Bitcoin & Money (2022)

“I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.” - Friedrich A. Hayek, 1984

“You may not be interested in war, but war is interested in you.” - Leon Trotsky

I have been asked many times in the past year, by dozens of people, “so what is Bitcoin?” And I have learned to never answer this question directly. I simply ask them a question in return, which is, “what is money?”. Not one person has been able to answer me this question the first time I ask it to them. Even the financial professionals I talk to have very little knowledge on what exactly money is. Isn’t that odd, that much of our lives revolve around this thing called money, but nobody knows what it is? You would think that since we go to work 40+ hours a week, and formulate almost every part of our lives around it, everybody would have a strong grasp on the concept of money, but it is not the case. Money is simply an extension of our mind to decomplexify the world. The best way to describe money is as energy. The purpose of money is to channel energy over space and time. So money in the past has simply been the highest form of energy humanity could channel. It’s therefore a claim to all other forms of energy. 

We have been programmed over time to think in terms of U.S. dollars. We denominate everything in the USD. But, I would not classify the USD as money, it is a currency. And as you denominate everything in an ever-increasing amount of dollars, the result is a loss of wealth for all. A fiat currency can be used as money for a short period of time, but has always failed in the long term. To understand the difference between the two, it takes some studying of history. And when you study history, you realize that the U.S. dollar is simply the largest ponzi scheme of all time. So I will talk about the USD first before going back in time, to show how weak it is as a function of money. In fact, about 40% of all U.S. dollars have been created since March 2020. $9 Trillion was printed magically in 2020 alone. To put this into perspective, you would have to spend $1 every second, for 31,710 years to spend $1 Trillion. Now, multiply by 9. The U.S. has done this in one year. Anyone who thinks rationally should see the problem here. I will not say I’m 100% certain of many things, but the fall of the U.S. dollar I’m certain of. It’s inevitable, though not imminent. 

So how did we get to the current broken state of money? It is a cycle that has repeated throughout history. Money began as cavemen creating a ledger on a cave wall. I owe you 2 buffalo, I make 2 marks here, you give me 3 buffalo, we adjust the ledger. People in Africa traded glass beads which were very difficult to replicate at the time. People in other parts of the world used rare seashells. The Romans used gold and silver coins. The people of the Yap islands used certain stones. All of these forms of money faced a death that is almost certain to any form of corruptible money: devaluation through inflation of the supply. If somebody can produce a large amount, at low costs, to enrich themselves, they will. The Europeans mass produced glass beads, and traveled down to Africa, devaluing the currency and therefore taking control. Roman emperors began clipping the gold off the edges of coins, devaluing how much gold was in each coin. The people of the Yap Islands had a visitor from Europe who mined bunches of rocks and brought them to the islands, devaluing the limited amount of rocks which were previously there. This is the same story the USD is following. We used to transact in ounces of gold here in the U.S. when gold was considered money. The government came up with the idea of a layer 2 application on top of it to make transactions easier, ultimately creating a more liquid market. They created federal reserve notes (USD) which were redeemable for gold. But of course, like the Roman emperors of old, the leaders of the nation cannot help but devalue the currency, as it enriches the government in the process. Every time the government needed more money, we could simply devalue the USD, just like clipping the edges off gold coins, so that you could get less and less gold for the same amount of dollars over time. Every time there was an “emergency”, they used this power. This power has funded many wars such as WWI, WWII, Vietnam, and even includes over $2 Trillion in the “war on terrorism” which was poorly executed in the Middle East, by any metric. The U.S. even made up their own wars, such as the “war on poverty” and the “war on drugs”, which were also failures funded by “free” money. The early 1900’s was shaped by periodic devaluation, until 1971 when Nixon closed the gold window, which made it so that nobody could receive any gold for the USD. It left everybody across the world holding the USD, who thought it was worth an equivalent amount of gold, with worthless paper. Over time, this power has been abused, continuously devaluing any dollars people across the world have on hand or in their accounts. Every time the U.S. prints more dollars, they dilute anybody who relies on those dollars. Enslaving all who rely on it to hold value. Just because a government states that something is money, does not make it a sound form of money. And we are seeing the consequences in current years. Printing over 30% of the monetary supply is no different than the Roman emperors clipping gold off coins, or Europeans mass producing glass beads. 

It is clear that this current state is not working, as it is following the same path as every empire that fell before it. Every country that has built wealth and increased their standard of living have had 4 things in common.

1. Private property rights.

2. Rule of law.

3. Sound Money.

4. Reasonably low taxes. 

I will only be addressing the sound money part of this as it is the base layer operating system of any economy. I thought it was important to show how the function of money isn’t only important to our individual self interests, but also to the success of everybody around us, and our country as a whole. All 4 of these rely on one another, and so as one breaks down, so do the others. 

So what characteristics best describe sound money? There are 5 characteristics that best describe it. 

1. Divisibility

2. Durability

3. Portability

4. Recognizability

5. Scarcity

Money in the past has always been a technology, or more simply described as a tool. For 5,000 years, gold was the best form of money to fit into these 5 characteristics. That is why every great empire, including the U.S., started by trading gold, or backing their paper currency with it. That is, until 2009 when Bitcoin first came online, out of the great financial crisis of 2008. Here is how Bitcoin fits each of the characteristics sound money must have.

1. Divisibility: 1 Bitcoin can be broken down into 100 million subunits called a satoshi. Gold is not easily divisible, which originally led to silver serving the role of small transactions. The USD took on that role later.

2. Durability: Bitcoin is pure information stored in a distributed format, infinitely durable, like the bible. It is stored everywhere and nowhere simultaneously. For example, you can burn all the bibles in one church, but that information is stored across the world in another database. You can shut off the internet and power in one country, but the Bitcoin ledger information is stored somewhere else across the world. Before the invention of the printing press, information was controlled by the church. Much like the revolution of the printing press, Bitcoin gives freedom to the people in a distributed format to circulate value.

3. Portability: Bitcoin is pure information that moves at the speed of light. I could send my family living across the world 10,000 satoshis almost instantly with 2 clicks, for no cost over the lightning network. This is a layer 2 application over the Bitcoin network. Part of the reason gold failed is because of its lack of portability. It was too expensive and time consuming to ship across the world. The USD was originally a layer 2 application to move that energy faster and cheaper over space and time, until corruption of the money caused a fall off a gold backed system.

4. Recognizability: The ability to verify Bitcoin, or its authenticity. If you’re running a full node you can verify Bitcoin is Bitcoin, and as a node operator you can audit the total supply of Bitcoin at any given time. It may take some time to recognize “fools gold”, but it takes a fraction of a second to spot fake Bitcoin.

5. Scarcity: There will only be 21 million Bitcoin ever produced. For sound money, you need to know the supply is safe from counterfeiting and inflation. Counterfeiting is criminalized inflation, and inflation is legalized counterfeiting. Think of it this way, if you have a money printer in your basement and can produce all the dollars you want or need, we can all agree you would be sent to jail. If the government does the same thing, we call it monetary policy. Gold in the past was the scarcest form of money, and so was therefore chosen by the free market. It is hard to mine, and so therefore has historically inflated at only 2% a year. After the next pre-programmed halving, Bitcoin will be the scarcest asset on Earth. It is the only form of money with a hard cap on its supply. 

Bitcoin is the first form of money ever created that cannot be monopolized, corrupted, changed, or weaponized. It therefore presents the most asymmetric wealth creation tool in the history of mankind. If you are reading this, it means you are likely one of the pioneers to this new world, whether you know it or not. 

The growth of the Bitcoin network has been fantastic to see. It is an example of Moore’s law, much like the internet, only better. The adoption rate of the internet in 1997, with 150 million users, was growing at 63% annually. The adoption rate of Bitcoin/crypto, at 150 million users, is growing at 113% per year. Since the human mind cannot understand the exponentiality of this growth, it’s important to understand S-curves. The S-curve shows that the time it takes to go from 0% adoption to 10% adoption, is the same time it takes to go from 10% adoption to 90%. In 1980, about 1/10 of 1% of households had a personal computer. The amount of time it took to reach 10% of households, is the same amount of time it then took to reach 90%. This is the same S-curve any technology has followed in the past.

Bill Miller said it best when he said “I’m not a Bitcoin bull, I’m a Bitcoin observer”. It is comparable to the printing press, the automobile, steam engines, railroads, and the internet. It’s a solution in search of a problem, just like any other new technology in history. Here is a chart of where we are currently in the adoption of Bitcoin compared to past innovations.

Now this all sounds great, so the obvious question is, what are the downsides? The biggest downside is the volatility of the asset in short time frames. When we look at market psychology of individuals, the coefficient of loss to gain is 2-to-1. Which means $1 of loss is twice as painful as $2 is pleasurable. Fear and greed will still rule. Most people won’t stay along to benefit from this adoption over the next 10 years. Unfortunately, most who own the asset right now will likely be shaken out through volatility. Volatility is the reason why most people will stay in negative-yielding bonds over the next decade, losing an incredible amount of purchasing power. People seek low volatility because they cannot handle short term pain. Achieving low volatility is not the goal of investing, though. The objective is to make money and outperform the market over an extended period of time. The price of volatility is a small one to pay. Michael Saylor, CEO of Microstrategy, said, “you know what’s really volatile? Crossing the Atlantic in wooden ships, moving west in a wagon over the bumpy undiscovered terrain.” We’re simply looking at numbers on a screen. Relax, and look at the bigger picture. Volatility is the price paid for the best performance. The best investment idea is not often the most comfortable. The only way to make the volatility go away is to make the opportunity go away. Nobody has ever lost USD's in Bitcoin over a 4 year time frame. And if you can take a 10+ year time frame, you will do extremely well. If you cannot handle it emotionally, I recommend buying a small allocation and then never looking at your portfolio, or you risk being shaken out.

Another risk that many ask me regularly is about the regulatory framework. A rational person says, “well wouldn’t they just tax it so heavily that nobody would buy Bitcoin?”. I think this is a valid point for those that don’t understand Bitcoin. Think about Bitcoin as floating property, much like a yacht, but without the costs associated to maintain the property. Now I’m going to tell a story I first heard from Michael Saylor on yachts sitting in a Sardinian port. In the mid-2000’s, there were many luxurious yachts sitting in a Sardinian port. These rich folks who owned the yachts would come into the city, and really bolstered up the economy. They’d spend loads of money at hotels, restaurants, and other pleasurable experiences. The locals decided it wasn’t fair for these rich folks to have their yachts filling up the port, spending a ton of money, but not paying any taxes. The politicians decided to pass a luxury tax, requiring anybody with a yacht to pay a tremendous amount to spend time in the city. The morning the tax passed, the yachts left, and the whole economy died. Floating property is a very powerful thing to own because once something unfair is agreed upon to attack the floating property, it just simply leaves. All of this to say, you can pass a tax on Bitcoin, but people will simply move it to any other jurisdiction that is more favorable to the property. Regulators and policymakers know this, which is why I don’t see it as much of a downside risk. Floating property creates competitiveness between countries to act favorably, which is good for the people. We see the beginning of this in El Salvador, as they are attracting lots of people to the country by having 0% tax on Bitcoin, along with incentives for those who do own it. 

The last argument I hear very often is that there is another better form of money that will come along. The common thought is that it can be displaced easily, much like Facebook displaced Myspace as a social network. Because money relies on a network effect to get more adoption, this is a reasonable concern. The success of Bitcoin relies on a continually expanding network. It must remain secure, have scalability, and decentralization. So let’s compare Bitcoin to Myspace since that is the common comparison in the mainstream media. Myspace topped out at a $12 Billion market cap 5 years into its existence. It was then quickly passed up by its competition. It followed the path of a growth company, but changed management early. It failed to optimize for its objective, and was slow to incorporate a mobile application. Bitcoin has reached a $1 Trillion market cap, leading the crypto market for 13 years into its existence. It came after cryptocurrencies like BitGold, Hash Cash, and Bmoney, passing them very quickly. It’s a long lasting protocol, such as TCP IP and USB’s are. It has been optimized for its objective, which is a monetary network protected by a wall of encrypted energy. For these reasons, I don’t believe it will lose its dominance in the market, and should not be compared to Myspace. It has already won.

Bitcoin is best described as an energy network, as it takes energy to mine. Skeptics of Bitcoin have argued that it is a waste of energy. What they do not understand is that energy is abundant, it’s not a limited resource. Humans have evolved over time, and grew to be the apex predator, by tapping into energy and channeling it. It is the same way today. “Technologies that are dominating today deliver force harder, smarter, faster, and stronger” (Michael Saylor). Every great investment has been into some form of energy network. Standard Oil was an energy network, as was Kraft, Hershey, Post, U.S. Steel, Ford, Boeing, and many more. Really, Kraft and Hershey? Yes, they simply channeled the energy of food and found a way to store that energy for a long period of time. All of these companies were great investments in the early days. They stopped being growth companies when they lost volatility.

These thoughts best describe why I believe Bitcoin is the best investment in the world right now. It is the hardest asset in the history of the world. Very few people own it, it provides insurance against financial catastrophe, and has the capability of moving 10-50X in the coming years. The government can’t take it from you when in self custody, and it is protected against inflation (theft). Money is the highest form of energy that humans can channel, and for the foreseeable future the highest form of energy is Bitcoin.