We Study Billionaires - The Investor’s Podcast Network - BTC059: Bitcoin is Freedom w/ Nic Carter (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to this Wednesday's release of the podcast where we're talking about Bitcoin. On today's show, I have a major thought leader in the space, and that's Mr. Nick Carter. Nick has written numerous articles on Bitcoin. Some of my favorites were the impact on Bitcoin energy consumption and ESG, how Bitcoin is a peaceful revolution, and how Bitcoin has the most robust settlement of assurances. And these are just to name a few. On today's show, though, we cover a range of topics.

Starting point is 00:00:28 We talk about the global macro situation. We talk about Nick's thoughts on policies moving forward. And we also talk about Nick is a venture capitalist and what his thoughts are with Jack Dorsey's recent comments about VCs having a conflict of interest when it comes to Web 3.0. We cover these things and many other topics. So without further delay, sit tight and get ready for my interview with Nick Carter. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. All right.

Starting point is 00:01:12 So like I said in the introduction, I'm here with Nick Carter. Nick, welcome to the show. Hi, Preston. Thank you. Long overdue for us to have a conversation. This is long overdue, Nick. I have no idea how it's taken me this long to get you on the show. But I'm glad that you have made time.

Starting point is 00:01:31 This is where I want to start this off. We're getting ready to start 2022. In fact, whenever this air, it is going to be the start of 2022. What is your general sentiment of Bitcoin fundamentally where we're at? Do you see it as a positive? There's people out there saying that the community is getting toxic, but at the same time, you're seeing all this progress happening fundamentally. So what is your take on where we're at here at the start of 2022 and just kind of take it away from there? I think all risk assets have suffered to a certain extent ever since the world started to become

Starting point is 00:02:10 much more concerned about rate hikes. And Bitcoin was not immune from that, right? It wasn't exempt from that. And so I think really a lot of it is just macroeconomic in nature that we've gone sideways for a long time here. And so you see what that does the sentiment. It's not just Bitcoin, it's just everywhere in the crypto community. There's a lot of infighting, a lot of chaos. and Discord. I don't see that changing necessarily until it becomes clear that either the Fed isn't going to taper and they're not going to hike. I think it's really just a macro thing. At the same time, yeah, you know, Bitcoin is getting more institutionalized, more enmeshed into the world of finance and gaining more credibility by the day, the literal government adoption of Bitcoin. That trend isn't

Starting point is 00:02:59 going to arrest itself anytime soon. But, you know, I think these are just the periods in time where you have to sit tight and and just wait for things to happen because, you know, we've had like a delirious year. It's been a crazy year and it can't always be up only. But I think most Bitcoiners understand this is kind of a long-haul type thing here. So, you know, patience is virtue. And when we look at the performance over the last year, I'm doing this really quickly on a chart as I'm talking to you. It looks like we're up, what would it be close to, what I'm looking at

Starting point is 00:03:39 for 2021, which, you know, I mean, it's not a bad year, but I think it's not what everybody was expecting to see. I really like the comment that you just made that the broader market is the macro backdrop is maybe what's driving this sideways action. And I agree with you on this. When you look at the fixed income market, like all the duration is selling off. Well, most of the duration is selling off, even though the federal funds rate has still stuck at zero. But when you look at the magnitude and the size of all those other durations that are selling off, because of these inflation prints that we're starting to get, that is turbulence for anything else that's, you know, when you're comparing it to Fiat. So I'm assuming that's what you're getting at with your comment.

Starting point is 00:04:26 Luke Groman says much the same thing. He thinks about stocks in a duration sense as well. If you think about like your unprofitable tech stocks where you're discounting a lot of growth and a lot of the cash flows are coming in the distant future, those have also suffered. And I think as inflation increases, it's not just that you know, you have to more aggressively discount those future cash flows. It's that you just have less certainty about the future. You know, Bitcoin, for better, for worse, it's pretty correlated with those assets. You know, it has a very tight correlation with, like, the flagship arc invest portfolio. And that was kind of something I was always a bit concerned about, was, you know, Bitcoin behaving more like a Tesla than a gold. Obviously, I think

Starting point is 00:05:15 it's got combines qualities of the two, but that's the flip side of this becoming an institutionalized asset class, which is it is very accountable to the macroeconomic eddies. It's not just an asset in its own right. And you do see the correlations. Since 2020, Bitcoin has shown a positive correlation or risk assets. And for better, for worse, that's sort of where we stand. Meaningful amount, especially during the sell-off in early 2020, but it's remained positive since then. And I think that took a lot of people by surprise. So when we talk about the fixed income space selling off, it's no mystery as to why. It's because we're actually getting inflationary prints in the basket that the governments are taking their measurement in. So first of all, talk to us about your opinions on this basket. Do you buy into the idea that the basket that they're showing you inflation is grossly miscalculated and to the benefit of the government so that they can keep issuing debt? very low yields. Just in general, give us a broad overview of your thoughts on inflation and

Starting point is 00:06:24 particularly the inflation prints that we've been getting this past eight months. With regards to like CPI methodology, people like to make fun of shadow stats and the chapwood index and so on. Those are really common targets on FinTwit for derision. I think the truth is in the middle, not to be both sides kind of guy or anything. Does the BLS have a clear incentive and effectively a mandate to take a very sort of minimalistic view of CPI and reinterpret the basket in sort of a favorable way. Of course they do. Is it, you know, as egregious as some of the worst critics make out? Probably not. But I fundamentally don't believe in a basket of goods that can represent inflation. Inflation is a completely local phenomenon. So everybody's

Starting point is 00:07:17 composition of spending is completely unique to themselves in their household. So, you know, a lot of people are indexed. People are indexed to different things. Like some people, the most of their expenditures go on rent and student loans. Other people, it's health care, other people, it's their mortgage. It just completely depends. It depends on your real estate market. It depends on where your lifestyle is. You know, so I just, I don't feel that a single number can capture, you know, the turbulence of the economy in terms of of the purchasing power of your dollars. So really the only honest way to interpret inflation is to construct your own index and looking at your own real estate prices and your costs of health care

Starting point is 00:08:00 and your cost of education. And it totally depends on your circumstances. I know that's not, you know, an easy thing to do. But certainly CPI is just not representative for most people. And if you look at what has gone up enormously, it's health care, it's education, it's rent, you know, those are incorporated into CPI, but probably with weightings that aren't representative for most normal people. So yeah, I think the idea that you can compress this economy-wide output into a single figure is just preposterous. And you also have these like games that, you know, the press will play like where one month they'll pick, core CPI, they'll exclude food and energy for some reason. They'll pick alternative indices.

Starting point is 00:08:49 And, you know, there's like a half a dozen different inflation indices that they use. And they'll selectively pick the one that's like the least, that's increased the least in the last period. And of course, if you have like a dozen or a half dozen indices, you can always, you know, pick the most favorable one. But, you know, at the end of the day, like we're looking at roughly, you know, seven to 10% year over year declines in the purchasing power of the dollar. That's where we stand. That's enormously high. That's the highest in effectively living memory for most people. And that's incredibly destabilizing. And that wasn't forecasted. None of our economists anticipated that. You know, a lot of bitcoins anticipated it. But your establishment economists failed to predict that.

Starting point is 00:09:36 And there should be a reckoning right now. But instead, we have a number of deflections. and denials and attempts to misrepresent what's happening. And I think people are seeing through it. I think people are fed up and they're seeing through it, but we're seeing a number of excuses, which don't make any sense, basically nonsensical excuses, coming from the White House,

Starting point is 00:09:59 from the highest organs in our government, and it's just kind of obscene because the relationship is pretty straightforward, and they're trying to misrepresent what's happening here. Let me ask you this. Let's say we could snap our finger and COVID would literally just disappear. Do you think we would still have the supply chain impacts that are happening right now, even if COVID was not a thing? Yeah, I think COVID was a very useful kind of culprit or pretext. But the truth is, if you look at the numbers, like the supply chain is stressed

Starting point is 00:10:36 because there's a record demand shock. You know, the supply chains are functioning at capacity. People, you know, they take the pictures of the ships and they say, oh, look, you know, we're bottlenecked. These bottlenecks are supply chains not working properly. If you look at the numbers, the ports are moving record amounts of volume and cargo. So, you know, what's happening here is, okay, maybe there's some COVID-related restrictions, but what's really happening is there was an enormous, enormous demand shock based on these fiscal measures which printed the equivalent of 25% of GDP in some quarters in 2020. I mean, you're looking at enormous outlays. You're looking at, you know, federal net outlays as a share of GDP surging to 30% for 2020, where the baseline was 20%. You know,

Starting point is 00:11:27 so you're just looking at gigantic government expenditures, the likes of which have never been seen before, only comparable to, you know, absolute total war situations where the government commandeers the economy. And of course, those dollars are, they're not financed by like foreign creditors. They're financed by the Federal Reserve. And, you know, they make their way into the economy in a very direct way, in a direct to household way. And then those households, you know, spend that money on stuff, whether it's electronics or cars or luxury goods or whatever. And then the symptom of all that is, oh, the supply chain is stressed. It's at capacity because people are moving records amount of stuff around because the U.S. government paid us all to stay home and buy

Starting point is 00:12:14 our widgets and our knickknacks. And so, of course, the supply chain looks stressed because there is a huge demand shock, which originated with this monetization of the debt. And, you know, that's clear with any data that you look at that there was, you know, a massively out of the ordinary level of expense, which is kind of an ongoing thing now, it appears. And so, of course, that's stressed everything because on the one hand, you're printing dollars out of thin air. On the other hand, you're trying to buy real-world resources, and the world can only produce so many of those resources in, you know, a given amount of time. And there's only so many widgets and knick-knacks that the world can actually produce. So all of the transport and the supply chain

Starting point is 00:12:59 look stressed as a consequence, and the prices of those goods goes up because there's more money searching for fewer goods. It's very clear that that's what happened. And I think if you just look at your chosen variables depicting what the supply chain is doing, you'll see these various hubs in the supply chain. They're not operating below capacity or below where they were in 2019. Many cases, they're above that. They're doing record capacity. So I think the supply chain deflection is a pretty vexatious, almost a lie. I mean, I think it's really deceiving and it doesn't represent reality. And I think you're mistaking the symptom for the disease. And the disease was the enormous, enormous fiscal impulse. And the symptom of that is supply chains looking stressed. So, Nick, in your opinion,

Starting point is 00:13:49 this isn't transitory, or is it that's just depending on the policy response that comes next? Well, I don't know. I can't like commit to this not being transitory. I think the fact that the Fed has retired that term is enough egg on their face. Obviously, inflation is never transitory unless you're on the gold standard. Inflationary events historically were transitory in the sense that you would get deflation to counteract the inflation and the overall price level would return to its pre-inflationary equilibrium. That's what truly transitory inflation means. In our case, maybe we're going to have a burst up to 10% that'll settle at 5%. That's not transitory. That purchasing power loss is permanent. You've permanently lost purchasing power to an aggressive rate. So it would have only been transitory if we'd experience deflation on the other side. And that's literally what used to happen.

Starting point is 00:14:46 If you look at inflationary episodes in the pre-fed U.S. history, the U.S. dollar started, I want to say, in 1790, fast forward 120 years from 1790, and the dollar starts an end at the same price effectively, right? You have the same purchasing power at the start and the end of that period from 1790 through to 1913. Of course, there were inflationary periods where lost purchasing power, and then there were offsetting deflationary periods were returned to the equilibrium, right? So that's sort of what happens in a non-central bank system. The same is true of the British pound.

Starting point is 00:15:29 There was a 200-year period where the British pound started and ended the same purchasing power effectively. And so in a sort of non-centrally controlled economy, things tend to reset with sort of benevolent deflation, deflation that's not actually damaging to the economy. But obviously, though, was never what we were going to get. we were not going to get offsetting deflation here. So the transitory thing was just like a really sketchy kind of wordplay, I think, because the purchasing power loss was permanent. But,

Starting point is 00:16:00 you know, if I look now, it's, you know, it's more of a question of looking at incentives. And I think the government's incentive is absolutely to run inflation hot. A, because we've normalized these fiscal expenditures and poliative handouts as a routine policy action. Like, who knows what we're going to get build back better, something else. But it seems normalized that the government's role in the economy is fundamentally stepped up to a level that it's basically never been in peacetime. That appears to be politically normalized, frankly, on both sides of the aisle. And to reset our enormous debt overhang, you know, sovereign debt level, I think 127 percent right now, to get that to a more sustainable level, it's not sustainable right now, you have to have this

Starting point is 00:16:47 period where you inflate away the debt. And you know, you have to do that soft default. The choices are a soft default or a hard default. And we're not going to have some incredible burst of GDP growth unless we discover nuclear fusion or something. So the only way out of that is to hold interest rates low and have an inflationary episode, but one lasting a decade or more. That's how we got out of that pickle, you know, in the 1940s. It had very significant inflation for a relatively long time. and that's kind of the only way out. So I don't know exactly how that's going to be engineered, but that appears to be the political sort of mandate that's kind of unspoken that is generally dictating like policy

Starting point is 00:17:30 outcomes. I guess when you look at where we're at right now, relative to that scenario back then, it almost seems like we have compressed rates even more relative to the spending burden that we keep piling on top of it. So to come out of this in a way, like you said, at least a decade, probably more like two or three decades, how in the world could they possibly do anything like that with how quickly information flows and how readily available it is? I mean, look at us. We're having this conversation that's going to get blasted out to millions of people, and they're going to be armed with this idea that you have a 400 basis point spread between

Starting point is 00:18:14 the inflation rate that they're publishing, which isn't even probably the real rate, it's probably higher, versus the interest rates that they seem hell-bent on pushing even negative in nominal terms. That's the thing which I think isn't priced in, basically, is like information flows really quickly and there's this ability to question official narratives in a really efficient way. and I think markets respond more quickly. Markets just act more quickly now. They're trying to anticipate the future really quickly. And everyone is now where they have these historical case studies in mind. They probably didn't live through the 70s, certainly not the 40s. Not a lot of people today,

Starting point is 00:19:00 have a good memory of what it was like in the 70s, especially not a lot of traders. But I think, the realization that monetary repression is underway, that happens quickly, that happens more quickly, and people are able to be more dynamic. And there's also just more liquidity in sort of alternative instruments. There's more ways to divest from the dollar if that's what you want to do. And that's not just the case in the U.S., but that's the case everywhere. And that's where I think a highly liquid crypto market comes into play, which is to say everybody can hold their wealth on their person without owning bars of gold or whatever in a really effective way. And so they can take the off-ramp from their state money system into an alternative

Starting point is 00:19:53 system where they themselves have custody. That's never been the case before. So if you look at why Turkey has tilted hard against crypto as they've been in. in the midst of a currency crisis with the lira. That's because the crypto market poses a real threat to the lira, right? That's not a secret. That's clear. And I don't really think the dollar is under threat necessarily, but certainly people can desert dollar-denominated debt and dollar assets, you know,

Starting point is 00:20:23 quite efficiently these days. And there's this, you know, informational economy, which isn't gate kept in any way. There's no gatekeepers behind the scenes on TV saying, okay, well, don't question, you know, Treasury's official narrative. Don't question the Fed's narrative on this. You know, it used to be just like three channels on TV, right? And they were all sort of institutionalized. And now, you know, we have a much more direct-to-consumer informational economy. And I think people like Linaldon and Luke Groman and yourself, like, that is a way to get high-quality analysis. to regular folks in a way that's not completely subservient to institutional narratives. But frankly,

Starting point is 00:21:07 you know, the establishment doesn't do itself any favors because they are peddling claims that are so obviously false. Like the various narratives on inflation, whether it's supply chain, whether it's to do with monopoly power, whether it's to do with corporate greed, like these are obviously false narratives, and it's just a matter of pointing out why they're false. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

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Starting point is 00:25:28 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Let's talk a little bit about global policies and politics and other nation states, things that maybe you find interesting. I know there's a lot of talk about El Salvador. Is there anything else that you see happening around the world

Starting point is 00:25:52 that you think is worthy of highlighting? Well, the El Salvador case, as much as Bitcoin has talked about it, gets just very limited hype for how interesting it is. So definitely want to hit on El Salvador. The other thing that I thought was really interesting, I want to say maybe last month or earlier this month was two events in Myanmar are happening at the same time, in the same week. So on the one hand, you have the coup government, which is a Chinese-backed. coup, which happened earlier this year, they de-dollarized their settlement currency. They went from dollars to Chinese yuan. And so I think that's just very indicative of the way the world is going, especially in the Chinese sphere of influence is de-dollarization. That's one trend to keep an eye on. The other thing that happened virtually at the same exact time was the opposition government, the shadow government that was deposed in the coup adopted Tether officially as their currency, right? A stable coin, dollar-backed stable coin. And these two things happen at the same time.

Starting point is 00:27:02 So on the one hand, you have official de-dollarization and yuanification. And at the other, you know, at the same time from the opposition, you have crypto-dollarization happening because the opposition government wanted to raise capital from the Burmese diaspora. They needed an efficient settlement currency, but they couldn't be encumbered by, you know, let's say the Burmese banking system. They had to do something outside of that system. And I think this was such a telling little anecdote. You know, it's kind of two visions of the future. And it's what I would take to U.S. policymakers that are thinking about stable coins and think about the crypto market. They're very scared of stable coins, U.S. policymakers. They kind of hate them. They fear them. And they think stable coins are a threat to the the dollar. Some of them think that stable coins are a form of counterfeiting, et cetera. But just look at this little example. You have, on the one hand, this secular long-term threat to the dollar, which is competing currency and competing for global reserve status from a rising hegemon. And then at the same time, you have the dollar's reach is actually expanding through crypto rails, through stablecoins,

Starting point is 00:28:17 acting as extensions of the dollar. The stable coins are backed by dollars and then they're issuing claims against them that circulate on blockchains. And because they are circulating on these credibly neutral infrastructures with no censorship, hopefully, depending on the blockchain,

Starting point is 00:28:36 that is this frictionless way to distribute dollars to the world's population to places that need dollars and they need dollars in kind of a less encumbered way than sort of the good old U.S. dollar in the legacy system, which is very encumbered, very politically encumbered. And I just thought that was such a telling little story. And that's sort of like two, you know, two forks. And like, here's world one and here's world two. And like, which one would you sort of rather? Well, and I think it's also a case that you're making maybe to U.S.

Starting point is 00:29:08 policymakers as to how important it is to not take a similar approach that China's making with their you want and that a person can use the coin and not have to worry about the government necessarily seeing every single, or peering into the privacy aspects of it, peering into every single transaction because it appears like they don't want to be encumbered by the Fed clawing dollars back. And so they're maybe using, I don't, you said they were using tether. So now they can get immediate clearance. They can operate on those rails.

Starting point is 00:29:39 They know it's somewhat backed. I'm sure that could be a long conversation, but backed enough that they're comfortable using it as their primary means, and they don't want to be using the Chinese yuan that they know has all these privacy concerns. So that's crazy. I have not heard anything about this. I heard that they were using Tether, but that was the extent of it. I haven't really dug into it. Yeah, they apparently ratified Tether as an official currency. I mean, to the extent they have the ability to do that, obviously they're sort of out of power, so they're sort of government and exile type thing. But yeah, I think the greatest threat to the dollar would be the Federal Reserve, creating a CBC

Starting point is 00:30:19 kind of product, which is highly politicized, which takes these informal political policies, which are implemented, you know, through the banking system because there are political constraints to using banks, right? Like explicitly and informally. So, you know, you've had actual programs dedicated to politicizing, you know, the U.S. banking system. Obviously, sanctions are one, but more insidiously and locally of stuff like Operation Choke Point, whereas whole industries, there are deplatformed via payment processors through FDIC and DOJ requests to the banks directly. So that was a real formal program. Now, that's just institutionalized and it happens informally. So banks and payment processors know to avoid certain things. That's why the adult industry

Starting point is 00:31:10 is always being unbanked because payment processors know that they'll lose their banking relationships if they do that. And the banks know to turn the screw on the payment processors because they don't want an FDIC or DOJ investigation. So even though it's not actual policy, there's a politicization. So there's sort of sets of things you can do with dollars and sets of things you can't. And it's obviously, you know, arbitrary and at the discretion of the state. And now, if you have a CBDC and these rules get directly encoded into the physical cache that we use, you know, that's a really bad outcome, I think. Because it's all well and good to say, well, you know, we'll just censor the bad people. And, you know, you'll be fine as long as, you know,

Starting point is 00:31:58 you're not doing anything wrong. But of course, like, you're completely exposed to whoever happens to have power at that point in time. And so there's a good chance you yourself end up being censored. So, you know, the best thing the U.S. government can do with the dollar is ratify stablecoins and say, okay, we're going to give you access to the Fed window. So stable coins themselves will be able to back their liabilities, back the stable coins with Federal Reserve dollars, which they currently don't do. They only have commercial banking relationships and they own treasuries and things like that. So, you know, going that extra mile and allowing stable coins to be, you know, on an equal footing

Starting point is 00:32:36 with banks would be very powerful, but then not insisting on any political mandates for who can transact with a CBDC, for instance. So I think the best model here would be a public-private partnership where the stable coins get access to federal reserve dollars directly, and they act as these de facto dollar issuers, and subject to various kinds of oversight, such as many of the stable coin issuers already are, to be clear that, you know, depending on the stable coin, they'll be issued under the New York Trust Charter, or there's a Nevada charter, or their state money transmission regime. So there's a lot already in terms of regulation there. The worst case would be a highly politicized and highly surveilled Chinese-style CBDC, and it concerns me that

Starting point is 00:33:27 policymakers feel that they need to live up to the standards of the Sino CBCDC, because when have we ever followed China's lead on anything. Just because it might be technologically feasible, why would we look at something the CCP built and say, I want that too? How does that make any sense? I think the argument, and I completely agree with everything you just said, I think the other thing that would be the pitch to policymakers is, hey, this is all about retaining a network effect. So what's your competitive advantage in the marketplace, global marketplace, for people to want to use your currency over the alternative, which has privacy issues. Well, you got to set up the model the way that you just described, where the government, private partnership that you have at

Starting point is 00:34:13 the touch points is there. But beyond that, it can go in any direction, can be used by anybody at that point. And I know that that would be maybe giving up a little bit of control that they have today. But I think the argument is, hey, you still want to achieve. this network effect on a global scale, that's the one thing that you're going to have to give up relative to the competition that's out there with much larger privacy issues and concerns, because some other country will try to step into that role of offering the type of stable coin that you're describing, Nick, and if it's not the U.S., it's going to be somebody else that's going to start supplying that. And I suspect that the market would prefer that token

Starting point is 00:34:55 or that stable coin. And just look at the ratios. In terms of stable coins, the dollar has more dominance than it has in foreign exchange reserves ratios. So like in terms of international trade or an asset that's held by central banks, the dollar is somewhere between 40 and 60 percent, depending on what sort of metric you're using. In stable coin land, the dollar is, I want to say 95% plus of the denomination of all stable coins. There's some euros, there's some, there's some some yuan, there's some rupeas, but really there's not a lot. It's mostly dollars. And that's telling. And I think the pushback I often get from policy people is, well, you know, we want to retain

Starting point is 00:35:43 our sanctions ability. We want to retain our ability to do sanctions. And first of all, I think the effectiveness of sanctions is very questionable. You can point to examples where they failed and caused a lot of misery. Second of all, I think it's kind of effectively cheating by thinking that you can sort of deal with problems purely through the financial lever without dealing with the problem in meat space. And that's, I think, why sanctions are so popular.

Starting point is 00:36:10 It's seen as like a really cheap sort of hack and you can fix everything just by shutting off the banking system instead of having to go to war with someone. But also, you know, we've relied on them as our primary instrument of sort of power projection for so long now, we've abused our privilege as the underwriter of the global financial system that even our allies are now disaffected by sanctions. So our opponents and our enemies are actively building alternatives, and some have already built alternatives. Our allies are trying to build alternatives. When we sanctioned Iran,

Starting point is 00:36:47 our European allies built a facility to circumvent the dollar so they could do business with Iran called Instex. Now, it didn't take off, but what does it say that our close European allies were themselves trying to build tools, ends around the U.S. financial system because the dollar at that point had become so politicized is not a good sign. So I think our sanctions ability has grown really blunt with overuse, and it's just not necessarily going to be something we can rely on forever. And I think people are going to desert the dollar faster if as a network it becomes a network where certain paths aren't available. And the way to reverse that is through ratifying something like a stable coin. God, I love some of your points there. That is stuff that we need

Starting point is 00:37:39 as many people as possible to listen to. You had mentioned that you had some different comments on El Salvador and you wanted to go back there. What are some of the things that you're seeing there that maybe some others aren't talking about? So I'd love to see more scrutiny on the Chivo system, which is the public, the official Bitcoin wallet. Now, the interesting thing that's happening there is that Salvadorian financial institutions are gradually adopting Bitcoin as a transactional tool. It's not that all Bitcoin-related commerce in El Salvador happens through the official means. So it's interesting that Bitcoin has become normalized as a financial network in the country. And I'd expect that to continue and sort of to spread in Latin America, Central America.

Starting point is 00:38:23 And I think that's a very interesting trend that hasn't received a lot of interest so far. The thing I'm concerned about would be people that use the Chivo wallet have related to me that, you know, it's relatively easy to get bitcoins into the wallet, but then it's relatively difficult to get them out. the government is sort of custodying the bitcoins on behalf of the users, and then they have sort of a Bitcoin denominated claim, and then sort of in theory they can cash it out. The thing I would want to see would be, first of all, proof of reserve, proving that the liabilities are equivalent to the assets. That's a trivial thing to do. And then second of all, I would be concerned that eventually the exit valve would be shut off, or close.

Starting point is 00:39:12 and you would no longer be able to redeem your Bitcoin claims for Bitcoins, right? And there's no technological reason why it should be difficult to redeem your claim. Like it's very, very trivial. That's what every exchange does all the time, the processing their claims. And so I think, you know, the ultimate plan, and I have no direct knowledge of this, but this is what I would sort of look out for would be to eventually cease that convertibility, and end up with the situation where the government has accumulated Bitcoins and fails to honor the obligation to redeem the claims in the wallet for Bitcoin. The structure of the system seems

Starting point is 00:39:59 very favorable in terms of achieving that outcome. And obviously that wouldn't be the first time a nation state has sort of defaulted on its promise to redeem some asset for something else whether it's a currency board or, you know, peso dollar convertibility or something like that. But yeah, that's what I would be sort of kind of concerned about with Chivo. How about you have some thoughts on the interbank settlement stuff that's happening down there as well. Talk to us about some of those ideas. Well, I don't know how, you know, widespread this is, but to the extent banks are starting to use Bitcoin, certainly happening in El Salvador.

Starting point is 00:40:39 I think what you might expect to see would be just direct bilateral settlements of flows using Bitcoin as that bridge currency as opposed to the dollar. And, you know, this ties into what I was saying before with, you know, the dollar being this sort of highly politicized system with enormous sort of gating factors built in. At a certain point, if you're onboarded onto the Bitcoin network as a financial institution, it might be less frictional to use it as opposed to the dollar. infrastructure that you're already on, especially if you're holding Bitcoin balances on behalf of your users, which I think is going to continue to be the case. So at that point, you end up with a

Starting point is 00:41:22 regional settlement network based on Bitcoin as opposed to having to do your correspondent banking network where you do your various hops back to the New York hub. And, you know, that is something that very directly challenges the dollar and is a huge snob. This is all on Lightning? It could be both. I think honestly, on-chain would be, you know, more, probably more conducive. But, yeah, if you think about the structure of Lightning, it does kind of mirror the way that financial institutions have established channels with each other.

Starting point is 00:41:55 It's just, I don't know if Lightning can support, you know, significant volumes as of right now. This is what I would sort of expect to see develop in the next couple of years would be direct interbank settlements in Bitcoin terms, whether lightning or base layer, frankly. All right, this question I don't think you're expecting. What are your thoughts on Ethereum? When we look at just from a price standpoint, and it pains me to say this, the prices outperform Bitcoin since September of 2019 to where we are right now. And I have my own opinions, and I'm not going to express them from a technical standpoint

Starting point is 00:42:32 of why I keep talking about Bitcoin and why I think. it's a better solution. But I'm curious to hear your thoughts on Ethereum in general and why the price continues to outperform. And is this something that you think is going to continue to persist? And are there issues that you see with Ethereum in general? Or is there things that you see as it being beneficial moving forward? Yeah, I think a lot of the Ethereum price action has to do with new deflationary or disinflationary mechanic that they introduced with the IP1559. That is a mechanism that takes fees from usage of the blockchain and does this perpetual retirement of shares, effectively, of Ethereum. So it's like a business taking its revenue and doing a stock buyback,

Starting point is 00:43:25 is what I would compare it to. And obviously the Ethereum shareholders like that, and they like the commitment to a potentially deflationary monetary policy. I think Ethereum is suffering the effects of having done that because now the transactional experience on Ethereum is worse. And it's not to say that EIP-1559 increased fees, like it may or may not have. It looks like it certainly stabilized fees at a relatively high level. But the problem was that insiders massively benefited from that, right? Because if you have a group of people that primarily transact using Ethereum, and then you have a group of people that primarily holds Ethereum tokens that are sort of the investors, those are different groups of different interests.

Starting point is 00:44:07 What that EIP did was advantaged the holders of the token at the expense of the users of the system, right? And so it may not have been a deliberate mechanic to increased fees, but it certainly meant that higher fee rates significantly benefited holders and disadvantaged users, right? Because if you're paying $200 to make a transaction, a lot of people are priced out at that point. And that's a kind of Ethereum's always had this, you know, I consider a problem. Some people consider it an asset of this sort of solutionism, this sort of desire to tweak the parameters to get the perfect system, and really alter key features of the system in order to compete and show differentiation and introduce new features and things like that, which is,

Starting point is 00:44:59 you know, some of that I think maybe is tolerable, but in the context of a monetary asset that's worth hundreds of billions of dollars, any change you make, it's going to have very consequential economic outcomes for the stakeholders in the system. And EIP-159 is one of the most clear examples I've seen where it's like, whatever the technical motivations may have been, there was a very clear economic motive too, which was, let's change this system to a fundamentally deflationary one, and we're going to empower one group that is the key decision makers. We're going to disempower this other group. So Ethereum has this problem now where it has an enormous optics problem because the fees are just structurally high, and it's clear that the leadership has the power

Starting point is 00:45:47 to determine effectively where the fees are. They can change the block space. They can do all kinds of stuff. And then there's other blockchains that are now competing on the basis of being more centralized and having more block space and lower fees. And they've actually done very well relative to Ethereum in the last year. And so, you know, that's sort of there in this weird middle ground where they have this ability to intervene and change key parameters. But there's these other, like, even more progressive blockchains, which, you know, are more aggressive about changing certain key features and, you know, having low fees and things like that. And so Ethereum's in this awkward middle ground where they're somewhat committed to decentralization and, you know,

Starting point is 00:46:25 monetary credibility, but not so much so that they're able to fully compete with all this new breed of competitors. So at least, you know, as far as Bitcoin versus Ethereum is concerned, Bitcoin sort of knows what it is. It's very content to sort of remain that way. and its monetary credibility is absolute. Ethereum is somewhat credible, but not fully because they change the rules all the time. It has sort of a partial respect for property rights. The system changes a lot, so it has identity crises. And then it's always trying to compete with Bitcoin, but also trying to compete with all

Starting point is 00:47:01 of its other Ethereum killers. So it's a tough place to be in. Obviously, despite all that, it's done very well. but hasn't gained the most important asset, I think, which is monetary credibility of the last year. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:50:36 Back to the show. You know, beyond the 59 piece that you mentioned, making the monetary issuance tighter, basically quantitative tightening, they're also locking up the, the ETH one holders are locking up their coins into ETH2. And ETH II is producing more coins that aren't coming on to the market being paid in interest to validate blocks that aren't even, you know, really happening. Like that whole ETH two isn't even happening. For me, this is a little bit of the elephant in the room is can they even port ETH one into ETH two into this proof of stake system? Because it seems like every time that they're talking about like when this is going to happen, the deadline just keeps pushing further and further to the right.

Starting point is 00:51:24 and it doesn't appear that there's an actual technical solution to something that is a massive undertaking from a technological standpoint to perform. So as we look at this and we look at some of the mechanics of what they're doing to do this, I see it as just being concerning from a technical standpoint and maybe disingenuous as to what risk is there and when it's actually going to happen. I'm curious to hear what your thoughts are on the migration. I think there's always an incentive to downplay the risks, especially of a significant technological shift like that. I just sort of assume the migration will happen. It might be more belated than, you know, might have been message initially.

Starting point is 00:52:07 I think it will happen. And then the question is like, well, what does Ethereum look like after that? So then you have a proof of stake world. I don't think it was strictly necessary to move to proof of stake in order to implement most of Ethereum's agenda. It probably would have worked fine on proof of work, frankly. Proof of stake doesn't give you skill. ability. That's a total misconception. Proof-of-Stake is just an alternative way to determine who is the authority to organize transactions and create blocks in the system. There's nothing about proof of work that's inherently unscalable, nor is there anything inherent to proof-of-stake that makes it scalable. You have scalable proof-of-work and unscalable proof-of-stake. So it's a totally different, totally orthogonal. But what I would be concerned about in a proof-of-stake world is what we've seen

Starting point is 00:52:53 from a lot of proof of stake chains, which is the validation becomes pretty concentrated because owning a lot of tokens becomes tantamount to political power and discretion in the system, which is how like all legacy financial consortia work, which is your influence over the system is a function of how large of a shareholder in that system you are. Whether that's Swift, whether it's any of the financial institutions like the World Bank, or whether it's a private company that has discretion over transaction selection like PayPal. So that's sort of the default model. Proof-Stake takes you away from the proof of work model, which is a new alternative independent model, and it takes you back to the legacy model. So it beats me as to why anyone would

Starting point is 00:53:39 want to go back to the pre-proof of work pre-Bitcoin model, where all of a sudden now you have all these shareholders that can basically decide what's valid, transactional validity in the system. They can decide on the inherent rules of the system. And so that's where Ethereum's going with this merge, which I think is unwise. Because if you look at Coinbase, they've a huge fraction of ether between Coinbase and Crack and Binance and Whobe, you know, between the sort of top 10 largest exchanges, you're going to have a huge number of tokens out there. And that's fine in a proof of work world where owning tokens doesn't give you political power. But in a proof of stake world, it does. And all of a sudden, the exchanges and the custodians become these

Starting point is 00:54:24 key entities that can actually affect policy changes, right? That's not just me sort of idly speculating. Like, this has happened in proof of stake blockchains before. In EOS, infamously, there was a cartilization that occurred where the top validators were able to collude. In Steam, this is like an undercover example, but in Steam, Justin's son was able to actually commandeer the entire network by al-a-ang with the three largest exchanges where users held their coins. And, you know, the proof-of-stake people always come back and say, well, users will be able to run a node and they'll be able to do this, you know, they'll be able to participate in these pools. Fundamentally running a proof-of-stake node, especially with the requirements that are being messaged to us in Ethereum, it becomes

Starting point is 00:55:09 It's expensive, very challenging technically to run a node. And as a regular user, you're not going to want to incur the risk of getting slashed, for instance. So you're going to delegate your node or, you know, more realistically, you're going to just deposit your coins to a custodial entity that will stake on your behalf. And then it becomes like sort of a BlackRock situation where, you know, or Vanguard, where you maybe hold equity and Vanguard manages it for you, but they get to vote on your behalf. you don't get to keep your vote. So it's not a democratic thing where the vote is carried through. Ultimately, you know, it ends up like any of these other systems where there's a principle

Starting point is 00:55:48 and an agent and the entity that is custody in your coins gets to vote on your behalf, but they don't consult you. You know, Vanguard doesn't ask me what my position on Exxon is when they perform an activist campaign to alter the board composition of Exxon, right? And it's going to be the same thing. Like, you will have exchanges and custodial staking providers that will be able to effectuate policy on behalf of the individuals to deposit their coins. So that's the thing I'd be concerned about. I think there's enormous economies of scale in terms of running an exchange. There will eventually be significant regulatory barriers to entry, where there will be a class

Starting point is 00:56:31 of exchanges that are institutionalized and highly regulated, and it'll be very difficult to break into that. So, you know, that's the thing I'd be worried about is, you know, these custodial third party institutions gaining significant political power over these proof of stake blockchains. What do you say to a person from that camp that would then say, well, you're having the same issues with proof of work, with the consolidation of hash rate by these big companies and, you know, the individual, there's no way they're able to compete with the large company. How do you respond back to that. Yeah, my requirement isn't that like John Q Public is on an even footing with like a large institution as it pertains to validation, because that's never going to be the case.

Starting point is 00:57:17 There's always going to be institutionalization and industrialization of transactional processing. The question is, what is the competitive dynamic in the industrial validation industry? Is it very competitive or is it uncompetitive? Are there significant economies of scale or dis-economies of scale? Is it a market that's easy to break into or impossible to break into? And like how fragmented is the market just empirically? Now if you look at mining, there's constant churn in who the largest miners are. Right now, the North American miners are doing well because public markets have been good to them and they've raised a lot of capital. And so North America will be the nexus of mining. But mining is a very competitive market. All you need is

Starting point is 00:57:59 energy and ASICs. And there's tons of ASICs floating around on the secondary market. They're very easy to acquire. And like, what are margins like, by the way, also? Because that is an indication of the competitiveness of the industry. Mining margins are wide now, but at maturity, they're obviously going to be pretty narrow because anybody that believes they have an advantage can enter the mining market. Now, can anybody enter the being a gigantic crypto custodian market? Of course not. Like, it's already a very regulated industry. And it's going to become increasingly more regulated. You're probably going to see federal regulation for exchanges. I would expect to see that in the next year. It's, you know, the compliance burden becomes your biggest challenge. Has there been a lot of

Starting point is 00:58:43 churn in the largest exchanges or have there been a few exchanges that have been the largest for a number of years? Now, Coinbase has been probably the largest crypto exchange since 2012, so for about a decade now. So these things, it doesn't appear to me that the exchange market has this dynamism. In fact, it seems very, very sticky. And so, you know, that is the thing. to me, the sort of proof of stake validation marketplace of the industrial validators, that looks like a market with high barriers to entry, with significant dynamics which keep new competitors out of the marketplace, those bears are only going to get greater. And it looks like a wide margin business.

Starting point is 00:59:24 On the other hand, proof of work industrial validation, aka mining, that looks like a highly competitive market, one that's laced with political risk, which throws the whole market into upheaval periodically. China, Kazakhstan, maybe certain United States, you see these periodic bans. So that throws the whole market into upheaval. And I think that looks like a thin margin business at equilibrium. So it doesn't seem to be the case. And lastly, you know, energy is a sort of highly fragmented thing. There's not like gigantic pools of like unused energy laying around. It's more you'd have to go after these small little pockets of energy all over the place. And so I think the dispersion of actual physical resources needed for

Starting point is 01:00:05 mining is also accretive to a general decentralization of mining as well. So that's the distinction I draw there. What are your thoughts on Jack Dorsey's Web3.0 comments about VCs? Well, I think not that he owes us anything, but I'd like to see him express his thoughts in longer form than just Twitter, although I guess it's ironic to ask Jack to use long form. But, you know, I think there's something getting lost in the message there. I think maybe it's a very lossy kind of transmission because on the one hand I see his points, which I think the point he's making is if Web 3 promises to disintermediate internet services and devolve power back to the hands of users instead of Silicon Valley, why is Silicon Valley so aggressively investing in the ownership

Starting point is 01:00:59 of Web 3? And I think that's a very good question is, if you truly believe this is democratizing power over the internet and pushing power back to the edges of the network rather than the internals, why are you acting as if you will be the oligarch of that new internet? Your actions and your words are contradictory, right? I think that's the point he's making. Obviously, I am a VC, and we invest in what could be deemed Web3. But that's a contradiction I perceive, right? If we're claiming that users are going to be in control, why are venture funds investing in the ownership of these new protocols?

Starting point is 01:01:37 So clearly it looks like the legacy model a little bit. So I think that's the question Jack is posing is, to what extent are the narratives powering investment in Web3, like actually genuine narratives, or are they contrived? And then I think the Web 3 people are pushing back saying, well, you know, it's a fundamentally different model and end users will end up with ownership over these platforms. And moreover, just the very nature of engagement where you're using your private keys as your identity online, that is a more democratic model. And so structurally,

Starting point is 01:02:09 you're disempowering Silicon Valley tech oligoplies. That's also a pretty fair rejoinder, I think. But yeah, I'd love to see that debate in long form because sometimes hard to tell what Jack he sort of really means there. Hey, so to wrap things up, I want to kind of go back to where we started, which was in the fixed income space. So I'm looking for a critique or a counterpoint of how you see this. But when I think about things kind of falling apart within the global economy, I think it's between the dichotomy of these inflationary prints that we're getting versus the yields that keep getting compressed lower and lower. So like right now, today, the last print that we had on the inflation was 6.8 here in the U.S., the 10-year treasurer. is at like 1.4 for a massive negative spread. I suspect that if that persists, call it for another

Starting point is 01:02:58 year. Let's say we're at negative 400 basis points for another year. And the trend looks like it's maybe starting to separate even more than what we're seeing, where the 10-year treasury is going lower because it's getting manipulated down lower, and you have inflation kind of running even hotter and that trend persists. What type of time frame do you think that it can continue to run with such a massive negative spread before the fixed income market starts to throw a fit or starts to say, hey, this is never coming back. In fact, I think it's going to be even worse than the following year or two years from now because I think that's when you kind of get the moment, the aha moment and like the everyone kind of flips out and you start to maybe see the market

Starting point is 01:03:43 throw a major tantrum that I don't know how it would recover because the response is only going to extantuate those trends in those opposite directions that make the negative spread even worse. What are your thoughts on that idea? Do you have an opinion on what time frame that would have to persist into the market before maybe it starts going a little haywire? What are your thoughts on it? Yeah, I'll caveat this by saying I'm not an expert or even active in the fixed income market. whatsoever. I found it very curious, frankly. The question to me is, why are treasuries being priced as if inflation hasn't materialized? Why is that the case? What do they know? What does the market know that I don't know? Because it seems to be the case that anybody that's buying treasuries right now

Starting point is 01:04:33 is signing up to lose money. And I don't know why they would do that. Yeah, as you say, like, if you look at the numbers, like, I was just running this chart recently comparing the three-month T-bell to CPI. And so you're looking at a negative real rate of minus 6.8% right now. And, you know, if you look at the 70s, the worst it got during the 70s was about minus 5.7%. So you're looking at real interest rates that are as negative as they ever were in the 70s. And if you look further back into the 50s at a certain point, the 40s and 50s, when you had genuine monetary oppression, you had a negative of real rate of 10%. So we're kind of in that territory. We're not far from the most deepest and most aggressive monetary repression period ever witnessed in sort of the modern era of government.

Starting point is 01:05:24 And I've been kind of mystified by the fact that yields have stayed so low because you'd like to think that that's sort of one of the most efficient markets in the world. It's a huge market and the traders are presumably very, very well informed. So you'd imagine it's an informationally efficient market. So it's a bit of a mystery. And I think the only answer I can come up with is the market is buying these claims that there's a transitory nature to the inflation, that it's supply chain driven, that there's other exogenous factors which are influencing inflation like Corporate Greed is the new line that's being peddled. Although I don't know how anybody could believe that, frankly. But I don't even think Elizabeth Warren believes it. Or, you know, monopoly power,

Starting point is 01:06:08 which is a very dubious explanation for inflation. But I guess maybe there's a market feeling that there's sort of core characteristics which are highly disinflationary, like demography, right? The fact that Americans are aging, technology and theory, and that the economy is going to cool off a little bit here as this fiscal burst subsides. But my reaction to that would be there's structurally inflationary factors at play here as well, which is the normalization of stimulus as apparently just like a policy on a go-forward basis with or without an emergency that warrants it. And very material stimulus, you know,

Starting point is 01:06:51 significant fractions of GDP. De-globalization and the actual breakdown of sort of trade routes and supply chains stepped up hostility with China. Like if we do get de-globalization, that is structurally inflationary, I would say. So, you know, I think there are sort of these kind of permanent, and the other thing I would say would be a looming energy crisis, right? The fact that we've had such prolonged period of underinvestment in actual energy infrastructure due to political mandates of political requirements that we under exploit hydrocarbon extraction, whether you think that's for a good reason or not, the consequence of that is going to be that we're going to be able to produce less energy than we were previously able to. If the sort of green revolution, does not materialize, where, you know, this glorious vision of powering the earth on wind and solar, if that doesn't materialize, then we're going to have a structurally higher energy prices. And energy goes in everything. It's how you make fertilizer, which is how you make food. It's how all industrial society works. Is like energy is the most fundamental thing.

Starting point is 01:07:58 So if, as I expect, you know, we continue to have energy crises, that's also structurally inflationary. So I think we're looking at an inflationary next decade. And lastly, I think that's actually politically convenient for the U.S. even though it's probably costly in terms of the midterms. It's sort of one of those realities where you just get this enormous debt overhang, you have to deal with it somehow. And monetary repression seems to be the only way out. So, Nick, you write some of the most shareworthy articles in the space, in my humble opinion. And somebody in the comments asked this question, they said, ask him when he's going to write an article critiquing Fiat from an ESG perspective. I think you got a title in the making

Starting point is 01:08:40 there that would be hilarious and amazing all the same time. So I'm just going to plant that seed. I'm not going to ask you any more questions because you've been so kind with your time and doing this impromptu interview. I know I asked you kind of the last second and you said yes. And I just want to personally thank you for coming on the show and just sharing your thoughts. I learned so much from you for many years at this point. So I just want to thank you personally for coming on. Well, the feelings mutual press, and it's my pleasure, my honor to be on. So I appreciate it.

Starting point is 01:09:12 Hey, you have your VC company. You got Castle Island. And people, if you want to follow Nick, we'll have a link in the show notes to Twitter. I'm going to put a bunch of the articles that you've written that we were just talking about in there as well. If people want to check it out, I know your articles on energy are just phenomenal. Is there anything else you want to highlight for people to check out? Yeah, the only thing I'll promote would be my merch. This hat is a rejoinder to anyone that says Bitcoin is on American.

Starting point is 01:09:39 I won't name names. I know you're out there. Look, Bitcoin is as American as Apple Pie, okay? And it's important that Congress understands this. And so, anyway, you can get this on the brink. Dot shop. I designed it. And, you know, I can sometimes be seen wearing the hat.

Starting point is 01:09:57 I think if there's one message that I like to promote is simply that America is the center of crypto innovation, Bitcoin innovation in whatever respect, however you want to quantify, America is the nexus of this. Obviously, we're looking at a crossroads here in terms of do we double down on this increasingly politicized dollar? Do we surrender control to China's, resurgent monetary dominance? Or do we go for a third way where maybe it's a little bit more difficult in the short term, but we just embrace the crypto markets here in the USA. And I think that is the most prudent approach here. And there's $140 billion of stable coins outstanding. That's a market signal. The private sector has created this enormous settlement infrastructure for dollars.

Starting point is 01:10:47 With no state engagement or, you know, no state interaction whatsoever, forget about CBDCs. Focus on what the market has produced right here in the USA and lean into that. That's what I would tell policymakers. So you have mentioned on the Brink podcast, which I know you are on and you put out amazing content on there. We're also going to have a link to that in the show notes. People can check that out. I'm sure there's going to be a ton of people that want to listen to more of your conversations. And that's the spot where you can find it.

Starting point is 01:11:16 So make sure you guys check out the show notes. I'm going to have a lot of links in here to just link you to all of Nick's stuff. And Nick, thank you for coming on the show. My pleasure. Thank you. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires.

Starting point is 01:11:34 The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - BTC059: Bitcoin is Freedom w/ Nic Carter (Bitcoin Podcast)

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