Aleksander Svetski Podcast Notes/Outline – August 2019
Sam: Aleksander is the CEO and founder of Amber a dollar cost averaging app for Bitcoin. You are a firm Bitcoiner as well too. I wanted to get you on to talk about Bitcoin principles and what it actually means going forward. I come from a more sceptical viewpoint looking forward into the years coming, when I look at Bitcoin, I think it is interesting. I think there are a lot of issues in both how currently it is looked at and how it will be used going forward. I think this is what makes everything so interesting about Bitcoin and other cryptocurrencies that we are developing. We are really at the dawn of something new and grand, which is trust less programmatic money which cannot be double spent. So welcome Alek to the podcast.
Alek: Thank you for having me on bro, nice intro.
Sam: Do you want to give a quick 30 second background about yourself?
Alek: Really briefly… a bit of background in markets business sort of fell down the rabbit hole of Bitcoin about three years ago, maybe close to 4 years ago I don’t know…
And since then, I have been trying to take a very principles approach to understanding what it is and how it functions. I really like to build analogies and models to try and understand it intellectually. I am not a cryptographer or developer or anything like that, so I can’t explain it deeply in any way from a technical standpoint. But I do understand it well enough to articulate what it is. What I am doing at the moment is, I am a firm believer that everybody should have some exposure to Bitcoin, whether that be…whatever makes you comfortable. There are those crazy people who, I am potentially one of those included, that you store as much as you can in Bitcoin and there are people who have heard about it from a friend, even they should have some exposure, something really sensible. I built a product called Amber, which allows people to download the app, link their account and set an amount and a frequency and it will go purchase the bitcoin on their behalf and cold store it. And they can withdraw it whenever they want. Really just driving home the idea of dollar cost averaging into Bitcoin. That is mostly what I do with most of my time. I also do some writing and podcast etc. That’s the one-minute version of me.
Sam: I actually agree with you that pretty much everyone should have some exposure to bitcoin like you. I have different views. If you look at equities, equities are two times overvalued, there are in the 99th percentile of valuations for the entire history of our history, right? If you look at bonds, they are either negative, or we have negative interest rates in Europe. The US is heading for zero which means that if you are investing into bonds, the bonds are a direct correlation to the health and growth prospects of the economy on a thirty year scale, that means you are not going to have no growth for at least a decade. Maybe even more. If you look at real estate, real estate has bloated, look what is going on in Australia. The property prices in major cities in Australia have trebled over the past ten years. That is correct?
Alek: They have come back this year, but it’s ridiculous.
Sam: But still, if you are 20 years old or 30 years old, how difficult is it to buy a house in Sydney?
Alek: It’s impossible, you can’t. You literally can’t.
Sam: So, if we take the three major asset classes, bonds, equities and real estate…. and they are all grossly overvalued and 2008 was supposed to be the deleveraging point where baby boomers passed on their wealth to the next generation, to the 20 and 30 year old people who have been waiting to move out of their parents basements into their own homes and acquire companies at a decent price. It didn’t happen because of central banks and them propping up this ever-increasing leveraged debt system that we have. So, Bitcoin, in my opinion, is a way to have an asymmetric bet on the future of this new technology. It may go to zero, it may do a 100x from here right now but if you are putting 1 to 3% of your investment portfolio into Bitcoin, that is enough that you can lose it if it goes to zero, but it also allows for significant returns on a return weighted basis going into the future.
Alek: 100%. 1 to 3% should be a mandate for fucking everyone on the planet. And then depending on your risk propensity, actually more what’s important is your level of the depth and understanding of what Bitcoin is and what is stands for should dictate how much further you go with respect to your holdings. I met up with a dude today that we are both of the opinion that we don’t want to hold any form of Fiat. We already measure everything in how much Bitcoin we have. It depends where you are on the spectrum. But basically, you need to be on the spectrum.
Sam: Correct. I would say that I actually wrote a piece a while back, I just published it two days ago, The Future of Bitcoin is Centralised. It is not about mining centralisation; it is not about chip manufacturing centralisation; it is more about the fact that people like yourself are developing apps where people invest money through them. Can people withdraw their coins from Amber?
Alek: People can withdraw their coins at any time; we are technically custodians. I know where you are going with this. Bitcoin Bank, right?
Sam: No, the increased use of Bitcoin custodians due to an increased demand from retail institutions and the creation of investment products will funnel the majority of Bitcoin into custody providers, not because people care about censorship resistance or actually it is because they don’t want to worry about private keys or losing their Bitcoin, they want to know their investments are insured. From an institutional standpoint, you can’t actually have – they can’t hold it themselves. They can’t have the private keys in a safe in their office. There must be a regulated custodian who holds their assets. So, going into the future, the increased use of custodians centralises Bitcoin in that. The custodians are bound by the law to freeze assets if the government comes calling. And not just your own government but the United States. What happens if the United States comes to the Australian government and says this person is evading taxes in the United States and we want you to freeze their Bitcoin assets. You as the company or custodian have to freeze those assets and potentially shift them to the control of the United States if there was a court order that forced you to.
Alek: Unfortunately, the current method of on ramping does tend toward people looking for custodian solutions. I will say that a lot of the things happening natively on Bitcoin are sort of building avenues or options that are UX friendly enough that people can self-custody. Although that still has a long way to go but I think that one of the beauties of Bitcoin is that never before have we been able to actually have a bare instrument that is so easy to self-custody. Because if you had that sort of level… Let’s say the average Bitcoiner holds 5 bitcoins, that is probably maybe not much in dollar amount. There is a significant amount of, that 5 bitcoin in percentage amount of the network, if you were to map that to how much gold that represents, with respect to its entire network that amount of gold would be much harder to self-custody in a way that is secure than Bitcoin. So fundamentally it is better designed.
Sam: Gold has the same properties. You can keep it in your house in a safe.
Alek: For the amounts, it’s a lot harder.
Sam: Correct. If you are keeping a billion dollars in gold.
Alek: Even if it’s not a billion if you have one bitcoin, that is one/21millionth of the total supply. If you had one/21millionth of the supply of gold available, fuck me, you are not going to be able to keep that in your house. It is fundamentally more attuned to being self-custody. But I think you are right for most people, the likelihood of them holding actual Bitcoin, particularly on the base layer, is zero for most people.
Sam: Right. Even myself, I want to custody provider to hold it, and I don’t want to hold it through some unregulated exchange based out of the Seychelles. I want to open up my brokerage account, that I trade futures and options through, and I want to buy bitcoin through there. I don’t want to go through some dodge exchange like I don’t trust CZ and Arthur Hayes enough to give long term custody of my bitcoin assets to them.
Alek: Agreed. So, I guess, one question from there, what is the outcome of your holding bitcoin, is it to buy more Bitcoin, or is it to build up or earn more dollars?
Sam: It is more… Again, I am dollar based, because the dollar is king…when you talk about an actual global digital currency, it is the dollar first and foremost. Until the dollar goes, it is king. And will continue to be. I judge everything on that.
Alek: It is important to start with that supposition what do people want? Self-custody becomes a measurement of your wealth or of your holdings in bitcoin. It depends on where you are on the spectrum. Most people, at least for the next few decades, will be measuring their wealth in dollars and will be using bitcoin as an instrument for speculation or trading or for asymmetric upside. Whereas there is a relatively sizeable cohort of people who will be measuring their wealth in bitcoin and how much of that they have. I err towards the latter, but we will dive into that.
Sam: When it comes to tax time, you are not thinking that, you are thinking about Australian dollars?
Alek: I guess for now until I can get the hell out of the system completely, until then I have to operate within that system.
Sam: Because when it comes to currencies, Bitcoin is a privately issued digital currency. Soon there will be a publicly issued digital currency which comes from central banks, which we will talk about a little later on, but for now, there are privately issued digital currencies. While they are currencies, what they lack is legal tender status. The reason that the dollar has so much power is that all taxes, all business transactions, have to take place in the dollar. Nothing else can be denominated for US companies to conduct those transactions and to pay taxes as well. Correct. So as long as governments require their citizens to pay taxes in their national currencies, Bitcoin will always be something interesting but not anything you would use as a unit of account in daily life.
Alek: Correct. A friend of mine said this to me; you can’t separate politics from philosophy and economics; they are sort of inextricably linked. So, to develop any social infrastructure, to develop any society whatsoever, you need some form of economic system, and you need some sort of form of governance etc. I think where that end game is, where Bitcoin ends up is this ecosystem that is denominated in Bitcoin, where people participate in Bitcoin, where something like tax become more of a voluntary thing that people do, as opposed to something that is imposed by whoever runs the monetary system at the moment.
I think it reinvents how we envision society down the track, and it is very much incompatible with the current way society functions. As a result, whilst I do believe that there is going to be people wanting to get exposure to Bitcoin as an asset for the purpose of having greater wealth denominated in dollars, I think there will be a lot of space for a parallel economic system that purely runs on Bitcoin and… it will effectively be its own state. And it may trade with other states that are denominated in US dollars or euros or whatever they are using. The question is which one is going to be the one that people want to live in. Then we start to move into the discussion….if I go back to the cyberpunk manifesto, why privacy, encryption and all that stuff became a point of contention is we are moving into a world that is increasingly digital and putting the power to communicate, the power to transact value in the economy, centralising that to one or two entities, governments or corporates, to run that, is very dangerous for the people who live in that society… so as a result that cyberpunks came together and started building open source encryption and standards and software. Communication is the first thing they wanted to give the right of privacy to. And then the next thing was to privately outside the state to transact without being censored, that was the next big thing… which is what we are seeing with Bitcoin now. I guess without sounding conspiratorial or doomsday, 50 years from now when cash does not exist anymore, the choice will be to live in a society that is more Orwellian, more centrally managed that knows exactly what you spend money on what you do who you talk do and everything, say you like the wrong person’s Facebook post, so they turn off your ability to buy food versus the opposite which is more libertarian in nature. Horses for courses, some people may like to live in the one that is more prone to authoritarian tendencies… That may not on the surface. Call it a paranoia thing.
Sam: Can we talk about pseudo-anonymity thing?
Sam: When you pay me in cash, I don’t know how much money is in your wallet unless you show it to me. But when you pay me with Bitcoin, I can see the address that it came from and I can see the leftover amount, and you can trace it etc. And then I can do a chain analysis to discover which wallets are mostly correlated with those addresses and then build a profile about you and your total bitcoin holdings. If you can build that profile, the privacy is lost.
Why wouldn’t you, when you look at other say privacy coins, I will bring up GRIN. GRIN has no addresses; you can’t see the other side of the transaction, you can’t see anything about the transaction, their wallet, their identity. Why shouldn’t we switch over to a purely private system?
Alek: The privacy function of cash – that element will not happen on a settlement layer. It is not the right place to put it. That will happen on Lightning (Network). Right now, if you do it, if you send money to me on Lightning, I don’t know shit about you. We can anchor it into a network that is transparent into a network that cannot be compromised such that settlement layer which allows for the development of a robust banking infrastructure or financial infrastructure which may look like what we have today but it will allow for the market to price in information more accurately quicker and it will also allow for the faster failure of shit that is decaying that should not be functioning inside a capitalist society.
So, you get the best of both worlds. If you keep that base layer pseudo anonymous then you have the ability to have everyone validate and verify a limited supply along with being able to validate and verify in some way shape or form anything that uses it for settlement whilst then being able to extract layers above that can optimise for privacy on a personal level.
Sam: Or things like Coin Join are added to every single transaction
Alek: Sort of. I think conjoin is a very good solution for now. I think it is a fundamentally short-term solution that is needed now. But in future highly unlikely to be used by everyday people. If we are talking about a large-scale monetary settlement network, you are talking about Bitcoins each worth in the millions …. You would not coin join at that juncture because it would cost you as much as house to do so.
Sam: The transaction itself would cost more than a house.
Alek: Potentially. You wouldn’t coin join. At that point in time, individual transactions would be settled for what you promised to the market as your signal to maintain solvency or reserves or whatever. And I think that is where the institutions are going to be working with the settlement network and very high net worth individuals who do want to transport large sums of money privately.
Sam: Can we come back to the custody issue? You are targeting mass market retail investors. Options also need custody too. If the natural outcome for greater adoption, that Bitcoin becomes an investment product, then there is a greater role for custodians. Are things such as censorship resistance something that people care about? Or is it the asymmetric returns to their portfolio that they care about right now?
Alek: I think initially right now the most important narrative is asymmetric returns on the upside. I think longer term, and there is a lot of precarious shit happening in the world at the minute, or losing your wealth to the government or some war or something or an existential threat, is probably not at the top of everyone’s minds at the minute, but that it is able to be self custodied in a manner far easier than at any other point in history which basically acts as a check and balance almost.
Let’s think about it like this, let’s say there are huge price increases in Bitcoin and it no longer becomes viable for any one person to hold large amounts in self-custody because it would open you up to potential threats both criminal and life threatening when people learn you have keys stored at home or a ledger at home. Then you would open you up to this, we have already seen people kidnapped. The most natural thing to do is to move your money to a regulated entity which provides custody services. If we assume that huge amounts of money flow towards these custodians. The almost layer 2 app that would be built on a method for your money to never leave the custodian but to be made on a layer 2 ledger. The custodian, the bitcoin would never leave their cold wallets, they would just make adjustments to the ledger both internally and with other custodians, which is essentially what the banking system does today.
Sam: Then you could move money around on accounts. So, if that is the case, then censorship resistance no longer matters because the custodians are bound by the regulatory rules of the societies that control them. So, if they are based in Switzerland then it is Switzerland, if it is the US then it is USA regulations. That would open the door to the FBI if they wanted to freeze your assets, they could. They could go to the custodian and say, show us. This is the natural point I wanted to get to that in Bitcoin moving toward mass market, retail and institutional use results in centralisation through custodians, which does away with censorship resistance and decentralisation.
Alek: To a large degree I understand what you are talking about. One of the areas I think is really important… there are things that Bitcoin does, being programmable money, you can’t do with other things. It allows for these custody programmes to be better solved. So, I think we will see a lot of stuff being developed over the coming years which are MultiSig based. Custodian providers are basically a form of centralised MultiSig, I am making that term up. But the natural MultiSig programmable nature of Bitcoin will mean that custody solutions will be more robust than back in the day and custody solutions may evolve that are more self-custody based but have the benefits of storing with a centralised custodian. That is sort of number one.
Number two is as well… I actually think that because this is a non-state/sovereign issued money. It is not something a company or a custody provider does not need the blessing of the state to build a business around. I think the market as and when required will build custody solutions let’s say inherently centralised but allow for better products and services that keep the broader decentralisation.
Sam: No, but it still wouldn’t work. Right because any custody provider is bound by the laws in which they operate in. If the police come calling and they have a warrant for these accounts – no more withdrawals or deposits; they are bound by the laws to freeze those accounts. Of course, there will always be people who will hold their private keys and keep them in a safe somewhere and will not use custody provider. If we get to the point where we can buy Bitcoin ETF. I don’t want to buy Bitcoin; I want to buy a Bitcoin ETF so I can use my brokerage account. You have done your taxes, hopefully, I hope you have. You know how difficult it is to accumulate all of your Bitcoin transactions for tax purposes for the entire year. It is very difficult.
Alek: It’s not that bad if you are not fucking around with Shitcoins. If you just have a record for when you bought Bitcoin and when you sold it, if you sold it, then you are fine. It is relatively easy.
Sam: But if you are trading and doing other things, then it becomes a much bigger task and if you are using different exchanges then you need to aggregate all those things and it’s very difficult.
Alek: It is very difficult. I think that is why it is better to buy this shit and not fuck around.
Sam: Yes, but with my brokerage account I just get a letter at the end of the year, they calculate all my capital gains for me. I take that and I can either export all my information from my brokerage account and give it to my accountant who can go back and do my taxes, or I can calculate it myself, but it is much simpler when it is all in one place. And I know if it is an ETF it will have insurance requirements, I don’t know how you insure that. Do you have insurance for Amber?
Alek: It is very different to get insurance for a Bitcoin product, basically it is pretty non-existent. There are products out there, but they cost more than the underlying asset. So, it’s ridiculous.
Sam: An ETF has to be insured there is no way round that; I have no idea how that will happen. It will probably be very expensive and baked into the holding costs of the ETF.
Alek: There will end up being a Premium on the product.
Sam: It will have a holding cost per year which will be 1% a year to hold a Bitcoin ETF. It is fine if it is giving the returns that it does but the main thing that if I am going to go tell my parents to go buy Bitcoin. I did this in January I had my Aunt sign up for Coinbase. My Aunt is in her sixties. I helped her set up an account to go buy some bitcoin. It was a very difficult process. She had no idea what these addresses were or how to use them. Coinbase is a very easy product to use but at the same time it is still difficult for people who are not tech savvy to use it.
Alek: 100% percent. First, I think a lot of these things are going to be smoothed out. I think the way we interact with Bitcoin today; people will look back in 20 years and think you actually sent Bitcoin on the Base layer to these addresses? It will seem crazy, the way we dealt with Bitcoin today. We are the pioneers of this and there is no handbook of how we should do this or do that. Second, coming back to your earlier point about Bitcoin becoming centralised around a few custodians, whilst that does have an impact on what one might perceive as censorship resistance, it doesn’t mean somebody who is not in those custodians will not be able to get the benefits of censorship resistance. So what will effectively happen is those that choose to trade and use Bitcoin within the custodial framework opting for a product that gives them potential gains in US dollar terms, they are not interested in the censorship resistance, but it does not remove this element of Bitcoin or remove if when shit goes wrong from a geopolitical standpoint, there won’t be a flight towards storing capital in Bitcoin in a way that maintains its censorship resistance for some larger players.
Sam: If I was the government, I would embrace custodians. One: I would say holding Bitcoin is illegal, you have to use a national custodian. Two: If you are going to hold Bitcoin, you have to disclose every single bitcoin address that you have ever used. And you must do this under the threat of jail time or forfeiture of assets. Third, I would force everyone to use a national exchange, and say this is the only place you can transact fiat for crypto. So we have a complete database of all the money coming in and all the money coming out, we know all the addresses and who they are connected to and then we can do chain analysis once the money leaves the national exchange we can then track it back to the addresses that originally purchased it.
Alek: That would be strategy for the government to try and quell it but I think one of the challenges facing governments and centralised institutions have is the coordination effort required to do that in a manner that is fool proof and does not leave an gaps on the way is impossible.
Sam: The people who want to have Bitcoin without KYC are miners, the people who don’t mind KYC to the government and exchanges are people who buy it through exchanges. There will always be people yes who can until 2150 be mining Bitcoin so that they don’t have to have KYC, that is a small minority of society.
Alek: This is why Layer 2 solutions on Bitcoin offer inherently more privacy like Lightning. It is fundamentally important to maintain the integrity of the censorship resistance function to persist in aspects of bitcoin. This is where the battle comes down to; one version of the world that is much more surveillance state in nature and one version of the world that is free, and you are able to transact and operate as you wish. People are going to have to make decisions about these trade-offs; the fact that Bitcoin exists is going to give people the ability to opt into something that offers the alternative to the status quo.
Sam: I don’t think people care though. I was surprised by this.
Alek: People don’t care right now. People don’t care until they care.
Sam: So, I was a linguist in the marine corp. We essentially worked hand in hand with the NSA. I know what the NSA does, and I was dealing with the Stone documents if you read them before that was all leaked. This was many years ago and I am sure many things have changed since them. But what Stone released was what was happening. There is huge data collection – it is still being collected. Even if it is curated by an artificial filter. There is a huge level of surveillance. You have to do something to pop up in their data filter. The government was doing this for a long time.
Alek: I wouldn’t say that people haven’t done anything. That may have been one of the early drivers of people into Bitcoin. You are fundamentally right that most people don’t care until they need to care. At which point having the option to go to something that fundamentally provides a high degree of privacy and personal property rights in that sense, that’s the important part having that option. It may not end up being used by everyone, because maybe despite the surveillance, despite the market distortions society gets on okay and continues to limp on as we are or the technological evolution might be strong enough for us to maintain this feeling that we are still progressing as a society and as a result, maybe Bitcoin never gets really adopted to the point where everyone is really scrambling to get it because they need an alternative, thanks to the complete fuckery that the existing system has become. But the fact that it is there is what matters. Because should something go wrong, we have that alternative and I think that alternative is something we have never had before.
Sam: I agree with that. The base case is that Bitcoin is a good investment for people and hopefully continues to be throughout the lifetime of its existence. That’s the limit. The upside is what you are talking about is hyper-bitcoinisation which I am highly sceptical about that. The base case I accept. I have gotten to the point where we have custodians and investment products, it’s professionalised, and it is going to continue to do so over the coming decades. How it professionalises and how it enters the existing financial services sector and how it works on the retail side – that is a given. My only question is, will the wholesale side be affected by Bitcoin? And this is what the hyper-bitcoinisation people say that it is going to move past retail into wholesale and you will see commercial banks and central banks using Bitcoin more. I doubt that but I could be wrong.
Alek: There are probably two points there. Number one: at some point in time the superior network or technology ends up being adopted by more and more people, so having a network that provides the base functions of send, store, receive; that is fundamentally unstoppable, and has this verifiably scarce unit etc. provides for arguably a much better base layer piece of settlement infrastructure upon which a more robust financial system may be built.
If we can at least agree on that settlement layer being superior to the cluster fuck we have now, I think we can then branch off to two questions. Number one being is it something that the existing status quo and the existing central bank and the existing banking infrastructure rebuilds or retools for themselves, or is there the emergence of a new set of Bitcoin banks and financial institutions that emerge from Bitcoin that are natively build in and around it that can provide a native suite of products and services that today’s banking system tries to provide and can provide a range of better product and services than today’s banks which are limited by the tech and the legacy stuff they deal with. Then it becomes a question of market, what will the market want to use more?
I think much like the internet inverted the telecommunications industry, there is a large opportunity here for emergent financial institutions banks financial products and services that are built on and around Bitcoin to invert and be the future giants in much the same way as an obscure book selling company launched in the 1990s has become larger than any Telco’s combined. So, I think that is a much broader question. I don’t know which way it is going to go. I think it is going to go the way the internet did. The largest companies of the internet were internet native. Not older companies that had every chance and opportunity to pick up the internet and run with it and potentially win. But they didn’t. I think that sort of thing is going to happen now.
Sam: The difference between being a retail product that institutions use to trade and being a reserve asset, so the dollar and the US bond market are the two parts of the global reserve system and the reason that it is the global reserve currency and bond instrument is that it is the deepest and most liquid when you need to sell assets, you don’t want to sell something that is illiquid which maybe your own national currency. So, everything trends toward the most liquid asset which at the moment is the dollar. The dollar really allows you find that deep liquid market. FX markets are trillions of dollars a day in volume. The Bond market is hundreds of billions of dollars a day in volume traded. I still have issues with wrapping my head around illiquidity when it comes to Bitcoin. Let’s say we get to central bank level where you need Bitcoin for reserves, if a bank needs to sell reserves to prop up their currency. I don’t think national currencies go away because they are important, they allow governments to fund social programs, spend beyond their means and allow for different parts of infrastructure and programmes to be run and then that would be effective for their interest rates as well. When they need to fund those programmes and they are seeing a devaluation of their currency they sell their dollar denominated assets and bonds to get dollars to prop up their currencies. So, if it was Bitcoin…
Alek: To get to that world though, the liquidity of Bitcoin is going to have to increase a thousand-fold anyway. So I think before central banks in any way shape or form buying up Bitcoin, Bitcoin is already 5 or 10 million dollars a coin and the level of depth and liquidity in those markets is such that it provides some sort of similar liquidity to what the US dollar presents now in FX or bond markets etc. I don’t think where we are getting stuck is that it is a temporal thing. Right now, Bitcoin is stuck emerging; we can’t even get an ETF together and all the exchanges are still run by cowboys. This is so early in it at the moment that liquidity is definitely not there at the moment. But that is going to evolve, and that liquidity is going to increase. It is going to come down to which products and services are better provided, whether it’s retail offering or whether it’s commercial banks wanting to denominate some of their assets in Bitcoin and participate in that sort of thing.
I agree with you that countries are a collective of citizens being able to build a society; they need to come together in some way and function together…
Sam: Before we move on to that, have you ever taken a Bitcoin denominated loan? In general?
Sam: Have you ever borrowed 1BTC from someone?
Alek: Have I done that? I may have done that. Why?
Sam: Would you want to take a bitcoin denominated loan?
Alek: What am I doing with that loan?
Sam: It doesn’t matter what you do with it. The purpose is not what you are going to do with the money you receive it is more if you take one BTC, is that a type of loan you want to take? I don’t think Bitcoin is a good thing to borrow on because let’s say you borrowed one Bitcoin from someone at $3,000 and now it is worth $10,000. Your cost of capital has increased 3 times.
Alek: That is why I said it depends on what you are trying to do with it.
Sam: Let’s say business operations I needed to pay expenses and salaries in national currency and I am borrowing 1 BTC to transact into dollars to pay.
The problem is that it depends on the time scale of when you are doing this. Right now, that is deranged behaviour – you’d be a moron to do that now. But when Bitcoin’s price movements veer toward 10% a year, 5%, 3% a year then it makes sense. Which narrative are we trying to fit over what Bitcoin should do? It can do a lot of things. An emergent money has to go through this emergent stage of crazy volatility. People who are stupid enough to borrow money in BTC now and have this denominated in dollars are going to feel the pain or some of them might get every rich lending it on the other side. Literally it comes back to that we have to go through this phase of volatility now – these growing pains of Bitcoin until the market starts pricing in and understands what an asset like this is actually worth whether for reasons like central bank settlement or about censorship resistance or a superior form of money or an uninflatable fixed supply asset.
Anyone can cherry pick a piece of the narrative and then a time when it doesn’t fit for Bitcoin and say this is not going to work where if we look at it more broadly. There are so many ways this could work if we apply the right things at the right time. The right thing to do with Bitcoin right now is to buy it hold it and not give it to anyone. Maybe in 20 years’ time the right thing to do with your Bitcoin is to plug it into your home node and you can be self-sovereign. You can participate with people who are always self-sovereign. There are loads here to unpack.
Sam: I tend toward the Orwellian route. My last guest Erik Townsend talks about what cryptocurrencies have given us. One is the solution to the double spend problem. Additionally, it has also allowed for trust less programmic money which can be programmed to do different things; whether it is policy, governance, limits for that money. The blueprint has been laid out for central banks and governments to cherry pick the best bits of Bitcoin, Ethereum and pretty much every other cryptocurrency to come up with a central bank denominated digital currency that can be coded to policy implementations that central banks have right now can be hard coded into the digital currency itself. One of the reasons central banks are ineffective at policy. They can adjust interest rates. We just had the first Fed cut in a long time, ten years. This is supposed to spur federally funded banks to increase lending. It’s easier for commercial banks to lend out money. But it doesn’t work like that. When borrowing costs decrease, the federal funds rates decreasing, only incentivises banks to speculate and to do other things instead of lending money to increase the money multiplier. So, while the central banks can adjust the overall policy of interest rates, they cannot affect what the commercial banks do as result of the interest rates being raised or lowered.
In a digital currency system, the federal reserve says we are going to offer you more money for lending out but only for these types of loans and any other banking activity is going to be tiered in this certain way to say that this is the type of loans we want to go out and trading is a speculative activity that we don’t want to occur so we are going to make the interest rate for borrowing money for trading much higher. This would force commercial banks through incentives to act in the way the central banks want them to.
Alek: That trends towards a socialist system, right?
Alek: That is no longer capitalism.
Sam: But this is the system that we have.
Alek: It is one of the systems we have. Bitcoin is the other option.
Sam: But capitalism in a modern sense is a managed asset deck; you have policy makers who manage interest rates and manage open market operations so that they can either discourage or encourage lending from the banks. If the economy is overheating or if it is…
Alek: That is again… the economy does not just overheat. This is the problem when you start tampering with complex systems. The only solution that you only have to fix it is to tamper more and the spiral more until you blow yourself up. I used to do stunt driving. The one thing that, if you are in the military you know this, when the car is losing control the last thing you want to do is touch the steering wheel. It is the last thing you want to do. It will stabilise itself. I think the true definition of a capitalist system is having quite broad limits…. That is why I love Bitcoin; it has 21 billion units every ten minutes. In the middle you can build and do what you want, and you know these broad limits aren’t going to move. I think there are some presuppositions in there.
Sam: Russia and China will pool together their gold reserves to back up their digital currency. You have a supranational digital currency and on the back of that they would create a bond market based on this to compete with the US dollar.
Alek: If they start using gold, eventually they will switch to Bitcoin.
Sam: Why would they switch from gold?
Alek: Because Bitcoin is far superior to Gold. They don’t have to count the gold. There is no way to interface the real work with the digital world. There is no way to prove the reserves of that currency. Fundamentally it is inferior to Bitcoin.
Sam: Bitcoin has no intrinsic value.
Alek: Yes, it does.
Sam: No, it has a confidence game in that the price is above or below the level of confidence in the market. There is zero intrinsic value in the bitcoin network.
Alek: Define intrinsic? I don’t understand what you mean about intrinsic.
Sam: If all confidence is lost in bitcoin, the price would drop to zero.
Alek: Why is there confidence in Bitcoin?
Sam: There is an assumption based on fixed supply that someone is going to buy Bitcoin at a higher price than you.
Alek: Why is that an assumption? I am sorry, what is the assumption?
Sam: Because of how the supply has been limited, there is an assumption that if I buy now there will be someone who will buy at a higher price or the same price in the future that I bought it about.
Alek: Isn’t that intrinsic value? Isn’t that the definition of intrinsic? The supply of 21 billion one could argue is the intrinsic value of Bitcoin and make up their mind about confidence in it. I think the concept of intrinsic value stupid because all value is relative. For example, do you value breathing?
Sam: All value is not relative.
Alek: It is.
Sam: It is one way of thinking about it. You can either come from a relativist standpoint. How do you find morality? That is the hard part for relativist how do you decide if it is good or bad? If you are saying there is no moral base to start from, then how do you define values after that? You say that there is value and that there are certain things that are more valuable than others but based on their inherent properties.
Alek: No that is more shilling points. That is people’s consensus points around what they consider to be valid. So, I will give you one simple example. Breathing. I assume you find your life valuable so that as a result, breathing is extremely valuable to you, but god forbid you and your kid crashed into a lake and there was only enough air for one of you to survive. You would most likely value breathing and your life less because you want to save your child. Everything ends up being valued relatively. I think intrinsic value is such a hairy topic. If we are going to start saying that particular objective attributes are the prerequisite for defining something with intrinsic value. Then I think we need to define intrinsic value first before we can a discussion about things…
Sam: Bitcoin has value because of the convenience it provides to people who use the network because they can transfer value. This is the primary value.
Alek: The primary value for me if I hold one bitcoin is that I hold 1/21th billion of the network so for me. I don’t care about transferring it to anyone. What is more important to me is that I can hold this unit and my wealth cannot be diluted. And as a result, it meets the definition of store of value for me.
Sam: But eventually you have to sell back to dollars to use it.
Alek: Correct. These aren’t mutually exclusive concepts. What defines Bitcoin is those who decide to buy into those consensus rules. What Bitcoin provides intrinsically is a hard cap on the availability, each block has a fixed amount of work that goes into it.
Sam: It’s artificial restraints on the supply.
Alek: It’s not artificial it’s intrinsic.
Sam: They are programmed into Bitcoin. You could create a different Bitcoin chain.
What differentiates Bitcoin is the participants that choose to opt into those consensus rules. Or as I was discussing before, a society is merely a set of rules. The narrower they make those rules, the more constrained and surveillance, the more Draconian the state becomes. Or do you allow the participants to be freer and more unrestrained and to make up their own minds. Then it becomes freer.
Sam: It is a determination of the confidence of the people in Bitcoin at the time as to the price of it.
Alek: The price is more a reflection of people’s misunderstanding of what Bitcoin is.
Sam: That’s false. The current price is the total amount of information in the market reflected in the price.
Alek: I was the first person to discover gold. And I said give me your rocks because we all use those rocks. When gold was discovered no one knew what it was. Most of the people in the Bitcoin market do not understand what Bitcoin is. The point with emerging assets is that during emergence we do not understand what they are worth. And by definition it is a market priced good there is always different people valuing its inherent attributes differently.
Sam: The difference between gold and bitcoin is that gold was always valuable.
Alek: No, it wasn’t.
Sam: Right but it had demand as a metal, natural demand. It has been used for jewellery for thousands of years.
Alek: We decided to use Gold for jewellery before we made it out of other materials. Jewellery was the original money. There was a time when copper was more valuable than gold.
Sam: It does not matter the society it was found in. Gold and Tin were the most valuable to the Aztecs. The issue with Gold is that the intrinsic value or characteristics give it value for exchange. It is a physical metal and element. Noncorrosive, easily malleable, divide it into different parts. These are the elements of gold itself.
Alek: Bitcoin’s properties are intrinsic because they are programmed into it at the ephemeral layer.
Sam: The physical properties of gold are non-socially found. The properties of Bitcoin were decided to be valuable by the creator Satoshi. He said this is valuable.
Alek: He just picked some random numbers, 21 million coins and 10-minute blocks. It could have been anything.
Sam: It could be a billion. What matters is the fixed supply and the elements of its artificial scarcity which were given to Bitcoin by its creator which makes it an extrinsic characteristic of Bitcoin determined by the creator.
Alek: No see this is where we diverge then there has to be creator of Gold.
Sam: The Big Bang or God or whatever we are going to define it as.
Alek: Correct. There are objective truths about Bitcoin. Whether you are inside the bitcoin network or outside the network, you can still point to the rules that are coded within the recipe. Gold was coded as this element which was inert. Bitcoin has the same inert structure from its rules.
Where the argument falls apart is that gold is physical, and Bitcoin is not physical.
Sam: We will close on the gold stuff. Central bankers have had it all wrong. They eased rates due to the threat of inflation in the system, but I would argue that they were essentially making people’s mistakes less damaging. They have prolonged the business cycles and tried to prevent any deleveraging. This cycle of easing has led us to where we are now and going into the territory of negative rates. It just doesn’t make sense. The thing that this the cause of it is more of a demographic issue. There is some research done by the UN into the demographics of the world. Population has peaked 10-15 years ago as the boomers die. Our entire social structure is based on increased population, and there will be more people around to support the system going forward. Over the next 100 years, you are going to see this decline in population in the first world. There is not a need for more children. We are not replacing ourselves. These declining demographics are met with the wrong policies.
When things are easing, you should make it easy for people to supply a growing economy because the amount of people are growing up. Now we have declining populations – general demand is going down across the board. What the central bankers are easing to create more supply. It makes no sense. This is why we are moving toward negative interest rates which allow for super leveraging.
What the central bank should be doing is raising rates to make it harder for people to borrow as the population decreases and demand decrease. This would be better for young people. My greatest fear is the greater economic issues, not Bitcoin. The bigger issues need to be addressed by politics. Revolutions are never bloodless. I worry more about this on a humanity level for the future we have coming. We have decided our society into the wealthy boomers who were able to ride 30 years of equity increase and bond decreases and a millennial generation now, Gen Y & Z who are facing asset depreciation so they can afford to buy it. I see stagnation for the next decade. I see Bitcoin as a way of getting around this stagnation. Bitcoin is a way of building wealth into the future. It is going to cause societal upheaval. Look what happened in Ukraine or across Africa. This is only the beginning of what you see in the future. I am really worried about that.
Alek: The kind of solace I have for myself at least. I think something’s got to happen anyway. Because all we are doing in this ever-continuing chase for yield or growth, the future is always going to cover the debts of today is just crazy. We are continually distorting. It comes back to what I said earlier… these fundamental baseline fabrics of society, the ability to communicate and transact value, to know where the monetary network is and where it stands... if those are broadly fixed, then open for interpretation within these broadly defined barrier, then society will naturally ebb and flow without this artificial attempt to grow for the sake of growing instead of taking a rest. Because we have been able to perpetuate something that should have taken a rest a long time again, I think we have made it worse and worse for the people who have to deal with it when it comes time to pay the piper.
Sam: I think the political action that is spurred from this is necessary. Maybe Bitcoin and other cryptocurrencies will encourage people to demand political action because it is not going to happen without that. It starts with having a strong voice to communicate the value to the people around you that you should have. The mistakes that we have made in developing a system that is on the verge of collapse with the amount of debt we have.
Alek: I think in some ways I used to subscribe to being more politically active in the system and trying to bring people over. You can’t have anything without an economic system that is robust and fixed – then you can build what you want off it. Maybe the best way is for people to opt out of the current system and jump into a Bitcoin economy. It is like an emerging economy: although there are not many stores or merchants or many customers, it is the place where growth is going to happen. People will come for its growth and its functions.
Sam: It should be bigger. It allows you to achieve the basics of human life: family creation, passing your knowledge and ideas and your wealth onto the next generation. We talked about prices in Australian. The lack of access to single family homes reduces family creation. This is a well-known fact. The people buy house later in life, start families later in life and that is bad for the economy. And it’s bad for society too. People who can afford families at an earlier age have more wealth at a later stage in their lives so this over appreciation of assets in society is destructive for the people who are your and my age. Your children as well. What will their prospects be? Where will all this lead them. What is the outcome of a housing market where no one can afford to buy except foreign Chinese buyers in Australian snatching everything up? I think if you want a better life for yourself and your family and the country, it starts with first principles. Then it should drive your actions in the political sphere. The politics are the projection of your own values on to society.
Alek: I agree with you in principle. Sometimes the better option is the time and energy you are going to waste trying to influence the current infrastructure is the time and energy you could spend developing this new infrastructure from a clean slate. The more and more people realise that – we are no more bound by distance, we could literally have hubs around the world in each local jurisdiction could operate purely on Bitcoin and they could trade and operate from an economic standpoint from other locals that are also bitcoin based. The gold standard can’t give us that but a completely fresh kind of slate and over time sort of build that up. So that the people who choose to jump ship from the broken system to the new one has a method or an avenue to do so. I have an interesting analogy from a guy I was having lunch with.
Alek: Which side was the messed up one in Berlin?
Sam: East Berlin was the communist side. The guns were only pointed one way in Berlin.
Alek: So, the West was the free side. West Berlin was that one. Bitcoin is West Berlin and only some of the East Berliners are going to get through until the whole thing comes crumbling down. It will take many decades from now. One infrastructure is fundamentally superior and what we can build off of that is much more robust system versus the other one which is basically putting lipstick on a pig and kicking the can down the road and continuing the façade we have developed to hide deficiencies in the current system. One of the challenges of starting with a new slate is that the new slate has to be so different and so new most people aren’t going to get it or understand it.
Sam: I disagree. Coming back to money, it starts as being a commodity money and then it moves toward paperback commodity money and then Fiat. Then there is a collapse and it goes back to commodity money so if we assume that at some point the fiat system will collapse then natural progression is to move back to commodity money.
Alek: No that is in primitive society before we had anything digital like we have today.
Sam: Well I mean I don’t think so. The return to more commodity money or digital backed commodity money or if … the fiat system has to collapse at some point, it is a carousel at some point, and it goes around and round. If we do go back toward commodity money maybe it’s gold maybe it’s Bitcoin, who knows. I would tend toward gold. In times of great strife, people tend to look toward safe assets which are the least volatile and preserve value over the longest time period. Typically, in times of war you have no access to power or any sort of digital system. If you are in a war zone, and you have no access to your Bitcoin, how can that work?
Alek: The world we lived in before. The generation growing up now have no interest in gold and don’t care about what was used as money before. Today power internet and telecommunications are inherently mobile. You can so easily be off the grid. Wars matter so much less. The fact that you can build something; one could build something after a war, a solar panel, a bitcoin miner and a garden… and communicate and transmit value to someone in China who is doing the same thing. You cannot do that under a gold standard. As long as we can pick up power, only something catastrophic would we not have Bitcoin. Other than that Bitcoin reimagines what money could be – just information. It’s still fundamentally superior to communicate over long distances which is something you can’t do with gold.
Sam: I don’t think we are going to change each other’s minds. Is there anything else you would like to discuss?
Alek: I think we need to do a round 2 bro because we did not get the chance to dive into the shared fiction element. There is one thing on my note pad. What do you define as the best parts of Bitcoin/Ethereum?
Sam: Building programmic rules into a digital currency version of the dollar to implement central bank policy better than it is implemented now. Let’s say you get to UBI (Universal Basic Income) and the central bank says that we don’t have enough demand now so this month all the UBI will be destroyed after six months. So, if people save it and don’t spend it, it disappears. They need to spend it. We talked about different levels of interest rate tiering that would go out to the banks to incentivise lending. There are a lot of other things.
Alek: So, what I would say are the best parts of Bitcoin are not it being programmable, but that it is censorship resistance. You would not be able to programme those things on Bitcoin. Each person to their own. Even though I think those things will happen; a hammer can be used for good and bad things. Technology is agnostic; it is how you use it that matters. The powers that be will use it in the only way they know how which is to build a centralised socialist system that they start to dictate how people can use their money. This will further highlight the differences between that and Bitcoin. That will be one of those East Germany/West Germany moments. There will be an exodus of people who want to move into a less surveillance state. Or maybe governments force people’s hands to look for something else. I wish more of the world was like the Hong Kongese.
I think the point is that we need to be clearer about the best bits and what they are.
Sam: For Round Two I think we should talk about the Shared Fiction around the monetary system and I would like to give you the book about central bank denominated currencies and you can come back and give me your opinion about it. Additionally, I would like to get your thoughts about the centralisation of bitcoin in China and the network infrastructure.
Alek: I can put that to bed now. The economic incentive to mine in China has significantly diminished. Mining is moving to renewables and more stable areas.
Sam: 70% of mining is still in China.
Alek: Not at all. Send me some stuff I am happy to look at it.
Sam: Data latency is slower coming into the country. One network attack can use the firewall to preference Chinese miners over non-Chinese miners. It depends on how fast it can be distributed to other miners. They have an advantage in theory. I want to talk about conspiracy theories around China next time too. What if they have been using OTC to corner the bitcoin market? We all the miners we have a large minority stake in Bitcoin.
Alek: From my understanding they are far too arrogant for that. They want to roll their own crypto before they roll into Bitcoin. Next time we will discuss this.
Sam: We will get you back in a couple weeks.