Unchained - Why Bitcoin Now: Andreas Antonopoulos and Dan Held on Bitcoin’s Monetary Policy - Ep.192

Episode Date: September 29, 2020

Andreas M. Antonopoulos, speaker, educator, and the author of Mastering Bitcoin, Mastering Ethereum, and The Internet of Money, Volumes 1, 2, and 3, and Dan Held,  growth lead at Kraken Digital Asset Exchange, discuss the core features of Bitcoin's monetary policy, including how it differs from traditional central bank monetary policy, what gives it value and yet how it seems to have derived value from thin air. Plus, we talk about how the coronavirus pandemic will affect Bitcoin. In this episode, we cover: how monetary policy in general is defined the core feature of Bitcoin’s monetary policy, and how it differs from previous forms of money the similarities and differences between Bitcoin and gold why the hard cap on Bitcoin is unique and so important the difficulties in analyzing and classifying Bitcoin whether or not transaction fees alone can sustain the network once all 21 million Bitcoin have been minted if Bitcoin will be able to fulfill its original vision of democratizing finance and serving as an everyday medium of exchange why they think Bitcoin has recently been more correlated with the stock market their thoughts on the stock to flow model and whether it works for Bitcoin how they think the coronavirus, unprecedented quantitative easing, and increasing inflation will impact Bitcoin’s adoption and price how crypto banks that don’t conduct fractional reserve banking or lending might change the economy   Thank you to our sponsors!  Crypto.com: http://crypto.com Gods Unchained: https://playgu.co/unchainedpod   Episode links:  Andreas Antonopoulos: https://aantonop.com On Twitter: https://twitter.com/aantonop YouTube: https://www.youtube.com/c/aantonop/ Dan Held: https://www.danheld.com On Twitter: https://twitter.com/danheld   Dan Held on Bitcoin's monetary policy: https://medium.com/the-bitcoin-times/information-theory-of-money-36247aebdfe1   Dan Held on Bitcoin's security model: https://www.danheld.com/blog/2019/6/16/bitcoins-security-is-fine   Unchained interview with Saifedeam Ammous: https://unchainedpodcast.com/why-bitcoin-now-saifedean-ammous-on-why-bitcoin-is-the-most-advanced-form-of-money/   Mises’ Regression Theorem: https://mises.org/library/bitcoin-regression-theorem-and-emergence-new-medium-exchange   Stock to flow model: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25   https://medium.com/@100trillionUSD/bitcoin-stock-to-flow-cross-asset-model-50d260feed12   Why the stock-to-flow model is wrong: https://www.coindesk.com/why-the-stock-to-flow-bitcoin-valuation-model-is-wrong   Federal Reserve announcement about letting inflation run higher than normal to achieve a 2% target rate of inflation: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm Kraken launching the first crypto bank: https://unchainedpodcast.com/the-first-crypto-bank-what-kraken-financial-will-do-and-how/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C-unchained podcast and subscribe today. This show is sponsored by God's Unchained, the digital car. game that offers true ownership to players. It's fun, engaging, competitive, and has more NFTs than any other Ethereum game on the market. You can try the game out at PlaygU.co slash unchained pod. Crypto.com is waiving the 3.5% credit card fee for all crypto purchases until the end of September. Download the crypto.com app today. This is the sixth in the Y Bitcoin Now series, in which you take a closer look at Bitcoin in the context of macroeconomic forces,

including the pandemic and the economic response. And today's episode will focus on Bitcoin's monetary policy. Here to discuss are Andreas M. Antonopoulos, speaker, educator, and author of mastering Bitcoin, mastering Ethereum, and the Internet of Money, volumes 1, 2, and 3. And Dan held, Growth Lead at Cracken. Disclosure, before we begin, at Cracken is a previous sponsor of my shows. Welcome, Andreas and Dan. Hello.

Thanks for having me. To start, let's define what we're going to discuss today. What is a monetary policy? I guess I can go ahead. So monetary policy is what a government or central bank would define, more eloquently a central bank would define as its issuant schedule of currency and or the inflation targets or other socioeconomic targets. Recently the Fed has described its monetary policy as to a,

accomplishing several other factors outside of just like an inflation rate. For example, I think they're focusing on solving inequality now as well. So that's how I would define a monetary policy. Also note that this is distinctly different than a fiscal policy, fiscal being more associated with the federal government or on a government level, which would be, you know, around the spending on different programs for, you know, Medicaid, Medicare or Social Security. Andreas, do you have any thoughts? Yeah, from a mechanical perspective, I think of this as you have central banks that are quasi-independent,

and they have a bunch of dials. And what they're trying to do with these dials is adjust the supply of money itself in order to affect the velocity of money through the economy. And they use different dials. Some of them are things like the balance seat dial, which is a relatively new one, where the central bank goes in and buys things on the market like treasuries. The most important dial, the traditional dial is the overnight interest rate for interbank lending at the Federal Reserve window, which is basically where banks park their cash overnight. and by tweaking that dial, they can control how much money is effectively in circulation

versus parked at the Fed. And through that, they can then affect other parameters. I think one of the things that I find fascinating about monetary policy is that, first of all, it's extremely variable and subject to political pressure, which is why central banks are quasi-independent. The other thing is that in many cases, tweaking the dial has a delayed effect. And this is tricky. This is a bit like, you know, you start changing the rudder on a ship and it turns three miles later. Because of this delayed effect, it's not always clear how much control the central bank actually has over the thing they're changing because they don't change that thing. directly. They tweak one of the other dials and then they have this delayed effect. So, for example,

inflation, they don't control inflation directly. They control interest rates on the overnight window and the secondary effect happens later. Would you agree with that, Dan? I would. And there's a useful analogy that I came up with, which is, imagine you've got the Fed, and the Fed is driving the car, which is the economy. The Fed can't see into the future. So you can't see out your front windshield, but you can use your rearview mirror. So they're looking at historical data, and they're using that to influence which levers they press. So they look historically, they look at the road behind them, and they go, okay, it's gone to the left. We need to make it go back to the right. And so they press the brakes. But the problem is, like you mentioned,

the brakes don't kick in for another mile. So it's a little bit tricky. And they're steering the steering wheel and pressing the gas, but these are all very delayed reactions to historical information. Really at the core root of this, it's a very tricky information problem and a very tricky influence problem where they don't have, you know, a really tight latency. There's not a really low latency there between their actions and their outcome. I love that analogy because it immediately makes me think of how if the central bank of the US dollar is a car driven by a rear view mirror, Bitcoin is a train and it's on rails. We know exactly where it's gone. Yeah, well, I was just about to say that one of the most fascinating things about the way that this discussion started is how different it sounds from Bitcoin's monetary policy, which we're going to dive into deeply. And I would say, at least to my mind, probably the most prominent feature of the coins monetary policy is the cap on its money supply, since the software will stop minting new bitcoins once 21 million coins are reached. Why is the cap on the

money supply, such a core feature to Bitcoin's monetary policy, and how would you say that it differs from other previous forms of money? Dan, do you want to go for that one? Sure. The disinflationary, so it's not technically a deflationary monetary policy. It's a disinflationary monetary policy. It's a decreasing issuance rate, or you could call it an inflation rate, but there's a bit of a nuanced to some people's definition of interest, sorry, inflation rate versus issuance rate, but essentially the Bitcoin Protocol issues Bitcoin at a decreasing rate over time. And those moments in which the newly minted coins decreases are called halving events. And the reason why the monetary policy with a hard cap is important is because Satoshi

was trying to solve for a couple different problems. one was the impossibility of choosing a proper rate of inflation. And so Satoshi actually jokes about this a little bit where he goes, you know, if we could trust someone to take data outside of Bitcoin's blockchain and bring it in accurately, then there might be a way to adjust the supply in reaction to demand. But I think he's saying that a little bit in a jokingly manner. You know, you can't really trust anyone on the outside to pipe in that data in a totally trustless manner. some degree of trust that you would have to have.

And what I think he fundamentally understood was that the inflation rate or the proper rate of inflation is impossible to determine. So let's say after Bitcoin's totally issued 21 million coins, there is no proper way to choose the right inflation rate. There's an information problem in which for us to choose the proper rate of inflation, we would have to digest trillions of data points a second. every single consumer's purchasing behavior all across the world, we'd have to ingest that, parse it, and analyze it instantaneously. And there's just no way we can do that. And so what

Satoshi decided to instead was set the rate at zero long term. So as soon as all the Bitcoin are issued, inflation rate is zero percent. That also reduces a political attack factor. When the rate of inflation is constantly and subjectively up to discussion, then that that will be used as a lever for certain powerful groups to influence the inflation rate for their benefit. We commonly refer to this in the space as the contillion effect. I'm not sure how many people outside of crypto have ever heard of that before, but it's essentially those closest to the money printing benefit from it. So those closest to the monetary policy influencing it will likely benefit from it. I think it's also a battle between savers and debtors.

in that inflation can be used to shift gains from those who save to those who have debt by making debt cheaper and removing the burden of paying back the debt by making it payable in less and less and less valuable money. That's one of the arguments against the current U.S. dollar monetary policy is that the government is effectively destroying savings, making it impossible for people to save because the interest rate you get from your bank or any form of savings is minuscule to zero. But the benefit that has for the government is that that makes the $23 trillion worth of debt or however many we have now.

Those are denominated in dollars, so the more inflation you have, the less value that has. So essentially, the debt gets smaller in... purchasing value over time because of inflation. And that's another thing that that is very subject to political manipulation. If you can shift power between debtors and savers, you can, you can very much manipulate the economy. Yeah. And one other thing I would add is that I read in Sabadeen Amos's book, The Bitcoin Standard, and it's so obvious. And yet just this simple statement struck me, he wrote, until the invention of Bitcoin, scarcity was always relative, never absolute. And it is true even if you think about other scarce forms of money, such as gold.

You know, it's not something where there's a finite amount. So, you know, the fact that that can be known in advance about Bitcoin is pretty remarkable. And well, actually, so let's actually maybe dive into a little bit more, the comparison of Bitcoin to gold. because it is often called digital goals. And I did just point out one difference between them, and yet they are often compared. So how would you say they're similar and how would you say they're different? It's all about the predictability of the monetary policy.

I think that at the core root of what we're all talking about here with Bitcoin, gold, fiat is the predictability of it. And with the supply, we for sure, under, we concretely 100% know that it will only be 21 million. With gold, we know that it was scarce, scarce on Earth. But if we zoom out and we look at the solar system and we look at these asteroids circling around the Earth and other parts of the solar system,

they contain large, large amounts of gold. So we know certainly that gold is only finite on Earth. We don't exactly know how finite it is. And then we know that it is not finite outside of Earth. So gold was only used as a mechanism for money because that was what we had at the time. But with Bitcoin with digital gold, we can concretely understand that there are only $21 million. And that assurance, that confidence, that absolute confidence in that number, means that trust can flow into Bitcoin, which brings in deeper liquidity,

which brings in more and more folks believing in Bitcoin and understanding it and placing their money, which money is a representation of time, energy, and trust, you know, placing that into the Bitcoin Protocol. I would add to that that there are a number of properties that are unique and fundamentally different in Bitcoin as compared to gold that actually make it much more powerful than traditional gold. As someone who has investments in gold and Bitcoin, you know, it's always been a very difficult problem, which is owning gold is not easy. And using gold as a store of value isn't easy, even for its main purpose, which is store of value, let alone secondary purposes like medium of exchange. The bottom line is that I do not have the technical capability to verify that physical goal that I hold is actually gold.

It's not easy to do, and to do it consistently and to do it safely. It's difficult to store securely, and it's difficult to, it's extremely difficult to transport securely, or even at all, because it's damn heavy if you've ever. held cold, you know that. It's, so it has a number of problematic properties that physical gold has a number of problematic properties.

It's much easier to confiscate, seize, freeze, or put such conditions on its storage that it's very, very difficult for many people around the world to actually hold it. So all of these properties, especially the forgibility aspect, are resolved in Bitcoin. Bitcoin is infinitely transportable

with great ease. It has zero weight. It can be subdivided very, very finely. And it is also absolutely unforgeable and easily verifiable as genuine and real Bitcoin. So all of these properties make it a much better store value. And then you add on top of that that Bitcoin also has a number of very strong properties as a medium of exchange.

Not yet, perhaps, for the smaller payments that you might think of the buying a cup of coffee example that we always think of. But certainly for me, as a business person, getting paid and paying payroll and getting paid for jobs, which are slightly larger payments, but often across borders, it's a fact. fantastic medium of exchange. And for that purpose, it's very, very suitable. And I could never use gold like that. So Bitcoin is digital gold if digital gold put on a cape and became a super gold. Yeah. And one other aspect of the cap that I think has been crucial to the success of Bitcoin was in helping it get off the ground. So why would you say that is? And specifically, how did that play out with, you know, minors and people wanting to buy it and stuff like that?

Well, it's an interesting idea. And first of all, to define formal, I said jokingly, formal fear of missing out. But I think that's true. But it is very true. Yeah. And so I think there's two aspects to this. And often there's a discussion in Bitcoin about the, the utility versus scarcity aspect of Bitcoin as a chicken and egg problem. You know, one of the things we celebrate in Bitcoin, I even have a mug with a symbol for it, is P-to-day, right? P-to-day represents the utility moment, the moments when Bitcoin was used to buy something that somebody wanted.

And before that, its value wasn't really yet defined. Interestingly enough, though, you could make an argument that its scarcity had not yet really become noticeable. So that's another reason why its value wasn't defined. So in the genesis of Bitcoin, one of the big discussions and debates, I think, is

did Bitcoin need to become useful before it became valuable, or did the scarcity make it valuable even before it was really useful? And there's differing arguments on these. I think they both work hand in hand. But this scarcity is becoming more and more and more

noticeable over time. With each having, it gets felt in the markets very acutely because, of course, miners do sell a big proportion of their newly minted Bitcoin in order to pay electricity. That's a specific amount of Bitcoin every day that has to be picked up by someone buying just for the price to remain stable. And as long as there are more people buying than that, then that pushes the price up. So the scarcity is being felt in the market, especially after each having. And that is, of course, generating fear of missing out.

Arithmetic, a lot of people say, well, you know, if you think about it, 21 million Bitcoin is far less than the, I don't know, 40, 50 millionaires that exist on the planet. So that means that not even every millionaire on the planet can have one Bitcoin. When you grasp these little nuances, it becomes very clear that, the scarcity is getting more and more real over time. And there's a couple really fun things to kind of break out here and talk about. So one is the decimal. Where Satoshi put the decimal at 21 million versus 21 billion or 210 billion?

I thought that was a really interesting, you know, decision to dig into in terms of how Satoshi felt that 21 million Bitcoin felt maybe you would feel more scarce than 21 billion. I think Satoshi, you know, this was the first cryptocurrency. that actually worked. There had been other failed attempts before, and I'm not sure if he was super confident that it was going to work. I think we all forget that Bitcoin didn't have a price for a year and a half.

That's a long time. Oh, Sadoche Nakamoto was definitely the first Bitcoin skeptic. He didn't think he was going to work necessarily. It was an experiment to him. And I think he largely, in his language, echoes that with the other developers of him encouraging them to experiment with going, hey, you should go try this out for XYZ sort of utility or application. And he wasn't sure as well that he hypothesized that scarcity alone could be the driving

factor behind price appreciation, but he wasn't sure. And he encouraged other people to go, you know, use Bitcoin for different types of applications, you know, with the hypothesis that that might drive demand. There's a lovely little myth that actually the 21 million was a mistake. And in the calculation of halvings, Satoshi was actually, actually aiming for 42 million. Yeah. Exactly double, which is, of course, the answer to the eternal question of what is the

meaning of life, the universe, and everything. 42. We find it everywhere. But then also, and that's from Douglas Adams' book, which I'm just like a hitchhiker's guy to the galaxy, right? But then also, if that were the case, which there's something about that that seems plausible, which is the fact that then the block reward would have started at 100 Bitcoin's per block rather than 50, which is where the software started.

So I also thought that was a very interesting theory. But one other comment that I wanted to make, so I'm asking these questions, but then I also sort of want to jump in, which is that, you know, I feel like having that specific number, and you're right, Dan, it almost doesn't matter what the numbers. It's just the fact that you can know what the number is. And that allows you to make calculations, right? So like with a minor, they could calculate, okay,

like they have actual numbers that they have the numbers that they can plug into an equation and be like, will I be profitable? And they can figure out the answer to that, right? So if they, for instance, know, okay, there's going to be 21 million bitcoins ever. You know, at these different points in time, this will be the supply. You know, then they can calculate that against known money supplies. You know, I've seen comparisons of the, you know, trillions of dollars that are in gold currently or the M0 money supplier or the M1 money supply or whatever. And so they can make rejections. But then also they can, once the price of Bitcoin became known, or once there was a price on Bitcoin, then they could also use that to then plug in whether or not their mining operation would be profitable. So I feel like all those things were helpful to people who, you know, heard about this new thing, didn't know what it was going to take off and yet could do math to kind of figure out, okay, is this worth my time and effort? Yeah. Sorry, go, finish up. Oh, well, just the last thing also is that I feel like in a way the cap creates this sort of like space of digital real estate, you know, like a future Manhattan. If you have this idea that, oh, okay, there's going to be some kind of, you know, future monetary version of Manhattan that will exist in the digital sphere. Sort of Bitcoin was like that.

And, you know, obviously Manhattan nowadays is very expensive real estate. So, you know, knowing like, oh, if I get a piece of that, like that's going to grow in value. Like, I feel like the cap is what does that. You know, it creates this like Manhattan-sized island. Money serves a very, very important. And I love your thoughts here. And this is, I got really excited once you brought this up because this brings me to an analogy that I find really, really useful that money is the measuring stick of capitalist experiments, which are entrepreneurial efforts. money is that measuring stick to help us evaluate is the allocation of capital towards a service

or good building that or creating that is that a productive utility for society so if i hypothesize that hot dogs are needed on my street corner and i buy a little stand and i buy the hot dogs and it turns out that no one wanted hot dogs and i fail money is the ultimate measuring stick of me allocating capital effectively in the economy to solve problems for humans and so bitcoin being a 21 million hard cap is a finite exact measuring stick. Before, we've got this variable measuring stick, which we're not even sure exactly how many dollars are out in the market. You know, there could be some numbers that are either fudged or, you know, it's hard for us to validate the entire supply of dollars or euros or yen. And with Bitcoin, we can now concretely measure. And this is a problem

that we see in the sciences. If you don't have a precise measurement of a kilogram or a meter, then how would you go evaluate different, except? experiments for different endeavors to measure and try out new things. And so with Bitcoin, it is the first time we have a concrete measuring stick for all business outcomes. One of the interesting conclusions you get from that is that in the end, it doesn't really matter how big a meter is as long as everyone has the same idea. So the actual units doesn't matter. 21 million, there are some aspects of human cognition where a certain round numbers are more appealing, easier to understand, et cetera, et cetera.

We don't really work very well with things after the decimal point. So there's an argument to be made that that was a good choice for the primary unit. But ultimately, the size of the measuring stick doesn't matter. And that comes to a second, very important aspect of this, which is ultimately, it's not the money that has the value is the things you do with the money that have the value. The measuring stick itself isn't its length. And that's important to realize it's not money that has value. It's the things you get for it that have value. And in order for the measuring stick to work, you have to have that stability. Or you have to have very, very massive utility. It's interesting. It's interesting.

because in all of this discussion, we talk about the US dollar as a currency that doesn't have these characteristics. Yet the US dollar is an incredibly successful currency. It is still the world reserve currency and is likely to remain the world's reserve currency for a very long time. So then the question is, why? How can you have a world reserve currency that doesn't have sound monetary properties and solid store value and fixed unit of measurements? I think that's a really interesting question to explore. Well, do you want to make a theory because I'm curious to know your thoughts on that? I think it's momentum from utility. The U.S. dollar has enormous utility and as long as most other substitutes are inferior in more than one ways, either politically

inferior, the Yuan, for example. Inferior in terms of breadth of trade vis-a-vis other economies and things like that, and inferior for geopolitical reasons, such as control of oil-producing economies, that utility can carry a forward with momentum much longer than you would expect on paper, in theory. And of course, that's exactly the thing that is being challenged by Bitcoin. Bitcoin offers a viable alternative on certain dimensions. There is no, in my opinion, there is no perfect system. And I think it's important to recognize that. Bitcoin has its own weaknesses.

And so from a broader perspective, it's really a matter of which dimensions are important for the thing you're trying to do. And that's why the dollar isn't just going to disappear overnight. Yeah, so I actually, I want to ask two questions based on these comments. One was I was going to ask you guys if you thought that Bitcoin would, or any digital currency would be successful or whether its monetary policy would still be superior to existing fiat currencies, even without a cap. So for instance, if there was some kind of perpetual inflation, which I know other

cryptocurrencies use. But then the other thing that I was going to ask, which was, as we know, Austrian economists have been really enamored with Bitcoin. But there is like one theory from Austrian economics that doesn't quite explain why Bitcoin's been so successful, which is something called the Meese's regression theory, which is that the value of a currency comes from the likelihood it will continue to be valuable, which means that, you know, in reverse, the current value is based on the previous value. And yet, coin got value out of thin air. So I'm interested in, but on your thoughts on both of these things. Yes. So to the second one, I think that a lot of Austrian economics, like economists, they looked at previous commodity monies and hypothesized that as these monies became into existence, that they came out to existence because they previously had utility of the commodity. So we saw different types, you know, some people also look at gold and they claim that gold has some alternative utility for industrial use and or jewelry.

But what's funny is that the industrial use for gold is a very new invention. Like 200 years ago, gold did not have a utility in an industrial use case. And then if we look at it still had enormous store value use. Correct. Yes, use is as a store of value. Versus like a lot of these economists go, oh, well, these commodity monies had had had previous like real world functional utility as for, something other than money, but that's the whole point.

It's his function as money. That's its utility. And with gold, people often say that, oh, well, it's also used for jewelry. Well, no, jewelry is the same objective. It's a display of your store value. It's not an alternative use. It's not an industrial use. There are plenty of shiny metals out there that are less scarce and easier to work with than gold.

So gold, you know, main value is its utility is its utility and money. Right. And, you know, the interesting thing is that a lot of these economic analyses of Bitcoin, like many of the analysis we see in the financial space, are based on 18th and 19th century economic doctrines. So the problem with all of those is that we're attempting to analyze something that is truly novel. It's truly novel in that it doesn't neatly fit into any of the categories that preexisted on which all of the analytical tools that we're using are currently based. So all of the economic theory that comes from Austrian economics or from Chicago School economics

or from any economics or MBA type of university training is based on certain assumptions about the structure of an industrial, primarily an industrial economy, and certain assumptions based on the historical perspective from the 18th, 19th, and early 20th century. These are not new schools of thought. Bitcoin confounds a lot of these analytical tools because it doesn't neatly fit into any of the categories that preexisted, and it exists in a realm, the Internet,

which doesn't neatly fit into any of the macroeconomic or even microeconomic analysis of the past. you know, the idea that the internet is an economy of its own was completely controversial less than 15 years ago. And the idea that you could have an entirely intangible economy that transcends borders completely controversial 15 years ago. The idea that Bitcoin isn't just a currency or a stock or a bond or an investment

or a commodity. You know, and a lot of people say, well, what do you think Bitcoin is? Is it a bond? Is it a stock? Is it a currency? Is it a commodity? I'll tell you, the answer is really simple.

Bitcoin is a cryptocurrency. And so we don't yet have that category and the analytical tools that come with it. We are now building the analytical tools to be able to rationally speak about how cryptocurrencies behave over longer term and larger economies. Until now, we didn't.

have any. And this has happened before. 20 years ago, there were no financial tools for speaking about derivatives simply did not exist in their modern form. They had to develop these. We have entire institutions like the commodities and futures organization and regulator here in the United States. That is half of its regulatory mandate is on something that didn't exist 25 years ago. We need to have new tools in order to speak intelligently about new things that do not simply fit the behavior or the tools we have in the past. Yeah, this is why I love covering this space because a different analyst will come up with new ways of modeling out the value of Bitcoin or other cryptocurrencies. And it's, you know, they're just, they're just making it up. And, you know,

which is not, I'm not dismissing what they're doing, but I'm just trying to explain everything that we're doing is new. Like it's all, we're just creating it on our own. And it just requires our creativity and our smarts. And, yeah, just new ways of looking at the world and trying to figure out what it is that is being built. And I think Spencer Bogart wrote this great post saying that the coin is sort of like this platypus because, you know, it's this animal that has all these different features from other animals. And yet it's all. in one. And that's why the U.S. government has had a hard time classifying things like Bitcoin, you know, the IRS calls it property and the CFTC calls it a commodity and, you know, et cetera. So. But this is this is cognitive dissonance playing out in very tangible in real worlds, in real ways in our industry. This cognitive dissonance as to expecting Bitcoin to behave as something that preexisted and then trying very hard to squeeze it into that category. and either being surprised or even more so being righteously outraged that it doesn't conform to those things.

It's a bit like the new automotive industry being emerging into a world of horses and horse carriages, and the analysts are still trying to figure out how it works by estimating annual consumption of hay, and the regulators insisting that it is common sense to have a veterinary doctor on staff in any transportation company, and it is both unreasonable and dangerous for public health not to have one. And this is exactly the kind of framework that is being hosted around Bitcoin. To kind of wrap up here, and I think it'll go back to your first question, which I don't think we answered. Yeah, about the inflationary, yeah, whether there could be proposed. inflation. Let's see if I can tie this together. Okay. Okay. All right. So wild Bitcoin is this new

species of money. I mean, it is a wild new exotic species, right? Like this isn't anything of what, like we've seen before. It's very different from these commodity monies, from fiat, from gold. For this new money to permeate into the, to permeate the consciousness of like, what is money, why is Bitcoin better or different than previous monies? And for that to have, to have, to, to, happen, that takes a long time to do. I mean, and so when it comes to Bitcoin is fundamentally different from a technological perspective and from a species of money perspective, but it is somewhat the same in terms of the problems that it's solving. And ultimately, it's all about trust that makes it work. And this was Satoshi's first, after the white paper, this was Satoshi's first post. And in the second

paragraph, he goes, trust is required to make it all work. We have to trust in the central banks. we have to trust in our banks. And Bitcoin essentially is solving the problem of trust. So while it's a new technology, it solves a very fundamental, I would say a problem that has always existed in humankind. It solves the problem of trust. Now, tying this back to the monetary policy and an inflation, monetary policy was say a perpetual inflation rate versus one that has no inflation rate post 21 million

issuance or post total issuance, the monetary policies are really tricky things. and the issue and schedule and the security models are all intertwined. That's what makes this really, really, you know, the more I've been in the space for a long time, not as long as Andreas or others, but I, you know, when you first get in, you go, oh, it's digital gold, gold 2.0. And then you're like, you go down the rabbit hole of proof of work and you're like, wow, this is pretty fascinating. And then you get into functions of like the security model.

And you're like, this is incredibly intricacies of how this is all tied together. And so let me play out a couple of things. here on the issuant schedule. So every four years, the rate of newly minted Bitcoin just drops in half. And that occurs every four years or every 210,000 blocks more accurately, until 21 million Bitcoin are created. Well, 21 million I've never created. 20,999,99,99999,000.

99-199-9-7. Specifically, if you work out the correct, and I'm going to be pedantic about it. this, but the correct one is 21 will never be reached. It's an asymptotic that never touches 21 million. That's why we have Andreas on the call. He understands the nuance of it and can also explain it simply. Yeah, so with this issuant schedule, why did Satoshi choose every four years and what happens during those halving cycles? You know, Satoshi hypothesized that, you know, Satoshi before Bitcoin had value hypothesized that due to the scarcity of it, that FOMO would it be a core critical element in terms of user adoption?

He goes, as the price increases, more people become aware of it, who then buy an anticipation of the price increasing further. He's essentially describing FOMO in a very volatile market cycle. The market cycles are Bitcoin's main user acquisition method. We all became aware of it probably in 2013 or 2017. I think Andreas was earlier, but for a lot of us, in terms of like the big adoption waves, 13 and 17, huge because the price appreciated. And Bitcoin's monetary policy, since there is no increase in

supply when demand increases, that creates very volatile moments or the price skyrockets up. And similarly, when demand decreases, the price drops. And so that is one, a user acquisition method. But what's also interesting is that as Bitcoin issues coins over, you know, this next hundred years or so, and that eventually becomes asymptotic with 21 million, there's something called the block reward, and the block reward is what miners receive, which is the block subsidy, the newly minted coins plus transaction fees. And this is Bitcoin's long-term security model, or it's been Bitcoin's security model, but when we project and look into the future for its long-term security prospects, Bitcoin's security model is dependent on, you know, the subsidy, the

newly limited coins keep dropping in each block reward, that has to be compensated by a rise in transaction fees. And those transaction fees come about through these market cycles where all of a sudden there was a million Bitcoin users and now there's 10 million. So there's many more transacting on chain, which means there's many more transaction fees, which means it replaces the subsidy. So when you look into the intricacies of how the monetary policy, the issuance schedule and the security model are all intertwined, it's pretty fascinatingly complex. And so there's some protocols out there that look at that long-term security model, and they hypothesize what if we had a perpetual rate of inflation? Because we're not sure if the transaction fees will replace the newly-mitted coins or the subsidy in these block rewards.

And I admire their want to go look at that very, very long-term security model and look at improving it. But they're also going back and destroying the fundamental thing, this is in my opinion, destroying the funding. the mental thing that makes Bitcoin or blockchain technology great is that it removes trust. If we have to trust that you won't change your monetary policy again after you've chosen a perpetual rate of inflation, which is impossible to choose, then you've now inserted trust back into the mechanism that we use to remove trust or remove trust with humans. So I definitely want to dive more into this because I have a lot of questions on a lot of what you just said, but this is the latest I've ever done in ad break. You guys are having such a good discussion.

I couldn't break it off. So we're going to talk about all these issues, you know, involving the cap and changing the issuance and et cetera. But first, a quick word from the sponsors who make this show possible. How much in fees are you paying for your crypto purchases? Cryptro.com is waiving the 3.5% credit card fee for all crypto purchases, which means you can buy crypto with a 0% fee. Apart from your crypto purchases, you can also get a great deal on food and grocery shopping too. Get up to 10% back on Uber Eats, McDonald's, Domino's Pizza, Walmart, and many more when you pay with your MCO Visa card. No card?

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With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. News. Back to my conversation with Andreas and Dan. So, Dan, I was so curious, this was something that I was, you know, kind of looking into before the show. So, you know, as he mentioned at a certain point when the block reward stops, there will be a transition where minors will be compensated in transaction fees, not in the block reward. And the current amount that they earn is from fees is about

9% of the block reward. And so we'd have to see transaction fees 11x by roughly 2140, which is when the new Bitcoins will step being minted. But I just wondered, you know, if we don't see like an increase in the amount of transactions that can happen at layer one, then can transaction fees 11x in that time? Or will that require people to pay a lot more per transaction? That's a great question. And when I'm not sure how many people who are listening to this working tech, but in tech, we have something called a KPI, a key performance indicator. And we use it as a calibration method to coordinate our efforts at a company and use that

metric to define success. For example, that might be user signups or a number of users trading at Krakken, etc. The KPI for this met for what we're looking at right now, which the question we're trying to answer is are transaction fees replacing the blocked subsidy in the block award? So our newly minted coins, as those decrease, is that value being replaced by the subsidy. And so we can calculate that that would be our primary KPI. So you could look at transaction fees over the subsidy, transaction fees in a block divided by the subsidy. And you brought up that, that's at 9%.

If we look at that historically and we make it like a rolling 60 day to smooth it, out a little bit and we look at this over time on a log curve, it's very much trending in the right direction where 11x sounds like a lot. But Bitcoin moves in really intense cycles where we've all seen it go from 1,000 to 10,000 or 20,000. When that happens, that means there's not an equivalent, but a directional rise in transactions and transaction fees. And so we have seen the transaction fees replace the subsidy over time. And so it very much is trending in the right direction to where over the next couple halving cycles, we should see it, start to predominantly be the value that is compensated to the miners in the block reward. Now, you know, we certainly can't predict the future.

We do not know if there will be future speculative bubbles or what Bitcoin's future adoption rate should be. But if Bitcoin doesn't become adopted, if it remains a more niche sort of a service for human kind where only, you know, let's say 20 million people use it, well, then it's long-term security will be weak. And I think that's what's really interesting. And it really, you know, people, people worry about like, oh, well, if Bitcoin is the world reserve currency that doesn't have a strong security model, like there's not a lot of monetary compensation in the block reward due to transaction fees, well, will that be a bad scenario? It's an impossible scenario because if it is the world reserve currency, there'll be very,

very many layer one transaction fees. Right. But what I'm asking is because the number of layer one transactions is limited. And right now I feel like a lot of the scaling is focusing on layer two. So I just wonder, will layer one be big enough to handle, you know, with the amount of transactions that will need to be on layer one in order for the miners to get enough fees to, you know, be incentivized to do this? A different perspective here, the blends the two topics of monetary policy and the technical implementation.

Maybe then you can, you can jump on that topic. as well. From my perspective, the monetary policy creates a very specific microeconomic environment. If you think about the commodity of money that is Bitcoin, their supply and demand. Supply, because of Bitcoin's monetary policy, is fixed and diminishing, tapering off asymptomatically and ultimately capped. And demand is variable. And the equilibrium between the two is the Bitcoin price. Now, if you think about that market, one of its characteristics, its strongest characteristic, what gives it to all of this formal,

is the concept of an inelastic market response. The supply cannot adapt to a change in price. If you take something else, potatoes, and suddenly potatoes are worth $1,000 a spot, well, my garden right on front here is getting plowed up and I'm planting potatoes. So the price causes an immediate response in the market where production of that good increases proportionately to the demand and the price acts as a mechanism, a signaling mechanism, to encourage production of that good. Now think about Bitcoin supplying.

So price goes up, same amount of Bitcoin. In fact, less after four years is going to be produced. There is no elasticity. There will not be a response in production. So that's the monetary policy. The same game plays out in transaction fees, and most people don't really see this, but if you think about block capacity,

the space for transactions that exist in the block, that is also fairly inelastic, perhaps not as inelastic as the Bitcoin supply. and it's not diminishing over time. But it is still inelastic in that there is a limit, and that limit does not respond to surges in demand. So when demand goes up for block capacity, that is a market, it's a microeconomics market,

determined by the supply of block space by miners, which is fixed, and the demand for transaction capacity, which varies based on prices, signal and also varies based on some optimizations in how transactions are stored, but not that much. So when you have these spikes, the dam was describing, what that does is it pushes off the transaction fee as everybody's trying to cram into this one tiny block all of the transactions because of phomal. And so the price responds accordingly because you have this in elastic block supply. Our question is, are these two in elastic supplies the same? And they're not.

The block space is actually fixed, but it's not diminishing. There are some aspects of this that create some concerns for the future. One of them is the fact that miners can collude in some very creative ways. They can first of all collude to restrict supply further and for the capacity of the block. Instead of mining blocks that have a megabyte of or two megs weight of transatlant, in them. They can mine blocks that have fewer transactions all the way to the extreme of mining empty blocks. They can do this like an OPEC of miners, where they collude to reduce the space that they occupy in the block, thereby driving off transaction fees. And this can be profitable,

just like OPEC is profitable for the oil for using countries. And it's very difficult to break out of that pollution. The other thing miners can do, which is very interesting, is that they They can occupy some of that space by basically rigging the auction. If you think about it, the block space is auctioned off to people who bid with their transaction fee and hope to get in. That type of auction has an obvious problem, which is that you can have what I call ringers in the auction. A miner can put a transaction up for confirmation with a very high fee, driving all of the other transaction bidders to increase their bids to compete against that.

And then if that transaction is included in the block and that minor has enough hash rate, they have a pretty good chance of paying themselves, which means this is a low cost. That depends on how much hash rate they have. But again, this is a tremendous opportunity for collusion, because if most miners do that, they're either getting paid when they win the block

from their own transaction. actions that they use to rig the auction, or they're getting paid by the other miners. Someone's getting paid. So then it's a very low-cost way to create essentially a cartel for the block capacity. These are real problems, and there are a number of proposed solutions, including advocating for a block size increase, which has other undesirable side effects. But I think it's important to know that these things are not finished. It is quite possible that over time, the block size may be increased. If there's enough demand for that, the consensus on that can change.

But the consensus on the 21 million coins, in my opinion, cannot change, because to me that's a defining characteristic of what Bitcoin is. If you create a coin that has 22 million coins issuance, you can do that using the Bitcoin code base. No one will call it Bitcoin, and there will still be a number of people who will remain on the one that has, the 21 million cap and everyone will call that Bitcoin. So in the end, the only way you can change that number is by forking off another coin that's less valuable.

Not a winning solution. However, in the block market, the inelastic supply can be dealt with with broad consensus. So over time, people may agree and say, you know what? At this point, the technology has gone up and we can't afford to do for Megblocks. I don't know. It's a very controversial topic. but I think it's important to recognize the similarities of the inelastic supply between these two markets, but also the differences in how critical these are in terms of principled aspects of consensus

and how unchanging they might be. Okay, yeah, so it sounds like you think it is possible people might consider that because, or rather it's possible that the amount in transaction fees will, maybe not be enough on layer one to replace the block reward when the time comes? Okay, well, two things. First of all, and I think this is, by the way, this is the number one question I get for the past eight years. All I've been doing is answer questions about Bitcoin.

The most common question I get is what happens in 140 years when block subsidy stops? And the answer, the most important part of this answer is it doesn't happen in 140 years. It happens today and tomorrow and the day after. Every single day, miners are making the profitability calculation and they are taking into consideration of a ratio of fees to subsidy and the current price of Bitcoin to decide if they're profitable and adjust their hash rate. There is no cliff moment where this happens. This happened in 2017. It's happening today.

It will continue to happen every day. And so this equilibrium is dynamically moving through Bitcoin with a heartbeat, to 10 minutes every single day. The question is, are fees enough today to maintain the current level of security we need today in ratio to block subsidy? And given the hash rate today, the answer the miners have given us is yes,

resoundingly yes. So then we look at tomorrow. And so over time, though, this may lead to moments where you have very, very expensive transactions. And that tests the market. It tests the market because it puts

the use of Bitcoin as a transactional medium of exchange against the use of Bitcoin as the fomo engine of store value. In those moments, it becomes a less useful transactional medium of exchange precisely because

it has suddenly become such an incredibly powerful formal mechanism for stored value. So it's not one or the other. It's a shift. Okay, I've got a great thought to append to Andreas's direction here. So Nick Carter wrote a really good article a few weeks ago about this with Ethereum. And Bitcoin has the, you know, they both have this fixed parcel of land, this block space. And we are all bidding to get into that block space. So all of the bidders, whether whatever store, you know, if your store of value, medium of exchange, or CryptoKitties use case, you are bidding for that fixed parcel of real estate. And so you're bidding to get, you know, a spot on that piece of real estate. Now, when we look at Bitcoin,

Bitcoin has two primary use cases, which are store value, gold 2.0. And there is the transactional use case if you want to send large amounts of money across borders. What's interesting is that for both Ethereum and Bitcoin, as transaction fees rise, which I think everyone's very acutely aware of over the last few months on Ethereum, they've risen to all-time highs, Bitcoin is similarly high relative to historical fees. As those rise, the use cases that move the largest amounts of money, which are likely to be more store value or maybe like very large smart contract use cases, those will outbid every other use case. So it's a really interesting thing to think about because for Bitcoin, as Andreas brought up, the store of value, more FOMO or

gold 2.0 folks, if that rises and becomes very, very popular again, and it's always been popular, but as that crowds out at fixed real estate, it'll push out the medium of exchange use cases because they'll be able to pay more on transaction fees. For example, if I'm wanting to send million dollars, I'm fine with paying $100 transaction fee. But if I'm trying to pay for my Netflix using Bitcoin, $100 transaction fee is super onerous. So I'm not going to do that. Right. But is this kind of against the original vision of Bitcoin then? Because, you know, I think a lot of people like the idea of Bitcoin because they think of it as democratizing access to finance. And there is a fly, by the way, for the people who are watching the video,

there is a fly in my room. It is attacking my face. I don't know what's going on. But, you you know, is it possible to fulfill that vision of democratizing finance for everyday people if it's only reduced to people who want to send a million dollars for the Bitcoin being able to do so? Yeah, I mean, I wrote a comprehensive threat on like Satoshi's intentions when he launched Bitcoin. I mean, I don't think any of us can go back and weigh those intentions and then weigh those perfectly and spit out like this was 100% Satoshi's intention. I mean, Satoshi, the first message that the only message you ever put in the Bitcoin blockchain is UK Chancellor on the verge of second bailout for banks, not visa on the verge of raising

processing fees. There's also like he references bet Bitcoin is digital gold four or five times or he calls it a precious metal, sorry. And there's also some functional aspects. The monetary policy has no supply response, which makes it very poor as a medium of exchange because it's not a stable unit of account. It's hard for people to mentally reconcile like, oh, I have to like re-measure. certain items that I'm purchasing.

I'd have to remasure the purchasing power of my coin constantly. It's a deeply nuanced topic. I have a slightly different perspective on this, if I may interrupt. These two visions are not only not a direct trade-off, but in fact, they're highly synergistic. Here's the thing.

Demarcating access to money makes sense if that money cannot be subjected to prior restraint, confiscation, freezing, and shutdown. The ability to make a transaction at will through the democratization of money has to assume an environment in which there is an adversarial relationship with those who do not want you to democratize the access to money. And if you ignore that adversarial relationship, then you can assume this is a simple trade-off, which is, listen, it's okay, what we do is we just increase the capacity, make transactions cheaper, and then we democratize access to money. The problem is that what you've done

in that trade-off is you've required the money to become more permissions, less resistant to prior restraint, and less resistance to various types of censorship attacks. What ends up happening is exactly what has already happened most recently in Zimbabwe. You have these incredibly versatile microtransaction platforms for mobile digital pay. And then when those threatened, the stability of the financial system of Zimbabwe's calipocracy, they remove permission and those things are shut down. Now, these people also don't have democratic access to money. And they don't have democratic access to money, even though they have a platform for very low-fee

transactions. You can't separate the two. The reason that tradeoff is important is because unless you have a system that cannot be shut down, having a system that's cheap is worth nothing. The cheap system that can be shut down will be shut down at precisely the moment when you need it not to be shut down. And I think people don't appreciate the fact that we are operating in a currency environment that is becoming even more so adversarial than it already is. This is not simply a matter of playing nice when you're dealing with considerations that go far beyond the transaction fee. Having a low transaction fee without a network to run it on isn't a useful property of money. The ScoreBet app here with trusted stats and real-time sports news.

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19 plus Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. Well, so I did want to ask a little bit more about this what's it called medium of exchange use of Bitcoin. Is the monetary policy of Bitcoin conducive to it being a medium of exchange? Because I'm sure you guys are aware, a lot of people will say, oh, I don't want to use

Bitcoin to buy coffee because then a year or two from now, I'll realize that I just, I had bought myself a $100 a cup of coffee. So I wondered, do you think that we'll see it being used more and more as a a value and not really see the medium of exchange use gain adoption? Yeah, Marad, a really famous trader in the space, he developed a graph that shows. It's a very rough graph and it's more for visualization purposes, but it shows the evolution of Bitcoin through time. Just like a tree or just like a person goes through stages of developments from being a young

child or becoming a teenager and an adult in a tree growing up and becoming a stronger and stronger and bigger, Bitcoin go over time has different characteristics. So due to Bitcoin's lack of supply response to increases in demand, that makes the price very volatile. That volatility in price makes it very, very hard to be a unit of account. The unit of account is great with Bitcoin in terms of its, you know, our precise measurement of how many coins are out there. No, there's 21 million. I guess it's a very precise, you know, ruler or measuring stick.

However, the purchasing power fluctuates constantly. So, you know, Bitcoin acting as a dollar or substitute or a replacement for a world reserve currency in that unit of count aspect from a stable purchasing power perspective is very far away. You know, I think that as many, many decades. Bitcoin's use as a speculative store of value, it's had that use case since day one. It's very, very good at that. The increase in speculative, you know, the increase in speculation increases awareness and adoption, which then drives, to Andreas's point, then drives medium of exchange.

The more and more people who hold Bitcoin means that the price goes higher and higher, which means that the market cap is higher, the liquidity is deeper. Eventually volatility should start to decrease over many decades, which makes the purchasing power more predictable and easier to understand and use in a day-to-day basis. So I see it as like a multi-decade evolution of a store value, a store value plus medium exchange, media exchange store value plus unit of accounts many decades later. So I see it as like there isn't a clear cut like, oh, it's only useful for this at this moment.

It's more of a gradient over time of which one becomes more or less useful. But as we see with transaction fees, to me it seems very clear that Bitcoin over the next decade or so and Intel layer two technology becomes more prevalent and very widespread and easy to use, that Bitcoin's primary use case will be store of value in the next full run as transaction fees largely probably go past $50 or $100 per transaction. That crowds out pretty much everything else other than store of value. I disagree slightly in that I think there is a function of medium exchange today and it does exist, but it depends on your context and perspective. So there's two aspects to this context. The assumption can I or should I use it to buy a cup of coffee,

it comes with a set of assumptions around it that are very, very specific. And it's probably the worst example to use, and I am totally guilty is the number one example in my book. And it was obsolete the moment I wrote it. We need to stop thinking about buying a cup of coffee as the primary activity of a medium of exchange system. You know, buying a ticket out of Syria may be a much more interesting use in that context. At that point, as a medium of exchange, it is all powerful. I think there's two presumptions or pre-assumptions

that come to this context. The first one is, at the moment, Bitcoin for most of its users, acts as an intermediary economy where you pass things through Bitcoin on the way to somewhere else. So you start with Fiat, you own, earn, and live in the Fiat world.

You take the Fiat, you transmute it into Bitcoin, and then you either hold it or you convert it into something else, usually by converting it back into Fiat after it's traveled somewhere. So this is the Bitcoin as Rails perspective. When you look at it from that perspective, the economics really make it very challenging

to use the medium of exchange. If you're coming from Fiat and ending up in Fiat, if Bitcoin is simply a highway that has on ramps and off ramps, but most of your life has lived in the neighborhoods, that's a whole different ballgame. I can tell you from experience, as someone who lives in the Bitcoin economy and treats it as a circular economy, the hoarding instinct and volatility and remorse of buying a cup of coffee, reverse themselves very, very quickly. And here's why. I don't buy Bitcoin.

I earn it. I earn it through my labor and through my entrepreneurial activities. So when I earn Bitcoin directly, not as fiat, the price volatility works both ways. It cuts both ways. When I pay payroll at the end of the month for my employees and contractors, suppliers, etc. If the price has gone off, that really works nicely for me because I give out less of my Bitcoin in order to fulfill my liabilities. But at the same time, if I'm getting paid next month and the price of Bitcoin goes up, I receive less Bitcoin for the thing I charge because my unit of account is still Fiam. So if I'm in that circular economy, the volatility in purchasing power

works for me on liabilities and against me on my receivables, on my income. And if you take it over a long period of time, it's a wash. I have used Bitcoin in a circular economy like that since it was less than $10 per Bitcoin up until last week when I did my payables for the mid-month payables. And so from that perspective, all of that goes away. I don't have remorse because, yes, I paid $1,000 for a cup of coffee. But I also got paid $10,000 an hour that month. You know, so it balances out.

And so the perspective of I'm an affluent American who has access to alternative mechanisms of payment and I mostly live in the U.S. dollar economy visiting Bitcoin as a tourist, is very different from the perspective of living in a circular economy, and even more importantly, for all of those people who do not have the comparables, the alternative mechanisms of payment. It's easy to say I'm not buying a cup of coffee with Bitcoin. I'm going to use X when X exists. When X doesn't exist or when X is Zimbabwe dollars,

then that equation may change rather dramatically. And I've heard this from a number of people who don't live in the, in the, in the environments where they have 20 other things to choose from that are actually pretty damn good as medium of exchange. Yeah, I certainly live in a privileged environment and country. I live in San Francisco, which out of all the cities in the world were very, very affluent. So totally understand that I come from a different perspective. I was there with you when we worked at blockchain.com in 2014. And blockchain.com paid everyone in Bitcoin. I was there while I saw thousands of Bitcoin businesses struggle.

You know, as demand decreased after the 2013 bull run and the price decrease. So the price is a function of price as it increases, increases demand. Bitcoin operates in that really interesting way as that price becomes that signal to the market. Like, hey, come pay attention to this. But it also signals to the businesses like, hey, be prepared as the price goes down. Be prepared for a drop in your customers. And it's really, really hard when Bitcoin businesses, when they had, you know, let's say you have, you can even paid in Bitcoin, like this circular economy idea where like everyone gets paid in Bitcoin, you receive your income, like your revenue in Bitcoin, becomes very, very tricky when the price is so volatile to plan out a business operation. So let's say I want to deploy a million dollars to go build a building.

And the price of Bitcoin is at $1,000. Well, if it drops to $500, now I may not be able to finance that operation. and maybe I can't make that decision within one day because I need to talk to many different stakeholders internally, get legal to sign off, get the permitting in place. So Bitcoin for a business purpose is really, really tough. Yeah. I experienced it at my own startup zero block, which we sold to blockchain.com. I saw it at blockchain. You know, that's why we have that more unit of account currency like the dollar used for

businesses because it makes it easy for business planning purposes. It is predictably decreasing in value over time. Yeah, and any sensible business will not operate in one currency, nor will it keep its treasury assets in one currency. Diversification applies on a business level just as much as it applies on a personal level, and I don't keep all of my business treasury assets in Bitcoin, or at the same time, I don't keep it all in dollars. And being able to diversify and take different levels of risk accordingly, gives me some great, has given me at least some great results over time. But it does take a longer term approach and it is very, very difficult to do planning with a volatile asset. I agree with that.

So I was curious, you guys, you know, we've been talking about Bitcoin being used as a medium of exchange or store of value unit of account. I was so curious because, you know, the idea that Bitcoin works as a store of value is probably one of the predominant narratives around Bitcoin. but then obviously we saw with Black Thursday earlier this year in March when Bitcoin was actually surprisingly correlated with the broader markets and did experience a precipitous drop on March 12th. Why do you think that investors actually did not turn to Bitcoin at that time but instead sold it? And how does that affect that theory about Bitcoin being a store of value? It's a great question.

A lot of people bring this up, which is, hey, Bitcoin sold off while the risk on assets, like equity is also sold off. Doesn't that conflict with the idea that Bitcoin's a good store of value? But when we see a liquidity crunch, which is what, you know, that black, back in March, what we saw there with a huge decrease in equities and Bitcoin price, that was a liquidity crunch. And we saw gold sell off tremendously. And gold is a 4,000-year-old store of value. I mean, it is the oldest store.

One of the oldest stores of value is still in existence that humankind uses. So gold also sold off it. So I don't think that, you know, because gold sold off, does that make gold a poor store value? No. I think in a liquidity crunch, everyone is selling everything they can get their hands on to meet their margin calls. There's a series of cascading margin calls that were essentially crunched and crunched the market to where people are enduring this liquidity crunch and they're selling everything they have to meet those margin calls. Now, what we've seen in 2008 and now is that after that moment, months and years later, then the store of value assets like gold start to perform. as people start to price in inflation concerns and pricing concerns over the monetary policy for government,

then those store value assets start to rise. And so I don't think we're going to see that impact on Bitcoin's price materially until, you know, six to 12 months from now. I think another factor that is playing in this is that what we've seen over the past 10 years at least is an unprecedented injection of liquidity in, pretty much all of the global economy, but especially in the United States. What that has done is it distorts markets by creating an environment in which more and more and more assets become correlated, not just to each other, but effectively they become correlated to one and only one action, which is the degree of stimulus that is being anticipated at the next Fed meeting. And it creates

these weird phenomena like good news is bad news, because it will lead to, less stimulus and bad news is good news because it will lead to more stimulus. And essentially, more and more of the assets become correlated to that one aspect of stimulus. Investors who have undergone this battle to find yield and keep looking in dusty or dustier and dustier corners of their portfolio to find yield because they can't generate yield because money is free and everyone's chasing yield and there's too much money out there. They will use Bitcoin and other crypto assets of various types to chase yield. And that does correlate Bitcoin closer to all of the other assets because it's responding to the same incentives.

You know, the majority of people who are invested in Bitcoin in every bubble are not there because they understand the principles of Austrian economics and sound money and the technological robustness of Bitcoin. They're there because, you know, to the moon, coin went up, number go up, yay, formal. But that kind of speculative behavior is both incredibly useful and very valid. But what it means is that those investors who chase yield will chase yield into crypto just as much as the other places. Crypto is experiencing asset inflation as a result of too much money sloshing around in an investor community, especially in the United States. And when there is a supply crunch, when there is a liquidity crunch is then described, everything goes on the table. And Bitcoin has one of the riskier more volatile assets, and because of it's in elastic behavior, we'll drop harder and faster than all of the other assets in.

the short term. That is normal behavior. And in fact, if you look at most of the people who are talking about this, they had predicted that the disaster glee that you see in some Bitcoin circles where it's like, I hope the economy

crashes because then I'm going to, Bitcoin's going to the moon and I'll have bags. That's disaster romanticism is both creepy as well as irrational because in the short term, exactly the opposite happens. In the short term, Bitcoin does get sold off just as hard as the other assets and probably harder because it

has this extreme volatility. There are no mechanisms to stop it from dropping just as hard. So I think this is predicted behavior. Bitcoin is currently much more correlated to other assets than it's ever been before, I think. And in the short term, it is going to bounce around rounds with the rest of the economy because scared investors are going to pull out of, pull their money out of everything. But short term and long term, two different things. I also want to talk about something else that in a similar vein is just a question around kind of how things will go against a pretty popular theory. So I'm sure you guys both know of this stock to flow model, which really made the rounds and people really glomped

to and it's basically, you know, saying that the amount of new Bitcoin, the ratio of existing Bitcoin to new Bitcoin being created will affect the price. And so as that ratio, I guess it would be that it increases because the number of new bitcoins will be decreasing that we should see the price go up at the same time. However, so after this came out, I don't know if you guys saw there was a column by Nico Cordero, the chief investment officer and fund manager at Strix Leviathan. And he published an article kind of saying that the premise of this Stock to Flow model, which is based on Stock to Flow in gold and how historically that has correlated to the price of gold.

He said, well, actually, you know, the author Cherry picked the points. And when you look at historical data and he said, quote, gold's market capitalization held valuations between 60 billion and 9 trillion, all of the same stock to flow value of 60. And he said a range of 8 trillion is not very indicative of explanatory power and lends itself to the obvious conclusion that other factors drive gold's US dollar valuation. So do you guys think that the stock to flow model works for Bitcoin or, you know, what's your take on on this theory? I find it interesting as the descriptive mechanism. to understand the concept of hardness of money, but I don't pay particularly attention as a predictive

theory to help explain or predict future price movements. I think hardness of money is an important, a very, very important characteristic of money, but it's not the only characteristic of money. Money operates in an environment of irrational human beings. I think the whole rational market actor hypothesis, which is clearly debunked, could support a theory like stock to flow. But the problem is that people respond to money and other markets things in irrational ways. and they evaluate risk in irrational ways. They far bias gain, sorry, they far bias avoiding loss over gaining reward. And so we know that these irrational behaviors result in weird effects in markets.

So, yeah, great. I mean, Stocktoflow explains why hard money is hard. And it also gives us a way to understand the hardness, the hardness of Bitcoin vis-a-vis other forms of money. I wouldn't take that to be a gospel as to how the price is going to play out at all. No one can predict the future. I don't think any model can out there. It certainly might give us an insight into, you know, trajectory-wise,

what Bitcoin might look like. But I certainly don't prescribe or, you know, really wait any sort of model, whether it be stock to flow or any other one is having, like, superior or very high level of predictability. I personally find it very interesting because it models out scarcity and it models out the hardness of bunny and it tends to look at that, looking at precious metals. And I think that's pretty fascinating that we go through that sort of analysis. And that's what makes the Bitcoin community really cool is I love the in-depth economic research done by a wide variety of different individuals or they go explore these different topics. So, you know, I haven't dug super deep into the nuances of like how predictable it is. I know there's some controversy as to some folks don't like the methodology or the,

there's some holes or flaws in it. I personally haven't dug in super, super deep. I would say it does relate to the point I was making earlier, which is that new things require new analytical tools. This is a useful analytical framework that gives us some insights into the hardness of Bitcoin in terms that we can understand in something like Bitcoin that is entirely novel in every other characteristic.

The reason it's not predictive, in my opinion, is because there are so many other things to take into account, and so many things that remain unanswered. We don't know how the fee market is going to play out. We don't know how Bitcoin's privacy characteristics, which are rather weak, are going to play out. And most importantly, we don't know how the geopolitical environment of currency wars is going to play out

in the broader $150 trillion market that is the planet. And Bitcoin isn't exist in a vacuum. It exists in that soup of competing forces. And how it plays out will depend on a lot of other factors of which Bitcoin's inherent characteristics or design tradeoffs are only a small, small part. No one can account for unforeseen events. How does Bitcoin respond to a pandemic? That's not a question we were asking. ago. How does the dollar respond to a pandemic? You know, what is China going to do next? We don't know

the answers to any of these questions. And the space, the geopolitical battle of currencies has been heating up for a decade, but it has now reached a point that we've never seen before. So, you know, that's why I think these models, interesting as they are, are basically operating on only a very, very small part of the broader picture. I think there is a tendency in our industry to look for easy, comforting answers and take things as gospel. I think that's a very dangerous tendency. This is still an experiment, and it's gone better than I anticipated and is astonishingly intricate

and operates very well. But that doesn't mean that it will always go like that, and it doesn't mean that it can't stumble. Yeah, so this is actually where I wanted to take the conversation next, is to ask about these different geopolitical forces right now, because obviously with the coronavirus and this unprecedented quantitative easing, and now this recent announcement by the Fed that they're going to target an average 2% inflation rate. And if that means letting inflation run higher than that for a little while,

then that's what they'll do to achieve that. So given all these factors or any other macro forces that you see that could intersect with Bitcoin in an interesting way, how do you think these things will affect Bitcoin's adoption and price over the next one or two years? I mean, Bitcoin is now such a large, like from when we were in it, way back when it was worth $10, like the evolution of Bitcoin or Bitcoin getting to this level. of adoption, liquidity, awareness. We've got a bunch of macro folks like Raul Powell and others really digging in and talking about Dant Puro. These guys really dig in, talk about Bitcoin from a classical, like, macro perspective. Bitcoin is becoming intertwined with everything.

As Bitcoin grows larger and larger, it becomes part of every geopolitical conversation. It becomes part of every currency conversation, et cetera. So I think that when we look towards Bitcoin's future, it will be intertwined with many different actions in the economy. I remember back in 2013, I think it was 13 where Cyprus was the big narrative in Bitcoin about how Bitcoin could help the Cyprus population for them to get access to basic fundamental economic rights of like storing value and being... Yeah, the bail-ins that were happening at the time. They got a hair on their bank accounts. And that was a big narrative driver for Bitcoin back in 2013. And so I think like as Bitcoin grows larger, we're seeing Bitcoin hit the Bloomberg headlines on a weekly basis, which is incredible.

I mean, I remember that I remember in 2014 we went to Bloomberg and we're like, wow, this is going to be one of the first times we talked about Bitcoin at Bloomberg. And, you know, to see it evolve as far to where it's part of like, I mean, Trump, even the president of the United States talked about it. You also had, I feel you, Andreas. No, I mean, I'm thinking back when you said 2014, I'm like in 2014, I'm like in 2014, Bloomberg invited me as a financial analyst. I mean, imagine how how empty the bowel was. Well, Andreas, you're actually a really great speaker for Bitcoin, so I wouldn't, I wouldn't be so self-deprecating. But actually, I think when you covered your face, I thought that was in response to Dan's comment about Trump tweeting.

Well, no, no, not. But, I mean, that too. Yeah. That too. Anyway. Yeah, we have Jerome Powell, the chairman of the Federal Reserve, say that Bitcoin is a speculative store of value. I mean, that's incredible. Like, we've gone from, it's a very nerdy, very niche group of people on Bitcoin Talk forums to the, to the highest

degree of awareness in terms of like the big stakeholders in the mainstream economy. So Bitcoin will be intimately involved in many major geopolitical conversations in the future as the TLDR. Yeah, you guys. You mentioned the Fed targeting average inflation. rate of 2%. And I found that fascinating because the word average is very misleading, because most people have an intuitive understanding of what the word average means, and that intuitive understanding is almost always completely incorrect. Let me give you an example. The average person has a greater than average number of arms. Why? Because there are a lot of people with one or no arms. And there aren't that many people with three, which means that two arms is a greater than

average number of arms, not the average. The average is 1.8 or something like that if you do the math. And this fact relates to the Fed in a sideways manner as follows. In order to get an average of 2% given the fact that over the past 10 years, we've been dragging along at somewhere between 0.5 and 1.5, that means that they have to go way above 2% in order for the average to calibrate of 2. And so when people hear, the Fed is targeting an average of 2%, they think, okay, so they're going to set the rate at 2 and that will be the average. No, they're going to have to set it much higher in order to drag it out in an environment where there are very, very strong deflationary pressures at the moment. Deflationary not because of value appreciation of the dollar, but because of a catastrophic

collapse in demand, which is the same kind of deflationary thing you saw in the lost decades of Japan, the bad kind of deflationary pressure. So in the face of catastrophic collapse and demand, because apparently people who don't have money can't buy shit, the end result is that the Fed has to pull much higher than 2% to reach an average of 2%. This is going to have really significant consequences because when you apply these types of percentage numbers to an economy the size of the United States

and you have the momentum of that economy dragging it into the future, when you realize you have overshot that target, That's because you're on the other end of the elbow of the exponential curve and it's way too late. So this is very dangerous territory. And it's unprecedented. I think the word unprecedented during pandemic has been overused. But in monetary terms, we are going through a monetary pandemic that is indeed unprecedented. And nobody knows how that's going to play out.

So when I used to start my speeches about Bitcoin, I used to say, let me tell you about the world. most radical and unprecedented monetary experiments. And it's not Bitcoin. It's Fiat. We have never done this shit before. This is a system that has only existed for 70, 80, 90 years. And we don't know how it works under the current conditions any more than we know how our climate works of 450 parts per million of carbon dioxide.

We've never been here before. It might work great. but it's very dangerous when you're talking about $150 trillion economy when the answer is we don't know. And one other thing that I wanted to ask about the future and where things are going and this really intersects with our conversations about things, the economy going kind of in a more deflationary direction, such as what happened in Japan versus inflationary. So we're seeing these new innovations come online next year, such as crack and financial, which is the, arm of Cracken that will be opening as the first crypto bank. And as such, it will not conduct fractional reserve banking and it will not lend, which obviously is not how normal commercial banks operate. So let's say over the next 10 years or even five years that, you know,

there's an increase in the number of crypto banks that exist and they do not engage in fractional reserve banking. And that becomes a big trend. How do you think that would change the economy? Would it dampen entrepreneurship or, you know, I just wonder, you know, we've been saying that Bitcoin can have a deflationary aspect to it or disinflationary, as Dan mentioned. And we've been talking about the downsides of that with, you know, what happened in Japan. And yet at the same time, we also know the downfalls of inflationary economies. So when you throw this into the mix, what do you think will happen? While Cracken may be full reserve, there will be other banks that decide to be fractional reserve. and they'll compensate the risk that their depositors are taking to giving them an increased yield.

Right, but those won't be crypto banks because to qualify for the charter that Crack and Financial got, they have to keep full reserves. So you're talking about like a normal bank? Yeah, I'm talking about how in a, if we're competing for customers, you're going to have full reserve banks. You're going to have fractional reserve banks. And there are different advantageous, you know, setups with each one. And with the fractional reserve banks, they're going to have certain, Where they lend out there, you deposit your money at a bank, they take those deposits and

they lend them out and they give you a return. It's likely that those banks will be able to offer you a higher rate of return than a full fractional reserve bank that does not lend out any money. So there are advantageous and disadvantageous traits of both a fractional reserve and full reserve bank. With Cracken, we see this as an opportunity to layer on many other new types of functions for our customers. We are now much more tied into the bank.

system, we can get around certain sort of choke points in the regulatory of models where before we would have to rely on someone else. So now we can have a more direct relationship with the mainstream economy. That way we can offer more services to our customers. There's a wide variety of things that we're exploring there. I can't really dig in or give any sort of concrete details as to what that feature or what that function might be. Just know that this is a giant leap forward in terms of a much more intimate, deeper, stronger tied to the mainstream economy that enables us to offer more crypto services. I want to add to that, which is the fractional reserve banking is tied very, very closely to

the monetary policy. If you take something that has the monetary policy of Bitcoin, lending it out is an extremely risky business, very, very, very risky. not just for the lender, but also for the borrower. Taking out a loan in Bitcoin that has to be repaid in Bitcoin, given both volatility, the opportunity of a FOMO bubble event, appreciation storm,

the overall deflationary characteristics, this is not a monetary system designed for lending. I think one of the challenges we have in this space is that people take a monopolistic money system that they understand, which is the fiat system, 194 countries, 194 flags, 194 colorful currencies,

and monetary policies. And they think of that in terms of a zero-sum game or a winner-take-all system. And from that perspective, you would arrive at the conclusion that, okay, so when Bitcoin replaces all money, then X happens. And I don't think that's ever the case.

I think, in fact, that what Bitcoin did was that It created a mechanism by which various types of monies can be created with various types of monetary policies. Bitcoin has an extremely opinionated point of view on monetary policy, which is very suitable for certain things. But I don't think that becomes the monopoly dominant system. I don't see any reason why it would. It can become the dominant system for saving. But that doesn't mean that there aren't other monies, both national.

Fiat and other monies that exist in other cryptocurrencies. And those may have very different monetary policies and may offer opportunities for lending and things like that. Now, that will mean that they're not a sound money. So I'm not really worried about the scenario of what happens if all money is Bitcoin and therefore lending and entrepreneurial activity stops. Not even what happens if Bitcoin is the dominant form of money.

We are so very far from that and don't really have the tools to analyze it. I think we're past the era of a limited number of monies in our planet. We are now in an era of many different systems. And again, this is very controversial and I keep getting flag for this. That doesn't mean that's what I want. That doesn't mean that's what I hope for. I'm simply recognizing what is actually happening, which is humans in their irrational stupidity,

are going out and creating monies with stupid names. names that they're giving to their friends and other people, and then they're pursuing these things, even though they most likely have very, very poor value characteristics. I'm recognizing that this is happening, and I'm recognizing that this is part of human behavior and will likely continue to happen. And we just have to accept that. That doesn't mean that Bitcoin is any less in exactly the same way that the Zimbabwe dollar doing stupid stuff with their economy doesn't.

change the U.S. economy. Just because there's other money out there that is doing other things doesn't change the value proposition of a money that has a different monetary policy. There can be other cryptocurrencies doing very, very crazy monetary policies that doesn't remove the value of Bitcoin. But it also doesn't mean that the others are going to go away. They're not because of human nature. Yeah, I do think the experimentation allows us to explore in like a Black Shoals model. ask way of like what monetary policies don't work. And it also explained flexuals?

A black sholes models are like simply a random walk. Like how we go through pricing options. It's how we look at modeling out future steps. So we go, okay, well, what if we took every single random variation from this current moment of a price and modeled that out? And so with these different, you know, the different cryptocurrencies that have existed over the last eight years that I've been in this space, I mean, I've seen, I've seen about like 10,000 cryptocurrencies come and go.

So we've certainly seen, like, that is never going to stop. There will always be new cryptocurrencies created from a more Bitcoinery perspective. I mean, I've tried out things like I've owned Ethereum. I've mined prime coin. I thought prime coin. Andreas probably remembers that. It's a coin from back in the 14 era a long, long time ago. But it's...

Has something to do with prime numbers. Yeah, using proof of work to find prime numbers. I thought it was more useful back when I didn't. understand proof of work fully. These were all experiments, and there's so many of them, that's why I call it more of like a black shoals, because there's so many random variations of monetary policy, block size, proof of work, proof of stake, hybrids, hybrid proof of work, proof of stake were really popular back in 14. And so we've seen what doesn't work. And I think that definitely reinforces my belief in my personal opinion that Bitcoin is the

largest innovation in the space. For me, it continually reinforces that Bitcoin's design decisions were made properly as we see it continue to thrive and grow. And we don't know what that means in the future if it'll continue to thrive and grow, but it's certainly done very well up until this moment. And will Bitcoin be the only currency in the future? No, but my personal belief is that it will be the predominant one. If it accumulates the largest amount of value stored in it, then it seems to be indicative that that will also be used in the medium of exchange function, where if I know that Andreas and Laura both have Bitcoin, it's likely that they will accept Bitcoin from me versus, you know, this very, very bifurcated world in the future

where let's say there's 10,000 currencies that were basically back to barter. If we have like a thousand different types of currencies or 10,000, I'm not sure if that's really reflective of like a new money which has superior characteristics to all previous forms of money. If you, if that would be the case. Yeah. I think one of the things that changes dramatically is when the switching costs between different forms of money drop to near zero. And then the major cost is the time value of money for the time that you hold a specific

money, which may be rather weak, versus the medium of exchange opportunities that that gives you, may actually change this equation of. There may be more types of money, but if that becomes a routing decision that your wallet makes automatically, then we may see a completely different conception of money, although I do agree with you. What's fascinating to me is that Bitcoin in its current conception, which appears to have perfectly chosen all of the parameters or most of the parameters, very neat. in this cohesive way, it is in itself an example of survivor bias, meaning that the reason we talk about Bitcoin and its parameters is because we don't talk about the 30 currencies, private cryptography-based currencies that came before Bitcoin that

all failed because one of those parameters wasn't set up correctly. We talk about Bitcoin because it's still around and therefore has proven through persistence, that those parameters sustain it. And the longer that narrative continues, the stronger it gets. It's surviving is one of its measurable characteristics that strengthens his possibility of surviving in the future. And the narrative that a newbie hears, where they hear Bitcoin's dead, again.

And then they find out that's not actually true and that causes a moment of cognitive dissonance. What do you mean? it's not dead. I thought it was dead when the Japanese CEO was arrested, et cetera, et cetera. That moment of cognitive dissonance is a very strong point of narrative that reinforces the idea that Bitcoin is perfectly tuned, at least in the current context we live in. All right. So I honestly, we can just go forever. I honestly really did have quite a number of other questions that I didn't get to. But I think through the, you know, various comments we've

made, we managed to touch on all the topics. This is, I think, the longest episode I've ever done that conversation just was super fascinating and kept going. However, we should give the listeners more to look up if they're interested in learning more about this. So where can people learn more about each of you? And where do you think they should look if they're interested in to learning more about Bitcoin's monetary policy? I guess I'll go first. You can find me at Dan held or find me on Twitter at Dan Held. And I wrote an article about Bitcoin's monetary policy that dives into the more metaphysical, kind of a little bit more abstract idea of that Bitcoin is, you know,

Bitcoin is the best application of information theory of money. So I've got a couple articles on my blog. If you want to read those to give you a more informed, a deeper dive into monetary policy security models. So I wrote an extensive piece on Bitcoin security model and other aspects of Bitcoin. And then on Twitter, if you want more soundbitey, very kind of more quippy quick hits on Bitcoin, that's where you're going to find that sort of content. You can find me as A-A-A-A-A-A-N-T-O-N-O-P on Twitter and on YouTube where I have 500-some videos on various topics around Bitcoin. Honestly, monetary policy isn't a topic that I talk about a lot.

Most of my focus is on the technology and it's social and political implications on the future. So if that's interesting to you, then you can find that all on my YouTube channel. Great. Well, thank you both so much for coming on chain. This has been such a pleasure. Thank you, Laura. Thanks, Laura. Thanks so much for joining us today. To learn more about Andreas, Dan, and Bitcoin, check out the show notes for this episode. forget, you can now watch video recordings of the shows on the Unchained YouTube channel.

Go to YouTube.com slash C slash Unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yun, Daniel Ness, and the team at CLK transcription. Thanks for listening.