Bitmain, Bcash, Facebook Crypto rumours, and reframing scarcity

Welcome to the Stephan Livera podcast.

Hey guys, welcome to Stephan Livera podcast and this is episode 17. And my guest today is Vijay Boyapati. Hey Vijay, thanks for coming back on. Hi Stephan, good to speak to you again. Excellent. So guys, for any of you who haven't listened to Vijay before, you've gotta look him up. He's one of the top minds in this space. He's a great economic thinker. He's well known for his article, "The Bullish Case on Bitcoin," some of his podcast appearances, and also his threads on Twitter that have just gone huge, particularly amongst Bitcoiners. so we've got a few topics for discussion today, Vijay. One of them is the recent- News from the Bitmain IPO. So there's some news coming out, and it's not really looking very good for Bitmain, and you had a great thread on this. Did you wanna elaborate a little bit on your thoughts there?

Yeah, the Bitmain IPO is probably the biggest news in the, the Bitcoin space this year, I think, in terms of the amount of money that they're gonna raise and just their influence on the mining market. They're a huge force in the mining market. They're, this vertically integrated company that, produces their own mining hardware, does their own research into, building, new mining chips. They run their own pool. they basically do everything in mining. and, and they're definitely the biggest player. and I, I think probably they're the biggest, most valuable company by market capitalization in the Bitcoin space, much bigger than even- And Coinbase. and so, they are filing for an IPO and when they filed, they, you know, when you file for an IPO, you have to make a bunch of details public, and a bunch of things came to light that people didn't know about Bitmain, and some of them were, really astonishing, And, digging into the, the filing, a few people found some in-information which I kind of dug into in my tweet storm. And, and really the biggest one was that, Bitmain had accumulated a massive position in Bcash, this sort of altcoin to Bitcoin, a fork coin that was created in August last year, and, The thing that was really interesting is that they had accumulated a lot of Bitcoin, over the last couple of years, and their Bitcoin holdings dropped dramatically over the last year, basically down to zero, while their Bcash holdings just went through the, through the roof and, essentially worth, I think about a billion dollars now. And, B-Cash has dropped a lot in value recently, and I wrote a tweet, A few months ago, can't remember exactly when, but, I made the point that I thought that if Bcash dropped below point one Bitcoin, it would just It would lose a lot of credibility, it's kind of a psychological level where it's like, "Well, this isn't even worth ten percent of Bitcoin, this, this is just, a piece of crap shitcoin." And I got a response from Jihan Wu, who's the CEO of Bitmain, to my tweet, and which I actually found really astonishing. Like, why is this billionaire replying to my tweet? And I think the reason is that it really hit a sore spot, which is, at, at the time I didn't know it, but they were sitting on this huge pile of Bcash, that was losing value, and I was kind of- Poking him in this sore spot and he obviously got upset and responded to my tweet. but there's an even bigger problem for Bitmain and that's that, not only do they have paper losses on their B-Cash, but If they wanted to liquidate their Bcash, they would basically crater the market because they're, they are essentially the demand side of Bcash. They're, they are propping up the market for Bcash. And the way they're propping it up kind of resembles, the way a failed state props up its, currency. Like if you look at a, a currency like the peso, the Ven- Venezuelan peso. If, if the government of Venezuela wants to prop up their currency, the way they do it is they take all their foreign reserves, all the, all the savings that they've accumulated in times of plenty, and, they sell those to buy their own currency to hold it up in value. And, and Bitmain has basically done this with B-Cash. They've sold off their Bitcoin, a, a, you know, a currency which has a lot of demand, and they've replaced it with B-Cash, a currency that essentially no one wants. No one wants to hold this thing. and, and so they, they're now sitting on this huge pile that's nominally worth a billion dollars, and it's essentially impossible for them to get rid of this, and that, that's a huge problem for the industry they're in, because, they, they are operating in a very capital-intensive industry, chip foundries and the research that goes into it and the production is very, very costly, you know, building Building a new chip foundry, potentially hundreds of millions or billions of dollars to create. So they, they need liquid capital to continue to innovate and develop in, the The, mining hardware that they're developing, and so they need liquidity and, and they're sitting, their savings is sitting in this altcoin Bcash, which is highly illiquid and which for ideological reasons they're, they're trying to prop up. and so they're in a really tough bind, and one way to get out of that bind is to say, "Hey, there's no way we're gonna be able to sell this without taking an even bigger loss and just destroying the market for B-Cash. So instead of doing that, let's go and raise money, let's go to the public markets and get ourselves out of this bind by raising money." that's certainly one way to do it, but then, you know, investors are gonna, investors who put their money into Bitmain are gonna be really interested in, "Why are you propping up this altcoin that no one really wants? Like, what's the reason for that?" and i-if you go back to 2017 when Bcash was created, you can see the reason was that Bitmain was afraid that, If, Bitcoin adopted SegWit, it's a technology which allows for second layer, scaling solutions. Then they were worried that there'd be less transaction fees for them into the future, and that's how they make their money is through, mining rewards and transaction fees. And so they wanted to stop this happening, and they wanted to create an alternative where, second layer solutions weren't attractive or not possible. And, and which they essentially controlled. And they, to sort of go into the history a little bit, they had, blocked SegWit for probably a year and a half or two years despite the fact that there was overwhelming, consensus. From users that they wanted this technology and it would be great for Bitcoin. The miners, Bitmain in particular, had blocked it. And then, there were some developers who figured out a way to get it launched, which didn't require miners, called UASF, a user activated soft fork, which kind of got, got around the power of the miners and, and really showed that users and nodes are sovereign. And, and this was sort of a terror- terrifying prospect for Bitmain. So what happened was they created Bcash as an alternative and, and they really got behind it, they bought it up and they mined it and, they promoted it and they have, you know- Shills that they used to promote it, people like Roger Ver and, and other people. But despite all their efforts and despite their power in, in the market, in the Bitcoin space, they weren't able to get anyone to be interested in this, altcoin, and it continues to sort of- Dwindle away in its value and, and I expect, you know, if, if we jump five years ahead in the future, it's probably gonna be a footnote i-in the history of the, the crypto space. I, I don't think anyone's gonna wanna use it at all.

Yeah, great points around how it's that they were being, they were trying to prop up Bcash, and for a long time, many of us were almost confused as to how Bcash was maintaining this value for so long, and I think now it's sort of coming to light that- Well, actually, Bitmain and potentially others, we're really just trying to prop up the price, and now what's happening is that they are essentially just trying to dump onto retail or dump onto IPO investors, but that- That deal comes with other conditions that they will have to live by. So it's funny that in a way, everyone's sort of becoming a maximalist, and you can either learn the hard way or you can learn the easy way.

Yep, you can, it's trial by fire really.

Yeah. Okay, so the next, thing was, and it's related, it's just around Bcash struggling to get merchant adoption. So Vijay, what went wrong here? Did they put the cart before the horse? Were they, and also this relates to some of your discussions and some of your sort of friendly debate that you've had with JP Koning?

Yeah, I think the problem is, and, so, so let me go back a step. And there was an article published by Bloomberg which talked about how B-Cash, despite all the promotion by Roger Ver, to merchants, you know, evangelizing and asking them to adopt it as a, as a means of payment, it's had very little usage, and merchants don't really wanna use it at all. And w-what they, the real problem is they don't understand understand the economics of money. They don't understand that money evolves in a certain way. And money, usually, I mean, I shouldn't say usually, it always starts out, as a collectible. As something that only a few people value just because it's kinda cool. so if you think of seashells or even gold, like these are things in the very, very beginning that some person picked up and said, "Wow, this is cool. " Didn't matter what anyone else thought, it was cool. And then, you know, other people thought it was cool as well, and it became a collectible that had, you know, a small market. And over time, as people recognized that it was, valuable, it became a store of value, and as the, as the population of people who valued it and- We're willing to pay something for it, grew, its purchasing power stabilized, and eventually, in, you know, in the case of gold, after centuries and centuries when it was sort of widely valued, then it became a medium of exchange, it became suitable for use in exchange because its purchasing power had stabilized. The problem with, these B-cash people is they've kind of flipped it around and they said, "Well," Money, money has to be a medium of exchange first. A-and the real problem is, I think that economists in the, the twentieth century have defined money as a medium of exchange, and they've ignored that money goes through this evolution. so if you think about something like B-Cash, which is sort of meant to be limited supply like Bitcoin, twenty-one, million B-Cash units. if you believe like someone like Roger Ver that B-Cash is going to be the, the global medium of exchange in the future, it's gonna be massively more valuable than it is now, which then raises the question, why, if I have B-Cash, would I spend it? Why would I go to a merchant and spend my B-Cash? It makes absolutely no sense. The only rational thing to do if you think it's gonna be global money in the future is hold it until it's purchased Power stabilizes until everyone values it and has some of it, and then it becomes sensible to use some of it to spend in, you know, daily commerce. a-and so the other problem of course is that the merchants, when, when they say that they're gonna accept something like B-Cash or even Bitcoin, they face the problem that the community of people who actually own this in the very beginning is minuscule. So a merchant who says they're accepting B-Cash has to go through the trouble of, you know, integrating with the new, payment system. And then they open their doors and they find that no one's using it. They're, they're going through the trouble, for no usage. Like the, the number of people who own B-Cash on Earth is like point zero zero zero one percent of the population. Essentially, no one owns it. So there's no point for a merchant to Accept it because it's not widely owned. So the big problem they have is they don't realize that for something to become, a widely used medium of exchange, it has to go through this store of value phase first. It has to become widely valued and widely held. before that, before that phase, it's just irrational to, to spend. so, you know, Bitcoiners, on the whole, have really grokked this argument. They're- understand it and, and so this hodl meme is really big in the Bitcoin community because it, it recognizes that it's the rational thing to do if you believe Bitcoin's eventually gonna become money is to hodl it now and spend it later when everyone has got some of it. But this is, this is sort of completely gone over the head of the, the Bcash community and I think that is, in my mind, the economic explanation, and it's an economic necessity That money evolves in this way. so when I, I saw that article by Bloomberg, I was like, "This is obvious. It's, it's never going to go through this, medium of exchange phase first. So the fact that they're promoting that as the use case, means that it's not gonna succeed. It's just, it's impossible that this thing can become a medium of exchange, 'cause they're not focusing on the part of the evolution that is important right now.

Yeah, great point. And I think it's, it's a lesson as well for Bitcoiners that you shouldn't focus too much on merchant adoption in the here and now as well, even for Bitcoin, because Bitcoin itself is- Yeah, still a small fraction of the global market, and it's still a long way off, so it, it doesn't make a great deal of sense to spend now. Yeah. And the other point that was good, could I just, is around you, you, you're gone?

Oh, I was gonna say, could I just, there's one extra point I wanted to make here that I-- This is something I haven't really tweeted about, but, but one of the things that they really focus on is that fees are low, that it's Bcash is a, is Stake because they're just looking at the miner fee and they're, they're saying that the fees are low because I've created this gigantic block size which is absolutely ridiculous and has led them down the road to centralization where there's only one miner which mines it. but My point is that mining fees aren't the only fees. When a merchant accepts Bcash in payment, the first thing they do is-- and this is same for Bitcoin too, this isn't, you know, necessarily a, a specific insult to Bcash, but when a merchant accepts a crypto-currency in payment, they immediately convert it to dollars or whatever their currency is. And the reason is the cost that a merchant has is denominated in that fiat currency, it's denominated in dollars. dollars, they pay their employees in dollars, they buy their, you know, the goods that they sell in dollars. So they need to take the payment and put it back into dollars immediately, because if they held it in B-Cash, they, they face the risk that, you know, someone came in and, let's say they bought like three hundred dollars worth of groceries, and they, they keep the three hundred dollars worth of B-Cash, and then the next week it's only worth a hundred dollars, it's dropped sixty percent. so they're facing a loss On this thing, and they need to pay their employees and to buy more produce, and now they have less money to do that because they held Bcash instead of dollars. So my point is they, they have to convert immediately to fiat, and in that process of converting to fiat The crypto that they accept, whether it's Bcash or Bitcoin, goes to an exchange, is sold on the exchange, and the exchange has a fee. And even, even if it waives the fee, there's a bid ask spread on an exchange, which is the, the difference between, the marginal market buy price and the marginal market sell price, and that spread is a fee as well. And the less liquid a market is, the bigger the- That fee is. And so you, you're not avoiding fees by making these huge blocks, there's this other step that goes, that, payments go through, So There are, there are other costs that they're ignoring. They're focusing only on the, the, the miner fees, but they're, they're ignoring the, the, the market fees, and they're also ignoring the opportunity cost, which is, you know, what I talked about earlier, which is if you believe it's gonna be successful in the future, there's an opportunity cost to selling it for something now, and it's, it's makes more sense to hold it into the future.

Yeah, so it's a hidden cost plus the massive opportunity cost that you miss out on by basically missing out on the hyperbitcoinization gains. So, well, well said. I think, the next area that would be interesting to talk about is that there have been actually some rumors of Facebook entering the cryptocurrency or what they might call the blockchain market. And so the specific news was David Marcus leaving the board of the crypto startup Coinbase. And so the quote was, that I saw was, "He said, quote, 'Because of the new group I'm setting up at Facebook around blockchain, I've decided it was appropriate for me to resign from the Coinbase board.' So Vijay, in your view, what could Facebook be working on?"

That's a very interesting question, and, David Marcus, from the people I know who know him, is a very talented executive, and what I find interesting about this is that Facebook has- Tremendous, resources to bring to bear in the market. i-if you think about, the people who develop Bitcoin, for instance, you know, there's, if you take all of the people who've committed to the, the core repository, it's a few hundred people, I think, but if you look at, you know, the,

the majority of commits come from a, a fairly small number of people. I would say that you, you know, this is a guess, I, I could be wrong, but maybe fifty percent of the commits come from ten people. so it's a fairly small team in terms of, the, the total contribution that's made, made to the repository. Any like small to medium sized team at Facebook, and they have lots and lots of teams, would be as big as that and will have, a small Some very talented engineers. so in my mind, Facebook coming into the market is really interesting because they, they have a lot of engineering talent, a lot of brilliant people. I, I had a bunch of friends who worked there who I know are brilliant, some of them were Bitcoiners. so this raised the question for me, is this a threat to Bitcoin, and what exactly is, is Facebook gonna be doing in the market? And my, my, thinking on this is there's three possible things that, Facebook could do. And, and I'm interested in sort of talking about what are the, advantages that they could bring to bear in the ma-the market. What is their comparative advantage if they do one of these three things? The first thing is they could build a payment rail, they, they could build something equivalent to Square Cash or, Coinbase Merchant Services or Visa or Mastercard as more familiar examples. and, and the huge advantage that they could bring here is integration with their messaging platforms like Facebook Messenger and, WhatsApp. And w-w-both of which together probably have billions of users now. And, there's a, a tremendous synergy between, having, a payment rail integrated with a messaging system, and we've seen that in China with WeChat, which is being used everywhere. In, in the West, we're, we're, you know, five, six years behind where China is on the integration of payment rails with, with messaging. Everyone in China uses WeChat, from what I understand. And so, so Facebook has, this great asset of having like the biggest messaging platform in, on Earth, and if they were to build a payment rail, I think they could t-take the lead, in, in terms of the, the payment rails out there very quickly. But in my mind, this, if, if Facebook was to do this or go down this path, it wouldn't be a threat to Bitcoin at all. It's, it's kind of the equivalent of, comparing Visa or Mastercard to gold. They're, they're completely different markets. They don't compete with each other at all. Visa and Mastercard are payment rails. They're what you use to transfer your money to a merchant, They're, they're not what you use to save. Gold is something you use to save, it's a store of value. So while they're both sort of, in the world of money as we think of it, they're, they're not competing with each other at all. So the first case I am, I'm not particularly worried about. The second case is, a little bit more interesting, and that's if Facebook creates, does, does kind of a, a controlled token ICO, a-and what I mean by that is they create, a digital currency which resembles something like, Ripple or EOS or, or one of those, which seems like it's, comparable to Bitcoin in some ways, you can transfer it and, it-it's not quite like a fiat currency that's issued by a government, but the thing that I think Facebook could bring to bear if they did something like that is they have, just gigantic revenues, and if they control the token, one of the interesting things they could do is they could, they could issue their revenue through the tokens that they create. So for instance, they could, issue a dividend to holders, of the token that they, let's call it Fcoin or FBCoin or something like that, and if you, if you owned Fcoin, then you got a fraction of the advertising revenue that went through Facebook, and that gives you an incentive potentially to, to own Fcoin, and, and value it. This is somewhat more concerning because this is starting to look more like a, a token that people might wanna value, but again, this isn't something that really concerns me because really Facebook has control over this and it's not a non-sovereign store of value like Bitcoin is, it's something that's controlled, which means that it can be censored. In, in the same way that Ripple can, and actually it's much worse than Ripple, 'cause Facebook is in so many jurisdictions that, it kind of has to comply with all of them, whatever any one of them says, it has to comply with, otherwise it gets kicked out. The, the EU, the US, the UK, complies with the laws in all of these different co-uh, countries. And so any one of those countries could censor Face- Fcoin, and say, "Hey, you need to make sure that this doesn't go to people that we deem, shouldn't use this for the savings or shouldn't be able to transmit this." so it's not non-sovereign and actually has the problem, I think, of being subject to multiple sovereigns. So again, I don't think it's, It's a threat to Bitcoin, I'm, I'm not so worried about that case. then the last case is if they create, a digital currency which they don't control, so they create the software, they create the protocol potentially, and they give it away and The, the unique advantage that Facebook has is distribution. They could potentially do the largest, airdrop in, in the history of crypto. They could, they have the identity of two billion plus people, and they could say, "Each one of you get one of these coins and, and can use it." This is, this is much more concerning in my mind because, one of the things that a lot of cryptocurrencies have tried to do is get distribution by piggybacking on Bitcoin, because distribution is actually a really hard problem. How do you get this into the hands of a lot of people? And one way is just to say, okay, if you own some bitcoins and you can prove you own them, you will get some of our currency proportional to the amount of Bitcoin you have. And this was used by, Stella.

Facebook could do the same thing except the fact that they have User identity and they could give people tokens based on the user identity. The issue I see with this, and although I find it a little bit concerning, I'm not 100% worried about this, is that when you give- Give something away, it's typically not valued. It's typically sold immediately if, if the person doesn't u-understand it. If, if they see that it has some dollar value, they typically say, "Oh, wow, someone just gave me five dollars for free, "because their mind is still thinking in terms of fiat. "And so they give it away. And actually, this has been my experience over the years, giving away Bitcoin for the last, you know, seven years to various friends and families, just so that they would get interested in it.

most of them, if, if they saw it had any value, would sell it immediately, and the only ones who really held it are the ones who forgot about it, not the ones who thought it was important. And I think for- For real adoption to take place, everyone has to sort of come to an understanding of why it's important. If someone just foisted on you and says, "Here's this new thing," If you don't have any understanding for why it's important, any ideological conviction in why it's important, you're just gonna give it away at the first chance you get. so I, I don't believe that Facebook giving away something like this is, is gonna mean that it's gonna be widely adopted. I think most people just dump it immediately. but that is to, to be fair, the, the, the third case is the one that I'm most worried about is that Facebook creates a, a new digital currency and is able to- get widespread distribution of it very quickly through their, the network of people who are, are using their platform.

Yeah, I like the point you make around how when you, when you choose to buy into something, you're also emotionally investing into that, and that was the case with many people who bought into Bitcoin. They spent their own hard-earned dollars or they performed a service and they got paid in Bitcoin, and then for that reason, they, they cared more about it and they valued it. and so with, if- Facebook were hypothetically to create a currency that they don't control and then distribute it, well, yeah, it might not have very much value at the start. and then the other thing to consider also is even if they make a currency that they don't control, it's still the question and the challenge would be around how would they build trust in the future monetary policy of that point? Exactly, that's another, that's

another great point. Because for

all we

know, yeah. Sorry, go ahead, Stephen.

Yeah, exactly, because it's like, yeah, no, I was basically just, yeah, making, that was basically the question I was gonna ask, it's just around how could they at all give? Give, you know, people confidence that, hey, I think this thing is gonna be around for fifty or a hundred years. We don't know, you know, Google is king, king of the heap now, but in fifty years' time, maybe they won't be a huge company. And like, like, likewise, yeah, well,

my, with the third scenario, I was envisaging more a coin which doesn't sort, sort of isn't tied to them in any way, so that they just create, they create a repository in the source code and they, they issue it out in Influence and then, they sort of step back from, from the picture. But you make a, a good point that how do you have confidence in the monetary policy? And really the best monetary policy is a fixed supply, and there's already a coin which has a fixed supply, so you're not-- There's no comparative advantage, and, and more likely if they were to, to produce a coin where they didn't have control over it, they, they just issued it out. people in Silicon Valley are, you know, generally- Generally very liberal and have very liberal economics, they would probably think it's a good idea to have, or create a coin which had, unlimited inflation, you know, following the Keynesian dog, dogma. and I think what they would find if they did that is in, it would lose very quickly in the market. No one wants to hold a coin that loses its value over time if they have a good alternative.

Exactly, yeah, and I think it just wouldn't have the same what we call Bitcoin network governance, you know, it just wouldn't have that same quality of being able to resist inflation, because it would just be too, perhaps, vulnerable to the inflationists who wanna come in and basically impose their way onto everybody else. but yeah, interesting, interesting, thoughts Vijay. I think the, that's, a good, point now to move into the next, topic, which was one of your threads, which was around reframing the concept of scarcity. And so in this thread, you talk about a little bit about the Salamanca School and how they were kind of a proto-Austrian, or they were one of the first to recognize that, you know, money, where money was more scarce, it was more valuable. do you wanna outline a little Thoughts on that and, potentially outline where some Austrians can get tripped up on this, particularly with the Misesian regression theorem.

Yeah, it's a, a topic that's really interesting to me because I'm an Austrian economist and I, I was really fascinated by the fact that while I think Austrians generally have the best economic method, they didn't really apply it well when it came to Bitcoin. And you, if you look at some of the famous Austrians alive today, most of them didn't really understand Bitcoin and still don't really understand it. Like, this thing just came out of nowhere. It's, it's, it's like it, it materialized out of thin air and yet it's valuable. How is that possible? And I think it sort of comes back to this concept of scarcity. and I, I mentioned in my tweet storm, there's a school of Salamanca, from the 17th century, that really, sorry, the 16th century, that were, were the first Just to kind of observe and understand that if there's a lot of something, it's not gonna be as valuable if there's less of it. And so they, they recognized where bullion was, abundant, it was less valuable than places where it was really scarce. and the Austrians kind of took that over and, they, they understood that money needs to be scarce for it to be money. If it's, if it's incredibly abundant, if it's like sand on a beach, then it's not gonna be used as money. Or, or the, I guess the term they use is super-abundant. So water isn't gonna be money, sand isn't gonna be money, even though they have other properties that m-might, might make them suitable for money, like they're divisible and fungible and that sort of thing. so scarcity is, is really, really important. But the problem with the Austrian school is that they really tied the concept of scarcity to the physicality of gold. It's a physical thing, and it has inherent value, you might be able to use it for jewelry or for electronics or that sort of thing. And, and that really hampered their ability to understand Bitcoin because it's not physical at all. And so I think the problem for a lot of- Austrians like Peter Schiff is that they see gold and they say, "This is physical and tangible and scarce, and so the scarcity is related to its physicality, " which I, I think is, wrong, but it, it really took an insight from, Nick Sabo in the late nineties to sort of rethink the way, we think about scarcity, which is, it's not something that's-- there isn't much of, there's a dearth of this physical thing. It's something that's really hard to produce. the cost of producing it is really hard, and it's easy to verify that it's hard. So, for instance, you could apply this same rethinking back to gold and say, "Gold is really hard to produce. Isaac Newton, tried to use alchemy to turn lead into gold and become rich, but, you know, the most-- one of the most brilliant minds of all time was not able to turn lead into gold. So, we know that it's incredibly costly to, to produce gold." That gold is actually produced in the explosion of stars, so it's not like the average person is gonna be able to do this. But, but the question is, okay, so if we can reframe scarcity as something that's costly to produce, how do you create costliness in the digital realm? And then, then it was the insight of Adam Back, one of, one of the very few people who was cited by Satoshi in his white paper. He had this great insight Like that you could take a hash function and you could provably create a cost by saying, so to, to give a bit of background, a hash function is something that takes an arbitrary piece of data and produces a fixed size digital string which is essentially random, like it's a, just a, a mess of, numbers and letters. And Adam Back, had the insight that what you could do is you could, require that the hash has a certain pattern, and the pattern is that it has, say, the, the last five digits of the hash are all zeroes. And, your job is to go and find a hash which has five zeroes at the end, which means you have to hash all of this random data, you go through tons and tons of data until you find a hash which has that pattern. And because The hashes that are produced are essentially random, you, you can only brute force this. You have to use a CPU, which is just expending CPU cycles to find something. A-and the way I describe this is, it's kind of like, finding a hash which has a certain pattern is kind of like finding, a marble on a football field while blindfolded. Essentially, you're just wandering around in the dark, putting your hands on the ground, trying to find where the marble is, and, and you know That anyone who has done this, once they've found a marble, they have expended great effort to do that. It, you're not gonna just-- I mean, you could get lucky, but on average, if you-- if people keep doing this, you know that a lot of energy is gonna be expended. so the same idea applies to hashing. And so it was these two, things that were combined together, was Nick Szabo's rethinking of, how we should think about scarcity and Adam Back's insight into how you create costliness in the digital realm. When you combine those, you get the, the fundamental building block of Bitcoin. And if it wasn't for those two insights, we wouldn't have Bitcoin today. So, I, I also wanted to mention just quickly, you, you mentioned Murray Rothbard. I ha- I, I made a point in my, my tweet storm about Murray Rothbard. he He believed, he interpreted Mises' regression theorem, in a, in a idiosyncratic way that really people before him hadn't interpreted that way, and, and his interpretation was that money can only arise if it is first used as a useful commodity in a barter society. That is, if you can't trace the value of, a monetary good backwards in time to it being used as a commodity, so for instance, gold being used as jewelry centuries ago, then it's not possible for it to be money. and, unless of course, you know, we have fiat monies, you can create fiat monies if you use massive force and you throw people in jail for not using it. But market-based monies, it, it can't be a money unless it can trace its value back to a commodity. And This really, I think, permeated, this understanding permeated the Austrian community, and so a lot of Austrians saw Bitcoin and said, "Well, what is its commodity use? It never had a commodity use, so therefore it can't be money." And this was actually a huge debate back in two thousand twelve and thirteen amongst Austrians that this thing can't be money because it never had an original use, which really is kind of absurd. The original use doesn't matter that much. It could get its original use through jewelry or it could get its original use just because someone thought it was cool. Doesn't matter, that's just the first establishment of a market price. After a market price is established, it bootstraps from there based on people's willingness to hold it for its uses as money.

Yeah, I like that point that, you're, you're basically saying some Austrians may have seized a little too strongly on the Rothbardian sort of commodity use or original use com-component or concept, and that has caused that sort of knock-on error of them not understanding, you know, the later part of how Bitcoin could have arisen in other ways. so, and yeah, I also really like the point you make around, you know, Zaba's reframing of- Of money being expensive to produce or scarce, something scarce being provably expensive to produce. so yeah, fantastic, articulation there, Vijay. the next topic is around hard money in the nineteenth century. Now, you've commented previously that this is as an economic framework, it helps people lower their time preference, which is also something that, you know, Safdean has spoken about. Now, the common kind of argument that we'll get back from From the no coiners or from others who basically try to argue, "Well, hey, look, it's two thousand and eighteen and we have all this great modern technology and we've got fiat money, how come you, you, you know, you hard money types want us to go back to the eighteen hundreds? Don't you know that the technology in the eighteen hundreds, you know, wasn't that great? So how, how would you respond to that kind of argument?"

virtue is timeless. It's timeless, you know? Moral behavior and, the, the desire to, to do good things, to be a good person, to save, to, to build, these are timeless values, and it really has, nothing at all to do with whether you live in the 19th century or the 20th century or the, you know, 35th century, And, and what, what sound money gives you is that framework to provide an incentive for people to save rather than spend. And, and one of the criticisms you sometimes hear from establishment economists is that, well, if you have deflationary money, that is money that increases in value over time, then no one's gonna spend, and no one's gonna invest, because why invest when you can just hold this? And so you're gonna go, go into this supposed deflationary spiral where no one- No one spends anything and the economy grinds to a halt and everyone starves and dies. It's, it's pretty, it's pretty ridiculous when you think about it. All, all deflationary money is doing is marginally shifting the propensity to save, sorry, marginally shifting the propensity to spend and consume to save. So if you have a currency w-which inflates at, say, two percent a year, which the Federal Reserve, In the US is they, they sort of take this as the ideal target, then it creates this propensity for people to spend and to, to in-invest their money and to get, get it out the door because if they don't, it's gonna lose two percent of its value over time. If you have a deflationary money, what's gonna happen once it's widely adopted is its, its value is gonna grow approximately by the, the rate of productivity, per year. So if an, if an economy is producing three percent more goods, it's the value of the money is gonna grow by three percent per year. So it's, it's not gonna mean that everyone suddenly stops spending, but it's gonna give them that extra small marginal tendency to wanna save. And what happens is if there is a, if there is a shock where suddenly people wanna save more and the purchasing power of money goes up a lot, eventually someone's gonna say, "Hey, wait a second, I'm holding a gold coin and I can now buy a house with this gold coin. Do I want a house or do I want my gold coin?" There is some level at which if people begin, begin hoarding their money because they believe it'll be value, valuable into the future, they will spend it. And this is actually really obvious Yes. I, if you believe that deflation was really bad, you would, you would think that the technology market would be in a constant state of recession, rather that, that the technology market is one of the most innovative and productive markets out there, or at least regulated as well. and it's a market in which the cost of goods drops every single year, and people don't say, "Hey, if, if I hold my thousand dollars in my pocket and I don't spend it, then I'm-- and I'm, I won't..." Wait like two or three years, I'm gonna be able to get an iPhone which is twice as fast, so I'm not gonna buy that iPhone now. That's ludicrous because the benefit of getting the iPhone now is you get the use value of the iPhone now, which might be tremendously more than the, purchasing power value that you accrue over time. So there is definitely gonna be people spending even if the currency is a deflationary one, it's just that it creates that propensity to save and- And saving is a, is a great thing for any society because it builds the pool of savings, and by building the pool of savings, you encourage, or you make it possible for people to, to invest, that extra pool of savings. And it's ultimately where, the welfare of society is benefit by, benefited by production that comes from a growing pool of savings. That's, a different Austrian take to the Keynesian take, which is that prosperity comes from people spending, which again, I think is ludicrous. The, the reason that we live in such a prosperous society is because over the last century or two centuries, there's been so much production and so much, innovation and insight into how we can build things more efficiently, and how we can use the, the insights that we have from science to, to make new products and to cure things. It's really our, our condition That we live in today is the result of much more efficient and wide scale production, not from, this very, Profligate tendency to want to spend all your money immediately, that's not what makes societies rich.

Yeah, and it's, it's a, it's, in one way, it's like saying we have nice things in spite of fiat money, not because of the fiat money that we have today. And really, it's about the capital accumulation, the saving, the investment that enable a society to really expand its production and become rich and prosperous as we are today relative to, you know, the 1800s, say. And the other point And I think that you're sort of touching on there is that it's like entrepreneurs don't necessarily, you know, just because people expand or lower their time preference and think more of spending in the future than today, well, then entrepreneurs will reorient their production to serve that longer term.

Yeah, and I, that, that was part of the point that I was making was that, a sound money system provides an economic framework that permeates through all of society. It's not just- The economic side and, production, it, it's, I think the moral sentiment improves in a society which has hard, which has hard money, and it, it sort of m-moves the tendency towards living a libertarian, sorry, not a libertarian, a libertine life, that is to, live profligately and to spend, and it changes that to a, a society where people want to accumulate capital and, and to save. a-and to live a frugal lifestyle in general, and I think fr-frgality and mo-morality go together, like peanut butter and jelly, to use an, an American, to use an American metaphor.

Sure, sure. Okay. and then the other topic I wanted to touch on was, you've commented before that you believe Bitcoin will do well in a broader market crash, so I'm gonna get you to outline some of your thoughts. And one aspect in which might be good to get you to talk about is, referring back to my prior, prior conversation with Fernando Ulrich, he spoke about how in developing countries with bad money, sometimes they actually use the US dollar To price things in terms of trade or in contracts. Do you foresee a similar scenario playing out in terms of the world, but using Bitcoin?

Yeah, absolutely. Eventually, as-- that was the conclusion of my, article, The Bullish Case for Bitcoin, was that fifty years from now, it, it will be Bitcoin that's the reserve currency of the world, and when you have a monetary collapse in a country, the people will flee to Bitcoin rather than fleeing to US dollars, because it has, this unique ability to- be able to transmit it across borders permissionlessly, whereas dollars, can be controlled much more than Bitcoin can be controlled. So I think in the, in the, the long term, it's definitely gonna be that, It's, it's interesting that you mentioned the US dollar in Venezuela. in the US, the US dollar essentially serves, the three functions of money that we were familiar with: a store of value, people often hold some balance of US dollars just as savings, a medium of exchange to, you know, go and make purchases at the store, and a unit of account, which is people who run businesses will calculate their profits and losses in terms of the dollar, and when you go to a store The goods will be priced in terms of dollars. in a place like Venezuela, the peso really only serves, one of these roles, which is a medium of exchange. People, stores will accept it in payment, but no one really wants to save in it, because if you save in it, its value, drops really quickly. And I, I actually have a friend who's from Argentina, who told me a story about when he lived there when he was a kid. And he said that in the store, there was a person who would, would go around the store and, put the price on all the goods in the grocery store. And by the time they'd finished, and they'd, you know, put the price on the last good, they'd go back to the start and do it again, because prices were changing so frequently. And so when he, he told me that when his mother got her paycheck, she would go to the grocery store and try and spend all of it, because you don't wanna hold a money that's depreciating. appreciating that quickly, where it's inflating away that quickly. and so you, you have this hot potato phenomenon where people who get money wanna get rid of it immediately, and so it's only used as a medium of exchange and not as a store of value. And in fact, it's not really used as a unit of account as well. Nathaniel Popper, who wrote the book Digital Gold, has a comment about how b-because, in Argentina, the value of the peso was fluctuating so wildly in, in general Dropping, people didn't think of the, the-- in terms of the cost of goods in terms of pesos, they thought in terms of US dollars. So if you were a merchant, you wouldn't, you know, price in terms of, pesos, you'd price in terms of what is this worth in terms of a currency that's much more stable? And then what you'd do is you'd, list, you'd do the conversion of, US dollars to pesos and put the price on the good. So the good would stay constant in US dollar terms, but it, Its peso, price would move all over the place, and that's not something that we're familiar with in currencies which have relatively stable, purchasing powers. We, we don't expect to go to the grocery store, and buy something and show up the next day and it's already increased in price. We expect it to stay fairly constant, and that constancy is actually very important for entrepreneurship because economic calculation, the, the function of entrepreneurs is to see opportuni- opportunities in the market, by looking at the cost structure and, and looking at what they believe the demand will be, and employing capital to, to take advantage of those opportunities. And if, if the price of money is moving all over the place, it becomes very, very difficult to do economic calculation. And so one of the very important functions of money is really undermined in a society where they have mass inflation or hyperinflation.

yeah. And I, I guess the other, point to ask around is, let's say we have another GFC or another, you know, two thousand and eight type scenario, two thousand seven, two thousand eight. How do you believe Bitcoin would fare in such a scenario?

You know, in the early days, if, if there'd been a financial crisis, I don't think it would have really changed anything for Bitcoin. One of the great things, about owning Bitcoin right now is it's a completely uncorrelated, financial asset, and so in, in a portfolio, it actually tends to reduce overall risk, 'cause one of the, the only free- The free lunch that you get, in investing is diversification, which is to have assets which don't have much correlation. So if one is doing poorly, then one of your other ones is doing well. and the problem a lot of people have with this is they don't, they don't understand what, correlation means so they'll, they'll buy things which they think are not correlated, they'll buy, stocks and they'll buy corporate bonds, for instance, and then when a crisis comes, they find that all of these things fall at once and they're actually very strongly correlated. Bitcoin, like, gold doesn't have any correlation to the stock market or really any other asset class. So just by, by the virtue of the fact that it has no correlation, it's, it's- A good thing to own. so I guess sort of, I'm going on a bit of a tangent here, but my, my point was that in the early days, when it, when it was, you know, much smaller in value, it acted more like a penny stock, and if there was a financial crisis, it really-- I don't think it would have, it would make any difference to, to Bitcoin, because when it's, when it doesn't have much value, if one or two people come in with a decent amount of capital, they can move the price A lot, like the Winklevosses coming in and moving the price hundreds of dollars after they, they bought one percent of the supply. And, and that would still happen in a financial crisis. As it gets bigger, I think it'll start acting much more like gold in a financial crisis, and, I think if you reflect on what happened to gold in two thousand seven, eight, and nine It acted as a really fantastic hedge, against the stock market. It dropped a little bit, but compared to stocks, it, it, it didn't drop much at all. And so I think when Bitcoin achieves scale, when it achieves the same scale of, that gold does, the same market capitalization as gold, I think it will, be useful for people to own, just because it, it's not gonna behave in the s-same way as other asset classes.

Yeah, you're right. And I think it, it may, maybe it'll even be a, a, a funny sort of scenario where other things are dumping, but Bitcoin is just not dumping as much as those other things, so it's still kind of a good thing to hold in that scenario.

Yeah, what you-- what really matters is its purchasing power across other things. So, you know, even though gold dropped a little bit, in dollar terms in, in two thousand and eight, its purchasing power went up a lot, like the, the amount you could purchase per ounce of gold Gold went up significantly, so you could buy a lot more S&P for an ounce of gold, you could buy a lot more house for an ounce of gold. so what really matters is in times of financial crisis, will it hold its purchasing power? And I think Bitcoin will, it was, it was born from a financial crisis, and I think it will really thrive in, in another one. Yeah, I think that's a fantastic,

way to finish off, this episode. So, yeah, Vijay, did you have any other things you wanted before we close up.

go buy some Bitcoin, now's a great time. We're, we're, we're in, we're in a bear market and, I think one of the best investing strategies for anyone over the last eight years is to just,

do, I've forgotten what the term is, but buy a small amount every, you know, month or every couple of, that's it, do-dollars cost average into Bitcoin in a bear market. There's very few investing strategies that have done as well as that. You might, you know, buy a little bit high and then feel sad that it dropped the next month. But you buy again the next month and, averaged out over time, once we get back into a bull market, you're gonna be very happy.

excellent, excellent. Okay, guys, well, you guys can find VJ on Twitter, find him at, so the handle is at real underscore vj, and as always, I'll put the link in the show notes and definitely also look up his article, "The Bullish Case for Bitcoin." Have you got anything else that you'd like, the listeners to read or to find you at, your prior work?

I wrote an article, about the inflation deflation debate, which people, really aren't very familiar with. I wrote it in 2010, and I actually,

A little sheepish to say this, but I'm, I'm even more proud of that article than my bullish case for Bitcoin article, because it was, it was tackling a lot of, Austrian concepts and I think, I addressed one of the mistakes that I thought Austrians made in, in the financial crisis, believing that we'd have hyperinflation. I didn't think we'd have hyperinflation, and I gave my reasons for why I thought Austrians had misapplied the Austrian method in that case. and it's, it's a long, it's a really long article. I think it's even longer than my, bullish case for Bitcoin article, which is like basically an hour read. So if you're interested in Austrian economics, maybe, maybe go check

yes, I've actually read that article. That was a fantastic article as well. I would recommend, your listeners go and have a look. And you know what? Maybe, next episode, maybe in a month or two, we'll get you back on and we'll actually talk about that article. I think it would be a good, exercise. but okay, that's, I think that's pretty much it from us today. So, yeah, thanks very much for your time, Vijay, and it's been an absolutely fascinating discussion.

Thanks, Stefan.

Alright, that was my conversation with Vijay Boyapati. Note, just for those of you who are new to my podcast, Vijay was also on SLP2, which is episode two of my podcast. So if you like this one, go over and listen to that one also. As always, if you enjoy my podcast, all I ask is that you share it with your friends, retweet, reshare on Twitter, Facebook, LinkedIn, et cetera. Also, you can find the show notes on my site, StefanLivera.com, just search SLP17 Lastly, come find me on Twitter, my handle is at stephan livera. That's it from me. Thanks, guys, and speak soon.

Thanks for listening. You can find the show notes on stephanlivera dot com, and please share the podcast on social media.