In this podcast Saifedean and Lyn discuss Bitcoin and trends taking place in the macroeconomy. Lyn starts by giving her view on the investment case for Bitcoin, PlanB’s Stock to Flow model, and whether Bitcoin can be characterized as a Ponzi scheme. They then move on to discuss global macroeconomic conditions and why Bitcoin represents a more attractive investment in a world where fiat currency supply expansion is accelerating. They touch on long-term debt cycles, 1970s stagflation, CBDCs and whether we should expect high inflation during the 2020s.
Articles by Lyn that were referenced in the conversation include:
- 3 Reasons I’m Investing in Bitcoin: https://bit.ly/3xO6uqS
- Bitcoin: Addressing the Ponzi Scheme Characterization: https://bit.ly/3f25FC6
- A Century of Fiscal and Monetary Policy: Inflation vs Deflation: https://bit.ly/3b71dRn
- Bitcoin: Fee-Based Security Modeling: https://bit.ly/2QRpdkU
See PlanB’s website for information on the Stock to Flow model: https://100trillionusd.github.io/
Saifedean Ammous: Hello, and welcome to another episode of the Bitcoin standard podcast seminar. Today’s guest is Lyn Alden, a macro economist who’s a relative newcomer to Bitcoin, but her analysis over the last year or so, and the articles that she has written have been some of the best and most thorough pieces that you could read about the case for Bitcoin, from the perspective of somebody who’s analyzing the macro economy and who makes the case for Bitcoin from first principles and why Bitcoin is relevant to investors today.
[00:04:13] So we’re going to be discussing Lyn’s case for Bitcoin. Lyn has also written on whether Bitcoin is a Ponzi scheme or not, so we’re going to be discussing that. And then we’re going to switch to more of a macro discussion on the global macro climate and what Lyn’s work on Japan can tell us and teach us about what’s going on.
[00:04:30] So, Lyn, thank you very much for joining us.
[00:04:33] Lyn Alden: Hey, thanks for having me happy to be here.
[00:04:35] Saifedean Ammous: Great. So, I wanted to first begin with if you could just give us your case for Bitcoin, if you’re talking to non Bitcoiners, what do you tell them about why they should invest with Bitcoin?
[00:04:47] Lyn Alden: Yeah. So basically, what we’re looking at is an invention of a new type of self custody asset.
[00:04:53] And if you look at the all the different types of assets that exist in the world, there are only a handful of ones that you can self custody that are portable, and that you can basically transact with someone without a centralized third party overseeing that transaction.
[00:05:07] And so one of them obviously is cash, physical cash. The problem with that is it’s not internet native, and also if you hold cash outside of a banking system, it loses value over the long run because it’s inflating away. You’re not earning interest on it. These days, even if you have in the bank, you’re still probably not keeping up with inflation.
[00:05:23]And so it has uses for that purpose, but it’s not a great store of value. Then of course there’s precious metals. They’ve been, the longest running self custody asset and they for lack of a better word, they’ve been the best technology that humanity has had for that purpose for a very long time.
[00:05:38]Some of the few downsides of precious metals that are, again, that they’re not internet native, and so they have various issues there. And so what’s interesting is that with Bitcoin they brought together a number of technologies such as blockchain, proof of work, that others had developed into a package that for the first time created true digital scarcity and basically made the third type of asset that can be self custody and that can be exchanged with someone without a centralized third party.
[00:06:04]And then this one of course is the first one that is digital native. And then, so from there, you can look at the properties of it. You can look at the pre-programmed monetary policy compared to, the monetary policy of fiat currencies and people can make a decision about, whether they want to allocate to that asset.
[00:06:18] And so for me, when I made the case for Bitcoin back in my research services April 2020, and then publicly in July 2020, it was basically the idea that the combination of the macro factors. So the very broad the fast increase in broad money supply that we were seeing and we’re going to continue to see combined with the fact that it was at attractive point in it’s halving cycle, it had been through a lengthy consolidation and basically halving what’s happening, which is generally where Bitcoin experiences supply shock, and therefore does very well on price.
[00:06:46]And so basically there were a bunch of forces coming together that in my view made it an attractive asset to begin holding and that it reached the point where, most people should have a non-zero position in my view.
[00:06:57] Saifedean Ammous: Yeah, absolutely. I think this is very much our bread and butter in this corner of the internet we are always harping on about the scarcity of Bitcoin and the fact that it’s digitally native.
[00:07:07]And then you mentioned the halving as well and the supply shock. I’m wondering, what is your opinions of how significant it is, and also the stock to flow model, which tries to model this relationship. What are your thoughts on that?
[00:07:20] Lyn Alden: So I view that the halving itself is very important for Bitcoin price appreciation and cycle so far.
[00:07:26] I think that’s been an important part of it, of how the algorithm works and how it kind of forces adoption over time. And that comes from just having a history of investing in commodity markets where, if demand’s pretty persistent, but you have some sort of supply shock that has to get resolved with increased price, unless you were to have some sort of demand collapse or something.
[00:07:43] And so, Bitcoin goes to this period where it has a certain monetary policy. There’s a kind of a balance of supply and demand establishes itself. And then, pre-programmed supply halving occurs. And so that starts putting upward pressure on the price because demand, it didn’t really change from that.
[00:07:59] And then eventually that starts pushing a price and then momentum traders jump on board and that pushes up the price even more. And that gives Bitcoin a lot more public awareness that gets a lot of FOMO people on board. And so it’s one of those things where, they say like, come for the price action and stay for the revolution where, first they’re in it because it’s going up and then they go down the rabbit hole, learn more about it.
[00:08:19]And it just, that’s how it kinda goes up it’s S curve of adoption and becomes monetized. Now as for specific models that track how the price should behave relative to that, I’m kind of agnostic on that. For example, found plan B’s charts very helpful.
[00:08:32]I think one of the key insights about Bitcoin is, a lot of people, if you see financial media that are always calling Bitcoin a bubble, they’re often looking at a linear price chart and they just see, they look at Bitcoin, they see the past history is like almost zero on that graph because they’re looking at it in linear terms.
[00:08:46] And then it just goes up like vertical. And then they’re calling it a bubble. Whereas if you zoom out and look at it on the logarithmic chart, especially if you then put the halving events on that chart, that’s a very different thing you’re looking at suddenly it looks a lot more reasonable and algorithmic rather than bubblicious.
[00:09:00] And so I think, his charts were extremely helpful. I also think, the idea of, basically a monetary asset has to have a reasonably high stock to flow ratio, which is why gold is monetized, silver’s partially monetized historically, but then something like copper, oil are not monetized in addition to other qualities that they’re less value dense and things like that.
[00:09:20] And so the fact that Bitcoin’s stock to flow ratio goes up over time is an important part of its monetization. But I don’t have a specific price forecast based on where it should be based on that. Other than that, I think that those havings and that overall thing plays a big role in its appreciation.
[00:09:36] Saifedean Ammous: So I’m wondering why you’re skeptical of putting a specific price targets on it? Because, obviously I agree with what you were saying in terms of the halving the stock to flow and in my mind, the way that I looked at it was that what the model essentially is saying is it’s looking at the average relationship between the stock-to-flow and the price and then it projects it going forward.
[00:09:57] I find it absolutely astonishing that over the last two years, since the model has come out, we’ve more or less stayed within the one standard deviation of the price. When the model first came out, I remember my initial reaction was, this is obviously stupid. There’s no way that we could put a numerical estimate on this.
[00:10:14] So yes, we’re going to get, I used to think that, yeah, after the halving there’s going to be a big rise in the Bitcoin price, but I thought that there’s no way that, that historical data can tell us what’s going to happen to the price in the future. We know it’s going to go up after the halving, we know there’s going to be a big bull run and a crash, but the idea that we could estimate where the bull run ends, I found to be completely, heretical at that point, particularly for me coming from an Austrian background where, you can’t make quantitative predictions about issues of human affairs, but it seems to be holding out so well so far. Astonishingly well, I mean, if you look at the chart, it’s almost like there’s something drawing the price to the prediction and it goes a little bit above and then it goes a little bit below and then it just keeps oscillating around it. It’s really hard to dismiss it, and it keeps getting harder. So I’m wondering if you could make the case for why we should be skeptical of these numbers?
[00:11:09] Lyn Alden: I guess, in my view, it’s always good to be skeptical in general.
[00:11:12] I think the default case is being skeptical. And, so I’ve not positioned myself as someone who’s in opposition of that model. It’s just more like I’m agnostic about it. And so I guess if I were to play devil’s advocate, I would point out that, even though it’s in the grand scheme of Bitcoin, it’s a fairly new model.
[00:11:28]And so a lot of the model fit is back-tested. And so of course the big thing was there, people were arguing that it was too back-tested. But then, as you pointed out since it’s been created next two years or so of Bitcoin performance has gone in very well in line with the model.
[00:11:43]And so, overall I think it’s, the model is certainly, shown more validity over the past couple of years because it’s become more forward-looking and accurate in that sense. But overall it’s not a huge sample size to work with. Basically it expected a big increase.
[00:11:58] We got a big increase. And so, I wouldn’t say, okay, now this is the model that I’m going to use for the next, five to 10 years to judge Bitcoin prices. But I think it’s one of those things where that phrase, like, all models are wrong, but some are useful. So there’s certainly a model that I’m going to be aware of.
[00:12:13]It’s in my toolkit for things that I’m watching, I would say, another thing I’d point out is that he has two main models at this point. He has the cross asset model, and then he’s got the more regional model, and they have two different price targets.
[00:12:25] And so basically ultimately you can say, one of them is either overshooting or undershooting. And both of them arrive at what they’re doing, with slightly different logic, but similar logic. And so there’s going to be a variance there between how it’s going to work out.
[00:12:38] And so I think it’s one of those things where it could be tracking something, and it’s not necessarily that specific thing, which is the sense that because there’s persistent demand for it. We can track that the supply shocks are gonna happen. And then that pushes a price. And when you take into account, Metcalfe’s law and network effects and overall, especially cause in Bitcoin’s case, unlike say email usage Bitcoin’s network effects are appreciative to price, right? Because it’s not like a user adoption of something that doesn’t really, resolve the underlying protocol appreciating price. So for Bitcoin, that is, it’s a monetary appreciation. And so overall, I think it’s a good way of thinking about it.
[00:13:15] It’s just that I still use it as one kind of tool or one way of looking at it among many, rather than saying, like, this is a model that’s going to play out. At least in my view.
[00:13:24] Saifedean Ammous: Yeah. I guess if I could also take the devil’s advocate side, I’d say. It’s absolutely astonishing that the model has held for those two years.
[00:13:33] And it predicted that there was going to be a big rise after the having, and that did come to pass similar to the previous two halvings. But I guess there’s still one big question left, which is will we end up landing or stabilizing around the $100,000 range, which is what the S2F model would predict or the $280,000 range, which is the S2X model.
[00:13:56]We’ve had Plan B over here and we’ve discussed this with him and he prefers the S2FX model, but I tend to prefer the S2F model because I think it’s a more reasonable specification because it’s time series. And because it doesn’t rely on data for gold and silver and real estate, which is very bad data and we don’t know how much gold there is.
[00:14:14]And if you take out those little points of gold data gold and silver. And then you end up with the time series anyways. It’s no different from the time series. And I think the time series is more interesting and more robust as an analysis because, you see it approaching with time.
[00:14:29] And we know that the S2F is an exogenous variable, we know that there’s no way that the Bitcoin stock to flow is being effected by the price, other than small little variations in production, we know the stock to flow now is going to be around 54 this year and that’s it.
[00:14:43] And then there’s no way around it. No matter what happens with the price if Bitcoin was still a toy played around with 10 people using it, or if it was used by 7 billion people, we still going to have a stock to flow this year of around 54. So the really astonishing thing for me is, we took off now, it was a miracle that the airplane has taken off. We’ve got this model that predicted exactly when Bitcoin takes off. Now, the tricky part is can they can Plan B nail the landing? Can we really land exactly at that range? And I think, if we end up in that range, which is a pretty, some people criticize the model for saying, well, the range is quite wide.
[00:15:19]The one standard deviation is like something between or two standard deviations is something between $50,000 and $300,000 or something like that over the next three years, which sounds like it’s large, but really it’s incredibly precise for the model because the model has running on data from less than a dollar all the way up to $100 million.
[00:15:38] So the fact that it can pinpoint this tiny range around $100,000 is quite astonishing. And if we do end up sticking around, like if we do land around that area, and then we ended up stabilizing sideways for three years. It’s absolutely mind-blowing.
[00:15:57] Lyn Alden: Yeah, that’d be very impressive for the model, if it does, the longer it continues to track that. And I think one of the interesting statistics about it is that the price has been both above and below the model every year. And so if that trend continues, every year that stays the case that improves the validity of the model and like you, I mostly look at the time series version of the model I’m aware of both, but I, the one I tend to glance at is the earlier one, the time series one.
[00:16:21] Saifedean Ammous: Yeah. Have you come across anything in your time of analyzing macro models that tracks this in terms of its significance in terms of its accuracy, and that is similar to this?
[00:16:32]Lyn Alden: Not specifically, no. I’ve looked at, my original piece, there was another analysis that was kind of looking at Bitcoin price in grams of gold.
[00:16:39] And so that removes the dollar from the equation. And just in general, any sort of, there’s a couple of different logarithmic analysis you can do. It was different price projections play out. And so, but none of them, say put forth a specific things that, basically the, what made the Plan B models interesting was that he really kind of put his neck out to S say, this is the range I’m looking at.
[00:17:01]Whereas other models are here’s where I think it’s heading they give a couple of different options. And so, overall, right or wrong, he put out this model and, I would say whether he sticks the landing or not, I would say that, his charts, the ones he made were say useful to me in terms of improving my understanding of Bitcoin because you can be educated by something, even if you say agree with at 90%, and then the other 10%, you’re like, I don’t know.
[00:17:25] So for example, showing. You know how it performs after each halving like when he has a chart, that kind of breaks down by color-coded halvings that’s I think extremely instructive for people. So I think the model has been good for the community regardless of how well, it sticks to landing and of course the more it sticks to landing that’s even more interesting.
[00:17:44] Saifedean Ammous: Yeah, no, I think there’s something about it that is similar to Bitcoins growth itself. The natural inclination is that you’re skeptical of this and it can’t work. And in theory, there are a million reasons why it can’t and shouldn’t work. And that was the same reaction that I had about Bitcoin when I first heard about Bitcoin.
[00:18:01] And yet it’s continues to work and then you need to start asking yourself, why is it that it works? Why is this Bitcoin thing? Why has government not shut it down? Why has it not been hacked? The initial reaction everybody has is it’s going to get hacked, but it doesn’t. And similarly, I think with this model, it just continues to it’s amazing.
[00:18:20] And this previous crash that we had in the last few months where we went from like $65,000 down to the low fifties it looked like we were maybe achieving takeoff when we’re close to leaving the one standard deviation range. And then it goes right back exactly to the line and crosses it just a little bit downward and then it reverses.
[00:18:38] And now it’s just tracking the line again. And I think with each one of these, people say that the model is going to get priced in that if this were accurate, then people would be buying if they know that it’s going to be a million dollars in 2025, they’ll buy it now, and then it’ll be a million dollars now.
[00:18:53] But no, I think with this case, pricing in the model is going to happen by people basically selling and buying when we’re above the line or below the line, if you’re above the line and you think, allright, we’re going to go down and then we sell it. And I think it might be, then this is the next big arbitrage trade.
[00:19:09]People who have a lot of capital and a lot of time to play markets with it will start arbitraging around the predictions of this model. I think we may be beginning to see this. I think there’s definitely a lot of analysts who will have had their head turned by this. And it’s interesting to think if we are, we’ll be tracking the line more closely because people expect this to be the case.
[00:19:32] Lyn Alden: Yeah. And there’s been debates about say whether or not the halving is priced in and things like that. And my view is that, If say the majority of participants agree with the model, then a lot of it would be priced in, but because there’s inherent skepticism, there’s different opinions on Bitcoin.
[00:19:47]It’s still a very small percentage of people in the world own Bitcoin still. I mean, even though it’s. Yeah, it’s gone up a ton, but it’s still actually a small asset in the grand scheme of things. And so, basically until that becomes so dominant that it’s self fulfilling.
[00:20:01] It’s almost by definition not priced in. And so, even in my initial piece where I’m like, laying out my case for Bitcoin back in July, I say reference to stock to flow model, but I’m like, ultimately I don’t know what the price is going to be. I think, I have a high conviction.
[00:20:14] It can be a lot North of here. But I don’t know the multiple that it’s going to go North of here. And so I think there’s a lot of participants like that where you say, okay, this stock to flow model is interesting, but they’re not say basing everything around that. And also just from investing in commodity markets and see how those behave there’s situations where a longterm investor can see a supply shock forming years in advance.
[00:20:35]But the market, the price doesn’t really start to move until it kind of starts to happen. And so, from people watching the uranium market or watching the copper market people have been pointing out that there are certain deficits building out, say X number of years in the future.
[00:20:48] And it’s not until some catalyst start happening that price appreciations starts playing out. And so the majority of the market does not just, price it out far in advance. It just kind of comes in burst as more and more people are kind of made aware of that situation.
[00:21:03] Saifedean Ammous: Yeah. And I think another aspect of it is that, first of all, the vast majority of people aren’t into Bitcoin, but then even the people that are into Bitcoin, the conviction when it comes to Bitcoin, is, first of all, you need a lot of capital in order to be able to price it.
[00:21:16] And a lot of people who get into Bitcoin, they can’t, I mean, you need price in because once you get into Bitcoin, you are, you flick the switch into just all in and that’s it. If you’re convinced that it’s going to work, then you’re going to go all in. Whether you think it’s going to go up by a hundred percent next year or 200 or 300 and 500%, you’re all in.
[00:21:39] And if you don’t believe in Bitcoin, you don’t think it’s going to work, then you’re zero in. So there’s a lot less room for people to just trade around it when it’s very small, but as this grows, obviously the margin for this increases, you start getting people that are 40% and then they can go longer in when they think that the model suggests a much bigger appreciation.
[00:22:02] So I think with time, we’ll see it getting priced in, but I’m not sure that we’re going to be getting the, halving a priced in because I think the demand can adjust for it, but there’s still, you have four years of double the supply switching down two or four years of the supply going down.
[00:22:20] So it’s a lot less coins out there. You’d require in order to fully price it in, you’d have to have somebody who is basically able to buy up half of the coins during this period, in order to bid up the price and then sell them in the next period, which is it’s enormously expensive and it keeps getting more and more expensive, but I think with more and more people will be seeing it more.
[00:22:42] Okay. So, um, switching a little bit. Well, the other thing that you were mentioning in that the paper was on the macro actually, before we go to the macro let’s stick to the Ponzi scheme. Is Bitcoin a Ponzi scheme? Why not?
[00:22:55] Lyn Alden: Yes. I wrote that long form piece explaining my view of why it’s not.
[00:22:59] And so, different people have focused on the different criticisms or FUD of Bitcoin and kind of provided Bitcoin’s defense. And so that was kind of my long form defense of why I don’t view Bitcoin as a Ponzi scheme. And you can break that down into two main types of Ponzi schemes.
[00:23:14] So there’s like the narrow definition and then the more kind of broad philosophical definition. And so the narrow definition is just outright fraud where someone’s basically like the classic, like Madoff scheme, where, you’re basically lying to investors about what you’re doing with the money you’re paying off older investors with newer investors.
[00:23:30] And, so what I did for that article was I went to the SEC website and they have how they define a Ponzi scheme and they list red flags for Ponzi schemes. And I kind of went point by point and compared Bitcoin to that list. And it shows that, it has very little if any overlap with the definition of a Ponzi scheme and the red flags of Ponzi scheme.
[00:23:49] And in some ways has less overlap with it than the U S banking system. And so, it basically, the idea is if you look at pretty much any non cash flow asset, so whether it’s gold, silver wine collectible cars, Bitcoin it’s ultimately gonna be, that the market is based around you buying it with the idea that it’s going to appreciate and price and that in the future, if you wanted to trade that for other goods or services or consumption of some sort that you could and with any of those markets, there’s going to be frictional fees associated with doing so there’s a people in the middle that are helping facilitate the liquidity of that.
[00:24:23]And so they take a cut, so some people have characterized Bitcoin as a Ponzi scheme because, you’re paying fees to miners. There’s, basically there’s this finite kind of closed network and the basically old investors being paid by new investors and eventually it has to stop.
[00:24:36] Whereas, as those other non cashflow asset show that can go on indefinitely. I mean, basically you have this kind of ongoing system of, things of value trading hands and appreciating price and people in the middle that facilitate that trade. And so I, based on that definition, I didn’t view Bitcoin any different than those other non cash flow producing assets that are held as stores value.
[00:24:59]And then another part of the narrow definition is, if you look at say how other coins since Bitcoin have come along in many ways they meet the definition of a Ponzi more so, so it’s actually, we were lucky that, the first cryptocurrency was kind of done in such a.
[00:25:15] Like a kind of a mature way. Right. So, so, well, I like to call it the immaculate conception of Bitcoin. Yeah. I think that’s the perfect way to describe it because we could have had say in an alternative universe, let’s say, Satoshi put all these pieces together, in the same way, but instead of, say putting out from the beginning, he just gave himself, X number of coins first and then put out there.
[00:25:37] And then he started five years later selling some of the coins, that would have tainted the whole project. Whereas, the fact that he put it out from day one Hal Finney was mining it publicly. And so from there on, it was, anyone had access to it.
[00:25:51]And so basically, and of course we had, the periods where people didn’t know what it was worth. So they bought a piece of, with it and got basically there’s ways to get coins out there rather than concentrated as much as they could have been. And so, because it was done in a way where he literally, he gave the white paper before he even launched the software.
[00:26:07] So he said how it’s going to work, what it’s going to do. And then months later launched a software that he had already been working on, of course. But basically he put out there before he even had the ability to profit from it. And he kind of went through a thesis defense on that, like email, if you look through the emails that he did on that cryptography email list, it’s almost like a thesis defense where it’s like putting out the paper he’s getting feedback and kind of responding to some of the feedback.
[00:26:30]And so. If you look at the whole process, it was a very kind of academic mature process rather than like a money grab. And so I just found that very interesting. And then if you back up and look at the broad sense of what a Ponzi scheme is in the broad sense, anything that’s not sustainable.
[00:26:44] And so we talked about how the other types of non cashflow assets can have these, indefinite, sustainable markets around, their products. And so. If you look at Bitcoin, basically Bitcoin is one of those things where it does have to reach a certain size to be fully self-sustaining to make sure it has adequate security and that, reliably fills up the blocks and, eventually transitions from a block subsidy security model to a fee based security model.
[00:27:07]But other than certain minimum requirements being met from there, it’s just, it’s a self-sustaining asset. Just like most of these other types of markets have non cashflow producing items. And the one thing I compared it to is the U S banking system where, you know, basically if literally 20% of people were to withdraw their money from the bank at the same time, the system falls apart. Basically if you go through the list of Ponzi scheme characteristics and red flags on the SEC website the U S bank system and any other global bank system meets more of those criteria, because of course, one of the red flags is like basically difficulty receiving payments.
[00:27:42] Where, you contact Bernie Madoff and you say, okay, I want to pull my money out. And he says, well, I can’t do it right now, but give me a month. And, it’s like it basically we saw actually during the pandemic crisis that many banks had to limit the amount of physical cash you could take out.
[00:27:54]There was a physical cash shortage. And also, basically you could only withdraw so many funds and that’s basically the limitation of the system that’s partially intentional. And so, basically Bitcoin does not meet anymore definitions of a, of kind of a broad Ponzi scheme than any other system like that.
[00:28:12] Saifedean Ammous: Yeah, I agree. And I think, essentially for me, the reason why I can’t think of it as a Ponzi scheme is that ultimately the way that a Ponzi scheme works is that there are some underlying assets and the person running the Ponzi scheme is issuing more and more claims onto the same amount of assets.
[00:28:28] And convincing the people that are buying that they’re getting claims on more assets. And so for instance you’ve got an investment business and you have like, this is what Madoff did. He had about a billion dollars, I think of actual assets, but he had $50 billion worth of investors who thought they had $50 billion for them.
[00:28:48] And as long as they all didn’t come in at the same time and ask for the $50 billion, then the thing continued to swim along fine. But that can’t exist in Bitcoin because a) Bitcoin isn’t a claim on any asset Bitcoin doesn’t promise you to do any. It says, you buy this thing and you can just hodl and look at it being pretty.
[00:29:09] You can use it to pay transaction fees. That’s all you can do with it. It’s not redeemable in something else. And so there’s no opportunity for somebody to create that kind of fraud. In that where, each Bitcoin say allow or entitles you to one share of Apple or one ounce of gold. And then they have a big pot of gold and they issuing Bitcoin backed by that gold.
[00:29:31] And then they start issuing more Bitcoin than the gold. That’s a Ponzi scheme, but first of all, there’s no pot of gold. There’s no shares of Apple. There’s no bonds or anything that is underlying. It is just the coin itself. So, you’re already accepting the fact that you’re buying this thing for its intrinsic for its own sake not for the sake of exchanging it for something else, which is not the case with Madoff.
[00:29:50]You’re getting a share of his stash of bonds and stocks. With the promise that you could one day redeem them and sell them out. And the second thing is that there’s no Madoff in Bitcoin. There’s no person out there who can make more Bitcoins.
[00:30:04] And I think, if you followed Bitcoin over the last 10, 12 years, you saw what has happened to anybody who has tried to make more Bitcoins. They’ve all failed at it and they can’t make it. And so if there was a mechanism for making more Bitcoins surreptitiously without people finding out then yeah.
[00:30:19] You could say that you’re developing that monetary premium into Bitcoin and then you’re creating new Bitcoins without anybody finding out that’s effectively, also like being Madoff and that’s effectively what BitConnect was. I think, one day everybody was on the BitConnect scam, woke up and found out that the price had tanked because the people behind it had made an enormous amount of new tokens and they sent them to exchange and they sold them.
[00:30:44] And so basically they took away all the monetary energy that is stored in the existing tokens and took them out. And that’s why, Bitcoin can’t be a Ponzi scheme because nobody can make more than 21 million because, you run your own node and it’s your node that decides the rules of the network.
[00:30:57] And so if somebody wants to make more than 21 million Bitcoin, that can’t affect your Bitcoins, that affects them and their Bitcoins, and they’ve just invented a new alt coin. Which brings me to another question. What do you think about altcoins? Are they Ponzi schemes in general or in specific cases?
[00:31:15] Lyn Alden: Sure. And I’ll answer too. One is just going back for a second. I think also kind of adding to your point, one of the things that a Ponzi scheme relies on is secrecy. Basically the investor has to be obscured from the truth for some reason. And if they knew the truth, then they would choose differently.
[00:31:29]Whereas the whole point of Bitcoin is that it’s open source. Anyone can verify it they basically can analyze it and then compare it to other asset classes or other coins, and they can make their own decision about whether or not they want to purchase into it. So that’s one of the things that’s inherently, not just, not a Ponzi scheme, but literally the opposite of a Ponzi scheme where it’s based on kind of radical transparency.
[00:31:48]And so, and then going into your second point about the alt coins, I guess my view is that I don’t predefine any alt coin as a Ponzi scheme or fraud, but they certainly have a very high ratio being one. And I don’t personally like, I’ve kind of pushed back on the notion of people investing in altcoins and trying to make sure that people are aware of the risks and the rather terrible track record that, altcoins have had since the inception, because one of the inherent kind of risks of an altcoin is that, they’re virtually all centralized. And so, if I’m being generous with altcoins, I would say at best, they’re more like equities where a centralized development team is proposing a system that can do some service based some platform for doing something.
[00:32:28] They have tokens associated with it. But I don’t view them as money because there’s fewer people that can then change the monetary policy. And so you’re more like you’re betting on management team you’re betting on their ability to make that into reality and to basically tweak their system until it does its purpose properly.
[00:32:43]And so, at best I would view them as in a different category as Bitcoin. And then at worst out of that whole massive category, there’s like a 99.9% failure rate of those tokens. And so there’s basically not a good risk reward for people venturing into that space in my view too much.
[00:33:03] Saifedean Ammous: Yeah, I think I agree. And I think would go perhaps a little bit further than you and say that any token that claims to be a utility token is by definition a Ponzi scheme because, and that’s like a casino chip that appreciates beyond the value of the casino of the money that’s redeemable for.
[00:33:21] So you have a casino chip that says this is a thousand dollars, which you can use to bet on a thousand dollars in our casino. But if you find that chip being sold for $5,000 instead of $1,000, then that’s accruing a monetary premium, which it has no business accruing. I don’t see any of these tokens having any reason to accrue monetary premium and the time when altcoins were marketing themselves as being out there to make money.
[00:33:47] I think that has passed generally. Now they’ve switched to all kinds of buzz words about, we’re using this for utility and we’re using this for that or the other thing, but ultimately that doesn’t matter. Nobody buys Chucky cheese tokens and keeps them at home as a cash balance.
[00:34:02]You hold your cash balance in the most liquid commodities and in the ones that have the best saleability across space and across time under a monetary system, like the gold standard. And I think under a universal Bitcoin standard. That question is settled because you just hold one token, which is the one that has the best saleability across space.
[00:34:21] And across time you can send the gold across the world through the gold banking system, and you can send it to your future self because it holds onto its value very well into the future. So then you just hold cash balances in the one most liquid most saleable good. Now under the Fiat partial barter system, you have to hold cash balances in different assets.
[00:34:43] So you want to hold dollars because you’re able to send these quickly around the world and make payments with them. And you might want to hold gold or some other form of monetary asset for the future, because that’s better at holding onto its value into the future, but under no condition, do you want to hold Chucky cheese tokens or casino tokens, no matter how often you go to the casino, you keep your cash balance in dollars.
[00:35:07] When you go to the casino, you give them your dollars, you take the chips and then you gamble and then you cash out. If you have anything left at the end, there’s no reason to carry the thing around. And, dishonesty aspect of it is that, well, everybody’s going to use our apps and our smart contract platform or whatever, and because they’re going to be using it, then our token is going to be more expensive.
[00:35:28] And that for me is, casino saying, Hey here, build a checking account and a saving account with our tokens, because we’re going to be getting a lot of gamblers and we’re going to be buying our tokens, the gamblers aren’t bidding up the price of the token. If they are going to be using it, they’re just going to go and buy one when they need it and get rid of it.
[00:35:46] And we haven’t seen any and any of these supposedly utility tokens actually develop any actual utility where, you need it in order to do something on the internet that you can’t do without it. And then of course, there’s the aspect of them not being transparent. As you said, for most outcomes, you can’t really run your own full node, so you can’t verify anything.
[00:36:02] So you’re just running by what other people are saying. And of course it’s centralized so they can change all the code. They can change the supply as they’ve done in many of these altcoins, they keep changing the supply and there’s no reason why they can’t change it again. And I think, eventually they’re going to be learning I think the inflationary lesson that made Bitcoin possible, which is that if you give people the ability to print money, they’re going to find a way to abuse it. And the incentive for the insider who’s close to the printer is always different from the outsider who’s holding the token. And so if your token has a guy next to the printer, you’re eventually going to have a bad time.
[00:36:40] There’s going to come up time and place where they have a good reason to run that printer into overdrive. And, that’s a, it’s not going to be pretty then I think.
[00:36:50] Lyn Alden: Yeah, separating Bitcoin from alt coins was an important part of my thesis for going long. And so my first article on Bitcoin was back in late 2017 after it had that big run-up that year.
[00:37:02] And so I was my first piece on Bitcoin and the broader cryptocurrency space. And so when I analyzed it then, I basically recognize a lot of the useful aspects of Bitcoin. It was interested in it and basically had good things to say about it. But the reason I passed on it, or one of the reasons I passed on it, they were kind of two main reasons.
[00:37:18] One is we just had that huge run-up in price. And there’s a lot of euphoria at the time. And that was like, November or so. It was like, I started writing the article at like $6,000. By the time I was done writing the article, it was like $8,000. And so I was this is a very euphoric space right here, and I didn’t have a lot of ways to price it back then.
[00:37:35] I had a couple models actually that I applied. But overall there’s a huge variance here. And when you have a huge variance combined with euphoria there’s a risk. And then two, I was saying, okay, so Bitcoin units are scarce. But my concern at the time was like, could we just had the Bitcoin versus Bitcoin cash split?
[00:37:51]And then so then we have, at that time say ethereum was doing very well in price and it’s okay if anyone can make a new cryptocurrency and if this whole space gets diluted enough we’re capital flows in and goes to like, the top 10 different protocols and it just kind of spreads out.
[00:38:05]Then I’m concerned about, even if each protocol or at least some of the protocols are scarce, if it just, if capital diffuses across so many protocols, then that scarcity gets questioned. And so that was my concern back then. And that’s why I stayed out of this space and we have, of course had the blow off top and then we had a big crash.
[00:38:22] We had a multi-year consolidation. And I kept watching the space and I saw that. Okay. So, Bitcoin retained a lot of its market share after that bear market Bitcoin dominance went back up for a while. We saw a lot of that era of coins basically just go into the dustbin of history.
[00:38:39]We saw that the Bitcoin versus Bitcoin cash split was settled by the market, in terms of market capitalization, hash rate, number of nodes the types of hardware, like say wallet makers that, focus on Bitcoin versus Bitcoin cash by pretty much any way of measuring a network effect, Bitcoin won out.
[00:38:55]And then, so basically I said, okay, so as long as Bitcoin can retain the, by far the dominant network effect for, basically being the hard money of that space well then it’s scarcity is valid. And so, as that kind of tests played out. And I also saw like institutional custodian technology’s kind of come on board where we’re basically the space was ready for bigger pools of capital to come in.
[00:39:18]And that’s why, as we went forward into 2020, I was kind of increasingly more interested in the space and we had that big liquidity crash in March and April. That’s when I said, okay, now, even though Bitcoin was bouncing up from those March lows it was like $7,000 a coin and it was ironically the same price that I passed on it, two and a half years earlier, but I said, okay, it’s the same price, but it’s been de-risked in the sense that it’s had this multi-year consolidation.
[00:39:42] We have the halving coming up and Bitcoin’s network effect has, withstood another two and a half years of assaults from these other ecosystems. And so Bitcoin’s, path dependent network effect continues to be valid. And so that was an important part of me saying, okay, I’m actually now I, it kind of filled in a few of the concerns I had about Bitcoin and that’s what made me kind of switch from, kind of a skeptical neutral to like a pretty high conviction bull.
[00:40:07] Saifedean Ammous: Yeah, I agree entirely. I remember when we had Michael Saylor, he said basically March, 2020 was the highest reward to risk ratio in Bitcoin’s history, because at that point you’d have the threat of altcoins and the hard forks eliminated, as you were saying, and you had the infrastructure being built and you had all these, this massive runway out a bit when to be built on top of it, plus then you had all the macro climate, which made things set up.
[00:40:37] And yeah, I think ultimately the way that I would look at it is that Bitcoin’s value proposition in terms of being immutable and in terms of being truly decentralized cannot be compromised because you can’t make another immutable digital currency. We’ve seen a lot of people try, nobody has made it, the second biggest currency, which has the biggest claim toward being decentralized.
[00:40:57] We saw that when, when the people in charge of the currency had their currency hacked they went ahead and just rolled it back. So, there’s nothing to stop them from changing the supply again and making all kinds of different changes for it. And so, as I’ve said before, in one of these episodes here, we call it, I think it was called the shitcoin standard, shit coins, essentially they cannibalize each other rather than cannibalizing Bitcoin. We’ve seen Bitcoin continue to grow, but we see them eating into each other’s value proposition. But I guess that brings us to the macro picture. So. What are your general impressions on the global macro scene currently?
[00:41:35] How things are headed and why does it make Bitcoin so attractive?
[00:41:40] Lyn Alden: It’s my biggest framework for this was inspired by Ray Dalio years ago, which is the conception of the long-term debt cycle. And so, when we look at the five to 10 year credit cycle, most of us are familiar with that rehab builds up and build up in, in debt.
[00:41:53]And then, either policy changes or an external catalyst comes along and kind of, forces an economic shock and then a period of de-leveraging and now. But in our modern system, that period of deleveraging gets short-circuited. So they cut rates, they do fiscal support. And so debt, as a percentage of GDP never falls all the way back to the starting point of that cycle.
[00:42:13]In industry it’s hit lower lows than the previous cycle. And so when you string multiple of those business cycles together, debt, as a percentage of GDP gets higher and higher the system, it gets more and more leveraged until it’s at its breaking point and eventually get to a cycle where interest rates at zero.
[00:42:28]And you can’t really do much more. And so instead, the central bank turns to asset purchases or another, basically different mechanisms for increasing the monetary base. And so in the 1930s, that was devaluing dollar versus gold in 2008, that was quantitative easing. And so you get into expanding the monetary base and that only goes so far.
[00:42:48] And eventually they combine that with kind of, a fiscal mechanism that gets that money out into the public. And so back in the 1940s, the last time we went through this kind of long-term cycle was the thirties and forties. That’s the last time that, interest rates at zero debt hit a very high level.
[00:43:03] And so. Generally, when you go through that period, you have kind of a private debt bubble that collapses. And so we saw that in, in the early 1930s, we saw it again in 2008. And then after that, some number of years later you then you have a public debt bubble, which is basically the response to that, trying to reflate that private debt bubble collapsing.
[00:43:21] And so the 1940s, you had the public debt bubble and then in the 2020, so far, we’ve had the, kind of the second public debt bubble. So it’s always like, it’s always kind of a one-two punch associated with these longterm debt cycles playing out. And the earlier part of that, that the private debt bubble.
[00:43:38] Tends to be a more dis-inflationary outcome while it plays through, but then the public debt bubble tends to be more inflationary outcome. And so, because now we’re seeing a very sharp increase in the broad money supply compared to any other time since world war two now that basically the number of dollars in the system is going up dramatically, the number of euros are going up dramatically.
[00:43:56] The number of yen are going up dramatically. That basically improves the case for having stores of value that have some degree of, they’re finite in some way. And so that could be, say. Commodity producers that own copper deposits that are pretty scarce, right? So things like that all sorts of real assets.
[00:44:14]But then of course, one of the more accessible ones in this environment is Bitcoin. And so anyone with a smartphone or access to the internet can buy Bitcoin and it’s got this, it’s, pre-programmed monetary policy a supply cap. And so when you contrasting that, kind of that tightening model compared to the very loose model that we see with fiat currencies that’s basically the best marketing that Bitcoin could ever have.
[00:44:35] And so basically it makes Bitcoin, as long as that network effect continues to hold as it has for over 12 years now that makes it a very attractive alternative basically currency than something like the dollar or euros or yen.
[00:44:49] Saifedean Ammous: Yeah, I’m curious, you mentioned the thirties and 2008. Wouldn’t you put 1970s as well in that bucket?
[00:44:57]Lyn Alden: As far as the long-term debt cycle? No, because even though that was an inflationary period in many ways, that was a very, that was a very different reason. There was kind of two big reasons there. One is you were at kind of the mid point of the cycle.
[00:45:09] So you had high loan growth and you had pretty big deficits. And then debt, as a percentage of GDP was actually very low going into that period because a lot of the debt was inflated away in the forties. And then it started to inflate away in the sixties and seventies. And so that was in many ways, a very different environment where you had, there was a change in the global monetary system structure.
[00:45:30] And so when you had that breakdown from the Bretton Woods system to the petrodollar system that was a whole another catalyst for why you had a currency devaluation. And so the long-term debt cycle, isn’t the only way that you get a currency devaluation. I mean, you basically, going back to the long-term debt cycle thing, what makes the end of a longterm debt cycle different than the end of a normal credit cycle is that it’s usually accompanied by some big currency devaluation because rather than de-leveraging the debt’s not nominally, they deleverage them by increasing the amount of money in the system. So they say that the debt to broad my supply ratio goes down a lot because you’re changing the denominator. And so in the seventies, you had a different environment where basically the global monetary order for how they peg currencies and how they kind of, back those currencies up deteriorated and then eventually broke.
[00:46:16] And so that was basically a whole different mechanism. Now, the interesting thing is that the 2020s, you could have say both happen at the same time. Like, we’re basically, I’m kind of tracking two separate long-term cycles. So one of them is the long-term debt cycle that we talked about. And then the other one is that, every several decades, you generally also have a shift in the way that the global monetary system is structured.
[00:46:37] Usually the previous one hit some sort of breaking point whatever aspect of it was imperfect and unsustainable starts to kind of, running into its head and that’s when, something has to shift and kind of be reset. And so basically the 2020s decade could be a period where we’re both of those cycles kind of converge.
[00:46:53] And so I separate them into two separate outcomes rather than saying that the seventies was anything like the forties. Cause in many ways they were quite different.
[00:47:00] Saifedean Ammous: So in the seventies we didn’t have massive public debt, but, a horse that I always like to beat is that 1971 depegging the dollar from gold was a default. It was a default on public debt. It was the government being in defaulting on its promise to redeem the dollars for a gold. So, does that change your analysis in any way? If you think about it as a default because Nixon effectively defaulted on their promises to other central bank.
[00:47:30] Lyn Alden: I do view it as a default that’s kind of, I also have characterized it in the past. Like I have an article that kind of shows all the different times that Treasury’s defaulted. And so that was one of them. Another one was the, the thirties, because you had, the treasury was a certain amount of dollars and the dollars was a certain amount of gold.
[00:47:46] And then they changed how much gold the dollars were worth. And so the seventies were another version of that, where they just took away the whole gold tie altogether. And so I do view those as defaults. The kind of the big difference was that in the seventies even though you had a default debt, as a percentage of GDP was low, both for public balance sheets and for private balance sheets.
[00:48:08] So in there, the issue was not that debt to GDP was high. It was that debt compared to the gold reserves were high. And so basically the whole fault, the shortcoming of the Bretton Woods system is that, from the beginning of that system, you saw gold reserves slowly go down. And the claims on those gold reserves.
[00:48:25]So basically treasuries and dollars, especially the ones that are owed by international creditors. Because at that point, for Americans, gold was no like a dollar is no longer redeemable for gold before those foreign international creditors. It was still redeemable. And so you basically had that draw down and that breaking point.
[00:48:40] And so that’s why I characterize that a little bit different. Basically the way that, that plays out tends to be a little bit different than how longterm debt cycle plays out. And so it’s not a totally separate thing, but I find that two different frameworks to kind of map out those breaking point is helpful for kind of our predicting the flow, like the order of outcomes that generally happen and kind of identifying which things are the breaking points where we’re kind of a light switch goes off and something changes.
[00:49:06] Saifedean Ammous: So what does the 2020s have in store for us?
[00:49:11] Lyn Alden: So I view the 2020s as in many ways, like the 1940s in the sense that you have a very fiscally driven monetary policy. So, when we look at policy maker tools there’s periods of time where you’re very driven by central bank monetary policy, and then other periods where you’re very driven by Congress, President fiscal policy.
[00:49:31]And so, from the eighties all the way up through the 2010s you had different periods of both, but generally that was more monetary policy driven. And what makes the 2020s kind of a shifting point is that kind of like the 1940s it’s very fiscally driven, which means that basically the majority of broad money supply growth that we’re seeing is not due to bank lending as it is in many decades. But instead from government deficits. And so basically the inflation versus deflation paradigm and that the whole kind of, judging the rate of, nominal GDP and all those things in part goes back to how big are the deficits that they’re going to run and basically that’s going to be one of the causes for different levels of inflation that we can model out going forward. And so basically the big question to look at is what sort of fiscal packages are they going to pass? Because they’re the ones that have a big influence on how big broad money supply is going to be.
[00:50:25] And therefore what levels inflation’s likely to reach. And so my overall base case is that when you combine that with the kind of the global commodity cycle which is, every, 15 to 25 years, you have periods of commodity oversupply. And then, because it’s cheap, no one really brings new supply into the market.
[00:50:41] And eventually, those supplies dwindle, demand catches back up and then eventually commodities get expensive. And you go through that bull market in commodities, and that encourages those producers to go and find more of those commodities and bring more supply to market. And so the past decade was characterized by commodity oversupply.
[00:50:59]And I think the 2020s, the further we go into it, the more it’s characterized by commodity shortages. And so, if you look at copper, for example we’ve also had big reductions in cap ex for oil and gas. There’s a uranium shortage and that’s of course important for a big part of the global electrical fleet and so basically as we go deeper in the 2020s, the combination of a very fiscally driven broad money supply growth and commodities that are not as abundant as they were previous decade tilts everything towards inflation compared to the prior decade.
[00:51:33] Saifedean Ammous: Yeah it’s very hard to keep making a case against inflation anymore. As you point out when money creation is primarily driven by the banking system, you will get inflation. It’s not going to be like you’re on a gold standard. Generally, it’s going to be faster money supply growth.
[00:51:49] But to an extent it’s self-correcting because the faster the money supply grows, the more bubbles you get, the more overexuberance. And then you’re likely to get crashes, and then the crashes are deflationary. And so they reduce the money supply. So as long as, and I’m writing, this, the Fiat standard right now, where I discussed money creation and the Fiat system in the terms of that we’ve learned from Bitcoin, from looking at money creation and Bitcoin.
[00:52:19] And it’s, self-correcting under a credit system because there’s credit being created, but you can’t just keep creating credit forever there’s limits on how much banks can lend that have nothing to do with the fractional reserve ratio. It’s just, they need to find businesses that want to borrow.
[00:52:34] And the more that they lend out to undeserving borrowers, the more defaults they get. And so that basically brings the house of cards crashing down. So it’s harder to build house of cards when you’re trying to build it with credit, it keeps crashing it down a little bit.
[00:52:49] And that’s in my mind, what has allowed national currencies to survive for an entire century where without real gold backing. But I think, yeah, we’re in a different ball game now when the credit creation process is essentially being taken out of the equation and central banks and governments are just printing out money and handing it over to people.
[00:53:07]That money is just going to be spent. It can’t get destroyed. There’s no deflationary correction that can bring this down. So, yeah, I think the case is accurate. And what do you think of the idea of central bank digital currency is being introduced as an alternative here.
[00:53:23]Lyn Alden: So it looks like we’re slowly going in that direction. And so one of the differences between say, if you look at the 2020s and the 1940s and how they’re similar versus the 1970s, which is in some ways it’s different is, when you look at how central banks respond to inflation.
[00:53:40]And so in the 1940s, when they had high inflation due to basically the large fiscal expansion that was needed at the time you had spikes and inflation and rather than raise rates to quell that inflation, they actually capped yields. So they held short-term rates at near zero.
[00:53:57] And then even for the longer end of the treasury curve, the central bank actually capped them at 2.5%. So you’ve looked at the full course of the decade. You had these big spikes in inflation that two of those spikes reached double digits. One of them reached high single digits, and yet a ten-year treasury yields were just like perfectly flat at 2.5% the entire decade.
[00:54:15] And of course, anyone holding them got a devaluation and the seventies were different because since federal debt, as a percentage of GDP was low, and generally private debt was pretty low as percentage of GDP, the central bank was able to raise rates to combat that inflation.
[00:54:30]And of course they were slow to do so throughout the seventies. And it was only under Volcker that they finally raised them enough to kind of counteract that and into the 2020s in many ways, it looks more like the forties where, because federal debt as a percentage of GDP is so high. The only thing kind of keeping that in check is the fact that interest rates on that debt are pretty low.
[00:54:49]And so if they were to raise rates substantially that would render basically the payments on interest it would be so high that would cause all sorts of issues. And so we’re in an environment more than the forties where even if they were to get inflation they’d be unlikely to be able to, their tools to combat that are somewhat limited in this environment, because it would cause so much, kind of nominal crashes in public and private finances.
[00:55:12] And so you’re generally we’re as we kind of, go forward. They, one of their ways is kind of, in some ways, resetting the system, we’re finding other ways to run their system. And so rather than, Basically in all these different areas, they kind of do a soft default on the previous system and move towards another system.
[00:55:29] And of course the order that we’re going down, the central bank digital currency route is partially tied to their incentives around the current system. And so, for example, because the federal reserve is at the heart of the current petrodollar system they’re among those slowest to want to change to a new system because when you’re the King of a current system, you’re less inclined to want to go to a new system.
[00:55:52] Whereas if you were on the outskirts of the current system, you have a more of an incentive to move to the next system. And so that’s why, for example, we see China spearheading central bank digital currencies. It’s a combination of, they want to be able to buy commodities, for example, in their own currency, they want to have more control over that.
[00:56:08] And then two, of course, because China is very kind of an anti privacy state. They want to be able to monitor everything and they want to go to control everything. They like that additional control that central bank digital currencies provide. And then you have kind of, as you go down the chain, you have, Europe’s also interested in central bank digital currencies.
[00:56:25] And then, towards the slower end of the spectrum is the FED where they’re the King of the current system. And so they’ve been moving less quickly on that. But of course they’re also being dragged along by some of those others. And so one of the views out there is the idea that if central bank digital currencies were created, they would render Bitcoin irrelevant. And I always found that silly because in many ways, they have opposite principles of Bitcoin because that gives policymakers even more fine tuning capability for monetary policy.
[00:56:54]And so basically they currently have a handful of tools they can use. And central bank digital currencies expands the number of tools that centralized policy makers have to control those currencies. And that does further makes that type of currency different than Bitcoin. It basically puts that even more on the other end of the spectrum of a decentralized unchanging monetary policy. And the only thing that they have in common is that they’re more inherently digital, but the commonality stops there. You’re still looking at one currency that has a very flexible supply that you cannot, self basically reduces your ability to self custody.
[00:57:28] It basically makes it always controlled by the centralized authority where then you have Bitcoin where that, that the fact that it’s monetary policy is unchanging and you can self custody. It is all that more important than that environment.
[00:57:41] Saifedean Ammous: I agree entirely. I would say digital currencies are not competition for Bitcoin. They are an advertisement for Bitcoin. Bitcoin’s value proposition is an uncensorable and immutable monetary policy. And the central bank digital currencies are built precisely for the opposite of that. And I think the digital aspect is kind of a non issue because all existing national currencies are predominantly digital, more than 90% of the dollars out there are digital.
[00:58:06] So, there’s a few dollars that are printed out into physical paper for almost like souvenir purposes. And we also have physical Bitcoin in the form of open dimes and other bearer asset Bitcoins. But ultimately what really matters is the underlying technology in the case of Bitcoin it’s immutability.
[00:58:23] But yeah. And I also agree with you that I think, we are probably, it’s the upgrade. If you want to call it an upgrade to, central bank digital currencies is being marketed as if we’re going to replace your clunky paper money with a fast and efficient digital money as if it’s just like a tech upgrade.
[00:58:42] But I think the tech upgrade side of it requires very little changes. So you don’t have to have a new digital currency in order to make dollars faster. You can make dollars faster by just running a little bit better database technology and on the backend of banks and central banks.
[00:59:00] And then it gets faster. I think ultimately what’s actually happening is I suspect, the dimension of China. I think we’re headed toward a possibly like a new international global reserve currency. That’s going to undermine the dollar to the benefit of the Chinese. And I think the spirit of international cooperation, if you want to call it that we’ve seen in the last year where you know that the entire planet was marching along to the tune of the world health organization, in terms of what you should do, take off your mask, put you on your mask.
[00:59:34] So stay home. Isolate, keep your kids away from school. The way that everybody in the entire planet just swallowed all of this insanity, which we’ve had hundreds of years of protocols for dealing with disease outbreaks and these notions of just locking everybody up, they’d been discussed before and then suddenly all of that went out the window and because it was an emergency.
[00:59:57] Which is, the worst thing that you can do in an emergency is to just get rid of all of the plans that you had, because they’re what are going to ground you. And we got rid of all of that very quickly, all over the world. And everybody went along with the plans of the world health organization, which was having degree influenced by the Chinese government.
[01:00:15] So I think we can anticipate something similar happening with monetary reform, I think over the next few years where the Chinese managed to get a significant improvement in this. And I think, we could have something like a digital SDR that is issued by the IMF as the sort of, proto global central bank, similar in its role to what the world health organization was doing with this pandemic we’ll have the IMF issue this digital SDR and then that would be used to backup national central bank digital currencies, and effectively, they’ll default on their dollar obligations and all of the existing national currency obligations. Governments are just going to say, essentially something like, oh well the dollar stopped working because it’s analog and that’s why the prices are crashing, but don’t worry.
[01:01:05] We are upgrading you to something digital it’s fast and it’s like Bitcoin, and it’s amazing. And here you go. So exchange your $10,000 of US dollars for 10 new CBDC or dollars. And now, we have a new global currency. I think, that impact of that is going to be a much bigger role for China international economically, and correction of the imbalances that the U S dollar system creates, because the U S is just printing money and other countries need to produce things for the U S and then the other countries need to prop up the dollar by buying on to more dollars and hoping that it doesn’t crash. So do you think that might happen or am I being unreasonable here? What do you think?
[01:01:50] Lyn Alden: I think that’s one of the roots. And so I laid out, I had an article on the, kind of the changing structure of the monetary system. And I laid out a couple of different paths that it can go towards, based on certain decision points. And so, starting with, if you look at the current system, it’s one of those things where we assume that the dollar as the global reserve asset benefits the United States, whereas the way it’s actually been going in the past few decades is that even within the United States, it only benefits kind of a small percentage of people in the United States.
[01:02:18] So people who generally work in finance or work around DC or work in tech in some cases, whereas anyone who, for example works in manufacturing or, in sort of industrial production has actually been harmed by the current system. Because the way that the system is currently structured is that, the United States made a deal with, OPEC, Saudi Arabia and other OPEC countries where they will only sell their oil in dollars to, to different countries in the world.
[01:02:44] So whether France or Japan wants to buy oil from Saudi Arabia, they have to do it in dollars, which means every country in the world needs dollars. And so that gives US the ability to print money for hard commodities, but also makes it so that currency is in global demand compared to other types of currencies.
[01:03:00] And that ends up pushing up our trade deficit. And so if you look at the U S trade deficit over time, we used to be a strong manufacturing hub, but when we shifted from the Bretton Woods system to the petrodollar system basically we, our kind of cost for maintaining that system is that our domestic manufacturing becomes very uncompetitive.
[01:03:18]This has been described by some analysts like Luke Gromen, for example, as the U S having Dutch disease, where basically if a country finds natural resources that often ends up ironically displacing the other things that they were good at. And so basically, because we now export dollars basically as part of what we do it’s displaced our other types of exports and made them less competitive.
[01:03:38]And so this system as currently structured benefits segments in the United States, and then it benefits exporters’ in certain of those other countries. And then there are a lot of people in both inside the United States and outside the United States that are not doing well under the system, because these imbalances do keep accruing where the US runs these big deficits, and then foreigners take those dollars surpluses and go ahead and buy financial assets.
[01:04:01] So it works really well if you’re one of the holders of financial assets in the United States, but it doesn’t really work well for a lot of other groups. And China’s interesting because people often assume that if the dollar system ends as currently structured, then that means that another country has to come along and take that mantle and be the global reserve currency.
[01:04:19]Whereas I actually find that somewhat unlikely because, there’s no country really big enough where their currency alone can be kind of the central point of the system, including United States anymore. So when the petrodollar system was started in the seventies, the United States was like 35 to 40% of global GDP.
[01:04:36] We were by far the biggest commodity importer. And then over time, the U S went down to like 20% of global GDP. We became like the second biggest commodity importer. And so it’s really hard to maintain that system when you’re a shrinking percentage of that pie. And then even China, even on their projected growth path is unlikely to be a big enough kind of, segment to be able to do that.
[01:04:56] They also, they’re aware of the downsides that like we described that the Dutch disease or the export on competitiveness that you have, if you have the system as structured. And so what China’s main goal is that they want to be able to buy commodities without going through the dollar based system.
[01:05:11] They want to have some of the advantages of a reserve currency without some of the drawbacks. And so I think over time, we’re shifting towards a more decentralized financial system, but that can take two really big paths. And so one is as you point out, they can do like a digital SDR.
[01:05:28]And so that’s one of those weird things. It’s both centralized and decentralized. It’s kind of like centralized decentralization where they say, okay, instead of one currency being at the heart of the whole system, we’re going to have a basket of currencies at the heart of the system. But then the ironic thing is that basket is centralized.
[01:05:43] And so you have kind of that centralized way of distributing the money supply, that the way that works out. And so that’s one of the ways that say policymakers want to go, the question is whether or not they’ll be able to make that happen. And so we’ve had, for example, the bank of England previous governor pointed in that direction.
[01:06:00] And that was also one of the original proposals all the way back in the 1940s, when the Bretton Woods system was constructed the alternate option was the BANCOR was basically the SDR in, in a different name and the downside, the hard part of making that system happen is that you have to have China, you have to have the United States, you have to have Europe all agree on something which in this environment is like herding cats, right? That’s the challenging part and making that system kind of come to fruition. Whereas the other option that this could go is just, basically a change in what we’ve been seeing, where we see over time, central banks are diversifying the types of assets they invest in.
[01:06:36] And so for example, with the creation of the Euro European countries buy fewer treasuries for their global reserve holdings and then you have Russia because they’ve been the target of sanctions because they’re not on friendly terms with the States. They’ve dedollarized to a significant extent where instead of holding treasuries on their central bank balance sheet, they hold gold and they hold Euro denominated assets.
[01:06:56] And then they’re increasingly interested in selling oil in euros to Europe or, and to China and other places. And so I think what we’re seeing over time is a shift away from that system where only the dollar can be used to buy oil and where the dollar is a very large share of globals central bank assets, where we’ll have say, regional reserve currencies, where you have the dollar, you have the Euro, you have the Chinese currency, and those will all be kind of regional currencies without kind of one central one. And so that, that’s kind of the way it goes. If there’s no central organization that kind of herds enough cats together to like update the SDR.
[01:07:33]Saifedean Ammous: Yeah, I think that’s an excellent analysis. And I agree with most of it. I think I’ll just add that I think there’s obviously a huge political problem in trying to get the U S and the Europeans and the Chinese to agree on a monetary policy, imagine having the IMF. Who do you make in charge of interest rates and how does that person get appointed?
[01:07:50] Who’s going to be Jay Powell of that system, but even putting aside the political problem. And even if we assume that say we get a new world superpower that is the U S and China or China, and they try and make the system work where, it’s primarily based around the interest of one country. Either we’re going to head towards a system where, we have all the imbalances is going to recreate the current imbalances with the US, and it’s going to take a few decades for that to emerge, but we’re going to shift all of the imbalances to China where the Chinese now don’t work and don’t produce and their industrial sector gets destroyed.
[01:08:21] And then Americans go back to working factory jobs, but we’re still getting the same kind of imbalance happening there. But if you try to do it as some kind of international system, ultimately without something like gold underpinning that system, you’re basically making stabs in the dark about monetary policy.
[01:08:40] So what is the value of this currency? How was it determined? How does the supply get determined and how did the people who get to determine the supply get appointed? There’s no easy economic answer for it. We use money for economic calculation. Any person who carries out an economic transaction is carrying out that economic transaction using money as the numerator, as the unit of calculation.
[01:09:05] But then when you make that value of that money as being something that needs to be decided by a government, you mess it all around. As you said when the US was big enough, it could kind of get away with that, but still created all those problems. But I don’t see how it’ll work in a multilateral world and I can see it leading to a lot of conflict.
[01:09:25] So perhaps the Chinese might be able to pull something off like this, where the new central bank digital currency is more favorable to them and they still managed to get the Americans and the Europeans to go along. And I’m just saying, hypothetically, if we do have something like that, it’s still not going to be, we’re still dealing with a monetary system that has no bearings without gold, without a hard assets that is out there on the market who’s supply is, are not controlled by the monetary policy.
[01:09:54] Then the monetary policy has nothing to go with and it’s going to be very ugly. And if we have the regional currencies arrangement that you mentioned, I think also that’s going to be very ugly because, Again, all of these regional currencies without a universal unit with which it can be measured we’re going to be witnessing a lot of economic miscalculation, and we’re going to be witnessing a lot of economic dislocations, essentially. We’re going to be reinstating barter. And this is what national currencies really are today. It’s a form of barter across international borders. But at least, currently with the current system, the barter effect is minimized because all currencies are all national currencies are essentially today in my mind, I like to call them the U S dollar plus country risk. Your national currency is not going to appreciate beyond what the US dollar is appreciating. It’s only going to go down compared to the dollar and it’s going to go down compared to the dollar by the magnitude of the country risk. And though is the way that I like to think about it.
[01:10:51] So at least, economic calculation now can be done with the dollar because you have all these dollars and quasi dollars if you want, that are being held out there. But if the dollar has gone and then we have all these Fiat currencies out there circulating against each other, It’s going to be really messy.
[01:11:09]How do you calculate prices? How do you calculate exchange rates? Monetary policy is constantly value changing all along and yeah, in my mind, I think that the only answer to this is Bitcoin it’s really, the gold can work as an answer. Hypothetically, if you had a bunch of angels in the world’s governments, but I think that train has passed.
[01:11:29] We’re out of angels in all world governments at this point. And so the only solution that works for me as a solution for the international monetary system is to base it around Bitcoin is how I see it.
[01:11:41] Lyn Alden: Yeah, the way it worked before the Bretton Woods system is used, you had that gold based system.
[01:11:45] And the way that imbalances worked themselves out was with different exchange rates easing over time. And so, for example, if you were economy was producing a lot more than it was importing. Your currency would generally strengthen over time. And that would basically, the purchasing power of people in that country would improve and they would often start importing more.
[01:12:05] And eventually, that system would kind of balance out. Whereas the other hand, if your country was not exporting enough to keep up with its imports, eventually the currency would weaken which weakened the importing power of people in that country and basically forced them to produce more.
[01:12:18] It also gives the incentive mechanism where, suddenly they become a cheaper market for production. And so that kind of increases their competitiveness at producing things. And so you have that kind of natural balancing mechanism with gold at the center, and then these other currencies kind of, moving around each other.
[01:12:34] And one of the problems we’ve had, especially since the 1970s petrodollar system that’s in place is that we have this weird incentive for multiple countries to want to purposely devalue their currency compared to others, because they want to keep their exports competitive as possible. And so, for example, we see countries like Switzerland, they literally just they create more of the currency to buy foreign assets for the specific purpose of trying to prevent their currency from appreciating too much.
[01:12:59]And so it, for many countries, it’s a delicate balance where, the, obviously they don’t want to depreciate their currency so much that people at home really start to feel it and they can’t import the things they want, but they also try to depreciate it so that their exports are competitive.
[01:13:13] And we’ve seen kind of China playing around with this, where for a long time, they wanted to have a very export driven economy. And so they wanted to keep their currency suppressed. And then over time, as they’ve kind of shifted towards a middle income country, they’ve wanted to kind of balance that out a little bit more.
[01:13:29] And so they’ve been doing a little bit less currency manipulations. And so the current system is structured, basically has all these different players purposely trying to try to devalue their currencies, just basically boost their exports. And part of the reason why the United, because the dollars that the accident, the system, the United States, one of the countries is not really doing that.
[01:13:48] They’re not say, if you look at our foreign exchange reserves, we’re not printing dollars to buy foreign assets. And so basically we’re the ones that end up being the ones with the trade deficits because we’re not intentionally devaluing our currency at least with the same mechanism that the others are doing it.
[01:14:02]But when it comes time to have a pandemic, the United States instead reduces their currency by doing bigger fiscal stimulus than these other countries, as a percentage of GDP. And so overall I agree that, most systems have some sort of imbalance to them. Especially if there’s no kind of central neutral asset, whether it’s something like gold or Bitcoin and then it just becomes a matter of degrees.
[01:14:23] And so the current one is if it’s centralized on one country, you’re likely to get these really big multi-decade imbalances. Whereas if you have another system that’s kind of more decentralized, you have a lot of messy outcomes, but it generally prevents like a really big imbalanced forming for decades.
[01:14:38]But instead you have a lot of these micro imbalances. They keep sorting themselves out, but the system itself is just not very effective because like you said, it becomes a barter system where you have say three major units of account in the global system rather than one. And that just becomes this kind of balancing act that keeps shifting over time. And so that is the challenge of kind of each global monetary system constructed has advantages, but then it has flaws and eventually those flaws outweigh the advantages and it breaks down. And then you go towards a new system and they’re always accompanied by currency devaluations.
[01:15:11] And it’s been one the kind of the economic history we’ve gone through. And it’s been, it’s always messy each time.
[01:15:18] Saifedean Ammous: Yeah, I couldn’t agree more. Kane has a question he wants to ask. Can you want to go ahead?
[01:15:24] Attendee: Yeah. Thank you guys, Lyn and Saifedean, and for doing these things and putting your information out. The one question I want to kind of talk about is a little bit of Cathy Wood, a little bit Jeff Booth with technology playing a factor like it never has digitally before, so. If we’re kind of at one of these revolutions where the world just drastically changes. And I totally agree with the stuff you guys were just talking about is possibly part of the problem that today, like no other period, you could start a business from your apartment bedroom that you rent, with credit cards have no inventory, very low to no overhead.
[01:16:02] Don’t have to have physical buildings, which means you essentially don’t need a loan. So interest rates don’t really have an impact on a large part of the economy today, like they did. And the fed just hasn’t really figured out that main tool that they’ve been using to jockey currencies or, economic output or inputs just no longer works.
[01:16:24] And they’re kind of the last ones to figure that out. And so as soon as we shift, whether it be through CBDC’s or Bitcoin or Ethereum or other currencies, Is that how we kind of get back to an evolving, group of people. Cause humans generally always go up into the right, even though there’s various periods where we drop.
[01:16:48] Lyn Alden: Yeah. We’re certainly, yeah, certainly it’s a trend, especially as it relates to modeling out inflation versus deflation, because we have all these structural deflationary forces. So you have some more problematic ones like debt and demographics, but then of course you have technology deflation, which is the best.
[01:17:05] Yeah. That’s the good type of deflation. Cause you want to have your currency buy more over time. And so if you look back, for example, in the late 1800’s, when you had the industrial revolution if look at the United States, for example, broad money supply went up a ton.
[01:17:18] But inflation was negative. You had deflation because you had just massive increases in productivity. And so, you basically had a like say if standard oil was founded and you had the Intercontinental railroad you had creation of electricity and a creation of the internal combustion engine.
[01:17:33] And that basically freed humanity for a lot of types of work so that they could develop other types of work. And so what we’ve seen since the late nineties is we’ve had, the internet we’ve had mobile internet we’ve had automation we’ve had offshoring, which is suppressed wages and basically done that labor arbitrage.
[01:17:50] And there’ve been winners of that environment because if you are a consumer that works primarily with information, if you work in healthcare technology, finance, or government, you’ve got a lot of benefits of that system, but they didn’t really have the downside whereas if you worked in say, if you were an American working in industrial production, you were harmed by that system because even though things got cheaper for you, your income was also impacted.
[01:18:12]And so, one of the risks to watch out for is that periods of technological deflation generally happen in bursts. And when we’re in periods of slow growth, we always assume that it’s going to be slow growth. And we’re in periods of fast technological growth. You’re always assume they’re going to, persist and they kind of hinge on certain bottlenecks being broken.
[01:18:31] And so, one of the things that will obviously affect how long this period of technological deflation goes is something like the emergence of AI over time. And whereas, some of the other things that we can mistake for indefinite periods of deflation is if you look at, like I mentioned the commodity cycle, we’re when we’re in a period of abundant commodities we often feel like it’s going to last forever.
[01:18:53] Like we have more commodities than we need. We’re in a disinflationary environment, how could we ever get inflation? And then eventually that period ends and you get more of those scarcity of commodities compared to what you need. And so I’m kind of viewing that where technology deflation is a big offset or compared to all the monetary policy and fiscal policy that countries are doing. And it becomes that tug of war between those two forces. And so if you looked at the past 20 years, there has been a bigger than normal gap between say broad money supply growth and most measures of inflation.
[01:19:24] And part of that is because of that labor arbitrage and that automation and that capital light business structure that you mentioned. But you know, I think eventually you potentially saturate how far you can go with that until we have the next round of big big breakthroughs is that I kind of viewed that technology progression as lumpy, rather than like a smooth, exponential line.
[01:19:43] It comes in these bursts whenever we have like a revolutionary new technology.
[01:19:47]Attendee: Yeah. I agree. And that kind of fits Ray Dalio’s paradigm shifts where, we get accustomed in one way. So an environment where rates go down the world works and now we’re kind of in that transition period where. Hey rates can’t just keep going down. We’ve got new technologies that create these new business models, which just means next generation skillsets are different. So that maybe they’re not factory workers, they’re just monitoring what the outputs for a bull case to kind of get out of the mess. That seems to make sense to me, I’m just curious.
[01:20:18] It sounds like you’re kind of looking at it, at least in that frame as well.
[01:20:23] Lyn Alden: Yeah. It’s basically, there’s two forces. It’s like a immovable object versus an unstoppable force and kind of just measuring and mapping, which kind of forces winning in any given year. And so, the 2020 was the year where we’re that the sheer amount of fiscal and monetary stimulus kind of overwhelmed that deflationary force for a period of time.
[01:20:42]And so it’s kind of like each year, just kind of seeing how the magnitudes of those two forces compare to each other. And we have become accustomed to a lot of these disinflationary forces of, we’ve optimized our supply chain so much. But then we sacrificed resiliency in some ways.
[01:20:56] And so we’re kind of now paying some of the costs for the lack of resiliency that we built into the system. We kind of have everything last minute. We have a high degrees of specialization where only a handful of countries even make semiconductors. And then suddenly we have semiconductors shortages and so, basically as this plays out, if we kind of respond to this shock we’ve had, and we make our systems more resilient that cost could be that basically we take some of the efficiency away and shift a little bit more towards resiliency, which is generally an inflationary force, all else being equal.
[01:21:26] And so I think we have to be careful about extrapolating the current trajectory forever and seeing where does that kind of run into a bump and maybe reverse the other way for a period of time? The long arc of history is, technology deflation keeps improving, but then you have these periods of time where it stalls or monetary policy and fiscal policy kind of temporary override it.
[01:21:47] Attendee: Yeah. And I think that’s, you said that a lot in corporate cycles where they just cut to the bone so much in the workforce that then they have to add back. Does that make sense? Yeah.
[01:21:57]Saifedean Ammous: Okay. We’ve got a question from Browning. He’s asking you, do you run a full node and if so, do you develop metrics from it for proprietary analysis?
[01:22:04]Lyn Alden: I personally do not. It’s something I intend to do. These past two years have been super busy for my business. And so I’ve kind of been pulled in so many different directions.
[01:22:12] And so, it’s something I am looking forward to doing at some point. But yeah, at the current time I do not run a full node.
[01:22:20] Saifedean Ammous: Okay. And we’ve got another question from, keep it simple Bitcoin he’s asking could that’s a good, very good question. Could the commercial banks become another advocate for Bitcoin?
[01:22:30] If we see central bank digital currency execution attempt to disintermediate commercial banks by having central banks distribute the CBDC directly to the population?
[01:22:40] Lyn Alden: Yeah, I think so. And we saw the interesting news of for example, NYDIG partnering with banks to, basically have customers at banks be able to buy Bitcoin through their banking relationship.
[01:22:51]And so I do think over time their incentives can shift to whatever’s, not trying to kill them as fast. There’s always going to be some market for credit. There’s bad types of credit. There’s good types of credit. And we’ve been over-reliant on credit but you know, there’s always a market for shifting around the time value of money and, basically pulling forward capital for certain purposes. And so some degree of lenders will always be important and the more that they can line themselves with technology including Bitcoin the better they can turn out. And so, one of the proponents like proponents of central bank, those occurrences often point out that it allows.
[01:23:28]Decentralized areas to go around the banking system. And so, basically banks can find themselves where historically they’ve kind of been very skeptical Bitcoin, and now they’re kind of warming up to it. And I think part of it is because they see some of the alternatives and they say, well, like I’d rather choose this one than the one that’s even more existential.
[01:23:47] And so I think it makes sense for banks to want to partner with Bitcoin. And even, seeing the press releases about that NYDIG announcement, basically bank saw that, they can monitor transactions that are happening and they see all this money flowing to Coinbase and other exchanges and they say, well, we want to retain that money.
[01:24:04] I mean, if we’re not offering products and services that people want, what can we do to change that? And so we’ve seen a sudden shift where as Bitcoin’s become a trillion dollar asset, and as education around Bitcoin has grown, and I think more people working at banks, I mean, I gave a presentation to a bank, a board of directors and they’re aware of things like the stock to flow model and stuff at this point.
[01:24:24] I mean, there, some of them are on Twitter and, so basically as education seeps out into these bank boards they say, okay, how can we retain this in our firm, rather than just getting our markets share eaten by these new companies they want to be the companies rather than get displaced by them.
[01:24:41] Saifedean Ammous: Yeah, and I think I agree. It’s a, it’s an interesting dynamic. A lot of the early Bitcoin rhetoric was all about screw the banks and we’re going to replace the banks. We’re going to get rid of banks. And people like me have been beating that drum for a few years that, the real enemies are the central banks. Banking is just a normal human business that has existed under any kind of money.
[01:25:01] And the reason that it is such a mess right now is because it is corrupted by a monopoly central bank. So it would be very fascinating to see this. And I think, banks are witnessing just the enormous amounts of money that are being made by exchanges by collecting Bitcoin fees.
[01:25:14] And there’s no reason why they should give that business up. And this is the business that you mentioned. The news that you mentioned on NYDIG effectively allows people to disintermediate exchanges. So now you can have your Bitcoin on your bank account, and if you want to take it out and withdraw it to your own wallet, you withdraw it directly from NYDIG.
[01:25:33] So basically you’re buying Bitcoin from your own bank account. You don’t need to set up an account on an exchange and you don’t need to use wire transfer to send the money to the exchange and then, get it lost and pay fees and all that stuff. It’s fascinating. And I think the more that central banks print money and handout money in UBI, the more Bitcoins, the more Bitcoiners and Bitcoin businesses are going to develop just amazing catchment technologies for sucking up all of that Fiat and converting it into a proper money like Bitcoin.
[01:26:07] It’s a modern alchemy and it’ll be fascinating watching what banks do.
[01:26:12] Lyn Alden: And yeah in the history, I mean, banks, one of the places historically to buy gold was at banks and it got banks developed out of the whole gold market. And so even when they became established, I mean, you could generally go to your bank and one of the services that they could do is sell you gold.
[01:26:26]And so we’re in an environment now, right? Where the typical bank account does not offer a yield that keeps up with the prevailing inflation rate. And so their product is inherently disadvantaged. They’re basically what a bank we used to offer was, Hey, deposit your funds with us.
[01:26:41]You’ll earn interest. You’re able to save over time. And now they can’t offer that. They were saying, basically we can give you pennies on, not even pennies on the dollar really. And so they don’t really have that, but if they can offer something like Bitcoin and they say, okay, you can keep your checking account with us.
[01:26:56] You can pay your bills with it, but then also you can save in Bitcoin if you’d prefer. And that basically lets them keep that banking connection. And so they’re interested obviously in keeping the fees associated with that, but then even, from a loss leader perspective if they can just retain that banking relationship by, maybe they break even on their ability to offer Bitcoin.
[01:27:14] For example, when it comes time for someone to want to do a mortgage, take out a mortgage or something like that, they often go to their existing banking relationship. And so they basically want to do whatever they can to remain relevant for people. Rather than that their service just dwindles over time, as you’ve seen, especially in say European banks with even lower interest rates where, it’s at the point where some people are charged money to have their money in a deposit in the bank, which is extremely unattractive for both the bank and for the person depositing it.
[01:27:43] Saifedean Ammous: Yeah, absolutely. Kane seems to have a follow up question. You want to go ahead and ask it?
[01:27:49] Attendee: Yeah. Just saying, one of the concerns in the Bitcoin community, or maybe outside is that, Hey, what happens with a block reward basically goes away and it’s just fees are the fees have to go up drastically or miners leave and then the network, could die off. And it seems to me that Bitcoin is a base layer. Like, Nik Bhatia says it’s a great book. To combat that with people moving away from banks, because they’re not really offering products that consumers want, that they just become mining operators set up nodes. They process transactions much like, Southern company or Georgia Pacific or whatever transacts power.
[01:28:28] And then the FinTech companies give us the consumer products. We really want, we really use on a day-to-day basis like Apple, Apple doesn’t process the power, but they build the product that we want to use and they sell that and it uses the power in the house. Seems like a good balance to kind of solve that potential future problem that at some point has to be looked at, but it isn’t now because there’s enough in the reward to keep any mining pool going after this.
[01:28:58] Does that seem to make sense as a possible way that it all comes together without one side or the other getting blown up.
[01:29:05] Lyn Alden: I think, to some extent, and one of the things I wrote an article on that change from block subsidies to fees because that’s, I try to identify long-term risks for a thesis that I have.
[01:29:15] And so when I look at Bitcoin, I try not to assume like this is predestined to work. It’s like, okay where are the stages where this project could fail? And so right now it’s been wildly successful for 12 years and then saying, okay, what are the remaining tail risks that could, prevent this ongoing monetization that we’re seeing in the Bitcoin network.
[01:29:32]And so one of them is that it’s still asked to navigate that transition from primarily relying on block subsidies for security, to having a permanent fee market that is able to sustain its security. And so when I just looked at that whole thing, quantitatively, generally you see over time that as Bitcoin grows, the percentage spent on security goes down which is good because as the asset gets very mature you need less percentages of it to basically have sufficient security.
[01:29:59]There’s a big open question about what is the ideal percentage and it’s gonna be market driven. So, the market’s gonna decide and we’ll see how that plays out, but basically Bitcoin needs to reach a sustainable level where the blocks are consistently full. And so there’s competition for that space.
[01:30:16] And therefore that there’s some degree of positive fees there at pretty much all times. And there’s, I kind of modeled out that fees don’t have to be super high in order for that to be sustainable, especially when you have things like the lightning network or even some other more centralized ways of doing exchanges, like a banking relationship where if you can batch transactions together than individual transactions can still be reasonably priced and yet there still can be a reliable fee market.
[01:30:41] And so it’s something that I don’t view that there’s insurmountable problems with Bitcoin developing a fee market. It’s just kind of a risk that I’m watching is something that has to be navigated and it just remains kind of something they keep on your radar to see how healthy is the fee market.
[01:30:54] How’s that developing. And there certainly is an incentive for custody providers to want to maintain security of the network. And so basically the way Bitcoin is designed is that, it primarily puts the onus on as you have the blocks subsidies then more of the onus is on the holders of the coins because basically you are having a mild inflation rate that is happening.
[01:31:15] And so basically the existing holders are kind of paying for security in that sense, but over time that security kind of shifts towards the people doing the transactions because as Bitcoin’s inflation rate drops to near zero it’s no longer the holders that are paying for security, it’s the transactors.
[01:31:30]But some of the holders still have an indirect incentive because they want to make sure that their investment retained it’s monetary premium. They want to maintain the health of the network. And so you could see custodians kind of involved in making sure that Bitcoin security remains robust.
[01:31:44] Saifedean Ammous: Fantastic. Who’s else has gotten more questions. Anybody have more questions?
[01:31:50] Attendee: Yeah, Michael Saylor is pretty casual. He has analysis, but he’s casual about seeing Bitcoin and US dollar living together. As a matter of fact, he sees them living together pretty comfortably.
[01:32:06] If I understand him correctly. I know Saifedean’s not in agreement with that. Lyn do you see any possibility of that happening?
[01:32:19] Lyn Alden: So I think that’s one of the possible futures and that goes back to you can have a reserve asset that’s different than the medium of exchange that happens. And so basically if you go back to say a gold standard period gold was the underlying asset and that there were still currencies kind of, tied to it.
[01:32:36] And it used the coins were, say, silver, you had bills that were backed up by gold. And so you can have an environment where central banks hold Bitcoin that people, save in Bitcoin. And, but they, basically they’re still using domestic currencies for transactions.
[01:32:53] And that partially comes down to, what backs a fiat currency is a government’s ability to tax in that currency and to put taxes on other sort of transfers. And so one of the things that’s currently kind of a hurdle for Bitcoin payments is the fact that those transactions are taxable events.
[01:33:09]And so that’s one of the ways that a currency tries to maintain monopoly status on being a medium of exchange is they say, okay, we’re a unit of account we’re going to tax any other transaction that happens if you buy and sosellgold, if you buy and sell a Bitcoin, you’re going to pay capital gains taxes and.
[01:33:25] When it comes time to pay our taxes, the only thing they’ll payable in is that currency. And so if you’re in the United States, you got to pay dollars. If you’re in Japan, you gotta pay yen for your taxes. And so that can work up as long as there’s no outright currency failure.
[01:33:41] And so when you see emerging markets certain ones that have currency failures you started to see say black markets in dollars develop. Because the public loses confidence in that currency. And so even though they’re still trying to retain monopoly power over their currency that people have enough of a public opinion against that currency, where they start to kind of ignore that.
[01:34:01] And so, unless you reach that point where people no longer have faith in that currency at all, it can co-exist for a long time. And I think, how long that plays out and all the different ways that play out, I still think are an open question that I think is worth monitoring over time.
[01:34:17] But I think the point is you can have an asset that is that you save in. There’s not necessarily the same asset that you transact in on a regular basis.
[01:34:24] Attendee: So does that suggest then that Bitcoin may act as a governor on inflation and therefore government spending.
[01:34:36] Lyn Alden: Well, it partially. So basically if governments find that their currencies are inflating too much then that is one of the limiters for how much fiscal spending they can do.
[01:34:44] And so, after the 1940s, for example, the reason they shifted more towards austerity is because they were beginning to view inflation as a problem. And then the same thing, in the seventies as inflation was a problem they were basically forced to raise rates to a very high degree and basically put the economy into a recession to basically to kind of retain the value of that money.
[01:35:04]And so if you were to have periods where demand for that currency is weak because people would rather save in other assets. And then the velocity of that currency increases a lot that can start a spiral where it kind of rains the mint. It’s historically challenging for domestic markets to experience very rapid inflation because there’s so much debt that’s denominated in those currencies. And that debt ironically ends up being a form of demand for those currencies, because the only way to satisfy those debts is to get those currency units to pay off those debts. And so we often see hyperinflation in one of two cases, either you have a market where their productive capacity was destroyed by war or social upheaval of some sort, or you have these types of emerging markets where the liabilities they have are denominated in a currency they can’t print. So you have something like Argentina that has dollar based debts and they can’t print those dollars as a note, no matter how much they print, they can’t make the liabilities go away other than outright default. And then people trust that currency less than it hyper inflates. And so overall, I currently view Bitcoin more as that store of value and then the option to use as a payment network, rather than something I’m currently modeling as displacing say, domestic currencies.
[01:36:20]Saifedean Ammous: All right. So keep it simple bitcoin is the name of the person who’s going to be asking the next question. Go ahead.
[01:36:28] Attendee: Hi, Lyn thanks so much for your time. A lot of concern I get from, people they have this they’re trying to, navigate their way through, Bitcoin versus all these other things.
[01:36:39] Cause there’s some, every cycle there’s so much hype, so. Do you see viability, for other quote, unquote, other blockchains, disintermediating or adding value to interactions people have with the more traditional financial assets, stock bonds, equity, ownership, derivatives, et cetera, or do you think that it’s Bitcoin and, layer twos, lightning side chains, discrete log contracts that will really fill in the value proposition for almost everything?
[01:37:12]Lyn Alden: So I think, the burden of proof is on altcoins to justify themselves because they’re going against a very bad track record. I try not to be in a position where I’m trying to prove a negative by asserting that no other token can succeed. And so, for example, if you look at operating systems today. There’s not a million operating systems, but there’s a handful of operating systems. And so you can have an environment where, Bitcoin is the primary one. And then you have a couple of other blockchains that are specialized at doing other things. And you kind of have value accrual will go up to say the top three blockchains.
[01:37:43]But that those other ones are more, they’re not really like hard money. Like they’re more like utility tokens. The challenging thing about a utility token is that there’s pretty low switching costs. And so, for example, I think one of the useful use cases of these tokens is stable coins.
[01:38:00] Because as long as multiple financial systems coexist, you have an environment where, they want to apply blockchain to fiat currencies, basically to get some of the benefits of a blockchain, but it’s still tied to a fiat currency. And so stable coins have a pretty significant use at the current time.
[01:38:15]Any sort of blockchain that can host those stable currencies is playing a useful role. But then as you’ve seen over time, stable coins keep migrating to whatever chain is cheapest. And so earlier they used to be tied to Bitcoin through the Omni.
[01:38:27]Then we’ve seen they’ve migrated towards ethereum. And then as ethereum fees got very high, we just saw, for example, now there’s like more tether on Tron than on ethereum, especially for people trying to do smaller transactions. And so basically all these, if you have, if you’re kind of sacrificing certain features in order to basically, if you’re sacrificing decentralization to new order to enhance certain features. The problem is that another protocol can come along and have even more centralization and do it even more efficiently. And you kind of have that, so that stable coins, things like that keep migrating to whatever’s cheapest. And so it’s really hard for those utility protocols to kind of create enough of a permanent moat or network effect to, protect themselves against all these competitors that can arise.
[01:39:11] As we keep seeing this cycle where whenever Bitcoin does well, alt coins do even better. But then when the bear market comes. Most of those get obliterated. And then when and Bitcoin holds up and then when the next cycle comes, Bitcoin reaches new highs and, 99.9% of those other altcoins, never come back to where they were during that peak.
[01:39:32] And so I don’t preclude the possibility of other blockchains coexisting and doing something different from say being money. But really the onus of proof is on them to basically, show why that they’re going to better retain value against onslaughts of just ongoing competition out there.
[01:39:54] Saifedean Ammous: Yeah, I agree. And then we’ve got a question from Browning. I think this is going to have to be the last one we do. What is your opinion on government potential ban on Bitcoin?
[01:40:05]Lyn Alden: So I think it depends on the country in question. We’ve seen, banning proposals more often in emerging markets just because they are more prone to currency crises and more concerned about kind of blocking some of the exits where possible. In the United States or Europe or Japan, it’s more challenging to do a ban because you have more safeguards against that sort of thing.
[01:40:27] Right. And so, but United States, for example, the precedent for it is the fact that they’ve banned gold for like 40 years. And so it’s kind of funny that they banned a non dangerous inner metal from people owning it just because in order to kind of protect the monetary system.
[01:40:41] And so I don’t rule it out of the realm of possibility that they’ll attempt to do so. But overall, the direction we’re seeing is that regulators have become increasingly aware of Bitcoin and they, if anything, they’ve been clarifying and helping regulations, their main view is that they want to better to track it to some extent.
[01:40:59] And they also want to make sure that they get their taxes on it while it remains in this current, kind of configuration. And so we’ve seen that the direction’s not been towards banning. It’s really been towards in their view trying to just make sure they know who has it.
[01:41:14] And so they’ve been trying to do KYC regulations and things like that. Employing those firms that can do analytics to find out and see, who owns it and who they have to go after for tax purposes where there’s not been a lot of movement in these major countries towards banning it.
[01:41:27] So I view that as a lower tail risk that’s out there, something to kind of monitor to see what they do to see if they kind of try to chip away at Bitcoin through things like, trying to make it harder to self custody or things like that. Or kind of like selectively raising taxes specifically on Bitcoin.
[01:41:46] I think one of the narratives to watch is the idea that they might use ESG mandates to say, put higher taxes on something like Bitcoin. And so there, there’s kind of ways that they can try to like make it disincentive to hold it. It’s hard to outright ban information. I mean, ultimately Bitcoin is you can have a 12 word phrase that you memorize in your head and you own Bitcoin.
[01:42:08]And so it’s challenging for them to outright ban and then especially the larger Bitcoin gets. The larger percentage of the public that owns it. The more large institutions and donor class people that are invested in Bitcoin in some way, the more they can influence politics to basically avoid outright bans and things like that.
[01:42:27] And so basically the bigger it gets, the more, the harder it is for them to ever do much.
[01:42:35] Saifedean Ammous: Yeah, I think I agree. All right. Thank you so much, Lyn for your time. And for all of these insights, it was a very enjoyable and edifying discussion and thanks to everybody who joined and we’ll see you in the next seminar on Monday.
[01:42:51] Lyn Alden: Yep. Thanks. Thanks for having me. Nice meeting you and nice meeting everyone that they came today.
[01:42:56] Saifedean Ammous: Thanks a lot.