Debating Professor Hanke on Bitcoin’s value

Professor Steve Hanke has many decades of experience studying currencies and fighting inflation, but does not see value in bitcoin. He joins Saifedean and Hong Fang, the CEO of OKCoin, to discuss Bitcoin’s value, whether bitcoin has intrinsic value, if bitcoin is just a speculative bubble, and if a currency board would work for a digital currency.

Podcast Transcript

03:39

David:

What is bitcoin’s utility and the value of bitcoin? What is the price that it should be trading that? We’re here to discuss these topics with 3 very prominent guests, experts in their respective fields with various viewpoints. Dr. Saifedean Ammous – independent educator at saifedean.com who is also the author of The Bitcoin Standard. Hong Fang – CEO of OkCoin and Steve Hanke – Professor of applied economics at Johns Hopkins University. Gentlemen and lady, welcome to the show! Dr. Ammous, it’s your first time, welcome to Kitco! 

04:12 

Saifedean Ammous:

Thank you so much for having me, it’s a pleasure to be on!

04:15 

David:

It should be a fun discussion about bitcoin! I know you all have very good opinions and viewpoints on how people should perceive bitcoin and the role it plays for investors. I’d like to start with bitcoin’s utility and its intrinsic value. That is the foundation of this discussion. Hong, ladies first! You have written an essay about this very topic and why you think bitcoin should reach 100,000 dollars. Is that still your price target Hong?

04:46 

Hong:

Short-term, yes, absolutely. I think it’s interesting when you mention intrinsic value, and the key word – utility. I think those two are very important to understand when we talk about an “asset class”. To me, bitcoin is a very special asset class. It’s not just an asset class. When we talk about an asset class in the traditional financial world, it is a type of asset that generates certain cash flow or be valued in fiat money, i.e., USD or any other fiat money that you can speak of. Bitcoin, to me, does not fall into that category. It is this very special asset class that actually provides essential utility as the best that we have as a store of value. The best store of value that we have ever had in human history. 

That is what makes it very special. We talked about this previously, on your show. The reason that bitcoin is very special and unique, compared to gold and many other historical store of value formats that we’ve seen, it is very scarce, divisible, durable, fungible and many other things. The most important thing about bitcoin is that it takes out any third party from the creation and management of this asset, and makes it very censorship-resistant, makes it free from inflation which has been the biggest “evil” that has plagued our financial system and our currency system, historically. That’s how I’ve been viewing it. Compared to many other asset classes out there. It’s very special, you cannot think about it as being comparable to a stock or a bond. It shouldn’t be thought of in that framework.

06:55 

David:

Ok. I’ll let each of you make a statement and then you have a chance to respond to each other. Doctor Ammous, you’ve talked about bitcoin and how it relates to Austrian Economics and its role for investors and economists alike. Can you elaborate on this concept?

07:11 

Saifedean Ammous:

Yes, I think the foundational concept of Austrian Economics is the idea that value is attractive. I think the term intrinsic value makes no sense in the context of economics. In the context of finance, it’s used to denote the value of the discounted expected future cash flow of a cash yielding asset, but that’s different from how we think about value in economics. A lot of things don’t yield cash flow and they’re still valuable. The value of anything comes from somebody valuing it. That is subjective, there’s no right answer over how much a person can value something or should they value something. It is entirely subjective; it is down to the person themselves. 

There’s no economic value without a human being making the valuation consciencely from the scarcity of the good that they’re valuing. For me, bitcoin has proven itself to have a value on the market for 12 years, and the market continues to exist with bitcoin in a very liquid form. I can understand how somebody won’t see value in bitcoin for themselves, but I don’t understand the idea that we can dismiss a 1 trillion dollars of asset being held by people all over the world as not having value. Somebody is holding all of the 1 trillion dollars of bitcoin that are out there today and they could be selling it, buying things, buying a lot of things for a trillion dollars’ worth of bitcoin but they choose to hold the bitcoin, so there clearly is value from all the bitcoin. That’s what economists should be asking themselves, why?

08:54 

David:

Ok, excellent. Professor Hanke, last time we spoke about bitcoin a few weeks ago, you made the rounds of the internet by saying that “Bitcoin’s fundamental value should be 0, and it’s going to eventually death spiral down to its fundamental value”. Can you elaborate on this view?

09:10 

Professor Hanke:

Well, first of all, I did say that and the fundamental value of something is very different from the market value. The only objective value of anything is the market value. The market value is, as a good Austrian I can conclude, the summation of the subjective valuations of the market participants who are engaged in buying and selling whatever it is on the market to determine its objective market price. These are dis classifications and terminologies that are used in economics. The market value of bitcoin is what, 55,000 today or something around that, I haven’t looked in the last hour, it moves around. What do you have there David, do you have it on the computer?

10:07 

David:

Yes.

10:08 

Professor Hanke:

It’s something around 55,000. That is the market price. That is the objective value and that is determined by subjective valuations of market participants. That’s clear enough. The fundamental value of something is at the limit, whether it’s generating either utility of some sort or free cash flow. A stock, we value that by looking at its free cash flow or a projection of that. That’s added together by all the analysts, all the subjective valuations and they’re buying, selling, recommending and ultimately, you get a market price which is the objective value. 

The reason I think the fundamental value is important to keep in mind is that there’s free entry into the crypto space. Bitcoin, I think has inferior characteristics to what could be superior cryptos that will eventually drive it out of the marketplace. When that happens, the supply is completely inflexible and inelastic, but the demand determines the price. The demand determines the price. If the demand disappears because people go to superior substances, then the price would go down to its fundamental value which happens to be 0.

11:52 

David:

Ok. Hong, I’ll let you respond to that, Professor Hanke made a point that bitcoin doesn’t generate any cash flow, that’s one of his assumptions for why the fundamental value of this asset is 0, because it doesn’t generate cash flow. Do you agree with this statement? Is it true that bitcoin doesn’t generate cash flow?

12:09 

Hong:

I actually want to respond to Professor Hanke’s point on several aspects. Professor Hanke talked about fundamental value which I actually agree with. When we think about the future price of a “asset class”, we want to think about what the utility of that asset is. Is it something that generates cash flow and then should be valued in discounted cash flow, or is it something that is more providing the utility – that’s not generating cash flow but a certain utility that people just want it. 

As a result of that, the value of it should be put into a supply and demand framework. In bitcoin’s case, it’s in the ladder. It’s not generating cash flow, it is a supply demand play, it is the best store of value. Depending on how many people actually see it as the best store of value. When that size of the population changes, the supply and demand dynamics will drive the change of price. 

Now, what I do believe in is, when you look at bitcoin versus all the other competitors out there as a store of value, either historically, or in fiat world, or in crypto world, there’s no other asset or whatever format that you can think of, that offers more superior attributes than bitcoin. 

The second point that intrigued me in Professor Hanke’s comment just now is that, when he mentioned the supply and demand and acknowledged the change of supply and demand will drive the price of bitcoin, he mentioned that there may be other assets in the crypto world that may come up with more superior attributes that may drive bitcoin out of this competition. I don’t agree with that, at least not now. I don’t see any other assets in crypto that can actually offer more than what bitcoin can offer at this point. There have been forks out of bitcoin but those failed. 

The other thing is, when you think about a store of value, we think about the consensus forming around that, and ultimately as a monetary network, there is a significant network effect there. Back to Professor Saifedean’s comment, it’s almost like a game theory. When you think about, either historically gold, or silver, or any other project commodity serving as a store of value, or bitcoin serving as a store of value, it depends on how you think other people will think of this as a potential lasting, durable store of value. There is a network effect. 

The longer bitcoins play out, the larger the networks become in the total market cap, the harder it is for a competitor to come up and challenge it. It has to be not just 2 times better, not just 10 times better, it has to be 100 times better, just like what bitcoin has been doing with fiat currency, with gold. It is 100 times better; it is a native internet money, a native store of value to the internet. That’s what makes it so special. It takes out government, central banks, it’s an absolute separation of money and state. That’s what is so special.

15:49 

David:

Ok, excellent, thank you. Doctor Ammous, I have a question for you but before I ask the question, I’d like to give Steve a chance to respond directly to Hong’s comments.

15:59 

Professor Hanke:

There are a number of things that can be said but the main thing is, there’s 7 characteristics of great currencies, and bitcoin just doesn’t fit the bill. I studied these things, the dominant currencies for 2,500 years. There have been 14 great currencies and the network effects are very important, obviously. The average length of life of each one of these is about 200 years. Bitcoin hasn’t been around long enough to say anything about its store of value. That assertion is kind of ridiculous on the face of it. The one thing that we do know is that gold, there is something called The Golden Constant. Roy Jastram’s book is titled The Golden Constant and from 1560 up until the present, gold has been something that holds its purchasing power over long periods of time. There are variations and volatilities but if you look into the ratio of wholesale prices over the gold price, it’s about 1. 

The thing stays pretty constant over hundreds of years. We have a long test there when we’re talking about store of value, holding purchasing power. Gold has, in fact, stood the test of time. What are the 7 characteristics? One is the size of the transactions domain. The size of the transactions domain for bitcoin is tiny, it’s not used for anything. This is a pure speculative asset. You have to look at the greater fool’s theory of speculation to figure out what’s going on. You can buy it today, its value is what it is and if you think it’s going higher you buy, you think it’s going lower, you would sell the thing short. Where it’s going, no one really knows. I have no idea where the thing – Hong might be exactly right. It’s going to 100,000 per unit in the short-run. 

The second thing that is required out of these 7 characteristics, stability of monetary policy. Three, absence of any kind of controls. Four, strength of the issuing state, because all the great currencies have actually been issued by states. And five, until 1971, there was always a fallback factor, in other words, the great currency was issued but could be convertible usually in gold or silver in some cases. The sixth thing is that there’s some sense of permanence, in other words, you can price deferred payments or long-term contracts or whatever this is, it has to be a unit of account that’s reliable and as a result of that, interest rates are low when denominating contracts from these things. 

All of these normal things that have been associated with every great currency for the last 2,500 years, you just can’t check the box on bitcoin. It just doesn’t have it. It is a speculative asset and you have to think in terms of a speculative asset in which the greater fool’s theory is the name of the game. You’re talking about something like the South Sea Bubble, or the Mississippi bubble 300 years ago in the 1720’s, that’s what’s going on. It might go a lot higher. It might go a lot lower. And, by the way, I can design a superior crypto.

20:11 

David:

Ok. We’ll talk about that in just one second doctor Hanke – your alternative crypto. Doctor Ammous let’s give you a chance to respond, I guess two questions now. First of all, Hong and Professor Hanke have both given their targets for what bitcoin should be trading at. What is your fundamental value target? Is there one for you?

20:34 

Professor Hanke:

David, I don’t have a target. This is a speculative asset that I have absolutely no target about, but a superior alternative is coming, entry is very easy, forget the networking thing. Entry is very easy. If you come up with a superior one, the demand for bitcoin will dry up and it’ll go down to almost nothing.

20:59 

David:

Ok, I see. Doctor Ammous, your response?

21:02 

Saifedean Ammous:

Well, my question is, we’ve already had 12 years of supposedly superior alternative coming on and entering the market. There are thousands of digital currencies other than bitcoin. Not only have they failed to replace bitcoin, they’ve also all failed at getting to 10% of bitcoin’s liquidity size. I think there’s no comparison between bitcoin and other digital currencies in any meaningful sense. They fail to challenge it at all. Bitcoin has just been continuously growing for 12 years at 200%. The question that I have here is, there comes a point at which bitcoin is bigger than the USD. There comes a point in which bitcoin is bigger than the global bond market if more people have money in bitcoin than in the bond market. Imagine 100 trillion dollars being held in bitcoin. 

Currently we’re at about 1 trillion, but imagine it goes up another one-hundred-fold. That is probably bigger than the global bond market. It doesn’t have to satisfy your textbook definitions of what makes a great currency because that refers to the currencies of governments issued in the analog world. It has to win the test of the market, and you have to think about it as a market good out there competing for people buying it. If more people buy it and we end up with more people holding bitcoin than government bonds, it doesn’t matter if it fulfills your criteria in your textbook, it’s already become a store of value bigger than bonds. My question to Professor Hanke is, if it goes up to 5 million dollars a bitcoin, it’s bigger than the bonds. Would you then consider okay, maybe it has a little bit of value itself to the people holding 100 trillion dollars’ worth of it?

22:46 

Professor Hanke:

If it’s 100 billion dollars, that’s the market value, that’s what it’s worth. There’s no question about it. All I’m saying and you’re missing the point of these definitions, it is not a currency, period. That’s the end of the story. I haven’t listed all 14, I’m not going to go back to the Greeks and go through every currency. I was talking about great currencies. Great international currencies that satisfy the definition of a currency. I wasn’t talking about a speculative asset. If the price goes up and the value exceeds the total value of all bonds standing in the world, that is the value of whatever bitcoin or the crypto is. That is the objective value. That’s the point.

23:40 

Saifedean Ammous:

Would you still say the fundamental value was 0?

23:42 

Professor Hanke:

Pardon?

23:43 

Saifedean Ammous:

Would you still say the fundamental value is 0?

23:47 

Professor Hanke:

Yeah. Unless there’s some uses that ultimately show up and the thing starts being used for something.

23:55 

Saifedean Ammous:

People will buy 100 trillion dollars’ worth of bitcoin. There’s 7 billion people around the world holding 100 trillion dollars’ worth of bitcoin, that sounds pretty useful to me. They must have a reason for holding it.

24:06 

Professor Hanke:

No. They do, they’re speculating. It’s a speculative market and a speculative asset.

24:13 

Saifedean Ammous:

You say that like it’s a bad word but everything you do is speculative.

24:16 

Professor Hanke:

I’m not saying it like it’s a bad word. I think speculation’s a wonderful word. I’ve spent most of my career speculating in foreign exchange, commodities, equities and bonds, so I don’t need lessons on whether speculation is good or bad.

24:31 

David:

Dr. Ammous, I’d like to draw your intention to a comment that the federal reserve chair Jerome Powell has recently made this week, in his testimony. He said that crypto assets are highly volatile and they’re not useful as a store of value. He said it is a speculative asset that is essentially a substitute for gold rather than for the dollar. What assumptions is Fed chair Jerome Powell making here and do you agree with his statement?

24:58 

Saifedean Ammous:

I think he’s probably correct to the extent of his old preference. He seems to prefer currencies that lose value steadily over time with general predictability to currencies that gain value with some volatility. There are different flavors of ice cream in the world and there are different kinds of currencies. The beautiful thing about bitcoin is that it is now offering us a free market test. We’re watching all those national currencies built on the idea that they need to lose value every couple of years to stimulate economic growth. We’re watching it go up against a currency that gains value. 

Powell is welcome to hold whichever he wants but I think the market shows bitcoin has appreciated 200% on average every year over the last 10 years. I think Professor Hanke and Professor Powell need to be asking themselves a little bit more about what it is that people see in this thing? Why has it not been displaced by all the other cryptocurrencies? The point I’d like to make to Professor Hanke is, when you were mentioning the specifications of a great currency, bitcoin effectively has one that substitutes for most of them which is the fact that nobody controls it, nobody can change the supply. It’s been 12 years, it’s a trillion dollars and nobody has figured out how to make more bitcoin, more than has been originally scheduled. 

This is the first thing that is truly scarce, and this is what distinguishes bitcoin from the other currencies because none of them has demonstrated the degree of immutability that bitcoin has which assures everybody in bitcoin that they can be 100% certain, almost, that there’s never going to be more bitcoin made. You can’t get that kind of security from any of the other networks. This is a very important point about what gives bitcoin value.

26:36 

David:

Doctor Ammous, I have one more follow-up question for you, you’re currently living in Lebanon where you experience and can observe very high levels of inflation. If I were to present to you options for hedging inflation, let’s say gold, bitcoin, stocks, government issued bonds, what would be your preferred instrument to protect yourself from inflation with?

26:58 

Saifedean Ammous:

I’m not living in Lebanon anymore but my preferred instrument would be bitcoin because the important characteristics of money is salability. The degree to which you can sell it without it losing its value. In bitcoin’s case, there are two parameters of salability. Salability across time, the ability of money to hold its value across time, and salability across space, the ability to move money across space. Bitcoin wins hands down compared to fiat currencies and gold in that regard. It’s ability to hold onto value across time is very good, as it’s standing, 200% appreciation a year. 

It’s also very cheap to send halfway across the world. This is when people talk about bitcoin not having utility, you can send money from the US to China in a couple of hours without having to use any of the national government infrastructure and institutions like the central bank. This is an enormous advantage. Places in Lebanon, they’re beginning to see the value of that. The dollar might be great and it’s more acceptable than bitcoin in a place like Lebanon, but you can’t send a dollar abroad. The banks won’t let you. The banks are closed, there’s capital controls and all kinds of problems. Bitcoin gets around that.

28:18 

Professor Hanke:

On Lebanon, David let me just make a quick remark because it’s something I followed hour by hour actually. In the last year, the Lebanese Pound has shed 81% of its value. Today, I just measured the inflation rate, it’s 378% per year. They are hyperinflating. They started hyperinflating in July. But this gets to the point about bitcoin versus the dollar and use and utility. Everyone wants what in Lebanon? They want dollars. Everyone around the world does. This is the utility. Almost all commodities traded in the world are invoiced and priced in dollars. 40% of all trade – manufactures, commodities, everything else, are priced in dollars. 60% of all central bank reserves are in dollars. 90% of every foreign exchange transaction has a dollar on one side of the trade. In terms of use, in use value, the dollar is the great currency. It is the international currency. All this bitcoin talk, it’s a minor footnote in terms of the utility and use. 

29:42 

Saifedean Ammous:

There must be a price at which you would have to – if you think it’s small then you have to be able to name a price at which you would admit that it’s no longer small, no longer a footnote. It is much bigger than it was last year in Lebanon, it’s not as big as the dollar yet, but it’s much bigger than what it was last year. If the trend continues, at what level would you admit this is just something that people can use? It works! It does what it says on the tin. You can send it across the world and it maintains its supply.

30:12 

Hong:

It takes time. When Elon Musk first started to invent electric cars, people in the traditional auto industry thought that was just a joke, a footnote. Now, Tesla is the most valuable auto company in the world. It takes time, and when the paradigm shifts, it comes slowly and then suddenly (???).

30:38 

Saifedean Ammous:

But I’d like to ask Professor Hanke to specify a price at which bitcoin becomes big enough for him to stop saying it has a fundamental value of 0.

30:44 

Professor Hanke:

You just measure the measurements that I’ve given you, the dimensions that I’ve given you. In other words, how many commodities? When are we going to start pricing oil on bitcoin? When are we pricing corn, wheat? That’s the commodities. When are we going to start pricing cars and manufactured goods in bitcoin? When? You’re talking about the speculative aggregate moving this thing around. I’m talking about the uses of it in transactions.

31:24 

Hong:

It is actually being used in transactions, Doctor Hanke. It’s probably just not as visible to us in the US than to other people living in different regimes where inflation is taking away their health. For example, in Latin America, there are a lot of commercial entities in their export business. With Asia, they’re selling commodities to Asia, they transact in bitcoin.

32:00 

Professor Hanke:

This is an academic footnote. The dollar dominates all of these transactions.

32:06 

Saifedean Ammous:

Yeah, but the British Pound dominated at some point and it doesn’t anymore. Just because it does, it doesn’t mean that it will dominate forever.

32:13 

Professor Hanke:

That’s exactly my point about entry of a competitor. A superior competitor. The USD became superior after WWI and drove the British Pound Sterling to the sidelines. I think, as someone who embraces the idea of digital currencies, which I do and I think that is the future in crypto. The question is what kind of superior product would be desirable, and I think a currency board type crypto would be. Facebook with Libra tried this but they had no one on the team, obviously, understand currencies very well, and how these things work. 

It turns out I’ve established 4 currency boards in my life. One in Estonia in 1992. They didn’t even have a constitution that have been approved yet, in June of 1992. We established the Estonian Kroon with their currency board backed 100% with reserves. We did the same thing in Lithuania in 1994. We did the same thing in Bulgaria in 1997 when they were facing a raging hyperinflation with monthly inflation peaking at 242% a month. We installed a currency board. And Bosnia and Herzegovina, wiped out by civil war in 1997 in August, we established a currency board. 

All these things work, there are no preconditions, the currency board does issue a lot of liability, whatever the local currency is – whatever you call it, it could be a private currency. I’m advocating private currency boards now. You issue a liability and that liability is backed with 100% reserves of some anchor asset and the local asset or asset issued by the currency board trades at a fixed exchange rate that’s freely convertible with no restrictions to the anchor.

34:38 

Saifedean Ammous:

They’re called stablecoins, they’re out there, they’re done.

34:41 

Professor Hanke:

They haven’t been audited, they’ve had all kinds of problems and that’s precisely why they have not been able to nudge – they have reduced the market share of bitcoin but they haven’t really been able to put it out on the market and compete. They are very inferior and we had a stillbirth with the Libra. The Libra whitepaper actually did mention the words currency board but it was a false start. It was improperly done and I think if one was done right, or others were done right, they could be very competitive with bitcoin and would in fact be superior, actually.

35:29 

David:

I have a few more questions, Hong, I will let you talk about other forms of cryptocurrencies, but Doctor Ammous, let’s talk about The Bitcoin Standard. Current regime backed by cryptocurrencies, is this possible, could it happen?

35:44 

Saifedean Ammous:

I think so. Professor Hanke is stuck at the mantle hurdle of thinking of currency purely within the nation state central bank paradigm. I’d love him to make the leap of imagining that we’ve gotten software now that gets around the central bank, gets around the need for a currency board and establishes market value, allows market value to accumulate into a free market good that is controlled by nobody. It’s not a good that is physical, it is digital. If I take your computer right now and I return it in the same physical form but I erase all the files of it, that won’t have the same value for you – that computer, right? It’s still physically the same, but the digital stuff on it is where you have value. We can attach value to digital things. 

What bitcoin does is, it allows us to replace the bottom layer of central banking, central banks and currency boards with a protocol that is set in digital stone effectively, and has demonstrated incredible credibility in maintaining supply and maintaining the integrity of the network for over 12 years. The question then becomes, you don’t need a currency board for bitcoin because it would defeat the entire point. Then you have a bunch of people who control it, and those people can abuse the authority because they can always issue more liabilities than they have. Bitcoin prevents that possibility entirely, instead what we’re going to be getting is bitcoin replacing the currency boards and the central banks, and we’re going to build second layer solutions like the stablecoins, like the currency boards, like commercial banking, backed by the bitcoin base layer.

37:28 

David: 

Ok. 

37:29 

Professor Hanke:

Well, what you said about the currency board, it really isn’t right. That’s technically, you’ve got things all mixed up. A currency board is not a central bank, it’s something completely different, and you can have, by the way, what I’ve been advocating, and that is a gold backed currency board with gold as the anchor. The liability of gold, who’s issuing that? Whose liability is gold? It’s nobodies! 

37:57 

David:

Let Hong respond here.

38:00 

Hong:

I think there are a couple of things that we have discussed back and forth but I would like to go back to, almost take a first principle mentality, Doctor Hanke, I commend you on your track record of setting up a currency board historically and making that valuable to the people in those countries that have suffered super inflation. One question that I would like to ask you to think about is, why would the currency board succeed compared to some of those local currencies? Also, when you talk about a list of good currencies, standards for a good, solid currency, I heard that you mention something that I think is very interesting and crucial. 

You mentioned something that’s called monetary policy stability. I think that is really important. That is actually the key point. When Powell is talking about bitcoin’s volatility, I think he is mixing it up with the price volatility and the monetary policy stability. People around the world who have chosen gold as the store of value, historically, before sovereign currency came up. That’s because gold is more predictable. That level of predictability and its monetary policy is what is driving its success, historically. When you think about a currency board that has been successful, they have been successful because they have been more predictable than those local currencies issued by local central banks who have no discipline in their monetary policy, it is totally unpredictable.

39:55 

David:

Hong, Professor Hanke talked about superior forms of cryptocurrencies that would one day de-throne bitcoin and drive its price down. Do these currencies already exist? Are there alternative coins out there that you see fitting this definition?

40:07 

Hong:

No! There is no superior form currently, that is more superior than bitcoin, that is more predictable, verifiable, Doctor Hanke was talking about potentially creating a currency board that is more superior than bitcoin. Maybe pegging against gold. How verifiable is that? Bitcoin is a network that is P to P, censorship resistant. Anyone, if you are interested in setting up a node and checking it out, you can check it out and verify it. It’s very fiable to anyone, everyone in the world. 

How can that be done for gold? You have to have a third party running the reserve, checking it and have them invite other third parties like auditors and legal councils to verify that. There are a lot of potential points of failure in that process but in bitcoin there is no single point of failure. That is what has been making it super exciting, different, unique and superior to all the other alternatives that we have in our traditional mindset. 

Again, I agree with Doctor Saifedean on the comment that, when you’re talking about the currency criteria, those are currencies issued by government, central banks, but that’s an assumption, that’s not a given. In our history of monetary usage, for human beings, not all the civilizations are using currency issued by central banks or the government. For a long time, gold is not issued by any government or bank, it was later taken by the government as a reserve, for people not to use it other than being a reserve.

42:00 

Professor Hanke:

We had private banking. The unit of account was something that was established by the government, but the issue of private money was very common. What you’re saying is just not correct! There was a lot of private money and private issues of money.

42:23 

Hong:

Those standard monies are issued by third parties, by individuals. Either an individual person or an individual organization. In bitcoin’s case, no third party has been issuing it or controlling the supply, managing the management of it. It’s all run on a protocol, like Professor Saifedean is saying, it was run on an open-source protocol. Everybody can see it, everybody who is interested enough to learn about it can go and actually run a node. Anybody who is actually interested in it can build on top of it. It’s very different, there’s no single point of failure, we’re taking away –

43:04 

Professor Hanke:

What happened with the various scandals that have popped up like Mt. Gox and so forth? How do you classify that? Wasn’t that a failure? You say that this is a failsafe system.

43:22 

David:

Yeah, Doctor Ammous, I’ll let you respond.

43:24 

Saifedean Ammous:

If I pick your pocket and I take your wallet and take 500 dollars out of it, that’s not a failure of the US Federal Reserve – central bank. The 500 dollars are still working as intended. When we talk about bitcoin not failing and not being attacked, the protocol itself has not validated a single fraudulent transaction in 12 years of running. Real transactions were done on the network where somebody managed to take somebody else’s keys and effectively stole their money. That is a feature in all money. 

If you can own it, it can be taken away from you. Bitcoin cannot remove theft from human nature, that’ll always be the case and as long as bitcoin has ownership, it can be stolen. The network itself continues to operate. That’s why I think it functions better, is better understood as a base layer for financial settlement layers and solutions that will be built on top of it. 

44:25 

Hong:

I just want to emphasize again that monetary policy stability is really the key. I would ask Doctor Hanke –

44:37 

Prof. Hanke:

I disagree with that because we have a stable, inelastic supply of bitcoin, and that by definition means that as the demand fluctuates, the price will fluctuate and it’s an unstable system. It isn’t a stable system, it’s an unstable system because the supply curve is completely inelastic, ultimately. As a result of that, the only process by which any adjustment can take place is a price! The price will be very volatile.

45:18 

Hong:

The thing about price is it’s a denomination of the USD or any other fiat –

45:23 

David:

I have one final topic that I’d like to address.

45:26 

Saifedean Ammous:

Can I please, I just really need to make one small answer to that.

45:29 

David:

Sure, yeah go ahead, but after that point we’ll have to move on.

45:32 

Saifedean Ammous:

Jastram’s book, The Golden Constant, gold developed the most constant value over time and did that for centuries as discussed in that book, but you look at gold’s supply, it also didn’t have a currency board, it didn’t have a monetary policy where somebody was practicing monetary supply in order to stabilize the price of gold. In fact, what gave gold that stability is that it had the lowest, least elasticity of supply in response to demand. Gold is the one good whose supply increases the least every year because it doesn’t corrode, so gold that has been produced over thousands of years is accumulating so, marginal production is always very tiny. Because marginal new production is always tiny compared to the stockpiles, that’s what gave gold its stability because its market is predominantly a monetary market and very little demand for industry and very little impact of mining. 

Bitcoin actually improves on that because it has a terminal growth rate of 0. It should actually in time become better gold than gold in this regard. I think you know; volatility is going to be with us for a while because bitcoin is still very small and is going to grow. Before we get to the point where we can use bitcoin to buy our coffee, there’s an enormous stage to cross first which is people need to build cash balances in bitcoin so that they can trade other goods with bitcoin. We’re nowhere near that, the total amount of cash balances in bitcoin are less than 1% of total cash balances in the world, but as it grows, I think we’re going to see more of that. I think, from now until the point where you can buy your coffee with bitcoin, there’s an enormous opportunity of a new asset monetizing that could eat up bonds and all kinds of other stores of value that people are using! 

You’ll get your stability to buy coffee at a price of bitcoin, maybe 1 million dollars or 5 million dollars, so you’re welcome to sit it out and wait out until then or you can buy bitcoins now, speculating on the fact that this is going to happen. If you are correct, it will be massively rewarding in the long-run.

47:44 

David:

Ok. I have one final topic and I’ll let you go first, Doctor Ammous because that was a good segue. The concept of central bank backed digital currency. This is being issued in some places already. The Federal Reserve in the US has not indicated they’re doing this immediately. Do we need a digital currency, a national unit of account backed by digital currency? What would be the motivations of implementing such a concept, Doctor Ammous?

48:16 

Saifedean Ammous:

Central banks, their motivation is going to be to continue to do what their main priorities and tasks are, which is managing monetary supply and controlling payment clearance. If they do build their central bank digital currency, they’re going to be digital but they’re going to miss the most important characteristics that make bitcoin important which is that bitcoin’s monetary policy transparent, is transparent, and payment clearance is automated by cryptography. 

Central banks cannot do this because it would defeat their entire purpose. They can’t just replace their monetary policy with a strict code that they leave alone. That’s not what they were meant to be made for. In my mind, what central bank digital currencies are going to do, they’re going to lead to more efficient, effective surveillance by central banks, and more effective inflation by central banks. They’re going to make national currencies less useful as a store of value in the long run. I think, ultimately, they’re going to serve as advertisements for bitcoin’s value proposition. I think that’s the long-run effect of it. When people realize the difference between what their central bank is giving them versus bitcoin, that’s going to be an enormous advertisement for bitcoin.

49:30 

David:

Hong, what are your thoughts on CBDC and what do you think is the future of digital currencies as an asset class.

49:38 

Hong:

On CBDC; my point of view is the same as with Doctor Ammous, I don’t have anything additional to add. I think it’s a combination of the worst of the two worlds. Let’s see what happens.

49:50 

David:

So, you don’t think it’s a good idea?

49:51 

Hong:

Well, it can help adoption. It can help promote awareness of digital currency, but it misses the most important point and strengthens the bad part of the fiat currency system.

50:12 

David:

Ok. Professor Hanke, I’ll let you have the last word. Should central banks adopt bitcoin or any other form of cryptocurrencies as the national unit of account?

50:22 

Professor Hanke:

No. The confusion that has been brought in here about currency boards, by the way, let me say unambiguously, they have no monetary policy. They have an exchange rate policy. They exchange one asset for another asset at a fixed exchange rate. It’s credible because the anchor asset that they hold covers the full valuation of any liability that they issue. They’re completely credible.

51:04 

Saifedean Ammous:

Until they issue more liabilities.

51:06 

Prof. Hanke:

No! They can’t issue more liabilities until they have 100% of the anchor asset as a reserve. They have no monetary policy, you’re just confused about this. You don’t understand –

51:24 

Saifedean Ammous:

I think you’re underestimating what I’m trying to say here. The fact that they stick to redemption is a monetary policy. The fact that they continue to redeem and they don’t issue more liabilities, (???) that is a monetary policy.

51:43 

Professor Hanke:

That’s not a monetary policy. It’s an exchange policy, but not a monetary policy.

51:49 

Saifedean Ammous:

Yes, but the president can put someone as the chief of the currency board and they can make more money to finance a war or to finance a new hospital building or something like that, so you’re back at square one. With bitcoin –

52:00 

Professor Hanke:

No, you aren’t. The only way they could do that is if they brought in the anchor currency and exchanged it for whatever is being issued as a liability by the currency board. They cannot engage in monetary policy. You just do not understand the mechanism.

52:18 

Saifedean Ammous:

This mechanism can be broken, and it can be replaced.

52:22 

Hong:

I think, Doctor Hanke, what you’re saying is, in a monetary board there is no sovereign monetary policy because you’re looking for free capital flow and also fixed exchange rate. You have to give up sovereign monetary policy i.e., the monetary policy for a monetary bought board is actually the monetary policy of the anchored assets. For example, if you’re using gold as an anchor, that’s a monetary policy of the gold that’s being used.

52:57 

Professor Hanke:

Not really, go to Hong Kong and figure out how the thing works, and you’ll see that the quantity of Hong Kong dollars in circulation is strictly a matter of the demand for Hong Kong dollars. In that sense, it’s exactly like bitcoin. The quantity of the issue of a currency from a currency board is strictly a function of only one thing, and that’s the demand for that currency. That determines the quantity of the currency that’s in circulation. There is no monetary policy.

53:46 

David:

We have to end it there because that’s all the time we have. I think you all got your points across. Thank you very much for your time, that was a great talk. Hong, Doctor Ammous and Professor Hanke, thank you all for participating and being on the show with us.

53:59 

Saifedean Ammous:

Thank you.

54:00 

Hong:

Thank you!

54:02 

Professor Hanke:

Thank you for having us!

54:03 

David:

I hope to speak with you all individually again very soon, thank you!