ROY SEBAG: It would be super easy to shut this down or to regulate or tax it. And it's certainly not as anti-fragile as the evangelists like to proclaim.

The size of the Bitcoin market cap today should already be powering an economy probably the size of one or $2 trillion.

I've always seen the two in this potato sack race against the fiat money system.

STEPHAN SPEARS: I'm Stephan Spears. I'm an engineer and executive with McEwen Mining, a New York listed precious metal mining company with exposure to gold, silver and copper. I spent the majority of my 17-year career involved with precious metals, gold on the investment side. And on the mining side. I'm here today in New York with Roy Sebag, my friend of 10 years or so. And we're going to talk about gold, about Bitcoin and about the 'Drop Gold' campaign that's been controversial lately.

Roy, good to see you.

ROY SEBAG: Good to see you, Stephan. It's great to be here.

STEPHAN SPEARS: Absolutely. So, as I mentioned, we've known each other for quite some time now. You've had a very interesting career, maybe you could start by telling us a bit about yourself.

ROY SEBAG: Sure. I've been investing in the capital markets for about 16, 17 years. And I started out being essentially a long short value investor, and very quickly transitioned to a specific niche within investing called distressed investing, focusing on bankruptcies and re-orgs and spinoffs and other event driven type of strategies. And it was through that prism that I really started to become a contrarian, almost immediately noticing that oftentimes, a lot of the conventional wisdoms that were proselytize in the market weren't true. And very quickly from there, I found myself being very contrarian about the housing market in 2006, '07, the CMBS market, the subprime market, traded that in the right way, capitalized on it and discovered gold initially as a portfolio diversifier but subsequently developed a very strong passion for the precious metals and began to actually actively invest in the life cycle of precious metals, everything from exploration to production, to development.

And it was around 2012, '13 that I decided to transition from being a portfolio manager to an entrepreneur, I founded something called BitGold, which was essentially a gold-backed digital platform that went on to grow to about one and a half million customers and 1.8 billion Canadian dollars in assets. Today, that company's known as Goldmoney. Since then, I've continued progressing within the gold industry, starting a jewelry brand, and doing a lot of other things. But one of the reasons I guess, that we're here today is I've also been the founder of a company called Bitfarms, which owing to my experience in exploring and mining for gold, avail to me this opportunity of mining for cryptocurrencies very early on. And so, even today, I'm one of the largest shareholders of this company that is, by our estimations, the largest cryptocurrency miner in Canada and perhaps North America.

STEPHAN SPEARS: Interesting. So, the subject matter at hand is the 'Drop Gold' campaign around about May 1st, there was a national ad campaign rolled out by Grayscales Management extensively telling investors to sell their holdings of bullion and to buy bitcoin through the Bitcoin Trust.

SPEAKER 1: In a digital world, gold shouldn't weigh down your portfolio. You see where things are going, digital currencies like Bitcoin are the future. They're secure, borderless, and unlike gold, they actually have utility. Leave the pack behind. It's time to drop gold.

STEPHAN SPEARS: You had a pretty strong immediate reaction to that campaign. So, can you tell me why it's different to you than just another asset manager or trust company trying to get market share from another asset class?

ROY SEBAG: Yeah, well, it wasn't immediate, actually. I was hoping someone else would do it. But about two months in or a month and a half in, I noticed that there weren't really well-articulated arguments on the other side. And I guess I just want to preface this with I personally have nothing against Bitcoin or cryptocurrencies. In fact, it's quite the opposite. I am not only exposed to cryptocurrencies rising and Bitcoin specifically rising. But I am actually very sympathetic to the project of cryptocurrencies as reorienting a society back to sound money principles. So, I don't really have a problem with the ethos of Bitcoin, or even Bitcoin being a successful project.

I guess my issue stems from seeing how these evangelists of Bitcoin trying to humble us with our piety about this being the greatest thing ever and rising, and we know we're in it for the mission, and we're in it for bringing down the fiat monetary system. All of a sudden, at some point, shifting from attacking the fiat money system as a problem to noticing the $8 trillion of gold and precious metals that have been held in exchange and transferred for thousands of years as being some a low hanging fruit funnel into the flow demand of Bitcoin. And to me, that was a red flag that required some response. Because it feels to me like some oedipal revolt, a revolt against the father, where gold is the father.

It's very difficult to me from where I sit with the knowledge that I have acquired to see how you could argue that Bitcoin not only displaces gold but succeeds without gold. And to me, I've always seen the two in this potato sack race against the fiat money system.

STEPHAN SPEARS: So, you firmly got your feet in both camps? You're hoping that Bitcoin actually becomes more anti- fragile through the debate and discourse that you've initiated? For those that haven't read the paper, let's just get a little bit into the nitty gritty of that. You discussed the crux of the matter is basically the difference between the natural physics of gold and the mathematical abstraction of Bitcoin, can you go a little bit more into the differences?

ROY SEBAG: Yeah. So, the way I look at the world in terms of an economy is I actually like to use the word 'cooperation', human cooperation. And at the end of the day, the reason I think that we're able to make predictions and cooperate is because the laws of nature, laws of physics, whatever you want to call them, are immutable. They're irreversible, and they're immutable. And they never change. And because they never change, we're able to essentially observe, measure, predict, and repeat various activities between each other as we seek to cooperate and achieve prosperity.

Now, in that regard, there is a fundamental distinction between the things that are external to my mind, that are corporeal that I can ingest through my sense perceptions, that I can see, that I can touch, that I can hear, that I can taste, and things that are entirely an abstraction, where I'm employing my memory, the interior of my mind, and perhaps a language like mathematics to communicate something to me or to you. And where this ultimately manifests is in the relationship between the thermodynamic relationship of energy and entropy.

And so, what we find is that things that are from the mind that are abstractions, or of memory, generally don't last. Their ideations, their trends, very academic term, but logical pluralism, there is no definite truth. Whereas things that are of nature are the load stars, they're the Polaris that allows us to cooperate. They're the sun, so to speak.

Now, when it comes to the difference between an element which is corporeal, and something like Bitcoin, what you essentially have to understand is that the element doesn't need anything other than the laws of physics to exist. Whereas Bitcoin is an abstraction. It's a system where humans come together and decide to allocate resources towards the reification of this abstraction so that it continues to perpetuate into the future. If humans do not cooperate towards that goal, that abstraction ceases to exist.

Where this really comes together, is if you consider that the economy has these corporeal elements like Legos. And we take these building blocks, and we build modular systems of cooperation to use them. But these building blocks are always fungible. And they can always be moved from different activities that we do. Now, our goal when we cooperate is not to just exchange bitcoins or exchange Legos with each other, it's to use the Legos to build a resilient, prosperous society. So, when you look at something like gold, it's definitely a Lego in the system. But it's a Lego that I can use for different things to do different things. I can move it around.

The fact that it's a Lego is based on the laws of physics. With Bitcoin, what I have to do is I have to go somewhere in the corner and take a lot of pieces of Legos, just to maintain a new system of Legos to do new things with it. And that's where the fundamental distinction is between the natural order of the natural world and things that are abstractions. And when it comes to Bitcoin, that distinction has become quite difficult for many people to appreciate, because of a combination of the language that's used to describe what's happening with Bitcoin, misnomers such as mining, ideas such as forgibly scarce, scarcity. And I think that where you have to really understand this is that Bitcoin is not being mined, it's being powered into existence.

So, essentially, all of these resources are being channeled into bitcoin in a way that perpetuates its own existence, whereas the gold itself is indeed being mined once and then once you mine it, it lasts forever. It survives into the future, it doesn't rely on the same miner that mined it in the past. And I'm sure we can get into more details about this, but this is really what it comes down to. And I find many of the Bitcoin evangelists have a problem even getting past that point, they simply don't believe it to be true. But of course, it is true. It's just an unfortunate fact. And I can quote some more reasons why.

STEPHAN SPEARS: Okay, so we can get back to the real differences between gold mining and Bitcoin mining in a moment, and I think we should also touch on the decay aspect of Bitcoin, I think that's a very important topic. First, maybe let's address some of the claims that are made in the 'Drop Gold' campaign that gold is heavy, that it occupies a lot of space, it doesn't have the value density that Bitcoin because Bitcoin is weightless, and so forth. I think you've proven that those are verifiably false, can you just go through a couple of those, and then we'll get into decay?

ROY SEBAG: Yeah, very quickly. So, in the advertorial campaign, you see people holding gold, which essentially misrepresents the weight of the gold. Now, this is very important, because those Legos that I mentioned earlier, those corporeal elements, they have immutable properties that are accessible to us through time that never change. And so, we know that of the 90 natural elements that occur naturally, gold has the highest specific gravity, which means that it condenses into a volumetric space, and becomes heavier and heavier and heavier relative to everything else.

So, in the advertorial, you see a guy essentially carrying two bars of gold, but those bars of gold would weigh 220 pounds, and he's effortlessly walking around with them. That's impossible. No one could actually carry gold that way. Moreover, we're talking about 10, $20 million of gold that this person would be holding. So, the misrepresentation begins by saying, it's this shiny metal, that's heavy. But in reality, that value density, the amount of energy embodiment that went into producing the gold, is why it's worth so much. And in fact, no other piece of Lego in the system could do that. No other corporeal element could store so much energy in such a small amount of volumetric space. So, that's one.

And then when I actually try to figure out how much volumetric space does Bitcoin take up, I discovered that it takes up an incredible amount of volumetric space when you consider the mining rigs, when you consider the transformers, the physical space that's required to actually run these servers that are constantly solving the mathematical puzzles. You end up with a difference in ratio of 500 to 5000 times depending on how you look at it. And that's when you're comparing all the gold in the world worth $8 trillion to all the Bitcoin in the world today, which is worth about $200 billion.

So, the idea that this Bitcoin that you're using on your smartphone has no impact or footprint in the physical corporeal world, that it's purely digital is false. It's cognitive dissonance. In fact, it's taking up an incredible amount of energy, physical footprints, resources, and ecological opportunity costs because it's requiring a continued investment in the reification of this abstraction, so that the bits of Bitcoin, which are just symbols, are worth any more or act any different than any other bits of symbols that I could just write with my pen and paper.

STEPHAN SPEARS: So, what are we talking about on an annual basis, what does it cost to actually run the Bitcoin network?

ROY SEBAG: So, I was very nice to Bitcoin in this exercise. All I did was calculate the amount of energy because I always try to think about things thermodynamically. And so, if you look at the latest hash rate of the network, it's about 65,000 petahashes. It would require 6600 megawatts to keep that system going. 24/7, that results in about $7.5 billion a year of electricity at wholesale rates. So, that's essentially the cost of electricity to society, is $7.5 billion.

Then you have to look at the mining rigs, it would require about 4 million mining rigs to run at 65,000 petahashes. So, when you calculate the cost of the mining rigs, again, even if I'm being very nice to Bitcoin at $500, $600, you're talking about another two or $3 billion. And the mining rigs have generally lasted for three to four years. So, I was extra nice to Bitcoin, I use a six-year amortization schedule, depreciation schedule. And in that regard, you're looking at about $10 billion before you get into labor costs, rent costs, things like that. So, that's your decay, that's your theta bleed and option parlance.

And that $10 billion a year is owed to the miners by the owners of the coin. And so, when you look at the coin, even today, when it's valued at $13,000, that's about $220 billion of market value, you have a monetary system, which is worth $220 billion, that's costing about four to 5% a year just to perpetuate its own existence year over year. That, to me, is worse than any negative yielding building bond, because it's telling you that the only way this works long term is for the price to keep rising. But it's also introducing a lot of other arguments that perhaps we can get into that I've reflected on lately with regards to whether Bitcoin is a security.

STEPHAN SPEARS: So, that's an interesting question, how is Bitcoin a security? How isn't it a security?

ROY SEBAG: I think that the regulators- one thing I've noticed, in general, like running Goldmoney, and we used to have a cryptocurrency operation that we exited three months ago, is I think there's this gulf, like a value gap between what's going on in Silicon Valley and perhaps with a few of these companies in the United States like Coinbase. And what I'm seeing with regulators all over the world, and I think that these companies in the US are presently taking advantage of an arbitrage, a regulatory arbitrage. So, for example, everyone believes that the SEC's white paper has set in stone the definition of what cryptocurrencies are securities, especially because one of the SEC commissioners, Clayton, said some things about it.

I believe that the jury's still out on this one, I think there's a lot of room for the Treasury Department, for the Department of Justice, for FinCEN, and even for Congress to step in and reassess those arguments, especially as this thing continues to disrupt the economic order. But from where I see it, I see regulators at the very early stages of trying to figure out what this is. And at this stage, being very unhappy with what they see. It's not compatible with the financial services ethos that have guided the financial industry for the last 40 or 50 years, but most specifically after 2008. And I think that some of this is going to get caught up with the industry in the next few years.

So, when it comes down to it being a security, well, if the miners- and I'm not sure if you're aware, but when this thing started out, nobody that you would have talked to that was a Bitcoin evangelist or proponent- and I went back and I looked at my emails and notes, would have thought that at 65,000 petahash, the price of bitcoin would only be $13,000. In other words, that level of decay relative to the nominal value of the coins is too high. It should have been much higher. So, in a way, something's wrong with the design.

Now, because this is the state of affairs, one has to ask themselves, what am I really doing when I'm buying a Bitcoin? Am I really buying something that's immutable? Or am I investing an amount of money to essentially buy an issuance of coins from a miner because the miner's literally issuing the coins and then distributing the coins through sale at an exchange. The miner can't buy energy from a utility company with bitcoins. At the end of the day, the taxes have to be paid with a fiat currency. So, you always have that requirement to convert the Bitcoins. So, the miners mining the coins, selling them through the mechanisms of the exchange, distributing this thing, this security, this instrument, which is then bought by a purchaser.

Well, what is that purchaser buying? If you have a 5% decay rate, which is implicit, it's written into the code at these prices, well then the purchaser is essentially giving the miner a bunch of money upfront in the hopes that the miner will keep running the system indefinitely. And I think that at the least, a regulator- it isn't too crazy to believe that at some point, a regulator may say, well, I have a handful of miners because of this natural monopoly that is developed that essentially control 51% or more of the hash rate. So, if they want to, if they're not getting incentivized, the same way an executive isn't getting paid to perform their function, they could argue, they have the bargaining power in this equation to essentially enforce that, at some point in the future, the person that bought a Bitcoin in the past has to pay more.

And it can be done through fees. It can be done by literally forking, as we've seen, was done by Jihan Wu, the owner of Bitmain, with Bitcoin cash. But if that risk exists, arithmetically, philosophically, I could see regulators coming together and saying, look, even though these miners claim to be decentralized, and by that, I don't believe anything is decentralized. But even if these miners believe them themselves to be decentralized, they're working in Congress in an industry, no different than a pricing control board. They're incentivized to work together.

So, in a way, they are an