Ep 59 | Bitcoin 101: How to Think About It as an Investment
In this episode, Priya Malani sits down with Raphael Zagury, former Wall Street executive and founder of one of the world’s largest private Bitcoin mining companies, to strip Bitcoin of hype and look at it through a real investment lens.
They unpack what Bitcoin actually is, why it exists, and how to think about it as an asset — not a gamble. From hard money and inflation to volatility, portfolio construction, and why “zero allocation” is rarely neutral, this is a grounded Bitcoin 101 for people who want clarity.
If you’ve felt like you should understand Bitcoin by now but don’t — this conversation is for you.
Takeaways:
Bitcoin doesn’t have to be all or nothing — the real decision is position sizing, not belief.
Choosing zero Bitcoin is still an active portfolio decision, not a neutral one.
Bitcoin’s volatility reflects how early it is, not that it lacks legitimacy as an asset.
When sized correctly, Bitcoin behaves like a long-term diversifier, not a short-term trade.
You don’t need full conviction to participate — disciplined allocation and time do the heavy lifting.
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Guest Bio:
Raphael Zagury has a wealth of experience in leadership, finance, and entrepreneurship. He was the founder and CFO of OpenCo, where he led multiple capital raise rounds, including a Series D with investors such as SoftBank, IFC, and LTS Investments. He also founded One Partners, a boutique investment banking company. Before his entrepreneurial ventures, Raphael built a career on Wall Street, holding senior positions at Deutsche Bank and Merrill Lynch as Managing Director, and at Goldman Sachs as Vice President. An avid Bitcoiner and coder, Raphael has contributed to open-source software and, as CIO at Swan Bitcoin, designed Nakamoto Portfolio, a tool that helped many investors understand how Bitcoin fits into asset allocation. He holds an MBA from Yale University and a Bachelor’s degree in Economics from IBMEC (Brazilian Capital Markets Institute).
Other Links:
White Paper: Bitcoin: A Peer-to-Peer Electronic Cash System
Author: Satoshi Nakamoto
Published: October 31, 2008
Transcription
From Hyperinflation to Bitcoin: Raphael's Personal Journey
You are definitely a crypto bro, but an atypical one which helps the rest of us.
I'm not a crypto bro. I'm I'm a Bitcoin. But that's the other thing, you know, don't fall into the natural trap, which is, you know, we've seen this time and time again of the new currency, the new Bitcoin, you know, a much better, faster Bitcoin. It doesn't exist. There's only one cryptocurrency, which is Bitcoin.
Who the fuck am I to tell you what to do with your money? My name is Priya Malani, currently managing millions of hard working dollars. Enough for play, let's talk. Welcome to the F word smart money.
Hey guys, welcome to the F word. I've got a really good one for you today. He's my former colleague from Merrill Lynch. This guy can price options with the Black Scholes model by hand in his sleep. He has done like a billion triathlons. He's got his MBA from Yale, did time at Goldman Sachs, Merrill Lynch, Deutsche Bank, and then he moved home to Brazil where he served as a CFO for a lending tech company that he helped found before exiting and getting into Bitcoin. Now, his company is the largest private Bitcoin mining company in the world. Needless to say, he knows Bitcoin inside and out. Today, he's here to convince us that Bitcoin deserves a place in your portfolio. Rafael Zaguri, welcome to the show.
Thanks, Priya. Very happy to be here. Glad we're having this conversation. Finally, we're talking about Bitcoin.
Finally is right. I've been looking forward to this conversation for a very long time and you are the perfect person to have it with. So I'm really, really happy to have you today. So as we've discussed in preparation for this episode, this is going to be a Bitcoin one O 1. But before we get into that, can you give us a little bit of your back story on Bitcoin? You know, after years on Wall Street, what got you interested enough to turn Bitcoin of your livelihood? And when did this all begin?
Yeah, I, I'd like to joke that, you know, I was a Bitcoin or even before Bitcoin started because I was born and raised in Brazil and through, you know, through the late 80s, beginning of the 90s when Brazil was experiencing hyperinflation. And when I say hyperinflation is this wild, crazy inflation to the point that, you know, would literally lose money from one day to lose value from one day to the other, right. So I knew the fact that, you know, hard money was extremely important at that time in Brazil just should, should give an idea. Everybody would price everything in dollars because that was the standard of hard money for Brazilians, right? So anybody could get their hands on dollars. We get our hands on dollars because it would keep value much better than the local currency.
Crazy stories. Just very quickly, I remember like my mother give me money for lunch, money for the school and she'll give me like bills. And she would tell me like, don't bring the bills back. You know, whatever you have left, just spend, you know, get a candy, get something. Because if you bring the money back, tomorrow is going to be worth less than it was worth today, right? Supermarkets were like packed in the 1st of the month because everybody received their paychecks. And the first thing you do is that you convert your money into hard assets. So you would actually go out and buy, you know, a lot of groceries. Brazil had this culture of massive supermarkets up until today because of that, because in the 1st of the month it was packed with people trying to buy groceries. And then the rest of the month was it was empty, right?
So it shaped me and shaped I think the Brazilian culture in in different ways. It is also why I ended up, you know, studying economics. And I really wanted to understand why that that was happening. Embarrassingly, it took me a degree in Yale to figure out that money printing was at the root of all of it. But that's, it's, it's true, right? I think that, you know, the, the more money is printed. And there is a, a philosophical and fundamental issue with that, which is the fact that you and I, we have to work, we have to be spending time here. We have to actually put our efforts to earn something, to get capital, to get money, right?
I keep saying that money is a memory of work because that's what it is, right? It represents something that you actually done in the past, and that's how you store the fruits of your labor. And at the other side, you have government and banks, entities that can just press a button and print more of it. So it just doesn't. For me, it never seemed like a fair system. I kept looking for an alternative for that, right. And I think the world looked for an alternative. We came from the gold standard, which was the first try of something that could could work in the first. When I saw Bitcoin, it kind of it resonated with me, I think for several reasons, but most of it because of the hard money nature of it. It's the first digital hard money that you actually have. It can't, you know, it has a limited cap, 21 million. The rules are written in code.
The the other thing that I think you know, I was born in Bitcoin because I, I, I always loved programming and coding. So being able to read the monetary policy in code for me, of course it's, it's beautiful, but there's more to that. The fact that it's transparent, it can't be, it's mutable, right? Anybody can read the code. You can download the code today and can see exactly what it is. Good luck doing that with any other currency where the, the case of the US, you have, you know, the Federal Reserve, which is 9 board members that, you know, close them close together in a board meeting that you don't know what's being discussed. You don't know what's behind their decision making. And they're literally deciding for the monetary outcome for the world, right? Not only for the US, for the, for the rest of the world.
So back in 2015, answering your question, around 2015, 2014, even before I went back to Brazil, you know, as I left mayor, I went to Deutsche. And when I was at Deutsche, I remember, you know, reading some stuff about Bitcoin, like most Bitcoiners, I ignored it for a long time. Like, yeah, this my first, reacts like governments are never going to let this happen, right? If it gets big, it's going to get banned. Second, how can I really know that, you know, there's only going to be 21 million? It just sounded for me like magic Internet money and I ignored it.
But you know, then time and time again it came back and I remember, and this was around 2015, I had one of the guys that I really followed that talked a lot about, you know, the Fed monetary policy macro that he wrote about. And he was a gold bug. He still is a gold bug. And you know, he, for a long time he kept saying no gold. The gold standard was really what was important for the world. The fact that we broke the, the, the gold standard electoral, these issues. And when Bitcoin came out, he was a huge proponent of it. You know, John Mauldin and John kept saying like, oh, this is for me, it's like digital gold. It has all the characteristics of gold. The only one that it doesn't have, it doesn't have a track record. So but it will be built with, with time, right?
And when I read that, and this was right after Bitcoin had like a massive blow blow. That's the other thing of the asset class is highly volatile. We can talk about that, but they had just collect the price went from like $1000 to like $300 and it was more the trader in me looking at it like, oh, price is much cheaper now. I actually should buy some funny story about that. You know, I bought a little bit, should have bought more, but didn't buy enough. This was the end of 2015. Then at Deutsche, we had an annual review of like the what we were thinking about for next year. The investment thes is for the next year and that year the big team was thinking, I saw the the box thinking about new investment opportunities. So I brought Bitcoin for like the for the investment committee at at Deutsche.
Needless to say that that didn't go well. You know, that conversation lasted maybe like 3 minutes like no, this is this. They had the same reaction I had the first time. This is magic Internet money. We can never give this, put this in a ortfolio for our clients, right and Fast forward knowledge where we are. And Deutsche actually in fact includes Bitcoin in the ortfolio of their clients. It is part of their asset allocation. So a lot has changed and a lot has happened in the in the last 15 years, 10-15 years, right?
Unpacking Bitcoin: Economics, Tech, and Its Early Market Stage
Wow, that is an incredible story. My gosh. So 2015, really more interest developed, but it really sounds like your childhood laid the groundwork, laid the foundation for you being open to a new type of system. Yep, that's insane. Magic Internet money. Well, yeah, I think that's really well said because Bitcoin feels like a game to a lot of people, and for others it's just plain intimidating, especially high earners who feel like they should understand it by now. So I just want to start with like, if someone is listening and they think like, OK, I'm smart, I make good money, but I still don't really get Bitcoin. Is that pretty normal from what you see?
Extremely normal. It's, you know, I would tell you, like most people, they approach Bitcoin exactly like that. There's one thing Bitcoin is multidisciplinary because for you to really rock Bitcoin, and by the way, I've been reading, studying, you know, not Bitcoin for more than 10 years and I don't, I still think there's a lot for me to learn, right. There's always something the technical side to learn in the philosophical side. And to that point, I think it encompasses at least five different disciplines you should be thinking about. You know, 1 is economics, which we talked about. The second is computer science, which we talked about as well. Then there's a little bit of sociology for the philosophy that encompasses it as well. The fact that we've talked about, you know, trust minimization, Bitcoin has rules without rulers. It's something very different than the traditional system that we, we live in.
Unfortunately, some people actually want to have, you know, they want to have a central bank. They want to have somebody controlling their money. They, you know, they, they want to have to trust in someone. This is a twist and a different way to look at things where you have, as I said, rules without rulers at the end of the day, right? You have math, a lot of the cryptography, it's based on mathematics and how it's been set up, right? And you also have physics like saying this is the part that you know, goes into mining about converting energy into, into proof of work right into cryptography and all of these these different things.
And as you approach Bitcoin, you tend to approach from the angle that it's the most comfortable for you. So if I talk to somebody that you know, comes from the computer science background, they are going to start asking questions about, you know, hash functions, you know, distributed networks like the the technical part of Bitcoin. When you talk about somebody about, you know, that comes from the economics background, the finance background, which is where we come from, right? They will ask you the macro, the monetary policy questions, the inflation questions, right, the game theory, time value of money, all of that and trying to understand from that perspective. But for to really drop Bitcoin, I think you, you need to understand a little bit of each because it's something very unique and very different from other assets that we've seen in the past.
Now, I struggled with this for a long time, as I told you, like in 2015, I, you know, I tried to, to explain this to financial folks, they couldn't get it right. And in some cases I actually took a complete different approach. I'll, I'll tell you one story. There's a very good friend of mine that, you know, I talked to him about Bitcoin for a long time. Hedge fund investor, you know, has invested in, in hedge funds for a long time, invested in everything big investor, right? So think about the typical Wall Streeter, right? It's traditional. And every time I told him about Bitcoin, you know, he would just completely he didn't even want to listen, right, completely disregarded.
So I did something tricky. I I printed to him. I got this was a while back, maybe I don't know, four or five years ago, but I printed to him the returns of Bitcoin in a sheet that looked exactly like a hedge fund manager, right? So it had like the monthly returns, the draw downs, the volatility, the sharp ratio and on analysis, just like if it was a manager and he looked at it and he immediately looks at the returns and all returns were very good sharp ratio off the scale, right? So sharp ratio just for, to make it non-technical for you to understand it's a way to measure returns, you know, on the basis of risk. So what you do, if you just say, oh, it went up 10%, it doesn't tell the full story. You want to know how volatile it was. You know, it's one thing to go from zero to 10 in a straight line is another to go to zero to 10, something extremely choppy, right, with high volatility.
I sometimes explain sharp ratio is miles per gallon, so how much return are you getting per unit of risk?
That's exactly right. And so when he looked at the sharp ratio of Bitcoin, that got his attention, like it was a sharp ratio that at that time was close to true, which did not even Berkshire Hathaway, Warren Buffett, they have that sharp ratio, right. So he immediately asked, so who's this manager? And I doubt, Well, listen, this is Mr. Nakamoto. He is a secretive guy in Japan. You're not going to be able to talk to him. His fund has been closed for a long time. There's no way you can get access to him. And he immediately got it. He's like, oh, this is Bitcoin, right? And I'm like, Yep, this is the returns on Bitcoin. And he looked at me and he's like, yeah, maybe I, I have been over thinking this. Maybe I've been thinking about this in the wrong way.
Because think about how crazy this is. This is if this was a hedge fund manager that will give me no transparency on the allocation, what he's investing on, what actually his portfolio is composed of. I would have invested, you know, with my eyes closed, right? While if I have a protocol there, I can actually see how the protocol is running. I have all the transparency in the road. Yeah, I don't know all the market dynamics about who's buying, who's selling, but I don't know that for anything, right? But I would have invested in it. And the fact that I'm actually have more transparency on this, it's hurting. It's right.
Going a little bit on a tangent here, but it's a little bit of the paradox of transparency, right? Sometimes when you have more transparency, it leads to more questions in the short term, it leads to maybe a little bit less trust. But in the because you're going to have, you know, visibility into everything. You're going to see that when things don't work, when things work, right? While if you have something opaque, we're just see beginning to the end that I don't tell. Yeah, I, I went from, you know, this city to this city and I got there safely. You, you have no idea to understand. You know, if you went through a path that, you know, you were very close to crashing 10 times, you were speeding, right? It doesn't tell you the full story, just that you went from A to B. When you have the full transparency, it will lead for more to more questions, but ultimately it does lead to to more trust.
More questions and also more emotion, and the emotion can sometimes distract from getting to your end goal.
100 percent, 100% and, and I think just to, to close up, if you look at Bitcoin purely as an asset, right, forget about why it's here, how it's built, you know, the protocol, the fact that it's immutable, all of that, all of forget about all of that, right? But if you just look in terms of like return risk and correlation to other asset classes, it's already fits in pretty much everybody's portfolio, right? You can run that, you can run any asset optimization software that you want. You include Bitcoin just because of the lack of correlation that it has for other asset classes. It already fits in a portfolio.
So the question is, given my risk appetite, right, and your risk appetite, how much should you have in a portfolio? I can tell you that zero is never the right answer because you know it. It does have negative correlation to other assets or low correlation to other assets and it has very positive potential returns in in the long term. Not only that, if you size it correctly and if you're wrong, let's say I don't know if something happens, Bitcoin is not here anymore and you put, I don't know, 2% of your portfolio, you're going to be sad because you lost 2% of your portfolio, but it's not going to be the end of the world, right?
While if I am right that Bitcoin is going to become, you know, the global monetary asset of the, of the world and it's actually going to demonetize a lot of other asset classes like gold, you know, silver, stocks, bonds, real estate, then we're talking about something that can, there's literally 100 acts from where it is right now. I don't know. For me it seems like much better. It should be on the side of having some allocation and having 0 allocation.
Yeah, Rap, there's no doubt that you're a proponent. So I want to get into the details and help build the argument and then understand the argument, really. But before we dive into the details, let's zoom out. And just from a big macro perspective, can you tell us, just for context, what percentage of the world's investable assets are currently in Bitcoin?
Yeah, very, very, very little. So Bitcoin is A2, let's round it up around 2 trillion asset class, right. Compare that with real estate. It's a drop and a drop and a drop in the bucket, right? It's less than a less than a fraction of a percent, so.
There's still time.
Oh, it's super early. Like one of the the models I actually wrote in the past was exactly putting probabilities around, you know, if the fact that Bitcoin could demonetize these asset classes, even if you put very low probabilities that it could happen, the value of Bitcoin should already be much higher than what it where it is right now, right? And I truly believe there is a lot of room like the the world needs, you know, hard assets. This is why people invest in real estate. You don't buy real estate because you want to have a second house you're sitting there or a third house, you're sitting there because usually, you know, people rent it out, will get some value out of it, right? And in the long term, they have this. It's a wrong perception, but they have the perception that the value is going to go up a long time.
That's a different podcast episode, but you're not wrong.
Yeah, if you put, you know, maintenance, you know, insurance like the your time that you're spending and all of that, 99% of the time it's not worth it, right. But people need to do it because they need to store their value somewhere. And this created this, you know, perversive culture also that, you know, you now, even if you have nothing to do with finance, right? You're a doctor, you're a lawyer. You have to be educated. That's, you know, people that you work with everyday. You have to be educated in finance because the reality is that you have to swim against the current, right? If you just stay stopped, you are going to be debased, right?
And when I talk about hyperinflation in the sense of Brazil, it's hard for people to relate. But the reality is that the US has inflation or has asset inflation pretty much everywhere because the money needs to go somewhere, right? Money is printed, it needs to go somewhere. And it's usually goes through these assets that people think that they can store long term as of value of money, right? And as I said, it's real estate. It's a big one, bonds, stocks. The fact that, again, a lawyer, somebody that has nothing to do with the stock market, has to understand the stock market is looking at stocks, right? It's a reflection of this. The fact that if you just leave your money sitting in the checking account, you know, good luck with that when you wake up 10 years from now, it's going to be worth much less.
There's still time, and just a fraction of a percent is actually what's taking up space in Bitcoin, but there's a lot of room. I want to start at the beginning. Let's talk about Mr. Nakamoto, Satoshi Nakamoto, Where did Bitcoin come from? And definitionally simple definition. What is Bitcoin?
Bitcoin is digital currency at the end of the day, where it came from, it doesn't matter that much because the fact is we we know exactly what it is, right? So just a little bit of history. So when Satoshi launched Bitcoin as a protocol, because Bitcoin is a protocol, the same way that you know, e-mail and TCPIP is a protocol where you know how value in this case, you know, messages are being translated and conveyed across the Internet. It's the same thing. It's a protocol, so money can be, you know, directed peer-to-peer. So I can transact with somebody digitally directly without needing a trusted counterpart in the middle, right? That was a whole goal of Bitcoin through money without, as I said, without rulers, without with rules, but without rulers, right?
So it's 100% transparent, like the coin. He released this through the road. He released the code base for Bitcoin so different than when you buy your office or your word or your Excel, right, But you don't you have no idea what's behind the code. This is an open source code. Anybody can download it. You can read it. You understand what's the rules are between you know, when is a Bitcoin transaction valid? How is it structured, right? What is what is a valid address and what, how does the cryptography works? All of this is extremely transparent. He wrote a white paper. I encourage everybody to to read the white paper is it's very technical, but it's short, you know, it's a few pages long.
And even if you don't understand the technical part, you know, they are as things that I mentioned, you know, like no trusted third parties. So it's the thing you have your bank, your bank, you log into your Bank of America account, it will tell you, you have, you know, X number of dollars there. You're trusting the bank. You know, you don't know if the money is there. You don't know where the money is, right. Probably the money doesn't even exist because it's all digital and created in databases everywhere. Here the Ledger of Bitcoin where the transactions sit and the balance is sit, it's fully transparent. So if you know a Bitcoin at the address, you can track it. You can see how much Bitcoin is on it when it sends transactions to other addresses. You of course don't know who owns that address, but the address is fully transparent, right? So it's already a much more transparent and more verifiable Ledger than what you would have in the traditional banking system.
That by itself, you know, gives you a lot of value, right? When you think about that, think about gold, right? Let's go back even before Bitcoin, why did we use gold? But we use we use gold or back back and I don't know many 100 years ago because it was something hard to find, right? You don't have gold everywhere. So it's scarcity is a big thing about it. And back in the day it was easy to you can move around, you know, gold coins without much of much work, right? As gold got more and more valuable, that became harder because then the physicality of gold actually was its limit, right? You can move value really, really well a long time, but you can't do it across space. You know, good luck getting all your wealth and bars of gold and going across in airports, right? I guarantee you're not going to go for TSA. And even if you do, if you get you, depending if you get to Brazil for example, I guarantee your gold is not going to make it there with you.
Again, another podcast.
So Bitcoin solves that, right? If you have a hardware wallet in Bitcoin, that's the other thing. I can custody Bitcoin on my own. I don't need a third party, right? I can have a hardware wallet that will be the signature device for my Bitcoins and I can take that. It looks like, you know, any other maybe like a UB key or security thing or one of those things that you use, It's something small like USB key, right? And I can take literally, you know, take billions of dollars across the border without anybody really knowing what it is, right? You know, another thing that when you think about what impacted me, how I actually started to grok Bitcoin, I remember the story of my about my grandparents when they, you know, they had to, to leave Europe because of the war and come to Brazil. They left everything behind. You know, my grandfather used to know like, oh, we had all these art, you know, gold, like couldn't bring anything. Like they came to Brazil to start their lives again and Bitcoin solves that. It's like you could like literally get the USB port and you you have all your, a lot of your money that can be, you know, condensed in, in that sense.
So there are a lot of things that Bitcoin solves. Does it solve everything? No, but you know, it's, it's already a huge evolution from where we were, I think in terms of money.
Can you talk a little bit about the limit? Like why? Why is there a limit on how many bitcoins can ever exist, and why does that matter? You've touched on it a little bit, but I think it would be helpful to understand what happens after all the bitcoins are mined. Then what happens?
The Mechanics of Bitcoin: Supply, Mining, and Transactions
The way that this works, I'll try to to explain without being very tech and going in. So every 10 minutes a new Bitcoin block is found, right? On average, and I'll tell you why, why it's on average later, but it's on average every 10 minutes when a block is found, whoever mined that block gets paid a Bitcoin incentive. So right now for every block, it's 3.1 through 5 bitcoins, right? Every four years, this is divided by two. So the issuance, it started at 50, then it went through 2512 and a half, 625 and 3, three and one eighths, which is where we are, right? So every four years we have an advantage called the halving in Bitcoin. So what that creates is that in the beginning you had a lot of Bitcoin being produced, right? So 50 every block. Then it kind of went down a little bit to 25. And as we go a long time, you know, this curve at some point is going to hit a limit because you're not issuing, you're issuing a fraction of a fraction of a fraction of a Bitcoin, right?
And there are 8 decimal. So when we are below 8 decimal points, the issuance of Bitcoin stops. So there are not any new bitcoins are going to be printed. It's expected that that's going to be around 2140. So there's a longer time to that to happen, right? What the reflection of that, if you look at the issuance and the inflation of Bitcoin, it's a very predictable curve that started at 0, right? And it's going to touch 21 million in 21 million bitcoins. It's a maximum that's ever going to be printed, which is what's going to happen in 2140. The question everybody asks, like, OK, if that's the case, you know, what will happen later since, you know, the miners, like they are incentivized to mine Bitcoin because they're going to get the reward in 2140. You can ask the question also, what's going to happen? You know, miners are not incentivized to mine Bitcoin any longer. Does the network collapse at that point?
And of course, that's not true because miners get two things. They get the reward and they also get the transaction fees that go into that block. So let's say a new block is going to be constructed in the next 10 minutes. What that block has is transactions between different Bitcoin addresses, right? So to send Bitcoin from one address to another, it's an open market. They can say I'm going to pay a fee, I'm going to pay 1 cent, $0.10, whatever it is, right? It's an open market and you just say I want to send the transaction from this block to this address to this address and I'm going to pay a fee for it. The miners captured those fees.
Why would you want to send? What are you buying? Like give a very simple example and when you said you'd pay 1 cent, do you actually mean dollars and cents? Like you wouldn't pay a fraction of a Bitcoin as the fee you'd pay.
Yeah, you'd pay a fraction of Bitcoin. I'm just saying dollars to make it simpler.
I see. OK. Yeah, yeah, yeah.
But going back to to your first question, let's assume for example, I don't know, we agreed that's from, I'm a client of yours, right? You're managing My Portfolio, tell you, and I tell you, listen, you know, going forward I'm going to pay monthly fees on Bitcoin, right? So we got to the end of the month and you tell me, well, the monthly fees for this month are equals to .1 Bitcoin, whatever it is, right? So what I'm going to do, I'm going to go into my Bitcoin Harder wallet. I'm going to say, you're going to give me an address because the addresses are public, right? That's OK. Here's my address, right?
And I'm going to get that address and I'm going to say, OK, from my address here that I control the keys, I'm going to send .1 bitcoins to Priya. And to do that, I sign a transaction. I broadcast the transaction to the Bitcoin network. And then you see it on your side, right? You see it on your side immediately. So you're going to see that the transaction was broadcasted where .1 Bitcoin is going from, you know, address A to my address B. What's missing here is that I just broadcasted that if I do nothing, I could actually, you know, imagine that if this is not written anywhere, I could broadcast the same transaction from that address through somebody else, right?
And you would have what is called double span. In order for that not to happen, you need to have a Ledger that checks that, you know what the balances are and that the fact that that transaction already was happened between person A and person B and it can't happen again. The way that this happens is through the block construction and through how miners actually mine the bitcoins. And then the fee that when you send from A to B, let's say I'm not in a rush, right? I want to pay you. It doesn't happen. It doesn't happen immediately in the next block. It doesn't matter, right? I can say I'm just going to pay very small fees, close to 0, and then a miner is actually going to put that at the end of the queue.
So you may come up in the next block, you may come up in five blocks, it may come up in 10 blocks, but you don't care because you're not in a rush, right? If you're more in a rush and say, no, I really want this to be confirmed in the next block, you're going to pay more. And there's an active market for this that it's also transparent. That's called the manpool. It's like a transaction queue where we see all transactions and whoever's paying more, whoever's paying less, and what's the expected time for final conclusion and final settlement? Those transactions. Now, this is another thing we didn't touch on, which is final settlement O. After this is written that transactions ran from address A to address B and it's confirmed in the blockchain, it's pretty much impossible. It's immutable. It's pretty much impossible to be changed, right.
So there is no way it's different than on your Bank of America account, you know where you can actually call somebody. There's good things and bad things you could call let's say for example, you know there's a charge in your credit card and you call somebody and say, well, I, I didn't do this, right? And they, they can revert it right now, the fact that they can revert it should scare you because you know, in some point they could confiscate it. Also, they do other things with it, which I know it sounds very foreign, but it has happened time and time again that, you know, confiscation happened. Whatever is written in the blockchain of Bitcoin cannot be changed. It's immutable at the end of the day because it requires an A huge amount of energy to actually reverse it back.
So person A wants to pay person B Person B wants payment ASAP so they're paying a greater fee. Is there some comparison there with like interest?
A little bit there's definitely, you know, parallel to to interest there because you know, if you if you really can wait longer, you're going to pay much less, right? So, you know, they have time preference really comes into play here as as well. But this changes, right? There are times there's like huge demand for, I don't know, for whatever reason, thousands and thousands of people decide that today we're going to transact in Bitcoin and you're going to see if you go, there's a website called mempu blue dot space. You can actually visualize there as you can see the upcoming blocks, how many transactions are in each of these blocks And some points you're going to see that, you know, the mempu is like hundreds and maybe thousands of blocks deep of like transactions waiting to be confirmed in some periods of time.
It's just empty. It's like it's the next block actually has space. So you can just go in. You go on a Sunday afternoon, for example, where there's less activity in the Bitcoin blockchain and it's usually fairly cheap to confirm transactions. Why? If you go maybe on a Wednesday, you know, 9:00 AM Eastern Time, it's going to be more congested, is going to be a little bit harder, and you're going to have to pay a little bit more to get going. It's second open market for, you know, confirmation and for final settlement.
OK, so your company is a Bitcoin miner. You're mining Bitcoin. You're receiving Bitcoin that you may not even need. Does that make you able to lend it to others?
Oh, good question. Yes, if we want you. So let me just go back on a little one piece and explain a little bit better what the Bitcoin mining company does, right? So in essence, what we do is that we convert energy into Bitcoin, right? How do we do that? So we use computers to go out and to find that next block of Bitcoin. Imagine if it was easy to find that block. Anybody could find it. You could do it like, I don't know, in your PC very easily you would find a block of Bitcoin that would create a problem because then it would be very easy to change also and it would have low cost to change.
It's the problem that you have with e-mail. Why do you receive a lot of spam or on Twitter? You know why there are so many bots out there is because there is no cost in actually creating any of these. You can create thousands of account, you can create thousands of users in next, right? And you don't have any cost for that. It's very different with Bitcoin to mine a Bitcoin block and to actually construct that block, you have to dispense a huge amount of energy. And then one block sits on top of the other. So if I want to rewrite the last block, I actually need to write rewrite the current block as well.
I think one of the genius things about block chains is the fact that if you just know the last block, the last block by there's a hash, which is, you know, very, very long series of numbers that it's unique to that block and the whole history of it. So if you change anything in one of the blocks before, the hash is completely different. So anytime that you anybody you know, comes in and once you change the blockchain, they would have to disperse a huge amount of energy, right by design. This is the whole, if you read again on the white paper, one of things that Satoshi for a long time struggled with was how can I, you know, avoid exactly that, that somebody double spends, right?
The double spending problem that he can change the Ledger, right? And the way he fixed that is by using a concept called proof of work. You actually have to work and you have to dispense energy, you have to spend CPUGPU energy or in our case, you know, very specialized machines to do that to find that block as compensation, finding that block we receive, you know, for every block that we find 3.125 bits coins, right? So a miner can do several things. So if you look, there are several public miners out there. You can look at Marathon, you know, Iran Riot, I mean, they're all public companies that can read a lot about what they do. And a lot of them what they do is that every Bitcoin they're mine is that they sell it. So the pure, you know, financial company where they're received the Bitcoin and at the end of the day, a lot of them will sell the Bitcoin, right to pay bills, to pay for operations, to buy more machines, to do different things, right? You can do all of those things.
In our case, we, we started this the opposite way. We came through money because we, we like Bitcoin. We, you know, we like it as an asset class. So we mine Bitcoin, we pay our energy bills, we pay, you know, our OpEx, we pay SG and A, we pay everything that we do. We're left with fund amount and we've been held in and this is our treasury strategy is to hold Bitcoin in treasury because we do think in a long term it's the best way for us to optimize ROI. Right now. There is a market that told you all of this because there is you, you asked about landing, there is an emerging market for landing against Bitcoin.
It's actually getting very, very active where I could use now Bitcoin as collateral to actually get a loan in dollars that I can use for other things. And a lot of miners, they will do that. They will mine the Bitcoin instead of selling the the Bitcoin, they will use it as collateral. Typically you can get like maybe 50% LTV on, on your Bitcoin today. So you put, I don't know, $100 in Bitcoin, you get 50, $50.00 in collateral in, in Fiat, right? And you can use that to pay bills to do other things. And then you still keep the Bitcoin. Of course, it creates other risks because now you're leveraging up, right? You have to pay interest, right? You have to manage your, your capital structure in a much better way than you you were doing before. But definitely something that it's emerging. I think the the market for landing against Bitcoin is going to grow a lot in the in the next few years.
Your strategy is to hold Bitcoin because you believe in it as an asset class for long term ROI. Sort of unrelated to the basics of Bitcoin 101, but who is that ROI for? Are people investing in your company and you're looking to have an ROI for them, so you've become the money manager?
Exactly. And I think mining is very financial in reality, if you think about that, right, it's, it's like it's not very different from BlackRock maybe going out and buying real estate and deploying capital in real estate to earn the, the, the income on that, right. The difference is that we get our capital, we deploy machines. I look at Bitcoin mining machines, we call them ASICS, as being like fixed income, you know, bonds denominated in dollars. Because I go out and buy these machines in dollars, but then every day they're plugged in, they're giving me, you know, a stream of cash flows.
Every single day I receive like, you know, the Armani and I'm going to be receiving a cash flow every single day of these machines denominated in Bitcoin, which of course is volatile. When Bitcoin is high, you know, I'm getting paid a lot. When Bitcoin is lower, I'm getting paid less, right? And managing the volatility is critical to to what we do. And the only way you can manage the volatility in our case is by being lean, being a very, you know, having been very cost focus to survive, You know, the ups and downs of this market, which is going back to what we mentioned in the beginning. It's still a market that it's emerging.
It's still a nascent market. Then any new asset class when it's being discovered, the asymmetry of information or how I see Bitcoin is very different than the way that you see Bitcoin. That's one of your clients see Bitcoin and the value that each of us puts through it, it's very different as well. And that creates volatility because you know, you're going to look at price goes up and like, oh, this is crazy. I know Bitcoin shouldn't be valued as much. And then you're willing to short it, right or to sell what you have. And naturally, you're going to have a lot of volatility as you walk towards closer and closer, you know, there's a symmetry of information actually converging, then volatility starts to go down, right?
So a lot of people look at volatility as a as a negative, like all Bitcoin super volatile. I look it as a positive because in my view, it's kind of like, you know, a temperature check that tells you that it's early because there's still this huge asymmetry of information among, you know, market participants.
Strategically Allocating Bitcoin for Long-Term Investment Growth
That's a good segue into talking about Bitcoin as an investment. Let's start with like if you had to compare it to another asset class, we would all be familiar with what any other early asset class like. What would you give us as like a benchmark that would feel more comfortable and known to us?
I think that the natural one is to talk about gold. You know, I think Bitcoin is digital gold in a sense, in the fact that, you know, it's scarce the same way that gold is scarce, right? The big difference is that we didn't get into this, but the issuance is written in protocol. So gold price just went up a ton. I know like a ton of investors now they're going out and, you know, building more mining facilities. They're actually looking to get more gold out of the ground. So typically what you see is that the booms and bursts are embedded in the commodity itself because as more people go out, find more gold, you know the supply is actually going to go up substantially, there's going to be more gold and then price eventually collapses, right?
It's different from Bitcoin. It doesn't matter. I can unplug all my machines and I couldn't plug in 10X the number of machines I have right now. But the difficulty in Bitcoin, it adjusts up and down every two weeks. So if there are more people mining, it becomes harder and harder to mine Bitcoin, right? That's why I told you in the beginning, that's on average every 10 minutes because it could be a little bit less if you have more and more people mining. But then in two weeks it resets. And if you look a long time, the difficulty in Bitcoin actually it's growing exponentially like because there are more and more people mining it.
The issuance curve, which is what matters to us, right, didn't change. It's the same. It's still going to end up at 2021 million no matter how much harder I mine. And I think that's, you know, another advantage that Bitcoin has compared to gold. The disadvantage that it has to gold is that it, you know, doesn't have a track record like gold. Gold has been around for, you know, thousands of years and people are familiar with it. They understand it. You know, you see the value on it. A lot of people talk about it's physical also. I can see it. I, I don't buy that because, you know, more and more I think we, we live in a world that being physical doesn't matter, right? But it is another advantage like you can use gold for, you know, for bracelets and other things and where you can't do it for, you know, I can wear my Bitcoin hardware wallet, but it doesn't mean anything.
That would be a fashion statement for sure. So back to Bitcoin in the portfolio, just going to ask a very straightforward question. The answer is yes, but like where does Bitcoin belong in a diversified portfolio? So assuming yes, but as an investment, as a like hedge or something else. Like again, we're I'm talking to high earners in their 30s who are at their earliest stages of their wealth accumulation, who really want to set themselves up for long term growth, proper investing, not gambling. Because that's the problem with Bitcoin is many people, most people still see it as a gamble. So take us to the world of investments and talk about Bitcoin within a diversified portfolio. How to use it best.
Let me start with the pure mathematical answer to that. So if you actually look, as I said in the beginning and use any asset allocation software, right, and what you do in these software is going to say, OK, here are the assets that I have, here's how much risk tolerance I have. And then it would flip and it would try to find the optimal asset allocation. You know, given, let's say you say I'm going to have S&P bonds, real estate, Bitcoin. And what it will tell you is that, OK, given the amount of risk that you want to take, if I want to take very low risk, the software is going to tell me, well, put a lot of money into bonds, very little into equities, right?
And so on. If you run these softwares and include Bitcoin on it every every way across the whole efficient, we call this the efficient frontier, right? The frontier where we optimize the sharp ratio as we were talking or maximize the sharp ratio as we were talking about every point along the way there is a role for Bitcoin. So for somebody that is very risk averse, it's going to be you know a fraction of a percent. For somebody that is more risk tolerant, it's going to be, you know several percent terms. So mathematically, this already answers itself that, you know, it should have a place in asset allocation.
Now the big question, yeah, this is great, but this is all you need to put assumptions, right? So you need to have assumptions on route what the future returns of Bitcoin is going to be and what the future volatility of Bitcoin is going to be. And none of us know that, right? It could be that Bitcoin, you know, if you look since since the origins, it has a compounded annual growth rate of like more than 60%. But who knows if that's going to be the case going forward, right? Probably not because you know, you have, you have marginal negative returns a long time. But anyway, it's still an important point. But if you just use history as a guide, absolutely it should fit in any portfolio.
Your second question around, you know, looking at, you know, high earners still in their early age, I actually think it's the best asset they can hold. Because when you, I don't know if you're somebody that is earning gonna make numbers up, I don't know, $10,000 a month, right? And you have to pay rent, pay everything. And then at the end of the day, you know, you're left with like $1000 if you start saving that in bonds, good luck accumulating a lot of value in a long period of time, right? You actually need to have some bang for your buck. You need, you actually want the volatility, right? Because we think about volatility, we think volatility is a distribution, right?
It's going to mean that you have more potential upside, but also more potential downside. You want to have assets that you know first of all would have volatility because you can capture that upside. Ideally you want to have more upside volatility than downside volatility. Hard to find these assets, right? I going back to what we discussed in the beginning, when you think about Bitcoin and the fact that you know, it is an asymmetric play right now, it is a little bit of gambling. You're not wrong with that because if you're wrong, there's still, I think it's very low probability and I think it's right now I actually don't think this could happen, but there is an event that Bitcoin could go to 0, right?
I put that as very low probability. But then on the flip side, there is also a scenario where Bitcoin captures a lot of the monetary premium that we talked about. It becomes, you know, the unit of account for the world and you can say that that's also a very low probability. But if that happens just a couple percentage points that you have in your portfolio that are put a long time, it's actually going to make a huge difference, right. The other thing we talk a lot, particularly I think with younger investors, I always tell them this is that, you know, make a decision that you want to locate something to Bitcoin and doesn't need to be a lot.
Just start, you know, we, we talk about stacking sets, right? Sets are the units of Bitcoin just every month buy a little bit because then the volatility can work a little bit in your favor. Some points you're going to be buying at lower prices, right? If you bought last year, you would have bought above above $100,000 and I can buy below $100,000. And they're just constantly, you know, dollar cost averaging into a position, I don't know, maybe in 10 years time would have a mass like a significant position in Bitcoin and your basis is gonna be very, very good because you bought a long time, right?
Okay, so to take that and to distill it into stash fault language, we think about investing for short, mid and long term financial goals. And if I'm understanding you correctly, it's that Bitcoin deserves a place in a short term, midterm or long term portfolio. It's just the amount that you want to to distribute to Bitcoin since it is a more highly volatile asset class given that it's early in its in its life cycle. So just really getting very basic with it. It's almost one step above equity, like bonds, then equities and then Bitcoin as far as like volatility and long term return potential.
Exactly my suggestion, set a percentage that you think is appropriate for you. I don't know and not for today. Let's say your personal today is 6040, just to make it simple, right? And say, well, by the end of the year, I actually want to have 5 percent in Bitcoin. Don't sell your stocks. Don't sell your bonds, right? Because if these people have the advantages, they're still building their portfolio. They still have, you know, dispensable cash at the end of the month. Just said it that, you know, going forward, you're going to allocate maybe more to Bitcoin than you are to the other asset classes. So that the end of the year you are going to have a 5% position in your portfolio that was derived from, you know, buying Bitcoin along every month for a whole period of time.
It's it's a less risky way to do it and also probably more tax efficient because you don't have to sell any of your positions, right? You're just building up with time. You're going to be building to get to to a larger percentage of your portfolio.
That sounds like you're talking about adding a Bitcoin percentage and then rebalancing slowly into your way into it, yeah.
Exactly.
Yeah. OK. So owning a small amount of Bitcoin could be meaningful. It doesn't need to be all or nothing. A.
100 percent, 100%.
We already talked about this, but I just want to hit the point home. Is it too late to get into Bitcoin? Like what if I think that? What would you say to me?
It's extremely early for all the things that I've I've mentioned, you know, I still think Bitcoin is going to demonetize a significant portion of of gold real estate, you know, bonds, all of these asset classes. And even if it is a fraction of a fraction, you know, price can still double, triple, multiply by 10 from from where it is right now. It kind of creates like a positive flywheel when that starts to happen because, you know, more and more even the conversations we're having around Bitcoin today were things that, you know, we couldn't even think about having ten years ago, right?
As I told you, like I got laughed at at Deutsche when I mentioned Bitcoin and now it's an institutional asset class right now. We have ETFs. Now you have, you know, established landing market. You're starting to have, you know, bonds are going to be denominating Bitcoin. All of these things are happening and it it became an institutional asset class. The risks that we had 10 years ago of Bitcoin just being banned. And like, I think these are gone because now it's part of the, you know, of the financial market system. And I think this is actually going to start feeding on itself. I think you're much better risk adjusted positioned by Bitcoin today than you probably were 10 to 12 years ago because there were massive risks, right? Those risks are gone, and the upside's still here.
Does that scare you a little bit that the financial services industry is more and more interested in Bitcoin? Because it feels like anytime Wall Street gets their hands on anything, it's just like, stay the fuck away.
Yep, we've lived for it, right. We saw Merrill Lynch collapse exactly because of, you know, the responsibilities of of Wall Street. It does scare me, but I do think Bitcoin is bigger than than all of that. They will try like with the ETFs, you know, there is going to be a lot of things that are going to happen, but the difference is that, you know, the protocol, it's still there. We still know where there is. So we can now if the financial system breaks, we can just escape to to the real thing, which is Bitcoin.
And that's the other thing that maybe you should think about, You know, longer term is like people always ask like, so how should I buy Bitcoin, right? I want to put it on profile. How do I do it? Having an ETF is better than having no Bitcoin. So buy an ETF you can have, you know, it's so super easy can buy in a brokerage account. It doesn't matter. The ideal thing is that you learn enough and you get comfortable enough and you want at least understand and how you can take self custody of your Bitcoin.
And there are several companies out there that can help you with that, like Unchained and other companies where basically you go and you have, you know, the signature devices, it's self custody. The custody is with you, right? And you can have it in a way that you have multi signatures, different devices in different locations. Don't try to do that on day one because you're going to be you're probably going to commit to make a mistake and you're going to be too afraid. Just buy an ETF, right? But with that, Start learning. I think one of the things with Bitcoin, we always joke like, you know, people that get in Bitcoin, they tend to fall into the rabbit hole and they start to read, they start to understand, they start to learn more and then gradually walk your way towards self custody.
At the at the end of the day, they can, you know, in the meantime, you can maybe open an account in a Bitcoin exchange and buy some Bitcoin there, right? And then eventually move it to your own self custody.
You are definitely a crypto bro, but an atypical one which helps the rest of us feel a little bit more comfortable.
I'm not a crypto bro. I'm a Bitcoin. That's the other thing, you know, don't fall into the natural trap, which is, you know we've seen this time and time again of the new currency, the new Bitcoin, you know a much better faster Bitcoin. It doesn't exist. There's only one cryptocurrency, which is Bitcoin. It's has a track record it's been around for a long period of time It has the network effects right and it's natural. This happens a lot that somebody will come in just like you like, oh, I'm too late for Bitcoin.
I'm going to buy. You know, I don't know this XYZ coin that it's coming out here because I think it's the new Bitcoin. You're I guarantee you're going to lose money, right? Just buy Bitcoin, you know, wait for it, you know, have low time preference and in the long term you are going to succeed. Just thinking, you know, four or five year cycles, anything you allocate to Bitcoin, it's super important. Anything you allocate to Bitcoin, you should never think about holding it for less than five years. That's what I always tell people, you know you're going to buy it, you're going to forget it, set it aside for five years. At some point it's going to be worth half of what you put in it.
Some point it's going to be worth, I don't know, 5X what you put in. Don't feel emotional in either of these scenarios. When it's down 50%, it's probably the right time to be buying more, not to be selling. And when it's up, you know, 10X, it's probably the right time. It should be reducing your exposure not to to be buying more. But I guarantee you're going to feel exactly the opposite way, right? So locking in for five years so you know that you feel at least, you know, a, a full cycle and it should work out well.
Learning and Investing: Final Thoughts on Bitcoin
You never had a period of time longer than four years where Bitcoin went down South.
That's the classic framework and advice and guidance that we give for other traditional assets. That makes a lot of sense. And so from goals based investing perspective, short term goals, you still want to keep that over to high yield savings account. Usually this is not financial advice on this podcast obviously, but midterm long term when you have time to work with now you can consider you can look at Bitcoin.
Exactly.
So for someone listening who still isn't sure how they feel about Bitcoin, what is one thing you hope that they take away from this conversation?
Yeah, as I said, buy slowly, buy a little bit every month, right. Start learning slowly. Don't try to understand everything at once. You won't. As I told you, I'm still learning. And you know, just go from there and think about it just being any other asset. I guarantee none of your clients when they invest in Apple, Google, whatever stock that they're reading all the 10 KS and 10 QS every month. They are not right. They shouldn't try to do the same thing with Bitcoin. Just think about this as being a new asset class they're investing in.
Start small. If you're wrong and price collapses in your face 50%, you're going to be fine, right? You're just going to be buying more and think about it in the long term.
I will link to the white paper in our show notes. So for people who are interested and want to get into the nuts and bolts, they'll have access to that there. OK, this has been insane. Before I let you go, RAF, we probably all need a bit of a palate cleanser. That was a lot of lot of Bitcoin talk, very informational, but we always like to end with a segment that I call Best Bite. You definitely know I'm a foodie. We've had many amazing meals together. And I would love to know what is something that you've had recently that just absolutely blew your mind? You're based in Miami, Me at the moment. Maybe it's something you've gone out to eat. Give me a recommendation. I wanna know where I need to go and what I need to order.
I'll tell you like I had a friend who just barbecued a tomahawk for us recently. That was amazing. Amazing. Really, really, really good. As a Brazilian, it arch impressed me with steak, but I, you know, I I really got blown away. Yeah, I don't know, steak. I I really like American steak. It's it's different than Brazilian steak. I would say like depending where you're going, the world, right, you're going to enjoy different kinds of cuts. You can't get like a very good, for example, a New York strip. You can get it in Brazil, but you can get a in the US as well. So, you know, and you can get like a very good beef of Teresa in Argentina, right, So.
That works. That works because I'm a big meat eater. And so now you put tomahawk on the brain and I have to go find a really, really good tomahawk. That's awesome. Nothing better than a friend who will cook you a great meal. Finally, Rafael Zagouri, where can people find you? Follow you? Tell us where your channels are so that we can stay in touch and follow all of your interesting work.
Yeah. So first of all, I encourage everybody to follow our company. Electron Energy is at Electron Energy at X. And then my Twitter profile, my X profile, it's Alpha Zeta, it's a LPHAZETA Alpha Zeta. I used to be an anonymous Twitter account for a long period of time. Now I'm not, but I kept the handle, you know, because a lot of people still know me by the hand. So that those are the best 2 places to go for to to get more and to to follow me.
Awesome, and we'll drop all your links into the show notes so people can stay in touch with your journey. Ralph, thank you so much for joining me today. I really appreciate how you walked us through this topic that is definitely surrounded by a lot of noise, hype, and fear. But for those listening, if this episode helped Bitcoin feel a little less intimidating or gave you at least a framework to start thinking about whether or not you want to learn more, That was our goal. That was definitely the goal for today. Just walk away a little bit more informed and have a wider vocabulary to be able to talk about Bitcoin. You definitely don't need to pretend that you understand something if you're still learning, and you definitely shouldn't invest in things that you don't understand.
Clarity beats confidence every single time. If you found this episode helpful, please make sure you're subscribed to the channel so you don't miss future conversations and a quick favor, a rating review liking subscribing all those things really help other people find the show. So if you have a SEC to do that, we really appreciate it. And if you know someone who could use this episode or have a crypto bro in your life who's very convinced that he's cracked the code by putting 100% of his net worth into one asset, maybe you should share this with them, you know, for educational purposes. All right, that's it for today. Thanks for listening. We'll see you next time.
Thanks for listening to the F word with Priya Milani. If you like what you heard, hit subscribe wherever you're listening and leave us a review while you're at it or approval junkies. Don't forget you can find a ton of great resources, content, courses and other freebies at stashwealth.com.
THE STUFF OUR LAWYERS WANT US TO SAY: Stash Wealth is a Registered Investment Advisor. Content presented is for informational and educational purposes only and is not intended to make an offer or solicitation for any specific securities product, service, or strategy. Consult with a qualified investment adviser (that's us) before implementing any strategy. Investing involves risk, including the loss of principal. Past performance does not guarantee future results. There…we said it.
