The Pomp Podcast - #1147 Matthew Ferranti | Harvard Says Bitcoin Is Sanctions Hedge

Episode Date: January 18, 2023

Matthew Ferranti is a PHD candidate in economics at Harvard University. In this conversation, we talk about a brand new paper that Matthew published titled: "Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves." We talk about bitcoin, US sanctions, and how central banks around the world use cryptocurrency to hedge the risk of the sanctions. ======================= Announcing LYCEUM | Miami, a day-long event on March 4th, 2023 in Miami hosted by Pomp. We’re gathering an explosive group of experts to engage in a series of fascinating discussions. We'll cover topics from investing, emerging tech, scientific research, sports, music and more.We have some massive names being announced via Twitter throughout January so stay tuned for details.This will not be your typical event and it certainly won’t be one you want to miss. We’re going to learn a lot, make some smart friends, and as always, we’re going to have fun.Spots are limited so head to lyceummiami.com to buy your ticket today. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= With a Messari Pro subscription, you gain access to exclusive industry-leading long-form daily research reports, daily crypto news & insights in your inbox, advanced asset screeners, curated sets of charts and metrics and so much more. Try Messari Pro today! Get up to 25% off their Messari Pro membership by visiting www.messari.io/pomp and entering promo code "POMP" at checkout. ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Matthew Ferranti is a PhD candidate in economics at Harvard University. In this conversation, we talk about a brand new paper that Matthew published titled Hedging Sanction Risk, Cryptocurrency and Central Bank Reserves. We talk about Bitcoin, the US sanctions and how central banks around the world may use cryptocurrency to hedge that risk of the sanctions. I really enjoyed this conversation with Matthew, and I hope you guys enjoy it as well. Once you get done listening, jump on Twitter and let us know what you agreed with, what you

disagreed with, what you liked and what you didn't like. I always appreciate the feedback, and it helps us get better. Okay, here's my conversation with Matthew Ferranti. This episode is brought to you by Accenture. When your advertising operations fall out of sync, Everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Hey y'all, it's Kelly Clarkson with Wayfair. Ever order furniture online and wonder, what if? Like, what if it doesn't hold up? That sofa was four days old.

You should have ordered from Wayfair. With Wayfair, there's no what if. Just style you love and quality you can trust. Visit Wayfair.ca. Wayfair, every style, every home. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments.

You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Matthew here with me.

Matthew, you recently published in November a paper that is titled Hedging Sanctions Risk, Cryptocurrency, and Central Bank Reserves. And this paper got whipped around the internet, obviously, by a lot of Bitcoiners, but also I saw quite a bit of conversation coming from traditional finance and even people who would fancy themselves kind of central bank experts. Maybe we could just start with why someone from the Department of Economics at Harvard would even be interested in the intersection of central banks and something like Bitcoin. Where did that interest come from and kind of what puts you down this path? Yeah, so first of all, thank you for having me on your podcast.

It's always fun to have an opportunity to talk about my research, especially with an audience as big as yours. But I think actually I got into this topic not through the crypto angle, but rather through the sanctions angle. So I was thinking about, I was long been interested in the effects of sanctions on the international financial system. And especially after what happened with Russia last year, where a number of countries froze their central bank reserves. It got me thinking about one of the effects of this might be that central banks might think about reallocating their reserves in anticipation of this type of risk, of trying to protect themselves from it. And so, you know, kind of logically following from that, the question you want to ask yourself is, well, what could they buy that would protect themselves from this type of risk? But obviously, gold, at least if you have physical custody of it, would be one potential answer. But I think Bitcoin might be another.

And so that was where the paper came from, sort of exploring whether Bitcoin can serve as either a substitute or a complement for gold in that sense. Yeah. So what's fascinating with the latest round of U.S. sanctions in the Russia-Ukraine conflict is the United States has been using financial sanctions for a long time now against a number of different countries. But I think that there was a fairly widespread belief that these sanctions, both the speed and the severity of them, kind of signaled a new regime or a new paradigm of financial sanctions. There was the freezing of central bank assets. There was kind of a global coordinated effort. Talk a little bit about the actual use of sanctions and kind of how you

evaluate, you know, maybe their historical use, but then also what's your take on these sanctions against Russia and how severe they were and kind of the global coordination that was used to actually implement them? Yeah. So my paper doesn't estimate the impact of sanctions on the Russian economy per se, but it certainly seems that they've had some effect. The Western world has sanctioned Russia's imports more than its exports. So that really causes them some major supply chain issues when when when it comes to trying to manufacture and build stuff I think what makes this this an interesting topic is that when it comes to these these sanctions there's not just one thing that can get you sanctioned so

obviously in the case of Russia the the sanctions were applied because they invaded in neighboring countries but there are other central banks that have also had their reserves frozen by the US for a variety of other reasons ranging from building nuclear weapons to terrorism-related concerns to just having a government that the U.S. doesn't recognize, like Venezuela, for example. So, well, and also, which, you know, maybe human rights-related concerns thrown in there, too.

But there's just kind of this grab bag of things. And that's what makes it interesting, is that there's not just one thing. And the other thing, too, is the sanctions are up to the U.S. president. And Congress can overrule the imposition of sanctions, but that would take a two-thirds majority to do that. So really, if you're thinking about the central bank,

if you're thinking about holding assets in the United States, you've got to ask yourself how much you trust the U.S. president. When you see the sanctions, I think for me, someone who does not spend a lot of time studying sanctions, even studying maybe central bank kind of chess moves, if you will, in the geopolitical stage. The thing that surprised me was the freezing of assets that were not in the actual sovereignty of the nation, right? So these are dollars or other foreign currencies that are being stored outside of Russia. They were gold reserves being stored outside of Russia. I believe that there

was another situation where Venezuela's gold was sort of like the Bank of England, if I remember correctly. And there was the kind of rejection of Venezuela's request to return their gold to them. And so it became very obvious to me, like you would think the central bank would have the national assets at the central bank, but then it kind of highlighted like, no, that's not how this works. And so how common is it for there to be sanctions on these assets that are not held within the country? Yeah. So, well, first of all, let's get to how common is it that countries store assets outside of their own borders? It's relatively common, and it really gets actually this sort of tension between, like, what are the benefits of having a centralized financial system

versus a decentralized one? Well, in a centralized system, you have lower transaction costs because you have these central clearinghouses that can facilitate transactions. You know, a good example that being the new york fed so they in the in the vault of the new york fed uh are quite a bit of gold uh that belongs to about 36 different uh international organizations and central banks and it's nice the benefit to them is that there's low transaction costs well first of all because the new york fed kind of handles the custody and security of it and all that but also if they if one of those countries wants to transact with another uh country that's also have got their gold at the New York Fed, some staff from the New York Fed will literally just

take the gold bars off of one shelf in the vault and move them to the other shelf. And so it's just very easy to conduct transactions. On the other hand, yeah, then, you know, once you store your assets outside of your own borders, yeah, I mean, you do have to ask yourself the question of, are they going to be returned if I want them? And yeah, you're right that Venezuela has had a dispute with the Bank of England, which as far as I'm aware, they've pretty much lost. So the British courts have not given Venezuela any relief in terms of repatriating its gold. So, yeah, I mean, I think that in general, you know, there's also just the fact that the traditional sort of Western financial system is well regulated and stable.

And so that also makes it an attractive place to store and custody assets. So, yeah, I mean, I think it's quite common that people would store in institutions would have accounts outside of their home borders. When I think about Venezuela asking the Bank of England for their gold back, um one i'm imagining that the british courts uh have an issue with uh venezuelan government human rights all the things that you know probably the u.s also uh would take object to um but also there's this element of if we tell them to kick rocks and we say you're not getting your gold back they can't really do anything and if you kind of compare that to you know maybe the united states if a country somewhere in the world said to the united states you're not getting your gold back

uh we got a pretty powerful swift and effective military and it feels like we actually could do something now whether we did or not would be up for debate and the details of that situation and so is there this element also of not just uh which country it is and human rights and stuff but also just like if you don't have a really strong military then like you kind of uh are at a disadvantage and countries know that? Yeah. So that's an interesting point. And I do believe that in some of the military conflicts, like in Europe, for example, in the 19th century, that one of the motivations for conquering another country was to acquire its gold reserves for yourself uh and so yeah i mean i mean i think historically maybe that that's been a motivation

or one motivation anyway for for conflict um you know in your example it's sort of it's actually asymmetric because i i don't think the u.s stores any of its gold outside of its own borders they would never have a situation where a country would be refusing to give uh the u.s's gold back to itself um but yeah no that i mean you are you are right that uh in terms of you know venezuela if the british courts don't give relief to venezuela but there's not a whole lot they can they can do yeah it's uh it's crazy to think about and so if we then take like the venezuela example and maybe we just extend that out to the russian uh situation uh it seems very similar Like Russia had a bunch of foreign currencies, gold, other assets that were on their central bank balance sheet.

They had them stored elsewhere. And it seems like this, although likely was led by the U.S., it was NATO. It was kind of this global coordination. And many countries decided all at once that they were going to freeze assets and kind of cut Russia off from this global financial system. Once that occurs, is it the belief that like we've breached kind of this new paradigm and therefore this will become the playbook? I kind of think of it like the 2008 global financial crisis, QE becomes all the rage. And now it seems like every time we have some sort of market downturn, people start talking immediately about QE and QE is like the new normal. Is that how you see this playing out with sanctions?

um there may be some element of that in the sense that there's a maybe a um uh a tendency or or a uh yeah a tendency for for politicians to reach for sanctions as a tool because they're they're perceived as i mean it sort of looks good like like they have like you can go in the press and say oh you know we're doing something about this bad situation like look at this big sanctions package we're unveiling and you can unveil many of them right so like you can step them up and step them down but at the same time you don't have to actually commit military resources to addressing uh whatever uh issue is going on that's the root cause of the sanctions so maybe you know in a world where military conflict is is very expensive and where countries

are maybe more at least a little bit more inclined towards isolationism perhaps at least there are political movement towards that regard, these sanctions do seem to be kind of like a very appealing alternative. And so, yeah, I mean, I don't necessarily know that I would call it like a new paradigm, but I think it is maybe sort of a continuation of a trend. Got it. And what's fascinating about Russia on just the sanctions part, I actually tweeted this a couple of days ago is i saw a graphic that showed the imports of all goods between february and august of 2021 so kind of february being the time when russia invaded ukraine and the fact that eu trade with russia on a whole increased in 2022 uh despite the sanctions so i'm sorry

february to august of 2022 now the nuance there is that commodity prices were highly volatile And so in dollar or euro terms, there's actually been an increase from 21 to 22 with EU country going ahead and exporting into Russia or Russian imports. And so what that told me was like, forget for a second the nuances of importing and exporting and dollar changes of the commodity prices and all that. it's just that sanctions on imports and exports are very very hard to have the intended consequences because the economy is like this big complex machine but in contrast if your gold's in my custody and i say you don't get it back i'm very direct in the in the kind of impact that i want to have you don't get the gold right so that sanction almost feels like it's easier to actually have uh control over and implement than maybe playing games with the nuances of imports and

exports and dollar values and various commodities yeah i think i think that's right um i think there i think whenever there's when when a country tries to country a tries to prevent country b from let's say importing good x uh if country b really wants it they can look around the world and find other people are willing to sell it for them and maybe they have to pay a higher price for it but uh yeah i mean as long as there's an economic incentive there uh you know it seems that uh that that they probably will find some where there's a will there's a way um you know maybe a good example that countries like turkey where they're kind of uh turning maybe a bit of a blind eye to enforcing these sanctions and so there's a lot of business getting set up there

where they're essentially acting as middlemen between firms, like let's say in Europe, who don't want to export directly to Russia, but they can export to Turkey, and then the Turks will just move stuff onward. So yeah, yeah. That makes sense. And so in the paper that you wrote, again, the title of it was Hedging Sanctions Risk, Cryptocurrency, and Central Bank Reserves. You had this data point early on where you say that from 2016 to 2021, countries facing a higher risk of U.S. sanctions increased the gold share of their reserves more than countries facing a lower risk of U.S. sanctions.

And really, I think what you're trying to get at there is countries are not dumb. They know who's at higher risk and lower risk, and therefore they were almost pre or kind of in anticipation trying to become more resilient with the central bank reserves. Is that correct? that's that's the argument i make yeah no i can't necessarily rule out that uh countries facing a higher risk of sanctions which by the way i proxy for that based on where they're getting their military imports from uh because i can't like compute exactly what a country's risk of sanctions is i don't think there's really a way to do that um but i can like try to find some other variable that's probably correlated with it.

And yeah, and I can't necessarily rule out that the countries that are getting more of their military imports from Russia and China and therefore at a higher risk of U.S. sanctions, that they're increasing their gold reserves because maybe just because of political considerations. Like they find it distasteful to hold U.S. treasury. So it's not necessarily that they're explicitly

considering the risk of sanctions. It might be that they're just making a political decision through a political statement. So I can't necessarily rule that out. But certainly, yeah, the evidence is consistent with the notion that central banks are at least starting to think about this. Interesting data point also is that the last couple of quarters of 2022, there were some big gold purchases by central banks, I think including China's. So, yeah, it's happening. the paper in the way that i read it i think came to kind of three conclusions um and uh you

basically make the argument on the first point that if sanctions risk uh exists or is increasing that would diminish the appeal of u.s treasuries so i think that historically central banks have held u.s treasuries your kind of first conclusion or first point is really the fact that like they may get rid of those because of that sanction risk explain a little bit more if a country is holding a large portion of their central bank reserves in u.s treasuries what the potential damage could be if they come under the scrutiny and potential sanctions of the united states yeah well i mean they lose act so if they happen to be sanctioned then they lose access to that that portion of their reserves they can't touch that money you know sort of like uh

it's almost as if it's been destroyed i mean because because really the value of money is in is in the ability to exchange it for something so if i if you have an account that has uh 50 billion dollars in it but you can't you can't touch it you can't withdraw it you can't deposit into it you can't do anything with it it's kind of useless to you it's almost as if you didn't even have that that money um so uh yeah i mean so it's quite uh quite pernicious and and yeah so So the conclusion is that this risk, even at relatively low levels, has potentially substantial effects on the portfolio through allocation decision of a central bank. So really what it does is it kind of takes treasuries, which are traditionally thought of as being a safe haven risk-free asset, and it turns them into a risky asset. So it doesn't mean you wouldn't necessarily buy any of them.

And there are many other reasons why you might like them, too. I mean, they're very liquid. There are swap lines, for example, you can set up with the Federal Reserve. So there are nice things you can do with these things for a central bank. But, yeah, I mean, with this risk of sanctions, they sort of turn from a risk-free asset to a risky asset. So, yeah, I mean, it changes the nature of treasuries. The second conclusion that you come to is that an increased risk of sanctions would propel broader diversification in central bank reserves. So one is like, okay, the U.S. Treasuries themselves may become less attractive, but also central banks may think about, forget any one asset.

We just need broad diversification to kind of increase the resiliency. Explain that a little bit more. Yeah, that's right. Well, so as long as the risk of sanctions is sort of imperfectly correlated, which is to say that, you know, in the case of Russia, the U.S. is pretty good about going all around the world and getting, you know, a large number of countries to freeze their reserves, and not just NATO, by the way, but also Japan and Australia, New Zealand, and a number of other, I think even South Korea.

So, you know, in the case of Russia, it was, I guess, almost perfectly correlated, but But as long as it's not perfectly correlated, that there's a chance that some countries might sanction you and some may not, then there's an incentive to really diversify so that in the event you get hit with sanctions by some countries, you might still have a portion of your reserves accessible in other countries that didn't sanction you. and then the last thing that you conclude is that that increase in sanctions risk could bolster the long-run fundamental value of both cryptocurrency and gold and so we already talked about gold as something that central banks are adding talk a little bit about cryptocurrency as a whole and then you specifically single out bitcoin in the paper a number of times and kind of talk about why you think that could become one of these like imperfect substitutes hey guys i hope that you're enjoying this interview. Before we continue, I want to quickly remind you, I'm hosting a

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link in the description, and I'd love to see you there. Okay, let's get back to this conversation. yeah so um the paper really thinks about uh cryptocurrency and and so let me actually start with the the second part of your question which is sort of why why bitcoin um bitcoin is by far the largest uh cryptocurrency and bitcoin and uh ether combined are like 70 percent of market value of all cryptocurrencies so um you know just looking at at bitcoin uh it gives you a pretty good proxy for the whole non-stablecoin cryptocurrency market. And non-stablecoin is kind of important here because stablecoins don't really help you if you're worried about sanctions because US dollar coin and Tether can be sanctioned.

And because of the way they hold US dollar collateral, they can probably be bullied by the US government into implementing sanctions if that's really what the government wanted to go down that path. So really, when it comes to cryptocurrency, it's got to be sort of the fiat cryptocurrencies. And it's got to be, for a central bank, it's got to be cryptocurrencies that are big, where you can conduct potentially a billion dollar transaction, let's say, without having a massive impact on the market price. Bitcoin, of course, today is a lot smaller than it was when I first started writing this paper. I think it was like $40,000 maybe around the time that the sanctions were applied to Russia. But it's still, you know, the market capital is $300 billion, something around there.

So it's plenty big enough to conduct, you know, transactions of non-trivial size. As far as the fundamental value is concerned, I think there are a lot of use cases for cryptocurrency involves just transacting sort of like you exchange fiat currency for crypto let's say you then send the crypto as a remittance to somebody somewhere else in the world and then that person swaps the crypto for another type of fiat currency. That type of transaction is not really going to contribute to a fundamental value because it's just buying and then reselling. So the real question when it comes to fundamental value is who's going to be holding on to

of stuff and this paper kind of conceives of of cryptocurrency as as being a form of insurance um holding on to it gives you insurance against the possibility of uh you facing sanctions and having a large portion of your wealth sort of potentially destroyed um and in that scenario you still have these these digital assets and also maybe gold uh and and so that that that generates the incentive then to hold on to this stuff uh sort of to protect yourself and so that that's the sense in which it's insurance when you think of bitcoin specifically being added is your expectation that central banks would buy the asset let's say they're able to acquire you know a large portion uh in dollar terms of

uh bitcoin have you gone deep enough down the rabbit hole to start thinking about like how they would custody it are they putting it on like hardware devices and they're like holding it in a vault somewhere are they like creating their own you know cryptocurrency custody solution like how do you just think about uh something that is um i think to the bitcoin and crypto crowd very native to them and they understand but to a nation state or central bank it's very different than and custodying almost any other type of asset. Yeah, that's right. And certainly, like the FTX case illustrates that, you know,

just another example of how it's important to choose your custodian wisely. I think that a central bank would almost certainly want to self-custody its Bitcoin. They might rely on exchanges to make the initial purchases. But I don't see any reason why they would want to take the risk of, you know, having an exchange blow up and lose access to a large amount of, of, of cryptocurrency. Uh, so yeah, I think they would have some kind of self-custody solution. Now, what, you know, exactly what that looks like. I, I,

I haven't sort of delved into the details of that. Um, but yeah, I, I think they would want to keep it off the balance sheet of some other, uh, you know, sort of corporate entity that, uh, potentially, uh, maybe not, not as, not that stable. Um, Yeah, I mean, this question of exchanges is sort of another interesting one more broadly. And it's definitely something that the crypto community has got to figure out. And what I think becomes kind of fascinating to me is also in some way you are mitigating one risk, which is U.S. Treasuries or sanctions risk.

At the same time, we know that Bitcoin is a bearer asset and you are increasing the like honeypot or the target of malicious actors around the world. Now, all of a sudden, you're almost increasing the financial reward for a adversarial nation state or adversarial group to hack your central bank and be able to somehow get custody of the asset. And again, how you custody it may determine whether that's a real risk or not or whatever. But in some ways, it almost feels like you're mitigating one risk, but you may be increasing another. Is that true, or do you think that nation states would figure out a way to kind of mitigate both? Yeah, no, actually, I think that's absolutely true. And so the paper doesn't think of cryptocurrency as being a sort of a free lunch at all. I mean, it is very much optimizing by trying to sort of balance your exposure to different risks.

Now, the risk you just pointed out about sort of custody risk and sort of the implications of self-custody as far as cybersecurity, there's also, of course, the risk if you're self-custodying that you lose access to your wallet, you know, you're kind of up a creek. So, yeah, yeah. So those are absolutely things they would have to think about very, very carefully. um uh the other thing i would say though so this paper thinks more about uh actually more about sort of the price volatility and sort of trading that off versus the risk of of sanctions um that's another that's another area where you're sort of optimizing these risks where you're you're adding bitcoin your reserves you're adding an asset that's much more volatile than than uh the exchange rates of fiat currencies but on the other hand it does also have this

type of insurance value so um that's that's kind of the trade-off that the paper is thinking about yeah and one of the other pieces of this uh that it gets into is i'll call it like the game theory so if all of a sudden a major uh country in the world decided to go ahead and add bitcoin to its central bank reserves and openly state it right so it was a known fact to the world does that then kind of kick off hey everyone's got to go buy it because you almost need a good defense and naturally a finite asset is going to go up in price if there's an increase in demand? How do you kind of think just about maybe the repercussions

of a major central bank somewhere in the world saying, we are buying this and putting in our central bank reserves? Yeah, it is an interesting question. So certainly El Salvador is sort of, I think, one of, well, really one of two countries that hold Bitcoin, And the other being Ukraine, I think they basically hold it because they've gotten donations, not because they actually went out and actively bought it. But but El Salvador certainly sort of went out and said, yeah, we're buying Bitcoin. Here's what we're doing. I think their wallet, whether they made their wallets publicly known or at least some of them.

And, you know, of course, they got a lot of criticism. People say this is crazy. Like, why are you doing this? You know, you're just basically lighting money on fire. And I think the average price they paid for their Bitcoin is somewhere in the $30,000 to $40,000 range. So they have lost a fair bit on their Bitcoin in terms of the market price. But, yeah, I mean, there is this interesting question of if you're going to buy Bitcoin, do you reveal it? In the paper, I also talked about maybe not revealing it also makes you a little bit more resilient to sanctions because the U.S. Treasury can certainly add cryptocurrency wallets onto a sanctions list. And that has the force of law behind it. So as a U.S. person, you cannot lawfully transact with a cryptocurrency wallet that's on the U.S. sanctions list.

And if you do, the penalties are quite severe, like civil and criminal penalties. But of course, the U.S. Treasury can't sanction something it doesn't know about. So if Central Bank X is buying Bitcoin and thinking about it as a type of insurance, then it seems that it might actually be better for them to just kind of do it quietly. A couple other points about that, too, are that, yeah, as you pointed out, If a number of larger central banks started announcing they were buying Bitcoin, yeah, you'd think you probably would move the price up. And so they probably wouldn't like that because they'd rather buy Bitcoin when it's cheap than after they've moved the price up by announcing that they're doing it, right? So there's never an incentive to tell the financial markets in advance what your plan is, right?

You always want to tell them after the fact so you don't move the prices before you trade. Yeah. And when you start to really almost critically think about a nation state somewhere in the world doing this, is it fair to say it'd be the nation states with the highest sanctions risk? Like El Salvador, I don't think has very high sanctions risk, at least when they started. They were doing it more from like a financial incentive standpoint, a prosperity for their future citizens, or at least that was what the talk track was. What you're talking about here is like people who almost are doing it out of necessity. Is that really the thought process of like the major countries are only going to do that out of necessity? They're not going to go and essentially speculate on the on the future price of a commodity?

Yeah, so I think I think you're right that that at least I never saw anything about El Salvador claiming that they were thinking about Bitcoin as a form of insurance. And I think that speculation is a very bad reason for anybody to purchase anything. And that includes just ordinary people and central banks. I mean, it's supremely difficult to forecast the prices of financial assets. So especially when you have something as volatile as Bitcoin, I think you're going to buy it. But the reason really ought to be that you're buying it because it's still some particular need in your portfolio. There's something about the characteristics of it that are well aligned with the risks that you personally face as an investor, rather than that you just think the price is going to go up because maybe it will, but maybe it won't. Right. So, yeah. So, yeah. And along those veins, yes, the paper would suggest that, certainly would suggest that the countries facing the highest risk of sanctions have the strongest incentive to think about acquiring some Bitcoin.

Now, whether they want to or not is also going to be a function of whether, for example, they feel like they can get enough gold. I mean, gold in the paper really emerges as the sort of premier or the primary or first choice for protecting yourself against this type of risk, because it's just so much more stable than than than cryptocurrency. You know, it has a multi thousand year history behind it. So but but if if you've got a central bank that, for example, doesn't have the capability of storing physical gold, like it doesn't have any vaults for doing that, and they think they're kind of worried about this type of risk, then potentially they might want to acquire a decent amount of cryptocurrency.

Do you think that there are any countries around the world who likely have already done this and just not revealed it? Or is it too hard to kind of guess in terms of where we are from like an adoption standpoint of nation states and central banks? Yeah, I mean, of course, I wouldn't know for sure. but it wouldn't surprise me at all if there are some that are doing it or not reviewing it. There is actually some interesting evidence that countries tend to

under-report their gold holdings because they don't like having to report that they've taken a loss on their gold when the price drops. And so if there's an incentive to do that for gold, then certainly there'd be a much stronger incentive to under-report cryptocurrency holdings, not only because they get exposed to criticism from the more traditional finance community, but also because it's so much more volatile than gold. So they have this incentive to not reveal it for a number of reasons.

First, they don't want to move the market price. Second, there's this volatility that they don't necessarily want to have to explain away. uh and um and then third that not disclosing it really kind of maybe boosters the the insurance value of of having these these uh decentralized tokens so um yeah i mean i think there's there's the incentives are there not to to reveal it and i also i wouldn't be surprised also if there are some countries where they've acquired some uh bitcoin let's say but they're doing it to their sovereign wealth fund rather than to their central bank reserves so there may often maybe just some accounting as to you know which ng they use to buy it or how they kind of keep it off the books

so to speak um but no i mean it wouldn't it wouldn't surprise me at all as you see these central banks um whether they are actually announcing it or not whether they're buying it or not one of the things i've been most surprised by is it seems like central bank digital currencies has gotten a ton of momentum, support, a lot of mindshare, a lot of papers. You just see like kind of the wheels are churning, right? Bitcoin seems to be the, maybe the enemy, and maybe that's like an exaggeration, but like it's very much like, no, not Bitcoin. Yes, this central bank digital currency is interesting.

How much of that is they may not be educated or taking the time to understand Bitcoin versus these central banks are very educated and they kind of understand exactly what the pros and cons of a central bank digital currency, a Bitcoin, and everything in between is, and they're kind of taking more of an aspirational position in terms of what they hope happens versus, you know, kind of almost being ignorant

to something like Bitcoin. Yeah, I mean, I don't think any central bank sort of wants to willingly just abandon kind of its job. as far as sort of facilitating fiat currency transactions and sort of guarding and safeguarding that system and then just sort of throw up their hands and say, okay, we give up and, you know, we think everybody should just start using crypto.

So, you know, it's almost like a sense of self-preservation here that, you know, they don't necessarily want to kind of just close up shop. But, I mean, you know, the price volatility of Bitcoin is really quite problematic. I mean, you just can't run an economy on an asset that swings up and down, you know, 5%, 10% in a single day. It's just too much. um and and uh and uh as far as the digital currencies too i mean i think i think a lot of that is also more sort of technological or as far as um just thinking about kind of improving

the plumbing of the financial system like how are transactions settled and cleared uh things like that um i mean those those are very important questions and they do have implications for uh financial stability and um so they're important to to understand um but that's that's also why you know i think there's a lot of ink getting spilled on on that you mentioned earlier before we got started that uh you had seen some of the past interviews i've done on bitcoin and uh some stuff we agree on some stuff we don't agree on um rather than uh bore the audience and probably you and myself on the things we agree on what are some of the things that uh we did you you believe we disagree on, maybe we could kind of talk through those. And I'd love to learn, you know,

from from your side, and maybe you could stumble into one or two things, if I put my foot in my mouth. Okay, sure. Yeah, yeah. And, you know, of course, just because we disagree on it doesn't mean I'm right, and you're wrong, right? I mean, we need to have a difference of opinion. I guess, maybe one of them we could talk about is, is that there's kind of this, I think there's this tension between the notion that uh bitcoin is is sort of represents uh free speech and that it's used for sort of legitimate purposes uh you know related to like furthering democracy and people's own you know free will and so forth there's like a natural tension between that and then this notion that it's resistant against sanctions because if if the government uh doesn't

want you doing something they're going to declare it illegal and if you're going to do it anyway with bitcoin then you're breaking the law so you know i think that a part of even if bitcoin is not used to a great extent today uh for the purpose of facilitating illegal activity i mean like for example the um there's an analytics firm called chain analysis that looks at blockchain transactions and and they say that a pretty small portion of of uh of bitcoin is is used in illegal activity now maybe maybe they're just not counting it correctly but but i think that like if you're going to argue that the cryptocurrencies are not used for illegal things uh maybe that's not true maybe that's true today but you have to at least acknowledge that like an important aspect of them

is that they could be like they could be used for that in the future and and that actually is like an important part of what what gives them value like i like i was describing them as insurance um now you can certainly argue whether uh the government should be making certain things illegal or not but the fact that you have the option of bypassing that uh you know there is kind of that that that tension there um yeah i i think it's a very fair question and if we separate out for a second uh um the illegal activities uh from the legal activities i think when people say that uh bitcoin is kind of free speech codified right uh the first thing is um in the united states you have the right to free speech now there are limitations around certain

things you know yelling fire in a movie theater all of those types of things but generally if you're trying to do good things or legal things, you are allowed to say what you want. And actually the true test of free speech is almost to protect the speech of the people you disagree with, right? But they're not inciting violence or any of this stuff. And so what Bitcoin does, which is unique for money, is that it provides this censorship resistance, right? Now, what is censorship meant to be? What is it not meant to be? When is it appropriate? When is it not that's definitely debated and i think that gets more into like the legal and illegal transactions but just from a technical basis the fact that i can send bitcoin to you and i don't need to ask

permission from anyone else is uh a technical innovation when it comes to uh being able to use economic value something with a market price and use for medium of exchange so i think it's like pretty well accepted uh let's say on the technical basis of just like there is this censorship resistance. You mentioned the insurance is a form of that censorship resistance for the central banks, whatever. Now, when it gets into legal and illegal, I actually think most people look at the illegal transactions. And I always joke that like, yes, there are anarchists. Yes, there are like hardcore libertarians that believe like there should be no rules or laws or whatever. But like generally, most people in a society agree on the illegal things that they should be illegal,

Right. If you are financing terrorism or whatever it is, for the most part, I think the majority of these societies say, hey, we should not allow that to happen. And it's good that we prevent bad things from happening to to our citizens. Well, let me let me let me let me interrupt you just for a second. And what about, for example, protesting Canada's vaccination policy? I mean, the government declared that illegal and they they froze their banking house. So if they were if any of those protesters were transacting in Bitcoin, they were breaking the law. Right. So so the question is, but just because the government makes it a law doesn't mean that it is a ethical law. Right. And the example I always the example I always use is like if they had done that in the United States, right, they would have violated the Constitution.

Now, I'm not an expert on Canadian politics nor what their legal documents are. So like maybe it's legal, maybe it's not. I'm not sure. But in the United States, if the government had said, hey, we are basically going to remove you, we're going to eject you from the financial system because you are not complying with a whether it's vaccination or any other law. I think that there would have been a line out of the courtroom door of lawyers saying, hey, you know, you're violating people's various constitutional rights. and so like it's a very weird thing because in some ways uh without censorship resistant money the default is the government's right the individuals are wrong when there is censorship resistant money in my opinion and again this is just me individually it kind of balances out the powers and now all of a sudden it is the individual is right and the government the burden of proof

goes to the government that they broke the law or whatever now what i think we have seen which you know kind of gets at this a little bit is we've actually seen a lot of law enforcement organizations a lot of politicians and governments all say like look bad people have done bad things on the blockchain 100 right like we know that's happened and they've been able to go track those people down and kind of bring them to justice whatever that ended up being and so it it almost gets at this question of like who should be believed by default or like who should be given the default right to continue until something changes. And it's like, is it the government

or is it the individual? And ultimately, as I'm assuming you would guess, is like, it just comes down to like political perspectives, which is like a weird thing because Bitcoin is technology, it's software. It's like the least political thing from a technical architecture, but it gets almost kind of brought

into these political discussions because to your point, it allows for people to do things that they previously couldn't have done, which opens up this whole can of worms, right? Yeah, yeah, yeah, that's right. I mean, yeah, so I think basically, you just have to acknowledge that it can be used

for things the government doesn't want people to use and that's part of the value of it. But yeah, I mean, whether that's good or bad, I guess also depends on, you know, how good do you think governments are at being the arbiter of right and wrong? I mean, yeah, these are very sort of philosophical questions. But, yeah, so, okay, maybe a couple other things, too. I think you've also mentioned before that, like, bank failures

and maybe, like, the potential for confiscation, like what happened in Cyprus is a good reason for people to hold Bitcoin. Do I have that right? I think it's less about, like, hey, that's a reason everyone should go out and, you know, buy Bitcoin. I think it's more so the idea of self-custody similar to the central banks, right? The more custody you have, the more sovereignty you have of the assets, it prevents against those edge cases. And they're very much edge cases in the developed world. In the less developed world, they're probably more common. And there's also not things like FDIC insurance,

et cetera. But it's definitely one of the reasons why sovereignty becomes important, in my opinion. yeah okay i guess i think i think maybe we would we would then mostly agree on that that uh you know in the in the developed world it's not so much of a concern uh there are by the way ways to to to increase your your fdic insurance by quite a bit i mean you could open up multiple bank accounts uh you can actually add beneficiaries to them so if you add beneficiaries to a bank account, it actually stacks up the FDIC insurance to up to 1.25 million. So, yeah, I mean, I think that the number of people who would actually need to start thinking about buying Bitcoin because they run out of banks to open, you know, to deposit their money at, I think it's got to be

vanishingly small. So another thing, and maybe we'll disagree a bit more on this, is I'm actually not necessarily convinced that cryptocurrency is currency. It's obviously the term that people call it. And so I use it. But I don't think that Bitcoin is not a currency. It's not a unit of account. It's not a medium of exchange. I can't go to the grocery store and hand the Bitcoin for groceries. I can't go to the movie theater and pay Bitcoin to go watch a movie. Amazon will not accept my bitcoin for selling me you know whatever it is that amazon sells is everything um so so it's it's it's more of a niche thing and now i i do however think it is a store of value um but but it it's not it's not yet at the level of a currency um now it's like gold for example

isn't isn't a currency either um you know if i none of those places i just told you about will will accept my uh gold bullion right so if i if i bring a bar of gold to the grocery store or whatever then they're not going to accept that um but yeah i mean so so i think i think that um thinking of of these things as as i mean so they're just not yet currencies uh that doesn't mean that they won't ever be um and maybe part of the the the again part of the sort of the insurance you're you're getting when you buy bitcoin is that you're kind of protecting yourself against the scenario where somehow the u.s dollar becomes worthless or something like like there's some major uh either policy screw-ups or like a nuclear war or something and in that scenario

maybe cryptocurrencies actually start becoming like a unit of account because like society is sort of broken down or something. But, but I don't know, just today, I just, I don't see it. So I have two things that kind of jumped to mind. The first is I'm going to throw out a like definition of a currency and you tell me if this is aligned with yours. I heard you say a couple of things. I'm assuming it's like store value, medium of exchange and unit of account would be the three things.

Yeah. Yeah. Okay. So I would agree with that. And I think that's like a good framework. And my guess is that most people who are quote unquote currency experts would say, hey, yes, that checks the boxes of that. Now, where I may question some of those currency experts is a lot of times when I hear people talk about, is something a currency or is it not? Obviously, given what I do on a day-to-day basis, a lot of time they're talking about Bitcoin, but there are other assets that you You mentioned gold and others that can kind of come under this scrutiny. One of the things that I've started to think about more, and I feel like they don't have a fully formed opinion, so I'll kind of throw it out there as maybe a prompt and you can respond to it, is that actually some assets are currencies in one situation but not currencies in another. And what it made me think about is like environment matters when evaluating if something's a currency or not.

And where this came from was I used to use the example of cigarettes inside of a prison. And so, like, again, kind of extreme example. Right. But but it highlights the point of like they're used as a store of value. They're used as a medium of exchange. And to some degree, they're used as like a unit of account. Right. It's more of like a barter type system. And they're used. Now, I don't think anyone who wants to be taken seriously in the financial world or in the academic world would go and say, you know, cigarettes are a currency all around the world. And if you've got cigarettes, you're good to go. But in that, you know, kind of more insular environment, they do act as a currency. And so if you take that and kind of extrapolate it out to Bitcoin, it's unique in that I think

most people who hold Bitcoin and even people who don't, but kind of evaluate it, they would agree, yes, Bitcoin serves as a store of value. Now, whether it's a good one or bad one, that's debated. You know, free market kind of determines price and it changes or it fluctuates. But store of value, I think most people are like, OK, you know, I can see that. when it comes to the medium of exchange and the unit of account, that's where I think, you know, you're highlighting, Hey, look, this is not widespread. This is not global. And so if you use that, like, well, what environment are you talking about

in a physical environment? If you go to, you know, Bitcoin beach, there's a lot of people who are using it for transactions. Things are priced in Bitcoin, but I don't know, maybe there's a couple of hundred, maybe, you know, single digit, thousands of people in that one insular economy that are using it again. Does that make it a currency on a global scale? Does that mean that it's just within that insular economy is that the first data point on a you know upward trajectory of adoption globally all up for debate but but at least in that insular thing it's being used as a currency but i would agree with you on a global basis it is not unit of account there has not been you know this hyper bitcoinization idea uh all of those types of

things and so like you know the the prompt that i would almost kind of want to hear your thoughts on is like, how do folks who look at these currencies think about, you know, global evaluation versus more of like these insular economies? And can something almost serve, you know, to some people as a currency and to other people, it's actually not a currency, like they actively are on the other side of that debate. How does that work? Hey, guys, I hope that you're enjoying this conversation. As you probably realize, we don't run any ads on this show. That's right. All the other podcasts, all the other YouTube shows that you watch, they have advertisers. We don't have any direct relationships with advertisers, and we simply create this because we enjoy doing it.

Now that we do that, though, we have a team. And if you'd like to support us, one way you can do that is to go subscribe to the Pomp Letter. It's a daily letter that I write to about 235,000 people about my personal opinion on financial markets, business, technology, and Bitcoin. Just go to pompletter.com and you can sign up there. I'd love to have you join us. And it's a great, easy way to support the work that the team and I are doing on a daily basis. All right, let's get back into this conversation. Yeah, that actually is an interesting question because, for example, the things that I just described, like going to the grocery store or the movie theater or whatever, if I'm doing that in the United States and I brought a Euro banknote to the grocery store or the movie theater, they wouldn't take that either.

So in that setting, the Euro banknote is not acting as a currency, even though, of course, we would generally recognize the Euro to be a currency. And certainly anywhere in the European Union and many countries besides that, it would be accepted for those kinds of transactions. So, yeah, I mean, I guess there is there is inherently a sort of like a time, place and manner type notion to the concept of a currency. But but still, I think that it's got to be more a lot more widespread than than Bitcoin currently is. um yeah yeah and i think to your point it's like um you know one of the things i've always said is like if bitcoin becomes a store of value it does not necessarily um achieve what is written in the white paper right electronic peer-to-peer cash like like it's very much intended to be both a store of value medium of exchange and then eventually that would lead to the unit of account

but at the same time if it became the global store of value that was used by billions of people like That would be a pretty big success. Right. So just that alone would kind of I think a lot of people would point to and say, hey, Bitcoin worked for that specific use case. Now, obviously, people in the Bitcoin community believe that it is going to become the medium of exchange and that unit of account. And so the other thing I always laugh about, it was kind of like with the inflation talk in the United States. They're like, you know, it's transitory. It's not transitory. I used to always say, like, well, what what makes that like where's the line? If it's only here for six months, is that transitory? But if it's here for seven, then it wasn't transitory. It's kind of like this very arbitrary, loose definition that's used.

And so the same thing with medium of exchange. As I almost think about if 100 million people used it for everyday transactions, is that enough? Well, there's like 7.5, 8 billion people, whatever it is in the world. We're not even really at 10%. Does it have to be a billion? Where's the line? and a friend of mine uh said to me he goes no it's more of like a you know it when you see it thing and i think that's kind of how people feel a little bit is like okay i i feel like it's a

store of value for enough people where like i'll buy that i don't know enough people who use it on a day-to-day basis so like i kind of don't believe that story yet and then i when i go to the store i don't see it priced in bitcoin so like i don't believe the unit of account um but i don't know maybe like there are definitions of this stuff that like you know the the bitcoin community just hasn't talked about yet it's like a very fascinating thing that um in some way the bitcoin community and myself personally like we've gotten a crash course in economics the banking system like currencies like all this stuff and i always wonder like how much of it is we're learning versus like we're trying to recreate the wheel and like we maybe should

just like learn from history a little bit at the same time yeah yeah no i mean i i certainly don't know off the top of my head of any kind of like specific definition as far as let's say how many people have to use something in order for it to be uh considered a currency um you know i i guess i just go back to your beauties in the eye of the beholder right yes so um on the other hand the one thing i will i do want to respond to uh in in um that you just had mentioned like talking about millions of people using it um you know my my paper actually kind of gets really is thinking more like you know like 100 institutions or something right like or maybe no more than 150 or something um and so like in terms of of bitcoin becoming used as a unit of account or

medium of exchange you know i think actually those are quite quite separable from from being a store of value and what and and the store of value doesn't necessarily imply the other two at all i mean again go back to the example of gold i mean people have been using gold as a value for uh thousands of years but um it's been quite some time since it's been thought of as as a unit of account or a medium of exchange so yeah yeah i look i i completely agree and again it goes back to this idea of like bitcoin layer one right kind of the the uh core blockchain is very much built for security, right? I don't think anyone would look at a blockchain

that has 10-minute settlement times and they would say, like, obviously that is optimized for global adoption to be used as a medium of exchange. And so that's where the Bitcoin community is trying to build the scaling technologies of Lightning and, you know, kind of all of that stuff. And, you know, I would argue that, like, so far,

it looks pretty good, but I do think that there's a lot of things that, you know, still need to be built out. And also, I think the critique being, okay, I theoretically understand what you're trying to do, but like, prove it, show me the adoption. It's very similar to like a venture capitalist showing up to a company and saying like, this is a beautiful deck, but like, show me the users, show me the retention, show me the growth, right? And I think that's kind of like the market will ultimately be the referee a little bit in terms of how far along the like Bitcoin vision do we get. And obviously, that's where markets get made because the Bitcoin community is very, very optimistic and enthusiastic. And then I think critics are saying, you know, I don't see a path from where we are today to that vision. And we'll kind of see what happens.

The only thing I hope for is, you know, it happens in our lifetimes. right like i want an answer before i die it's like the way that i've now come to the conclusion this isn't a 12-month exercise it's probably a couple decades and it's like let's see where it kind of goes um but i don't know what what what is your kind of maybe we'll end here in terms of like what are your thoughts in terms of uh the biggest milestones like like i take you as somebody who maybe is um cautiously optimistic is maybe where i would kind of characterize your your view of uh bitcoin optimistic being like you see some use cases like the insurance for central banks but like cautious in terms of the critiques of it's not a medium of exchange it's not a currency things

like that is that like maybe a fair kind of bucket to put you in if you would allow me to put you in a bucket um yeah and i would also just say i don't think it's for everyone so so like you know if you're living in a developed country and you have no real reason to believe that you know your assets are likely to be confiscated or that you're in a situation where the government's going to pursue like civil asset forfeiture or something against you, then I think the argument for you to buy Bitcoin, certainly buy a lot of Bitcoin, is very tenuous. Like there's just, you know, because again, like you're not getting an insurance benefit out of it. So if all you're doing is just speculating, that's probably not a game you

want to be playing for the vast majority of people. So I think there are absolutely some use cases for some people, but it's not for everybody. What would change my mind a lot on that would be if it became a lot less volatile. So if the price volatility really came down, Um, then, you know, then it might actually, because then it's almost like you have your case and you just get this insurance value. And it's also sort of the stable, you know, thing where you don't have to, uh, worry about it dropping, you know, 75% in one year, like it did last year. Um, so yeah, I, I, so I think, I think, uh, I think you, you, you, you had me mostly, uh, pegged correctly. So the volatility question is actually pretty interesting. I want to throw an idea out there. And I'm going to allow myself to say, Department of Economics, Harvard, you probably are much better versed in this than I am. But from kind of a layman's view of this, one of the questions around volatility that I struggle with, one articulating, but also to even just understanding, is that like, it's very clear Bitcoin's volatility because we use the dollar exchange price, right? So I will take one Bitcoin, today someone will buy it for $17,300, two weeks ago they

would buy it for $15,000 and a year ago they were buying it for $69,000 or whatever the numbers were. So obviously that exchange price is super volatile. When I think of dollars, no one really thinks of them as volatile because I get paid in dollars, I save in dollars, I buy all my goods and services in dollars, I pay my taxes in dollars, like everything around me is denominated in dollars. But if I was to pull back and look at the purchasing power, obviously with the official inflation numbers compounding at over 7% for multiple years, you're like, okay, I don't know, 12% to 20% inflation over, let's call it the pandemic era or whatever, depending on what numbers you want to believe. But we don't think of dollars as volatile, right?

Because it's like $1 buys you $1 worth of goods, it's just the amount of goods has changed. How do you think about, or maybe if you were even me, like talking about Bitcoin volatility compared to like dollar volatility? Or do you think that they're just apples and oranges and it's like unfair to try to compare them? Well, I mean, that's kind of the concept of a real exchange rate, right? Sort of like how much does a currency move around in terms of the amount of consumption that it buys you? So in terms of a dollar, yeah, that's eroded some because of inflation, but also just also in terms of it's moved around relative to other currencies. So, yeah, I mean, you always have to – when you're measuring an exchange rate, you always are measuring it against something, right? You have to measure it against the dollars against euros, dollars against yen, Bitcoin against dollars, whatever.

But I think no matter how you measure it, Bitcoin against X, whatever X is, I think you're going to find that that's very volatile in terms of whether you measure it in terms of just the X itself or you then take a step further and measure it in terms of units of consumption. So, yeah. again, let's go back to kind of 2020 to now, I'll call it the pandemic era, if you will, the dollar is down, whatever that number is, right? Whether it's on the lower end of 10, or maybe on the upper end of 20, it's down some double digit percentage. Bitcoin has gone up and down and up and down. And it's been like, you know, just whipped around, but it's up 200% from where it started 2020, right? So kind of over that three year period, it's up kind of 200% or so. And so the way that I think about this is like, on one hand, with dollar denomination, assets and goods and services have gotten more expensive over that three year period. But if you had the Bitcoin denomination, things have gotten cut in half in terms of like your purchasing power and your ability to buy goods and services.

I don't think many people are picking their day-to-day currency based on a three or even five or ten year time horizon. I think it's more that store of value, as you mentioned earlier. But how would you kind of think through that? And maybe it even doesn't work on it of like in the short term, something super volatile compared to a more stable asset like the dollar. But in the long term, it seems to actually have a better store of value and kind of almost have this tailwind for people who hold it that then want to consume using it. This episode is brought to you by LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of liquidity and they have 100% uptime track record through all the volatility spikes. LMAX Group's liquidity relationships and ultra low latency technology

means that LMAX Digital is the market leading solution for institutions across crypto trading and custodial services. LMAX Digital, secure, liquid and trusted. Go learn more at lmaxdigital.com slash POMP. Again, that's lmaxdigital.com slash POMP. Pro membership by visiting www.masari.io backslash pro and entering promo code POMP. Again, that's masari.io backslash pro and use promo code POMP. Navigate the market with confidence with Masari Pro. I think you have to be careful when you're conducting an analysis like this, because it's going to matter greatly where you choose the starting point and the ending point, right?

So, I mean, as you pointed out, you know, one way of looking at Bitcoin is that you're up 200 percent over the last what like three years did you say three years or since 2020 or something yeah another way of looking at it is you're down 75 last year correct yeah so the shorter the timeline the more the pain i think of like the shorter the timeline the more the pain the longer the timeline the more it looks good for you know the bitcoin uh holder if you will yeah i i but i do i do think that uh bitcoin holders have got to expect even over longer time frames that the returns are not going to be as high as they have been um i mean i think the the early adopters of i mean if you bought bitcoin in like 2010 or something like you know clearly you know i was

super yeah yeah clearly you've done super super well um i actually remember taking a course on cryptography as an undergrad where people brought up bitcoin like as an interesting like academic curiosity almost i think it was like ten dollars or something back then so yeah i kind of wish i had i wish i knew you it was in that class yeah but uh uh um you know in order for like like there's just there's just no like economic rationale for why why over, say, the next 10 years, Bitcoin should return thousands of percent. I mean, it's just like I just struggle to come up with any kind of plausible reason for why that ought to be the case. I mean, if it's going to act as a store of value and sort of a real asset, then the rate of return ought to be much closer to the rate of inflation.

And, you know, I think that that's, if you're going to buy Bitcoin, that ought to be closer to your expectation than, you know, the kinds of fantastic returns that people got when Bitcoin, and, you know, back then it was a riskier thing. I mean, people had no idea whether it was going to work out. I mean, you know, it could have had, maybe someone could have successfully attacked it or found bugs in the protocol, right? I mean, like there are all kinds of risks related to the early adoption of a cryptocurrency that have, I think, nowadays been more or less settled that, you know, we know that this thing is fairly secure and robust because there certainly are enough people using it today and that have, you know, kind of looked at the code and everything and made sure that everything checks out. But back when it got started, I mean, I don't think that that was necessarily the case. So, you know, the early adopters got some some risk premium for that. And but but there's no there's just no reason why it's going to keep producing these kinds of tremendous returns. So I think, yeah, you got to expect inflation, maybe inflation plus one inflation plus two or something. But, you know, that that's that's probably the long the long run for for Bitcoin. Yeah, I actually agree with you. I don't think that you will continue to see like I call like video game number returns. Right. I think at some point those taper off. And yes, everyone loves the stories of hundreds or thousands of percent, you know, tens of thousands of percent. But I think you nailed it in that you get paid for the risk you take, and now Bitcoin has been drastically de-risked in a number of different vectors.

There's still plenty of people who have certain risks or concerns or whatever, but many of the major risks have been at least mitigated, if not completely removed. And so you should expect the return to go down. But the other thing too, and maybe this kind of gets at the dollar Bitcoin thing, is I don't know if they necessarily are competitive on a short to medium time horizon. And so I think that the Bitcoin community does a great job of pointing a century away and they're like, look what's going to happen 100 years from now. Maybe, right? I don't think I'll be alive for that. But I do think that in the next, I don't know, let's just say 10 or 20 years. like the u.s dollar likely will continue to uh strengthen against other fiat currencies and kind

of become you know at least uh hold its position if not become more dominant against weaker currencies uh and that will continue to be used as a day-to-day medium of exchange but bitcoin maybe it just continues to gain steam as a store of value right and and uh it kind of has this rise with the dollar and they coexist for quite a bit um and that can be separate and distinct from what happens in the long run right like to me it's not a uh just because they're structurally set up some way you don't necessarily have to conclude that the end game is what happens you know even in our lifetime let alone in the next 10 or 20 years um which is unique because then it kind of again if you unpack it the dollar is designed to lose a little bit of value through inflation every

year to spur the economic activity and kind of all the things that uh people understand bitcoin is almost engineered in a way that although it'll have short-term volatility in the long run to kind of continue to gain some purchasing power just because it's a finite asset and as more people adopt it it should go up in that purchasing power terms um but i think as you kind of started the conversation like we we don't know for sure right like it is uh these questions are worth asking because ultimately the market will kind of determine it but um we need to kind of understand what the risks are and what the potential pros are, and we go from there. Yeah, I mean, so I'm actually not necessarily sure that over a 10- or 20-year period,

the dollar will appreciate or depreciate. I mean, that's also going to spend a great deal on the course of monetary policy in the U.S. compared to the rest of the world. And then whether the U.S. dollar continues to gain traction as sort of a medium of exchange or unit of account in international trade, I don't know. I mean, I think, you know, that countries like China, for example, has been very insistent and interested in trying to peel countries away from dealing in U.S. dollars to dealing in, well, probably they prefer renminbi,

but if not that, then at least something else. So, yeah, I mean, I think, I actually think we're probably headed more towards a sort of a multipolar international financial system where the dollar maybe is a plurality, but it's not going to be like the dominant majority force like it has been. And I think that Bitcoin may be one of the smaller things that's part of that.

And maybe it's just used as a store of value. But yeah, you know, actually, so as far as like the long run of Bitcoin, the last Bitcoin will be mined, what, in like 2136, 2140? 2140, I think. Yeah, so certainly, you know, it'd be interesting to know what will happen with Bitcoin after that. I mean, like, are the transaction fees going to be enough to sustain it? You know, to incentivize miners to continue mining? Are people going to be willing to pay fees that are that high? I mean, that's sort of an interesting question. But yeah, unfortunately, I will be dead by then. So you, you and I both will, uh, we'll, we'll, we'll be on our deathbed wondering, I wonder what's going to happen.

And hopefully, uh, we, we, unfortunately we'll never know Matthew. I really enjoyed talking. I, uh, this is, uh, this is a fantastic and, and, um, I really appreciate it. I think kind of just your critical thinking around so many of these topics, if anyone wants to reach out or learn more of the work that you're doing, where can we send them to find you on the internet? Yeah. So I have my contact information on a Google site.

So if you just Google my name, it'll come up. And there's also a link there where you can download my paper or whatever the current version of it is. I'm working on a revision. And if you want to read it, I'm always interested in hearing from people who have thoughts and feedback on my work. So, yeah. Awesome. And for those that want to go check out the paper again, it is titled Hedging Sanctions Risk, Cryptocurrency and Central Bank Reserves, published back in, or the original was published in November of 2022. But Matthew, thank you so much.

I learned a ton today, and I hope that this was valuable for everyone watching and listening. And please kind of keep pushing forward because there's a lot of people, I think, as you realized, once you published the paper, who are paying attention to this space and found your paper valuable as well. So thank you. Yeah, thank you very much for having me on. It was a fun conversation.