In this episode with Vijay Boyapati, we discuss the economics and cycles of Bitcoin. Most interesting is the concept that over time, more and more people are being ‘mentally captured’ by Bitcoin. Some other points discussed:

  • Bitcoin progressing through stages of ‘moneyness’
  • Hype cycles of bitcoin
  • Some recent debate on HODL’ing as freeriding
  • Confidence in Bitcoin strengthens over time
  • Remarks on where some Austrian economists miss the big picture on Bitcoin

Vijay’s links below:

  • Twitter: @real_vijay – Vijay shares a lot of great thoughts and twitter threads, he is well worth following
  • “The Bullish Case for Bitcoin” – I believe this article is one of the best ‘single article’ arguments for Bitcoin as sound money

Some interesting tweets and tweet threads by Vijay:

Support on Patreon: Stephan Livera Patreon

Website: Message/Follow me on twitter: @stephanlivera

Podcast Transcription (Sponsored by GiveBitcoin):

Stephan Livera: Hi guys, welcome to Stephan Livera Podcast episode two with Vijay Boyapati. Vijay is a software engineer and Austrian economist. He’s been around Bitcoin for a while and he commonly shares his thoughts on Twitter. Most famously, I think you’ll like his article, The Bullish Case for Bitcoin, A Great One-Stop Shop Case for Bitcoin.

Stephan Livera: This discussion is fantastic and it’s filled with insights, but unfortunately, during this recording, unknown to us, just for a short period, around five to 10 minutes worth of it, there was some audio distortion. I apologize for that, but the discussion was too good to just let it go. Hopefully, that’s okay for you, and I’ll try and fix it up for the next episode. So without any further ado, here’s my conversation with Vijay. For our guest today we’ve got Vijay. So Vijay, tell me a little bit about your intellectual influences that led you into Bitcoin.

Vijay Boyapati: I’ve been interested in Austrian economics for probably about, let’s see, 15 years now, and so I’ve been interested in the topic of money for a really long time. I came across Bitcoin in 2011 when a friend of mine, who’s also interested in Austrian economics, we had a bet with each other about Federal Reserve policy and what the Fed would do at one of its meetings. I won the bet, and the bet was for a single Silver Eagle, a silver coin worth about $20. It was worth about $50 at the time. So I won the bet and my friends said, “Hey, there’s this new thing called Bitcoin and don’t take the Silver Eagle, let me just give you Bitcoin instead.”

Vijay Boyapati: I think Bitcoin was about $10 at the time, so he sent me five Bitcoin and he was like, “You need to download this software.” It took a couple of hours, it was on an old laptop, I was downloading it, downloading the blockchain, and after it had transmitted on the blockchain and it confirmed a couple of times, he showed me this really old crappy block explorer and he was like, “See, here’s the Bitcoins I sent you.” It was just a bunch of strings and numbers, and I’m like, “What the hell is this thing?”

Vijay Boyapati: That was the start, I had no idea what it was, but it quickly became apparent to me that this was a monetary good, and it was absolutely fascinating because it’s created out of thin air and yet it has value on the market. How is that possible? Most economists, before Bitcoin was created, would’ve thought such thing as completely impossible.

Stephan Livera: Yeah, I know that’s a great point. I think that leads in really well to one of the themes that I’ve seen you write about recently, which is, Bitcoin’s process of mental capture. I think at that point, you had then been captured from that point onwards. So yeah, I saw you had a really good Twitter thread on this. Did you want to maybe outline a little bit on that process of mental capture?

Vijay Boyapati: Yeah. I think what happens for a lot of people when they first get exposed to Bitcoin, they either hear about it and they buy a little bit or someone gives them a little bit. I’ve had a bunch of friends and family who I’ve given small amounts of Bitcoin to over the years. I mean, it was small at the time, the purchasing power was quite small, but over time it started increasing in value and I’d give someone $20 or $50 worth of Bitcoin and then a few years later it’d be $500 worth, and they’d start paying attention like, “What is this thing?” I think there’s this transition from hearing about it and getting a mild interest in it to becoming an active participant in the market. That process takes a while and involves what I call mental capture as a person becomes more interested and eventually becomes a really active participant and starts buying Bitcoins and becomes a HODler.

Stephan Livera: Yeah, I know, that’s a great way to explain it. I think what many people experience, and I think you pointed this out in the thread, is that basically people might buy a small chunk and then see it go up in value and then it might crash a bit, but then, now that they’ve made a bit of a gain, now all of a sudden they have just become so much more interested in it. Then maybe that’s what causes some people to then go down the rabbit hole and understand, “Okay, what’s Austrian economics? What’s sound money?” That’s a really interesting process.

Vijay Boyapati: Yeah, absolutely. I think it also ties into the biological chemical reaction that happens in the body when you gamble. Trading and gambling are pretty similar things psychologically. You get the oxytonin response when you have a profit and you feel a little bit depressed when you lose money, and that’s a very addictive thing. Part of my point was that when you first buy some Bitcoin and you see it go up and you see it go down, it’s a really volatile asset, so it tends to trigger that response. Someone who’s bought some Bitcoin and then seen it double, it’s really, really hard after that to forget about the price of Bitcoin.

Vijay Boyapati: Like you could’ve bought Bitcoin in the past hype cycle for instance, when it was like $100 and then seeing it go all the way up to $1,000 and then crash all the way back down to $200, and then maybe you forgot about it because it was flat for a couple of years, but it’s there in the back of your head, and if you hear someone else talk about it or there’s a new story about it, it rekindles that interest.

Vijay Boyapati: So part of my point was, there’s a lot of people out there who are partially activated. They have some interest in Bitcoin but they’re not active traders. When a new hype cycle comes, these are the people who are ready to start participating in allocating capital to Bitcoin. There are tens of millions, hundreds of millions of other people who haven’t even heard of Bitcoin, and they’re not ready yet to purchase Bitcoin. But as each hype cycle progresses, it brings in new participants, and usually, they’re the ones who are willing to play a bigger part in the subsequent hype cycle.

Stephan Livera: Yeah, I know, these are all fantastic points. I think you also had a … that reminds me that you had another thread, I think it was late last year and it’s something like, “While there are no a priori rules about the path the monetary good will take as it is monetized, a curious pattern has emerged during the relatively brief history of Bitcoin’s monetization.” Basically, you go on in that thread to talk about how it’s really about these different hype cycles, and then one point I like that you’ve really made is that, few people really anticipate how high prices will go, and then when that cycle ends, people attribute a popular cause to it. But really, that’s not really the reason for the end, it’s just that we’ve reached the end of … we’ve exhausted the number of participants who are reachable in that cycle.

Vijay Boyapati: Yeah, yeah. My view is that in each hype cycle, there’s a pool of people who are reachable in the sense that they’re able to understand it, they’ve heard enough about it, they’re ready to even consider putting some money in, and it’s a finite number and each hype cycle, that number grows. In the first hype cycle, the people who really understood what Bitcoin was and that it had any kind of potential is a very small circle of cryptographers, people like Hal Finney. To me, the first hype cycle was from zero when it didn’t have a market price up to about a dollar.

Vijay Boyapati: The next hype cycle brought in people who were ideologically interested in Bitcoin, Libertarians and people of that sort. Then in the latest hype cycle, the one that we saw in 2017, we started seeing a lot of retail investors, people who had heard about Bitcoin before in the previous hype cycle and they were now ready to participate and buy some Bitcoins.

Stephan Livera: Yeah, I know. It’s interesting that’s … each era, we’ve had different eras lets say, and I think as you pointed out that along with that point that you were making about the different types of people, we’ve had these different eras of Bitcoin as well which I think you’ve mentioned in another one of your threads where you’re basically talking about how there was an era of protocol risk, and then it became an era of exchange risk, and then regulatory risk, and then product market fit.

Vijay Boyapati: Yeah, yeah. I think the risk that has surrounded Bitcoin has decreased with each hype cycle and as the risk decreases the number of people who are willing to entertain even owning it has increased dramatic amount. In the beginning, even the cryptographers who understood what it was about weren’t fully convinced that what Satoshi had published was possible, that you could have digital cash. I think even someone as brilliant as Greg Maxwell was pretty skeptical that this was possible. So in the beginning it’s pretty obvious that there wasn’t going to be much capital allocated to Bitcoin because the risk was just tremendous, it’s just made up internet money. But over years, people have become more confident that the cryptography is solid, the protocol is solid, they started becoming confident that the exchanges were solid after [crosstalk 00:10:30]

Stephan Livera: Yeah, after the early hacks.

Vijay Boyapati: Yeah, the Gox hacks in the crash that happened around then. A lot of the exchanges really improved their game and improved security. The amount of capital that people are willing to allocate to Bitcoin has being growing a lot because the risk has been dropping at the same time.

Stephan Livera: That’s right. I think the other thing is that, in terms of resolve or conviction, what we’re seeing now is that some of those early holders, after they’ve been through a crash and then they’ve seen the next hype cycle come, they now become a bit more hardened in their resolve and they’re now more willing to be the holder of last resort as someone like Trace Mayer might say.

Vijay Boyapati: Yeah. If you’ve been through a crash where you’ve seen, 80 up to 90% of your investment disappear and you’re able to hold on because you have such strong conviction, almost religious conviction that this is better money, then nothing is going to shake you out, absolutely nothing. I agree with Trace’s HODLers provide a really strong base. There’s a number below which Bitcoin cannot go because there is enough people who will just say, “Well, if it goes below this level, I’m just going to buy the entire supplier.” If it goes below, say a hundred, there are enough wealthy Bitcoiners who have enough fear who will just say, “I’m going to buy up 10% of the supply or 20% of the supply.” Of course, that’s not going to happen, but it puts a strong floor on the Bitcoin, this incredible conviction that people have that it’s better money.

Stephan Livera: Bullish indeed. I think one of the other things that you’ve done well to highlight to people is that … and I think you referred to William Stanley Jevons, where he talks about how money progresses in stages. So it’s collectible, storage of value, medium of exchange, and then unit of account. I think that was from your article, The Bullish Case for Bitcoin. So maybe if you could outline a little bit around how money progresses in stages.

Vijay Boyapati: Yeah, sure. The interesting thing I think about money is it’s the most important good in any society. Without money, economic calculation would be impossible and there would be no division of labor. So without money, you have no civilization and we’d basically all be living in poverty. Despite the fact that it’s that important, people have an incredibly poor understanding of money, and I blame this mostly on the economics profession which has propagated really bad explanations of how, why money rises. One of the big problems I see with money is the way it’s defined, and this is true of all schools of economics. I consider myself an Austrian, but I think even the Austrians make this mistake. They define money as a generally accepted medium of exchange.

Vijay Boyapati: The problem with that definition is that medium of exchange is just one of the roles that money plays. There are other roles which are just as important or I think actually more important. So for instance, the store of value role of money, that you keep some of the value that you’ve earned over time in money and you can tap into that later on if you need it. It’s a nest egg or insurance policy against uncertainty in the future. Then there’s the unit of account role of money, which is, you price goods in terms of money, and you calculate profit and losses in terms of money. This role of money allows for economic calculation, which is such an important part of a market economy, and the great Austrian economist Ludwig von Mises, made the point that socialist economies can’t work because it’s impossible to have economic calculation when you don’t have money.

Vijay Boyapati: I want to go back to the point about the definition of money. Almost all economists define money as a generally accepted medium of exchange. But the problem of defining money in terms of one of its roles, is like defining, let’s say, defining a car as a vehicle which has four wheels. While that’s kind of descriptive it’s not really complete picture, and in fact, it hinders our ability to understand what makes a car different to say a bus. It hinders our ability to understand the properties of a car because a car is more than just wheels.

Vijay Boyapati: I went back and dug into a bit of the history of the evolution of money, which of these roles of money come first and which one’s more important, and I came across Jevons’ writing, and he made the point … Jevon is actually a pretty famous economist, he’s one of the fathers of marginalist economics with Carl Menger. He made the point that, in its path to becoming money, gold went through four stages. It started as a collectible or ornamental use where people valued it because it was shiny and good for jewelry and it was pretty rare. After it was valued for that use for a while, people started saying, “Hey, people will accept this in exchange because they can use it for these things that they find valuable, the ornamental use.” So it developed the store of value use, because people were willing to hold it and they recognize that others valued it.

Vijay Boyapati: Over time, over a long, long period of time, when enough people were willing to hold it and valued it, it became stable, much more stable in purchasing power, and then it was useful as a medium of exchange, where you could use it in day-to-day, used to buy a cow or a tractor or whatever it is. Finally, after it was a medium of exchange, it became a unit of count, it became the thing that everyone priced their goods for sale in. So they would say, “I’m a grocery store and I have all these goods, the prices for these goods are not going to be listed in terms of bushels of wheat anymore or whatever I demanded when I was in state of barter, they’re going to be priced in terms of gold.” So it reached the final stage of monetization which was becoming a unit of account.

Stephan Livera: Yeah, that’s a great way to explain it, I think. One of the common criticisms of Bitcoin is its volatility, all right? I think that process you’ve just outlined there is part of the explanation or the counter argument of, okay, this money has just been formed, and as you said, nobody in living memory has ever seen something be monetized. So we’re all clutching in the dark a little bit, we have to look at parallels in history to try and understand how this might evolve over time.

Vijay Boyapati: Yeah, absolutely. One of the things I find amusing is that establishment economists deride the fact that Bitcoin is volatile as if you can go from something that didn’t exist to being a stable form of money overnight. It’s completely ludicrous. Bitcoin when it was first created and first began to be traded was incredibly volatile because it was like a penny stock, it really didn’t have much purchasing power and the pool of people who owned it was quite small.

Vijay Boyapati: As the pool of people who owned Bitcoin grew over time, its price also increased and its volatility started to decrease a little bit as well. It’s only when you have widespread ownership, say you have one billion or two billion or even most of the world’s population who own Bitcoin that you can expect that its purchasing power is going to really, really stabilize and it’s going to look a lot more like something like gold, which is fairly stable in purchasing power over time.

Stephan Livera: Yeah, that’s a great point. I think the other factor is, it’s just a function of size, right? Like the global market for stocks and bonds might be 100 trillion, the global market for M3 money might be 90 trillion, the global market for Bitcoin right now is like 120 billion or something like that. So I think it’s just a function of size, as it gets larger, it will have less movement as a percentage.

Vijay Boyapati: Yeah, absolutely. I think, you can always think of these assets as pools of liquidity, and when you compare it to those other pools like you did, Bitcoin is like a little puddle, and when you have one foot step on a puddle, it’s going to cause a big splash. If you have one foot stepping in an ocean, it’s not going to make much of a difference. As Bitcoin, as the liquidity increases, the effective big people, big sources of capital coming into Bitcoin will have a much smaller effect than it does now.

Stephan Livera: Yeah, that’s right. I think that’s a good way to come back to the no-coiners. So Vijay, in your opinion, how would you define a nocoiner and who are some of your favorite nocoiners?

Vijay Boyapati: Favorite nocoiners. I guess a nocoiner is just defined as someone who doesn’t own Bitcoin, and it’s a very sad existence, and I feel sorry for these people but I’m just kidding. Kidding, I love nocoiners. There’s a difference, I think, between people who don’t own Bitcoin because they don’t really understand it and they’re not yet convinced that it’s a better form of money or that they should allocate capital to it, and I totally respect that. I mean, money is a very, very difficult subject and even people who practice economics, I would say that 90% of them don’t really have a clue about money. So I don’t really have a problem with people who don’t feel confident enough in their understanding to be willing to allocate money to Bitcoin, allocate their savings to Bitcoin. But then you have people who are ideologically against Bitcoin. You have people like Paul Krugman and … I’m trying to think of that fellow, the other economist.

Stephan Livera: Nouriel Roubini.

Vijay Boyapati: Nouriel Roubini, yeah. These are people who have an ideological axe to grind. Bitcoin is built on a score of economic thoughts, Austrian economics which is hard money and a limited supply of money, and the supply of money is not in the hands of the state. When they see something like this, it really rubs them the wrong way because they think the government should be controlling money and they think that government does a great job of controlling money, and obviously, they don’t have much of an understanding of history, they haven’t really looked at the history of Fiat money and how frequently it falls into oblivion, its value disappears and millions of people lose their savings. They’re quite convinced that governments are great stewards to their money. I wouldn’t say they’re my favorite nocoiners, but they’re some of the more prominent ones. If I was to say my favorites, I’d probably have to say someone like my mom and my dad, they don’t own Bitcoin and I still love them.

Stephan Livera: Yeah, yeah. I mean, I was a bit tongue in cheek with that. I think some Bitcoiners actually use a slightly different definition. They think of nocoiners not as people who just simply own no Bitcoin, but they mean nocoiners, the ones who actually go and argue against Bitcoin. I mean, you’ve got the guys like Nouriel Roubini and so on. The funny thing with some of these guys is they come out and they do this victory lap. When they first pronounced that it was a bubble at $600 and it crashed from $20,000 and at that point it was down to 6,000. So it’s still 10 times up from the point that he had come out against it.

Stephan Livera: I think the other thing with that is that it’s coming from a Chartalist view which we would contrast with that Mengerian view, which he outlines in his book or essay on the Origins of Money, which I’m sure you’ve read. I think it’s an interesting point. I suppose that leads me to the next question, and maybe you’ve already touched on this, is, can the different users and when I say users of money, we’re talking store of value, medium of exchange, unit of account, can they really be separated or are they really all taking root together at the same time, but maybe it manifests in those different stages as you pointed out before?

Vijay Boyapati: Sure. Yeah. I think that you can think of the store of value role as a prolonged equivalent of a medium of exchange role. Like when you hold something like gold as a store of value, you’re hoping at some point in the future to exchange it potentially for something else. It’s just your time horizon is much longer when you’re thinking of a store of value. A medium of exchange is something that you’re thinking about using in the very near future, and the reason that you use a medium of exchange is to solve … To go back to the Austrian story about the origins of money, there’s this double coincidence of wants problem where if you have two people who want to trade with each other and you have one person who’s selling apples and one person who’s selling oranges, if they don’t desire the trade at the exact same moment, the trade’s not going to happen.

Vijay Boyapati: Or if say the orange seller doesn’t want apples, they want bananas. So unless you have something that they both value at the same time, the trade’s not going to happen. Money serves the role of satisfying the coincidence of wants problem. So when you think of the medium of exchange role, it’s a much more of a short-term thing whereas the store of value role is a long-term thing.

Stephan Livera: Yeah, yeah. Okay. Let’s talk now about some of the Bitcoin cash and Bcash components. I think what’s … I guess economically, if you had to break down what that pathway that Bitcoin cash wanted to go is they seem to argue that even at the maximum, like Bitcoin’s fees went to, I think, 40 or $50, and I think they neglected the fact that Bitcoin was still fantastic for large value transfer, even at 40 or $50 fees. So maybe if you just wanted to comment a little bit around Bitcoin cash and economically, how you would assess them versus Bitcoin.

Vijay Boyapati: I’m not sure what Bitcoin cash is. I know there’s something called Bcash, it’s a shitcoin. It was copied and pasted from Bitcoin under the delusion that they could make a better Bitcoin by increasing the block size. They completely misunderstood the value of Bitcoin, and they also misunderstood the path that money takes, that a monetary good takes to become fully-fledged money. The people who are behind Bcash were obsessed with the medium of exchange role of money, and they mirror modern economists who are also obsessed with the medium of exchange role of money and who define money in terms of being a medium of exchange.

Vijay Boyapati: This is I think completely backwards in the stake and something has to be a store of value first before it can be a good medium of exchange. If it’s not widely valued, then it’s not going to be used in exchange. You actually go back to the early days of Bitcoin, there were people who really obsessed with getting merchants to accept Bitcoin, and it’s just a completely backwards way of getting adoption for Bitcoin.

Stephan Livera: Yeah, great argument. I think … Yeah, go on.

Vijay Boyapati: Yeah, to focus on merchants. Because you imagine the story for merchants, you go to a brick and mortar merchant, you go to a coffee shop and you say, “Hey, there’s this awesome new digital currency and it’s a great medium of exchange.” Let’s not mention the store of value. People like Roger Ver were doing this. So the store says, “Okay, this sounds interesting, and oh, it has low fees,” because at the time, no one was using Bitcoin so the miner fee was quite low, so it seemed like it was a good idea. The problem was no one owned Bitcoin, no one valued Bitcoin. So you’re a coffee shop who proudly says they accept Bitcoin and no one comes into your store using it. It’s a complete waste of time.

Vijay Boyapati: What you need to focus on first is growing the store of value use case, and getting millions or billions of people to value it. Once you have millions or billions of people valuing Bitcoin, then you can move on to the medium of exchange role for money, and then you can say to people, “Hey, you should probably take Bitcoin in exchange because there are so many people who hold it now that you’d probably do a decent business accepting it.” I think that the problem with that way of thinking was that these guys like Roger Ver were really obsessed with keeping the miner fee low, and so they wanted to increase the block size, and they said, “Look, this is really easy. These core people don’t know what they’re doing it’s a parameter in the code, you increase one megabyte to eight megabytes and we’re done. We just do a hard fork, it’s not going to be backwards compatible, but who cares? We will have increased.”

Vijay Boyapati: What they didn’t realize is that making a change like that completely undermines your confidence in the monetary policy. The fixed supply of Bitcoin being 21 million Bitcoins that could ever be produced. If someone can just change Bitcoin, someone can just change a parameter and hard fork and then it’s the new Bitcoin, then you can have no confidence that at some point in the future someone’s going to say, “Hey, 21 million, maybe that was good once upon a time, but let’s make it 42 million now because 42 is a much better number. We need more because all these economists have told us that we need to increase the supply.” That completely undermines the store of value use case.

Vijay Boyapati: You’re never going to get to the medium of exchange role of money if you undermine the store of value use case of money. By doing this hard fork and showing that they could really easily change a parameter and hard fork, the Bcash people destroy that preliminary stage of money, and they’ve done that a few times, they’ve done like two or three hard forks and it really shows … it’s quite trivial to change these core parameters of Bcash and if I was the owner of Bcash, I would be wondering like, “Okay, right now I own like 0.001% of the supply of Bcash, say 10 Bcash tokens, but in the future that might be a much smaller percentage of the supply. They might just inflate that supplier away.

Vijay Boyapati: If the miners think that it’s a good idea, then what control do I have? Whereas the thing with the fork that happened, and the 2X split that was going to happen, it really proved that it’s incredibly hard to change Bitcoin, and the fact that it’s really, really hard to change Bitcoin despite what, all these big companies wanted to do and what all these prominent Bcashes wanted to do. They couldn’t change it, and that gives you incredible confidence that into the future when you buy some number of Bitcoins, the percentage that you own, the total will never decrease. As Bitcoin grows in value, then the value of your savings will grow too, they’re not going to be inflated away.

Stephan Livera: Yeah. That’s a great point, and I think some other points that you touched on there is, because of this pathway that they’ve gone down, they are risking the decentralization of Bitcoin and in doing so, they are risking the very thing that makes Bitcoin so valuable and that’s why now I don’t regard Bcash as any serious threat, but I just think it’s a useful teaching lesson for new people to understand what really is Bitcoin and what makes it more valuable. The other point I really liked you made, it’s like going back to the whole 2013 days, there were people trying to get merchants to take Bitcoin, but really that’s putting the cart before the horse, right? What we want is those merchants to … you want the merchant to want Bitcoin in its own right, not just as a payment rail.

Vijay Boyapati: Yeah, absolutely. I mean, you want people to take Bitcoin and then just hold it, and to recognize that it has value. You want the pool of people who think that way to grow, and eventually it will be large enough in that, the price volatility of Bitcoin will drop a lot and it’ll be great as a medium of exchange.

Stephan Livera: Yup, yup. Okay. I think another topic that might be good to get into is HODLing as free riding. I know you had some comments on this. Maybe you want to just provide a little bit of context around how this discussion came up on Twitter.

Vijay Boyapati: Yeah. Naval Ravikant, who is a pretty prominent person in the crypto space came out with a controversial argument that people who are HODling Bitcoin are free-riders, he’s using an economic term here which is they’re people who are gaining some economic benefit without doing anything. It’s like for instance, someone who has a house next to a park or something and other people invest in the park and the person who owns the house is free riding, they’re getting a benefit of this beautiful park that other people are investing in, but they’re not contributing anything to it. This was very controversial, obviously HODLers too, do not feel this way, and Naval is very well known and so this got a lot of play on Twitter and other places.

Stephan Livera: Yep, yep. What happened then was essentially some guys on Twitter basically started doing a hashtag look at me and Naval and basically having a joke at Naval’s expense. I thought it was mostly good natured fun but then he did start arguing back against that. I think you had some great points that you made in response to that as well. So I think you were pointing out that actually HODling is not free riding, that you’re taking a risk. Then also you had a good point around political incentives versus the open source mentality. So maybe if you could just expand on that point a little bit.

Vijay Boyapati: Yeah. Regarding the mob justice that happened to Naval, I guess I wasn’t really, really a fan. I like Naval, I think he’s a smart guy and he seems like he’s pretty Libertarian. His heart is in the right place. He can be wrong, we can all be wrong, and the people who were criticizing him, who created this hashtag, the tough part is really attacking his identity. A lot of people think of him as a thought leader, and some of his tweets sound very philosophical, like a Greek philosopher. They were making fun of that. I can see why he was a little bit defensive, some of them I’m sure were just doing it in fun, but I’m sure some of them were doing it to really undermine him as well.

Vijay Boyapati: When I responded to Naval, I wanted to point it out to him that … I think he brought up a reasonable topic that’s worthy of discussion. It’s not something that requires mob justice. I think he’s wrong, and I gave the reasons why thought he’s wrong. In particular, I think people who are HODLing are not free-riders because they’re going to great deal of risk holding Bitcoin and holding it while its price is going up and down and going all over the place. It’s a really scary ride, and by HODLing Bitcoins, they’re providing a price level for Bitcoin, and that price level is a global signal of the significance of Bitcoin. The higher the price level, the more people pay attention to it. Bitcoin at $10, it’s not that interesting. It might be interesting to a few cryptographers.

Vijay Boyapati: Bitcoin hit a thousand, these agencies are starting to get interested in it. Bitcoin at 100,000, that’s when governments are starting to look over their shoulders, and say, “Well, this is getting scary.” So price level is actually really, really important. The price level is also a signal to get developers interested. If you’re a developer, you want to work on a project and you’re working around to what’s roles changing. Because for a lot of developers, their motivation is just give me a paycheck. Their motivation can analytic change the world. If you look at something like Bitcoin and it’s got a price level 10,000, it’s like, “Wow, this could really change the way we think of money completely up in the banking system.” We could have a big impact on whether nation states are able to fund themselves through taxation.

Vijay Boyapati: There’s a lot of appeal for people who might be ideologically motivated to start helping build this thing. That’s what I think has happened. The people who have come to Bitcoin and want to help build Bitcoin, and developers who’ve come there are very ideologically committed to it. They’re not the kind of person who’s just looking for a paycheck and writes Java script code. They want to build something that’s important, and so Naval’s point I think, was it would be really good if we had something in the protocol that pay developers as an incentive mechanism to make the protocol better.

Vijay Boyapati: The criticism of that was that, doing that really sullies the protocol you create like a special class of people who are being funded by that protocol, and it really turns people off. It’s like, “Is this something that we’re building to change the world, or is it something that we’re building to make the small group of people rich?” So I think Bitcoin is a world changing technology and a very important form of money, and people who are HODling are the ones who are giving it the significance that could change the world. So they’re taking a huge risk to be that significance. I don’t think they’re free-riders at all.

Stephan Livera: Yap, yap, got It. I think that’s a great point you make around the incentivization of developers as well because it’s as you say, they want to work on some grand challenge. They want to be a part of history and that’s what many of the Bitcoin developers view this as. So I think, yeah, you make a great point around ideological commitment because I think nobody’s going to go down the hill to make the founders of some secondary, some altcoin rich, right? Now some people do try and come back and say, “Oh yeah, aren’t you making Satoshi rich by building onto that coin?” What would you say in response to them?

Vijay Boyapati: Satoshi’s gone. No one really honestly knows what has happened to Satoshi. But I think the most likely story is he is gone forever. Anyone who could help Bitcoin and not sell or move, not only not sell but not even move a single one when it’s worth, billions of dollars has just incredible willpower that no normal human being has. My theory is that Satoshi, god bless him, destroyed his private gains, and so those Bitcoins that he mined in the beginning are all dead, and are never going to return.

Stephan Livera: Yeah. That’s probably a fair theory. I think it’s either that or, yeah, Satoshi died. We don’t know. But I think it is a good point there around what we might call the importance of money being neutral and not neutral in the value sense, but neutral in the political sense that no one country or party or company or person owns it or controls it. Maybe you want to talk a little bit about that.

Vijay Boyapati: Yeah. I think a lot of the value of Bitcoin comes from the fact that it’s a known sovereign store of value, that people realize that it can’t be controlled by anyone. It’s interesting how in the early days there were a lot of people, even libertarians that I have a lot of respect for, before the [inaudible 00:42:47] value of Bitcoin was it allowed people to do things anonymously. For example, buy marijuana or something like that. The real value of Bitcoin is not from [inaudible 00:43:01] on the strap transactions or teenagers buying pot

[inaudible 00:43:05]

from the world’s savings fleeing to a currency that’s on inflatable and that can’t be controlled. That has profound geopolitical consequences for the world.

Vijay Boyapati: If the world savings flee into Bitcoin, it makes it very, very hard for governments to inflate the pool of savings, the global pool of savings, because Bitcoin’s not inflatable. If they can’t inflate the pool of savings out there, they have to rely on direct taxation to get the capital to fund their activities. Direct taxation is much harder to do than inflation, people don’t like being taxed. Inflation is something that’s invisible but they don’t even realize it’s happening and it results in prices increasing slowly over time. So people are fooled into thinking that everything’s fine, but with taxation, someone’s reaching into your pocket and taking your money.

Vijay Boyapati: So my view is that a world in which Bitcoin is global money is a world in which nation states have to shrink substantially, and things which are very capital intensive like waging war on another country will be become much harder.

Stephan Livera: Yeah. I know, these are great points. I think I agree with that. Another topic that might be interesting as well. So this is a fellow Austrian economist Peter Schiff. Now, he’s famous for debating against a lot of Bitcoiners and he recently did debate with Erik Voorhees. How would you come back against gold and how would you compare Bitcoin versus gold and let’s say, you were debating against Peter Schiff. What arguments would you make?

Vijay Boyapati: I’ve actually met Peter Schiff in person. I met him back when I was campaigning for Ron Paul, in 2007.

Stephan Livera: Ron Paul.

Vijay Boyapati: Ron Paul invited me to his office in Congress and he also invited Peter Schiff when we got to meet there. I had a lot of respect for Peter Schiff in 2007, he was explaining things about the crash that a lot of people did not understand, but really … I don’t, think of Peter Schiff as an economist. He’s someone who has read a little bit of Austrian economics and is sort of regurgitating the little bit he understands about it. He’s not a deep thinker like someone like Guido Hülsmann or Hans-Hermann Hoppe.

Vijay Boyapati: Well, he’s a well known figure, I don’t think he has the best arguments from the point of view that he’s taking. But it does raise a really interesting topic and I think the problem actually starts going all the way back to Menger and this might be controversial amongst my fellow Austrian economists. I think there’s a problem in the Austrian story of the origin of money that Menger came up with.

Stephan Livera: Okay.

Vijay Boyapati: Let’s review that story a little bit. The idea is that, some time in the very distant past, humans lived in a state of barter, which means we didn’t have money and when we wanted to try things, we tried to even based on some very rough estimation of how much we thought they are worth. Like, I’ll trade one sheep for 300 coconuts or something like that. But as I said before, with the double coincidence of wants problem, that kind of barter trading is incredibly inefficient and it makes trade very difficult.

Vijay Boyapati: The Austrian story is that when you’re just in a state of barter there’s certain goods which have greatest saleability, that means they’re more widely accepted by other people, say coconuts are more widely accepted than sheep. So you build up a store of coconuts because when you want to exchange with someone else, they might not want the sheep you have but at least they’ll take the coconuts and you can get what you want.

Stephan Livera: Yap.

Vijay Boyapati: So over time, one good becomes more and more salable, and eventually all goods get priced in terms of this good and then becomes money. The problem I have with this story is that it doesn’t account for the fact that as something is becoming more and more saleable and people are demanding it more for the purpose of using it in exchange its value is also increasing. The demand for it is increasing, so it’s price level is increasing. If the price level of something is increasing across all of the goods, that will encourage speculation in that good. The speculation will actually increase the price level itself. There’s this feedback loop, game theoretic feedback loop, and this is the part of the story that I don’t think Austrians really got.

Vijay Boyapati: I think a lot of the old school Austrians associated with the Mises Institute, and they were very skeptical of Bitcoin at all. I think a lot of them still are there. They didn’t really understand that it’s this thing where it was created out of nowhere. It’s not a commodity, it’s not like a physical tangible thing, and so it doesn’t fit in their mental model and they completely dismissed it. It’s really sad because, in my opinion, it’s the most important monetary development in the last thousand years perhaps, since the minting of coins. It’s a very, very important development economics and yet these economists dismissed it.

Vijay Boyapati: The thing I find interesting is that as a good as increasing in purchasing power because people are demanding it, you get the speculators coming saying, “Hey, I can just make money by buying Bitcoin and then it will be worth more at a future point in time.” As it goes up, as value goes up, it brings more people in who see that there’s value in speculating in it and eventually you get a whole bunch of people who are speculating it, who also value it. They’re holding it as well because they’re speculating it. So it’s increasing its usage in the role of the store of value because the pool of people who are willing to hold it has increased.

Vijay Boyapati: I think it’s this part that the Austrians have missed, that there is speculation involved. I think it was just completely obvious when you looked at the way that Bitcoin has evolved over time, the speculation is a really important part of its development, and a lot of people who have poopooed this and said, “It’s just a speculative vehicle, it doesn’t have any value.” But I think this is actually part of the process in which anything becomes money, and I think it probably apply to gold as well. As gold became more marketable, it was increasing in purchasing power at the same time. So people may have been getting, acquiring gold to do trades with other people, but by doing so, they were increasing the value of gold.

Vijay Boyapati: So other people would come in just for the sake, the gold was increasing in purchasing power and say, “I want gold too.” Today gold coin buys 10 sheep, but tomorrow a gold coin could buy 20 sheep. So I’m just going to buy gold for that very fact that it’s increasing in its purchasing power, and that hastens the process of monetization. I think the speculative part is really important, and it’s a part of the story that’s completely missed by the Austrians.

Stephan Livera: Yeah, yeah. Okay. I think that makes a good sense to me. Also on the point that I’ve seen Peter Schiff make around, “Oh, there’s nothing else that you can use Bitcoin for.” He seems to operate under this idea that, “Oh well, see with gold, you can use it as money, but you can also melt it down and do all those industrial things and make jewelry with it.” I’m not really aware of any requirements in any of the economic literature that money has to have some other purpose. What do you think about that?

Vijay Boyapati: Yeah. This goes back to the regression theorem by Ludwig von Mises, and I think Peter may not have a deep understanding of that, but that’s basically what he’s referring to. One of the paradoxes that was facing the 19th century economists was, why this money have any value? They understood that it had value because it had value yesterday, and so because it had value yesterday, then people today will probably still value it. But that caused the circularity that they didn’t quite understand and they thought it was … Where does this regression backwards end? Mises solved this problem by saying it ends in a commodity. You go back far enough in time and the good is valued as a commodity. So someone like Peter Schiff has an understanding of this regression theorem and he probably thinks that a monetary good has to have some original value that comes from commodity use.

Vijay Boyapati: One of the things that I talk about in the article that I wrote about Bitcoin, I think the one small thing that I can take credit for is my contribution to economics is that, monetary goods have a monetary premium, which is the premium over the price that could be justified by the use value alone. For something like gold, that premium is, let’s say it’s 80 or 90% of the price level of gold as explained by its monetary premium. That is people holding bullion and central banks holding bullion, they use value probably only explain … The price of gold is like $1,300 or something like that. The use value of gold, people using it for dental uses in electronics could probably only explain one or $200 that price, the rest of it is all monetary use.

Vijay Boyapati: Some of its jewelry use, people in India buying jewelry, but that’s essentially a monetary use as well. Indians are using it as an ornamental store of value, something that has value that they can also wear and they can display to show off their wealth. Then you look at something like silver, which used to be a form of money as well, and it was completely demonetized in the 19th century, when governments basically got rid of the supplies of silver and now the monetary premium for silver is very small. Maybe there are a few people … silver bags out there who have a few silver coins, but most of the price level of silver is explained by its industrial use. Then you have something like Bitcoin which is pure monetary premium. It’s all monetary premium.

Vijay Boyapati: It’s not underlying, you see, you can’t use Bitcoin to build something, you can’t wear a Bitcoin. Well, I guess you could print your private key.

Stephan Livera: Very risky.

Vijay Boyapati: Yeah, you could walk around with that. So Bitcoin is a monetary good, it’s pure in the sense that it doesn’t have any use value, but really the use value is only the fuel to get it off the ground, once it’s off the ground then it’s level is determined by people’s willingness to hold it for monetary purposes not for its original use case. People buying bullion don’t care that you can use it in people’s teeth. They’re holding it because they think other people will hold it for monetary purposes.

Stephan Livera: Yeah, that’s a great way to put it.

Vijay Boyapati: What raises the question, how does Bitcoin get that original value, that first value with something like gold, you can say, well, it was used as jewelry or something like that. But with Bitcoin you can say the original value came from someone saying there’s a non-zero probability that other people in the future will value this thing as money. One person having that belief is enough to give it a market price and then it just bootstraps from there. So the Epsilon price that comes at the beginning is just one person believing that it could be money. That’s why you have thousands of old coins, shitcoins, which have a non-zero price because people … you only need a very small number of people to believe that it could potentially be money for it to get a market price. Then getting off the ground isn’t hard but getting up to cruising altitude, that’s the hard part.

Stephan Livera: Yeah, yeah, that’s a good way to put it. The other thing is around liquidity, right? So there are many of these old coins and then they’ve been around for … what happens is they have basically no liquidity. There’s no one who really wants to buy and sell it, and you look at the volumes of some of these very small old coins, it’s nowhere near where Bitcoin has.

Vijay Boyapati: Yep, yep. That’s true. I think for a lot of them, they’re just pumping dumps games. People who don’t even honestly really believe that it could be money. It’s just a way of scamming some other person to accept it and convincing them that maybe it could be money, and then when you’ve convinced enough people, dumping your supply of the old coins so you can acquire more Bitcoin. I think the vast majority of all coins, I’d probably say all of them were created as a way for some people to try and get more Bitcoin, because everyone wishes they bought Bitcoin early. Anyone who knows about Bitcoin wishes that they had bought back in 2010 or 2011.

Vijay Boyapati: If you can’t be that then, if you can’t be Satoshi, if you can’t be the guy who created it and got a lot of it from mining, then why not create your own one with the hope that it could be Bitcoin. Obviously, it can’t because it’s lacking the network effect that Bitcoin has, but if you can convince other people it might be as good as Bitcoin, then you can transfer it to something that actually is Bitcoin.

Stephan Livera: Yeah, yeah. Okay. Let me see. I think that most of the key questions I had for you, maybe we’ll start to wrap it up now because I know your time is limited. Have you got anything else coming down the pipeline for you in terms of, if you got any Bitcoin, writings or projects that you want to talk about?

Vijay Boyapati: Yeah, I have a few more articles I want to write. I have unfortunately very limited time because I have two small children and have full time job, but there are definitely other things I want to write about Bitcoin. Like I said before, I think it’s the most important development in monetary economics for a thousand years. It’s really surprising that there aren’t more professional economists who are paying attention and writing about it. So few of them who actually understand it at all. It’s a subject that’s ripe for investigation and there should be a lot more people, people like Safieddine who wrote a great book on this topic, there should be at least a hundred people who are also thinking about the same ideas and the implications Bitcoin will have for our world.

Stephan Livera: Yeah. I agree, I agree. All right. Well, I suppose with that we’ll end the call and what I’ll do is I’ll link to Vijay’s Twitter and guys you’ve really got to follow Vijay on Twitter. His Twitter handle is @real_Vijay and I’ll put the link and his other must read article is the Bullish Case for Bitcoin, which again, I’ll put the link for that in the description. Is there anything else you wanted to … How else can the guys find you Vijay?

Vijay Boyapati: I think Twitter is the best place to find me. That’s where you’ll find me tweeting about things and because my time is limited, I typically … where I would love to write an article, I’ll do a tweet storm and give a short view on my thinking on something.

Stephan Livera: Yeah, fantastic. That’d be great. This has been a great episode, I think the listeners will get a lot of value and listening to you Vijay and yeah, we’ll definitely have to get you back on very soon. Thank you.

Vijay Boyapati: Thank you Stephan.

Stephan Livera: All right, that was my conversation with Vijay Boyapati. I’ll put a show notes page on my website, Stephan Just search SLP2. Lastly, just as this is a new podcast, I’d really appreciate if you guys could share and subscribe and give the podcast a rating. Thanks guys. See in the next one.

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