This week we discuss: What are shitcoins good for? Can shitcoins help bitcoin scale? Do shitcoins take market share from bitcoin, or from each other? Plus, find out why backing gold with bitcoin is far more likely than backing bitcoin with gold!
Ahmed, you have a question?
Is there any potential for other cryptocurrencies, other than bitcoin, to play the role of daily currency - replacing fiat?
I mean, I fully see the case of bitcoin being uniquely different and better than others, but we do have this need for a currency to replace the fiat role and daily transactions and daily purchases etc. Somebody told me that ethereum could play this role. Obviously, I don't agree. I'm still thinking, what would be a good replacement to the fiat standard.
The answer is to understand the distinction between the settlement network and the payment network. This is really one key point that I had in The Bitcoin Standard. If you look at how many transactions are carried out every day, per second, I did this math in The bitcoin Standard, I think Visa processes up to 2,000 transactions per second all over the world.
Mastercard does something similar, probably a bit less but around the same range. You also have other networks and other methods of payments that add another few thousand. Probably, consumer to consumer payment, there's at least 10,000 transactions a second, conservatively speaking. I don't have this number in The bitcoin Standard, I just have the Visa number which was 2,000. If you're doing 2,000 transactions per second, bitcoin can do, in best cases, around 7. If you need to scale that by 1000-fold in order to get to a level where you can handle all consumer pains.
We'd need, conservatively speaking, at least 1000 bitcoins to be running their blockchains and making payments in order to scale enough to allow everybody in the world to have their consumer payments put on the bitcoin blockchain. But, if you look at the other currencies as well, they don't do much better. Depends on how you calculate the transaction capacity and how much you value the settlement insurance. It's somewhere in the same order, around 7 transactions per second.
They make claims about being able to do 10,000 a second or whatever. That's what many of them do in their whitepapers, but this is all like children playing with their toys and saying: "my fighter jet is faster than the F35". It's a toy. You can't compare somebody running a network on their shitcoin that has 700 users and saying: "look, we demonstrated 10,000 payments a second". It’s nonsense. If you wanted to run it securely and if you had actual value on the network - that's the key thing.
If you had 50 billion dollars transacting on your network every day, you wouldn't be able to achieve it because then the security problem becomes real, you have actual adversaries trying to attack. You wouldn't be able to do anything of that scale. The point here is, even if you added all the shitcoins to bitcoin, all of them together might be able to scale but one individual shitcoin is not going to make the difference.
You can't just have bitcoin and then have ethereum or one of the other coins work as a second layer. Not a single one of them will be sufficient to scale to Visa level, regardless of whatever their stupid advertisements say. If they can't scale to Visa level individually, which is the case, with each coin that you're adding in order to make this new modern payment system, you're going to be introducing another layer of complexity in the money.
The whole point of money or one of the main points of money is that it becomes a universal medium of exchange. Everybody trades their labor and their goods for money and then trades money for all the labor and the goods that they have. Everybody chooses one money. That's what allows for economic calculation to happen, for trade to expand, it allows people to save, all of the things we talk about in eco 11 - my course. The idea that we can live in a world with a thousand currencies is ridiculous.
This is something that shitcoiners often say: "we have a million companies, why can't we have a million currencies?". It's profoundly missing the point of what currency is and why we need currency. The whole point of a currency is that you have a universal medium of exchange, not bartering. Adding more currencies is un-solving the problem money solves.
Money is the solution to the problem of lack of coincidence of wants, adding another money is reintroducing the problem of the lack of coincidence of wants. Now, you want to buy something, but I want to get paid in something else. We've introduced another layer of complexity. You and I have to go back to a partial barter system where you sell your money for somebody that has the money that I want and you take that money from them and pay me. That's essentially un-solving the money problem.
Adding more currencies is not what the free market does. Money is not a market good. There's no provider of money, we see it with gold. We go toward the neutral money because people don't want to be using somebody else's money. It doesn't happen in the real world. We see the market is constantly rejecting shitcoins. They're constantly losing value against bitcoin.
Essentially, you can think about shitcoins as being the tax we pay for so many stupid people buying bitcoin early and getting rich. People buy bitcoin early for wrong reasons, they don't know what's going on, they take a bet on it, it goes up and they become really rich from it and they're highly likely to fall for another scam like a shitcoin, and put their money in it.
There's a lot of these people that are in bitcoin, have a lot of bitcoin and then try out the next bitcoin. By giving their bitcoin to the shitcoiners, that allows the shitcoiners to make a market in their shitcoin. After it gets listed, initially there's the pump phase where they're publicizing it, promoting it, there's marketing, a lot of people are being drawn into it and now all of the new money is being drawn into it. Afterwards, the market will have its way. The demand for this one particular shitcoin, there's no way that it can keep up with it.
Maybe this thing would revolutionize video streaming and then my currency will be worth a zillion. There's not a lot of stupidity in bitcoin - well, of course there is, there are still people buying bitcoin for the wrong reason. You can see this from institutional investors. Institutional investors are putting in tons of money into bitcoin and practically zero into the shitcoins because there's no coherent case for anybody to invest in shitcoins.
You see it with bitcoin, because there's constant new money, the shitcoiners are essentially cannibalizing each other, they're not cannibalizing bitcoin. People used to say the more shitcoins get made the more you will dilute Bitcoin's value proposition and the more you will inflate the supply of bitcoin. Some people said bitcoin is not inflationary but bitcoin and shitcoins are inflationary because the shitcoins dilute the market value of bitcoin.
I don't think that is the case, I think shitcoins dilute shitcoins, that’s the problem, you can pump ethereum, EOS or ripple or any of these scams initially, the price goes up and people come in at that point. There's a lot of buzz, you buy the press release, you buy the twitter influencers and you get on all the bitcoiners feeds and start telling them: "bitcoin is actually slow, our shitcoin is better".
There's a peak period for each one of these where they have a concerted effort. It is a concerted effort by an organization that's almost like a private company, and you pump it. Afterward, you have to compete with all the other shitcoins for the new churn of the new supply of people who don't know what they're doing. There's still a lot of money coming into the space over all, so there are a lot of people that will fall into them. We still keep getting more money going into shitcoins, but there's more shitcoins for it to go into. ethereum was the asshole from which the shitcoins sprang for a very long time, there's a lot of shitcoins coming out of there.
All of their buzzwords are being co-opted by other stupid shitcoins like cardano and EOS. The kind of people who fall for: "ethereum is going to revolutionize smart contracts because ethereum has blablabla turing complete blabla", and all these buzzwords. If you're likely to fall for that, you're also likely to fall for whatever stupid buzzwords they're using with cardano these days. That continues to cannibalize itself.
The supply of shitcoins over all continues to be inflationary and none of them can command the monetary premium that continues to increase over time because none of them have a clear use case. All of their buzzwords make no sense. The only use case in the entire space is the bitcoin use case as a hard money, sound money, a free market money, as a money with a limited supply.
That market has been cornered; they're not even trying to compete with it. At some point there were a bunch of ethereum influencers that tried to say something along the lines of: "ethereum is better gold than bitcoin, ethereum is a better bitcoin than bitcoin", but that narrative is gone. Ethereum having a bunch of coders in charge and they're constantly heart forking. They can never claim that the supply is fixed. They can never be able to claim that the supply really is immutable.
The monetary premium for a store of value for money that will attract value, people will sit on that value, is exclusively going into bitcoin almost. Shitcoins continuously decline individually and collectively, they continue to decline except for the fact that there's a very large number of new coins that are being churned out every day.
The way to think about it is, bitcoin is a large market of around a trillion dollars, if you wanted to add to the bitcoin market cap, add a few million dollars, you need to be buying a significant amount of bitcoin in order to pump the price. With each dollar increase in the market cap, there needs to be an equivalent increase in somebody demanding bitcoin in their cash balance because if there isn't, somebody else will sell. Even if you buy a million dollars, you raise the price, but then raising the price might cause a lot of the people to sell and the price goes back down.
With bitcoin it's impossible to manipulate the price upward because the market is so large, there's so many people who buy and sell that the only way of manipulating is to actually buy bitcoin and hold it. That involves a real cost, you have to give up dollars and buy bitcoin.
With shitcoins, it's very trivial to manipulate the supply, especially the smaller shitcoins. If you list the shitcoin right now, you can do wash trading - you have two bots trading with one another, buying at a specific price. You can manufacture liquidity and a price for a few hours that creates a buzz, gets a bunch of people to buy in. Being able to generate is far easier when you have a small market. When the whole supply of the coin is controlled by a few people.
If you have currency where a couple of people control the entire supply and then trade a small fraction of the supply at an inflated price, that creates the illusion that the currency has a market cap that is much larger. IF you go beyond the 100th shitcoin more or less, in terms of liquidity size, that's what's going on there. A constant churn of tiny little shitcoins being pumped with very tiny liquidity with their price rising and they show up on the market cap website and it appears there's real liquidity there. Because we're constantly adding more of these, it appears that bitcoin dominance, the ratio of the bitcoin liquidity to the rest of their liquidity - of the shitcoin industrial complex.
It appears to be around 67% last I checked, somewhere in that range of 60-70%. It appears that bitcoin is 60-70% of the market but really, bitcoin is in reality more like 90-95% in terms of real liquidity. The majority of that liquidity is wash trading on exchanges meant to pump up numbers. That's easy to do with very tiny shitcoins. Obviously, you can't make a tiny shitcoin into a trillion-dollar shitcoin by manipulating the trading.
There's like 10,000 coins out there now. If each one of them sells for a few million dollars, that's a lot of millions of dollars that shows up as if it's real liquidity. The reality is, all of these shitcoins that have very little liquidity, they're just being traded as gambling on websites. You can think about it as competing with sports gambling. People bet on obscure shitcoin number 5328 in the same way that they bet on horses or sports events.
You can't really say that his shitcoin is offering any kind of real liquidity in the market that anybody who holds it is able to sell it easily, especially if you start holding larger quantities of it. You start trying to sell it, the shitcoins round down to zero, they should be rounded down to zero.
To go back to the original scaling question - other shitcoins can help us, there's no incentive to adopt other shitcoins because of monetary effects. The easier moneys, in the case of shitcoins, they can't even credibly demonstrate that their supply is real. It's entirely plausible that some shitcoins will have moments of inflationary expansion. They get together, the miners and coders and they heart fork. All shitcoins can be heart forked, really. There's no guarantee on what will happen.
People learn that lesson eventually. It's happened with some of the smaller coins, people are holding them and suddenly the people behind them print an enormous quantity and they start dumping it on an exchange and the price collapses. The people that are holding end up holding nothing. This has happened many times. There's no reason to trust any other monetary policy behind any of them. The real monetary demands will continue to flow to bitcoin.
To go back to the issue of scaling - ultimately, what's going to happen, whether it's with Bitcoin, gold or government money, is that the consumer payments are going to be separate from the settlement payments. This is just always going to be the case. There's not going to be a monetary system, according to the inventions we've seen, where you buying a coffee for 3 dollars from the store next door is going to move the actual monetary unit in final settlement, from your hand to the hand of the recipient. That's not possible with any technology.
It was possible when people used gold and silver coins but those days are gone. No one is going to be using silver and gold any more, physically, for reasons discussed extensively in The bitcoin Standard and The Fiat Standard in the early chapters which you can get by subscribing on saifedean.com.
We're not going to be using physical gold and silver, if we were to go on a gold or silver standard today, it's not going to be with physical coins, it's going to be gold and silver coins and bars stored at banks. When you're going to make a payment, it's going to be with your phone, checkbook, credit or debit card. Your bank will take the 5 dollars from your account and the recipient's bank would credit them the 5 dollars, and the two banks will settle amongst each other depending on what kind of arrangement they have.
Maybe at the end of the week, or month or maybe even at the end of the year, there will be a movement of physical gold from one bank to the other. We're not going to physically move gold every time we buy coffee. Similar to government money. When you give your credit or debit card to the coffee place and they take 5 dollars from your bank, it's not government credit that's going to be allocated immediately, it's not going to be finally settled in that moment. You're going to lose the 5 dollars from your account, they're going to get 5 dollars in their account but it's still going to be another couple of days, weeks or months before the two banks have finalized the settlement between one another. They're going to batch it with a whole bunch of other transactions.
The accounts being debited with the federal reserve or the central bank will take some time. You're not going to get a final settlement with fiat or with gold, or with bitcoin. In my mind, it's false advertisement. A lot of the early bitcoin evangelists evangelized bitcoin on the basis that it's just going to rid you of the inconveniences of credit cards, that bitcoin is just a better Visa.
I think that has really set us back a long time, not really set us back because nothing can stop it going, but it set a lot of people back in their understanding of bitcoin because they keep expecting it to be a cheaper, perfect Visa with no tradeoffs, and it isn't. It does nothing to solve the problems of Visa. Maybe not nothing, it helps, but ultimately, whatever we're going to be doing with the base money, bitcoin can't do it, none of the shitcoins can do it, gold can't do it, silver can't do it, government money can't do it. We're going to need a settlement layer as it exists in the fiat system today.
You have the Fedwire or there's the European one - Euro RTGS. This is the settlement layer and then there are the consumer facing layers. We're going to have something similar with bitcoin, inevitably. No shitcoin can claim differently. There isn't a shitcoin that can have a final settlement with each coffee transaction. The only ones that claim this are straight up lying.
We can't have a final settlement on shitcoin. If they're going to help bitcoin scale, they're still going to be utilizing second layer solutions. Why would anybody want to build a second layer solution on an inferior shitcoin that doesn't have bitcoin's monetary insurance? At that point, the original argument about the monetary aspects and properties is what makes this even more pronounced at this point.
Why would anybody want to build a payment network on a monetary system that is easy for a small group of people to change. Government money is better at least, because even government money, it's not easy for people to manipulate it. Of course, central banks and governments do a terrible job of managing it. It's much harder for central banks and governments, even in dysfunctional places, it's harder for them to abuse the currency than it is for a couple of guys who programmed a shitcoin in their basement. It's just much easier for shitcoins.
There's not going to be any potential in my mind, for scaling through shitcoins. Scaling for bitcoin and consumer layer transactions are going to come from - the question is going to be either bitcoin native solutions or is it going to be an importation of fiat native solutions with bitcoin integrated in the back end. Visa said this in a press release a few weeks ago. They said they're considering adding bitcoin.
They make a very good point. I've spoken to the Visa crypto team, they get it! They very much understand bitcoin value proposition and they've gone through the studying the shitcoins phase, and the press release said: ”we already clear 160 currencies, we have 160 currencies with which we accept payments, adding bitcoin would just be another one”. If they move from 160 currencies to 161 currencies, they can accept bitcoin.
They’ll need a custody solution and they'll need to carry out their own transactions and will be settling bitcoin with people. There are a lot of questions to be answered about how this is going to be arranged, how you send them bitcoin or how they send you bitcoin. All of these transactions which are going to be done on the bitcoin blockchain, are going to be an infinitely tiny percentage of the number of bitcoin transactions you can do with Visa.
Visa already does 2,000 transactions per second. All of these could become bitcoin transactions. You'll have a much smaller amount of settlement transactions being done between Visa and other financial institutions, and between them and individuals. This is one possibility that fiat payment rails like Visa, Mastercard and Venmo, PayPal, will install bitcoin and allow their clients to start making payments with bitcoin.
That’s one possibility, then there's the other possibility which is, bitcoin native solutions. I think, in the long-run you can see why this is likely to have the advantage. Particularly, Lightning seems to be most promising in this regard. It's a very smart idea. I've talked about it in The Fiat Standard, and I'll be talking about it in the forthcoming chapters. It's, in my mind, better suited as a scaling solution for bitcoin because it's native on bitcoin and it's likely to attract more and more liquidity because it is bitcoin native.
Fiat payment processes have a much bigger advantage in terms of starting, first mover advantage, they already have networks of billions of people signed up to all of these services, used to the interface, used to the way the things work. The most important thing about Visa's business is the tens of thousands of merchants they have relationships with all over the world. This is what their business has been doing.
The merchants and the millions of customers all over the world that they have records for, they know how much you buy and how much you spend, you've been dealing with them for 20 years and you're used to dealing with them. The merchants that deal with them, they've managed to build all of these networks of liquidity all over the world with businesses. That's enormously valuable in terms of the network effects and enormously valuable for consumers and for retailers but in the long.-run, you can see how, as people become more and more familiar with bitcoin, we'll move towards things like Lightning.
In fact, Visa will probably be running Lightning - this is how I see it. You can think about these as being a good example of what Lightning nodes would be. Visa would run an enormous amount of Lightning nodes all over the world. It would essentially on board its customers and its relationships and its business capital, business expertise, they would on board that onto bitcoin Lightning network as the liquidity on the network increases. I can't really see any role for shitcoins in that.
After listening to you, an idea came to my mind which is, maybe we can think of Visa, Mastercard, American Express etc., as altcoins of sorts in the following sense. When you go buy coffee using your credit card, you're not really moving dollars or euros from one part to another. Sure, in the network there are dollars and euros. At the very moment of the transaction, we're moving, let's say Visa tokens or something like that, they're digits, numbers, bits and bytes that correspond to certain amounts of dollars.
That's what we do at the very moment. Then, afterwards, there is a settlement. In a loose sense, they work kind of like altcoins already. They already have a very robust system which uses cryptography, not the very best cryptography - nothing compared to bitcoin, but it's not like any amateur can go there and break the code. It's being used all over the world already. In order for any shitcoin to do the same, that shitcoin would need to have a size of the supply which is known and immutable. Otherwise, the exchange rate between bitcoin and that altcoin is anybody’s guess. That altcoin would need to have an immutable supply, size and a very robust security safe network which everybody can trust. This is not the case of any shitcoin out there.
Let me just interrupt for a second. I think I disagree with that. You can't really say that Visa is an altcoin, because of a very important difference which is that Visa is effectively a stable coin of the dollar. You're paying me in your Visa coins but your Visa coins are redeemable for dollars, even outside of Visa. I receive the money from Visa because you paid me, I take it out in dollars.
What you said is we need to have the supply fix, if we had the supply for altcoins fixed and it was credible, it's still not going to be stable in value compared with bitcoin, it's going to oscillate with bitcoin. In that case, it would not be able to serve as a Visa-like network. Visa runs on the fact that it is 100% redeemable in non-Visa dollars. That's not the case for altcoins.
What might make sense for altcoins is if they would become bitcoin stable coins. Economically, I think this makes sense because a lot of these altcoins, the way that they launched, is that they sold their own token for bitcoin. The founders are sitting on a ton of bitcoin. Altcoins are out there trading. The interesting thing here is that many of these altcoins, their market evaluation is much smaller, the total market cap of altcoin is much smaller than the market value of the bitcoin they have in their treasuries.
All of these shitcoins are bleeding value next to bitcoin. There comes a point at which the value of all the coins in the circulation is smaller than the bitcoin behind it. In that situation, the people who are running the shitcoin could actually significantly pump its price by simply making it redeemable in bitcoin. In other words, if you say: "we have 100,000 bitcoins and we have an outstanding supply of 100 million of our coins. 1,000 of our coin is equal to 1 bitcoin. If you give us 1,000 of our coin, we'll send you 1 bitcoin", if you do that, you immediately raise the price of the shitcoin.
I imagine for many of these shitcoins, you would actually raise the price because the shitcoin is not worth as much as the bitcoin that's backing it. Well, it's not really backing it now so, if you were to begin backing it, you would have a shitcoin stable coin for bitcoin. While it makes sense in economic terms, I think the impediment for this is legal and practical. In order to make this peg enforceable, you need to have somebody managing the treasury of the bitcoins and making a market in shitcoin and bitcoin.
You're sitting there and telling people: “I will always buy bitcoin for you for 1,000 and will always sell bitcoin to you for 1,000 of my coin.”. If you do that, you're basically issuing a security. In that situation, it's likely going to look like a security. You might get into trouble with the FCC, that might be the problem there. Then, you can't really pretend the altcoin is decentralized, maybe you would if you set all these coins aside for lawyer fees, you might be able to do it.
I'm not so sure this is feasible but I think this is a good example to go back to Ahmed's question, this may be the one example where you can say: “they could help in scaling in a sense because you'd have the shitcoins serve as a (???) stable coin”. The security is not as good as the bitcoin security but maybe it's a tradeoff that some people are willing to have. Nothing will have the security of a bitcoin transaction and we won't have a lot of people being able to afford bitcoin security. People will look for alternatives and maybe this is one of them.
I pretty much agree with what you said, let me just clarify something. When I said Visa is some kind of altcoin, I said altcoin of sorts. It's really not an altcoin but it's playing the role of what the best altcoin would be. As you said, the very best altcoin that we could possibly have is an altcoin that has a fixed supply and the network is safe enough so we trust it. In order for any altcoin to do that, we need to have these guarantees that nobody is going to mess up with it. Maybe Visa can do much better in this regard. Centralizing everything, pegging it to bitcoin, having a network that does all this very fast and efficiently. The very best altcoin we could possibly imagine is something that Visa can do pretty much.
Yes, that's a great point. Ultimately, they can't be anywhere near as good as Visa at doing what they do. Visa is a business - how old is Visa? They've been at it for decades, I know that for sure. For decades, they've been building relationships with retailers, customers and keeping track of everybody and figuring out who's a good credit risk and who's a bad credit risk. Shitcoins have none of that.
They don't have the real-world business dealing with this kind of size. They don't really have anything to offer in that regard, they can offer a small number of transactions in another unit of account as it stands. If they wanted to scale, they would want to switch to bitcoin standard by backing the currencies with bitcoin. Then they might have something to offer in terms of scaling but it wouldn't be much. There's just not that much capacity on top of them, I think.
Yes, exactly. The best that an altcoin can do is to be a stable coin for bitcoin but Visa can do it much better, that's about it. One last comment, I like something you said, shitcoins are not diluting bitcoin, they're diluting other shitcoins. I agree with that but I would like to add something. When we look at the total market cap of so-called cryptocurrency markets, There's quite a lot of money pooled into all those shitcoins. Maybe it's not diluting bitcoin but it's diluting the market cap of other assets to some extent.
Of course, at first, I used to think this was a bad thing, could you imagine if all this money were put into bitcoin, it would be so much better, no such noise happening. But now, I am looking at this from a more optimistic perspective. The money is getting out of gold and real estate, stocks and so on, and it's getting to this crap, a bunch of shitcoins. Eventually, when people realize that this has no future. All those people are going to migrate to somewhere else. Part of this money is going back to real estate, gold and so on.
A lot of them are going to migrate to poverty, unfortunately, let's be honest.
Yes, sure. Most of those coins are going to be worth very little. There is probably still going to be some good chunk of money out there, ready to migrate back to stocks or to bitcoin. The people who were considering having those shitcoins - they have 1% or 2% of ethereum in their portfolio and thinking about increasing the size, they're going to say: “oops, no, I'm going to bitcoin”. Maybe in the long run this is good for bitcoin. It's a sort of social experiment. We need to have this kind of competition, it's necessary in order for everybody to figure out that bitcoin is the real thing.
Yes, I think there's another aspect of - well, maybe I'm not so optimistic about this. The amount of money that goes into shitcoin will probably be more than what comes out of them because they are going to go down and people will learn that lesson after they have lost a significant chunk. Then they buy less bitcoin than they would've bought initially. However, the real positive of shitcoins is that they're not cannibalizing bitcoin's market value, in fact, they're probably adding to it.
Shitcoins do their own marketing, bitcoin doesn't have a marketing department, there's nobody going around making glossy pamphlets to give out to people, doing giveaways of bitcoin - nobody does bitcoin giveaways anymore. They do those things for shitcoins. They do incredibly good marketing for a lot of these shitcoins, to give them their due. That's what they have going for them, great marketing that draws a lot of people who otherwise wouldn't have ever looked at bitcoin.
It draws them into the crypto space. I've seen this happen over and over again. Somebody goes in because they heard about this, their friend told them about this, they saw a few videos and they got drawn into one of the altcoins. They get into the space but after a while, they start smelling something fishy about the altcoin. They start getting exposed to bitcoin, they start hearing about bitcoin and bitcoin smells different.
Bitcoin is fresh and the altcoin is stale. A lot of these people find out about bitcoin and learn about it properly all because they heard about the shitcoin originally. Like everything on this planet, this is good for bitcoin. You can't do anything that is bad for honest, hard, best money. It's going to win. Basically, bitcoin has the world in checkmate, by being the best money. You can choose to submit or choose to fight and give it more fuel to get stronger.
It's hard to see something that's bad for bitcoin happen. I enjoy being in the world of bitcoin because you don't need to ask anybody of anything, there's no activism here, it immediately turned off anybody who likes to treat bitcoin as a form of activism. I don't find it useful because bitcoin needed us to behave in a certain way in order for it to work and succeed. Bitcoin works because of economic incentives.
People buy it because they benefit from it, not because they want to live in a better world, I'm sure a lot of them do, but that on its own would not be enough to get us where we want to go. If bitcoin didn't have its unique and proprietary number go up technology, then we're not going to mobilize the planet around taking money out of the hands of the government. We're not going to mobilize the planet to do this out of activism. We're not going to manage to pull it off. If it's going to happen, it's going to happen because people are signing up because they benefit from it and gain from it. It's liberating because you don’t have to fight anything. You just go along with it and watch economic incentives doing their thing.
This is ultimately why bitcoiners are perceived to be so toxic and hostile - because people come at bitcoin expecting that their feelings matter, that we need to sit there and win them over. No! You have to win me over. I want to join bitcoin but you have to make me feel special. Everybody wants to be made to feel special and the reality is bitcoin doesn't give a shit about anybody.
Bitcoiners don't have to give a shit about anybody. If you join, you benefit, if you don't want to join that's your problem - you can't threaten people. I won't join your thing, I'm going to impoverish myself and continue to use inferior technology unless the people who use the better technology are nice to me! A lot of people act like this and it's exactly as idiotic as saying: “the computer community is toxic because a bunch of computer users made fun of me once. I'm not going to use a computer anymore, ever again, I'm going to stick to abacuses and bring back my typewriter, that’ll show them! That'll show those meanies! That'll show those awful, awful meanies! I can't be taken for granted, I'm not just going to join your superior technological revolution just because you guys have the best technology, no.”
This is exactly what it feels like when you hear about people complaining about bitcoiners being toxic. You may as well be complaining about knife holders, wheel owners, car owners, it's technology that anybody can use and people don't use it because they're part of a community. We didn't have to, at any point in time, there was no wheel community that went around nicely evangelizing the wheel to others and trying to tell everybody: "hey you know, if you use a wheel, your life would be much better. Instead of slaving away all day, come and use the wheel, that'll make you better".
No, when people saw the wheel, they wanted to copy it themselves, they wanted to do it and use it, that's the case with bitcoin. That's why people join, they benefit from it. It's sad to see the people who don't get that, that think bitcoin needs them. I'm not so convinced about bitcoin because you guys sound rude. You guys are too toxic. That's why bitcoiners respond with: “have fun staying poor!”.
Bitcoin is the best technology for fighting poverty that has ever been invented on an individual and global scale. This is our best tool for fighting poverty. If you can be bullied out of it by a couple of people being mean to you on Twitter, congratulations! You win! Your prize for winning this contest is that you don't have any more bitcoin, enjoy it! What else is up?
I was asking about ETFs across the world but there's some hype about the US ETFs for Bitcoins coming out. Are these types of vehicles even worth holding or is it just build your own wallet and stack that way? Just curious of what you guys think about those types of things.
The way I see it, the best thing to do is have your own bitcoin, to hold your own bitcoin. I shouldn't really say that, I can't decide for other people what works best for them. There is that temptation to say: ”not your keys, not your bitcoin, you should only hold bitcoin if you have the private keys on your own.”. A lot of people are very strict about this. A lot of people don't want that - hold their own keys. They prefer to have them with custodians.
Who am I to tell people what works best for them? There definitely are cases where it is better to be in these situations. A lot of investors have their own charters and their own direction for what they can invest in, their own direction for what they can invest in, on behalf of their investors. They have a fiduciary duty to invest according to specific standards. They can't just go and buy a hardware wallet and put 80% of their holder’s money on it.
There are different solutions that you can have. Institutional custody if you want, another one of these is an ETF which offers the added benefit of the fact that it is tradeable, much more liquid than having your own coins locked up with custody. For people who want to get in and out of a position quickly, that might make sense. For people who don't have access to other forms of holding bitcoin, this makes sense.
It's tempting to say the bitcoin politically correct thing which is hold your own keys. Obviously, there's an enormous case for that in terms of your own security. There are risks in involving others holding your keys for you, but there are also risks involved when you hold your own keys. bitcoin is growing out to the point where custody solutions that are used in the mainstream financial markets are used for bitcoin. It's only natural that we'll see an ETF.
We saw the one that opened in Canada has done an incredible job over the last few months. Last few weeks are when it's launched, they're up to about 10,000 bitcoins already, in a few weeks. There's an enormous demand for it. There's a lot of money that can't get into other forms of bitcoin, that will get into ETFs. So far, we've not heard anything about the likelihood of any of the ETFs being approved in the US. We'll see, the new SCC seems to be, hopefully, maybe, potentially, who knows, more in tune with what is going on with bitcoin, so we'll see. Any other questions?
As of yesterday, they're up to 11,394 in the Canadian ETF, which is quite something. Currently, the options for American investors who want to get into something like an ETF, the best option right now is, I think, you could go to Grayscale. But the way that Grayscale is structured and the fees that are on Grayscale are pretty high. They’ve managed to get their own fund through but most ETF applications so far have not gone through. Because there isn't an ETF, they're able to charge a very high fee. It's hard to see this dynamic surviving long, that you'll just continue to have this one entity able to offer bitcoin to the market while nobody else can do it. Then, they're being given a massive regulatory edge which they can monetize. We'll see, I think we'll start seeing more of these ETFs pop up in the US.
You know, in Gold Walls, the author explains how the IMF and central banks have manipulated the gold price for Euros in the 80’s, 90’s and so on, in order to make fiat look good and sustainable as a system. Basically, if I understand what the author says, they were able to do that because they had huge gold holdings in the first place. Am I mistaken if I imagine that they couldn't do the same thing with bitcoin or do you think it's the case? Do you think, at some point, we could see central banks accumulate bitcoin just in order to try to make it crash, or put the market in turmoil.
I think, ultimately, the most important ways in which gold is manipulated, if you want to call it manipulated, is through the fact that central banks confiscated the gold. When they confiscated it, that means that they can buy and sell on the market and have an enormous amount of leverage on the market. Currently, the central banks own about a sixth of the world's gold. Around a sixth of all of the world's gold is in central banks. Maybe the more important way in which they can continue to control the gold market, more important than the confiscation - well it's not really more important, it is highly related to the confiscation, is the fact that you can't have a market for clearing gold outside of central banks.
That's really what it comes down to in my mind. In other words, even after the central banks confiscated the gold - the reason they could confiscate the gold was because the gold was so centralized and the reason gold was so centralized is because gold doesn't move easily. It's very expensive to move a gold bar across the Atlantic. It's expensive to move it across from one country to the other.
You end up with payments and settlements happening over banks that effectively have a monopoly over this process. Because they have a monopoly over it, it's not possible for the gold market and gold banks to emerge outside of this. Without that, it's not possible for people to take their gold elsewhere and use it. Your gold without its bank is pretty useless outside of your neighborhood. It's very expensive to pay for it.
I talk about this in The Fiat Standard in chapter 5, on salability and scale, salability across space. Gold excels in salability across time, you can move gold easily across time. You can move value with gold well across time, it holds on to its value across time. But it's salability across space is very bad. Every time you try and move gold, it's expensive. Effectively it loses its value once it moves. That means its clearance.
As trade began to expand in the 19th and 20th century all over the world and communications started to expand all over the world, doing final settlement with gold became more and more expensive which necessarily led to the emergence of banking networks that you had to keep your gold on in order to make it fly. Imagine banks are like the bitcoin payment network and gold is like the bitcoin token.
You can't run a monetary system on gold without the payment network, without the banks, except for something very small and local. Otherwise, it becomes very expensive to move the gold back and forth. The lack of salability across space is why gold ends up being highly concentrated. When the governments wanted to confiscate gold in the 1930's and 1940's, we don't have many stories about violent confrontations in order to perform the confiscation because the confiscation was pretty straightforward. Everybody's gold was already in the bank.
All that happened is that the government went into the banks that were already under government control and told people you can't take your gold anymore, you're just going to be given paper. Effectively, that is how they confiscated it. It was very straightforward because the gold was all concentrated.
Once you move away from that, once they confiscated it, then what prevented the emergence of the free market and free banking in gold is the fact that you just can't do that. You can't set up a bank that clears gold. Banking is an oligopoly; you need a license from one monopoly buddy which is the central bank in every government. Central banks don't all run on gold and don't approve banks that don't run on their national currencies. You can't just go to a central bank and tell them: "I want to set up a bank and I'm not going to deal with your shitcoin, I'm going to deal with gold only, and I'm going to be settling my gold internationally by taking bars of gold and shipping them on boats and airplanes."
That won't happen. They won't let you. I think the key distinction with bitcoin between gold and bitcoin is that because of gold's much higher salability across space, it's much harder to confiscate it because it's going to be, inevitably, far more distributed. In a central banking era, each country had one central bank. In the bitcoin era we're seeing many more per country, emerging. It's much harder to confiscate because it's not one central bank and the central banks are not under the government control.
Secondly, this is the key, unrelated to the fact that it's not centralized, the money is very easy to move around. It's easy to build parallel settlement networks. Even if they do confiscate a bunch of other people's bitcoin. If you still have your own coins, you can still send your own coins on the network. You can still use Lightning, you can still send money from one person to another without having it to go through central bank approved institutions.
That's why I think, ultimately, bitcoin has a better chance than gold. Gold's low salability across space means that you have to get the government to agree to let you run it, agree to let you cross the border. There's no way around that. You can't have a monetary system built around going around the government, you can't have people smuggling gold for a monetary system.
People get caught and it's unworkable. You won't be able to do that with gold but you can still do it with bitcoin. Bitcoin does half a million transactions a day, and these can be international settlement transactions. In my mind, this is the trickiest part about controlling bitcoin. You can confiscate people's coins but so what? Other people can continue to operate on a network. More than just that, I think confiscation doesn't just happen overnight. With Bitcoin, it's very easy to opt out.
In 1934 things were going bad, you couldn't just take your gold and send it to a bank in Switzerland and let it sit there. It's very hard to do something like this. Today, particularly in democracies where things need to be discussed among politicians and approved before they happen, you're probably going to smell some smoke before the fire of confiscation comes along. If people suspect a hint of confiscation coming along, a lot of money will be moving out of custodians. It's much easier to take it out of custodians.
You take it out of a custodian and put it in your hardware wallet, you memorize the seed or send it to a custodian outside of your country. It becomes a much easier solution, really. That's the key point of later chapters of The Fiat Standard. (???) is saying in the chat, this is why bitcoin will back gold. I think that's very profound. At some point, if gold continues to lose value in real terms, because it kind of is losing value - it's gone up very little in the last ten years while the dollar has been increasing in supply and the prices of everything have been going up.
Gold's becoming less and less of the monetary value of the world. If that continues, as I said in the previous podcast on the stock to flow a few weeks ago, you could demonetize gold. If the value drops and then starts becoming affordable for industrial uses, starts getting used more and more for industrial uses. That stuff that goes into industrial uses is no longer part of the monetary stockpile. You can't count this as part of the stock, so the stock to flow declines.
If this continues with gold, I can see how we could go back to gold coins, but they would be gold coins backed by bitcoin. We'd have something like the Opendime, but it would be made out of gold because gold is the king of the metals, there's no questioning that. You'll see bitcoin backed gold where the price of the gold is a small part of the value of the coin. The private key would be encrypted into it in one way or the other, could be physical or digital. Could be something like an Opendime inside a gold coin or it could be something called the Casascius coins.
I think you're onto something (???), I think we're going to have bitcoin backed gold. Eventually, whatever happens with bitcoin, there will be room for physical Bitcoins. One way in which bitcoin scales is physical bitcoin. Things like Opendime are a great way for bitcoin to scale.
If you have a simple device that you can verify quite easily, then moving this physically around becomes a way in which we can scale bitcoin for smaller transactions, maybe even for bigger transactions - you'd have gold bar equivalents where one Opendime is made out of gold and worth the market value equivalent today of a million dollars.
The gold that goes into it would be 50, 200 or 1000 dollars out of those million, practically nothing. I think bitcoin backed gold sounds like a great idea! It would be a fitting development for all the people that have spent years telling us we should back bitcoin with gold. We're actually going to back gold with bitcoin, that's the plan, you heard it here first! (???) monetary reform plan! I like it.
In order for this to really work, wouldn't we need to have a good degree of certainty about the supply of gold and the supply of gold next year, next decade so that the ratio-
No, no, because gold doesn't affect the supply of paper, it doesn't matter, what matters is that the paper is redeemable for gold. With fiat money, what matters is that your paper is redeemable for the gold that is backing it, you don't care about the gold itself and in fact - if the bitcoin bar was worth a million dollars and the gold inside was 100 dollars, who cares if it's 100 or 80, if they put a little bit of tungsten inside it and it's actually 60, doesn't really matter. I think it would matter in terms of quality of production. If we're going to be using gold, it's not going to be worth it to lie with it. It's likely going to continue to become cheaper and cheaper.
Yes, but if that is the case, then it doesn't have to be gold. We need to have-
Not for its monetary purposes, for its physical properties.
Yes, but then it's a fiduciary medium, right? If we have a company, a bank or a government which we trust and they have a public wallet and we know exactly how many bitcoins there are, they issue something - could be gold coins, paper or digital units in a network, either one is going to work fine. It doesn't have to be gold, right?
Yeah, but I mean, it's like paper but instead of putting your million dollars’ worth of bitcoin on paper, you put it on a gold bar. It's better, it's not going to burn, be ruined by mold and it maintains its shape, it looks nice. You won’t do it for a small Opendime that has the equivalent of 10 dollars. You could build it so it is very secure, and it could also be made so that you would need to melt the gold in order to get the private key. You could see something being developed like that where you'd need to melt and process the gold in order to be able to crack the gold bar and get the private key.
Once gold is demonetized and the value is dropped significantly, I can see a lot of potential for gold in the monetary industry just because of its physical properties, not its monetary properties.
I see. Another comment on gold, you just talked about salability across space and time, for quite a while those wall street guys kept making fun of gold bugs saying you guys are outdated, gold used to be a good store of value but it's no longer that. When you look at a window of time, like 30 or 40 years, it surely is a good store of value. In the window of 10 or 12 years, there are many cases where it doesn't hold its value because of the whole complexity of the economy.
Then I wonder, maybe one of the reasons for that is the lack of salability across space of gold. In current times, gold is no longer a convenient medium of exchange when it comes to a final settlement. Even for every-day use, if somebody wants to pay me with a gold coin, I don't know if that gold coin is real gold or not. It could be the case that the lack of salability across space of gold is making it, over decades, less and less of something people want to use as money. Then, the value is not being kept as in the 19th century, right? Is that correct?
Exactly. This is how I see it developing, it's what happened with silver and I see it happening with gold at a slower rate now. Basically, the total amount of economic value that is parked in gold as a percentage of the world is declining and I think in the last 10 years this has been the case. It wasn't so much the case in the previous 10 years, it was the case between 1980 and the late 90's. Historically, the price of gold was going up.
Of course, in the 70's, it went up a lot. If you want to look at the 70's, 80's, 90's and 00's together, if you want to take out that big spike in the 70's, arguably, except for a few months in 1980, it was a continuous increase in the market value of gold. Since then, in the last 10 years, 2011, 2012, it's just been declining in real terms. The result of this is that it becomes more affordable to use it in industry. If you're building an electronic device, gold at 1,500 dollars is usable in your electronic device, but if gold was at 4,000 dollars, you wouldn't use it. The fact that gold has not jumped up to 4,000 dollars is why it's more likely to be used in electronic applications. In turn, if it does get used in industrial electronic applications, that stuff is taken out of the stockpile, now it's no longer a monetary metal primarily.
People are doing things other than stacking gold bars with it. If they're not stacking gold bars with it, and they're using it for industry, then the stockpile is declining so the stock-to-flow ratio is also declining. It would be ironic if this does indeed happen, and after spending so many years being a devout gold bug, I end up uncovering the mechanism for how gold gets demonetized. Oh well. Thank you very much for joining guys and I'll see you next week! Take care!