Joe Burnett of Blockware joins me to chat about why Bitcoin’s security is probably fine in the long term. We chat about the typical arguments for and against here, as well as the surprising idea of ‘finality, not security’. 

  • Bitcoin long term security arguments
  • Finality, not security
  • Bitcoin’s scaling cycle
  • Why ETH is more or less doomed
  • Bull and bear markets of bitcoin are a feature



Stephan Livera links:

Podcast Transcript:

Stephan – 00:00:08:

And now here’s my chat with Joe. Joe, it’s been a while. Welcome back to the show.

Joe – 00:02:48:

Thanks, Stephan. Good to be on.

Stephan – 00:02:49:

So, Joe, I’ve seen you’ve been doing some great work recently. I know you’re over at Blockware now, and you had a really interesting thread that I wanted to chat about and get some of those insights out there in audio format just for some of my listeners. I’m sure they’ll be interested to hear your thoughts on why basically Ethereum has various long term security issues while at the same time Bitcoin is actually, we could argue, is safe in the longer term. And so this is a big point of discussion. So we’ll have to break some of this down for everybody. But do you want to just start with a bit of a high level about why you wrote that thread?

Joe – 00:03:26:

Yeah, definitely. So before this thread, Pierre Rochard and I, who’s VP of Research at Riot Blockchain, we wrote a report about how Bitcoin’s security in the long term, as many ETH talking heads recently have been tweeting about, they say that Bitcoin security is not okay after the block subsidy ends. And so we wrote a report that kind of rebuttled that idea. And the general thesis behind my ETH thread specifically was going into, okay, now that we’ve rebuttled why Bitcoin’s long term, quote unquote, security, and in our mind, it’s more about transaction finality is fine. In reality, it’s actually ETH that has a security problem and related to that, a value accrual problem, like how does the ETH token actually obtain and retain its value? And so I kind of came up with a short thread that analyzed, okay, what are the security problems with ETH and how can we attempt to value ETH, and what are the problems with trying to value ETH today?

Stephan – 00:04:37:

Got you. Yeah, and actually, you know what? I think it would be a good idea to chat a little bit about the Bitcoin security side of it first. I think that is a common area of, I think, attack, or people just say this line without really thinking it through. Right? So let’s just spell out the basics for listeners who are new. Right? So Bitcoins blocks, on average, there’s a new block every ten minutes that has a bunch of transactions in that. The reward that the Bitcoin miners receive is actually made up of two parts. There’s the transaction fees, and then there is the block subsidy, right? That’s the 21 million coins being issued out over time, whereas the transaction fees relate to, let’s say Joe sends me a transaction or I send Joe a transaction. I attached a little bit of fee to my transaction to incentivize the miners to include my transaction into their block. And so this whole argument, I’m just spelling out the basics, so the basic argument goes, oh, look, the subsidy is decreasing over time because, as most people know, Bitcoin’s block halving or the halving happens roughly every four years where that subsidy halves. And so can you just spell out kind of the high level argument that is made there about, oh, no, why is that not going to be enough? Or why is that a problem?

Joe – 00:05:51:

Yeah, it’s interesting because we see this in the no coiner camp and the Bitcoiner camp where there’s kind of two narratives, right? When fees are high, when transaction fees are high for the network, the people that may not like Bitcoin or don’t see Bitcoin as viable will say, hey, Bitcoin can’t scale. But then when transaction fees are low, the same people are saying, actually Bitcoin doesn’t have long term security. So they’re kind of painting the narrative to match whatever the current environment is. And to be honest, we kind of see this somewhat in the Bitcoin community as well. We see when fees are high, people say in the Bitcoin community may be like, hey, security is totally fine in the long run. And then when fees are low, people in the Bitcoin community might be like, hey, Bitcoin is scaling. So people on both sides of the argument are constantly trying to make their side seem great depending on whatever the environment is. But the general thesis behind this report is, it’s not necessarily about Bitcoin security when the block subsidy ends. It’s more about transaction finality. And so in the report that we put out with Blockware and Riot, we came to the idea that, hey, Bitcoin security is more about private key storage and Bitcoin’s consensus rules are more about being able to operate and run your own node whereas receiving or sending a Bitcoin transaction. And miners building these digital walls of energy around those transactions, that’s more about transaction finality. And as more walls or more blocks get built around your transaction, then that increases the confidence and the finality in the transaction that you sent. And so the general idea is, hey, it’s not that miners provide security for Bitcoin, it’s that miners introduce a level of transaction finality. And over time, as more blocks come in, that transaction finality becomes more confident and more final.

Stephan – 00:07:55:

Got you. Yeah. So let me just replay that again just to make sure new listeners are following along. The basic idea here, as you and Pierre argue, is this idea that it’s not so much about more hash power equals more security. It’s more like we should think of that more about as finality. So generally in Bitcoin, as we say, don’t take transactions on the basis of zero confirmations, that we should wait for one confirmation. Now, there’s a separate debate going on about in the RBF world about can certain merchants manage a zero confirmation risk? That’s kind of Bitrefill and John Carvalho and other people are making that kind of case. But here we’re talking about this idea and it is related, this idea that in Bitcoin things can be reorganized. However, the basic idea is the more confirmations, the more blocks there are, the harder it is to reorganize. And so in that sense, what we’re talking about with Bitcoin miners trying to find a new block, they are sort of creating a continual wall or additional finality that every new confirmation that is added. Every new block that is attached to the Bitcoin blockchain.

Joe – 00:09:05:

Yes, exactly. And there’s basically two ways that we outlined in the report that users can mitigate attacks. So right now, for example, people deem most Bitcoin transactions perfectly settled within six confirmations. Whether you’re sending $10 or you’re sending a billion dollars, if you deposit on Coinbase, they’re going to be like, hey, it’s six confirmations. No one even really worries about it. So a lot of this report is also talking about the idea that, hey, this is kind of like a theoretical problem that doesn’t really exist currently, but potentially could exist in the future. But in the report, we talk about two ways that users can mitigate attacks if they are worried about their finality of the transaction. One, and we’ve seen this in reality with other less…change, with less hash power, like Bcash, we can wait for more confirmations. So, like I said, a Bitcoin deposit typically is deemed final after six confirmations. With Bitcoin Cash, a typical deposit at Coinbase, Kraken, or Binance might be deemed final after 15 or 100 confirmations. And both of those are less than 24 hours, which is not a big deal for global trust list final settlement. And so that’s something that can happen over time. If Bitcoin’s hash rate drops or people are simply worried about the finality of their transaction, they can just wait for more confirmations. The second way to mitigate attacks is increasing transaction fees, right? So if there is an active group of miners that are 51% attacking the network, remember, they can’t change Bitcoin consensus rules. They can’t necessarily take your private keys, but they can censor transactions. That’s effectively what all attacks stem from. So if miners are, for example, doing an empty block attack and just mining empty blocks, this could be a state level actor that doesn’t want anyone to transact on Bitcoin. All that would happen in that scenario is people would be bidding their transaction fees in the mempool to try to get included in the next block. And we’ve seen, like, what happens when the mempool gets clogged or when there’s not enough block space to fill all the transactions in the mempool. Miners or transactions could go from, per-block transaction fees could go from zero Bitcoin to ten plus Bitcoin really fast. As we saw in 2017, during the peak, when there was a lot of demand for Bitcoin blockspace, but there wasn’t necessarily much supply for block space. So if there’s active censorship on the network, the natural market-based response in the mempool is simply increasing transaction fees. And that’s kind of the response and the way that Bitcoin naturally would mitigate against any sort of censorship attack.

Stephan – 00:12:01:

Right. And just to spell that out, part of the idea there is the increased transaction fee increases the incentive for, let’s call it an honest miner to pick up that transaction that let’s say, the dishonest miner or the government attacker or someone attacking the network is, let’s say that person is trying to DOS the network, denial of service. And so they are trying to do what you said, the empty block attack. So they’re just trying to do and it’s like not an economic attack, they’re not going to make money by doing this. In fact, they are losing money to attempt this. But the point being, they may have a certain quantity of hash power and they are trying to have enough hash power to just consistently deny and basically stop other people from using the network. But as you said, one of the countermeasures is that people would increase their transaction fee. And so then, even though that malicious actor is trying to do empty blocks and block the network from proceeding, or at least meaningfully proceeding, there are the honest miners who do want fees and they’re just obviously motivated to earn fees. So the higher the transaction fees are going, the more they’re inclined to include or anyone is inclined to try to include that transaction in a block. And as an example, there may be even people who see, oh wow, look, there’s so many people putting in high fee transactions, it might now actually start to make more mining machines profitable that were previously unprofitable. So that’s part of how the dynamic there works.

Joe – 00:13:28:

Exactly. And another interesting point that we found, like researching this topic is at the time that we published this Bitcoin Cash’s block reward, total block reward was 5x less than average Bitcoin transaction fees per block in dollar terms. And so even though that Bitcoin transaction fees are already providing much more reward to finalize and build these blocks on Bitcoin, Bitcoin Cash is still traded on Coinbase, Kraken, and Binance, and they simply only require marginally more confirmations. And like I said, it’s 15 or 100 confirmations, which is still rapid settlement without a trusted third party. And so that kind of gives hope that, hey, even if Bitcoin transaction fees don’t rise significantly from where they are today, we’re already seeing other networks being able to do trustless final settlement without having to worry too much about 51% attacks or double spends. Another topic that Pierre and I have been talking about recently is all of your other assets that you hold, even in the fiat world, whether it’s US Treasuries, your equities, your real estate, basically what’s the walls around those transactions of you acquiring those assets is basically just a legal system. And that’s about it. In a way, the Bitcoin network still has a legal system, potentially that’s one layer of security around Bitcoin transactions. Like if Michael Saylor buys a billion dollars’ worth of Teslas from Elon Musk and he sends the Bitcoin and then Michael Saylor double spends on Elon Musk. Well, in the real world, he’s still going to owe Elon Musk a billion dollars worth of Bitcoin. Right? So Bitcoin not only has the legal system that may exist protecting the transactions, but it also has these digital walls of energy that add a second layer of security around Bitcoin transactions. Whereas all of your other assets with real estate, US Treasuries, equities, bonds, there’s no digital wall of energy protecting those assets. It’s just whether the government says you do have it or you don’t have it.

Stephan – 00:15:38:

Right. I think that’s a great way to put it. And fundamentally, what we’re talking about here is that Bitcoin is the system that exists outside of the government and so it’s a monetary system outside the government control. And I think some of the key lessons that we’ve been talking about so far, one of those is this idea that it’s the nodes that really protect the overall validity of transactions, right, because, yes, Bitcoin miners are involved in the ordering of transactions, but actually it’s Bitcoin nodes that say whether it’s valid or not. And so that’s the really crucial part. And I think sometimes people take this a little bit too far. There are individuals out there who try to make this idea of like, oh, it’s going to be like a war gaming scenario and you need Bitcoin mining. Well, no, it’s the nodes that are deciding, is this a valid transaction or is it not? Right, so is it signed by the private key associated for this address or for this public key or multisig whatever conditions are? Is it a valid signature yes or no and that’s it, and then yes or no, it’s a valid transaction or yes or no, it’s a valid block or it’s not a valid block. And that’s just what it is. So it’s the nodes that really protect the actual security of the network. And as we talk about in Bitcoin, the idea is that it should be accessible for people. Ideally, it’s cheap for people to run a Bitcoin node. You can do it with your existing laptop or computer or buy a $300 laptop or old PC, and you can run Bitcoin node on that. So I think those are probably the key points. One other area that I really wanted to touch on is this flywheel. So I see this in the report as well, where there’s this interesting flywheel, and I thought it would be fascinating to talk about this idea that we start out, let’s say there’s a demand for cheaper settlement, then the fees go down because of that new technology, whether it’s Lightning or batching and so on. Then we get adoption and then the fees come up and then it’s just a round and round and round. If you could just explain and elaborate a little bit on that idea.

Joe – 00:17:30:

Yeah, this is something that we titled in the report, the Bitcoin scaling cycle. And we’ve seen this play out throughout the history of Bitcoin, where, hey, Bitcoin is increasing in scarcity, there’s a having, there’s another wave of adoption, the price is going up, there’s more demand final settlement of actual Bitcoins because people want to acquire Bitcoins for long term savings. And because of this, there’s a fixed amount of block space. Like we said, we want to keep block space fixed because that’s what enables everyone to run a full node and keep the network accessible and verifiable from an individual perspective. So the global consensus rules of Bitcoin don’t change. So there’s a fixed amount of block space, but there’s potentially lots of increasing demand for final settlement of Bitcoin. When that happens, transaction fees go up. So that’s one reason that transaction fees can go up if there’s scaling issues on the base layer of Bitcoin. But when transaction fees go up, what we see happen is people demand cheaper settlement, right? And so we’ve seen this play out. We’ve seen exchanges, batching transactions, we’ve seen the Lightning Network development, we’ve seen Fedimint, we’ve seen Liquid, we’ve seen Rootstock, different Bitcoin sidechains. And so when transaction fees go up, we see demand for cheaper final settlement that encourages people and developers and companies to build out various scaling solutions on top of Bitcoin. And then people can theoretically put more throughput through the same amount of fixed block space, and then fees eventually go back down. And then Bitcoin is scaling properly. And then we later see another wave of Bitcoin adoption where maybe there’s 10x more people demanding final settlement on Bitcoin, and the fees go back up again. And then we see, okay, now we have another layer or another period of increased demand for cheaper settlement because fees went back up. And then now Lightning Network gets more developed or Liquid gets more developed or Fedimint or whatever. And so we’ve seen this play out through 2017. We saw Lightning really get created mostly after that. It really got developed mostly after that. Liquid exchanges started batching transactions, SegWit as well. So people started to do these different technology like selling solutions, and that helps Bitcoin scale and lead to more final settlement.

Stephan – 00:20:00:

Yeah, it’s a fascinating scaling wheel or adoption cycle. And I think it is true to say that in 2017, the fees were rising. And at that point there were a lot of people complaining about the fees. I think at that point, at the peak, I think people were paying something like $30 or $50 a transaction. And so people were saying, oh, how can this be? And then a lot of people were basically yelling at exchanges, hey, get SegWit when SegWit, so SegWit, and then the addition of exchange batching. So the idea is, let’s say I’m an exchange and I’m paying out to the customers who want to withdraw, instead of me just doing one transaction per customer, I just do one transaction. But actually there’s 50 outputs, so it’s one transaction going out to 50 people. And so that that batching massively saved on the block space. Right. So as we said, blocks happen on average ten minutes and a typical block, you know, if you look on, you can see the blocks go by. But on average we’re talking 2000 transactions, maybe 3000 per block in an average. And so I think those techniques, SegWit and batching are probably most to thank. And so now, basically the major exchanges support SegWit and pretty much all the exchanges do batching. And we saw a very big drop in the mempool, or at least in the block space market or the fee market, when for example, turned on SegWit and started doing batching as well.

Joe – 00:21:24:

Yeah, exactly. So basically the key idea is transaction fees on the Bitcoin network can be high for one of two reasons. One, there’s a lack of scaling technology, which over time can get resolved with more scaling technologies. And then two, active censorship from a select group of miners. And two, the reason the response to if there’s censorship fees go up. And that’s just a natural response, honest miners come back online or the attacker says, hey, instead of attacking Bitcoin and not making any money, I should actually just honest mind these transaction fees and defect and play the game because the incentives actually work.

Stephan – 00:22:04:

Yeah, that’s fascinating. And I think I for a while speculated, oh, we’re going to see more Lightning when we see another bull run. Like, this is years ago, right? I thought, oh, we’ll see more Lightning when there’s like a big bull run and transaction fees spike again. And that will be the impetus. Just like with SegWit, like this time around, that will be the thing for Lightning. Now, it didn’t quite happen that way. I think it’s probably more fair to say the large exchanges turning on SegWit and batching were enough to bring fees down to where they are today, where oftentimes it will clear. But I think longer term we’re going to have the opposite problem. Like we’re going to have a lot of people who want to transact because they want to open a Lightning channel or they want to do some kind of transaction using Bitcoin, whereas today they are very much not doing that. And of course, we have our scale, we have a lot of the scaling stuff that we’re laying the roads, we’re laying down the piping, right? We have Lightning, we have people like Galoy and Bitcoin Beach Wallet where they’ve got tens of thousands of people on that wallet who are using Lightning. day to day, there are big exchanges who have enabled Lightning. So whether that’s CashApp, Kraken, Bitfinex, so many. So it’s interesting to see where that’s going. And I think the other really interesting thing I saw and I picked this up from your report where you point out that there are 32 million entities according to there are 32 million entities estimated who store wealth on the Bitcoin blockchain, but almost all of them are using it as store of value and not medium of exchange or method of payment or whatever we want to call it. And then what happens when we go to 7 billion? Well, that’s going to be over 200x increase in entities competing for that block space. So I think if there’s any kind of suggestion that the fees are not going to be enough, it’s insane to think that when I think if anything, the problem is going to be the other way around.

Joe – 00:23:51:

Yeah, definitely. Exactly. So it also kind of plays into the idea of where we’re at in Bitcoin’s adoption cycle. Kind of like you’re saying right now, people are adopting Bitcoin as more of this collectible store value because it’s very volatile and its adoption is growing extremely rapidly. But in the long run, if more users do adopt Bitcoin as a store of value, it effectively would also become the default best form of medium of exchange that you use to actually trade Bitcoin for goods and services. And not only does the amount of users go up in that scenario by a significant amount, but the amount of transactions those users are making also goes up by a significant amount. So if Bitcoin transactions per user were about one to five per day and we had about 7, 8 billion people using Bitcoin, that’s about 80,000x increase in transaction throughput that needs to occur on the Bitcoin blockchain. And obviously for that to happen, we would definitely need to be using second-layer scaling solutions. But certainly I definitely agree that the problem most likely in the future will be fees will be high and we’ll be trying to build out more and more scaling solutions as those fees become or they ended up pushing people to Lightning or Liquid or even third-layer solutions.

Stephan – 00:25:09:

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Joe – 00:29:08:

Yeah, exactly. And I think the general idea of just adding on to the idea of a security budget, we kind of think that’s kind of like a weird term and kind of the totally wrong way to look at it, because we think that the security budget or the counterattack to an attack is higher fees. So, theoretically, if someone is attacking the network or a miner is attacking the network or attacking transaction finality or effectively censoring transactions, the response is higher fees so that the budget can be however high people are willing to pay for transaction fees, which could be very high because Bitcoin is the most or the least uncertain asset because of the ability to run your own node like we talked about. So, yeah, we think that by 2032 to 2048, Bitcoin transaction fees in aggregate will likely surpass, on average per block, the block subsidy. And then at that point, it’s kind of up to, I guess, the ties will change where people won’t be attacking Bitcoin’s long-term security. There won’t be much of an argument at that point as long as Bitcoin is still working and at that point and people still deem it the least uncertain monetary technology that humans have ever discovered.

Stephan – 00:30:21:

Yeah. And so let’s go into that a little bit. So for people who are newer to Bitcoin, why is Bitcoin the least uncertain monetary technology?

Joe – 00:30:28:

Yeah, definitely. So Bitcoin is an open and accessible network. Anyone can join and anyone can run a Bitcoin full node, right, and anyone can hold their own Bitcoin private keys. And because anyone can do that, Bitcoin has these unique monetary properties that are immutable. So Bitcoin has immutable scarcity, it’s portable, it’s durable, it’s divisible, it’s fungible. And because of these unique monetary properties, we know with the highest degree of certainty that, hey, this is what Bitcoin is today. No one can change it. No group of, no government can change it. No group of developers can even change it. All of these properties are set in stone and immutable. And that’s what makes Bitcoin the least uncertain monetary technology. If you compare it to I’m sure we’ll probably get into this something like ETH, the future supply of ETH is extremely uncertain. In fact, the future supply of ETH is literally determined by how many Ponzi’s and dog tokens are being traded or minted at any given point in time. So the future supply of ETH is extremely uncertain as far as even in the market. But also we have the Ethereum Foundation, which can make consensus-altering changes to Ethereum and completely change the monetary supply schedule. So something like Ethereum is very uncertain. Something like gold is even relatively uncertain. It’s more certain than almost all other monetary technologies except for Bitcoin. But theoretically, we could find a massive sum of gold at the bottom of the ocean when new technology is created to mine gold. And so with gold, you’re kind of relying on nature and your kind of short technology. With Ethereum, you’re kind of relying on the Ethereum Foundation to not change things and people to mint dog tokens and Ponzi coins. But with Bitcoin, there’s not a specific central group that can change Bitcoin’s monetary properties. And that’s what makes Bitcoin so special.

Stephan – 00:32:26:

Yeah, that’s a great explanation, and I think it really is important to hammer that point that there’s a reason to hold Bitcoin because we believe it’s going to be money. So if you’re coming from an Austrian way of thinking about money, you’re thinking, what is the most saleable good, what’s the most saleable commodity? That’s the one that’s most likely to be money. And that’s where we get into all this stuff, right? The scarcity, the divisibility, the durability, the portability, all of these aspects, the verifiability, all of these things help us reduce our future uncertainty. Because, again, that’s another point. Like, why do we even hold money? It’s because we’re uncertain about the future. We don’t know what the future is going to be. As I say, I could break my arm tomorrow and I need to go to the hospital and pay for an operation. I need money to do that. And so the argument here is that Bitcoin is the least uncertain. It is the best at doing this alleviation of our future uncertainty. And so that, I think, gives us a strong reason for why people want to hold Bitcoin, that’s reservation demand for Bitcoin. And so I think this is probably a good spot to actually chat a little bit about that distinction between Bitcoin and altcoins, because I think that’s really one of the big factors that a lot of people don’t understand. There’s no or little raison d’être to keep holding that token if it’s a utility token. And I think that’s really that distinction that is worthwhile people understanding. So could you explain how you see that?

Joe – 00:33:47:

Yeah, definitely. So I think it’s like you said, money is an interesting concept, right? It’s basically an intermediary tool that we use to trade various goods and services with. So, for example, economic systems inevitably converge on one monetary tool, because if we didn’t converge on one monetary tool and we had infinite goods and services being traded with each other. That kind of defeats the purpose of money to begin with. The purpose of money is to find one intermediary tool that we use to trade with every other tool. We use it to price things. We use it to store value. We use it to reduce future uncertainty. So first I think you have to come to the idea that, hey, economic systems and individuals inevitably converge on one monetary tool. That monetary tool is the least uncertain monetary tool. And we think that’s Bitcoin obviously. So when you come to that idea, you have to realize, okay, if ETH is not a monetary tool because its futures is very uncertain relative to Bitcoin, what is ETH and how could you value it? Well, you could argue, in my opinion, that ETH is some sort of like, semi-decentralized equity, right? And so, like any equity, all of ETH’s value is derived from the estimated present value of future free cash flows. And ETH’s future free cash flows are based on how busy the network is and how busy it will be in the future. And this will be mainly from transaction fees, that’s basically ETH’s future free cash flows. So you can think of stock buybacks as like, fees burning on the Ethereum network, and you can think of ETH staking yield as dividends being paid out to ETH holders. And I think it kind of leaves an interesting problem when you realize, okay, ETH’s not money. And its future value is built on the idea of future transaction fees on the Ethereum network. It kind of leaves a very interesting problem, right? Because if fees are high, DeFi, if it’s even a viable technology or NFTs or whatever is being built on ETH, DeFi will be built on other chains if fees on the Ethereum network are high. And this could be other, like, Solana or whatever, or Bitcoin side chains potentially as well. So if fees are high, all of this gets built elsewhere. If fees are low, ETH has no future cash flows, and the token is kind of not worth anything because that’s how you would derive the value of the ETH token. And so in my opinion, this means that ETH cannot even successfully scale for it to be a valuable token, because if ETH finds a scaling breakthrough, well, fees become low and the present value of the ETH token becomes low because that’s how you derive the future the value of ETH. It needs transaction fees to be valuable. And if ETH doesn’t scale, then fees become high and DeFi gets built elsewhere. So it’s kind of this nasty circular feedback loop until ETH has a very low present value in the long run. And I think, unfortunately, all non-money layer ones have this value accrual problem. And it ultimately kind of leads to a security issue for ETH and other non-money layer ones because if the ETH token is not worth enough money, whether it’s worth less than $10 billion, it can’t securely settle $100 billion worth of stable coins or wrapped Bitcoin because you could theoretically buy the ETH and then use that ETH to change the transaction finality of all the other assets that are being built on ETH. So I think kind of in the short term, as we’ve seen, markets can certainly remain irrational. People minting and trading dog tokens and monkey JPEGs for billions or millions of dollars. But I think in the long run, markets are more of a weighing machine rather than a voting machine. And I think ETH generally is designed to trend towards zero.

Stephan – 00:37:52:

Fascinating. And so let’s walk that through just to make sure everyone’s following along. So basically, put it this way, Bitcoin is very clear about what it is. It’s trying to be money, right? And so for that reason, it’s trying to be a hard, scarce money. And for that reason, there’s a reason people want to hold it because it helps resolve their uncertainty. Now, if you’re not trying to be money, then you’re kind of in this category of being a utility token. But as with any of these tokens, if you even think of like frequent flyer miles where the airlines have an incentive to just print more of them, right, or to devalue them in terms of how you can redeem them, there’s this fundamental issue. Why do people want to hold the thing? Now, it’s interesting as well because over the years, the Ethereum people have constantly shifted the narrative, right? It comes and goes, right, because at times they’ve said, oh no, we’re not trying to compete with Bitcoin, we’re not trying to be money, we’re just trying to be like gas. Like you just use this gas token to do this utility thing. But then other times you see them trying to have their cake and eat it too, right? Because there are other prominent Ethereum huffers who try to say, oh, it’s ultrasound money, we’re reducing the money supply, but you can’t have your cake and eat it too. You need to choose. And I think with Bitcoin we very clearly made that choice. It’s money and that’s the most important thing. Whereas with Ethereum it’s not really clear because people in their community seem to want to have their cake and eat it too. They’re not willing to just make that choice and say, no, we’re just doing this one thing. And I think the other point that you made is that we should view Ethereum more like equity. As Michael Saylor says, it’s more like a security, right? Like it is to be classified in that way. I’m not simply for the SEC or whatever, but the character of this thing, the nature of this thing, is more like equity. And so it really puts them in between a rock and a hard place because fundamentally they either scale successfully and it’s going to fail for because there’s no reason to hold the thing or the other way around. People go use other chains to do things with. And to be honest, I think that other path around of somehow people choosing it as money, to me it just seems even a crazy scenario. Right. Why would people choose this thing with this uncertain future, uncertain supply, with a foundation that can control it? It’s just there’s so many levels and layers of absurd that you have to go to to actually go there. But even then, I think I appreciate that you’re trying to steal man, so you’re trying to at least give them like, okay, hypothetically, what would that look like?

Joe – 00:40:20:

Yeah, exactly. When you look at other assets, like US dollar or Apple stock, for example, during certain periods of time, us. Dollar and Apple stock could be considered ultrasound money according to their definition. Right. I mean, if you look at the shares outstanding over, I think, like the last five years or so of Apple, it’s slowly decreasing and becoming more scarce. But of course, Apple stock is controlled by a select group of people and it depends on being able to produce future cash flows that enable them to buy back their shares. Same with the US dollar. It’s like, okay, there might be short periods of time where the M2 money supply is actually decreasing, but in the long run we know that, hey, the only way to get out of this problem is to create more money and encourage people to go into more debt and effectively creating more money. And so during short periods of time, Ethereum could be ultrasound money. But at the end of the day, if it’s still controlled by a small group of people that have in the past just recently made consensus altering changes to the network and at least it’s certainly more uncertain than the future of Bitcoin to be able to make consensus altering changes, then it’s a non-starter when it comes to being actually the least uncertain money.

Stephan – 00:41:34:

Yeah, and I think probably at this point, like an Ethereum huffer might say, oh, look, see. But it was always the plan to go to proof of stake and therefore it wasn’t just kind of like a last-minute rug pull by the centralized foundation. It’s more like somehow because they’re trying to sort of do the mental gymnastics of trying to say it’s like just decentralized enough that it’s a security and that it’s not a security from their point of view, but somehow the community knew this was coming and this was always the plan. And then when things are found out that it’s wrong, we need a new Band Aid for that. That’s coming in a few years’ time and we’re just going to paper it over with marketing.

Joe – 00:42:14:

Yeah, it’s very interesting. They always are painting the narrative to match what they think fits best. And yeah, I think it’s kind of a non-starter. And I think, like I said, the best way to value ETH is like, what are the future cash flows it’s going to produce? Because it’s clearly not very certain to be money, even though they say that, hey, we’re going to do this inevitably, even if it works like the future of ETH, the monetary policy is dependent on how many dog tokens and Ponzi’s get minted and traded on the network. And it’s like, is that really a sustainable way to generate an ultrasound monetary policy? I would argue it’s probably not.

Stephan – 00:42:49:

Yeah, I think you’ve done it there. So look, I think that’s enough on that stuff, but let’s chat a little bit more broader about where things are going now. I know the first time we spoke on my show was about this idea of valuing Bitcoin and what kind of valuations. So I’m curious if you have any thoughts on that. I know you also put out some data around like pricing things in sats over the long term. So what’s your overview there?

Joe – 00:43:17:

Yeah, definitely. The Blockware team, Blockware Intelligence team, actually put out a report somewhat recently within the past six months about analyzing the future purchasing power of Bitcoin. And the way that we thought about it, and it was similar to how we talked about it over a year ago was, hey, Bitcoin is this, you know, the least uncertain monetary technology. And today we don’t have a very scarce monetary technology to store value. And it’s rather uncertain. Right? A lot of people use the US dollar as their monetary technology to value other assets. And so we think because of the dollar is lacking in its future certainty, people resort to other assets to store massive amounts of their net worth. And most people hold a lot of real estate, they hold a lot of equities, they hold a lot of bonds. They hold all these other assets except the actual dollar in itself. And in fact, some of the, the like wealthiest people in the world actually probably have negative dollars. They owe more dollars than they actually hold on their balance sheet. And that’s because they know that by design, the dollar is going to deflate or inflate against other assets. And so in the purchasing power report that the Blockware team put out, which is on the Blockware website, we show that, hey, these assets are all still going to exist. You’re still going to have real estate, you’re still going to have equities, you’re still going to have things like gold. But their monetary premium will likely get siphoned into Bitcoin itself because now we have this new least uncertain monetary technology to where you don’t have to put your money in a massive diversified portfolio of 5000 different assets. You can just hold Bitcoin. And any sort of technology gains that the world creates will kind of go to two separate groups. It could go to the entrepreneurs that created that technology. And it can also go to the Bitcoin holders through increased competition for the technology, making products and services cheaper over time. Bitcoin is kind of this ultimate savings technology in a way. It’s kind of like a productivity index without management fees, and that’s kind of what people are looking for in their 401k, but they’ve just kind of created a very bizarre, diversified way to get that position for their portfolio.

Stephan – 00:45:41:

Right. And I think we can see that also when people show money supply growth and correlation with the markets and they say, oh, okay, is it all really just basically correlated to what the money printer is doing? Is it really just that simple? And so I think the other aspect I’ve seen you chat about this recently, and I know you put out a thread. Now, funnily enough, I think you put that thread out in, I want to say, December 2019 or maybe January 2021. You were saying, look, here’s the thread I did last bear cycle talking about the extreme bull and bear markets in Bitcoin. So in your view, why is that a good thing?

Joe – 00:46:21:

Yeah. So a lot of people, when they hear about Bitcoin, they think, okay, Bitcoin’s may be cool, but it’s very volatile, so how can it be this money? Whereas I kind of look at it a different way. Like, okay, Bitcoin is actively being monetized from zero, and the only way for Bitcoin to actively be monetized from zero by 8 billion people is probably through extreme volatility and extremely rapid growth. Right. I mean, Bitcoin has outperformed virtually every asset over the past ten years, and it’s still if you look at entities on the network, even during dark bear markets, more and more people are adopting Bitcoin, using it as savings technology, and using it ultimately as an alternative form of money. And so I think that these bull and bear cycles kind of are helpful and actually end up speeding up Bitcoin adoption. We have the bull cycles, which is where the price just goes crazy. We see more developers come in, we see more institutions come in, we see more speculators come in, and we see more Bitcoin adoption generally come in at a more rapid rate. Of course, the price gets kind of overheated relative to what’s sustainable at that time, and people just kind of get in a speculative frenzy. And then we have these dark bear markets where we basically end up washing out everyone that doesn’t fully believe or understand what they hold, and they end up selling it at the low or capitulating. And maybe they were over leveraged, maybe they understood it, but they just took on too much leverage at the top and ended up getting wiped out near the bottom. But then the only people buying Bitcoin and when it’s down 70, 80% at this point, are like, true hardcore believers that understand, hey, Bitcoin is the least uncertain monetary technology. And I’ve been fairly conservative or responsible when it comes to my personal balance sheet, my personal income statement to where I know I can accumulate Bitcoin. If it does fall further, that’s fine. But I know in the long run, like I said, this is the least uncertain monetary technology we’ve discovered, and therefore, in the long run, we’re likely to go through another massive bull market until eventually we see global adoption sort of peak, and then we can see Bitcoin potentially growing with global productivity.

Stephan – 00:48:42:

Yeah, and I think one point I would add to what you were just saying there is it’s often in these big drops that new, quote unquote maxis or maximalists are minted. That is the time that people dig in, because up until then, they were just sort of going along with the flow. Maybe they bought some Bitcoin and left it on a custodial platform somewhere. And then after this whole wreck wreckage happens, some fraction of those people actually dig in. And that’s the point where they start maybe listening to a podcast or reading some books or reading your research reports or things like this, and then that’s when they actually go on that journey. And so I think that’s been the pattern that I’ve seen, and this is multiple cycles. I’ve seen the same pattern happen. And what we typically see is a bunch of people who say, yeah, you know what? I’m going to sell the shitcoins, sell the Ethereum, sell the shitcoins, and just go to Bitcoin learn and learn about securing my coins, running my Bitcoin node, all these kinds of stuff. So that’s the trend I’ve seen. But I’m curious, is that what you’ve seen?

Joe – 00:49:42:

Yeah, definitely. I mean, that’s kind of my personal experience getting into Bitcoin. I saw what happened in 2017, and I remember watching it, the price, obviously on Reddit and Twitter. It was so interesting because I had been as a kid looking at stocks, like looking at something like Coca Cola or IBM, like, wow, you can earn 2% a year in dividends forever if these companies still exist. Whereas this Bitcoin thing just went from $200 in the 2015 bear market low up to $20,000. This is insane. Obviously, something might be here. And so I kind of dove into the whole crypto space broadly. And then during the 2018 bear market, I started interacting with other people because I was like, okay, there’s probably something here. I don’t know what it is exactly, but there’s something. And I personally dove in deeper into, okay, what is Bitcoin? Why is it important? Why is transaction fees per second not like the critical stat you need to be looking at when you’re comparing different altcoins and Bitcoin? And eventually you learn, like, hey, it’s not about how much transactions you can do per second. You can do a lot of transactions on Visa or PayPal. That’s not the invention here. The invention is being able to run your own node, being confident that Bitcoin is the least uncertain money because of its immutable monetary policy. So, yeah, I totally agree. I mean, I think that we’re going to see more and more people I think we have seen this bear market with the FTX blow up. We’ve seen more and more people demand self custody because they realize, hey, I can’t trust the third parties. I need to run my own node, take ownership of my Bitcoin, take self-responsibility, and hold the private keys to my Bitcoin. And they understand that, hey, it’s not FTT token that I need to be buying or Doge coin. It’s actually Bitcoin.

Stephan – 00:51:38:

And so when it comes to the broader macro world with the Fed and all of this going on, I know you were commenting or maybe just kind of speculating that inflation might slow down and then that might actually spur the Fed to at least pause or even start cutting rates. As in pause the rising of the rates and then potentially even start cutting rates again.

Joe – 00:52:02:

Yeah, one thing that I found interesting, the last Bitcoin bear cycle, Bitcoin bottomed at the end of 2018 and early 2019, right when the Fed paused that rate hiking cycle. Now, that doesn’t mean that when the Fed pauses this cycle that that’s going to be the exact bottom for Bitcoin per se. There are certainly things that have changed, but I think it’s certainly possible that inflation is already starting to come down on a year over year basis according to CPI. And if that does happen, and the federal funds rate is relatively high relative to that inflation, it would make sense for the Fed to say, okay, hold on a second. We see that our rate hikes may be working to bring down the CPI inflation. Maybe we can pause, see how things look for a while, and then maybe something ends up breaking in the treasury market, and then all of a sudden, they need to start cutting rates again, doing QE, incentivizing more people to borrow, take on leverage, and then we’re back at another bull cycle for Bitcoin equities and pretty much every asset on Earth.

Stephan – 00:53:08:

And I think the other aspect people are normally asking is this idea that this is the first time Bitcoin is going through a bear cycle, and the broader, you know, markets are also in a bear cycle. Whereas you could argue, okay, since 2009 and ’10, basically it’s been mostly a bull in the normal in the fiat asset world. So I’m curious to your thoughts on that idea.

Joe – 00:53:31:

Yeah, definitely it’s interesting because in the Bitcoin world or outside the Bitcoin world, I guess, I think a lot of people have very short time horizons. They see Bitcoin was trading at 69,000 last year, now it’s trading at 17,000. And they’re like, wow, this is like obviously a Ponzi, a bubble. And we saw the exact same narrative play out the previous cycle, where Bitcoin made it up to 19,000, 18,000, fell all the way down to 3000, and people were gloating on Twitter like, oh, Bitcoin was obviously a Ponzi or bubble. Yet even during this macro collapse, almost, or at least some of the largest drawdowns we’ve seen in equities and the treasury market in the history of the treasury market, really, we’re seeing that, hey, Bitcoin is still about 5x higher now than it was at the previous bear market bottom in 2018 and 2019. So it’s very interesting that Bitcoin is doing actually very well compared to just three years ago if you bought the bottom and you held to potentially this bottom. But people lose sight of what’s really happening in reality and they say, hey, they cherry picked dates like the 2017 top that happened for like 2 seconds or the top of last year, and they say, hey, obviously this is a terrible investment, what are you doing? But in reality, Bitcoin is very clearly trending up in the long run, even during very treacherous times from a macro perspective.

Stephan – 00:54:59:

And just on that point on 2017, I think it’s worthwhile pointing out, a lot of people just say, oh, 20,000 the whole year. That’s actually not true. For 75% of the year, it was under 5000. So I think it only went above 5000 around September of that year or so, or maybe October. And then it was under 10,000 for, I think, 90% of the year. So for actually most of the year, it was well below $10,000. And it was just that last month or two that it really went crazy. But people cherry pick certain dates and say, oh, see you’re down from the top in 2017.

Joe – 00:55:33:

Yeah, exactly. I mean, it’s very interesting because in the short term, anyone can Bitcoin can trade at any price, right? I could sell you one sats for $1 and then all of a sudden Bitcoin is trading at $100 million. It doesn’t mean that that’s a sustainable price and obviously people are going to sell if you’re going to be bidding that price. But yeah, that’s basically what happened in 2017. There’s a massive speculative frenzy and obviously the price was unsustainable where global adoption was. More hash rate was coming on the network, more miners were mining and that was kind of siphoning, you know, as more miners start mining, they have electricity expenses to pay, they have ASICs to buy. Obviously they’re going to be selling some Bitcoin to do that because it makes sense to do so at that time. So, yeah, definitely. It’s definitely interesting to see how certain people cherry pick dates to make their point heard.

Stephan – 00:56:24:

Yeah, okay, so we’ve spoken about a lot. I think it’s good to just summarize some of the key things just so everyone’s following along. So rewinding back in terms of Bitcoin’s long term security, we should think of Bitcoin blocks and confirmations more as being finality rather than security. Like. Having more hash rate doesn’t necessarily it’s not necessarily making the whole thing more secure per se, beyond a certain threshold, let’s say. And then we’ve spoken a bit about why Ethereum has problems and why it’s really caught between a rock and a hard place that they’re trying to have their cake and eat it too. And so, yeah, we’ve covered a lot of things, but I think fundamentally it’s that a lot less people are using Bitcoin today than could be. Right? So if that glassnode estimate, and okay, the reports may be a couple of months old by now, but it’s probably still roughly, right, 32 million entities around the world who are storing wealth in Bitcoin, and that number, we believe, is going dramatically up. So do you want to tell us a little bit about where you see it as going as the closing thought then?

Joe – 00:57:26:

Yeah, definitely. I mean, Bitcoin is the least uncertain monetary technology, and it’s not because Bitcoin security post block subsidy is fine. Bitcoin is the least uncertain monetary technology because anyone can run a full node. Its rule set is immutable. We can’t change Bitcoin supply schedule. No single person, no single entity can change Bitcoin supply schedule. And that’s what makes Bitcoin’s value. It’s not the miners, it’s not a government, it’s not a single corporation. It’s the users running Bitcoin full nodes, holding their own private keys and demanding final settlement in Bitcoin. That’s what makes Bitcoin valuable. So in the long run, I’m extremely bullish on Bitcoin. I don’t know, timing-wise, what’s going to happen. I think for Bitcoin to really go in another bull run, I kind of expect the macro situation to have to shift because if dollars are ultrasound right now and the M2 money supply is decreasing, then it’s going to be more difficult for Bitcoin to go on a bull run. But at the end of the day, we know that fiat money is designed to debase, people are designed to take on debt, to buy businesses, to buy houses. And if money is getting dollars are getting more valuable, that’s going to cause a major deflationary recession for many people as people default on their debt. Whereas Bitcoin is this hard, more certain asset where there’s only going to be 21 million forever. And if you have infinitely increasing dollars with only 21 million Bitcoin becoming exponentially more scarce over time as there’s more halvings, then I think Bitcoin will just inevitably win in the long run, as it simply is the best monetary tool we’ve ever discovered.

Stephan – 00:59:06:

Phenomenal. Joe, thanks for joining me. And just before we let you go, where can people find you?

Joe – 00:59:10:

Yeah, thanks for having me on. You guys can definitely check out, which is where I work. You can also check out Blockware Intelligence, which is where we put out the recent report with Riot. We also put out a ton of other cool reports. And we have a podcast there as well, so definitely check those out. And also I’m on Twitter as Joe Burnett, but my handle is @IIICapital.

Stephan – 00:59:32:

Fantastic. Thank you. I hope you found the show informative, and if you think this is a great episode for your family and friends to learn about or if they have concerns about long term security, send them this episode. You can get the show notes over and a transcript will be up there sooner or later. Thanks for listening, and I’ll see you in the citadels.

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