Phil Bonello joins me to talk about the book, The Sovereign Individual, and how it relates to a Bitcoin investment thesis. We talk:
- The Sovereign Individual book
- Black Magic of Compound Interest and Jurisdiction shopping
- What the book got wrong
Investment theses around the book relating to:
- Media
- Education
- Remote Work
- Bitcoin businesses
- Censorship and Privacy
Phil Bonello links:
- Twitter: https://twitter.com/PhilJBonello
- Sovereign Individual Investment thesis: https://philjbonello.substack.com/p/the-sovereign-individual-investment
Sponsor links:
Stephan Livera links:
- Show notes and website
- Follow me on twitter @stephanlivera
- Subscribe to the podcast
- Patreon @stephanlivera
Podcast Transcript:
Stephan Livera:
Phil, welcome to the show.
Phil Bonello:
Thanks for having me.
Stephan Livera:
Phil, I know you wrote about the Bitcoin sovereign individual investment thesis on your sub stack recently. So I thought it’d be great to chat with you and also talk a bit about the book, The Sovereign Individual, cause I think there’s a lot of relevance right now especially. So can you just start with telling us a little bit about yourself, how you got into Bitcoin and what’s your involvement in all this world?
Phil Bonello:
Yeah, absolutely. I originally got involved in the space actually kind of interestingly through, I was interested in machine to mission communication and kind of the whole IOT space. And I actually happened upon ethereum. I thought it was, it was amazing. And that kind of, that launched me into the whole space. My thoughts have changed significantly since then. And I’m much more on the monetary side than the technology side, but you know, I still think there is there’s some use on the technology side of things, but so kind of in 2016, 2017, I really started getting interested in everything and I decided to kind of leave my full time job completely and do research full time. That actually led me down to Los Angeles to join Ikigai asset management, which is a multi-strategy hedge fund.
Phil Bonello:
So I led research at Ikigai you know, going through all the different alt coins as well as Bitcoin, look at on-chain metrics, market analysis, look at our venture investments, really just doing research across the board. And then I left Ikigai in the fall and I’ve just been an independent analyst for the last few months. And one of the things that I wrote, like you were talking about today is the sovereign individual, on investment thesis. You know, I read the sovereign individual, I almost, I feel ashamed almost that it took me so long to to read the book, but when I read it, I was just like, this makes so much sense. It’s so applicable to today. And it’s one of those books where you read a page and you’re like, was that written last week? But really it was, you know, it was written 20 years ago and it’s incredible in that way. And so I decided to try to make my reading of the sovereign individual as applicable as possible by putting together this investment thesis looking through different pillars of the sovereign individual.
Stephan Livera:
That’s awesome. And so for listeners who have not read the sovereign individual, can you just give them a background? When was this book written and what’s it mostly about?
Phil Bonello:
Yeah, so the book was written in 1997 and I would say the primary thing that Sovereign individual talks about is the leverage of violence and the power shifts throughout different periods of history. So starting in the Hunter gathering phase to agricultural societies, to industrial society, and now in the information age. And the reason that’s relevant is because in Hunter gatherer societies, there wasn’t a need kind of hoard goods. There wasn’t this idea of personal property actually it was inefficient to hoard anything because there were no preservation techniques. So if you were to kill something, then it’s probably going to rot and you’re actually just decreasing the available amount of food that you can then go out and hunt for later on, right? So there wasn’t this idea of personal property and then agricultural societies, that’s when the idea of personal property really came to be, right?
Phil Bonello:
And so with personal property there was also increased leverage to violence, right? So now everybody has goods that they’re saving and that also means that they need to protect those goods. And so now the biggest guy in town can get a bunch of his buddies and just say, okay, either we’re going to use this violence to just go take stuff from people. Or maybe we can provide a service to all people in town and help them protect the goods that they have. So you can kind of see this power structure form around violence and the power of violence. And then in the industrial age that leverage of violence actually just becomes exponentially increased, right? Because now these nation States have the ability to build really, really destructive weapons. And the people that use those weapons to the best of their ability have the most power in the world.
Phil Bonello:
And now in the information age, a lot of the physical violence that leverage starts to decrease because more and more of our wealth and power is live as living in the digital world opposed to the physical world and governments and violence has less leverage in that physical. They are in that digital world. Right? so it’s just this kind of, this shift in power structures and especially as we kind of transform into the information age, there’s this decreased leverage to violence. And basically the book goes into detail about how they predict the information age will change those kind of power structures.
Stephan Livera:
Yeah. It’s really relevant for us today as well. Everyone’s going through this coronavirus thing and we’re saying crazy movement and the financial markets, and I think people are now starting to question a little bit more what those preconceived assumptions were about. “Oh the government will protect me.” Now it’s not so clear, isn’t it?
Phil Bonello:
Yeah, absolutely. And I think one of the most interesting things and one of the things that I didn’t really expect when I, when I wrote that thesis is that we’re seeing this shift happen very quickly right now. Right. The book talks a lot about protection and this idea of protection. And in the thesis I also talk about the motivations for why people would adopt some of these different investments, right? Like, I think right now we’re in a very consumer mindset and kind of this idea of acquire things. And we don’t have much of a defensive mindset. People generally, right? We kind of outsource our protection. I think we can look at just a very simple cases.
Phil Bonello:
Most people use the password. One, two, three, four, five, six, like that’s the most commonly used password in the world, right? That’s not much of a password. Then we see a lot of things like these some of these hacks that are going on in a centralized institutions. We’re leaving all of our data to, you know, Google, Facebook, what have you, and we just really don’t care about privacy protection, any of these things because things have been going really well. Right? But I think this virus could be a kind of a tipping point in some ways. Number one, because we’re all forced to live in the digital world if we’re all going to be locked in our apartments or our homes. But also, and I’ve seen this pop up in the last a week, there are a lot of government initiatives that are getting pushed through to surveil populations with the idea that, okay, this will help us kind of stamp out coronavirus. And that’s pretty scary, scary to me. But I also think that things kind of have to get worse in that direction and there has to be more surveillance for people to realize the value of privacy in the value of their digital freedom. So really crazy to see what’s happened over the last, you know, few months on so many different levels. But yeah,
Stephan Livera:
That’s right. And as a famous saying, for all my disagreements with Milton Friedman, he had a very famous quote, which is there’s nothing so permanent as a temporary government program. And that’s what we’ve seen with, you know, even if you look back to 9/11 and the Patriot act and all the impacts of the TSA and all the security theater that we see around the world, we’re going to see another round of that with Corona as well. We’re going to see all sorts of power grabs and people will then stop and think, well, hang on. How much power does the government have? ExactlyhHow much insight or surveillance into my life does the government have now with all these new powers that are inevitably going to come down the line. So this change in power dynamics. And I think a really interesting point from the sovereign individual, maybe you could touch on this as well, is they mentioned the end of nations and maybe it’s not like the end of all whole nations, but they at least they become a lot smaller. And an interesting point as well was this idea of certain currently existing powers didn’t realize that their power was fading. Like the Roman empire didn’t recognize that their power was fading. Do you see a similar dynamic today?
Phil Bonello:
Yes. And so I think the juxtaposition is kind of governments based on voice for governments based on exit and exit costs has never been cheaper. You know, like it’s really easy to go anywhere in the world specifically because you can still communicate with anybody in the world. You can still do most jobs from anywhere in the world. And again, back to the virus. You know, this is becoming more and more clear. We can we can work remotely and everybody, I really think that working remotely is going to be more of a necessity than a luxury and working physically like in a city or something is going to be more viewed as a luxury than a necessity. Yeah. So, so basically I just, I think that exit costs are going to continue to decrease for governments and we’re going to continue to see these big bureaucratic weights dragged down general populations. And there’s going to be a real need to exit, right? Like, I think Singapore is such a great model and it’s, yeah, I think that a lot of people are just going to realize that there’s no reason to pay exorbitant taxes to also let their money be devalued relative to the supply. I mean, again, look at what’s happening in the last couple of days with stimulus packages.
Stephan Livera:
Yeah, that’s right. And so with places like Singapore or Hong Kong, well before some of the recent more Chinese government interventions into Hong Kong, those were probably better examples. Although obviously nothing’s perfect, but they were probably better examples of city, state kind of idea. Smaller government, not necessarily zero. Although one thing though it is, it is going to take some time though. So because right now, and let’s be cognizant as well, right? Take people like yourself or me or probably many of my listeners as well might be in a position where we can work remotely, but there would be, there are still a fair few jobs that can’t be done remotely rather that’s, you’re a delivery driver or you’re a chef oryou know, you’re in some sort of service role that can’t be done remotely. But I wonder what’s your view on even that small percentage or let’s say growing small but growing percentage of people who can work fully remotely, will the changes they do with their own life still impact everyone else anyway, such that it brings a benefit anyway,
Phil Bonello:
So I’m not sure I understand the question fully.
Stephan Livera:
Yeah. So I’m just saying for example, it might be that only 20 or 30% of society can work remotely, but could it be that even if only 20 or 30% of people work remotely, that’s enough to still drive a change in the overall society such that we can all get a benefit even if you don’t, even if you can’t work remotely, would you still benefit from the fact that there are people who can?
Phil Bonello:
yeah. So I think. There’s going to be, and this has been playing out over the last few years, well, everybody can be educated because information is so readily available, right? And when everybody can be educated with the same information then everybody can pursue the same type of jobs. You know, again, physical location is still a barrier, but the trend is towards digital. Right? And, and more and more people can do job digitally, so even 20, 30%, whatever the number may be. And that will have a very interesting impact for society. So for developed countries, I think it probably is going to be a big wake up call. A shock, a deflationary shock, right? Where a lot of people had gone to a university, had paid $200,000 for education. And now someone who maybe is in rural India has done some online coding courses and can now do a similar job as someone who’s living in San Francisco. And you know, that that’s probably going to be really tough for the person who’s in San Francisco trying to pay $3,000 a month for a studio apartment. Right? however that’s great for the person in rural India. Now they can satisfy jobs that are, maybe five times what they would make before. And that’s a really interesting dynamic. So I think, I think we’re going to see wages continue to trend up and kind of developing countries and probably trend down a bit in developed countries.
Stephan Livera:
Yeah. And it may also have the impact of varying the government expenditure or minimizing government expenditure even in the big government countries because people have the, the alternative of going elsewhere. So currently, you know, as you were saying, part of the calculus was the logic behind violence. Right. And how much can you protect yourself and versus how much is your protection being outsourced to the government. But then the other question that you could raise is how much of the government’s expenditure is legitimately that defense versus how much of that is random offensive Wars around the world? Or how much of that is like welfare state or random bureaucracy? Do you believe that’s the case there that governments become more lean?
Phil Bonello:
Yeah, absolutely. I definitely don’t think like, we don’t see any kind of government. I just think the trend is, like you said, a more lean system and maybe more localized governments. Yeah. Because like you said, when you really do a cost benefit analysis, it’s like, well, what is, what is this government actually providing me? Oh, I think they’re providing me protection. Okay, but what is that as an overall percentage of the cost, right? Yeah. Yeah.
Stephan Livera:
It’s funny. I saw as well, some recent news. I can’t remember exactly which state, I think it was Philadelphia or not. I can’t remember. But there was a specific, there was like some announcement that saying that they weren’t going to certain types of crimes anymore because of coronavirus and it’s like, hang on, okay, fine, well if they’re shutting down. Does that mean you don’t have to pay the taxes for that?
Phil Bonello:
Yeah, also very strange that they would even announce that. Right. Why would you announce that? Why would you just stop? You know, I, I’m not sure what the rationale was behind that, but pretty strange.
Stephan Livera:
Yeah, so that’s a really funny thing there as well. And yeah, I mean it is going to drive this change. Now, one really interesting topic from the book that might be good to talk about as well is the black magic of compound interest. And so there’s just a section where they’re talking about here. Basically they’re saying, look, every, so here just quoting a section, it says, remember each $5,000 of annual tax payments paid over 40 years, slashes your net worth by 2.2 million. Assuming you could realize just a 10% return on your capital at a 20% return that balloons to 44 million. And so basically it just the, so another section there is saying compared to the Swiss alternative, the lifetime losses from paying federal income tax at us rates would be $705 million for an investor who could average a 20% rate of return. So I guess the question for you, Phil, is what does it look like when people start jurisdiction shopping because of this massive incentive they have?
Phil Bonello:
Yeah. Well, I mean, we aren’t very good at projecting nonlinear growth, you know, so like a 20% tax versus 30% tax. You know, it doesn’t seem to make all that much a difference on an annual basis, but then when you start to really do some of that compounding, it’s pretty shocking. But I’m not really sure. I again, I look at Singapore and I’ve been meaning to really dig more into the founding of Singapore and kind of the thought process behind some of their tax structuring. Yes. You know, it’s going to be interesting. One comment that I will make though is in the book, I think they tend to be pretty absolute about like this digital world and exit costs, but you know, we still are living in the physical world, right? We still have to eat, sleep, we have to have a roof over our heads have to protect ourselves against, you know, a virus essentially. And there are nicer places to live than others. Right. So, you know, currently I’m in Los Angeles, it’s 70 degrees outside. I moved from Chicago where it’s terrible in the winter. Disgusting. Right? And so those sorts of things still play in. Right. But yeah, certainly, you know, topography, climate those are huge deals. And technology is just one factor in that and I still think there’ll be taxes, you know, probably maybe five, 10%. That seems a little bit more reasonable.
Stephan Livera:
Right? Yeah. And I think we will see more and more people try to, especially at the higher echelons of income, we’ll see those people try to get a tax deal with a certain country. Right? They may go to whatever the Switzerlands or the wherever of the world and try and negotiate a better tax deal, which makes sense from the perspective of those other countries as well. If they can get a high earning person or a person who is producing a lot, then it’s worth their while to do that.
Phil Bonello:
It probably starts with the wealthy, with like the ultra wealthy where there are either attempts to see some of their wealth through taxation. You know, we have the wealth tax proposal on the board, so you, okay, I have $10 billion and the government’s saying that they want to take 50% of it. No, I don’t think so.
Phil Bonello:
And then you know, Oh, you’re going to jail me. Okay, well I’m going to go look for another place to live. Right. So I think that’ll probably start with a wealthy. Yeah.
Stephan Livera:
And so also, even for those people who are still living in the country that I normally am and they haven’t left yet or yet let’s say there is still this funny dynamic of old laws versus new technology. So in the book as well, they make an example where fax machine laws in the 80s still outlawed use of fax machines because they were under the, these ancient laws, they were considering it like a first class mail, which the US post office has the legal monopoly and whatever, and yet people are still using fax machines, right. And so it’s a similar kind of thing where maybe we see more and more people who have the option to set up their own BTCPay Server and be a sovereign individual and receive their for their services.And who’s going to stop that and who’s going to know?
Phil Bonello:
Yeah, absolutely. I mean I think regulation is always lagging technological progress and there’s no hope for it to kind of get ahead and yeah, there’s more people are using Bitcoin hopefully. There will be less ability for these governments attacks and less ability for them to create revenue through money printing.
Stephan Livera:
Yeah. Now, one topic that I think is also important to raise is to understand, sometimes we might be right directionally about the way things are going, but we might be calling it early and like as listeners have probably seeing the big short, right? Like those guys who had to hold that position for a long time and there were times where they were, they looked like they were wrong, but it’s just they were early and there were many who tried that trade and failed because they weren’t able to hold it all the way through. So in the same way. Do you think any of these ideas, they’re right, but they’re just early?
Phil Bonello:
And to be honest, I thought that probably five months ago, I thought that we were way earlier than today. You know, today I think that maybe that 10 year timeline is maybe more like five years and, but I think digital money is pretty much ready for the world and the world is ready for it. So I kind of see that as the first domino and then I also think like dissident technology, this antifragile technology, distributed technology generally like mesh computing and things like that. I think, I think that’s probably maybe a little further out, but not too far out, right. Like especially again, coming back to the present day, what’s going on with the virus, what’s going on with kind of nationalization and I really think that we could see an uptick in demand for some of these services, but still probably five years until they’re really in demand.
Stephan Livera:
Yeah, and I think something for me even I was noticing people on Twitter were much further ahead of my friends on Facebook for example. And I think it’s a similar dynamic that we’ll see in terms of people who are into Bitcoin right now, they’re still very early compared to the masses and so it takes time for that message to percolate out to everyone. In terms of the sovereign individual book, are there any things you think the book got wrong?
Phil Bonello:
So I mentioned this a little bit. They tend to be a little absolute, don’t take into account the actual physical benefits of being in certain locations where I think there still are a lot of benefits to being in one place versus another. And then I would say they don’t touch a whole lot on the ability for physical coercion to still exist. Right? So even if I have all my money in Bitcoin and I have, you know, three of five multisig and whatever it may be, still there are ways for people in the physical world to coerce me to give up that information, give up those private keys, and then they can still take control l of my Bitcoin or whatever digital goods that may be. Another thing is I don’t think they really touch on tech conglomerates like Google, Facebook, like how do we deal with those? And they didn’t predict kind of the uprising of these big power houses. Right. That, and I think that’s largely due to the client server relationship and hopefully we have new services in the coming years. That kind of change that relationship, but still, those are some of the biggest powerhouses in the world today. Maybe more powerful than a lot of governments and they don’t really touch on that too much.
Stephan Livera:
Yeah, I think that makes a lot of sense. I think that those are things that would have been difficult to predict from, you know, in the late nineties to understand how things could have played out that way. That now we have big companies like Apple and Facebook and Google and Amazon who in some ways have powers similar to a nation state. They’re not quite the same, but they can have a lot of influence. Let’s bring it now to the Sovereign individual investment thesis. Right. So what are some of the ways, let’s say we’ve accepted the faces, the underlying thesis of the sovereign individual as a book, and we are, we’re committed to that idea. We think that’s, that’s, that’s, that’s correct. And it’s going to play out that way. How do we then act as investors? And you start off with this Jeff Bezos quote. Can you tell us a little bit about that?
Phil Bonello:
Yeah, so I start off with a Jeff Bezos quote specifically because I think we try to focus a lot how things are going to change and, and Bezos has this great quote, which is I’m more interested in, I’m going to paraphrase this here, but I’m more interested in what’s not going to change over the next 10 years than what is actually going to change. And he actually starts to talk about like, consumers are never going to say that they want slower delivery times, they’re not going to say that they want higher prices for basic goods. And so I think that’s really interesting. And I use that kind of as the beginning way to think about different angles of demand for all of these different and for how these shifts are actually going to take place.
Stephan Livera:
Yeah. And so then we get into some of these theories of change and as you spell out, you have a few different ones. One of them is globalization as an equalizing force. This idea of having low cost jurisdictions, remote work, online education tell us a little bit about that?
Phil Bonello:
Yeah so i touch edon it a little bit. I think education is such a massive part of this. Churches really controlled information for a long time and then printing press came along and people were able to print books really efficiently and that changed the way that education could be information could be disseminated and education as a result of that. Right? And right now we see really, really expensive education, huge student debt and its just completely unsustainable. I think some of the really interesting things are like something like Lambda school, codecademy, Udemy, those are really interesting products and they allow people to really learn probably just as well, if not better than traditional education institutions. Like I love going on code Academy and just messing around a little bit and trying to learn some Python or C++ or what have you. You know, and it’s almost agreed upon, at least in my circles, that you go to high get higher education, mostly for the credentials, for the network that you create.
Phil Bonello:
And for those, you know, two, three letters, right? And so I think education is a really important part and I think we’re going to see a huge uptake in online education. And then the follow on to that is credentialing, right? So if people are still going to traditional institutions mostly because of the credentials that it gives them, how do we, how do we replace that right there is, they are useful credentials are useful, but is a social graph of some sort, maybe more useful. Like Erik Torenberg has been working on something called co-sign, which kind of creates this this social graph where you can endorse someone that you’ve worked with or someone that has inspired you and you only, there’s a scarce amount of endorsements that you can make every month. And that’s really interesting and I’m not sure if that’ll work or if something else will work. But those kinds of experiments I see having a big impact in the coming years.
Stephan Livera:
Yeah. That kind of reminds me of like LinkedIn recommendations and whatever. Now that became a bit of a farce, right? Because it was just like whatever. But yeah, maybe it could be done better, but we’ll see some of these ideas of quote unquote unbundling of the credential from the university experience and unbundling the educational content from the university experience and putting it into the Coursera, udemy, codecademy’s of the world and Lambda schools of the world. And so when it comes to things like media, do you see changes there as a result of this sovereign individual investment thesis?
Phil Bonello:
Yeah, I do it. I think, again, you know, with the, with the virus, it’s been incredibly eye opening from probably late December until now. I’ve been following on Twitter what’s been going on. Mostly because we have this distributed media coming at us, right? We follow all these people that we might respect and we see some of like someone’s retweeting a really good piece of information that may or may not be true. And then someone’s calling out certain pieces of that. And you know, what is, what is true, what’s false. And Balaji you know, he’s been kind of this hero of the Corona virus kind of uptake, right? Nobody was talking about this. Mainstream media was actually making fun of Silicon Valley for being worried about the Corona virus. And even when I, when I was talking with friends and family and I would text, I would text someone about coronavirus I’d be made fun of, right?
Phil Bonello:
Like for weeks. And it probably until last week. And that was the only reason I had any kind of education that was nontraditional was because of Twitter. I was receiving such great content from so many people that I had or that I respected and then I that I knew and they’re, consistently being fact checked, right? On Twitter, someone posts something and everybody else can say no, this is false. This is true. And I think that’s really interesting. And it’s the same, it goes along the same lines as like the social credentials, right?
Stephan Livera:
Yeah cause you’ve got that sort of social graph of who follows who and companies like that website hive.one. So I often recommend that for newbies as well to go and find, okay, here are some good people in the Bitcoin world. It’s not perfect, but it’s at least a good indicator of who follows who. That’s kind of a social graph in that way. And so that’s an interesting thing as well, like new versions of reputation systems if you will. Yeah. One question I guess that comes up there is does that only work for people who are really, really well known? What if you’re not in the top 200 or whatever of a certain field, how are you meant to get known and how are you meant to get employed that way?
Phil Bonello:
Yeah, I think it allows it allows the cream to rise to the top and it doesn’t always happen immediately. Right. But you, you see sometimes someone just has a thread on Twitter that goes viral and you know, hundreds of thousands of people like it or retweet it or whatever it may be. And you compare that to going to four years of university and then maybe going into a job and then you work at that job for 10 years and then you maybe get title of vice president and then someone starts to listen to you. Right? Well, you don’t even have to go to college. You don’t have to go high school. You can just start writing online and sharing that on Twitter. And that’s a great way to gain credibility.
Stephan Livera:
Yeah, for sure. And so we’re moving into this more digital world and we need ways to protect our money for want of a better word. So what are some of the companies and some of the products that we will need to do that?
Phil Bonello:
One of the most interesting things that I’ve been thinking about recently is the idea of digital insurance and essentially if more value is now living in the digital world and I mean digital world as naturally digital, not just a copy of the physical world, right? So something like Bitcoin and some something like non-fungible tokens or these things that are actually they’re digital goods they’re not available in the physical world in any sort of way, and they’re immutable. So if you lose them that’s it. Right. And I think that these key management systems, like something like Casa is really, really interesting because that essentially serves as a type of insurance against you losing your private keys. And I think there could be multiple, multiple tiers of key management systems. And we see this starting to come up today, like for your, for your really, if you have, millions of dollars in Bitcoin, then you’re probably gonna want to use the top tier of Casa, right? And then if you just have something that you want to use on a day to day basis, you’re just gonna keep it in your hot wallet on your iPhone. And so we’ll have different, different kinds of tiers. And key management systems seems like this killer use case where it’s going to mirror the insurance, kind of the insurance business in the physical world.
Stephan Livera:
Yeah. And in terms of Bitcoin investment, we have to think about the split between businesses that work for speculation now and defense later. So I think you spelled out a little bit of that, for example, with companies like say Casa and Unchained who are there to offer like multisig as your defense for the future, but what about some other Bitcoin businesses that warrant consideration?
Phil Bonello:
Yeah, and so I think in, in, in the post that I wrote, I probably called out, you know, bit BitMEX and Binance because they’ve essentially been able to kind of skirt regulation but also offer like this great gambling product, right. So they’re able to at the same time satisfy this speculation need, but also satisfy the defensive need in being able to kind of skirt a government regulation but also accompanies like, you know, Greyscale or lending businesses like Genesis or BlockFi, you know, those are, those are satisfying demand right now. I think that some of the stuff that’s going on with lightning is really interesting and like something like Strike, OpenNode. I mean those are really important. Yeah. You know, I’m really curious to see what other types of are built around Bitcoin because yeah, it’s kind of hard to imagine what a free, you know, a free money can do.
Phil Bonello:
We’re, bounded a little bit by scalability issues right now, but lightning may open that up a lot. And, and so I think one of the questions that I, that I frequently ask myself is will lightning become a killer, killer use case because of censorship resistance or will it become a killer use case because of usability, right? Like, will lightning applications or a lightning wallet be able to be integrated with a game? Right? And now you can monetize all sort of gameplay. So will it be on the usability side or will it be just the censorship resistant aspect of money and trying to use lightning in that way?
Stephan Livera:
Yeah, there’s a lot in that. So there’s a lot of examples I can think of already. Like, so things like Litenight for example, the attempts to make a kind of Fortnite style game, but with lightning payment that’s just one example and it’s early days. So there’s a lot of development still to make the lightning network more private and that, that will come hopefully over time. I’m optimistic on it. But even even just Bitcoin without lighting, right? Like if you’re just using, say, coinjoin and a Samourai wallet or JoinMarket that there’s potential there as well for people to use these kinds of as you say, dissident technologies to give themselves an edge or to give themselves some protection. So do you have any thoughts around that pathway as well if people are using privacy techniques and privacy tools?
Phil Bonello:
You know, I, I think it’s, again, one of these things where it’s not in demand right now because of this whole this whole idea of defense vs acquire this defense versus speculation. And most people don’t have a defensive mindset. You know, you frequently hear like, what do you have to hide, you know, privacy, why does it matter? I think that’s pretty absurd, but I don’t think we’re going to see a huge uptick until things get worse. Right? Like things are going to have to get worse before people actually realize why privacy is so important or why protection is so important, like personal protection and bring it into your own hands. And yeah, it’s unfortunate that things have to get worse before people realize that, but it’s kind of analogous to people buying a ton of insurance after like an earthquake. Right? Like that’s a common thing that happens, but obviously not very intuitive.
Stephan Livera:
Right? Yeah. It’s like an availability heuristic. Sometimes we only think of things once they’ve been on the media and now you think, Oh, okay, yeah, I need to go and get this thing. Right. And so it’s the same thing. I agree with you that and the same thing with inflation as well, right? So we’re saying, you know, all this crazy stuff from central banks, from the fed doing all these just things that would have been unheard of 20 years ago, 10 years ago, even some of them. So that will I think push people into Bitcoin and the use of some of these techniques, right? So I with you that many people need to feel the pain before they care, so they need to feel the pain of negative interest rates of bail-ins, capital controls. And just general inflation in general too before they really get more into it. But when, once, once they do come in, it’s like a gradually then suddenly moment and at that time only even small changes in the population. Even if only 5% of the population started to go hardcore into Bitcoin, we’d see massive, massive changes in our world in terms of what services are available, what products are available, the price of Bitcoin, the development of Bitcoin.
Phil Bonello:
I mean, right now we’re in such an interesting time for Bitcoin. This is literally why it was invented, right? if they can stay alive through this period. This is the time that Bitcoin reaches its inflection point. Banks are doing everything they possibly can to prove out its use case.
Stephan Livera:
Yeah, that’s right. And so this is a funny thing as well because you see some of the more anti Bitcoiner. The nocoiner position is, Oh, look, I thought you guys are saying Bitcoin is a safe Haven. Why is it not, you know, why is it not rallying up during this historical financial crisis? You must’ve been wrong about your Bitcoin thesis all along. How do you respond to that kind of idea?
Phil Bonello:
Yeah, I mean, everything was down this past week, right? It’s a deleveraging. Nope, nothing is safe. I don’t know. I don’t actually know too many Bitcoiners that were saying like, you know, Bitcoin’s going to do well in a recession. I don’t, I don’t think that was ever the case. Bitcoin does well in the face of really money printing and monetary and fiscal irresponsibility. And I think that is all that has kind of always been the case. Right. For most people I talk to anyway.
Stephan Livera:
Yeah, I think so. And yeah, so I think it also relates to having the ability to spend your money, how you wish when in all likelihood we’re going to see more and more financial controls coming in into the legacy financial system. So I think really the case for it will really get proven out over the next few years. But I can appreciate how from an outside perspective, obviously we’re in this Bitcoin game where we’re bullish on Bitcoin, but an outsider might think, Oh, you guys are just shifting the goalposts. You’re always saying it’s around the corner and maybe you’re just like those permabear gold people who are always doomsaying and whatever. But I mean to me personally, and I’m curious what you think as well, but personally the way I would respond on that is more like, look, we really can build a parallel or just an alternative, right? So right now I have a BTCPay Server. I can set up and take payment and anyone, doesn’t matter what country you’re in, if you can do online services, you can do web design or programming or whatever, online service, and you can set up and take payment right now. It works right now. You don’t need to trust anybody else to be able to do that. And you can’t do that with gold. Right. I can’t send you gold to Zimbabwe or wherever. Only with Bitcoin is this possible.
Phil Bonello:
Yeah. You know, there’s that aspect and there’s also just the fact that you don’t have to watch what the Fed’s going to say. You know, during a crisis like this, you know, you know what the monetary policy is. And I think that’s really important. Like the last couple of weeks, if you’re a trader, you have to be, you have to be watching exactly what, what’s going on during all of these Trump press conferences. Because you’re waiting for an announcement of fiscal and monetary stimulus. And that’s, that’s pretty ridiculous. I think. So it’s just this idea that you can, you don’t have to be a trader. You can actually keep most of your wealth in money, right. What it was, what it was, what money’s supposed to rather than trying to find all these different places to protect your wealth. And that’s, I think that’s one of the biggest worries that I have right now. You know, so many people have or are trying to retire or have retired. And it seems like everybody has to be a macro investor in order to protect their wealth when, when really it would be great if there was an asset, you know, that has a predictable monetary policy and that everybody accepts as a good store of value and a good medium of exchange and then you don’t have account. And I think that that asset could very potentially be Bitcoin.
Stephan Livera:
Yeah. And we are also seeing alongside this shift towards Bitcoin as the money, we are seeing perhaps more of a shift towards the idea of self hosting. So instead of trusting Google cloud, Apple cloud, whatever, whoever else, cloud potentially setting up your own. So I think a good example would be something like NextCloud, right? You can set up your own document server and it’s a habit as like a private Google docs and so on. Now it’s not easy to run these things yet. It’s still takes some technical competence, but I think again, aligned with the Bitcoin sovereign individual thesis and investment thesis, we should see a shift towards that kind of way of operating. Do you have any thoughts on how that space evolves?
Phil Bonello:
Yeah, the personal server revolution I think is going to be massive and it’s still incredibly early days. I think it will be the biggest, one of the biggest paradigm shifts, right? Like the biggest, most powerful companies right now are powerful because they control your data. Well, what happens to these companies when everybody’s operating on personal servers? You know, and there are a lot of questions there because from an economic standpoint, why do companies want to build apps where they’re not going to be able to control your data? How is that monetization going to work? Are users going to have to pay a subscription fee? You know, because right now it’s, really nice to sign up for Facebook. It’s free sign up for Instagram, it’s free Snapchat, it’s free. Obviously they’re harvesting your data on the back end. But this also plays into the idea of are people going to adopt this type of defensive mindset or what is going to shift someone from using a consumer application that is free upfront, but it’s going to essentially be mining your data on the back end.
Phil Bonello:
And what, yeah, what makes a user switch, right? Is it a monetary thing? Like maybe this is something that I’ve thought a decent amount about. Maybe one of these applications can help you store all of your user data. You can take that user data and then you can encrypt it and you can sell it on some sort of marketplace. And now the same application that you were using is going to buy that data in order to improve the usability of their application. Right. And so how does that whole data marketplace actually start to play out? I’m not really sure but, and it’s really early days, but I think that’s a really interesting area to study.
Stephan Livera:
Right? And also with the expansion in home internet connection and having more of an upload, because I think that was one of the limiting factors. At least in the past, most home connections didn’t have a good upload. Whereas now we’re starting to get to that point where with newer internet technology you can do it. It’s a bit slower, but you can do it. Though there are still vectors or angles of censorship. So for example, if you know, a government were to try and identify, okay, who’s out there using Bitcoin, who’s out there doing these kinds of self hosted things? Could that be something where it depends on who? Depends on what kind of actor you’re talking about or thinking about that might represent a risk. Or another way to think of it as well is not everyone is qualified to run their own server. Right? And then you might screw up something about the security of it and you might accidentally open a port and accidentally open yourself out to all the hackers of the world who start, you know, taking your data. So there are legitimate questions there around defense, security of it, back ups, all of those things that you now have to manage for yourself. If we are going to go personal server revolution.
Phil Bonello:
Yeah, It’s kind of analogous to what we see surfacing in Bitcoin right now. Like some people want to be completely self-sovereign, but you know, my parents aren’t going to be on that, on that kind of line of thinking and they’re probably going to hold a lot of their stuff in Coinbase or on Square or wherever they tend to, whatever service they want to use in the future. But I kinda doubt that they’re going to ever adopt like a fully self-sovereign model. So like they are just tiers of sovereignty that you can kind of opt into. But I think really the key is that there’s the option, right? It’s this optionality that you can actually exit the system. And really that is, that’s kind of what the sovereign individual, the book is largely about, right? A lower exit costs.
Stephan Livera:
Yeah. And maybe there’s also a role there for culture as well, right? That Bitcoin, we have a culture of self custody and we always, where possible teach people, Hey, you need to self custody, you need, you must self custody. And what role do you see of having a self custody culture that pushes people to try and take, take command themselves and not trust somebody?
Phil Bonello:
Well, I mean, I think it’s really important to continuously try to get people to take defense, protection into their own hands. But there are inevitably going to be people who want to take different layers. Right. You know, I’m sure the younger generations will be masters of self sovereignty, right? Like it’ll be so easy for someone to actually adopt a self-sovereign model for their Bitcoin wealth, for all their digital wealth. But again, like my parents aren’t going to, they’re never going to learn how to, how to do all of this stuff. Right. It’s just a, it’s a big technical lift. It’s also a big risk.
Stephan Livera:
So look, did you have any closing thoughts for the listeners on the sovereign individual and the investment thesis around it?
Phil Bonello:
The one other thing that I wanted to mention was a sovereign individual talks about Y2K a little bit and I meant to mention that as one of the things that obviously didn’t play out the way that they, that they discuss.
Phil Bonello:
When I recommend the book to friends, I kinda have to say there’s a whole chapter on Y2K you can kind of just skip past that. And you know, cause like yeah, obviously like they go into detail about Y2K and then it’s like well this is the year 2020 we know what happened in 2000 but it’s still kind of interesting to read through some of those chapters. But no, you know, the sovereign individual I think is such an important book to read, not necessarily to construct a top down model, but really to understand, just to understand the possibility of these things to kind of happen and just open your mind up to some of the ways that the world could kind of unfold. I think there’s a decent probability of a lot of these things playing out like a sovereign individual talks about Bitcoin really.
Phil Bonello:
You know, they talked about, they talk about more of it’s a gold backed digital currency that they discuss, but still, you know, the way that they discuss it is, is pretty amazing. Right? So prescient. So yeah, I had a fantastic time reading it and a fantastic time writing the sovereign individual thesis and it’s been great talking with you and others on the thesis.
Stephan Livera:
Awesome. So Phil, where can listeners find you online?
Phil Bonello:
@PhilJBonello on Twitter. And I think it’s probably the same for some stack and that’s the easiest way to get in contact with me.
Stephan Livera:
Awesome. Well, I’ll put those links in the show notes. Thank you for joining me, Phil.
Phil Bonello:
Yup, thanks. Stephan.