This is the first of a weekly series that I’ve decided to write on the subject of bitcoin, inspired by my friends Marty Bent and Saifedean Ammous. Education is such a critical aspect of bitcoin and I hope that, by distilling my own thoughts, I can help others accelerate their path in understanding a complex subject. I’ve titled the series Gradually, Then Suddenly. As Hemingway penned the process of going bankrupt, it’s also the way that government-backed currencies hyper-inflate and often how people come to understand bitcoin (gradually, then suddenly).Writings will generally stick to bitcoin but will also include the Fed and monetary economics as these stories are deeply intertwined. Because I’ll be trying to keep concise, the series will communicate my principal conclusions and opinions rather than setting out to present every detail that led to them; my intention is to provide insight into my thought process and to provide a roadmap if others are interested in learning more. My hope is to reach a broader audience (beyond those that have been formative in my own journey) and to help folks on the periphery gain a better understanding of why many of us are so focused on bitcoin as a subject matter. Views presented are expressly my own and not those of either Unchained Capital or my colleagues. Hope you enjoy & please provide feedback.
Bitcoin is money
Or rather, Bitcoin has become money (to me). It was a slow process that involved unlocking a number of mental blocks along the way but it began with asking the question, what is money? That is the beginning of the real rabbit hole. And not the speculative, I’m looking for a lottery ticket blockchain-is-going-to-change-the-world kind of rabbit hole. At the root level, it’s the rabbit hole that attempts to answer the question, “why is the dollar in my pocket money?” Why do hundreds of millions of people exchange their hard-earned, real-world value every day for this piece of paper (or digital representation)? It’s both a difficult question to ask and a harder one to answer, something I realized everyone has to approach in their own way, on their own timeline and guided by their own life experiences. People have to be interested in that question in order to even begin to understand bitcoin.
For me, the path involved first understanding why gold was money. That involved understanding the unique properties which made something a better or worse form of money and what differentiated money as a unique economic good compared to most other types of economic goods. The Bitcoin Standard was formative for me in exploring the questions, not as a gospel but rather, as a foundation to think about the problem statement. When I applied that foundation to my own life experiences and to my own understanding of the existing financial system, and its flaws, only then did it begin to become intuitive. And that’s something that may be evident (that bitcoin is intuitive as money) to those that have spent years thinking about it relative to monetary principles but it’s also true that bitcoin is not intuitive. It’s extremely not intuitive until it becomes intuitive and then over time it becomes hyper intuitive.
As part of my process, I found it helpful to consider bitcoin relative to two tangible guide posts: gold and the dollar financial system. Does A (bitcoin) share the properties of B (either gold or the dollar, respectively). Is A better than B? Because what makes something money is not an absolutism; it is a choice between storing value in one medium vs. another, always involving trade-offs. Without understanding the flaws of the existing financial system (whether the dollar, euro, yen, bolivar, peso, etc., respectively), I could have never arrived at bitcoin being money in a vacuum.
While I worked at Deutsche Bank during the financial crisis, I had no baseline to understand what was actually happening. Ten years later, and after having worked in the restructuring world and at a macro hedge fund, only then did I start to develop a more clear understanding of what had really transpired in 2008 and 2009. Through my own research of the great financial crisis, the Fed and specifically the impact of quantitative easing (see here), I came to the principal conclusion that the root problem was that the financial system had been leveraged approximately 150-to-1 (too much debt and too few dollars) and that the insane degree of leverage was only made possible as a function of Fed policy which had consistently prevented system-wide deleveraging over the course of the three decades leading up to the crisis. Further, it became apparent that the solution (quantitative easing) merely caused an unsustainable credit system to metastasize over the subsequent ten years, making future QE an inevitability. I became convinced that, whether bitcoin survives or not, the existing financial system is working on borrowed time and that one way or another, something other than the status quo will be the inevitable path forward.
Then I figured out that bitcoin has a fixed supply. Developing an understanding of how and why that is possible is the basis of understanding bitcoin as money. Doing so requires significant personal investment in understanding how economic incentives are woven together with bitcoin’s technical architecture and why bitcoin can’t be “faked” or copied (or rather, why the incentives are so strong to cooperate and why the opportunity cost is too high to defect). It’s a long road but will ultimately lead one to an understanding that a global network of rational economic actors, operating within a voluntary, opt-in currency system would not collectively and overwhelmingly form a consensus to debase the currency which they have all independently and voluntarily determined to use as a store of wealth. This reality (or belief system) then underpins and reinforces bitcoin’s economic incentives, technical architecture and network effect.
So it’s not simply that software code dictates that there will only ever be 21 million bitcoin; it’s understanding why that monetary policy is credible and resilient and how bitcoin achieves verifiable scarcity. That can’t happen overnight for any individual. It can’t be explained to someone at a cocktail party. It is a reality that is reinforced and strengthened over time only by experiencing the incentive structure and seeing it work time and time again, every 10 minutes (on average). When then compared to how the dollar system works or even the underpinnings of gold, bitcoin as money becomes more intuitive.
In summary, when trying to understand bitcoin as money, start with gold, the dollar, the Fed, quantitative easing and why bitcoin’s supply is fixed. Money is not simply a collective hallucination or a belief system; there is rhyme and reason. Bitcoin exists as a solution to the money problem that is global QE and if you believe the deterioration of local currencies in Turkey, Argentina or Venezuela could never happen to the U.S. dollar or to a developed economy, we are merely at a different point on the same curve. Bitcoin represents a fundamentally different structure and a more resilient path forward but you have to understand where we’ve been and how we got here to know where we’re going.
Hayek writes about the price mechanism as the greatest distribution system of knowledge in the world (“The Use of Knowledge in Society”). When the money supply is manipulated, it distorts global pricing mechanisms which then communicates “bad” information throughout the economic system. When that manipulation is sustained over 30-40 years, massive imbalances in underlying economic activity are created which is where we find ourselves today. Ultimately, gold’s failure was the dollar and the dollar’s failure is the economic distortion which led to, and which has been exacerbated by, QE. Bitcoin’s promise is the solution to both. Because bitcoin’s supply is fixed and cannot be manipulated, it will eventually become the most reliable pricing mechanism in the world and consequently, the greatest distribution system of knowledge. The volatility witnessed today is nothing more than the logical path of price discovery as adoption increases by orders of magnitude and as we advance toward that future state of full adoption.