The Breakdown - 13 Years On, The Significance of ‘Chancellor on the Brink of Second Bailout for Banks’

Starting point is 00:00:00 Bitcoin, as I mentioned, was a very different type of protest. It made a determination on the root cause of the problem of this system, in this case at the most surface level, the ability for a central bank to even consider bailing out a traditional financial institution. Instead of just calling that out, Bitcoin actually offered an alternative to how the system was designed. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, January 3rd. Welcome to the first work week of the new year.

Starting point is 00:00:48 Now, today is a day of much historical significance in Bitcoin, and I'm excited to do a little bit of a retrospective historical episode. First, though, a little housekeeping. First up, sponsors. This show is sponsored by nexo.io, the all-in-one crypto platform for storing and earning interest on your crypto. Abra, a simple and secure app for trading crypto and getting crypto collateralized loans, and FTX, the safe regulated way to buy digital assets with up to 85% lower fees than competitors. And of course, as a disclosure, I also help run marketing at FTX. Second, how you guys can support the show. First, rate, review, subscribe, all of those things actually really help people discover the show, which is good for growing the community of listeners around. Speaking of

Starting point is 00:01:37 which, if you want to join the community, the best place to have discussions around these topics, other types of things you want to see on the show, macro topics, anything really at all, come join the breakers Discord. The link is in the bio and it's a growing community with a lot of really interesting perspectives that I'm really enjoying. But now to the show. Today is January 3rd, and that means that it was 13 years ago today that the first Bitcoin block was mined. There are two plausible birthdays for Bitcoin. The first is, of course, Halloween 2008. That's when Satoshi shared the white paper for the first time and started to get feedback on it.

Starting point is 00:02:16 The second day that you could argue is Bitcoin's birthday is January 3, 2009, the date of the Genesis block. The Genesis block was notable for a few reasons. First of all, its difficulty was one. Now, you've heard me say probably before that I think that the difficulty adjustment is one of the most elegant and underappreciated parts of the Bitcoin system. The difficulty adjustment is a process by which approximately every two weeks, every 2016 blocks, to be precise, the software running Bitcoin automatically makes it either easier or harder to win blocks based on how much computing powers being thrown at the network on that time. The power of the difficulty adjustment system was on full display last year. When China announced its Bitcoin mining ban and hash rate flooded away from the network as

Starting point is 00:03:04 China-based mining operations went offline, there was a massive downward difficulty adjustment, which of course made mining more profitable and also made mining more profitable at higher energy costs, incentivizing more miners to come online. Anyway, during the Genesis block, the difficulty was won. It is currently at $24.272 trillion. The block reward back then was 50 Bitcoin, currently worth about 2.3 million, but of course, at that time, worth literally nothing in Fiat terms. Now, Block Zero, the Genesis Block, wasn't actually mined like the rest of the blocks. It was instead hard-coded into the original software, along with the Coinbase transaction of the first 50 BTC.

Starting point is 00:03:43 Those Bitcoins are unspendable. Block 1 onward is included in the global transaction database, and Block 1 actually wouldn't be mined until January 9th, 6 days later. As you might imagine, there has been tons of speculation about why the delay, why six days between the Genesis block and Block 1? Some have theorized that Satoshi spent those six days testing, mining blocks, and then deleting them and backdating the timestamp just to make sure everything was stable. A more out-there theory says it's a reference to the literal story of the world's creation in the book of Genesis, where God created the world in six days and then rested. Still, somehow this is not the most notable thing about the Genesis block. That is, of course, the message left in code on the block, the Times 0.3 January 2009, Chancellor on Brink of Second bailout for banks.

Starting point is 00:04:33 Bitcoin was, of course, born into the world of the great financial crisis, and this headline seems to represent that. The piece was from the Times UK and is still online to be read for anyone who wants to see it. Chancellor Alistair Darling on Brink of Second bailout for banks. Billions may be needed as lending squeeze titans. Alistair Darling has been forced to consider a second bailout for banks as the lending drought worsens. The Chancellor will decide within weeks whether to pump billions more into the economy, as evidence mounts that the 37 billion-pound part nationalization last year has failed to keep credit flowing.

Starting point is 00:05:07 Options include cash injections, offering banks cheaper state guarantees to raise money privately or buying up toxic assets the Times has learned. The Bank of England revealed yesterday that despite intense pressure, the banks curbed lending in the final quarter of last year and plan even to, tighter restrictions in the coming months. Its findings will alarm the Treasury. Now, all of this seems to be a reference to the bailouts, the bank bailouts that characterize the beginning of the great financial crisis. These bailouts represented two things. The first was a demonstration of the significance, the power, of private sector financial

Starting point is 00:05:45 institutions. This was, of course, where we got this idea of too big to fail. These companies were so large that they had to be protected for the sake of the larger economy, despite the fact that it had been their decisions, their legacy of leverage that had gotten them into the position where they needed to be bailed out in the first place. The second thing that bailouts represented was a shift in the very conception of monetary policy. We entered a world, which we have been in ever since, of extreme government involvement in markets, where the mandate to financial stability means, in fact, propping up markets through cheap money. Because of that in many ways what the bailouts really represented, at least to some, was a recognition of the problem of the power flow

Starting point is 00:06:29 between government and the financial sector. Nexo is a trusted and easy to use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets. So whether you're just getting started or you're a seasoned pro, get the most of your crypto today with Nexo at nexo.i. Today's episode is sponsored by Abra. Join over 1 million users and conquer crypto with Abra, an all-in-one, simple and secure app,

Starting point is 00:07:20 where you can trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral, and earn interest with up to 14% APY on stable coins and 8.15% APY on Bitcoin. Visit Abra.com or download the app app from the Google Play or Apple App Store today. Abra, Conquer Crypto. The breakdown is sponsored by FTX.

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Starting point is 00:08:22 In practical terms, that single line, the inclusion of this single message, Chancellor, on brink of second bailout for banks, gave Bitcoin the stem of an ideology. Reductively, that has been described or viewed as just some sort of digital libertarianism, right? A rally for governments to get out of markets in people's lives and et cetera, et cetera, et cetera. But that's not really accurate. You have to remember that reaction to an acrimony for the whole bailout process, from when the bailouts happened to, particularly how no one in those financial firms was really held accountable, was bipartisan. It was Occupy Wall Street on the one side and Trump's drain the swamp on the other.

Starting point is 00:09:05 Bitcoin was a very different approach to a protest, because it had embedded within it a larger critique of the underlying system. When you take democratic political action, there's something you point to as not wanting or repugnant or problematic, and you try to find ways to exert power that win you concessions. Those concessions, those concessions, can be things like new laws. Bitcoin, as I mentioned, was a very different type of protest. It made a determination on the root cause of the problem of this system, in this case at the most surface level, the ability for a central bank to even consider bailing out a traditional financial institution. Instead of just calling that out, Bitcoin actually offered an alternative to how the system was

Starting point is 00:09:47 designed. Put differently, Bitcoin didn't engage with the existing financial system on its own terms. It chose exit, and as it did so, it invited other people into a new alternative, with the only precondition that they agreed to play by its rules, which were rules that theoretically couldn't be changed by people. Now, of course, in practice, it isn't this clean. Yes, the rules of Bitcoin are hard-coded, its monetary policy based on math, not people. But there is a layer of people as well. rules like Bitcoin's only matter because of the network effect of people around them.

Starting point is 00:10:25 There is a social consensus that agrees to enforce those rules and forces exit of those who wish not to. Those who do exit are forced to go recreate the network effect, an immensely difficult thing to do. This is why it was wrongheaded to think that forking would diminish the value of the network on the main chain, although lots of people thought this in 2017. The Bitcoin Cash Split was one of the major reasons that some, were skeptical of Bitcoin. If one group could splinter, did it actually undermine this $21 million hard cap because there were going to be dozens and dozens of these 21 million hard cap supply things floating around with no one knowing what was the most important? It's also why it's wrong-headed

Starting point is 00:11:05 to think that another crypto could just choose an even more limited supply and somehow be more popular than Bitcoin because they were being more Bitcoin than Bitcoin was. Those people, again, would need to build some type of network effect around that to reinforce social consensus. Bitcoin spent years quietly attracting people who are looking for their own exit, their own type of alternative, and as it did, its value rose. This created one of the more interesting dynamics in Bitcoin, the weird confluence of interest between speculators and ideological holders. One reinforces the other. People who are holding based on ideology, based on philosophical reasons, set price floors and limit the risk to the speculators. Speculators, on the other hand,

Starting point is 00:11:48 create upside and bring in new people. And of course, some of those new people and some of those speculators convert to ideological holders. Speculators increase, the holder base grows, and the conviction of both increases over time. Even this distinction obviously isn't as clear as I'm making it here, because these categories are not mutually exclusive, and people are malleable. They can change their perspectives over time. What's more even using the idea of lumping all, quote-unquote, ideological holders of Bitcoin together is sort of farcical. There are many ideologies which lead people to Bitcoin. Monetary policy controlled by math and not people, alongside a fixed supply, is a little bit different of a reason for being interested than censorship resistance,

Starting point is 00:12:27 and the idea of a non-sovereign money, which is also a little bit different than a portable store of value argument, which is a little bit different than a final instantaneous cross-border settlement. The point, of course, is that there are a lot of things that range from market thesis to ideology that have brought people to Bitcoin more than just some libertarian bent, which is why it's so frustrating when people try to reduce it to that. But ultimately, all of that starts with the Chancellor on brink of a second bailout for Banks line. It grounds Bitcoin in something in the real world. It plants enough of a thought of an ideology that people could rally around it even before there was that value,

Starting point is 00:13:04 even before there were these broader articulations of market theses that have brought people into the system. So, how have the number of people with whom that line resonates changed over time? I think it's fairly clear to say there has been an increase, but it hasn't been a clean line. Remember, reaction one to the great financial crisis and bailouts was thanks for saving the economy. Reaction two was, holy crap, there's going to be crazy inflation. Look at all this money printing. Reaction three was, holy crap, how could you bail out the banks and not have anyone go to jail for their actions? Now, on reaction two, this idea that there was going to be crazy inflation, that didn't show up, at least on the consumer side. In fact, what we got was just asset price

Starting point is 00:13:44 inflation in a booming stock market. This surprised many people. people and would shape their perspective on the relationship between money printing and inflation later on. It also, from a personal incentive standpoint, got a big part of the market quiet and just enjoying the gains. At the same time, it was very clear how addicted to cheap money markets had become. Now, reaction three, this frustration that there was a bailout for banks, but not accountability for the people within those financial institutions. This disaffection manifested, as I mentioned before, in lots of different ways. Occupy Wall Street on the left, of course, but then the rise of Trump. Remember the whole thing was about draining the swamp. His whole appeal

Starting point is 00:14:23 was as an outsider of the whole D.C. complex. And that had come to mean not just politicians, but the entire mainstream system of power that ran from Wall Street to D.C. Fast forward to COVID times. 2020 and 2021 made the stimulus of the great financial crisis look quaint. It was a whole different era and the memes entered the mainstream lexicon this time. In fact, it wasn't just crypto who initially resuscitated the money printer go-burr idea. It was the Wall Street bets crowd, who bet months earlier than the hedge funders that this wave of stimulus would bring the markets back. And in so doing made a lot of professional managers who were predicting Doom Forever look silly. Of course, there's an inherent sort of cynicism that was involved in many

Starting point is 00:15:05 of those trades. If everything was just a casino game backsop by the Fed, and there wasn't really a sense of alternative plausible paths to a different life, why not go all in? While that was happening, some others were having their own revelations. Famous hedge funder Paul Tudor Jones, who wrote his great monetary inflation thesis and announced himself a bitcoiner. Michael Saylor, who was coming up with his big block of ice metaphor and was about to make one of the most dramatic corporate treasury actions of all time. Over the next 12 months, many, many more came in, most notably big institutions, many of the too big to fails. Now, the economic crisis following COVID was different from the great financial crisis. It was a demand crisis from people.

Starting point is 00:15:46 being in lockdown. But it's still reinforced for many, this idea that the central bank is a completely political apparatus now that ultimately exists a prop of the markets. Whether true or not, that is a major narrative for people on both sides of the political aisle heading into 2022. So, here we are, 13 years on from Chancellor on Brink of Second bailout for Banks. The involvement of government in markets that Satoshi seemed to identify is not only still present but stronger than ever. The group of people who have concern about that involvement has also subsequently grown. Part of why it has grown is the existence of an alternative in Bitcoin that has, despite so much effort, not died. An alternative that the very banks who were the beneficiaries of the bailout have

Starting point is 00:16:31 also started to capitulate to and get involved with. We've even seen a government in El Salvador show that Bitcoin represents an entirely different form of an exit from the existing system than many of us thought possible. I describe this show every day. is about big picture power shifts, and there are a lot of things in the crypto space that are contenders that are fighting to be so. NFTs could be just a bunch of hype and JPEGs that don't have any value, but they could also represent a disruptive force to the music industry, the gaming industry, you name it. Dow's could be complicated, burdensome organizations that never really get off the ground, or they could totally change how people come together to leverage pooled capital into what ends.

Starting point is 00:17:09 Defi could just be financial yield farming games, or it could change the way the pipes of the financial system work. Web3 could just be a clever rebranding of things people already don't like. Again, too burdensome and differing from consumer norms to make a dent, or it could undermine the model of ownership of the services we interact with every day. The point, of course, is that all of these things are potential disruptors. They have the potential to shift power. But 13 years on from Chancellor, it's clear that Bitcoin already has. The very fact of its existence, growth, and success has changed the possibility set for individuals and institutions. an ever-growing number of which avail themselves of that new optionality every day.

Starting point is 00:17:50 So welcome back to 2022. I'm excited for this year. Thanks again to nexo.io, Abra, and FtX for sponsoring the show. Rate it, subscribe it, review it, join the Breakers Discord. And until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - 13 Years On, The Significance of ‘Chancellor on the Brink of Second Bailout for Banks’

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