Saifedean Ammous is an economist and the author of The Bitcoin Standard: The Decentralized Alternative to Central Banking, which has been translated into 20 languages. In this episode, he discusses:
- the basic tenets of Austrian economics and why it is the only school where Bitcoin is possible
- historical examples of currencies and how they lost their monetary value
- the stock-to-flow model and how Bitcoin fits into that model
- the three functions, or descriptive properties, of money and why Bitcoin fulfills these functions
- the concept of sound money
- the idea of time preference in economics and why he believes it is so important
- the distinction between debt and money, and why they are not the same
- the significance of difficulty adjustment and why he believes it is the crowning achievement of Bitcoin
- why he views Bitcoin as the best store of value humanity has ever invented
- the metrics he watches when assessing Bitcoin
- what he thinks is in store for Bitcoin in the future, and whether he still thinks central banks will buy Bitcoin as a reserve currency
- his thoughts on Ethereum and other digital currencies
- and his predictions for Bitcoin in the next year
Thank you to our sponsor!
Saifedean Ammous: https://twitter.com/saifedean
Saifedean’s website: https://saifedean.com
The Bitcoin Standard: https://saifedean.com/book/
Invest Like the Best episode with Saifedean: http://investorfieldguide.com/ammous/
What Bitcoin Did episode with Saifedean: https://www.whatbitcoindid.com/podcast/saifedean-ammous-on-understanding-bitcoin-economics
Plan B’s stock-to-flow model applied to Bitcoin: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25 https://medium.com/@100trillionUSD/bitcoin-stock-to-flow-cross-asset-model-50d260feed12
Essay on why the stock-to-flow model is wrong: https://www.coindesk.com/why-the-stock-to-flow-bitcoin-valuation-model-is-wrong
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full time. Subscribe to Unchained on YouTube where you can watch the videos of me and my guests. Go to YouTube.com/C/Unchainedpodcast and subscribe today.Crypto.com
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This is the fifth installment in the Why Bitcoin Now series which takes a closer look at bitcoin in the context of larger macroeconomic forces such as the pandemic and geopolitical moves happening in crypto. My guest for today is Saifedean Ammous, an economist and the author of The Bitcoin Standard: The Decentralized Alternative to Central Banking. Welcome, Saifedean.
Thank you very much for having me, Laura, it’s a pleasure.
You’re an economist and you now specialize in bitcoin, and The Bitcoin Standard has been translated into 20 languages making it one of the more well-known books about bitcoin. Tell us about your background and how you got into bitcoin.
Well, I was a university professor in economics at the Lebanese American University and I was always interested in monetary economics and, in particular, in the Austrian School of Economics which focuses on understanding the monetary differences between hard money and easy money and the economic implications of monetary policy and inflation on monetary policy, so bitcoin was a natural fit for these kinds of interests, and so I was quite curious about it when I first heard about it, and even though I was pretty skeptical for quite a while eventually I came around to thinking that this thing is interesting and it might have legs.
And what are the basic tenants of the Austrian School of Economics and why do you think that bitcoin is a natural fit for someone interested in that?
The fundamental idea on which Austrian economics is built and the way that it differentiates itself from other schools of economics is the foundation of the principle which is that value is subjective and from the fact that value is subjective you know, I would say a fundamental difference is in the understanding that economic calculation takes place in individuals’ minds and that it’s not possible for central planners to impose preferences on market participants in a way that improves the well-being of the market participants and so the understanding of subjective values and the understanding of the importance of economic freedom for markets to function, the ability for people to trade with one another makes the Austrian school more receptive to free market ideas.
Now particularly when it comes to money I think the Austrian school is specifically, I would say the best school for understanding bitcoin because it is the only school in whose world view bitcoin is possible, in whose world view bitcoin can actually work and that’s for two reasons, because every other school of thought tacitly or explicitly accepts the idea that money is a creation of the state, that money is whatever the government says it is, money is whatever the government uses for tax collection, and government can make anything into money by just putting its imprint on it.
This is predominantly accepted I would say by most schools of economics today, whereas from the Austrian perspective money is whatever the market says it is and it is governments who have to make their coins out of gold because the market chose gold, governments would have rather made it out of something else. And so governments can interfere in the market for money but they can’t completely destroy the market for money, and the implications of their interference in it are best understood from the Austrian perspective, so that’s the first one, money control.
The second one is the fixed supply of bitcoin and that was what really drew me to it because before bitcoin was invented I used to think you know, I would pose this hypothetical question to other economists and I would ask them, if we had a form of money whose supply was fixed, why would that be a problem? And from all other perspectives and all other schools of thought you know, there is some importance to the nominal quantity of money, the number of units of money that are out there matters and the percentage by which the units of money grow every year also matters and you know, there are all kinds of different perspectives on how these numbers should be controlled and how they should change with time but there’s very little debate of the fact that the money supply has to increase. In order for an economy to work, money supply has to continue to increase.
And so from the Austrian perspective, there’s a recognition that money is a unique good whose entire quantity does not matter. The number of monetary units does not matter, what matters is their purchasing power. So, people don’t prefer 10 yens to one US dollar, they’ll still rather take one US dollar over 10 yens because the value of one US dollar is more than 10 yens. So, it’s not thenumber that you get of the units, it’s the purchasing power.
And if you think in that way then there’s no reason why a fixed supply monetary asset can’t work as money, in fact you would argue that this is better money and that’s essentially the argument of my book. This is the most advanced form of money that was ever invented, precisely because it’s something whose supply is completely resistant to inflation.
Yeah, the first part of your book was really interesting because it dives deep into the origins of money and the purpose of money, so why don’t we maybe break some of those things down for people. You did go through some of the three main functions, store value, medium of exchange, and unit of account. Why don’t you just explain those and then we’ll get into some of the other concepts and maybe also cover some of the fun historical stories that you had about money.
Sure. I’d say the key concept of the beginning part of my book where I discuss historical examples of money and how they lost their monetary status and how new ones came about, I make the contention that the most important metric for the success of a money, or one of the most important perhaps, is what I call the salability across time or how well money is able to hold onto its value over time. You know, you can think of it as on the one hand people always want to hold the money that holds value more over time, but on the other hand there’s also another force acting there irrespective of what people choose to do which is that the moneys that are harder, that hold onto their value better, will end up holding onto more value whereas the other moneys will lose value and so the net effect will be more and more wealth will remain in the harder moneys. And I think the argument I make, it’s not an original point, it’s something that has been made for many years within the gold space, what I did was that I applied it to bitcoin, is using the concept called stock-to-flow which measures the existing stockpiles of a material or a monetary good and divides it by the new annual supply.
So, you would look at the total existing stockpile of copper or gold or silver and you would divide it by the new annual production that was produced this year and that will give you a ratio. Now the unique thing about monetary metals is that they are metals whose stock-to-flow ratio is significantly higher than one. For all other commodities, for all other market commodities that people accept and use daily for all kinds of various reasons, the stock-to-flow is always within the range of one.
So, if you think about something like oil, the entire supply of oil that is out there in storage all over the world today is probably somewhere around one year’s production of oil. It’s somewhere in that range, it might be 50 percent less, it might be 50 percent more, 200 percent more maybe maximum, but it’s not that much because nobody stores oil. There’s just not that much room for oil storage because people don’t use oil to store it, they buy oil to burn it. And so because it is burned the stockpile is always being decimated, it’s always burning away quite literally, and so the new flow is quite large compared to the stockpile and so this makes oil terrible as a form of money because new production is quite significant compared to existing stockpiles and so if someone were to use money or were to use oil as money they would store value in it.
It’s quite trivial for oil producers to flood the market with a lot of oil, much larger than the existing stockpiles and therefore effectively devalue the oil and take away the savings that the person had put into oil.
This doesn’t happen with gold and to a lesser extent silver because gold is effectively indestructible, because gold does not decay, doesn’t rust, it doesn’t ruin in any way. We’ve been accumulating gold over thousands and thousands of years and the result of that is the total supply of gold that exists today is many multiples, all of the supply that we’ll produce this year, in fact the number is more like 60 or 70 which means effectively that every year the supply of gold is increasing by around one and a half to two percent every year which means that gold is a much better monetary good. So, it has a higher stock-to-flow which means that the stockpile of existing gold is many multiples higher than the annual production. So, this is why it’s difficult for gold miners to dump an enormous amount of gold on the market and devalue the gold and that’s what prevents gold from becoming an industrial metal.
And so applying that framework to currencies across time I think is quite useful, so for instance if you look at places like prisons, they use cigarettes sometimes as money because there’s no easy way to make cigarettes in prison. If you look at societies, for instance there’s the example of the Yap island where they didn’t have limestone on the island but on a nearby island there was limestone, so it was a big deal and it was very difficult to get limestone from that island to this island and so those limestones became money. But they’re difficult to get but they’re not that difficult to get, so over time the supply for limestone started to increase and there’s a story about how the supply inflated and eventually the Yap island, like all other islands in the world, went onto more advanced forms of money.
And can you tell that story because I thought it was interesting.
Yeah. It was a best-selling book written in the 1950s based on a true story and then it was turned into a movie I think with Burt Lancaster and it’s called His Majesty O’Keefe, and apparently it’s a true story, happened in the 1870s. An American-Irish sailor by the name of O’Keefe had been shipwrecked at the island and he went to the island and he found that you know, it was an island that had an enormous amount of coconut which he knew that he could sell at a significant price, and he found that their monetary system was just a bunch of limestones and they used large limestones because they’d been you know, producing more and more limestone over time and getting it from the islands nearby.
And so he thought after he was shipwrecked and he had left the island, he thought well, I could buy all of the coconut that these people produce if I go and get them large amounts of limestone because that’s their money. And so he left the island, he went to I think it was Hong Kong, he chartered a modern boat with explosives and so you know, he could get enormous quantities of limestone. And he took a professional crew and dynamite and so on, went and extracted enormous quantities of limestone and then took them to the island and wanted to buy the coconuts with it.
And then basically what happened was civil war broke out on the island because some of the island chiefs said no, we can’t accept his limestones. These are easy, cheap limestones that didn’t cost him a lot of effort. For us it has to have been something that’s very hard and very expensive, and they understood something that most economists don’t understand, you know. Money is only useful if it’s hard to make. If it’s an easy thing to make then it’s not money. It’s not going to do its job as money, it’s going to lose its value, and that’s exactly what happened. Once the limestones came to the island, the price of the limestones collapsed, and the entire economy of the Yap island collapsed, and a lot of their coconuts was taken away from them and all they had left were a whole bunch of useless limestones. Just like many countries today people all that they have left are a whole bunch of useless pieces of paper.
Yeah, so you know, I asked you about the three functions, I think all of this explains the first one, store of value, I guess a little bit also medium of exchange, but do you want to just briefly touch on those and then we can talk a little bit more about some of the other concepts form the early parts of the book.
Yeah. I mean, I think these concepts are quite intertwined. I don’t think they’re distinctive functions in as much as they are descriptive properties of what money is and so you necessarily have to be a medium of exchange if you’re a store value and vice versa. Functionally speaking, you can’t exchange something unless you store value into it.
I think the interesting thing which is a topic of you know, developing the analysis of the use of bitcoin for payments which is what people usually people refer to in terms of medium of exchange, and that’s going to be the topic of my next book, The Fiat Standard which is the sequel to The Bitcoin Standard. I’ve written most of it so far. And in The Bitcoin Standard I focus on the intertemporal salability of money, the ability of money to hold onto its value across time. In The Fiat Standard, because I’m analyzing the fiat system and how it displaced gold and how bitcoin could potentially displace it, I focus on interspatial salability. In other words, how much value do you lose from your money as you try and spend it into longer distances and you know, in terms of, the further away you want to spend your money the higher you have to pay transaction costs generally, as the cases with national currencies.
So, if I wanted to exchange a dollar with the grocery store around the corner, then I could just hand them the dollar and that costs me you know, a three-second walk or 20-second walk or whatever. But if I wanted to buy something from the next town, then you know, I’m going to be needing to use the domestic payment app and then depending on which one there’s some kind of transaction cost, and if I’m going to another country there’s a higher transaction cost because I’m going through banks and settlement institutions and so on.
So, in a sense I think the real power of bitcoin which I discuss in the next book, in The Fiat Standard, is in the fact that it has very high interspatial salability across national borders. You send a transaction of bitcoin…the bitcoin transaction is completely distance independent and so you know, sending money from one of your wallets to the other wallet that’s right next to it costs exactly as much as sending that money halfway around the world.
So that means I think in my mind that bitcoin is going to you know, bitcoin offers more of a value in terms of its on-chain transactions it offers a lot of value for international settlements and that’s something of course I also discuss in The Bitcoin Standard, that bitcoin payment network is likely not going to be a network for individual retail transactions but rather for large on-chain transactions. I think they would likely be the larger and higher value transactions.
Yeah. One thing about the spatial aspect that you mentioned is I think at least for now…so I could see that point applying further in the future when we have greater adoption but at the moment you would need to find somebody in that far away place who would be willing to accept your bitcoin which at the moment because global adoption is low is you know, a slightly difficult thing to do.
Well, yeah. I agree, of course, you do need somebody else which is why you know, bitcoin’s liquidity is limited compared to fiat currencies, however I think you know, if you really think about it over the last 12 years how far the liquidity has come. I mean, it’s already much larger than the liquidity of many national currencies that have been around for decades and countries that have been around for millennia. I think you know, the bitcoin market cap is much larger than the Egyptian currency’s market cap and Egypt’s been around for a lot of time.
So, it’s astonishingly impressive in terms of the size of the market cap and the fact that it is internationally distributed means it’s not an insignificant pool of liquidity.
Yeah, yeah, and I’m not disagreeing with that, it’s just I was more thinking that like even amongst my friends I don’t know if I could find anybody who would take money from me in bitcoin, so in that regard like it just feels like, yeah. But obviously I agree with you in theory and down the line I think that will be more the case.
But a couple other concepts that I want to cover before we dive even further into bitcoin. In your book you were often talking about sound money, so how is that defined and why is that so important?
The definition that I follow from the Austrian School based on the work of Professor Joe Salerno or based on the work of Ludwig von Mises is sound money is money that is chosen and valued freely by the market, and unsound money is money whose acceptance and value is dictated through violent commands essentially or through government diktat. So you know, if you need to pass laws that say people have to use your money or else, then that’s not sound money.
And for me the astonishing thing about bitcoin is that it’s achieved adoption as money without anybody passing a law for it to do it and so this is really why you know, I make the contention that here’s the definition of sound money and bitcoin fits the bill because you know, you may not like it, you may not want to use it but all of this value is out there and people are using it. It works, it fulfills the functions of money for the people who use it for that and it’s chosen freely on the market.
Yeah, and you also call it commodity money in the book and obviously we all know the CFTC agrees that bitcoin is a commodity so I do think that applies. Another concept that you talk about a lot in the book is time preference. What is time preference and can you walk us through some examples of how that plays out with money?
Yeah. Time preference in economics, it’s the degree to which an individual favors the present over the future. So, if I were to give you the choice between a hundred dollars today and a hundred dollars one year from today, basically every rational human being would prefer to take the hundred dollars today. If I wanted to make you wait for a year for the hundred dollars, I’m going to have to offer you a price through extra dollars so I need to give you a 105 or a 120, and that measure of how much extra you discount the future, that measure is the measure of time preference and it’s perfectly rational that time preference is always positive and the reason for that is that life is finite. We all die, we are not immortal, and life is uncertain so you want to enjoy things as soon as possible because you never know if you’re to be there tomorrow, and also because you know, your life is limited. You want to have the things earlier so you get to experience them for longer.
So, people always prefer to have things early. People always have a positive time preference, however the lower your time preference effectively means the more that you think about the future, the more that you provide for the future so the more of a long-term oriented person you are, the lower your time preference, the lower the discount rate you place on the future. You would require a small amount in order to get you to give up a hundred dollars today and accept them in a year.
So, for me I think a time preference is enormously important concept in economics, in fact I think it’s the most important concept in economics. When I used to teach at university, whatever class, whatever topic I was teaching in my 10 years at university I’d always surprise my students with a lecture on time preference and tell them you know, if you’re going to learn anything from this course just remember this, it’s the most important concept in economics because the degree to which you discount your future self in my mind is the best predicter of the state of your future self because, and I say this in the book you know, you conduct trades with other people, you’ll work with other people, you will have so many different interactions with others and yes, other people can rip you off and other people can do bad things, but you will never have as many interactions with anybody as much as you will with your future self. You’re always trading with your future self.
So, when you decide that you’re going to eat junk food you know, you’re sacrificing tomorrow for the sake of enjoyment today. When a college student decides to go party the day before their exam, they’re sacrificing their future and their better grades for the sake of a fun day today. So I think you know, this is one of those concepts once you learn it, it sticks with you and it’s hard to unlearn it because you start seeing it everywhere. You start seeing it in your personal relationships, you start seeing it in your financial decisions, and once you just start looking at all of those things with that lens of me versus future me you start really understanding where present you comes from and you start seeing how your current problems of present you were caused by all of the hurdles and neglect create by past you, and then you start applying that in all kinds of different matters and I think once you’re aware of it and you’re able to see the distinction between applying long-term and short-term thinking, it’s quite powerful and I think a lot of people enjoy this concept in my book and a lot of people told me that it really changed their life just by applying this lens of thinking.
Anyways, how all of that relates to bitcoin is that I contend in my book that time preference in society…well, I don’t contend that. From the Austrian perspective, time preference is what determines interest rates so what determines the interest rates on the market is people’s time preference. The lower people’s time preference the more they save, the more they save the more savings are available on the market, the more savings are available on the market, the lower the interest rate.
So, in my mind the opposite process is happening when governments are interfering in capital markets through inflation and through government fiat money which is easy money which is increasing in a larger supply. They end the role of the interest rate as being a signal, as a market price and instead replace it with the interest rate as something that is centrally planned and that in turn affects everybody’s time preference.
So, when suddenly your money is expected to lose value you have less of an incentive to hold onto your money and so you have less of an incentive to save and you have more of an incentive to spend, and on the flip side because the government is able to create more money, that artificially lowers interest rates so that gives you more of an incentive to borrow, and so this basically teaches society high time preference. It reverses the lowering of time preference and really we have to understand that the process of civilization is effectively the process of human beings lowering their time preference, human beings learning to think further and further into the future, learning to invest further and accumulating more and more capital which leads to higher productivity.
So when we start moving…and that’s why throughout history we’re constantly moving to a harder money which allows us to think further into the future and allows us to lower our time preference. Now we move to an easier money and that process reverses, in my opinion. In my opinion, that starts making people think more and more about the short term and you see it in the differences in saving rates. In the 19th century under the gold standard, people had much higher saving rates and there was far less indebtedness and today everybody and everything is in debt. All corporations and people and governments are up to their eyeballs in debt basically and that’s just the way that people live, and nobody even thinks that savings is something that needs to be done you know, you’re constantly racking up more debt and you work to pay off the debt rather than spend from your savings.
Well, so one thing that I wanted to ask about, and so did you read Sapiens by Yuval Noah Hurari?
Oh, okay. Well, so there is a piece in there where he talks about how the creation of credit and debt, people taking on debt is what fueled growth and you know, so in your book you talk about how you know, low time preference is what results in saving and less debt and ultimately like investment. So the way that Yuval Noah Harari positions it, it’s sort of like taking on, the debt is also a low time preference thing in the sense that you know, like maybe you endure pain now to have this gain in the future, so is it always that low time preference results you know, it causes people to save rather than take on debt or maybe I’m just not thinking of it right, but somehow the way that he was describing it, it sort of seemed he was saying that when people do that it’s because they’re thinking about you know, investing in their future essentially by taking on that debt.
Yeah. I mean, it’s unsurprising he’d have these confusions because after all he is a Marxist anthropologist so you shouldn’t go to him for this…
No, but I…
…just to be clear, that’s my interpretation of what he was saying. He was talking about how credit leads to growth and…
No, a lot of people have asked me about this and they share his stuff with me, I’ve seen a couple of videos. To be honest, I’ve no interest in reading what Marxists think about economics in general so I’m not going to read it, but I know enough to pass judgement on it and readers are free to disagree. I think the fundamental problem with the way that Marxists view money is that they think of money as just being…and he says that, Harari, he says it’s a social hallucination or it’s a collective hallucination or it’s a socially constructed good that you know, we all agree that this thing can be money and then this thing becomes money and if we all agree that debt can be money, then we all agree that debt can be money and then he talks about just how powerful and transformative it was to use debt as money.
And this is also similar to the work of another Marxist anthropologist who also doesn’t understand economics, who’s David Graeber, who also talks about debt as money and doesn’t understand the distinction between the two, and of course the distinction is really very important because from the Marxist perspective, they’re interchangeable because they can both play the role of money which you know, is a little bit like saying that bitcoin and gold and Rai stones in Yap island are all the same but of course, they’re not all the same. Different things play the role of money differently and so debt, while the advantage that debt plays, and this is why I argue in The Fiat Standard, the advantage that debt money or government money has is that government can do interspatial settlement quite effectively. You know, it controls all the banks within a jurisdiction and if you pay one bank that bank has to…you know, I pay you, my bank pays you. As long as they’re both running their balance sheets under the supervision of the central bank, the central bank can make this happen.
And so for Marxists you know, there you go. This does the job of money. The central bank does this and then does the job of money, but of course you know, economics is not their strong suit so they don’t think about the consequences of things and they don’t think about what is the consequence of having an entity being able to use its own promises as money and forcing others to accept it, and the answer of course is catastrophic as is apparent when you look at any place where any Marxist ever got anywhere near the central bank or the presidency or the finance ministry. The end result of course is that when you tell somebody that their own credit is money, they’re going to make a lot of that credit and that’s going to devalue the money and it’s going to destroy the role of money and destroy the market structure of society and cause hyperinflation.
So, ultimately they missed the aspect of money being easy and of course, they don’t understand the issue of salability and that’s the fundamental tenant of the Austrian understanding of money as explained by Carl Menger in the 19th century and it’s really, debt is horrible money because debt is…you know, your debt is only acceptable to people who trust you and so if I have a piece of paper from you that says I will pay say 10 bitcoins, well, that’s great but that’s not a present good, I can’t exchange it for money today, I can’t exchange it for goods today. If I were to…you know, you’re paying next year 10 bitcoin, if I wanted to cash it out today, if I wanted to exchange it for food today, if I needed liquidity today, it would have to have a significant discount.
And so they completely miss the point between present goods and future goods and so that allows for the introduction of this absurd concept of debt being used as money which is of course, why…it’s a very popular of course, it’s a very popular idea with government-financed economists because that’s what governments like, they like the idea of being able to make their own money. But you know, to go back to your question, anybody can generate more credit and if the limit on generating credit, taking on credit doesn’t require sacrifice, it’s the opposite of sacrifice, it’s indulging yourself so that you can spend now at the expense of the future.
So, saving on the other hand is sacrificing now in order to reward yourself in the future, so nobody ever got rich by printing debt. There’s no record of somebody who didn’t save, no countries in the world got rich without saving. You have to have capital goods and credit doesn’t create capital, you have to actually defer consumption. I mean, it’s the basic thing that all creatures understand that if you don’t work and if you don’t defer the consumption then you won’t have it. You know, ants understand it, they put food aside. They know if they eat it today it won’t be there tomorrow, and so similarly you know, we have to defer the consumption and delay the consumption goods in order for them to become investment goods or capital goods that we could invest.
All right, so in a moment we’re going to talk a little bit more about some of these different theories and more about bitcoin as well as the current macro environment, but first a quick word from the sponsors who make this show possible.Crypto.com
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Back to my conversation with Saifedean Ammous. One other thing I wanted to ask you about was the stock-to-flow theory was seemingly debunked in a recent post by Nico Cordeiro, the Chief Investment Officer and Fund Manager at Strix Leviathan, and his essay basically just said that across history there has been no correlation between the stock-to-flow ratio and the price of gold, and I wondered what did you think of that essay and how does that affect your views on how this theory applies to bitcoin?
No, what he was debunking was the mathematical model built around the stock-to-flow, and so that’s not what is in my book. In my book, I introduce the concept and I argue that the thing with the higher stock-to-flow will be money and I don’t think anybody can contend with that on a free market. You know, gold and silver have the highest stock-to-flows and they were the only moneys chosen on the market.
What he’s done is…somebody else then took my model and tried to find a relationship between the stock-to-flow and the market capitalization and they seemed to be getting significant results when including gold. I think what this guy was saying is that the mathematical model for predicting value based on the stock-to-flow is not accurate, but I’m a little bit agnostic about it but I think the model that does not include gold, the model that just tries to model bitcoin’s value according to stock-to-flow is far more interesting, about including gold because we don’t really have reliable data on gold whereas with bitcoin we have very reliable data on the stock-to-flow and the market value.
Oh, I see. Okay, because I think his was historical, it wasn’t a projection. But if you’re saying that the data wasn’t good maybe that’s why because yeah, the historical you know, plotting of the stock-to-flow ratio of gold versus the price of gold there was no correlation. But okay, so the data is not good.
So one other thing I noticed in your book is that you also emphasized the difficulty adjustment in bitcoin and I wondered you know, you talked about how you felt that was quite significant. Why? How do you see that as being important for bitcoin as money?
I think really the difficulty adjustment, I call it the crowning achievement of bitcoin, or it was the missing ingredient, the magic ingredient that made the soup really work. If you think about it, the technical ingredients of what was needed to make bitcoin work were all already invented before bitcoin was and the one thing that bitcoin added was the difficulty adjustment. And what the difficulty adjustment does is: A) it makes the difficulty of mining part of the consensus parameters of the network so each node is not out there mining on its own and making its own coins, and so the difficulty of the mining is part of the consensus parameters so that all mining is against the same difficulty.
And secondly, the difficulty adjustment essentially is what ensures that the bitcoin supply sticks to the schedule that is outlined from the beginning of bitcoin because it’s different from every other liquid asset that we’ve had and I discussed this in the book. With every other liquid asset as I was mentioning, whether it was gold or copper or silver or oil, if somebody were to use it as a monetary asset the value would rise significantly. But then it’s possible for producers to make more and more of it and even with gold, with gold they can make the least more but they can still keep making more and every year they can keep digging further and they can keep finding more and more. So, the higher the value of gold goes up the more people dig for it and more people find it.
On the other hand with bitcoin, bitcoin’s mining process is more like a sports competition where rather than you know, if more people mine gold we get more gold but if more people compete in the 100-meter dash in the Olympics, we don’t get more Olympic medals being handed out, it just gets harder and harder to win the race.
And so effectively bitcoin hands out a specified number of medals and then no matter how many people compete, when more people come and compete that’s not going to lead to an increase in the supply, instead it’s going to make it more difficult to increase the supply. In other words what has been happening with bitcoin is that as this happens you know, as the number of people trying to mine bitcoin increases, they don’t increase the supply, instead they increase the security of the network. We bring more hash rate on the network and that makes the network harder to attack, and for me this is really the only way that we can understand how bitcoin has been able to rise in price so astonishing and I think it’s done something like a billion percent in about 11 years or so and I think you can’t really…you know, nothing has ever risen this much for this long.
This has just never happened. There has never been an asset that can rise this much for this long and the reason for me is that no other asset has this kind of technology, the difficulty adjustment or what people on Twitter like to call the NGU technology for Number Go Up because instead of the supply going up which is how all other moneys scale you know, central banks just keep printing more money, bitcoin just keeps the supply fixed and that necessitates that the value goes up and that’s why I think the value has gone up so drastically over the last 11 years.
And another thing that you talk about is the near zero cost to verifying the validity of a transaction. Why is that important for bitcoin?
I think that’s really the glue that holds the security of bitcoin together, the idea that thousands and probably tens of thousands of individual bitcoin nodes exist all over the world and each one of those nodes is appear to every other one. Not a single one of those nodes has any specific privileges over the others and so they all have to agree for anything to happen and they all need to agree on every single block, on every single transaction. Every single bitcoin node needs to look at every single block and say all right, this is clear, this is fine by me, nobody’s cheating here, these are all the correct coins going from the right person to the right person, agreed.
And so in my mind what maintains bitcoin’s security, that transactions continue to work on the one hand, and also what maintains bitcoin’s monetary policy, what can assure us that nobody’s going to be able to break bitcoin’s NGU technology and figure out a way to make more bitcoins is that this is completely decentralized and there are tens of thousands of nodes out there and no single node controls bitcoin. And for that to be the case it needs to stay cheap for people to run their nodes and that’s why, in my mind really, bitcoin is the only decentralized digital currency because it’s the only one that has these many thousands of nodes that are active, and economically active nodes. You know, you can always obviously spin off nodes on data centers in order to make large numbers but bitcoin has a large number of economically active nodes and it’s not easy to…not just not easy, it’s basically so far as we know it’s been impossible for anybody to find a way to basically take over the nodes and introduce changes to the network that are not unanimously agreed upon.
And as we mentioned earlier, you talk in your book about how the ultimate limited resource is time and something that fascinated me was you wrote, “Bitcoin’s immutable monetary supply makes it the best medium to store the value produced from the limited human time. That’s making it arguably the best store of value humanity has ever invented.” What did you mean by that?
Exactly what it says. I think you know, your time is fixed. You can do your best to extend it but you know, you can never buy back the time that was wasted, it’s gone.
But why is bitcoin the best store of value to capture that?
Because I mean, the way to think about it is let’s say you work for one hour and you make 10 dollars. If you’d like to save that money in say dollars, with every new dollar created your 10 dollars are being diluted slightly more because the value of each one of those dollars is going down because it’s a smaller percentage of the total dollar supply. And so you know, you hold 10 dollars for 10 years you’ll find that their value over time will decline and you know, the way that I look at it when we go back to the issue of the hardness of money, the higher the growth rate of the money the lousier it is at holding onto its value. Gold was the best that we’d ever had because it had a reliably very low growth rate in its annual supply. But now we’ve figured out something that in a hundred years or so is going to have exactly zero growth in its supply.
And so you can’t make more bitcoin just like you can’t make more time, so if they want something in which to store your scarce times value in, store it into bitcoin and then okay, well, bitcoin might oscillate but in the very long run at least nobody can make more of it, just like you can’t make more of the time that has passed. And so you know, you look at places where people lose their wealth and you know, I used to live in Lebanon and the country’s just gone through horrific hyperinflation and I’ve seen just how terrible it is, and when you think about it you know, people worked for years and years and years and put all that wealth into currency or into saving accounts and then to watch it all disappear because somebody managed to print more and more of it is absolutely shocking, and bitcoin really fixes this like no technology has ever fixed it.
Yeah. Another quote that you wrote in your book that stuck out at me was, “Until bitcoin no good was ever finite,” but actually through this conversation I thought now we have time as well, at least for each of our individual human lives so maybe that’s another reason why it’s a good way to capture the value of our time.
And you know, correct me if I’m wrong but the way that I was reading your book it seemed to me that you were saying that bitcoin is uniquely positioned to take the place of gold in the digital realm, and on a recent episode of my show the historian, Niall Ferguson, said that…well, actually it was his friend, Matthew McLennan, he said at first that bitcoin currently functions as an option on digital gold and I wondered what your thoughts were on that.
I mean, I’m not sure how that is really different from saying it is digital gold. It’s already functioning as digital gold but I guess…yeah, in a sense I guess also holding bitcoin is effectively you know, you hold it as digital gold but I think at this early stage of bitcoin the way the bitcoin bootstraps, as opposed to how bitcoin would function if it were fully mature, you know, you would expect that bitcoin at full maturity would be appreciating at a very small percentage every year, maybe one percent or five percent or so on. If bitcoin was the only money and the money supply was fixed then it would only appreciate compared to goods based on how much those goods supply increases, so when we have economic growth bitcoin appreciates slightly.
Now effectively at this early stage of bitcoin’s operation where bitcoin has about 0.1 percent of the global money supply, you know, holding it and hoping that it becomes 0.2 percent involves a 100 percent roughly return on your holdings, and so even though it doesn’t pay cash dividends to an extent it’s a little bit like a high-growth stock or like a high-risk investment and my good friend Pierre Rochard coined the term, bitcoin is a growth currency which is a new thing that has never been there. So you know, it’s a category that usually exists for stocks. You will buy a growth stock because you think this is a small company that has potential for growing significantly but it doesn’t exist for currencies. People buy currencies not for growth, but bitcoin is a growth currency in that you know, you hold it and even though it doesn’t offer returns, just its own appreciation can end up doing much better than returns from actual companies.
So I think in a sense yeah, betting on bitcoin right now is betting on it increasing in its value over time and becoming more of a digital gold.
And so here we are in this crazy macro environment now due to the coronavirus pandemic and quantitative easing and low interest rates, sometimes negative interest rates. How do you imagine all of this will affect bitcoin?
You know, astonishingly bitcoin…well, maybe not so much astonishing but bitcoin has done pretty well over the last eight months really. You know, you think about 2020, it’s been a hell of a year for everybody all over the world with the coronavirus lockdowns and all of that economic destruction. I think what was really incredible and you know, I’ve mentioned this previously and in my website you can find some research reports that I used to write for subscribers and you can buy them, one of them regards how bitcoin performs in a financial crisis.
In that I thought you know, there are two scenarios and it’s hard to be able to tell whether bitcoin has matured enough for it to act as a store of value, as a safe haven in a crisis, that you’d see things get liquidated and bitcoin doesn’t get liquidated. So, we didn’t quite see this happen this time in that when the big sell off was happening in the credit markets and in the stock market in mid-March, bitcoin also sold off so it was a risk on asset. However, that was expected.
I think it’s going to be a while before we see it not sell off, but I think the interesting thing is that it bounced back, or the really interesting thing was how quick it would take for it to bounce back and you know, as I say in that paper effectively you could say that for the first few financial crises bitcoin doesn’t have to act as a safe haven, it has to take the beating and then come out of the beating not dead basically, and the fact that it takes the beating and comes out not dead is going to be for the first couple of times, is going to be like a championship win because eventually people will think well, you know, even through the worst beating this thing still comes out with a pulse on the other side. That opens people’s eyes.
So I think…I was astonished at how quick bitcoin’s recovery was, really took me by surprise. I thought we’d witness a longer, deeper, more painful crash but it was astonishingly quick and what’s amazing about it is that you know, the central bank had to step in, in order to rescue capital and credit markets and so on and they stepped in by printing enormous amounts of money effectively by engaging in quantitative easing, effectively converting long maturity financial assets into short maturity financial assets in order to improve the liquidity situation of these financial institutions so you know, making more liquidity available and making more money supply.
And bitcoin you know, the contrast with bitcoin which was going through its halving around the same time where you know, not through the command of anybody and not like anybody could do anything about it, bitcoin was going to respond in the exact opposite way. We go to drop by half all the number of new coins that we produce and you know, both of them seem to work. The reduction in the new supply of bitcoins clearly reduced the new selling onto the market so probably has helped keep the price up or prevent it from dropping further, and we know the central bank’s quantitative easing and helicopter money policy and giving everybody cheques seems to have done the same for the stock market.
Now, let’s wait and see for the long-run effects of the two approaches. You know, you have the short-term fix of let’s just print money at the expense of the future versus the you know, the bitcoin, we stick to what we were doing anyway. Well, not like we have a choice but you know, bitcoin just proceeds and fewer coins are out there. This is just another test of the Austrian contention that the total supply of money doesn’t matter.
And do you have any theory about why…so after March, after Black Thursday you’re right, so there was the dip and then it sort of just bounced back to where it was, but then in the last few weeks we’ve seen it tick upward again. Do you have a theory about why that happened?
I don’t have theories on short-term price fluctuations but I think you know, the long-term trend is just NGU technology is going to play out. For the past four years, we had 1800 new bitcoins being sold on the market at an average price of say…I can’t remember what it was exactly over the last four years but I think it was about 7 or 8 thousand dollars over the past halving period, so 1800 hundred coins at around 7 thousand dollars each, so that’s around 10 million dollars a day of coins or something like that, roughly 10 to 15 million dollars I think was the value of coins that was being produced every day over the last four years. Now, we have half as many bitcoins so if the price stays the same we have half the amount of new selling coming onto the market.
So it’s shocking that this is controversial in the bitcoin space because you know, people have learned so much bad economics that this sounds controversial, but yeah, four years of dropping 1800 coins versus four years of dropping 900 coins a day is likely only to be resolved one way which is that the average price in the next four years is going to be higher than the average price in the previous four years.
Of course, this assumes that demand for bitcoin does not tank. It’s quite possible that demand tanks but you know, demand needs to drop by half in order for the price to stay the same and so as long as demand doesn’t drop by half for bitcoin every four years then NGU technology works.
And in general like when you’re looking at bitcoin and assessing it and trying to figure out where it’s going, are there any particular metrics that you like to watch?
I think really there are only…well, not only but the two most important metrics…now well, I’ll add a third, three. The first one obviously is the price and a lot of people like to pretend you know, we’re here for the tech and that this is about technology. The tech is the price, that’s it. Bitcoin does one thing and it’s the price itself really. I mean, I think the way that bitcoin grows and the way that bitcoin scales is through appreciation. That’s just how the system works and I think you know, people like to kind of virtue signal that you know, we’re not in it for the money we’re in it for the tech. If you think the tech is anything other than the money, then I don’t think you’re getting the tech. You know, this isn’t…as I argue in my book you know, blockchain is a spectacularly useless technology for pretty much everything except if you want to get bitcoin to work, and the higher the price goes the larger the value of cash balances held in bitcoin, the larger the opportunities for trade between people who both hold bitcoin.
And so the higher the price the more bitcoin succeeds, the more secure the network. So, make no mistake about it, price is the most important metric.
The second metric for me is the number of nodes which we mentioned earlier. If the cost of running a bitcoin node rises significantly then you get a big reduction in the number of nodes, I would be very worried. I would advise investors in this case…I’m not an investment advisor but if I were I’d tell people to be careful because if bitcoin operates on 100 computers then it can be pretty straight forward to compromise it. Or maybe not straight forward but it would be much harder to compromise than it is right now and I would be far less secure about the amount of money that I have in it.
And then the third one would be transaction fees, bitcoin transaction fees which is always interesting to follow because it gives us a good indication about demand for transactions and how many transactions are taking place, and I think in the long run, I think bitcoin transaction fees are likely to rise a lot and I think you know, people need to prepare psychologically for the fact that bitcoin transactions you know, they’re going to be the monetary equivalent of chartering a charter cargo ship. It’s not something you and I do where you know, I don’t know how to charter a cargo ship but all my clothes and my electronics and my furniture has been on cargo ships at some point, and so it’s the underlying infrastructure of a financial system I think its the bitcoin blockchain, and so it’s quite possible that transaction fees will continue to rise.
And where do you think bitcoin’s future is going, and when I say that I mean including how does it look with the current system of central banks, how do you see people transacting with bitcoin, and one other thing I wanted to ask was you did say at one point that you thought central banks may buy the coin as a reserve currency and I was curious to hear how you thought that would go down.
I mean, I mentioned in the book it was a possibility but you know, with time I’m less and less convinced that this could happen. I think it does make sense on an intuitive sense you know, intuitive way that you’d think well, if you’re a central bank and you want to settle payments with other central banks then you can use bitcoin and then you don’t have to go through other central banks. There is an element to that but I think you know, we’ve had gold for the past 50 years and central banks still have been using the dollar. I think the economy of scale for central banks and the network effects that they all settle one another for dollars and they all use the same system so they all have to be on it and then it just makes sense to be on it. Plus of course, you know, the geopolitical aspect of the US’s geopolitical weight also helps make people’s mind up about wanting to be part of that system.
In general, I think the main reason I would say that I don’t see central banks adopting bitcoin is because it is completely against their mental model of the world. I would not be surprised if central banks are the absolute last people in the world to get bitcoin. In fact it might well be the case that you know, 100 years from now if bitcoin takes over the world and we look at adoption by profession, if somebody collects data on it I think we’ll find that central bank is where the absolute last people to get bitcoin because you know, it’s really hard for the central banker who’s entire job is predicated on the premise that government and the monopoly entity is needed in order to make money work. It’s very hard for them to take seriously the concept that actually the same thing that you do doesn’t need you to be done, it can be done with code, you know?
It’s like the taxi commission coming to terms with Uber. They’ll be the last to install the Uber apps and the people in the taxi and limousine commission in New York City but you know, Uber is still…I think there’s a beautiful poetry to it. I think it’s great that the people who benefit the most from the current system and who are most heavily invested in the current system are also intellectually handicapped at understanding bitcoin which I think is wonderful because it gives all the rest of us the chance to get head start on them and I think it’s also…you know, the flip side of it is that people in places like Lebanon and Venezuela and Zimbabwe are you know, their mental models of watching their national currency implode in front of them will put them in a much better place to be able to comprehend bitcoin’s value proposition over the coming years and decades as it continues to grow.
And so this is a little bit off topic because we’ve only been talking about bitcoin but I did want to ask your opinion of something like Ethereum.
Yeah, I mean, I generally think all the other digital currencies don’t really compete with bitcoin and are in no way similar to bitcoin. I think their real competition is if I’m being generous I’ll say Amazon Web Services and these kinds of platforms, and I think in that sense you know, the notion of distributed cloud, the notion of distributed blockchain computing for all kinds of other applications, I’ve spent the last what is it now, 4-5 years basically waiting for somebody to show me a working application that needs blockchain, or show me somebody who made a dime of revenue selling blockchain services.
So, I think there’s no scope for any kind of uses for blockchain technology other than creating a digital cash and I think the only real value proposition for a digital cash like bitcoin is the fact that nobody controls it, the fact that it is immutable, the fact that we can be very sure of the monetary policy, and I think on the other hand you know, and bitcoin won this after many, many years of many people trying and doing a lot of things to try and change things about bitcoin and failing miserably at changing it.
So on the other hand we’ve seen with all the other coins you know, it’s quite trivial for them to organize a hard fork and that makes them more like a private company, so essentially you’re going with a currency issued by a private company and you’re having to place trust in a small team of people. There are several single points of failure for other digital currencies other than bitcoin, so you know, nobody has the monetary policy guarantee.
And so beyond that to be perfectly honest, everything else, all the other buzz words in this space are you know, at best interesting high school projects but definitely not something that I think a serious investor should be…there are no working prototypes for anything that has been working, but I think Ethereum is the most amazingly guilty of this. It’s been what now, five, six years of shifting from one buzz word train to another so I’m not quite optimistic that things will be different, and incidentally just today on Twitter people have spent about the last day trying to find out how many tokens of Ethereum there are out there and apparently nobody can answer that question, nobody runs a node, nobody has a code for it, they have never even made a code for it, so yeah, count me firmly in the camp of the skeptics when it comes to all other currencies.
All right. Well, because this show really should be about bitcoin why don’t we end on a bitcoin note. Do you want to make any predictions for what you think will happen in the next year in bitcoin?
I’d say every 10 minutes we’re going to get a new block.
That’s a cop out. That’s a cop out but I’ll let you have it. All right.
It’s the only prediction I make on bitcoin.
Okay. All right. Well, it was a good one, I’m sure it will bear out. All right. Well, thank you so much for coming on Unchained.
Thank you. Thank you very much for having me, it was a lot of fun.
Where can people learn more about you and your work?
So I’m now independent, I work on my own website, Saifedean.com. I’ve quit my university job and I teach online courses in Austrian economics on my website, and I publish my own research directly to my readers, and I publish excerpts of my forthcoming books as well where you can subscribe or buy early drafts. All of it is on Saifedean.com. You can find plenty of courses and papers, and soon we’re building a new forum and student area for discussion. So yeah, Saifedean.com, as well as Twitter, of course. I’m very active on Twitter, also @Saifedean.
Perfect. All right. Well, thank you so much for coming on Unchained.
Thank you very much for having me, it was a pleasure.
Thanks so much for joining us today. To learn more about Saifedean and The Bitcoin Standard, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/C/Unchainedpodcast and subscribe today.
Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and the team at CLK Transcription. Thanks for listening.