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TILP #07: What is bitcoin - The monetary side w/ Jesse Myers
81 Plays1 year ago
In this episode Jim is joined with/by Jesse Myers to get down to the brass tacks about the monetary side of bitcoin. They discuss what money actually is, why bitcoin is a better form of money, and discuss common questions and stigma related to bitcoin.
Jesse's blog "Once-in-a-species" - onceinaspecies.com/about
Jesse's company: @onrampbitcoin
Jesse's twitter: @Croesus_BTC
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Transcript
Introduction and Purpose
00:00:00
Speaker
Hi, I'm Jim Kreider and this is the Intentional Living Podcast where we have conversations about how to use your resources, your time, your money, your talents for what's important to you in life in an efficient and effective manner. I'm glad you're joining with us today and I look forward to this journey with you.
00:00:24
Speaker
Hey, in today's conversation with Jesse Myers, Jesse and I discuss what is Bitcoin from a monetary perspective. We talked through the history of money, history of store of value, how Bitcoin came about, the problem that Bitcoin set out to solve, and where we see Bitcoin going in the future. It's a lot packed in this conversation, so let's get started.
Demystifying Bitcoin's Monetary Value
00:00:46
Speaker
All right, Jesse, thanks for joining me today. Thanks for having me, Jim. Yeah, man.
00:00:53
Speaker
I've been really excited for this conversation. I had a conversation a few weeks back with a guy named Michael Schmid, and we talked through what is Bitcoin from a technical side of things. My hope with that conversation is to make Bitcoin understandable.
00:01:08
Speaker
and approachable for anyone, a grandparent or a college student who knows a pretty good amount about the technical side of things to someone who knows nothing. And I think we did a good job in that episode. And my goal for this one is to take that same approach of what is Bitcoin from the monetary side of things and help if you know nothing about Bitcoin or if you know a pretty good amount, you can be encouraged. If you know nothing, you can walk away understanding what it is and why it's probably important.
00:01:37
Speaker
So that's the framework. We've got a lot to do in the next hour or so. You with me? Yeah. Yeah, that is quite a bit. We'll cover. Sweet. Well, let's let's get started. So let's start off with the framework before we jump into establishing like why you should own Bitcoin, all that stuff.
Bitcoin vs Fiat: Creation and Impact
00:01:58
Speaker
Let's begin with present date and then we'll work our way backwards and then we'll get then we'll work our way into the future. So let's just start off Bitcoin.
00:02:06
Speaker
when it was created or present, what problem does it intend to solve? Yeah. So the proximate cause for Bitcoin, the real innovation, the breakthrough was solving the double spend problem, which is a very technical thing that basically means how do you have a digital system where you ensure that people can't trick
00:02:34
Speaker
their way into spending the same currency twice by gaming the system in some way. And that hadn't been solved in the digital arena with a decentralized currency until Bitcoin's breakthrough there. But that's a technical answer, really. And the bigger
00:02:53
Speaker
The bigger picture answer is that Bitcoin solves a problem in money that we especially feel today with unbacked currencies like the dollar, where Bitcoin has a finite amount of supply. There will only ever be
00:03:15
Speaker
21 million Bitcoin. They're they're fractional. So you can there's two point one quadrillion subunits, but there's a finite number that will ever exist. And that contrast to the dollar for the dollar, there's an infinite number of dollars that can exist. And in fact, we've seen an exponential growth of the number of dollars in circulation. And so that that's the problem with
00:03:44
Speaker
with money today is that we deal with inflation. And people talk about how inflation is necessary. You need to have 2% inflation for an economy to work to have the incentive to spend your money.
00:03:58
Speaker
But that is a bit of an assumption. And it's actually rooted in a flimsy study from Australia or New Zealand in the 80s. And people ran with it ever since then. So the reality of inflation is that if you have any significant amount of inflation, whether it's 2% or 5% or 10%, people's savings
00:04:27
Speaker
are diluted over time. And it's debased over time. And savers, people who earn their money, store their money in the currency and save it for a rainy day, see their money slowly erode, their value slowly erode over time. The nominal number of dollars is still there, but the purchasing power of that dollar erodes over time.
The Stability and Evolution of Money
00:04:50
Speaker
And that's a big problem for people. That's a problem for people who want to live a life of saving.
00:04:56
Speaker
which is to say that you want to work hard, put that, you know, put your your extra earnings away as savings and save that for a rainy day. And the real breakthrough of Bitcoin is creating a currency where you are guaranteed to not have dilution over time. So you can therefore trust that the
00:05:23
Speaker
your units of that currency will be propagated through time as the same percentage of the total pie that they were when it began. And that's just a big change in how money has worked in the fiat money era with the dollar. And it even improves upon the gold supply dynamics from the past as well. Awesome. I think it's a fair summary.
00:05:53
Speaker
When someone asked me why is Bitcoin even important and without trying to give them an earful that they didn't ask for, I tried to bullet it down. Basically, there's a fixed unit of supply because that's such a strong juxtaposition to the fiat monetary system and then also the decentralization of control. Again, that's another juxtaposition not only to fiat money systems but other cryptocurrencies for both of those. There's an unknown supply cap for
00:06:22
Speaker
limitless supply cap and centralized control, be it a government, a individual, an institution, a hedge fund, whoever created these things. And those are those are truly important things. And that's not even considering the technological side of things of being able to send value pretty much instantaneously across the world for nominal fees. So let's so now we've established why Bitcoin
00:06:52
Speaker
Let's go back in time to sort of march through like, okay, historically, what has established things as being good forms of money and good stores of value to arrive at why is this relevant today, though? So yeah, can you just give a history of money and stores of value?
00:07:10
Speaker
Yeah, absolutely. So this is the thing that we don't learn in school. And so this comes as news to everyone when they really dig into Bitcoin to try to understand why it has value. So the history of money for humanity goes back 70,000 plus years. So there's actually evidence of shell money being used in cave sites from dating back 70,000 years. And
00:07:38
Speaker
And so back then, shells were money because shells were these fancy trinkets that you could collect at the seashore and bring inland and they were rare. And people realized that they wanted them. They wanted to collect them. These precious little things had value to people.
00:07:57
Speaker
And so when that happens in a social group, once you establish something as a collectible, that's actually the first stage of a commodity developing the properties of money. It needs to be viewed as a collectible that people desire.
00:08:17
Speaker
Then once that begins to happen, that process takes hold, then other people start to realize that this small group treats this commodity as a valuable thing and therefore they want it to. It becomes something more than just a collectible. It starts to become something that's valued because it's valuable.
00:08:39
Speaker
as a collectible. So you start to have this second level abstraction of this thing has value. And then that's when a commodity begins to be a store of value asset. It's first a collectible for a small group of people. Then it becomes a store of value asset for a larger group of people because they all know that there's a group of people who value this as a collectible. So I can store my value. I can trade for it.
00:09:09
Speaker
If I obtain this, I can hold on to it and exchange that for value in the future because there's a group that values this. Then from that, the next stage is it becomes something that you can trade in. It goes from a store of value to something you can use as a medium of exchange. That is fundamentally a social group level treatment of a commodity as a form of money.
00:09:35
Speaker
that you can use this to exchange for goods and services and exchange value. And finally, once everybody's doing that, then it's a unit of account. Then everything's priced in terms of shells.
00:09:49
Speaker
You know, that's the 70,000 years ago version. So that's how money came to be in our in the story of our species. Notably, it's also worth mentioning that so Homo sapiens sapiens is our subspecies and that those are the cave sites that have shell money evidence. Homo sapiens neanderthalensis.
00:10:13
Speaker
is a subspecies neanderthals that does not have any evidence of shell money or any other form of money being used at their cave sites at the same time. So that was a
00:10:26
Speaker
That was our species. That was one of the defining characteristics of our species and possibly one of the main advantages that we had over Neanderthals and why we out competed them over time because we had a money and therefore a more thriving economy. Anyway, so 70,000 years ago,
Historical Monetary Shifts
00:10:44
Speaker
shell money. But moving forward from there.
00:10:47
Speaker
Any commodity can be money. Any physical thing that meets the certain characteristics that you need, it has to be durable. It can't rot. You can't use an orange as a form of money. You need to be able to store value in that orange.
00:11:02
Speaker
or whatever money you're using. So it can't be oranges. It can't be fruit. It can be shells, though. It could also be salt or glass beads. So over time, we saw different versions of little commodities be valued as collectibles. And then people placed their value into these things that become store value assets and used as money.
00:11:29
Speaker
Shell money gave way to, in different places, different commodities substituted that. In some places it was great big round stones that were carved. The effort was put into making a round stone and that becomes money. Or in other places it's glass beads in large parts of Africa. Glass beads that were very difficult to make.
00:11:55
Speaker
You'd have to have some sort of rudimentary furnace in a fire to create glass beads. But they're rare and they're precious as a result of that. And they're cool. They're glass beads. So you place value in them and you start to use them as money.
00:12:12
Speaker
But the problem with all of these rudimentary forms of money is that fundamentally they're easy to make more of. Like even if it's kind of hard to make glass beads using rudimentary techniques in Africa thousands of years ago, it's very easy for Venetian glass makers thousands of years later who then come into contact with these civilizations in Africa who value glass beads.
00:12:40
Speaker
Then the word goes back to Venice. Hey, they seem to use glass as money in Africa. Let's make a bunch of it and ship that down to Africa and trade for goods and services and land and resources in the glass that it's easy for us to make, but hard for them to make.
00:13:00
Speaker
And so that's the process that played out over thousands of years of civilizations would come into contact with other civilizations in each. And if they use a different form of money, then whichever civilization found it easier to make more of the form of money that the other civilization used.
00:13:22
Speaker
would be able to confiscate the wealth of that civilization, to easily purchase the wealth of that civilization by creating new units of currency and totally upending the soundness of a currency system based on glass beads.
00:13:42
Speaker
So we saw an evolution over 70,000 years of human history from shell money to things like glass beads, cloth strips, round stones. And then eventually, you know, civilization develops enough that there are mining operations. You start to find silver and tin and gold. And those are much harder
00:14:09
Speaker
forms of a commodity to make more of. It's not easy to go create more silver. You have to go mine it. And it's difficult to do that. And you can't go back to Venice and create a bunch of silver and bring it back. You have to go mine it. And so monetary commodities became monetary metals. And we started to treat precious metals as money.
00:14:39
Speaker
And gold was the metal that was the hardest to make more of, of any of the metals out there. It's harder to go mine gold than it is silver or tin or any of the other metals that are mined, copper. And so gold is in that sense, a quote unquote harder money. It's harder to make more gold
00:15:07
Speaker
and dilute the existing supply of gold than it is anything else. And so civilizations gravitated through this organic free market process over time of whoever was using gold as a store of value asset, as a money, was more protected and had better properties of money from using gold than if they had used a different form of money that could be
00:15:35
Speaker
diluted more easily. And so that emerged through this free market competition, almost like a March Madness bracket of different forms of money competing against each other to see who emerges as the strongest form of money. And it's gold. It's the best physical commodity out there to use as a money. And that began about 6,000 years ago. And for the last several thousand years,
00:16:05
Speaker
Gold has been the money worldwide last several hundred years, really, because it took us a while to reach the new world. And that's the history of money that we also forget about and aren't really taught about in school, that these are free market processes that play out in the commodity landscape that resulted in gold being the gold standard for money.
00:16:34
Speaker
in the physical world. I want to highlight a few things you mentioned there. One, the glass beads in Africa and how that was hijacked by Venetians. The difference there is there's a
00:16:55
Speaker
There's true scarcity, and then there's a perception of scarcity. And the problem was the Africans thought they had an asset that was truly scarce, but it was just their perception. And the Italians knew that and took advantage. And you see that without getting us to the conversation where I want to be in half an hour, but I will skip ahead right quick. That's similar to what we're seeing today, is most people think the US dollar is scarce. So there's a perception of scarcity.
00:17:24
Speaker
Yet the people who are able to go easily create these things understand that it's not actually scarce. It is simply a perception of that. And that perception of scarcity is something that they have to continue to uphold. Otherwise, it could be dangerous for them.
00:17:40
Speaker
So there's that. And then even you should mention a second ago, marching into gold. Yeah, we've seen gold for thousands of years. Usually when I think of gold, I tend to go to the Roman Empire and even even how these metal, these metal based money systems were still able to be debased through manipulation of different forms, manipulation by individuals and by government entities. So government entities, for instance, able to continue to grow the Roman Empire through expanding through
00:18:09
Speaker
conquering through wars, were able to pay their soldiers with diluted value of their currencies. So Roman Daenerys, they were able to collect these, and at first, if Daenerys contained 100% precious metal, well, by the end of the Roman Empire, contained a very small fraction of that precious metal with the vast majority of it being fillers. So that was a means of debasement through the Roman Empire. And I personally think that
00:18:37
Speaker
two of the biggest causes of the fall of the Roman Empire would be monetary debasement and then moral debasement. I think it was a culmination of those two things. But then you also saw the manipulation of the Daenerys through individuals. So people who work in, you know, Stan, I'm here selling animal hides and you give me a Daenerys, I could just pile those up and then at night just shave down a little bit of scraps
00:19:02
Speaker
and then able to melt those scraps and build them up again and be able to make a whole new freshenary out of that. And that's really small. Again, that's a small debasement over a large time. But eventually, over a prolonged period of time, you have any roaded currency that has actually added to a greater supply. And that greater supply than erodes the value of each individual unit.
00:19:26
Speaker
Okay, let's keep going. So I want to fast forward a few thousand years. So I think a few different interesting turning points would be World War I and Germany and what happened there. They're very famous pictures of kids building blocks of money. And then maybe 1934, 1940, the 1940s, Bretton Woods, the 70s, and then we'll be at present date. Can we walk through those as well?
00:19:53
Speaker
Yeah, absolutely. So the modern history of money, I guess it's helpful to remind people that the closest thing that we have ever had to, you know, in the modern era to like a true gold standard period was the, you know, in the US from the end of the revolution until the creation of central banking in 1913.
00:20:19
Speaker
So that's about 150 years of free market money on a gold standard where gold is money and you've got a variety of banks competing, you know, promising, issuing promissory notes against gold they're storing in their vaults, but these banks are in competitions and that competition more or less keeps people honest of you have to be fully reserved
00:20:49
Speaker
full reserve banking and actually right by your promises. And what we saw during that period, if you think about it, was an incredible era of prosperity and development in the US in particular. And so that's the context of, that's what's possible on a sound money standard, the gold standard at that time. And then in 1913,
00:21:18
Speaker
A few clever things happened that our founding fathers specifically warned against and tried to stave off successfully for a century, but then ultimately these forces of
00:21:37
Speaker
The state wanting to take control of money with the help and collaboration of private bankers eventually won out and that was the founding of
00:21:51
Speaker
the Federal Reserve in 1913, which incidentally was done over the Christmas break on short notice, you know, without much. It was snuck in the the voting on the Federal Reserve and the and also the installment of a personal income tax. So those happened.
00:22:19
Speaker
uh, together and that which, which at the time was just for millionaires, um, people who would now be called billionaires because the money meant so much more back then. Um, that, that was the, the only people that were subject to a federal income tax at the time. And it was like several percent were millionaires. Um, anyway, so that, that process really begins in 1913 of, of central banking coming, uh, into the world.
00:22:49
Speaker
And central banking then from that point forward means that the government is in control of monetary policy. It's no longer a free market for money because the government is saying what monetary policy is, what is money, what are the rules around money. And obviously you have this legacy of free market money and people trusting gold. And so they can't overnight change what money is.
00:23:17
Speaker
But you start to see a slow erosion over the next century of what is money and what is monetary policy. So you already teed up how, well, let's, I guess, talk about what happened to Weimar Germany after World War I. They lost the war, had spent a ton of gold on the war, and had borrowed a lot, made promises to pay back
00:23:47
Speaker
in order to try to fund the war in a desperate bid to win. Obviously, that didn't work in World War I. And then they were saddled with war reparations as well, which was massive debts that they had to pay back. And the way they tried to navigate that reality was by printing more money. So they tried to pay back their debts by printing new money.
00:24:17
Speaker
Um, and some of their debts were, were, uh, in all of their debts were denominated in gold. So in order to print new printing new money, didn't get them more gold. It just obfuscated a remaining portion of what was left. You know, in the value of the currency from the holders of that currency and siphon that into gold, which they could then use to pay back debts. Uh, if, if.
00:24:46
Speaker
Yeah, if you can't tell, that is a losing gambit, which kicks the can down the road until it can't be kicked anymore. And the can't be kicked anymore is what hyperinflation looks like. So the Weimar Germany is the most famous example of hyperinflation, where the government is trying to pay their debts in gold, doesn't have the money.
00:25:09
Speaker
creates more money, paper, Reichsmark money, and that money has some value on the market that can be traded for gold. So they have to create a ton of it.
00:25:28
Speaker
in order to trade that money, newly created money for gold in order to pay back their debts. And the amount that they have to create gets exponentially more. And so they're creating exponentially more paper money in order to get the gold that they are trying to pay their debts with until they finally simply can't print enough money.
00:25:52
Speaker
in order to confiscate any more gold value out of the existing supply in order to pay those debts and they collapse. It's just ironic that in order to be able to purchase more gold with their money, they had to create more money. But then the creation of that
00:26:13
Speaker
those new units meant that they had that took more units to buy more gold. It's this feedback loop. And that's where the US is
00:26:24
Speaker
privileged, fortunate enough right now where our debts are denominated really in our own currency in a lot of senses so we can continue to devalue it. But yeah, we see this. You're on this never-ending hamster wheel. Things are just going to get messier and messier as you go, and it's inevitable that it falls. Sorry to cut you off. It's just the
00:26:43
Speaker
It's not humorous to the people I have a I have a picture in my office right by me of kids building towers with with their marks their notes and Obviously it wasn't funny for them at the time, but looking back now hundred years. It's the irony is just amazing And that that escapes a lot of people and it's so simple like if if creating more money or more pieces of paper monetary units led to
00:27:13
Speaker
led to people being more well off and a better civilization, then we could simply go create a lot more units, hand them out, and we're all in a better spot. That's not how things work. Overall, it bleeds the system dry. Anyways, let's carry on.
Fiat Currency and Economic Challenges
00:27:29
Speaker
The lesson that you're hitting on here that is the takeaway from the whole history of money is that the pie is what it is. There is a pie of value.
00:27:47
Speaker
However much currency there is, each unit of currency is a percentage of the total pie of value. And when you add units of currency to that pie, you're not growing the pie.
00:28:01
Speaker
you're just adding, you're inserting more your fresh slice of the pie and squeezing everything else into what remains. You know, you're you're redistributing the the area of that pie to to a new denominator of total
00:28:21
Speaker
units of value in that pie. That's the lesson of monetary history, is that in all of these cases, whenever there's an expansion to the money supply
00:28:42
Speaker
you're not creating wealth, you're just redistributing the existing wealth to a new number of total units of currency. So we can jump to finish out the evolution of money over the last century. So we had 1913 Central Bank and created
00:29:02
Speaker
a notable example of hyperinflation in 1921 with Weimar Germany. And then it's 1944, the Allies win World War II. The US is the most powerful country left standing.
00:29:26
Speaker
and gets to dictate terms for a new monetary standard for the world. And that's the Bretton Woods system that's put into place. And that system says, OK, we're going to be on a gold system, a gold standard.
00:29:42
Speaker
And the US will hold everybody's gold. And you can all have your own currencies and your currencies will be pegged to the US dollar. And the US dollar will be backed by gold.
00:29:58
Speaker
Works out great for everyone, right? Well, it really works out for the US because the US is then able to manipulate, adjust down the peg of how many francs is in each dollar. And when you do that, you're confiscating wealth from holders of French francs.
00:30:26
Speaker
And so that process happened for a couple of decades until in the late 60s, the Allied power started demanding their gold back. And in fact, France sent an aircraft carrier to New York City demanding that their gold out of Fort Knox be placed on that aircraft carrier and taken back to France.
00:30:51
Speaker
And then when West Germany was threatening to do the same in 1971, lo and behold, we're going to go off the gold standard entirely. And so then we don't have to pay our debts in gold terms anymore. Now we can pay our debts in dollar terms.
00:31:11
Speaker
And because that link is broken, so now we can print as much dollars as we need to in order to pay our debts, which we had been incurring for the Vietnam War. And that's what we did. And lo and behold, there's high inflation in the 70s as a result, because suddenly we're off the gold standard. We're having to pay our debts.
00:31:32
Speaker
from Vietnam. And we create a bunch of money to do that. And that creates the inflation because because now there's more money in the system. The value, the cost of a hamburger goes from five cents to 20 cents or whatever it was at the end of the decade, because there's that much more currency in the system. And that's the percentage of the total amount of currency in the system didn't change. Just the total number of units did.
00:32:04
Speaker
Yeah, what happened there was just a manipulation of the numerator and denominator, and we were
00:32:13
Speaker
we were lying through our teeth for decades about the denominator in that equation and the parity between the numerator and denominator. And then finally in 71, we got called on our math on our equation and said, all right, fine, here's the real math. But then instead of having a fixed denominator, we said, all right, the numerator is the denominator as well. And suddenly we're not even using math anymore to
00:32:42
Speaker
to portray and communicate value. It's like having a ruler and that's a fixed, obviously a fixed distance length.
00:32:53
Speaker
and then suddenly changing the length of a ruler and saying, well, the length of a ruler is whatever we say this ruler is, and we can manipulate it as we go. Well, then suddenly, how are you going to measure things? And it's more of a as-you-go basis, and you're suddenly pegging one ruler to another versus a ruler to another hard asset or a fixed thing. So yeah, sorry to cut you off there. Oh, yeah. No, so you're right. Tying that back to the history of money that we talked about,
00:33:22
Speaker
So 70,000 years ago until 1971, we're on some form of commodity money. We're on a commodity money standard, a sound money standard, because it's hard to make more of a commodity, whether that's seashells or glass beads. Obviously, it's easier for those to make more of it than it is for gold. And that's why gold ended up the victor. But you're on some kind of sound money standard for that entire time period with some experimentation
00:33:52
Speaker
that always went ended poorly of printing money along the way towards the last several thousand years in particular. So yeah, 1971, we're now in a fiat money era. And so we think of, you know, we all grow up in this and we all grew up thinking that money is what it is and that it's always been this way. But we happen to live in a 50 year anomaly right now.
00:34:22
Speaker
which is the fiat money era. And that is there's no guarantee that that's going to continue. And in fact, there's a whole lot of evidence that it can't continue in the same way that Weimar Germany eventually, in a very accelerated way, ran up against reality and the ill effects of being able to print more money. We are
00:34:51
Speaker
running into the ill effects of being able to print more money today. And what that looks like for us is the gradual erosion of the US as a superpower, first and foremost, because we are able to take on more debt than we are able to spend more than we produce. And that takes the form of debt. So we are
00:35:18
Speaker
As a country, we are running deficits. We spend more than we produce. And each of those annual deficits adds up to our national debt, which is a running balance of how much debt we've accrued. And it took us as a country 225 years to go from zero national debt to $6 trillion in national debt.
00:35:42
Speaker
And at the moment we are on, we won't end up doing this, but over the last four months we have spent an annualized, we've added to the national debt an annualized rate of $6 trillion. So that is some context about what's going on for us right now. An important bit of perspective here also is that
00:36:07
Speaker
We sort of depends on what data sources you turn to here, but I believe we have 129% debt to GDP at the moment. So, you know, our national debt is now
00:36:25
Speaker
33 and a half. It's almost it's almost 34 now, 34 trillion. And our GDP is varies 20, 23 trillion per year. So that means we have, you know, 129 percent debt to GDP. And a study a couple of years ago pointed out that in
00:36:50
Speaker
And there have been 51 cases since 1800 of countries that have gotten over 130% debt to GDP. And every single one of them defaulted in either a hard default or a soft default.
00:37:09
Speaker
A hard default meaning they throw their hands up and say, we can't pay our debts. And a soft default meaning that they print more money to pay their debts in nominal terms, but not in real purchasing power terms, basically inflate away the debt.
00:37:25
Speaker
And so that's happened. 51 times the country has gotten above 130% debt GDP. In 50 out of 51 cases, they've defaulted. The only time that hasn't happened is modern day Japan, because they are circling the drain still and have yet to default. And that's the only reason. And so we're on that threshold right now of the point and overturn.
00:37:49
Speaker
In my opinion, we've already crossed the effective event horizon where we just don't have the ability, the political will, the
00:38:00
Speaker
the appetite for austerity that's necessary to pull ourselves back from the black hole that's pulling us in in terms of national debt, because we haven't balanced our budget in 22 years as a country. And we've now normalized multi-trillion dollar per year deficits, which means we're adding
00:38:23
Speaker
in the last few years, on average, $2 trillion every single year to our national debt pile. And then that not only keeps adding up with each additional addition to it, but it compounds because of the interest expense that you have to pay on that national debt, which for the last decade has been more or less 0% interest rates. But now that interest rates have risen,
00:38:48
Speaker
It's like 5% on that national debt, which at $34
Bitcoin's Monetary Principles
00:38:53
Speaker
trillion in total national debt means $1.7 trillion in annual interest expense on the national debt. That's in addition
00:39:03
Speaker
to all of our already high spending amounts. We're already running multi-trillion dollar deficits per year. Now you're talking about adding $1.7 trillion per year in additional debt. For context, that's two US militaries per year that we're spending just to service the national debt that we've accrued over spending more than we produce for the last 50 years in particular.
00:39:33
Speaker
Let's, as we march forward with arriving at Bitcoin, which Bitcoin is simply money. So we've talked through the history of money, but let's go ahead. If you could, can we define money itself? I'm familiar with, and I know you are as well. What are the key attributes that define something being money, being scarcity and those sorts of things? Could you walk us through those core attributes?
00:39:58
Speaker
Yeah, so scarcity is the most important. We'll talk about that more. And Jim, help me with this list, because I'll hit some of them, but I'll miss some of them too. So you need durability. We talked about that one already. You need divisibility. You need to be able to break this down to a subunit. You can't trade in Monet paintings, but you can trade in grains of gold.
00:40:29
Speaker
Let's see, other things, you need portability. So you need to be able to carry it around in your pocket and use it at the market, which is sort of one of gold's limitations. It's not really good at that. Gold coins don't really work because the mass there means you can't really carry around a lot of it. Let's see, what are the other ones I missed? As you mentioned a moment ago, there's scarcity, and that's one you let off with. There's verifiability. Okay, yep.
00:40:57
Speaker
So the ability to verify, obviously, that the unit is actually what it's claiming to be. And one of the innovations in the history of monetary metals was when we went from the invention of standardized coinage, which was to say, you'd have your king would
00:41:22
Speaker
collect a bunch of gold, put it melted into coins and then stamp his face on the front of the coin, which is a way of saying the king has guaranteed that this has a standardized amount of gold in this coin. So you can trust it when somebody offers this to you. And that's a way of solving for that verifiability problem where otherwise you'd have to
00:41:48
Speaker
assay the purity of this gold that you're being offered and that's an impossible problem to do in the marketplace. Here, let's camp. You mentioned scarcity being important. Do you want to just tell us right quick why that one specifically is important?
00:42:08
Speaker
Yeah, so it really is the solution to the key insight in the whole history of money. Why did we evolve from using shell money? Why didn't we just keep using shell money? Why didn't we keep using glass beads? Why did we end up at gold? And we ended up at gold, as I mentioned, because it's harder to make more gold than it is hard to make, to find more seashells or make more glass beads or anything else in the physical world.
00:42:40
Speaker
In terms of commodities that can be used as a money, gold is the hardest to make more of. That means it's the scarcest. And so that scarcity is really a measure of what percent is added to the total existing supply per year. And it's a concept in the in the monetary metal space called stock to flow. So so how how much stock is there above ground?
00:43:07
Speaker
And how much flow are you adding to that every year? And that ratio, the higher that ratio is stock to flow, meaning the less you're adding to the existing supply every year, the more scarce a commodity is. And the more scarce a commodity is, the harder the
00:43:31
Speaker
the more you can trust that value that you place in it will propagate through time effectively because you're not being diluted by new supply coming into the market and diluting what you're holding. So that's why gold is a better store of value than copper, where copper can have a huge percentage of new supply added every year. Gold on average for the last hundred years has been 1.5 to 2% more
00:43:59
Speaker
gold added to the existing supply each year. Copper can be 10, 20, 30%. And that would mean 10, 20, 30% dilution of your value if you were to store your value in copper. And so that is why gravitating towards using the scarcest form of money is a winning strategy for storing your value and propagating it effectively through time.
00:44:24
Speaker
Now, a couple of things there to just reiterate. Stock to flow is just the inverse of inflation rate. When you say scarcity, you're referring to not just scarcity of existing, but the scarcity of introducing new units. So let's just place out just for fun's sake.
00:44:45
Speaker
Obviously, if we had the most scarce asset, there was one item in existence. That'd be a horrible form of money, because how would you possibly transact with that? Now, if we're introducing new units of that on a regular cadence, we would at least have some sort of predictable inflationary rate.
00:45:00
Speaker
Now, let's play the opposite. Let's say sand. Let's say we couldn't create more sand. Who knows how many grains of sand exist? But theoretically, if no more grains of sand could be created and we were able to easily measure grains of sand, sand theoretically could be a decent form of money because it's a fixed supply and it's super divisible.
00:45:23
Speaker
despite the fact there's a gazillion units of it. So it's the matter of the introducing of new units, the inflationary, the stock to flow rate mixed with the existing units for ease of transaction.
00:45:39
Speaker
As we go forward, in my simple brain, I try to keep things really simple. There's enough complexities in the world, so things that can't be simplified. Let's go ahead and do that. My simple brain, money is simply a means of communicating, storing, and transferring value across space and time. The problem with introducing new units is it's an introduction of noise to a means of communication. If I'm trying to communicate value,
00:46:06
Speaker
across time and during that time transfer during that time if noise is introduced suddenly it is a the Sound the message I'm trying to communicate is suddenly hijacked by that. So that is a that's where this
00:46:30
Speaker
inflation or stock to flow can really come in and impact things. Now, if we know that there is a set inflationary rate or stock to flow rate, we can account for that relatively with the communication factors. So let's start off that as a basis. Now, let's go into Bitcoin specifically. So we've talked through history of money. We didn't talk through gold and like, I mean, yeah, I think, I mean, the US has defaulted on our debt lots in very soft ways. I think one of those being when gold was
00:46:58
Speaker
became illegal. The US basically made it illegal for you to own gold outside of like ornamental jewels, those sorts of things.
00:47:07
Speaker
I think they purchased it for $20 an ounce, and immediately the day after it became illegal to own, it was revalued at $35 an ounce. If that's the one that's terrible, too, that is certainly a means of soft default. But anyways, let's get to Bitcoin, because people I talk to suddenly think that Bitcoin is just something used by tech bros or
00:47:30
Speaker
people who live in their basement and like to code or things like that, which I'm not a tech bro, nor do I live in a basement, but I like Bitcoin. So clearly that's not the case. So how do we get to Bitcoin? Can you give us a little history of like cryptography and why we're here now? Yeah. So it is a misconception that people think that Bitcoin is just this random experiment that happened and it came from nowhere.
00:47:55
Speaker
But it's actually the culmination of 40 years of people pursuing this sort of holy grail in the digital landscape of creating a non-sovereign, immutable, hard-cap supply, decentralized currency.
00:48:15
Speaker
It began in Silicon Valley in the 60s and 70s of the invention of this new form of code encryption, which we now use. The entire internet runs on these encryption algorithms that were invented back then. And these are just incredibly sophisticated pieces of math that make it impossible to
00:48:45
Speaker
know what a message is unless you have the particular unhackable password to decrypt the message and understand what that message says. And that's why the whole internet runs on these encryption algorithms. The most commonly used is called SHA-256.
00:49:09
Speaker
And that is what Bitcoin uses as well. So there were a number of attempts over the years and decades to try to create a digital money and specifically with various flavors of ideology woven into them.
00:49:29
Speaker
most notably that people wanted to have a non-state based money. So an internet based money that's a free market money in the digital landscape rather than something that is by decree. Fiat means by decree.
00:49:48
Speaker
And so in the sort of dot com bubble era, there were a number of attempts at creating a cryptocurrency that failed or the government shut them down.
00:50:04
Speaker
Mojo Nation was a popular one that started to see success and then the government was threatened by it and they chopped its head off. And that was all because each of these attempts had some sort of centralized entity that was administering this database of who owns what digital currency and in what amounts.
00:50:30
Speaker
and issuing that currency. So there was a centralized authority that the government was able to shut down. And that's why they kept killing these upstarts. And so that was the context in which the creator of Bitcoin knew the parameters around which he had to solve for it. He knew that he couldn't implement a
00:50:54
Speaker
a digital currency that had any kind of centralized authority because that centralized authority could be shut down because it had been in so many cases in the last few decades. And so he knew it had to be a decentralized networking solution. And this is in the wake of the invention of Napster and other peer to peer networking solutions for, you know, for
00:51:18
Speaker
exchanging information in a decentralized way and Satoshi brought those sort of ideas to money.
00:51:27
Speaker
you know, so peer to peer file sharing. What can we can we do that with money as well with value? And through the orchestration of a few innovations and just strokes of luck, probably as well, landed on the system that is the invention of digital scarcity. And that's the central piece for understanding Bitcoin and understanding why Bitcoin can't be
00:51:53
Speaker
can't be bested by any challenger going forward. It's the invention of digital scarcity. And that can only happen one time. That's an important part I'm sure we'll get back to. So this is a system in the internet landscape. You can copy and paste everything. It's just information. You can copy and paste any information. And so it was never possible to bring value into that landscape.
00:52:20
Speaker
But Bitcoin is the invention of a system of digital scarcity. So within this little system, within this little walled garden, it's impossible to copy and paste.
00:52:31
Speaker
And that's the real breakthrough of Bitcoin. That's the invention of digital scarcity. So that you know that your unit that you hold can't be copied by somebody else. It's yours. It's yours forever. And you have perfect property rights around that, so long as you maintain security of your private key, which is an extremely long password that's unhackable.
00:52:58
Speaker
Okay, so we've talked through money, history of it, stores of value, Bitcoin in general.
00:53:10
Speaker
Well, I was going to say maybe this segues into, you know, we talked about digital scarcity and then there's the key to understanding the value of Bitcoin, the attractiveness of Bitcoin as an investment asset in particular, is in understanding that scarcity. The invention of digital scarcity
00:53:30
Speaker
the fact that Bitcoin has increasing scarcity which is a key misunderstood bit and then finally the absolute the terminal absolute scarcity of Bitcoin which the world has literally never seen an asset like this before
00:53:47
Speaker
Let's go in, let's go into then Bitcoin specifically for like, okay, well then we, we, we defined up front, like what is, uh, what's the value proposition of Bitcoin? What problems is trying to solve for, but let's get more specific there. I think that's what obviously people want to really understand is the, the financial side of things as implications of this. So you've, you've, you write a lot, you wrote an article, um, that, that speaks pretty heavily to this, uh, that's, um,
00:54:16
Speaker
What's the name of the article? Was it the full potential valuation of Bitcoin? So let's talk through that. So yeah, the full potential value. And let's bring in like, obviously in that we're gonna talk to like, okay, well, what is the value proposition more specifically? What market is this supposed to be competing in? Is this a tech stock? How big is that market? So let's get into this type of conversation now.
00:54:44
Speaker
OK, so to set the stage here, first of all, Bitcoin right now, well, I guess right now it's about 700 billion, but I ran these numbers when it was at 500 billion. So I'm going to say it's 500 billion so I can still have accurate numbers here.
00:55:00
Speaker
$500 billion total value for Bitcoin as an asset. And that is in the context of the global asset landscape. So how much value is out there sitting on all the different assets and asset classes? How much is out there? There's $900 trillion, $900 trillion across all your different asset buckets that
00:55:22
Speaker
You know, that's that includes money itself, bonds, which are promises for future money, real estate, stocks, fine art, collectibles, precious metals and Bitcoin. There's nine hundred trillion across all those those buckets and Bitcoin is one two thousandth of the total landscape. So that's zero point zero five percent. That's how tiny Bitcoin still is.
00:55:52
Speaker
So that's the context. And then we should introduce what's the point of Bitcoin? What is it seeking to do? Bitcoin is a digital store of value. It is seeking to be a competitor on this global asset landscape for
00:56:10
Speaker
where people store their value. And that's fundamentally, it's an ongoing constant competition between different asset types, which are trying to attract capital based on the properties that they offer and the potential return that investors could see if they parked capital in that asset. And so that's an everyday competition that's constantly evolving.
00:56:39
Speaker
And Bitcoin has this secret weapon that only Bitcoin has because it's the only one that's digital. So all these other asset classes like real estate or fine art, they're physical. There's no limitations on how much fine art can be created. And in fact, there's no real limitations on how much real estate can be created. You can not only dredge swamps to create more
00:57:08
Speaker
good land, you can also build skyscrapers to create more built square footage. So Bitcoin is the only asset that because it's digital, it has and it has this immutable supply schedule, which is the heart of it all, where there's only going to be 21 million Bitcoin and how you get from zero Bitcoin in existence on Bitcoin's launch date in 2009.
00:57:35
Speaker
to the eventual terminal amount of 21 million Bitcoin in existence. How do you do that? So what Satoshi implemented is a very clever system that in the first four years, half the Bitcoin that will ever exist were released through Bitcoin mining. And so that's a process that happens every 10 minutes. It's a lottery, basically, of computational power
00:58:04
Speaker
on the Bitcoin network trying to win the lottery for that 10 minute period and get the right to create the next block in the Bitcoin blockchain. And so each block happens every 10 minutes. In the first four years, each block came with 50 new Bitcoin being issued to the miner of that block.
00:58:33
Speaker
the computer that creates that block or gets to create that block. And so that's how you issue supply. But the genius part about is that in the code, in the Bitcoin protocol, that everyone's agreeing to when they participate in the Bitcoin protocol. And that's why it can't be changed because nobody has authority to change it. Everyone has agreed to this consensus standard set of rules.
00:58:59
Speaker
In that code, it says that after four years, the amount of new Bitcoin issued with each block will drop, be cut in half down to 25. And then after four years, cut in half again. Every four years, cut in half until it reaches zero. And so that means that if you add up the total supply of Bitcoin in existence over time, it creates a bit of an asymptotic
00:59:25
Speaker
curve where it starts at zero and rapidly goes up and then it starts to level off as it approaches that hard cap total supply. What's incredible about that is that is a system of increasing scarcity. So the amount being issued relative to the existing supply in the first few years was huge.
00:59:49
Speaker
And then as every four years, the amount being issued at each 10 minutes gets cut in half. Over time, the amount being issued per year relative to the existing supply becomes nothing. And so you go from high inflation to zero inflation. Yeah, block one to block two. Again, the first four years, the block roar was 50 Bitcoin. So block one to block two, the inflation rate in that 10 minute period was 100 percent.
01:00:20
Speaker
block whatever 210 million or 209 million from all the ones that created that point was relatively large. Now where we are today, the mining reward being
01:00:33
Speaker
about 6 Bitcoin versus the existence, we're at a really small inflationary rate. And as you're aware, just over 93% of Bitcoin that will ever exist has already been created. So as we introduce new units, Bitcoin, we can debate semantics in a sense is still being inflated because the units that are actually out there to be
01:00:55
Speaker
traded is going up. But it's being inflated at a minuscule rate and at a rate
Bitcoin Halving and Market Impact
01:01:05
Speaker
that we can calculate and foresee in the future. Yeah. And it's a good bit of context here that right now the annual inflation quote unquote inflation rate for Bitcoin is one point eight percent.
01:01:23
Speaker
Uh, and that happens to match gold, right? Gold's one and a half to 2% per year. We're, we're at parody with gold right now. Um, so each of these times that the, the new supply, the supply issuance rate gets cut in half. That's called a halving. And it's just the term that we landed on to describe it. Uh, and there have been three halvings, um, 20, 2012, 2016, uh, 2020.
01:01:49
Speaker
And in 2024, each of these four years apart, in 2024, we're going to have the fourth halving. So supply issuance is going to get cut in half. Suddenly, our annual supply inflation rate is going to drop from 1.8% to 0.9%. Suddenly, it's much better than gold in terms of storing value and propagating it into the future without dilution.
01:02:14
Speaker
So that's the process by which Bitcoin slowly becomes a better store of value asset, better and better and better and better every four years and doesn't get any worse at being a store of value asset with regard to scarcity specifically, which is the most important property of money. The wild thing with this is we have this collision of increasing scarcity
01:02:42
Speaker
with increased adoption rate. So the new units being introduced are being suddenly distributed amongst a larger population. Right now, it's very, very small, 1% or so of population actually understands and owns Bitcoin. So yeah, we have these things colliding that really make for an interesting environment. And that is constant, but is highlighted
01:03:09
Speaker
emboldened every four years at this halving cycle. Because most normal people, like you and I are weird, but most normal people right now think that Bitcoin's dead. So we've reached a supply demand, relative supply demand equilibrium. And then in whatever, five months, that equilibrium will be impacted by this halving event. So suddenly the new supply will be suffocated.
01:03:36
Speaker
And the demand will stay relatively the same, assuming there's no new adopters at that point. And when we have a reduced supply and an increase in a steady demand, that should cause price to go up. And that's what happens every four years, is the price goes up. And then everyone who thought the Bitcoin was dead said, hey, I thought the thing died. It didn't go down 80%. I have friends who lost a ton of money. Well, I guess I should go buy a little bit because it went up some. Well, then you have, again, this reduced supply met with an increased demand.
01:04:04
Speaker
which causes more euphoria and so on. And then we, then we reach the place where people go do stupid stuff, you know, they're, you know,
01:04:11
Speaker
getting kidneys taken
Societal Views and Misconceptions on Bitcoin
01:04:12
Speaker
out and doing dumb stuff to building up a lot of leverage and goofy things come along with our cryptocurrencies and a lot of speculation and then it reaches euphoric high, then something happens, a domino falls and it goes down, there's like a 70, 80% drop. And then people think that I knew that was a Ponzi, I shouldn't have trusted in the first place, I was right. And then it goes back to this,
01:04:36
Speaker
hibernation in a sense where weirdos, now the weirdo population grows every four years, but nonetheless, weirdos continue accumulating for a few years and then it pops back up. That's what we've seen. That's why I thought this thing died. This seems familiar now because we've seen this multiple times. I strongly assume that we'll see this again in the spring of next year. That's right. You hit on a bunch of key points here. In fact, my earliest bit of analysis
01:05:04
Speaker
You probably haven't seen, because I was less well known three years ago, was Bitcoin's adoption adjusted scarcity. And where I combine the adoption curve and the amount of people competing for new Bitcoin versus the increasing scarcity function of it, and that results in a sort of amplified
01:05:33
Speaker
It that yields based on depending on the assumptions you put into it. It makes sense based on those mechanics that the price of Bitcoin would go up five to 10 X every four years at during particularly during this stage of the adoption curve where it's exponential in terms of the amount of new adopters coming in per per unit of time. We have this introduction of
01:06:03
Speaker
computing stuff that's beyond me, we have the monetary side of things. And then we have game theory that makes this really interesting. So you choose the game theory part of it, which comes in with conversation we'll have in a minute about whether they're cryptocurrencies, but also we look at adoption rates. I view the adoption rate of Bitcoin very similar to the internet's adoption rate. I would say that right now, Bitcoin's adoption rate is probably in the mid 90s, maybe like 95, 96, 97, as far as the internet's concerned, but it's being adopted
01:06:30
Speaker
More quickly and more distributed than the internet was which is really interesting to watch I mean heck just think about the internet just even the last 15 years I remember my sophomore year of college in 2009 when my roommates would buy his Doritos on Amazon and I couldn't understand what like what is Amazon, you know that I feel stupid saying that but that wasn't that long ago and at that point the internet at that point was Was really adopted but it's just come so much further. So that's that's more of how
01:06:58
Speaker
the adoption curve is working. So you wrote another article. It's sort of fun. It's the Yuppie Elite article. Can you talk to us about that right quick? Yeah. So everyone who gets into Bitcoin has this
01:07:14
Speaker
pretty classic arc of first of all, everybody thinks it's stupid at first. Everybody writes it off at first because it sounds stupid. It sounds like internet monopoly money. So why should I care about that? And then for various reasons, people finally take a serious interest in it and start to actually do their homework.
01:07:34
Speaker
And then in doing that, you realize many of the things that we've been talking about over the last hour, like, oh, wow, like I didn't know the history of money. I didn't know the properties of money. I didn't know that scarcity was so important. And I certainly didn't know that Bitcoin is a system of money where there will be a finite amount of it.
01:07:55
Speaker
And I kind of want to own a piece of that before the rest of the world catches on. And I also didn't know that Bitcoin has increasing scarcity such that it's easier for me to obtain a unit of this currency now than it will be in the future when they're issuing less of it. And so those things, when they start to make sense, you start to get excited about it and want to own some of it.
01:08:21
Speaker
And yet, everyone in your life is not there with you, right? Everybody in your life is still viewing it as stupid and writing it off because it sounds stupid. And so that was my experience. You know, I went to
01:08:40
Speaker
I went to Stanford to get my MBA, which is a fantastic school. And I went to school with incredibly smart people. And they're all very resistant, borderline hostile towards Bitcoin because it doesn't make sense. It sounds stupid. So why won't Jesse shut up about Bitcoin? And this is an experience that everybody who gets into Bitcoin deals with. And so I tried to articulate what I think is going on here.
01:09:09
Speaker
And part of this is that we see how
01:09:18
Speaker
There's all types of people who are into Bitcoin and yet there's kind of a particular archetype of people who dismiss Bitcoin. And the people who tend to dismiss Bitcoin are very smart. So what is that? Is it that the smarter you are, the more you think that Bitcoin is stupid? Because that would make sense, right? That would line up with our expectations in reality. But then when you get into Bitcoin, you find out that there's
01:09:48
Speaker
a bunch of nerds like you and me who are pretty damn smart who think that this thing is incredible. So how do you reconcile that? And I realized that for me, the major driver of that gap is how much you trust the existing system.
01:10:06
Speaker
And I think that helps explain why so many people who are very smart think that Bitcoin is a stupid idea because they trust the system, they trust the US dollar, they trust what the government says in general, and Bitcoiners tend not to. And so to understand Bitcoin, to see the point of it, you have to be coming from a place of not entirely trusting
01:10:36
Speaker
the dollar, not entirely trusting that the government's going to, you know, not debase your savings and dilute you or soft default aren't debts or any of these other things. And I think that's the big driver. That's why I like to lead off conversations with establishing historically what are stores of value and forms of money.
01:10:59
Speaker
because that's how we have to arrive at why Bitcoin. And if you don't understand those things, the history, then you think you're gonna solve for a non-problem. And Bitcoin is certainly not, it's not trying to solve for a non-issue. It's solving for an issue that's existed for thousands of years. The issue, I interact with a lot of financial planners. And yeah, a lot of people, a lot of financial planners, probably most of them, think I'm stupid. That's fine. My mom thinks I'm smart and that's all I need. Thanks, mom.
01:11:28
Speaker
Now, the problem is most financial planners I interact with are really smart. And their issue is they're really good at managing money. They're great at helping people with stock options and tax planning and all these fun things, managing money-wise. But most of them, what I've recognized, have never actually stopped to ask, but what is money? And if you don't go there,
01:11:52
Speaker
then you'll be like a fish that is swimming in water all day. And maybe you're a great swimmer and you're good at interacting with the water, but you never stop to think, but what is this substance? And as that substance begins to change, you're not recognizing that change itself. Cause you never put the thought of what is this thing that I'm in anyways. And that's, that's something we have to start pulling the current back on is what is this or else you're going to, you will think that you're solving a non-issue. Let's go there. I do want to talk through the, where do you think Bitcoin's going? But,
01:12:19
Speaker
Let's confront some stuff there while we're at it first. We need to pull back these things, ask the hard questions. I get asked a lot of questions by clients, by random people, because I talk about Bitcoin a lot.
01:12:31
Speaker
and by financial planners. I regularly, probably quarterly prod the bear trying to get financial planners to at least look into this. And they all think I'm an idiot. And I get a lot of questions by these people. And so is it okay if I just hit you up with some common questions I get? Yeah, we'll do the speed round. Speed round. All right. Why would I buy Bitcoin versus another cryptocurrency?
01:12:56
Speaker
Yeah, this is where the digital scarcity is a one-time phenomenon comes in because once you create that system of digital scarcity, where you cannot copy and paste within that system, the problem is you can take that system, that circle is how I conceptualize it, and you can create a copy of that.
01:13:18
Speaker
And so now you've created a new system of digital scarcity, but it's a copy of digital scarcity. And that you can create infinitely more copies of that system of digital scarcity. And that's what we've seen. There's 30,000 copycats of Bitcoin's invention of digital scarcity. And then if you think about it,
01:13:40
Speaker
Those copies inherently are not scarce because they're all they're always being more new copies created. So there's no scarcity for a copy of digital scarcity. And and therefore you can't be storing value in in one of those copies. It doesn't make sense because they're going to make so many more new copies of that of a new form of digital scarcity system that your
01:14:11
Speaker
your copy isn't special. It doesn't make sense to store value in overtime. In fact, I call this the Crypto Catch-22, where to catch Bitcoin, to catch up to Bitcoin, you need a marketing budget and a leadership team to guide the development of your project.
01:14:33
Speaker
If you have a marketing budget and a leadership team to guide the development of your project, that means that you are a centralized entity and you cannot compete with a decentralized open source protocol like Bitcoin. So it's a losing game from the get-go. What about the volatility? It's too volatile and it's dangerous. It's too volatile. It's very volatile.
01:15:04
Speaker
Because that's how you experience it. Because the thing that's not volatile is the supply of Bitcoin. And what's volatile is the entire world adjusting to this changed reality of like, OK, this thing, Bitcoin, how much do I value it? And it goes through and it's also experiencing these periodic
01:15:31
Speaker
halving events that upend the equilibrium that's been established in supply and demand price equilibrium and results in a bubble, as you described well earlier. The history of Bitcoin is a history of miniature bubbles, not so miniature bubbles. These are bona fide bubbles that develop for real reasons, for positive reasons, which is the halvings.
01:15:59
Speaker
causing the price of equilibrium to be upended. There's not as much new supply being created going out to meet the unchanged demand. And so the result is the price has to drift upwards, but people get too excited. It turns into a speculative mania. You create a bubble. The bubble pops on the back end of that.
01:16:22
Speaker
And, you know, it crashes. There's big drawdown. But stability re-establishes itself over that four year period from having create upending that equilibrium until the next having four years later. So what we see is this sort of.
01:16:40
Speaker
the sine wave effect, like a heartbeat every four years following the halving. And the key is that each of these bubbles, each of these sine waves, each of these heartbeats has a higher high
01:16:58
Speaker
and a higher low at the back end of it. And that's the key is that every post bubble bottom is higher than the one four years before it, significantly higher than the than the one four years before it. And that's that's how Bitcoin grows. It grows through this these periodic shocks of volatility. But if you can hold for more than four years, you see the value of your the purchasing power of your stored value grow.
01:17:30
Speaker
What about, I'm just going through classics. It's funny, the same things come up over and over again. It's just a shiny rock. It's just Beanie Babies. It's just tulips. It's just speculation. Yeah, I love this one. The tulip mania, the Dutch tulip mania was a four-month period.
01:17:52
Speaker
And people forget that when they talk about this is a tulip bubble. And for each of those examples, Beanie Babies, let's talk about that. Was there any sort of finite supply of Beanie Babies? Was there any sort of
01:18:15
Speaker
reliable supply constraints on Beanie Babies? No, not at all. It was all manufactured hype. You could create however many Beanie Babies you wanted. And that's not true of Bitcoin. Bitcoin has this increasing scarcity that is completely indifferent to how much Bitcoin we would like to create. And in that sense, it's truly different because
01:18:37
Speaker
I would love to get my hands on a whole lot more Bitcoin than I have. But I can't. I can't do anything but buy it on the market from people who already hold Bitcoin or compete for the small amount that's being issued today via mining. Those are my only options. And that makes it fundamentally different from Beanie Babies or Tulip.
01:19:03
Speaker
Tulip mania or anything like that. And the other thing to think about here is that we've now had 15 years of bubbles, the whole series of bubbles, and each bubble ends up with a higher base than the one before it. And that is not how Beanie Babies or Tulips or any other classic bubble works out. Those bubbles go back to zero. What about another
01:19:29
Speaker
only but a goody I get regularly, primarily from financial planners would be, I'd rather own companies that cashflow or I don't invest in non-producing assets. Yeah, that's a great one. And this is a school of thought we were all brought up in, in terms of investing, you want yield, you want something that generates more dollars.
01:19:55
Speaker
But why? The assumption there is that the dollar is money. And there's no other form of money that's baked into that. You're assuming that there's no money competing with dollars that could possibly outperform holding dollars. So if you want to think about it in that sense, over the last
01:20:22
Speaker
Gosh, I mean, if you go back for a decade, Bitcoin is returning 100 percent annualized average growth in terms of value appreciation. It's not yielding any additional units of Bitcoin by holding it, but you're growing your value by more than you would generate a nominal yield by holding any dollar.
01:20:46
Speaker
based asset, dollar generating asset. And then the other thing to think about there, especially with regard to bonds is, you know, a bond is a promise for future dollars. So, you know, if you hold a 5% bond, which is sort of the, you know, what bonds are trading at right now, you get 5% per year for holding that bond.
01:21:08
Speaker
But what's inflation? Is inflation 3% like they say it is? When you go to the grocery store this year versus last year, do you feel like you're spending more than 3% more? Is it 7% more? What's the true cost of inflation? And if the bond that you're holding is generating less than the true cost of inflation, then you are losing in real terms just by holding
01:21:39
Speaker
a dollar yielding asset that is not yielding enough to make it worth your while. Yeah, our inflation rate at the grocery store is certainly more than 3% or 5%.
Bitcoin and the Environment: Debunking Myths
01:21:54
Speaker
And based off of the gasps and groans that I hear in line at the grocery store, I think that other people's wallets agree that they're experiencing far more than that. Yeah. What about this one?
01:22:08
Speaker
If the government bans it, it's all going to zero anyways. Yeah, this is an interesting one because it's a very compelling point, right? That makes a lot of sense. But then you have to think about how this is an international money. It's a non-sovereign money. It is a super national money. It's money for the internet, and the internet is a global thing.
01:22:35
Speaker
And this is where game theory really comes in. One of the best things that the US did with regard to its policy on internet innovation in the 90s was to allow innovation to develop because they knew that they wanted that innovation to happen in the US to be the home of this industry. And that worked. Google, Amazon, these are US companies.
01:23:01
Speaker
So the home of the internet is the United States, fundamentally. And that has accrued a ton of value to the US. It's been very strategically smart for the US to embrace the internet and bring adoption and capital to the US.
01:23:19
Speaker
And so every country knows that and every country wants to be that for cryptocurrencies. Every country has that incentive, at least, to be that for cryptocurrencies. And some will not do that. Like China has been kind of increasingly negative on allowing this stuff because it's sort of incompatible level of freedom with what they generally go for.
01:23:45
Speaker
But every other country has this incentive. El Salvador has made Bitcoin legal tender and has seen a huge influx of capital and talent flowing to El Salvador. And it's been an extremely successful initiative in just two years. Every country on Earth has that incentive in the game theory to be to embrace Bitcoin and want it there. And so unless you get every single country on Earth to ban Bitcoin,
01:24:15
Speaker
then the innovation flows somewhere, the capital flows somewhere. And that means that when you think about it from the game theoretic point of view, it's kind of the only losing move is to ban Bitcoin and instead you want to embrace it. Yeah, the classic meme of you can't, what, you can't ban Bitcoin, you can only ban yourself from Bitcoin? Yes.
01:24:40
Speaker
You brought the internet a second ago, I think this is really important and something that stops financial advisors from understanding why you should own Bitcoin and only seeing it as a speculative, like speculation versus investment. Because what they're viewing Bitcoin as is a competition or competitor amongst tech stocks or something like that. They view it as another company or trying to value it as a bond. But again, Bitcoin is not a company. There's no free cash flows. It doesn't have a dividend.
01:25:09
Speaker
It's not growing in valuation based off of taking over market share because it's producing a new good. It is money itself. And the way it's going to grow is by adoption rate. So I put that as Bitcoin is not Facebook or Myspace. Bitcoin is the Internet. And Bitcoin or the Internet's adoption rate grew. And as that the Internet itself became more valuable. Now you have companies that's built on the Internet that come and go.
01:25:40
Speaker
That's wildly important to understand. That's important in a lot of ways, again, from a valuation perspective, like what market shares is trying to take. But then also as an attack vector, you mentioned earlier, Mojo Nation, I think. I've never heard of Mojo Nation. It lost its Mojo. That was like perfect time. I would assume that came out right around Austin Powers times too.
01:26:05
Speaker
Okay, so mojo nation, like you mentioned, like all these other crypto currencies had were subject to these state attacks because they had a centralized authority and Bitcoin doesn't have a president and have a CDO CEO. It doesn't have a marketing team. It's it is money that's out there. It's wild to think through. Okay, a couple last things that I think are important. You can answer these real quick. One, it's primarily used for illicit activities into it's bad for the environment.
01:26:33
Speaker
Yeah, the illicit activities one is just totally wrong. What currency is best for illicit activity? One that's not trackable, like the US dollar, like physical notes. That's what you want to use for illicit activity.
01:26:58
Speaker
I'd be making up a number, but I think it was like 90% of US dollars can contain traces of cocaine on it. Right. I've heard that too. Yeah, I believe it. And some tiny, tiny portion. I forget if it's like half a percent or less something tiny of Bitcoin activities is illicit. And there's a recent example here of
01:27:24
Speaker
of Hamas having to tell its supporters to stop sending cryptocurrency because the cryptocurrency is trackable. So they don't want that form of donation to their cause because it's more easily shut down.
01:27:45
Speaker
So, you know, that's just entirely wrong. But it's you know, I guess it's rooted in, you know, the very early days of of Bitcoin were some of the earliest adopters were were these online drug bazaars where you could go buy drugs
01:28:04
Speaker
anonymously over the internet using this form of currency. And I think it's vestigial from then. And that's really not how Bitcoin is used now. The other thing you asked about was, was it energy? Yeah, it's bad for the environment. It's energy use is waste.
01:28:23
Speaker
Yeah, so I would actually take the completely opposite stance that Bitcoin is possibly the single greatest tailwind for the adoption of renewable energy in the world. And I would also include in that nuclear power, to be fair.
01:28:48
Speaker
which is not commonly thought of. And I say all that because one of the problems with like hydropower is a great example. Let's talk about, we'll talk about Africa.
01:29:06
Speaker
There's a lot of places in Africa that have abundant water and therefore lots of rivers and hydropower potential. And they simultaneously don't have any electricity. They don't have a grid because there's not enough industry to justify creating
01:29:25
Speaker
a coal fired plant that would create electricity for the surrounding area. But they have all this hydropower that's unused. But there's not even enough of a business case to put in a hydropower facility until Bitcoin. And that's a pretty radical change because Bitcoin is
01:29:50
Speaker
What's the phrase that people like to use? It's always willing to purchase electricity. Any spare unused excess electricity Bitcoin will take because all you need to do is plug in a computer, a Bitcoin miner,
01:30:12
Speaker
and use that electricity to generate new Bitcoin, which is money. And so all you need is electricity to generate money just by plugging in a piece of hardware. And that's a super low barrier in terms of infrastructure necessary. So suddenly we're seeing communities that don't have electricity in Africa
01:30:38
Speaker
get micro hydropower installations put in. There's a cool company called Gridless Compute doing this, for example. And now that that micro hydropower facility is generating electricity that's being used first for Bitcoin miners.
01:30:58
Speaker
but it's actually available to the highest bidder. So if the local community wants to buy that electricity, they can. And so suddenly you've bootstrapped part of what's necessary for development to occur in an area, because now there's electricity that's available if you want to build some kind of plant
01:31:20
Speaker
Well, you can plug into the micro hydropower facility that's spitting off electricity now. And so in that sense, that that renewable energy installation becomes possible because Bitcoin is the buyer of last resort is the phrase that I was thinking of. And and that's true across all types of renewable energy. And in particular, when with regard to like intermittent energy like solar power,
01:31:50
Speaker
where half the day solar power creates too much energy and that energy goes unused. But if you have Bitcoin miners there, they can use that energy and turn it into money. And so suddenly the business case for when you're evaluating whether or not to put in that
01:32:10
Speaker
renewable energy installation makes more sense because you're going to get more revenue than you otherwise would have if you had wasted unused electricity. And so that helps justify, from an economic point of view, adding more renewable energy to the world. And so it's actually a tailwind. And not only is it a tailwind, it's helping to
01:32:36
Speaker
to incentivize more efficient forms of energy installations. It's also helping to balance the grid to load stabilize. So in Texas, Texas has a problem with intermittent energy. Occasionally, there's too much demand for energy and not enough being created. And in those scenarios,
01:33:04
Speaker
Any Bitcoin miners in Texas can actually just switch off and the energy grid incentivizes them to do so and pays them for not using electricity for that period of time. And so that way becomes a way to load balance to stabilize an energy grid just because there's Bitcoin miners who are happy to switch off at a moment's notice to stabilize that
01:33:29
Speaker
that energy grid. So when you dig into it, basically, there's a lot of reasons why Bitcoin mining is
The Future of Bitcoin as a Value Store
01:33:37
Speaker
one of the best new variables in the future of energy for the world. Even with all that, if we put aside like, well, Jim, if you create one unit of waste that's unnecessary, that's still waste, we still have to consider what is Bitcoin doing anyways.
01:33:59
Speaker
And again, we have to consider the alternative. So having sound money versus a fiat standard. And again, I would argue that our current monetary system creates much more wasted energy, both human energy and also energy energy.
01:34:18
Speaker
I don't know the word, but actually, you know, the energy people get mad about. So there's a lot of wasted energy there that people don't account for. They just see the surplus of energy created by Bitcoin or utilized by Bitcoin without thinking of the opportunity cost of Bitcoin not existing. So we have to consider that as well, aside from the the opportunities now presented through Bitcoin. All right. I've kept you for a really long time. Would you have a moment to talk through? OK, I think we should own Bitcoin.
01:34:49
Speaker
But where's this going? Again, we talked about having cycle adoption rate, game theory, history of money, really small adoption right now. Most pretty smart people don't own it. The having cycles, all that stuff. So like in the what is what is Bitcoin trying to solve for and the full potential valuation? So let's let's arrive at that finally.
01:35:13
Speaker
Yeah. So we set the stage for it's $500 billion asset, 0.05% of global asset value out there. And what is Bitcoin trying to be? It's trying to be digital gold at minimum. That's, I think, the easiest mental starting point. And gold is a $12 trillion asset.
01:35:41
Speaker
Uh, all the gold in the world is, is $12 trillion. So to get from today to that, uh, is what is that? It's a 20, 24, um, 24 X, uh, to get to gold, to, to become digital gold. And how does it become digital gold? Just by the March of time, just by increasing scarcity, continuing to play out and people.
01:36:08
Speaker
And at the same time, the adoption curve of people realizing the properties of Bitcoin leading to increased demand. That's all that's all it takes for Bitcoin to 24x to match gold. But that's that's the low end of what's possible for Bitcoin. And this is where it gets a little crazy. And I understand this. This all sounds a little crazy. But with every asset in the global asset landscape, there's
01:36:35
Speaker
new supply being issued every year. And that new supply sets the ceiling for the total valuation for that asset class. Gold 1.5 to 2% a year is a $12 trillion asset class. Real estate, there's a tiny amount of real estate, like new land being created every year. And that's a $300 trillion asset class. But the ceiling is there.
01:37:04
Speaker
for both of those because the market has to absorb the new supply created every year. And with Bitcoin, obviously, that new supply created every year goes eventually to zero. So Bitcoin doesn't have long term
01:37:23
Speaker
or, you know, this will take decades to get to, it doesn't have that kind of ceiling. Its ceiling is therefore then based not on how much supply has to be absorbed because it's zero, but instead how much people want to hold Bitcoin as a digital store of value versus other assets. And that's kind of open to everyone's interpretation of
01:37:50
Speaker
How much how much Bitcoin do you want to hold versus bonds or versus equities that are generating some kind of yield versus how much do you want to hold a form of money savings vehicle that allows you to propagate your value through time.
01:38:07
Speaker
undiluted and grow at least the rate of the economy's growth in purchasing power every year. And over the next several decades, as increasing scarcity plays out, it'll be magnified by that jet fuel of increasing scarcity causing value appreciation to play out.
01:38:31
Speaker
How much do you want to hold that versus how much do you want to hold bonds, which are going to generate a negative real yield over the next few decades as we are forced to inflate away our national debt? There's 300 trillion sitting in bonds, half a trillion sitting in Bitcoin. How much of that will flow into Bitcoin once they realize the properties of Bitcoin as an investment asset?
01:38:56
Speaker
Don't know. It's kind of up to everyone's individual assumptions about what's possible there. But I personally think a conservative ceiling of what's possible for Bitcoin within this framework, the full potential valuation framework, is to be a $200 trillion asset class. And that would mean $10 million per Bitcoin in today's dollars
01:39:23
Speaker
several decades from now. And so that's a 30 year prediction, maybe even more. But right now it's $35,000 per Bitcoin. So to go from there to even a million per Bitcoin would be an incredible success and the best performing asset in almost anyone's portfolio.
01:39:49
Speaker
As we think through this, again, there's the adoption rate, alluding to internet, there's the game theory involved. Again, how do we arrive at this? Bonds, real estate, equities, there's all these things. Trey and I talked about this a few weeks ago on the podcast was monetary premiums assigned to all these other assets. A house cost outrageous
01:40:12
Speaker
amount right now, not because people want homes, but because houses are used as stores of value assets. And in my opinion, that monetary premium, the difference between the actual use case of the house and the cost of a house, again, we can assign that as being called a monetary premium. That monetary premium, my opinion will be eroded and put into Bitcoin because Bitcoin is easier to hold.
01:40:39
Speaker
it's more tax efficient to hold in a lot of senses. You can transact it a lot more easily. It contains these properties that we just assigned earlier as being, or defined earlier as being important parts of money in a much more simplistic way than real estate or gold or bonds. So that's where, again, not just the adoption, 1% to, it's called 100%, whatever, maybe that's too bullish, but this adoption rate, but that
01:41:09
Speaker
coinciding with, as people start to understand this, they will, I think that they will start taking a portion of the monetization of other assets, putting into this thing, causing it to go up further until eventually reaches equilibrium. And the goal is one day, probably not in my lifetime, Bitcoin's really boring. It's talked about, maybe I'm in a really small bubble that I hear people say, like talk about Fiat and stuff all the time now, probably just me. But I feel like people talking about money and what money is, is actually sort of in vogue at the moment.
01:41:40
Speaker
But historically, that's not been a very fun topic for most people. And my hopes is that yes, I assume that over the coming decades, money will be a popular conversation, not money in the sense of like, you know, rap videos and doing stupid stuff with money, but like actually the core principles of money itself. But then eventually, once Bitcoin is
01:42:01
Speaker
This should be really boring. We don't have to talk about it. It would make financial planning a lot easier because we're not speculating with a store of value. We have something that's a hard asset that we can just account on pretty well.
01:42:14
Speaker
Yeah, eventually this will be a non-issue. It's something that you don't hold Bitcoin in order to grow your wealth. You hold Bitcoin in order to retain your wealth. That is what money is supposed to do. Money is supposed to hold, communicate and transfer value across space and time. Right now it's just Bitcoin is
01:42:33
Speaker
been growing purchasing power and value across space and time because of the adoption rate, because of the inflows of capital to it. But eventually it will reach us equilibrium. Well, it's boring. And you just own it because you want to retain purchasing power. And then you'll go and you'll buy other assets that have been repriced against actually a good sound money that will cause these other assets to actually be, we can actually use math again to value things versus speculation. It's like, hey, the opportunity cost of holding Bitcoin money is boring.
01:43:01
Speaker
versus if I go invest in something, actually invest. If I go and invest this, I can get some yield off of that. It will reach this place again. People will be motivated to go and part with their Bitcoin to buy assets, other assets, income producing assets, and things will be reset in a healthier way. I'm excited for that. I doubt I'll see that in my lifetime, but it is fun to see. That's another thing I heard another financial advisor say to me is like, yeah, I think this is probably going to happen, but it's not going to happen in my lifetime. Why would I even care?
01:43:31
Speaker
I don't know, do you have kids? Do you care about humanity? That's weird. Yeah, I'm excited. That's just the ability to participate in this. I was born way too late for the adoption of the combustible engine and the internet.
The Vision and Early Adoption of Bitcoin
01:43:47
Speaker
We saw a rise of that in our lifetime, but I think this will be on par with the internet, the wheel, and we're right in the middle of this, and it's amazing.
01:43:59
Speaker
Maybe we'll look back as fools in 20 years. And it's like, dude, I can't believe I put my, I stick my name to that thing. I don't think that's the case. I'm willing to put my neck out there because I think it's more of like.
01:44:08
Speaker
wow, these people saw something. And I have a lot of respect, like whoever Satoshi is, it's incredible. Like they were able to build this, the vision and the amount of things that he was able to understand and build together in Bitcoin is astounding. Again, from the technical side of things, from computing to the financial side of things, the game theory, like it's just beyond me and it's pretty awesome to be part of that. Yeah, totally agree with all that. The, you know,
01:44:39
Speaker
It may not happen in our lifetimes that Bitcoin becomes the unit of account money, the end state of what a money should be. But we just happen to be, I think, living through the early stages of its adoption, which means the most opportunity and the most upside is right now. And, you know, great. And so I think it's a challenge for everybody to figure out how
01:45:09
Speaker
how they're going to approach Bitcoin. And, you know, this is a this is a problem that everybody faces every day, whether or not they know it is how do I allocate my portfolio and my earnings into assets? How do I spend my money? Do I consume it? Do I invest it? And then what? And I believe we are living through the very early stages of the digitization of value. And Bitcoin is the protocol
01:45:39
Speaker
the internet that all of this value will accrue to. And what better problem to have?
Conclusion and Financial Advice Reminder
01:45:49
Speaker
Well, I think on that note, man, we hit a lot. So I appreciate you. Let me interrogate you for the last almost two hours. I enjoyed it. So appreciate it, Jesse. Yeah, this was a ton of fun. We packed in a ton. I hope people get a lot out of it. All righty.
01:46:07
Speaker
Hey, thanks for listening to the Intentional Living Podcast. Now, today's show is simply entertainment and educational in nature. Do not take this as tax, legal, or investment advice. If you are looking for tax, legal, or investment advice, you should go talk with a tax, legal, and or investment advisor. Again, this content is simply educational and entertainment purposes.
01:46:34
Speaker
Thanks again for listening. We look forward to you joining us on the next episode.