Bitcoin as Savings Technology & Number Go Up

Hi and welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today, for episode one hundred and forty-seven, my guests are Pierre Rochard and Saifedean Ammous. Firstly, a word on behalf of the sponsors of the show, ZKracken, one of the world's leading Bitcoin exchanges. They offer a high quality platform, they have high trading volume and low fees with no minimum or hidden fees. They offer twenty-four seven support and sign up is really quick. Kraken also have Kraken Security Labs, which is really working hard to a- assure the safety of not just Kraken, but also other peers and other companies in the Bitcoin space. There is also Kraken Pro mobile app Kraken Pro delivers all the security and features you love about the Kraken exchange in a beautiful, mobile-first design for advanced Bitcoin trading on the go. You can find it on Google Play and Apple. Kraken also offer Kraken OTC desk for those seeking more private, personalized service for large block trades of a hundred thousand USD or more. Kraken offer margin and futures, up to five times margin and up to fifty times futures. Kraken is one of the most liquid exchanges, and also they offer the CryptoWatch platform, a popular charting and trading terminal. So go and sign up at kraken dot com. Next up, this podcast is also brought to you by Unchained Capital. Unchained Capital is a Bitcoin financial services company empowering customers with financial freedom and control. All their products and services are built on the foundation of multisig, so you can store your bitcoins over the longer term in a two of three multi-signature vault, so you can hold two keys in that scenario, and Unchained can act as the co-signer or as a backup key if you were to lose one of your keys. If you need to- Access liquidity, but you don't want to sell your Bitcoin, Unchained offer collateralized loans, which is a unique option. All Bitcoin is stored on-chain in dedicated multisig addresses, and Bitcoin is never rehypothecated. You can also share in the security of your Bitcoin by holding one of three keys in that scenario. Make sure you check them out, they've got not just these services, but they're also releasing valuable content, open-source tools such as Hermit and Caravan, which is a stateless multisig coordinator. I think you'll enjoy partnering with them. Go and check them Them out at unchained dash capital dot com. Next is CipherSafe, ciphersafe dot io. They're producing the CipherWheel product, so if you need a steel backup for your Bitcoin seed, right, if you've invested in a Bitcoin hardware wallet or you've made a seed some other way, and you've got, say, a bip thirty nine seed, the twelve or twenty four words, you need to back that up in a way that's fireproof, waterproof, rustproof, petproof, and tamper evident. So the CipherWheel, it comes in a wheel shape and it masks the been opened. So make sure that you or your loved ones have access to your bitcoins if an accident occurs. So the order is actually going out now, so go and order yours at safesafe dot io. So for this episode today, my guests, Pierre Rochard and Saifedean, I think they barely need an introduction, but just for listeners who aren't familiar, Pierre Rochard is a well-known figure in the Bitcoin space. He's the host of the Noted podcast, he's working at Kraken, he's also written many fantastic pieces at the Nakamoto Institute and Saif Saifedean Ammous, he is the author of the Bitcoin Standard. He previously appeared on episode one and sixty-nine, and Saifedean is well known for speaking about Bitcoin and Austrian economics. so this episode we talk about savings technology and number go up. So we talk about some of these points around what's more economically relevant, and I think many of you will enjoy this episode because it's quite a common point of confusion. So hopefully this episode helps clarify some of those points. Pierre and Saifedean, welcome to the show. Thanks for having us. Thank you for having us, Stefan. Alright, so we are in Pierre's house, and, I was initially just gonna record this just with Pierre, but Saifedean was around, and obviously Saifedean more than welcome to join. I was really keen to hit this topic of savings technology. It is a very misunderstood, concept, and I think it ties in as well around this idea of what is a cash balance and how has that been abused or changed in today's world. So do you wanna open it up here? What, what is a cash balance as the, as the Austrians would explain it?

Yeah, so, it, it really represents the, the non-use of a resource, and that I think is, the, economic fundamentals of holding a cash balance. and what it does is it builds into the economic system first of all, your, ability to impact prices in the marketplace is increased when you have a cash balance, which then allows for a reallocation of resources towards something. So one example would be like if there's a hurricane that happens, and so people spend down their cash balances that they were holding, because they were holding those in anticipation of any kind of event, any-- and you hold it because of uncertainty, for unex- expected events, which are going to be negative cash flows, you wanna be in a position to be able to, in this case, rebuild after a hurricane. And so then when people are able to spend money on construction supplies, the cost, or sorry, the, the price of construction supplies goes up, and then the whole economic structure reallocates production towards this end because now we have an increased need for it in the real economy. and so that's the, to me, the f- Fundamental use of, holding a cash balance is to self-insure against, these kinds of unexpected, you know, economic events, that, that happen. And there's been like a deliberate policy on the pa-part of central banks to, suppress that because they actually want people to, bring future consumption and investment forward, in time, so that it makes GDP P number go up and that's, they get reelected and they, you know, have a popular mandate or whatever. And so, it causes all sorts of-- it, it, it makes the economy much more fragile when people are holding a lot less cash than they otherwise would, because this is why there's like financial panics essentially, right? Is that, there's not enough, cash in the system because people weren't making deli-- deliberately they were making the decision not to hold it, and so- Instead they were invested in, you know, these pyramid schemes that were, built up by Wall Street.

Right. And so there was like an unsustainable, boom, right? And that's the theory. now Pierre, I know you, you and Michael have been big on this. I've, I've been sharing that article a lot, which is that Hopper article, "The Yield from Money Held Reconsidered," right? Which is like--

Yeah. So this is like a very big debate within monetary economics is like, what is the utility of holding cash? And so this

Yeah, I think, obviously, I agree with you that, the utility of holding cash, ultimately the reason people need to hold cash is because of uncertainty. So if, if you knew, and Mises says this, I think, in Human Action, if you knew about all of your future expenses and when you would expect them, then you wouldn't need to hold money. You would just time them in a way in which your income is immediately spent. But of course, we don't know the future, and the world is uncertain, and so that's why money is Technology to have its optionality, you're able to use it to, to, to your advantage, whatever the future brings, whatever you want. But I think the other thing that, gets, forgotten about this, thanks to the, All, all of the horrible Keynesian propaganda that is, trotted out at universities and media is the fact that savings is the, a precursor step to investment, logically and, in terms of financial planning and also conceptually, even at, even at a very primitive way of trying to understand how these concepts work, first thing that needs to happen before an investment takes place is you need to, defer consumption, you need to s- stayed from consuming resources that you could use to satisfy your needs now, but then you decide to defer the consumption until later, which frees up the resources from being consumed and then can have them utilized in, investment. And so, at, at the very, you know, if we can think about it at the very simple level of, imagining, growing, grains, you know, you can, you first have to not eat the grains in order to, put them into the ground and grow more grains. So the- Saving is the first step toward investment, and, the way that it would work in, in normal healthy free market economy is that the hardest asset gets chosen as money. People use it when they, want to provide for their future self. So when you've earned enough money that you can meet your needs, your most pressing needs right now, and can afford to start thinking about your future, then you resort to putting, to, to, to storing value effectively in money. Effectively, it's a way for people- Providing for your future self. And so the harder the money is, the better it is at transferring value to the future, the less the uncertainty associated with it in the future, the more you are likely to save, the more you are likely to pro-provide for the long run, and that in turn lowers your time preference. And then the more savings you have, the more consumption you've deferred, the more resources you have available for you to be able to engage in investment. And so and, and, and, and if we wanna think about it in the sense of financial planning, you know, initially you save some money that is there always in the most liquid form, in, in, in, you know, four or six months expenses or one or two years expenses that you could always have, to fall back on. In case you needed it. And then once you've had that secured, once you've been able to save up that amount, then you can have more money that you would then take and invest. That's money that you would then take risk on. So money is supposed to offer you no, yield. It's-- it, it offers no return. It offers you only,

the ability to hold on to its value, so it has the least risk, it has no return, but it has the-- it should at least have the re-least risk and the best ability to hold on to value into the future. So it's a way for you to hold on to value into the future rather than a way to take on risk, which is what investment is. So investment comes at a secondary stage. But in our com-current, you know, GDP number go up, obsessed economy, we are obsessed with just bring number up, number up, number up, Of course, that you have the entire, political and economic media industrial complex constantly haranguing you about the need to invest, invest and put your money out in, the financial system, which, essentially makes it so that everybody needs to be investing in order to stay, in order to hold on to their value, and, it makes it so that the ability to save value into the future becomes something that requires significant amount of, expertise and market timing And following geopolitical events and so on, and, and that's just something that's not available for the majority of people who don't have the ability to do that. Either it's because they're too young or too old, or, you know, they have other things to do with their life than keep following, MSNBC's latest round of, talking heads. I,

I think that it leads to a, an effect where, there's a, stronger and stronger separation between, the financing of companies And entrepreneurialism. And so, the kind of the logical end of it is this index investing, passive portfolio approach of like just invest without any kind of entrepreneurial calculation, right? You're just, like, putting money into a vehicle that, or you've given up on, on life in a way. But it, it, that, that I think has really happened because of what you were describing with, i-in the fiat system being disincentivized from saving. if people saved more and then only invested in a way that was tightly coupled with entrepreneurialism, where they're starting their own company or they're investing in a friend's, successful company, and it's like a much more, like, It, it, it's not, it's not based on, tr-trying to passively make money essentially. It's an active partnership type setup where equity makes more sense. And at this point, you know, there's a just strong separation in the, agent-principal problem between management of companies and, shareholders, where it's not even clear that like the returns that people talk about on the stock market, obviously they've been very high because of Fed pumping lately. But, if you go back historically, you know, the, the risk-return, ratio isn't attractive, especially when you compare it to Bitcoin.

right. And look, bringing it back to Bitcoin as well, right? So this savings technology idea that I think Pierre, you're, you've really done well to popularize that idea, because I think sometimes people got it a little bit twisted in the past, and they thought of it more like, "Oh, it's payment technology," and it is that also. It's just that they haven't-- There's been- It's been a o-almost overfocus on payments. Do you wanna ex-uh, expand on that?

Yeah, everyone's default Keynesian, right? and so, by default, they're gonna be like, "Hey, this system needs to have utility with payments, "and then that will drive demand, so then, you know, the, the number will go up. and that's kind of-- that's the default basic approach to Bitcoin, right? and when you read Satoshi and when you, like, I, I've written- Things that were like, if you kind of looked at it through the right angle and the right lens, you'd might be like, "Hey, Pierre's kind of making that argument as well." and so then, then there's the, the supply argument, right, which we can get into later, but, I think that the, yeah, having the, the default Keynesian approach and then No one, no one really thinks about savings anymore because the system has become so effective at, absorbing people's savings, right? So like, now you get a, it started out with just like bank deposits, and then it became like money market funds, you know, like now my money mar- market funds are guaranteed to be a dollar and they're not gonna break the buck. But really, like- The, the amount of the financial system that's a hundred percent reserve essentially, because the US Treasury will print as much, or, you know, the Fed will print as much, as many dollars as possible to guarantee, you've got the whole bond market, right? Like, and so the whole-- to me, like, the whole bond market is part of the money supply because it's all would just instantly get monetized under any kind of stress scenario, you know, QE style. Yeah.

Yeah, I think the, the thing is that the, you know, the- The promise of fiat money was that we could just keep, stimulating the economy and making it grow faster and numbers can all go up and everybody will be happier.

And bailing out the fractional reserve banks. And bailing out the

banks, of course, and doing all of those things, and you know, fighting wars abroad and bringing democracy to people all over the world and, doing all of these things that won't have any actual real cost because it's just, you know, from the magic Keynesian, machine that just generates economic value by printing new money. But of course, the real cost has always been, you know, either in the inflation or, the, the cost is reflected in the, in the dropping of the value of the money. And so the way that they tried to con-fix that is initially to make it so that, you know, your checking account was guaranteed to be making money and that the government will guarantee your checking with something like the FDIC, and that you'd be making two, three, four percent, whatever, which should compensate you for the inflation. And so that way we get to have the free lunch of stimulating But also not robbing people's bank accounts, because, hey, you know, you get your magic FDIC guarantee, three, four, five percent. So essentially, you know, they, they try to square that circle or they try to run this perpetual motion machine where we can have the proof of stake system. Yeah, it's, it's exactly like those shitcoin scams. And we can, we can have the, we, we can have the, we, we can have the inflation, the benefits of the inflation without paying the cost. But that led to all of the, activity from banking to go from the, narrow banking system to the shadow banking system, which effectively functioned as a casino w-without, explicit Federal Reserve guarantee, which then had to become explicit, or I mean, at this point it's not really explicit, but it is, de- it's de facto, it's a de facto guarantee from the Federal Reserve. So now, you know, we've extended it to the point where essentially all of the shadow banking system is gambling with the same amount of money. And it's just, you know, you're constantly devaluing the money and offering people returns. And i- and if this does work out in the sense of, well, maybe returns beat the devaluation in money, I think what people are missing is, a, how much the money devaluation, happening, how much of the money's devaluation is happening outside the US? People all over the world who are holding US dollars who aren't intimately plugged into the Fed's, fountain of, printing? And so are not getting that sweet Canton, effect at the pro- at the, at the end of the day. They're, they're

probably paying fees to have an account open. They're not getting paid interest and with a free account.

Yes, and also, you know, that also includes all the central banks that watch their dollars get devalued all over the world, and, you know, that devalues their national currencies. All of it is essentially, you know, fueling all of these speculative bubbles which the Fed has to guarantee. And so ultimately, you look We're running all of this circus, for number go up in order to keep up the pretense that inflationism works and to make sure that, you know, the value of the money doesn't drop. But all of that can be replaced with a hard monetary asset. None of these stupid games were being played under the, gold standard because the money itself held onto its value or appreciated by one or two percent every year, and that's fair, you know, the, the, well, fair has nothing to do with it, but that's- Just what a free market provides. That's what people will figure out on a free market. They'll figure out that there's something, could be a shiny yellow rock or it could be an orange digital coin, but there's this something that is very hard to make and, you know, it allows you to store value into the future and have unexpected to appreciate slightly or to stay the same without much threat of its value going down because of inflation. That revolutionary technology is called money, and if a startup were to be coming up with something like this that, you know- That just guarantees you the return without you having to finance a giant, parasitical financial and military industrial complex to keep it running, I think that the startup would make a killing, but fortunately, it's not a startup, Bitcoin does it?

That's right. And so I think, yeah, with Bitcoin and this concept of savings technology and one thing that we can see over time is some of these other cases might get taken by, say, stablecoins, right? For example, if someone wants to just have pure- FinTech and payments technology, they could use like some stablecoin, but ultimately what they're missing and what they can't get anywhere else is a money that is outside of that control, right?

It's what I like to call the underlying technology behind Bitcoin. Number go up. People have thought that it was blockchain technology, but I think that was a nice camouflage. But really, the underlying technology of Bitcoin, that's it, is just the number go up. It's, it's a, it's, you know, everything else can try to- To number go up, but they can't copy it because there'll always be an incentive for people to make more of it or more, more like it. But

the moment number go up, starts happening for another coin, they're gonna find ways to create more and to somehow, you know, create forks and whatnot and dilute it.

There's, there's no coin that's going to be able to resist the political pressure that was put on governments to get off, the gold standard and join the shitcoinery. circus.

Right, and it's, it's sort of like the Julie and Simon argument of how if something is really demanded, people will find a way to make more of it, but it's just that Bitcoin has a way of resisting that tendency, and I, I think that's the way to maybe summarize that point. Yes,

it's-- To be fair, it's the difficulty adjustment, that's the formal name of the number go up technology.

Right. yeah, so let's bring it now to this concept, so because now some people in-- I guess there's different arguments to put around here. So some people might say, "Oh, look, but if, if it's constantly number go up, nobody will spend." And now that's one of the arguments that's going now about this idea of the so-called circular economy, right? Now, Saifedean, I think it would be great for you to touch on this idea. Is the circular economy something that should be encouraged right now or is it more-- More like people, you know, can just huddle until they feel comfortable to spend.

Generally, this notion that you need to spend because of some sort of obligation to the rest of the world is just ridiculous Keynesian nonsense. you spend if you need to spend, if you think that the value of the thing that you get from the money is better than keeping that money for another day and then reconsidering. And that's a personal decision that, you know, every person needs to make on their own, and this is, It's, I find it silly how people discuss it on the internet as if there's a position to be taken that, you know, you're either on the category, you're either on the side of people who think that you should be spending or the side of people who think that you shouldn't be spending. And the answer is, you spend when you want to, and it's your own choice. And, you know, that's kind of the point of what money is and what Bitcoin is. You decide based on your vision of what you expect to happen in the future and the uncertainty that you

this is, this is really ultimately what, h-h-how things will work, and this, this notion that if we just sacrifice our own convenience by spending more Bitcoin and trying to go out of our way in order to, continuously replenish and spend, you're just essentially paying more fees to inconvenience yourself, and that's, you know, if, if Bitcoin needed us to be doing these kinds of, financial activism, in order for it to work, well, it's not going to work. It's, it's, i-if it had to count on this, it's not going to work. And fortunately, you know, the number go up technology underlying Bitcoin doesn't require you to engage in these, activities in order for the technology to work. In fact, what really matters is- For Bitcoin to continue to grow and succeed, for me, it's the issue is the size of the cash balances, what Pierre was mentioning earlier, in Bitcoin needs to grow, and that's just the way in which the- People will start to spend more Bitcoin. At this point, about point one percent of all the world's money supply or point two percent of the world's money supply is in Bitcoin, which means that When you're trying to trade with somebody else, when you're trying to, exchange goods or services with somebody else, the chances that they also want to trade Bitcoin with you, that they have a cash balance in Bitcoin that allows them to take, to, to take payment in Bitcoin or to make payment in Bitcoin, is roughly in the order of point one or point two percent. And that's why it's m-far more likely that when you want to transact, you'll be able to find people that are going to be wanting to transact with you in, fiat currency. Differences. And that's fine, that's just the economic reality that you need to deal with. And I, I think it's, it's really counterproductive if, Bitcoiners think that, you know, we need to preach and harangue to people, harangue people to, act against their economic interest for them to work. What needs to happen is that the size of those cash balances increase, and therefore the possibility that you'll run across somebody else who's willing to spend Bitcoin or receive Bitcoin continues to increase. And that's just not something that can happen overnight. It's not something that can happen over ten years, and it's incredible that in ten years we've gone to, from zero to one hundred and fifty billion dollars of cash balances in Bitcoin worldwide. It's absolutely astonishing that people have made this much room in their cash balances so far in only ten years. But, you know, it's gonna take a lot of time for this to grow. I don't know how much time, and, you know, the, the way that it's going to increase is people growing those cash balances and having more chance to have, trades with this liquidity, w-w-where they find people who also are able to trade with Bitcoin. That's ultimately what it's going to come down to, in my opinion.

Well stated, Pierre. Did you have anything to add?

Yeah, I, I think that until the end, the most liquidity is going Fiat currencies and Bitcoin, and not between Bitcoin and goods and services. and so until fiat currencies do collapse in the tail end of hyperbitcoinization, and so ahead of that, we wanna be, you know, first of all, scratching your own itch, right? Like, I think that there's a lot of people who are intrinsically interested in understanding the, underlying blockchain technology and, and Lightning and whatnot, and wanting to- to contribute to that because they just find it interesting, you know, from the same way that people build, you know, Linux open source, software. and I think that, that also is good because- When we're in this future state where, you know, we don't need the, legacy payment rails anymore, we wanna be using a really robust open source system that Caters to our needs as, consumers, right? and at that point, we'll be able to spend down our cash balances in the most, convenient and liquid way possible. and so that's why I think that-- And the other part, though, over time is that there's a wealth effect, right? And so people who got in really early and now their, their cash balance as a percentage of their balance sheet has g-g-grown to a percentage, you know, of like ninety-nine percent, right? And that- And they're like, okay, I need to rebalance here because, first of all, it would be nice if I had a little bit of a bigger house or, you know, go, go on a, vacation or whatever. and so we're gonna see-- and we have seen, and journalists write about this as a negative of like, "Oh, these, old hodlers, these whales, they dumped on retail in two thousand and seventeen, they dumped, you know, six billion dollars worth of Bitcoin or whatever it is."

and The baton, you know, like there's going to be successive waves of people who get in and then eventually they're rebalancing and rotating out. Now, you know, hopefully not too much, otherwise they'll miss more upside, but that's just the way, marginal economics works, right? What's people's marginal propensity to consume and invest and save, and that's just an equation in, in everyone's brain that's, subjective.

Yeah, exactly. And I think also the, the other side is that, as Bitcoin- Bitcoiners begin to interact with more and more Bitcoiners, and the number of Bitcoiners increases, you're more likely to run into people who are already, Bitcoiners. And so particularly for people who work in the Bitcoin, space, who produce things related to Bitcoin, in my case, for instance, in my website, I accept Bitcoin because a lot of my, readers are, and the people who buy my courses, a lot of these people are already Bitcoiners, and so it makes sense for them to, spend some of that coins, and so I, I don't think it makes sense to, be evangelical and missionary about it. It'll make sense for somebody to spend their Bitcoin when it makes sense for them to spend their Bitcoin. Right.

Yeah. And so I think one point, so, Saifedean, you've got to leave us. So, do you wanna just quickly- Yes, unfortunately I have to go on. Yeah, unfortunately, but do you wanna just, shout out where, listeners can find you as well before we let you go?

Saifedean dot

com

Courses in economics and Austrian economics and, you can, buy some of the previous courses and, get some new ones and also some of my research papers and, You can also find all of the translations of my book and where you can buy them from. Thank you so much for having me, Stefan.

Thanks, Saifedean. Cheers. And thank you for hosting us, Pierre. Yeah, sure thing. Come back. Thank you. Awesome. All right, so Pierre, we're carrying on with you. we've got another topic I was really keen to hit, and I think it would be good to touch on, which is obviously, not obviously, but stock to flow, because there's been a lot of discussion online, you know, is it Obviously, if you're into Austrian economics, you're talking more about praxeological, application, deductive reasoning, and you're not necessarily as into, statistical understandings of economic law. But how do you square that circle in terms of it, you know, it not being, a, a deductive, reasoning around stock to flow modeling?

Yeah, I think that, the, Bitcoin BTC influencers have become a price cult, and, so they're taking this stock-to-flow forecast here and staking their reputations on hitting these lofty price targets over time based on some, you know, crank math, and, it's all gonna f- fall apart very soon, very soon. no- Now, more seriously, I, I think that, to me the, the interesting question really is like, what-- is it correlation or is it causation? And at this point, I, I like the idea that it's correlation and that essentially you have, positive feedback loops that are all happening pretty much simultaneously, and so, Because we are able to,

because two of those feedback loop numbers are public Right, which is the price in the stock to flow, that we're able to see this relationship. If we were able to get other metrics as well, you know, maybe people's, price expectations, right? If we were able to extract that from people's brains of like, where do you see the price going in the future? we would be able to see similar relationships. But we're-- and it's actually, it's one of Bitcoin's fundamental properties that we can actually see one of those. numbers, which is the, the, the stock to flow ratio, right? and so, that is also sets it apart from even gold, right? You can't see gold's stock to flow ratio. you can't, you know, see it for fiat certainly. and so there's,

Yeah, it, it's, it's kind of unique because people talk about also like, oh, because of Bitcoin's public on-chain data, we're able to do analytics on, you know, transactions that we weren't able to do before. And, yeah, true, but at this so far quantitatively, it's like the most interesting one that's been found, you know, of on-chain data.

Yeah. And the other interesting part is also not necessarily prediction, but just trying to understand why has it been accurate up until now?

Yeah, I think that, Even if the forecasts are wrong, right, and that, something-- the, the correlation fundamentally breaks down and the parameters change and it destabilizes, you still would have ten years of price history where there was that correlation. So you still actually have historical, like, and, it's important to understand that, praxeology and history are different fields. And so when we're talking- Talking about quantitatively what has been the relationship between stock to flow and, Bitcoin's price, that's history, that's not praxeology. and so there's nothing wrong with, you know, using publicly available data to run a regression and to see, you know, this, this rela-statistical relationship. I don't see that contradicting Austrian economics because it's actually just, it's, it's completely in line with Austrian economics. Right. So let's

split it up then a little bit. So if we were to say I'd say one part of this is praxeology. Would we say, would you say something like the idea that humans will chase towards the, an asset with a high stock to flow ratio, maybe that's more on the praxeology side, and then the actual specific price numbers, that's more on like a, we're not dealing in praxeology in that field, that's more in relation to- analytics and modeling and prediction.

Yeah, so I, I think so, and I think that the, you know, the, the praxeological approach I, you know, I, I think that there's, there's a lot we haven't explained yet of, because this has never happened before, right? Like, there was a lot of, work done by scholars, Austrian scholars explaining the transition and the breakdown of the gold standard to the present, you know, fully fiat world standard. And, you know, Murray Rothbard wrote, you know, "What Has Government Done to Our Money?" There's been lots written about this And, and analysis done of, you know, how, how did this happen and by what, you know, causal mechanisms? And so there hasn't been that scholarship for, how, how is it that Bitcoin, you know, was able to grow in liquidity so quickly? Like that's not something that has really been studied.

With stock to flow, you could almost argue that it really focused very much, it focuses very much so on the miners and how much are the miners selling. And I think Parabolic Traders may have commented on similar kinds of ideas around this, and he was saying it's almost like there's not necessarily a big, big whales that are out there selling lots of coins, who are the people with a lot of coins? It's miners, and then who are the people with a lot of expenses? It's, it's miners. What's your take on that? And is that why- Yes, Dr. Flo, potentially has been kind of accurate.

Yeah, I, I don't, I don't have a view on it honestly, because to me that's just too granular of like trying to figure out chicken and egg problems, because there's so much, reflexivity and circularity in, in these causal mechanisms in Bitcoin because it's, it's a self-balancing system, and so, I, it's, it's very hard to like isolate, like to me, what is actually driving, whether it's the price or, you know, people's, educational process and this mind virus that is spreading among us, like, you know, it's, it's I would argue that it has been, way more, impactful than any virus, that's happened, in real life. and, it's sticking around, you know? People like, you don't see people being like, "Ah, I used to be interested in Bitcoin, but now I don't, I, I'm not into it anymore," like, I lost interest. you see people who actually start out with very little interest in it, right? And they're like, "Ah," you know, my cousin told me to throw like five hundred bucks at it, and now it's like fifty grand worth or something, you know, like, and then they get interested in it at that point. and that's just gonna continue to happen, and then there's, there's the underlying properties, right? Seizure resistance is huge, censorship resistance is huge, being permissionless, and There's gonna con- be a continued trend of de-platforming, right? So, by payment processors around the world for all sorts of different stuff. So that's gonna continue to happen, and that's gonna drive also a lot of the transactional demand on it.

Right. Yeah. So it's almost like there's just too many different factors all at play, there's too many variables in the air that you can't really seize on one of them and say, "Okay, that's the most important one." and I think let's bring it back to one of your favorite We can und-- one way to understand, potential money candidate, if you will, is how saleable, how marketable is it? And I think in modern parlance and finance parlance, we would know that as liquidity. So what's your view around that and how that develops over time?

Yeah, so I think that, it started-- so Bitcoin's liquidity started at zero, right? And, half an e, was the first participant, right, with, Satoshi, he's the first one to receive a transaction. I don't think he paid anything for it, but, and it also, you know, it was trading against the cost of electricity and compute at the time. and so, it, it, it started out nil and then built up from there. And I think that, the, the way that it was able to build up this liquidity is what Saifedean was talking about earlier, which is that, the unforgeable costliness, that in-insures its scarcity essentially. And that's t- to me like the, the What, what's driving the whole thing? what was the question again? And I, I was also

just, also interested to ask about your thoughts on where we are now with liquidity, and we were talking earlier offline, compared to, say, this time, in like twenty fifteen and sixteen, where are we now today? And then, what, what's the reflection for the coming, you know, year

or two? So I, I remember, having conversations about like How quickly financial institutions are gonna get involved with Bitcoin, and, now we have six hundred million dollars being traded in twenty-four hours on, you know, regulated US, you know, commodities exchanges and futures. And so that's like, that, that's something that I would never have guessed is happening so soon, in Bitcoin. And people don't talk about it very much. It's like not really- But they don't understand the, yeah, the depth of, liquidity that now exists for Bitcoin. and yes, the price moves around a lot for sure, but, you're able to buy and sell in size at any point in time, and not really move the price all that much. and so I think that, people who are managing a lot of money, they're starting to actually see this as being big enough to pay attention to. And that's why, People, you know, think that, liquidity is, like, zero to one thing, but really it's a one to N thing, and so, the, the network effect of it, is huge, and it's very-- That's why the US is able to abuse its position, right? That's why it's able to inflate so much, is because it has this tailwind behind it. Of having this, dominant network effect, being the global reserve currency. and so, the same thing I think is gonna apply for Bitcoin as well,

right, as it builds over time. And do you think we're gonna get really surprised to the upside in, say, a year or two if we hit another, you know, twenty seventeen?

I think that, yeah, I, I think that there's, there still needs to be a lot of, more infrastructure in place, before, we really- Start getting surprised by Bitcoin price movements. a lot has been built, over the bear market, and there's also, you know, on the technical side Technical upgrades happening. And, there, there, I, I've always been skeptical of this, but you hear people talk about how SegWit activation helped number go up, in 2017. And I don't, I personally don't buy it, but, I know that some argue that that's the case, and so they think that, like, Taproot is bullish. I, I don't subscribe to it though. I just wanna put it on the table.

And look, from a lightning perspective, what are you most excited about? What are you most, keen to see happen?

Yeah, well, so, I guess this is both on-chain and lightning, but I, I wanna see on-chain fees go up. I wanna see full blocks. I think that, Luke was right and we should have lowered the block size limit, the block weight limit, because right now, you know, it's one Satoshi per byte. It Interesting. So, I think that we would see more Lightning adoption. Now, on the other hand, I think that there's a lot of developer work that is ongoing on Lightning, and so maybe it's not ready for, you know, some kind of like mass market adoption just yet because there's still fundamental work that needs to be done. And, you know, Square Kryptos funding their Lightning development kit, and so you can see that there's like, progress there. And every time you look at, you know, the latest release Of LN or c-lightning, there's a long list of improvements that have occurred, so that's just gonna continue happening.

It might be fair to say we have to get to a point where the user, most users, don't really know whether they're spending, you know, Bitcoin or Lightning. From their point of view, it's just scan the QR and pay, right?

Yeah, I mean, you should have like three things on your screen, your balance, a send button, and a receive button. And that's, you know, that's all you should really like know or care about, because that's all you're doing with money is you're just sending, receiving, and holding it. Yeah. and it should also just kind of be like tightly integrated where if you're a small business owner, you know, from your phone, you're able to connect to your BTC Pay server in a very convenient manner to where like- You know, hey, if you've, if you've got a company expense that you're gonna go pay for, you know, you can easily do it from your phone. so all these projects are just making leaps and bounds in terms of, how easy they're gonna make it to manage your UTXOs by building layers and layers of abstractions, and, yeah, it's just a lot of engineering work.

Yeah, right. And we're starting to see that now with things like Phoenix, where the channel management is done in the background, or things like RTL. Have loop in and loop out built into RTL so that then a merchant can quickly manage the channels more easily as well. So I think these are some examples of multipath payment as well that helps you route in a way without having to worry about in individual channels and just kind of route from your overall balance.

Yeah, that's gonna make it a lot more capital efficient. Something else I was thinking about on capital efficiency was, I heard from someone that, one of the disadvantages of, Lightning is, it's, It's like a prepaid system, right? And you've-- so you've gotta put money in to, to be able to move money around. And, So their view was that it's a disadvantage because there's a cost of capital and there's an opportunity cost, and so thus, you know, people aren't gonna wanna use Lightning, and it's not gonna be liquid enough. but I, I think that that's like a, inflationary fiat view of, cash balance, right? because it's okay to have a cash balance on Lightning if you're gonna have a higher cash balance anyway, because Because your cash balance is increasing in purchasing power, not decreasing. and so I think the, that problem is probably overblown in that, if anything, there's going to be an excess of coins in Lightning, and that's currently what we see, right? LN big, like, there's, there's, probably a disproportionate amount of capital, now maybe if, if it was- More efficiently distributed, then we could have, you know, f-faster payment routing and fewer failures and whatnot. but in any case, I, I think that Then when on-chain fees start going up, that's when it's gonna get interesting, and, that's, that's what I'm waiting for.

Right. And I think it's, it's a fair point you make because right now many people on Lightning, we're still not really doing Lightning channels and our fees on a arms-length basis, let's say. We're just kinda doing it in like a hobbyist way. And I think to your point, it's when Bitcoin on-chain fees rise, that when, that's when people will really start to actually account for that more. And so Some people now today, like someone like Alex Bosworth, right? He's probably got a more efficiently run node which actually does make back some fee revenue compared to most other people because he's actually really actively managing it and balancing his channels and so on, whereas the typical Lightning user today might not be doing all of those things or it's not automated enough. Is there anything else you're kind of excited for in, in terms of the more Bitcoin world as opposed to like Lightning specifically? Yeah.

I think that, yeah, the part that I'm recently have found, to be fascinating is the idea of Bitcoin as collateral. And by no means am I the first person to, you know, look at or think about this, but, and there are companies that have built excellent products around it, including Kraken, right? Kraken, you have Mar- And trading is basically using Bitcoin as collateral, and you've got, companies like BlockFi, people always bring up Celsius, although I don't like them because their CEO is a shitcorner, and, There's, Unchain Capital here in Austin as well, where basically, because we're using Bitcoin as savings, and we're also living in this fiat world that, it makes sense to use your Bitcoin as collateral and borrow against it and leverage up, because the interest that you're gonna pay on the fiat is less than the purchasing power increase you're going to get on the Bitcoin over four years, let's say. and so you essentially, you know, you're, you're part of the arbitrage going on between, you know, Plan B's model and- And, the fiat banking system.

Right. And let's put some numbers there. So, I mean, you might be paying, I don't know, ten percent interest on the loan, but then if Bitcoin is returning two hundred percent per year, you're

well in the clear, right? Now, the problem is that you've got a-- there's, there's a huge amount of risk there, right? and so the, the loan-to-value ratio matters, when you start matters as well. Like, if you start doing this in December two thousand and seventeen, you're in trouble Yeah, exactly. and so I think that you've got to run like sensitivity analysis, and I don't think that there's been enough financial modeling around this, of people looking like, okay, back testing, like, here's what would have been fairly safe and, you know, with, within, the standard deviations of whatever price returns, you know? but then, you know, we're-- so we're already seeing the, this, market for Bitcoin as collateral, and to me that's- part of the, speculative attack that's gonna happen on the fiat financial system, because, I used to think that, the leverage would come from, other assets within the economy. So for example, like George Soros would borrow against, treasuries he has in his portfolio and go buy Bitcoin. And he would borrow this from, you know, commercial banks. And so, or, you know, in the case of the Fed, I think that there's like primary dealers that are hedge funds. And so they're ba-- they're financing their balance sheet with like, this, this- anyway, so they, they can, they can leverage up and buy Bitcoin, and they're creating new money, they're creating like new base money by doing this. and this is what has happened in speculative attacks in the past, where basically the speculator will- Borrow in the weak currency to purchase the strong currency, and then that kind of has its own, negative cycle to it, until the issuer of the weak currency increases interest rates, and so it makes it more expensive to borrow the weak currency, and that's what breaks the speculative attack. Now, the challenge is that, you know, the harder the good currency is, the higher the interest rate you've gotta go in order to break the- speculative attacks. So the, the gamble for hyperbitcoinization is, you know, or one of the open questions is, you know, in this scenario, will interest rates go high enough to, to save fiat currencies? And then that kind of goes into like John Nash, I think, has this world where this, very hard currency would, live side by side with fiat currencies, so maybe it would constrain government monetary policy? Or we just live in an economy where there's no, there's no USD and it's just Bitcoin.

Right. But the question, the open question is when we get there or if we get there and so on, and we don't know that. Fifty years, a hundred years, never, we'll see. We'll see, right? so look, I think that's probably a good spot to end it, but, make sure you shout out, where can we find you online? And Kraken, obviously.

Yeah. So, if you wanna get paid in Bitcoin, And you'll find it, we've got lots of open engineering positions, and you can work remotely and earn Bitcoin. So, then if you're interested in trading, if you're trading futures, in Europe, use Kraken Futures, and then if you're just trading spot, or available all over the world. So go check us out at kraken dot com and follow me on Twitter at Pierre underscore Rochard. Awesome. Thank you very much for joining me, Pierre. Sure

thing. Thanks for having me. Alright. So So I hope you found that enjoyable and educational. Remember to share this episode with anyone you know who is confused about cash balances or this concept of savings technology, and as always, go to Stephan Livera for the transcript and the show notes. Thanks for listening, and I'll see you in the citadels.