mining Bitcoin in Bueno Aires, and it was just the perfect introduction. I feel like I was just lucky that my mindset was there, I was already focused on the investment side of things, I was already writing my newsletter, so it was just really a perfect introduction.

Clay: I came through a similar path. I read your report, I read James Rickards’ book, The New Case for Gold. [00:07:30] It’s just really unfortunate that he doesn’t seem to be a huge fan of Bitcoin given that the entire time I was reading his book about gold, I was just thinking about Bitcoin, but also became excited about gold back then. It definitely does seem you have this philosophical bent and proclivity that just happened to work out for you in a pretty economic way. Or was it not an accident at all, have you always been [00:08:00] pretty interested in money and the accumulation of wealth?

Tuur: My interests have been more about personal freedom. It’s only gradually that I discovered that in order to really be sovereign, it’s important that you take care of yourself financially. That only came gradually as kind of a byproduct of really yearning for complete independence and freedom. There was also this element of fear in 2007/2008, “What if I’m stuck here in this [00:08:30] country?” For example. “What if I’m stuck in Belgium for the rest of my life? What if I won’t be able to afford the kind of education, I might want to give my children?” Or things like that. I just love the challenge of trying to figure things out that are highly complex, and the markets are just ever changing, and it’s basically the whole of society is taking part in them so, it’s endlessly fascinating to me.

Clay: At what point did you decide that you wanted to transition from being personally interested [00:09:00] in this space to taking a leadership role, writing up reports, sending out newsletters, sharing as you do on Twitter? What was the impetus for making that switch?

Tuur: That definitely was conscious decision. Although, I did already have a newsletter in Belgium. I think I wrote about 8,000 words on Bitcoin investing before the price was $30, but that was all in Dutch for my subscribers. I was already doing that, but [00:09:30] really the main motivation was just finding ways to connect with people in the space and finding ways so that the people that I admired could possibly become peers over time. I feel so privileged and excited that the kind of quality people I get to talk to. There’s this round table of comedians that I saw, maybe two years ago, it’s a one-hour recording of Ricky Gervais and three other guys, they’re talking, “What motivated you to want to become a [00:10:00] standup comedian?” One of them said, “Well, I just wanted to be one of those guys. I wanted to be part of that club of cool people.” It’s pretty much the same for me. Obviously, I want to contribute to the space and do things that I think are just not being done yet; just to offer something that’s, hopefully, new and valuable.

Clay: You started off and the moniker I saw was Adamant Research. What was that [00:10:30] really back then? Was that just sort of a name to put on the reports you were putting out? Were you doing independent or freelance research for investors? What was Adamant Research?

Tuur: It was a brand that I was just exploring. I wanted to have something that was independent from my name that I could grow but, at the same time, wasn’t bound to one particular asset necessarily. The name Adamant, I liked it because there’s this adamantium metal [00:11:00] in the X-men universe, and it’s extremely strong. And then there’s, obviously, the whole Wolverine character, which is kind of headstrong but at the same time, just very passionate, you could say. It’s just something that I wanted to build, and I didn’t really know what I was going to do with it. Initially, it was those reports, and I also did Bespoke Research. I started it when the market was totally dead, like 2014. There was just no interest, let alone institutional interest, so that was just [00:11:30] starting something. I’m glad I did because it’s been four years now, so we have that name out there now.

Clay: What became of your explorations around freedom, and sovereignty, and perhaps location independence, working from anywhere? Have you put those on hold to go full time in Bitcoin, or are you pursuing those interests still with the same level of vigor and enthusiasm as you are the investment stuff?

Tuur: Yeah, I definitely have a bunch of plans up my sleeves still. [00:12:00] For now, I’m in the US. I just love the US, it’s such a huge market. I see it as a continent, it’s not really just a country, it’s so big, there’s so many opportunities here. I still have the European experience; I still have my Latin American experience in my back pocket. But in terms of just the combination of stability and opportunity, in my mind, nothing beats the US.

Clay: It’s interesting to [00:12:30] hear you say that. I definitely run in some circles that are often see this country as sort of one of the worst places to live in the world. In part, because of lack of social safety nets, and just the state of our healthcare system, our current president, various interventions worldwide. How do you reconcile those things with your experience here?

Tuur: It’s always a topic of debate and discussion. First of all, I don’t think there’s something that fits for everyone, [00:13:00] different people will have different preferences. And it may very well be that other people just find a better fit for them elsewhere in the world; it’s such a big world.

Clay: Yeah.

Tuur: This just happens to be a fit for me at this moment. One thing that I would say to people that don’t live in the US, or that do live in the US but haven’t really been around very much in terms of seeing different places, is that it’s not homogenous at all. It is a very rich continent full of different cultures, and regimes, [00:13:30] and approaches to taxation. I think it’s better to look at it state by state rather than to kind of say, “Oh, this is the US and these are the statistics for the US.” I just love how entrepreneurship is celebrated around here, how dynamic it is immigration-wise, that there’s always people that come from different backgrounds. There’s lots of mobility within the states. Like in Europe for me growing up, it was a big deal if you moved from Brugge to Gent, which is 50 kilometers away; the mobility is [00:14:00] totally different. To me, I just love that about the US.

Clay: That’s encouraging to hear. I can sometimes get a little bit down on the seams.

Tuur: It’s the grass is greener right?

Clay: Yeah.

Tuur: I think that’s where travel really comes in. If you travel with a critical eye, you can often really appreciate a place and love what it has to offer. But still think, “Well, what would it really be to live here, would I want that?” If you have the means, I would encourage people to try a few months living in a particular country that you think you like. Because right now, [00:14:30] there’s so much more work that we can do; so many things that can be done remotely that really means that people can choose very freely where they want to live.

Clay: I wish there was more of a free market around location, and citizenship, and things like that. I think it behooves any country to try and just brain drain the rest of the world and have all the smart people move here. It’s a net positive for us that you moved here. I’m glad we attracted you in this space. Hopefully, we can keep you [00:15:00] as someone who’s invested here. But man, I think part of what is going to happen with the decentralization of money is a more competitive environment around things like citizenship.

Tuur: Crossing borders as a refugee, it used to be very, very hard to carry any financial goods with you. There are these stories of Hungarians sticking gold coins in their shoes, and Jews sewing diamonds into their jackets and things that. You know that’s incredibly inefficient compared to a [00:15:30] Bitcoin brain wallet or something.

Clay: Yeah.

Tuur: I really do think that as Bitcoin grows in adoption, it’s going to enhance mobility for a lot of people.

Clay: Hopefully, it’ll make states desire to be more competitive. Right now, if you think of money as a means of exchange, unit of account, and store of value, if you own sort of the world’s ‘currency’, you can just print some more; that’s a really terrible place to be. Whereas if we had to be a little bit more [00:16:00] marketing ourselves, and soliciting wealthy people, and sort of the things that actually generate capital locally here, I think that’s a good thing. We’d just be a lot more dependent upon attracting wealth rather than depending on the printing press.

Let’s cap this off by learning a little bit about Adamant Capital and your transition from Adamant Research to Adamant Capital. When did you decide you wanted to go pro and not just do this stuff for yourself, but that you were going to do this on behalf of [00:16:30] others?

Tuur: I don’t want to talk about it too much because I don’t want to be soliciting publicly. That’s not the purpose.

Clay: Right.

Tuur: But in terms of motivation, it’s just something that is an extension of what I’ve been doing for myself, my own investment activities. For me to take it to the next level, allows me to build a more refined machine to execute these strategies. To me, it would either be that or it would be a financial newsletter. I felt more drawn to [00:17:00] something like a fund because I felt it was more of a challenge and also a slightly different audience that I would be addressing. And then there’s also the whole skin in the game, the idea that, in a fund, it’s really your own money that you’re putting at work and other people’s money of course too, and there’s this accountability. Part of me is drawn to that just being accountable, held accountable by reality in the markets, and of course, performance.

Clay: That makes sense. Plus, the content business is just [00:17:30] this hamster wheel of death. If you read a good report, a fantastic report, it seems like when it strikes you and when you’re inspired, you don’t have to churn out content daily to make ad revenue.

Tuur: I think that it’s probably different if you can write for institutions but it’s true. There are different dynamics that work. It’s very challenging to write for a retail public because usually, the newsletters that do best will tell people what they want to hear which is usually one of two ways. There is this kind of [00:18:00] perverse, yeah, incentive structure there.

Clay: Let’s kick off chapter one, which is an exploration of investing for Bitcoin accumulation. Why would one want to invest for Bitcoin accumulation? What are the philosophical underpinnings of this? Why do this?

Tuur: To me, this fits perfectly with this little book that I read as a college student which was The Richest Man of Babylon. I think it was originally written in the [00:18:30] 1930s, and it’s just this very basic approach to investing. It’s basically, this laborer who talks to a wise man and learns from him the secrets of investing which is that you want to accumulate more gold. “How do you do that?” “Well, you put aside some savings, and you put it under a rock, and those are your gold coins. Every now and then you make an investment in a business, and that will also yield more gold over time.”

For ages now, accumulating more money [00:19:00] was really the way to go. Not only if you accumulate Bitcoin, do you pursue the same goal that people have always pursued historically with gold, but you have this tailwind which is the fact that it’s not fully mature yet, it’s still being adopted. If we go from 3%, 4%, 5% adoption to 20%, 30%, 40% adoption then, of course, Bitcoin’s value should be a lot higher.

To me, [00:19:30] where I come from, but of course, for institutions, and for family offices, and people who might not have the same conviction that I have, for them it’s more an asset that is very not correlated with the rest of their portfolio. An asset that has an extremely interesting risk/reward ratio, an asset that has 10 years of track record by now. To me, accumulating more Bitcoin, why do that? Well, it’s better than having Bitcoin and not accumulating more. That’s a [00:20:00] very simplistic answer, but that’s kind of where I come from.

Clay: Maybe another way to think of this would be why accumulate Bitcoin versus accumulate the alternatives which would be fiat. It does seem like there’s a belief in here about accumulating in deflationary assets versus inflationary assets; or accumulating assets that are going to appreciate in value versus depreciate in value. Is this how you’ve always approached investing [00:20:30] with regards to accumulating for BTC versus accumulating US dollars or another fiat currency?

Tuur: Like I said in the beginning, it’s about accumulating assets that are highly liquid and that have low third-party risk. The perfect example of that is hard money. Hard money is incredibly liquid no matter where you go around the world, but the challenge with the dollar is that there is a third-party risk. Of course, there’s the printing press, which works against you as an inflation tax, and which can go rampant. [00:21:00] I mean, the average lifespan of a fiat currency throughout history is 27. Basically, less than three decades is the average lifespan of fiat money; so, you have that working against you. And then also the fact that almost all of fiat currency is held by third parties, and they can go bankrupt, they can freeze your funds. Anybody who was there when Cyprus had their crisis in 2011, or in 2001 in Argentina, I mean they just freeze the bank accounts. [00:21:30] Or some judge—even without a ruling—can order for your accounts to be frozen. There’s that element of non-sovereignty which Bitcoin does not have. Bitcoin is really sovereign money. If you own your keys, then only you can control the Bitcoin.

Clay: It seems like another advantage which I unfortunately, encountered the wrong way. Let’s say, hypothetically, someone buys what they considered to be a bunch of Bitcoin for them after reading your [00:22:00] report that comes out in 2015 when Bitcoin is at 300 and then it goes to hypothetically, wherever it was in 2017. And then hypothetically, that person invests in some funds that are denominated in USD, automatically that generates a taxable event. That person is, potentially, in a lot of pain with regards to the IRS.

Tuur: Right.

Clay: So, it seems like also there are tax advantages to denominating in BTC [00:22:30] when it comes to your investment activities. Would you say that’s true?

Tuur: I would say that you really have to be aware of the tax situation. Every country is different, but it’s often the case that if you sell Bitcoin that has appreciated, then your local IRS is going to look at that as a taxable event. It’s going to look at the difference in fiat value between when you purchase it versus when you sell it; either long term or short-term capital gains taxes.

Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast [00:23:00] is brought to you by Nexo. Here’s a word from them:

Nexo is the world’s largest & most trusted crypto lender offering automated instant crypto credit lines, which allow you to use your crypto (e.g., Bitcoin, Ether, or XRP) as collateral to get cash in over 45 fiat currencies & stablecoins without selling your cryptoassets.

Nexo also offers interest earning accounts yielding up to 6.5% per year for stablecoins & Euros. Interest is paid out daily & you can add or withdraw funds at any time.

Nexo is also a strategic partner of exchanges, OTC desks, traditional & crypto funds helping them earn interest on idle stablecoins & fiat. The company’s growing portfolio of structured institutional products includes fully collateralized continuously rebalanced swap agreements allowing counterparties to effectively manage their balance sheets.

Check them out at Nexo.io

This episode is also brought to you by the NomicsAPI and CSV Data Export Service. The Nomics market data API offers squeaky clean and normalized primary source trade data offered through fast and modern endpoints. If you’re a professional investor or developer, you need accurate prices or accurate history, I can tell you that our competitors’ prices for the most part are not accurate, we’re actually going to come out with a report about this soon. I should note that the Nomics API is used [00:24:30] by many of the largest and most influential companies in the space, including top exchanges, $100+ AUM funds and prop shops. Hit us up if you’d like more details or go to NomicsAPI.com. Furthermore, if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

Okay, back to this episode.

Tuur: You have to be really aware of when, and under what circumstances, you might want to sell your Bitcoin. There is another approach to it [00:25:00] where you leverage your Bitcoin rather than outright selling it; which is something that people have done very often throughout history with life insurance policies too. It’s one thing to have a gold deposit and you can use that to borrow against it, but life insurance policies, it’s not in your favor, even without taxes, to liquidate your life insurance policy. But it does have real value so you can borrow against it. Typically, people do that to start a business or have investment real estate or something that. I think that [00:25:30] Bitcoin is going to take a similar role for investors in regimes that do tax capital gains, where you really want to only liquidate your Bitcoin if you’ve explored the other options, and they’re suboptimal to what you want to achieve financially.

Clay: I think that’s something I learned the hard way as an LP in various funds is that if the fund is denominated in USD, it doesn’t matter if you are contributing to the fund with Bitcoin, [00:26:00] that Bitcoin converts to an interest in the fund immediately in USD. If you’re getting your statements in USD, and your assets under management are in USD, that just triggered a taxable event.

Tuur: I’m not an attorney, so people should contact their own counsel. But my understanding is that the concept that makes all the difference is diversification. For example, if you pull real estate with other people, and you keep it in real estate, then that might not trigger taxes versus [00:26:30] if you say, “Well, I’m going to contribute this piece of real estate to a fund that’s otherwise invested in totally different assets, and then my asset gets commingled with everything else, and I just get a share of the total.” Well, then that could be considered you actually liquidating your assets. The concept of diversification is often important when you’re thinking about funds, and partnerships, and things like that.

Clay: In the history of investing, investing for accumulation [00:27:00] of really hard stores of wealth does seem like a pretty novel thing to do. I don’t know of any instances where you can contribute gold to some kind of gold accumulation fund, and then they give you back more gold than you gave them. Or with real estate, you can somehow give real estate to a fund and then they give you back your real estate with additional real estate. Do you know of any instances where people have, at scale, done investing of really [00:27:30] hard assets in the hopes of accumulating more of that asset?

Tuur: This is probably a stretch, but you could say that the early 20th century gold-based life insurance was a bit like that. It started in the 1850s. The benefit doesn’t accrue to you because it’s a death benefit, it’ll accrue to your family. If you don’t get to have a full working career, then your family is going to get more gold than you initially had. Maybe the other comparison might be the kind of shift that we’ve seen in the stock markets [00:28:00] where companies, instead of paying out dividends, they will buy back their own shares, which is in a way, they’re reinvesting the proceeds so they’re generating more of the thing that you try to invest in initially. And so, they grow the pie that by that way, and that’s often more beneficial for investors because they don’t have to pay taxes on these dividends. That’s the cool thing about Bitcoin is that it does not pay dividends. Ben Davenport recently penned a piece about something that’s not very often considered by [00:28:30] proponents of proof of stake, is that if you have a coin that generates more coin because of staking, you’re probably going to be taxed on that down the road.

Hey, this is Clay cutting in to define proof of stake. Proof of stake is an alternative to proof of work and a type of consensus mechanism where a set of validators propose and vote on the next block, and the weight of each validator’s vote depends on the size of its deposit, i.e., [00:29:00] what is stake behind the validator. Okay, back to Tuur.

Tuur: I think that owning a coin that is just probably scarce, and that is going to be adopted over time is probably a more tax efficient kind of strategy.

Clay: The SEC recently said that Ethereum is not a security. But it does strike me that one of the things that you get with a security is dividends. And so, in a proof of stake system where you’re [00:29:30] getting paid proportionally based on what you’re staking, that just seems so much like a security. Again, I’m not a tax attorney or a professional, this is all just speculative, but so much of proof of stake earnings just feels like everything I’ve read about what a security is.

Tuur: The Howey Test is such an old test, I mean, it’s like what, 80 years old?

Clay: Yeah.

Tuur: I think the initial coin offering pretty much [00:30:00] past the Howey Test which means, I think, it was a security when it was initially offered. And then the SEC was slow to respond which is understandable because it’s all so new and nobody knew if it was even going to be alive after the first few years. But then they kind of gave it a pass and said, “Okay, well right now it’s no longer a security.” But then the big question is, “If it becomes sufficiently centralized, again, because of all these bloat issues, could it be deemed a security again?” Especially if you think, [00:30:30] “Yeah, maybe they’ll lose staking, and things like that, to incentivize people to buy the token.” I think that’s pretty dodgy territory. It’s definitely possible I think that it could, at some point, by some jurisdictions be deemed a security again.

Clay: Let’s move on to chapter two of this exploration of investing for BTC accumulation. How is investing for Bitcoin accumulation different than investing for, let’s say for example, USD accumulation?

Tuur: [00:31:00] First of all, it’s a mindset shift. If you invest for Bitcoin accumulation, you really have to very deeply accept and continue to work with the fact that Bitcoin is extremely volatile; that is probably the biggest challenge. Because if you look at the 10-year trend, then if you look at long term, and the baseline of the technology, I think it’s pretty clear that it’s going to stay around. Emotionally, it’s such a roller coaster to have years where it [00:31:30] rallies by 400%, 500%. Then there’s other years where it crashes by 70%, 80%. If you succeed in accumulating more Bitcoin and that, over time, rewards you with more wealth, I think what you’ve done is you’ve kind of beat the market in being willing to take on that volatility. And for most people, the way they do that is just by regulating their initial investment. If your initial investment is not that much, kind of the mantra of, “Don’t invest more than you can afford to lose.” [00:32:00] Then you will probably also be able to stomach the volatility. Or, if you’re lucky and you kind of get in at the bottom, then you never go under water, so to speak. That’s the ideal situation, obviously, if you invest right at the bottom. It’s very volatile, but it’s always in the plus in dollar terms but that’s I think very hard to obtain.

Ideally, you want to pursue combination of the two where, first of all, you’d think about how much do you want to invest in this market. I think it’s probably a good idea to approach it as some kind of [00:32:30] insurance policy. Just like how you get insurance against fires, and theft, and things that. It’s like insurance for the rest of your portfolio. “What if we have very high inflation in 10 or 15 years from now, how do I protect myself? What if there’s another repeat of 2008 where there’s all these things that are built up in the system that not enough people are aware of? What kind of asset would I want to own that could protect me against that?”

I think Bitcoin falls in that category next to [00:33:00] gold as hedge against systemic risk. Do that first—decide on the kind of quantity you want to invest. Then secondly, you want to look at the cycle of Bitcoin and try to identify. Ideally, I would say not exactly the bottom, but try to invest during the accumulation phase, which is usually when Bitcoin has had a big bear market, when retail is not interested at all, but when you see smart money at work, where you see infrastructure being built, where you see the price going sideways, [00:33:30] ideally, in a channel; I think those are the periods when you probably want to think about deploying that capital.

Clay: Yeah, that makes a lot of sense. I like what you said at first about the shift in mindset. I find it kind of interesting that despite a large number of Bitcoin maximalists, and people who profess to be thinking in BTC, there aren’t a lot of websites that will price crypto assets in BTC. There’s not a lot of [00:34:00] accounting solutions that allow you to denominate in BTC. There’s not a lot of people who can tell you how much a cup of Starbucks coffee costs in BTC or Satoshis or what have you. It does seem like there’s a bit of a Copernican shift in our financial world that needs to take place super early—between thinking of USD or whatever our local fiat is as the center of our financial world—to thinking [00:34:30] around Bitcoin or whatever your favorite cryptocurrency is. Is that a switch that you’ve made with regards to your personal accounting and thinking? What’s your sort of unit of account as an investor?

Tuur: I would say, by and large, no. I have no idea what my utility bill is expressed in Bitcoins, for example. I do think very long term we could be heading in that direction where Bitcoin becomes basically, a unit of account aside from store value, [00:35:00] the other function of money. But I think that in the short term, basically, when people think about Bitcoin accumulation, what you’re doing is benchmarking really. I mean, it’s so common in the fund world to have a fund that is benchmarked to the S&P 500, or benchmarked to global stock markets, and then the goal is to outperform that. It’s just really, really common. That’s how I think it’s useful to look at it.

It’s like, “Well, once you believe that [00:35:30] Google is the search engine that’s going to dominate,” then rather than investing in a basket of search engines in 1994, 1995, which there were dozens of search engines back then, you could say, “Well, I’m just going to hold Google as a core value in the search engine market niche, and then together with a few others maybe those together are going to be a benchmark for me.” Maybe, more recently, that would be like the FANG stocks. I mean, [00:36:00] it’s hard to come up with real analogies because, of course, Google is not a protocol. It’s not like TCP/IP or the email protocol. It’s really a private company, whereas the potential for Bitcoin to be a financial backbone is so enormous that I think, thinking in terms of Bitcoin, is probably more useful than thinking in terms of Amazon performance because there’s so many things that can cause a company to go off the rails that are less likely with a [00:36:30] semi-ossified protocol like Bitcoin.

Bitcoin is not going to change much. The only thing it needs to do is continue to show that it’s reliable, and that things can be built on top of it for it to succeed long term, I think. Just like dotcom domain names, the top-level domain name space does not have to change much for a dotcom to continue to be a valuable platform for you to register a domain name in because technically, right now, there’s dozens. Nomics.com, [00:37:00] you could register nomics.ind or whatever, but you chose .com because it’s the standard and it communicates that you are a serious business, and all those kinds of things. I think it’ll be similar with Bitcoin.

Clay: I think that’s a really interesting point. I once paid seven figures for a dotcom domain name that was really, really difficult to get. There was no differentiation with that domain name versus others that could potentially exist like .pizza or .blue or dot [00:37:30] whatever it was, other than it was dotcom. That’s a really interesting point about value.

Tuur: And just to kind of continue a little bit is I would say is the fascinating thing with me is that top level domain names, it’s completely flat. There’s no technical difference at all with a .ru, or a .eu, and a .com; it’s exactly the same technology. Just how a lot of the alt coins are almost identical to Bitcoin. The only thing is is that there’s this kind of [00:38:00] reputational snowball that has created more value and has made the market more valuable. Thus, created a kind of a barrier to entry, so that you have to put more money on the table to buy that .com which means that you probably need some kind of long-term plan with that name to execute it, which you don’t need if you only pay $10 for nomics.eu or something. That is like a label of quality, it communicates to the rest of the world, to strangers like, [00:38:30] “Oh this guy has this expensive domain name. He must be serious about this. The chance is lower that this is just a random scammer.” I think it’ll be similar with Bitcoin, “Oh, this merchant, this product is built on top of Bitcoin, they must have thought about this to be willing to…” because I think Bitcoin fees are going to go up, it will be $10, $100 for transacting on the Bitcoin blockchain I think in the long run.

Clay: Going a little bit back to Bitcoin being at the [00:39:00] center of the financial universe and benchmarking yourself against it. I think benchmarking is one standard saying, “We’re going to measure returns against the returns we would have gotten if we just invested in Bitcoin and held.” For you, as an investor, is investing for Bitcoin accumulation, is that really just investing against a Bitcoin benchmark, or is it truly about accumulating more BTC? Because I think there is a difference.

Tuur: I would say that the [00:39:30] difference is if you had an offshore fund where there were just zero taxes to be taken into consideration, those would be pretty much identical. But if you’re a Bitcoin benchmark fund, then you do all kinds of things under the hood that will generate a lot of taxes for investors. It’s possible that when all is said and done, they will actually lose Bitcoin even though the net performance shows a positive as kind of a benchmark outperformance. Yeah, it’s something that you have to really take into [00:40:00] account when you think about investing for yourself. It’s a big difference before and after taxes. You have to even take into account what state do you live and things that when you want to think about accumulating more Bitcoin.

“What is the particular activity that I want to do, and how is it seen by the IRS, or is there any guidance already?” Which is often a challenge. It’s understandable that for a lot of people, the safest route is just to say, “Look, I’m going to hold on to my Bitcoin and [00:40:30] I’ll just ride that wave without risking losing my stake,” so to speak, which is totally understandable. But like you said, it’s very important to make that distinction. Depending on the tax situation, it can be a huge difference between Bitcoin accumulation versus Bitcoin bench market.

Clay: What about in terms of infrastructure and services that are available to people who do invest for Bitcoin accumulation? Hypothetically, if someone were to [00:41:00] have a fund that were denominated in BTC, are there even fund administrators that will do accounting that way, and report assets under management back to LPs in BTC? Do you know what exists there and how hard that kind of thing might be?

Tuur: My experience is that you want to find an administrator that has experience in this space. But ultimately, it will happen in dollar terms; it’s just a matter of translating everything in a good way. That’s not making the difference to the [00:41:30] bottom line, or to the actual tax situation; it’s just how denominate things. What assets move; what assets are being sold; how things are denominated isn’t going to make the biggest difference. But of course, you want for your administrator to be aware of what’s happening and what the benchmarks are, and what the strategy and the structure is. Yeah, I would not be comfortable to work with an administrator that doesn’t have any experience where the education has to start from scratch; that would not be the way to go. [00:42:00] There’s been Bitcoin funds for about five years now, so there’s definitely quite a bit of experience. Once you start looking around, you can find those partners.

Well, that wraps up part one of my conversation with Tuur Demeester from Adamant Capital. I hope you’ll join us next week for part two [00:42:30] where we discuss the methods for investing in Bitcoin accumulation and hear Tuur’s take on Ethereum and the future of bitcoin. Until then, take care.

Part 2 Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own [00:00:30] opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Welcome to the second and final installment of this two-part exploration on investing for Bitcoin accumulation. I am joined by Tuur Demeester from Adamant Capital. Before Adamant Capital, Tuur was the editor-in-chief of Adamant Research, a global macro investment research firm.

While most investment strategies focus [00:01:00] on generating returns in US dollars, Tuur focuses instead on generating returns in Bitcoin and he measures his success against Bitcoin. If you’ve followed the growth in price of Bitcoin over time, you’ll note that generating returns against Bitcoin is a much higher bar for an investor than generating returns against US dollars. While I won’t comment on Tuur’s funds specifically, I can tell you that there is a growing number of crypto fund limited partners who are looking for funds denominated in [00:01:30] Bitcoin and which charge fees based on returns in BTC. Tuur’s general approach is in line with this philosophy.

This deep dive is broken up into four chapters. Chapters one and two were covered in the previous episode. In chapter one, we explored why one would invest for Bitcoin accumulation. In chapter two, we discussed how investing for Bitcoin accumulation is different than investing for USD accumulation. In this episode, which is part two, we dive into chapters [00:02:00] three and four. Chapter three is about the methods for investing in Bitcoin accumulation. Finally, chapter four, we discuss Tuur’s unfiltered thoughts on Ethereum and his take on the future of Bitcoin.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by Nexo. Here’s a word from them:

Nexo is the world’s largest & most trusted crypto lender offering automated instant crypto credit lines, which allow you to use your crypto (e.g., Bitcoin, Ether, or XRP) as collateral to get cash in over 45 fiat currencies & stablecoins without selling your cryptoassets.

Nexo also offers interest earning accounts yielding up to 6.5% per year for stablecoins & Euros. Interest is paid out daily & you can add or withdraw funds at any time.

Nexo is also a strategic partner of exchanges, OTC desks, traditional & crypto funds helping them earn interest on idle stablecoins & fiat. The company’s growing portfolio of structured institutional products includes fully collateralized continuously rebalanced swap agreements allowing counterparties to effectively manage their balance sheets. Check them out at Nexo.io

This episode is also brought to you by the Nomics API. If you need an enterprise-grade crypto market data API for your fund, smart contract, or app or if you need historical CSV dumps of trading data from top exchanges or even obscure ones then consider trying out the Nomics API [00:02:30] or our historical data export service. Our API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything you need through one screaming fast fire hose. If you found that you or your developer have to spend too much time cleaning up and maintaining datasets, instead of identifying opportunities, or if you’re tired of interpolated data and want raw primary source trades delivered simply and consistently with [00:03:00] top-notch support and SLAs, then check us out at nomicsapi.com. Finally, if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

Okay, back to our regularly scheduled program. Here’s part two of my conversation with Tuur Demeester from Adamant Capital. Enjoy.

[00:03:33] Let’s start this episode and part two of our conversation by kicking off chapter three which is about the methods for investing in Bitcoin accumulation. When I think of investment methods, I think both in terms of passive, smart beta strategies, and active strategies. What do you see as the fundamental strategies for Bitcoin accumulation if there are special cases here? I was thinking mostly about [00:04:00] earning interest on BTC, that seems like a very BTC accumulation friendly approach versus just investing whatever in whatever you want and hoping you just beat Bitcoin.

Tuur: The one that we’ve seen the most is people are agnostic about whether Bitcoin is going to win or something else is going to win, they just see a lot of activity in the crypto space and they try to kind of invest broadly. And so, either they will hold a basket of currencies or they will invest in companies that extract profits out of the space. Most notably, [00:04:30] of course, exchanges, but there’s others as well. There are these analytics companies, there are the miners, there’s some media companies; although I think that’s maybe a stretch to really call those investments crypto plays. I’m trying to think. There are hardware companies that make things that are used in the space, there’s wallet companies who are mainly looking to gather a lot of eyeballs and then, hopefully, build a platform that people are going to interact with.

Now, there’s more institutional services too, [00:05:00] such as prime brokerages, OTC desks, things like that. Those are all beta kind of proxies for the space; just like investing in the NASDAQ back in 1998. But then, if you hone in on Bitcoin, what is the proxy for Bitcoin? You can, of course, invest in companies that primarily focus on Bitcoin, like miners, Bitcoin miners, and more and more actually because Bitcoin is becoming more dominant, and mature. There are more and more startups that focus primarily on Bitcoin [00:05:30] such as, Casa recently announced that they’re shifting to pure Bitcoin. Casa is a hardware producer in the space, they produce nodes and I think they also do multi-SIG custody. When it comes to really generating alpha then, I think, yeah, Bitcoin interest bearing accounts don’t really exist.

There are some products that are being offered, I think most of them are based on lending. Somehow the Bitcoin is aggregated and then lent out, [00:06:00] and more Bitcoin is paid back. There are pools of Bitcoin that are used as collateral for certain activities. The very earliest one was probably the pool that was under Satoshi Dice, which was a gambling website. And so that was the house, it was basically the money of the house, and then the profit that the company generated, part of that I think was paid out to people who invested in the pool, and many other Bitcoin gambling sites have done that, and it was risky. It’s always been risky to invest in those pools [00:06:30] because the existence of these gambling companies was just precarious.

But now there are miners who borrow sometimes. There are just funds who are trading Bitcoin and sometimes they want to go short, and in order to go short, you need to borrow; so those are kind of the sources of interest. And in a bear market, especially in a down market, there’s a lot of demand for shorts, that’s very interesting. But as you start going up, and you really start hitting a new bull market, that’s when the risk for defaults increases, because you have all these [00:07:00] debtors who are exposed to a debt that is in dollar terms exploding in value. That can be tricky.

And then there’s all kinds of options strategies, where if you sell out of the money options on your Bitcoin, you can earn $1 income without having to sell the Bitcoin. But you have to be careful because if there’s a big move against you, then you can be forced to liquidate that Bitcoin. There are different strategies out there to [00:07:30] earn interest. You can also use Bitcoin as collateral, and then borrow dollars, and then invest in that way, that would be another alpha strategy. If you think you can outperform whatever your interest rate is, then you also create alpha on top of your Bitcoin.

Clay: If someone were listening to this and held Bitcoin, and didn’t want to exit their Bitcoin position, and they weren’t an institutional investor, they weren’t incredibly sophisticated, they just kind of wanted a simple, easy way [00:08:00] to accumulate Bitcoin without exiting their position in Bitcoin, is there a place that you’d send them or is there a particular strategy that you would encourage them to learn, kind of first and foremost, before everything else?

Tuur: I would say, first of all, don’t do it with all your Bitcoin, because you aren’t going to be rewarded for taking risk, which means that the risk is real, you can end up on the wrong side of that; so don’t do with all the Bitcoin. And then I would say the way to not sell your Bitcoin is to [00:08:30] somehow use it as a collateral, just how people borrow against their life insurance policy. I don’t want to name names, but there are players out there where you can do that, where you deposit your Bitcoin as collateral, we actually saw this happen back in the day even. People who would just go to the bank and just borrow a small amount and invest in Bitcoin. But, of course, the bank would not accept their existing Bitcoin stash as collateral, and so that’s kind of a sign of more and more maturity where now, yes, you can find [00:09:00] places that will accept that as collateral, and then you get better term because then it becomes a secured loan.

Clay: Either depositing your Bitcoin and earning interest on it or putting your Bitcoin down as collateral and then taking that money and deploying that in a way that might return some kind of value that you could re-convert back into Bitcoin. That seems like the two big ones.

Tuur: Yeah. I would say if you deposit your Bitcoin for earning interest, you really want to [00:09:30] investigate who the kind of parties are, you really want to study that closely because it’s a very specialized activity to be a lender to kind of parties, especially if you’re going to lend in an asset like Bitcoin that could appreciate a lot.

Clay: At first, this seemed like such a simple thing and a no-brainer and then, personally, as someone who does have Bitcoin, it does struck me that I didn’t want to give up custody despite all the benefits; giving up custody of Bitcoin would be hard.

[00:10:00] But I think that goes into what you said about not handing it all over to one of these services in the same way that exchanges go down, and there’s security vulnerabilities, and all that. Until there’s FDIC insurance for Bitcoin that’s earning you interest, it’s probably not the best thing to do with all of your BTC.

Tuur: If you look throughout history and you look at, for example, bond rates, government bonds, and they were all denominated in gold, and they were just super high in the Middle Ages and the 15th, 16th century, [00:10:30] like 20%. If you look at it on an aggregated chart, it’s like wow you could have made a killing, it’s so easy, just buy these bonds and you get 20% or 15% a year. Until, of course, you take into account the default rate, which was very high at the time. It’s only if you’re able to jump from bond to bond and not have those defaults happen, that’s when your annual return would have been 20% so, that’s a big if.

Clay: I think from a risk profile or [00:11:00] risk assessment perspective, again, personally looking at this stuff, I’ve definitely had the thought like ” Hey I could deposit a bunch of BTC here and earn interest on it, or I could put this down as collateral.” And some places let you take, let’s say, 50% of the value of your BTC out as a loan, and I don’t like the latter situation because I’m paying interest rather than earning it. But I also like that worst-case scenario, I still have 50% of [00:11:30] what I originally deposit versus maybe earning a little bit of interest but losing all the principal. How do you think about that?

Tuur: I generally agree, it’s always a tradeoff. The market will price risk for you, and sometimes the market will misprice. But one common strategy with earning interest is putting it to work at an exchange where other traders will borrow your Bitcoin to go margin long. That becomes part of their [00:12:00] trade is that they borrowed your Bitcoin to go long, and that’s all behind the scenes, and just the exchange just pays you for the risk. But you are exposed to keeping those and trusting those Bitcoin to that exchange. If you bet on the wrong exchange, and they go belly up, or they get hacked, you might get a haircut on your initial deposit.

Clay: Do you know of any trustless ways to either borrow or lend BTC?

Tuur: I don’t. Maybe the Lightning Network is probably going to be closest.

Hey! This is Clay cutting in from the editor’s booth for a bit of commentary about the Lightning Network. The Lightning Network takes transactions away from the main Bitcoin blockchain. This practice should decongest bitcoin blocks and reduce transaction fees. The Lightning Network could enhance Bitcoin’s utility as a medium for daily use, which includes borrowing and lending. Okay, back to Tuur.

Tuur: I’m very skeptical of when people use the word trustless in the context of borrowing and lending, because [00:13:00] there’s this huge problem, it’s called the Oracle problem, first of all. If you want to get information into a trustless system, well then that is the Achilles heel, because that’s where wrong information can be inputted to activate a payout, for example, of the smart contract and then you’re screwed even if technically, you won the bet or whatever.

And then the other challenge is identity. How do you know that I am who I say I am and how do I know that you are who you say you are? How do you do identity in a kind of [00:13:30] decentralized trustless environment? I’ve often heard answers like, “Oh, we’ll do it reputation based.”

One of the ways that we’ve seen in the early peer-to-peer lending spaces of Bitcoin, people would set up an account and they would set up, I think, it was a reputation loan. They would say, “Okay, I want to borrow three Bitcoin, five Bitcoin whatever, and then I just show the marketplace that I’m reliable because I consistently pay it back.” Well, how do you know, as a new investor, how do you know [00:14:00] looking at my reputation? Maybe I was paying it back to myself, just to build up that reputation. Maybe I built a couple sock puppets accounts that received my own money back with interest, so it was free. In my view, fundamentally, there’s always going to be risk, but if you get a return on your investment, that means that’s a premium for the risk that you’re taking; and that cannot be undone. Even in Lightning, Lightning is slightly more risky than just holding your own private keys; so even that reward [00:14:30] is for a form of risk.

Clay: I wonder, as someone who has a reputation for being a Bitcoin guy, Bitcoin maximalist, maybe that’s a mischaracterization. Are you ever a little bit jealous of some of the DeFi decentralized finance solutions that exists on the Ethereum blockchain like collateralized debt positions with Dai or what Dharma is doing that appears, at least on the surface, to be more trustless in [00:15:00] orientation than alternatives that might exist for Bitcoin?

Tuur: Not really. I have this write-up out there that’s like what if I’m wrong? Basically, this kind of soul searching of like, “Oh my god, what if Bitcoin is Betamax, and it looks better on paper, but actually, Ethereum is the VHS.” Because I mean, to me, all these applications on top of Ethereum, they all rest on the premise that Ethereum is stable, will be stable, is decentralized, will remain decentralized, etc. If that [00:15:30] changes, then the whole value proposition could be turned upside down. Just how if you had built a startup on say, Google Glass, and then that platform just disappears, well then no matter how good your startup is, that’s also going to go away.

Clay: Shout out to Kyle Samani.

Tuur: Oh, that’s true, actually. Yeah, it’s the first thing that came to mind. But, yeah, it’s important to choose your platform, and it’s no dig. Startups’ always risk, there’s always risk involved. It’s [00:16:00] important to choose your platform. It’s a very broad generalization, but I think we’ve already seen it, that some of the platforms that are called decentralized all of a sudden, the guy who’s operating it gets subpoenaed and it kind of goes away. It turns out that it wasn’t as decentralized as people thought, so I think you have to be careful. It’s not because something is called the decentralized that it actually is, and it’s not because something is called trustless that it actually is.

I haven’t studied these platforms in depth, [00:16:30] although with Dai, I think I have some friends of mine they were comparing it to the Yen carry trade. The Yen carry trade is this idea that, because interest rates were so low in Japan for so long, you could basically borrow Yen in Japan, then turn around, convert it to dollars, invest it in dollar denominated government bonds, earn an interest, and then just pay it back in Yen for super cheap; so it’s like free money. But then, of course, as soon as interest rates start rising in [00:17:00] Japan, the whole carry trade unwinds, and there’s a run for the hills. The suggestion that I’ve heard from some people is that it would die, it’s potentially kind of a similar buildup of risk. I would have to study in detail to understand the details.

Clay: We’ve discussed a little bit about passive strategies or at least strategies where it’s explicit in an agreement that you are putting up Bitcoin and getting back some kind of return [00:17:30] in Bitcoin. Let’s call those the majority of those passive strategies.

How do you think about active strategies? Are there active strategies around Bitcoin accumulation that aren’t simply like, “Let’s make investments that we think are going to outperform Bitcoin in the long run?” Are there investments here that are a bit more tied to Bitcoin that you would still solidly call alpha?

Tuur: Aside from how you call it, there are several ways to outperform Bitcoin. And just for argument’s sake, [00:18:00] I’m going to make abstraction of the tax situation because you can kind of compartmentalize that sometimes. To outperform Bitcoin, like you said, you can invest in smaller coins that will then go up more in a bull market. Which is a little bit like investing in small cap stocks, who are often also going to outperform in a bull market, and then they get worse performance in a bear market that is, I think, a valid strategy.

Also, it gets interesting in a bear market, [00:18:30] is you can outperform Bitcoin in a bear market simply by holding dollars. In a bear market, what often happens is that Bitcoin is kind of crowded out in the bull. People just get really wild about these alternative coins, alternative possibilities, or things that complement Bitcoin. And then all of a sudden, in a bear market, it’s back to basics and Bitcoin is often the funding mechanism for a lot of these investments.

Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by Nexo. Here’s a word from them:

Nexo is the world’s largest & most trusted crypto lender offering automated instant crypto credit lines, which allow you to use your crypto (e.g., Bitcoin, Ether, or XRP) as collateral to get cash in over 45 fiat currencies & stablecoins without selling your cryptoassets.

Nexo also offers interest earning accounts yielding up to 6.5% per year for stablecoins & Euros. Interest is paid out daily & you can add or withdraw funds at any time.

Nexo is also a strategic partner of exchanges, OTC desks, traditional & crypto funds helping them earn interest on idle stablecoins & fiat. The company’s growing portfolio of structured institutional products includes fully collateralized continuously rebalanced swap agreements allowing counterparties to effectively manage their balance sheets.

Check them out at Nexo.io

This episode is also brought to you by the NomicsAPI and CSV Data Export Service

The Nomics Market Data API offers squeaky clean and normalized primary source trade data offered through fast and modern endpoints. If you’re a professional investor or developer, you need accurate prices, and I can tell you that our competitors prices are not accurate (we’re actually going to come out with a report about this soon). I should also note that the NomicsAPI is used by many of the largest and most influential companies in the space, including top exchanges, $100+ AUM funds and prop shops. Hit us up if you’d like more details or go to NomicsAPI.com. Furthermore, if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com

Tuur: If you want to get out, you have to go to Bitcoin first, so Bitcoin is kind of the bottleneck, and that’s why the Bitcoin dominance will often really increase in bear markets. The kind of the strategy that comes with that [00:20:00] is that you can short assets as you see the market get tired; you can short altcoins against Bitcoin. You borrow the altcoin, you go long Bitcoin, and then over time, you sell the Bitcoin, and you buy back the altcoin. That allows you to make a return in Bitcoin, as well. That’s kind of a way to kind of, “Oh, but what if there’s one more spike?” I always am hesitant to outright short Bitcoin against the dollar, but shorting these alts is a [00:20:30] little softer way to still put a bet on that it’s a bear phase.

Clay: With that strategy, one would use their Bitcoin to borrow alt, wait for it to go down, and then buy back into that position, and then return it. Is that essentially the strategy?

Tuur: Yeah, say that you short Ethereum, and so it’s the Ethereum-Bitcoin pair. Say that it’s a one Bitcoin investment, so you sell one Bitcoin worth of Ethereum [00:21:00] when Ethereum is worth a lot, and then Ethereum goes down, and Bitcoin goes down too but not as much. Then with less than one Bitcoin, over time, you should be able to buy back that entire Ethereum position to pay back your Ethereum debt, in other words. And so, whatever Bitcoin is left in your account is your alpha.

Clay: That’s brilliant. And is the strategy for doing that with altcoins…?

Tuur: Of course. Sorry, of course after interest. Because if you go short you are borrowing, so you are going to pay some [00:21:30] interest as well.

Clay: Is the reasoning for doing this with altcoins versus, say, USD that there’s just larger swings there, or is there something else at play, or you’re just not interested in doing this versus USD?

Tuur: Well, the tricky part with just going plainly short in dollars is that kind of what if you’re wrong?

Clay: Yeah.

Tuur: Whereas if you are right in that the altcoin market is overheated versus [00:22:00] Bitcoin, that relative assessment, then you don’t have to even be right about the entire bull market being over; it can just be a low or whatever, and you just make that trade and so it’s just less risky to do it that way. In a way, you could argue you can have somewhat bigger positions. Bitcoin, I think, on average has gone up against the dollar by 50 basis points to date overall the year; so that’s a significant bet to make. Whereas Bitcoin versus altcoins, [00:22:30] especially in bear markets, Bitcoin has absolutely murdered these altcoins.

Clay: Yeah, yeah, that makes a lot of sense.

Tuur: And they also keep rotating. There are altcoins that are the fat of the day, they’re just nowhere to be seen a couple years down the road.

Clay: I can think of instances where I felt sure about some of these decisions versus others, and I never feel quite sure about shorting Bitcoin. Whereas I often have a lot more conviction about shorting altcoins or at least Ethereum which is a proxy for what’s happening with all altcoins.

Tuur: [00:23:00] I think so, yeah. It’s a good proxy for the altcoin market.

Clay: Anything else we should be covering on active strategies for accumulating BTC?

Tuur: I think that other active strategies are more in the option sphere where, like I said, you sell out of the money options, or you use your long-term conviction as an asset, and so you’ll buy really long dated options because you have that long-term belief, and you’re willing to swallow [00:23:30] the short-term volatility, so that’s a way to also get rewarded in Bitcoin and possibly generate alpha.

Clay: It seems like there’s the huddle strategy which is premised on the long-term faith in BTC. But it seems like you could do some interesting things if you combine that huddle strategy, which is just overall faith in BTC as an asset with this accumulation strategy where you’re willing to be a little bit more active. [00:24:00] If you take a long enough time horizon into account, and inevitable times of downturns, that can play into this as well. Simply just having a long-term conviction is enough to pull off this strategy, even if that’s just buying a little bit more BTC with USD; that’s probably the simplest accumulation strategy.

Tuur: Right, right.

Clay: Okay with all of this established, let’s kick off chapter four which is about Ethereum and the future of Bitcoin. Tuur, [00:24:30] the second big think piece I read from you was around Ethereum. You wrote a medium piece about Ethereum and how you might have been wrong about it and its potential. What’s your stance today on Ethereum?

Tuur: It’s still the same. I just see the network, increasingly, grow more centralized. That’s, kind of the problem with these hard forks is that every time you do a hard fork, you probably lose some nodes that are just not catching up with you, or they’re sick and tired of doing these upgrades, and having this really top heavy system. [00:25:00] And so the less nodes that run your system, the more you start looking like a PayPal, and that has always been my concern is that by not coming to me, it’s almost a misunderstanding. I don’t know if it’s deliberate or accidental, but not understanding that blockchains are for validation not for execution. And Ethereum is always built execution, or this idea that you have to execute these smart contracts on the blockchain, [00:25:30] which is super expensive and it’s super slow to do that.

Whereas Bitcoin has always had this idea of, “Of course we’re going to do smart contracts, but the blockchain is going to be for verification purposes only, for validation only and, therefore, it’s okay that it’s very lean this blockchain.” And actually, we want it to be lean because then we can have 50,000, 100,000 nodes around the world where it’s super robust, and that we can’t get hijacked so easily. But like right now, as far as I understand, [00:26:00] it’s pretty much impossible to run an Ethereum node not on a phone, and not really on Raspberry Pi or a kind of a cheap system. It requires quite a lot of technical knowledge to fix things if somehow, you’re stuck. That to me is just the bottom line.

I keep seeing new partnerships, and things like that, but decentralization issue is going to cap, I think, the long term market potential of Ethereum because that means it can be [00:26:30] hijacked by some political entity, by some economic entity, and then they can just do with it what they want. Then all these startups are kind of at the whim of whatever this authority is going to be.

Clay: I was actually, at one point, an Ethereum maximalist. I had this theory that there would be the second order network effects. That in addition to having network effects around Ethereum, there were the network effects of all the tokens, and projects [00:27:00] that had issued ERC20 tokens on top of Ethereum. It would be this sort of compounding platform, and that a whole bunch of value would accrue there. Luckily, I had that idea when it was a good idea to have that idea, and I stopped having that idea before everything went to crap.

Tuur: Good for you.

Clay: But, yeah, I don’t know if I believe that anymore. I don’t know that Ethereum is actually really good at one thing. Like, “Is it the best of both worlds or is it the worst of both worlds?” [00:27:30] I’m starting to think now it’s probably the latter.

Tuur: I remember Vitali talking about, I think he called it a transactions-first blockchain. Ethereum was like a transactions-first blockchain and Bitcoin was a security-first blockchain. And it just always was weird to me because, if you want billions of transactions, billions of dollars of value of transactions on your chain, shouldn’t it be secure in the first place? Shouldn’t you figure out transactions after you’ve kind of nailed security? I feel like the market has validated that. [00:28:00] Ethereum is, what is it now, worth only a quarter or less? It’s like $16 billion versus $92 billion for Bitcoin, so 17% of Bitcoin’s market cap now. I think that’s because it’s just way less secure.

I just tweeted it out, “How do you define Ethereum?” If it can hard fork at any time? And Ethereum 2.0 is going to be something completely different from Ethereum 1.0, so it’s probably going to be this contentious hard fork as well. It’s really just [00:28:30] a hornet’s nest, I think. I do think that there was this serious economic value, because it was a publication platform, a funding platform for all these ITOs. I think you are right in that assessment is that that drove a lot of the value. But then, just like we had to ask with Yahoo back in the day, they were also the advertising platform for startups, “Is it sustainable? Is it scalable? ” And Yahoo was not, and I think Ethereum is not either.

Clay: What about [00:29:00] a lot of things that we turn to Ethereum for? Things like, faster payments, faster settlement times, smart contracts, decentralized finance. Do you see Bitcoin having its own version of those? Obviously, we have the Lightning Network for faster payments, although it’s still a little cumbersome. There’s things like Rootstock, and with Rootstock you can start doing decentralized finance. Do you see any of that happening anytime soon, or do you think Bitcoin is going to remain this hard store value and [00:29:30] not try and do much else?

Tuur: No, I think Bitcoin is going to be like the Internet of money; it’s really going to be very huge. It’s just that, because it’s this modular ecosystem, you just really have to understand the phase that we are in. Right now, Lightning is one of the first smart contract platforms on Bitcoin. By the way, the reason why Ethereum could do more transactions is just because they have relatively bigger blocks. But their tradeoff is just a much more [00:30:00] bloated blockchain. I think that allowed you to grow faster, in the beginning, but then you have this massive problem down the road, which I think is what they’re having now.

Yeah, but smart contracts, rather than looking at Rootstock, I’m looking at the liquid side chain, blockchains, liquid side chain. ICOs are coming to Bitcoin basically. We’re going to have asset issuance on top of Bitcoin, just as many tokens as you want, completely private; which is also [00:30:30] different from the ERC-20. And so that’s just going to open a whole world of possibilities, IOUs, derivatives; all that is possible on top of Bitcoin. Rather than call it really decentralized, it’s trust-reduced finance, because I don’t think you can completely decentralize. For example, a derivative, it’s just a bet between two parties. How can you make that completely decentralized?

How do you sue someone on a blockchain? What if somebody refuses to pay, or what if [00:31:00] contracts are not honored? That was the challenge with the Internet too, is that we see all these possibilities. For example, video streaming. It’s like, “Wow, that’s so obvious that’s going to happen.” But if you had a startup doing video streaming in 1998 or in 2002, you’re going to fail, you were just too early. I think with Bitcoin; it’s going to be financialization first. We’re going to see all these financial products built around and on top of Bitcoin, like different futures, and all kinds of contracts that make it easier for funds to have it as an asset in their portfolio and [00:31:30] to place all kinds of bets on it. And then the bottom up structure is going to be a bit slower, first with Lightning, and then we’ll see more sophisticated things down the road.

To me, it makes sense to focus on first walk, then run. Even just having Bitcoin be a very secure network is hard enough, but even getting the miners to not be extremely centralized is a challenge. But I mean, people can work on what they want, that’s the beauty of this; it’s an open ecosystem. I might be wrong, maybe we’ll see these [00:32:00] crazy smart contracts in a few years already.

Clay: Well, that wraps up this two-part series with Tuur Demeester from Adamant Capital. I hope you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes of the Flippening podcast at a much higher rate, we now have room for a few more sponsors. [00:32:30] If you like the work we do and you would like to support this show, then a sponsorship might be a good fit for you. I can say from our own experience that Flippening sponsorships work. Each and every time we put out episodes of this podcast, we mention our own API, and to date, every single one of those advertisements has resulted in at least one customer. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. Over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in [00:33:00] sponsoring a show, please hit us up at support@nomics.com. Okay, that wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.