On listener request, I fly solo for this episode to give Bitcoin newbies and Bitcoin intermediate listeners an overview on ‘Bitcoin Austrian’ thought. Learn why students of the Austrian school of economics are well placed to understand Bitcoin:

  • How money arises on the market as most saleable good
  • Why Bitcoin isn’t a scam
  • ‘Intrinsic value’
  • Blockchains and social scalability
  • Bitcoin and Austrian thinkers worth listening to and reading

Make sure you share this episode with your friends who are struggling to understand Bitcoin!


Transcript (Podcast Transcript sponsored by GiveBitcoin):

Hi and welcome to the Stephan Livera Podcast, focused on Bitcoin and Austrian economics. I’m your host, Stephan Livera. Today, we’re actually going to do something a little different. I’m actually just going to do a monologue. I’ve had a request from some of my listeners and now that I’m back from Japan, I’m ready to just put some of this material together.

The idea is this is an episode targeted more for Bitcoin newbies and Bitcoin intermediates who want to understand a little bit more on what is the Bitcoin Austrian view? Why is it that understanding Bitcoin through this frame or prism of Austrian economics, why does that make more sense? Let me just articulate some of those thoughts for the listeners who maybe, they’re not as familiar with this, and they’ve only heard Bitcoin as characterized by Bitcoin skeptics, or in the mainstream media, or by crypto currency generalist types.

So if you’re a newbie, you’re probably wondering, “Well, okay, this Bitcoin, is it a scam? It doesn’t have any intrinsic value. Bitcoin doesn’t return any dividends or income. Is it just like the tulip bubble and is everyone just gambling here? Won’t the government shut it down? Can it get hacked? What about all these other coins? Why don’t I just buy those other coins because I missed the boat on Bitcoin? Or, what if I buy Bitcoin and then the next Bitcoin comes out, and it’s better,” in this whole kind of Facebook and Myspace example that people throw around. So hopefully in this episode, we’re going to try and touch on most of those questions and how what I’m going to term, a Bitcoin Austrian thinks about those things.

So who are some of the, I guess influencers within the world of Bitcoin? Personally, some of my influencers and how I think about this Bitcoin Austrian view would be people like Nick Szabo, Saifedean Ammous, Pierre Rochard, Michael Goldstein, Vijay Boyapati would be probably some of the main influences on my thought. Then there are others as well, so Tuur Demeester, Trace Mayer, Daniel Krawisz, Konrad Graf, and Peter Surda who have been also were writing about it from the very early days. Although individuals such as Daniel Krawisz, I would not recommend you follow him nowadays as he’s more of a Bcasher but will get into maybe some of that later.

Now from the world of Austrian economics, some of my influences are Carl Menger, the founder of the Austrian school, Ludwig von Mises, Murray Rothbard, Hans-Hermann Hoppe, Bob Murphy, Tom Woods, Guido Hülsmann, Dr. Joseph Salerno, Huerta de Soto, just to name a few. Now just to be upfront with you, the listener as well, I do not consider myself some sort of thought leader or influencer.

I’m not a professional PhD economist, rather I consider myself a student, a longtime student of Austrian economics. Not to dox myself fully, but I’m in my early 30s, and I’ve been interested in Austrian economics since I was around 15 or so. That’s solid 15, 16 years of time. In terms of Bitcoin, I’ve been interested in it since around December 2012. So as I record this now in May 2019, that’s over six years of time being interested in Bitcoin. So, let me just now outline just a few overarching thoughts around how what I term a Bitcoin Austrian, considers Bitcoin.

So, Bitcoin should be thought of as a digital hard money. Essentially, it is the ultimate challenge against government monetary intervention, particularly central banking, not necessarily banking in general, correctly understood. Now, Bitcoin is extremely interesting to many of us because it has a strictly limited supply of 21 million. There will never be more than 21 million Bitcoin’s and this feat has never been achieved before in history of having actually a strictly fixed supply. We might get into a little bit more detail around that later.

It also achieves this quality because of the way Bitcoin is set up that it is extremely difficult to influence or control by any large centralized party. So that’s what helps it maintain its value because other people see value in this idea of this ledger of money where it’s very, what we call immutable, meaning it’s very hard to go back and rewrite that ledger.

Over time, because of the technology around it known as proof of work, as that proof of technology builds, the analogy made in the past is it’s like amber. The more and more amber around it, the harder and harder it is to change. So you can understand that in the past, attempts have been made to decentralize, or take money away out of the control of the state or any individual person. It’s not about one person. It’s about the technology that we’ve had.

So, Bitcoin should be understood as this kind of revolutionary technology that enables a new form of money that is not so susceptible to centralization or co-opting as it has been in the past historically. So historically, what happened is if somebody got a lot of power, they tended to want to inflate the money because obviously, if you’re the king and it helps you to debase the money by say shaving off a little bits of silver of the coins, then you can very quickly enrich yourself and essentially raid the wealth of your whole society.

There’s good and bad around that and some people will make different arguments around that, but essentially that’s why people see so much value in Bitcoin, but it should be thought of as a long-term case. We’re talking multiple decades here. So, let me now jump into some specific essays and topics around Bitcoin. So I think we’ve got to start with Carl Menger, the founder of the Austrian school.

So if you look at his essay, The Origins of Money, one of the fundamental insights from this essay is that there are differing degrees of salableness or marketability, or another way to conceive it might be liquidity in different commodities. That over time, there’s a tendency because of this problem known as the double coincidence of wants, people want to move towards the commodities that are easier to market and sell.

So, quick example. If you have a product that’s not easy to sell, then you might be without trading partners for that product even though it might be a highly valuable product. Let’s say you made whatever, telescopes, and the guy who makes bread, he might not want your telescope. Then, there might be another problem that he might not want to give you however many loaves, say 200 loaves of bread. He might only have 10 to sell, but your telescope, you can’t really easily cut that up. It’s not divisible. So that’s just an example, and you might not be able to quickly find that guy.

So because of that, we understand money as this indirect medium of exchange. It’s the idea that because you can’t directly exchange with barter because it’s more difficult to do that, that’s why money. So, this idea of differing degrees of salableness, now Carl Menger spoke of this through time and space. So he was saying things like, “Okay, how broad are the markets for this good that you’re trying to sell or get a trading partner for? Also, how durable is that money? How well will it store its value through time?” This is where people come up with stuff like monetary attributes, so they think about how divisible is it?

A good money should be hard to counterfeit. It should be easy to verify. It should have what we think of as, well historically, a high value to weight ratio is a good idea because … Quick thought experiment, compare gold which obviously has a very high value to weight ratio versus whatever, grass. Think how much grass you would need to transport around, obviously it would be easier. Now Bitcoin is different because it’s digital, and it achieves a certain level of digital scarcity in a way that was not possible before.

So, this idea really focused on this idea of salableness. I think that’s probably one of the key, key components, and many of these other attributes of Bitcoin are all contributing to which one is the most salable. What we can understand is that there’s strong tendencies there towards convergence, towards the best few that will become money. At the same time, we have to understand it’s not like there was a top down coercion. It’s not that the government had to come out and say, “I dictate that this particular good is the money.” It’s more like a bottom up view. It’s emergent. It arises on the market just naturally with each person acting in their own subjective interests.

Now, some people think of it like, “Oh, Bitcoin is a belief system, blah, blah, blah.” It’s not a belief system. It’s more like people are looking in their own interest to find what’s the most salable commodity that they can use as money, and we’ll get into it later. We talk about this idea that as Saifedean has pointed out, that it’s the hardest money that people converge on, historically. Things like, “What was the most hard money but also what was most salable?”

Now, some people think of Bitcoin as being gambling. Everyone hears this gambling, and it’s just the whole thing is speculative. I think on this point, it’s more like, yes, in some sense it is speculation. There is speculative demand, but there are good arguments around why it actually makes sense to speculate on Bitcoin, and those who played out over this last 10 years, well, we’ve seen Bitcoin is coming up and there had been many, many challengers, but none of them have actually managed to surpass Bitcoin.

These are some of the ideas that hopefully help change your view, and you might contrast this view, this kind of Mengerian view of money and of Bitcoin and contrast that with say chartalism, which is the state theory of money. It’s like a top down theory of money saying, “Okay, the government declares this is the money.” You have to think that through a little bit further because look at some historical examples like Venezuela, or Weimar Germany, or Zimbabwe and so on, or Argentina. It’s not enough to just say the state declares it money, therefore everyone uses it as money because what happens is if they go too far, people will switch.

So, that was the phenomenon as well that we’ve seen historically is that people when they started to live in a very hyper inflating environment, they would quickly try to change. It became a game of monetary hot potatoes. So, they would get their Venezuelan currency, and then they would immediately go and buy something with it because otherwise it would devalue over time.

So, that was where we saw that phenomenon of dollarization. So people in Venezuela or wherever, trying to use another harder money because they needed that as a way to preserve their value. What we see as Bitcoin is, is we think that we will eventually see this prices of Bitcoinization, similar to that idea of dollarization.

Another view of money that some people have is this kind of David Graeber view of debt as money. This idea of, “Oh, it all started as debt and that’s what money is.” We would disagree with that, and obviously on this basis of money as medium of exchange and salableness. So, there are others within the Bitcoin world, so a good example would be Nick Szabo in his essay Shelling Out.

Now, that’s a phenomenal essay as well. It’s a must read. It’s available on the Satoshi Nakamoto Institute. In that essay, Nick Szabo talks very much about this idea of proto-money, and he’s talking about collectibles. So, it’s very in line with the Mengerian view, and essentially he’s talking about collectibles as the first secured form of embodied value.

Similarly to that problem, how we were talking before about avoiding that problem of the double coincidence of wants, he speaks about this idea of collectibles as a way of delayed reciprocation. Collectibles were almost like a technology that helped us to cooperate and help set up scenarios where people could transfer wealth amongst their kin or in and amongst tribes.

Historically in India and so on, there’s things like the dowry where the bride’s family will pay the groom’s family. Nick Szabo in that essay points out historically, it actually went the other way around. In any case, it existed as a way that people used to help coordinate. Historically in the past, you might have lived in a smaller village and people could all keep track of each other’s favors. Who owed what? Who had done what for who? Obviously, that’s not necessarily scalable.

As you look at as societies grow, and people talk about this idea in the Dunbar number. It’s this idea that beyond 150 people, it’s difficult for you to maintain that relationship with people. So in some sense, money is a tool that we humans used in a sense scale up beyond that 150. That’s one way to think about it. I think this sort of ties in nicely with the next essay from Nick Szabo which I want to highlight which is Money, Blockchains, and Social Scalability. Again, you can find this one on the Nakamoto Institute, and it’s also on his blog, I think it’s called Unenumerated.

This one is a fantastic essay as well. What he’s trying to point out here is that Bitcoin is incredibly computationally inefficient. He’s saying, “The secret to Bitcoin’s success is certainly not its computation efficiency, or its scalability in the consumption of resources. Instead, the secret to Bitcoin’s success is that it’s prolific resource consumption and poor computational scalability is buying something even more valuable, social scalability.”

Here again, so similar to that point we’re making earlier. Social scalability is like this institution. It’s the rules of the game, the customs. It’s the things that constrain or motivates people’s behaviors, and in some sense like we’re saying with the Dunbar number, it helps us overcome certain shortcomings in our human minds. So understood in that way, we should be skeptical of some of these people who come out and promise the world with so-called blockchain technology. So they say “Blockchain not Bitcoin” and so on, when really they’re not appreciating that it achieves a very specific purpose.

Blockchain as used within Bitcoin is designed at this incredible, incredible cost, give a certain level of assurance to people around what are the rules of Bitcoin. There will never be more than 21 million coins. You can’t double spend somebody else’s coins, things like that. There are certain rules that we understand within Bitcoin. So in that sense as Nick Szabo says, “Blockchain technology which implements data integrity via computer science rather than via call the cops, has so far made possible, trust-minimized money.”

So understood from this, I would say people should be more skeptical about so-called blockchain technology as applied to things other than money. It’s a very, very high bar. We should be incredibly skeptical about this because for at least four or five years now, this narrative has been going about, “Oh blockchain, not Bitcoin.” Yet, they have really struggled to find any profitable use cases, and even where they are profitable, they might be easily disrupted by using a different technological approach, perhaps even using cryptography but just not using a blockchain so to speak.

I guess, the skeptic in me thinks that some business executives who maybe are not as tech savvy, they might be using it in some sense for marketing or they need to do a trial with it. Then, some IT staff might be cool with it because it helps them get more budget, that they can just use to do things even if they’re not necessarily the most efficient way to do things. It’s not clear but at any point, I think it’s quite clear that we should be skeptical about blockchain technology and for further discussion, see my earlier episode with Jimmy Song and also with Udi Wertheimer.

Now, next as I wanted to touch on is Hans-Hermann Hoppe’s essay, The Yield from Money Held Reconsidered. Now, this one’s available on mises.org. The context of this essay I think as I understand it, it was a response essay to some gold skeptics. The idea is people are saying things like, “Oh but, isn’t holding money unproductive? Why would you hold that money?” This comes to that question of why do we hold a cash balance?

Now to explain that a little bit deeper, there are different … Let’s call it three different categories, and I think Rothbard makes this point in Man, Economy, and State. I’m sure, basically most Austrian economist would agree with this point, but essentially think of it like there’s three categories. You got either consumption.

Let’s say you’ve earned some money and you got three possible choices. You’re either going to consume something with it now. You’re either going to try to invest that money to earn more, but obviously there’s a risk with that return there’s risk, or you’ve got a cash balance. What Hoppe is driving out within this essay is he’s saying, “Why do we hold that cash balance?” Ultimately, it’s because of uncertainty. To be fair, I think even Mises makes this point as well.

Essentially the point is, think of this thought experiment. Imagine if there were no uncertainty. We may not need a cash balance. We could simply invest or loan our funds such that we receive them back at precisely the time we need them. So for example, if I knew in six months’ time, I need to pay $1,000 to buy good X. Well, I might not necessarily keep that in my cash balance right now if I knew exactly, and I had no uncertainty about it. Then, I might simply put that away in a six-month term deposit, or in some kind of bond, or other instrument that can be redeemed at six months exactly such that I don’t have to hold that.

Ultimately, what Hoppe is driving out in this essay is he’s trying to explain that the unique productivity of money so to speak is like a yielder of certainty in an uncertain world. The reason is because if you hold cash, that’s the most liquid, the most salable asset or commodity as we were speaking about earlier. This is the thing that enables you to buy pretty much anything else at the least possible slippage cost, and the least efforts of trying to find somebody rather than having to barter, do double coincidence of wants, you just use money. That’s really the main point.

Now, another concept to consider here is … and I think this is where people fall into a bit of a category error so some of them are more aggressive anti-coiners or mainstream financial analysts. They look at gold and Bitcoin in similar ways and say, “Oh well, look, isn’t gold just this dumb unproductive rock? Why would you hold that?” Ultimately, that’s a category error.

They’re trying to think of it like it should be held in that investment category and that it should throw off dividends like a stock does. That it should throw off interest payments like a bond does. That’s not why we’re holding. That’s not why people would hold gold or Bitcoin. It’s held more in the sense of being a cash balance.

Now, another thing we can layer on here is this concept of speculative demand. Now, one legitimate reason that you may increase your cash balance is if you believe that holding money would result in your greater ability to command non-money wealth. So for example, back in the older days if you thought the gold price is essentially going to go up, then if you held gold that you would have more command over being able to buy more houses, cars, food, clothing, etcetera, then that’s a good reason in terms of speculative demand.

So, that’s one way the Bitcoin Austrian would probably respond to this idea, “Oh, Bitcoin doesn’t throw off any returns.” It’s not designed to in that sense. It should be thought of more like a cash balance, and as we’ll get to later, it’s more around this idea that society converges towards the best, or most hard, or most salable money.

So another really key essay is by Hans-Hermann Hoppe, it’s called How is Fiat Money Possible? Again, you can get this on mises.org if you google that. Some really cool points in this essay, and I think Hoppe reinforces a few points that we learned even from Carl Menger in On the Origins of Money. So here again, there’s this focused on self-interest as what drives this emergent behavior. It’s not there was some top down organization, and it’s not like even there needed to be one person out there advocating for gold or Bitcoin, it’s each person in their own self-interests wanting to hold this because they believe it would be a better store of value.

The point Hoppe is making here is that it’s beneficial for any individual to select a medium of exchange that is already being used by other people. So, rather than this idea of some people in the crypto world, they talk about this … They won’t call it this but essentially they have this kind of multi-coin world view. Essentially, this is reintroducing the problem of barter and really, we should be thinking of it like one dominant money, which means there’s less indirectly useful media being used, and that’s more optimal for calculation and just less wasteful.

Hoppe in this essay, he also makes the point around how accounting in a world with one dominant money is a more accurate expression of opportunity cost because there’s less and less people who are trying to fiddle around with foreign exchange markets and dealing with things like presentation currency, transaction currency, and the different things associated for accounting for that as well, and then all the people who are doing FX, hedging, and so on. It’s absurd. The whole thing, it becomes an absurdity.

Another point he makes, there is around this idea of some people talk about trading zones, and they say, “Oh, but within these trading zone, you might use this sort of money.” As long as people prefer more wealth than less, they’re going to prefer the global trading zone. Obviously in an increasing age of internet commerce, why wouldn’t Bitcoin be that? Essentially, it can’t just be the US dollar because the US dollar can more easily be shut down and stopped, or censored. There are economic sanctions. There are financial surveillance controls.

What we’re looking at here is which of the cryptocurrencies would be the most global? I think, the argument can be made here that Bitcoin is exceptional. It is special. It was the first one and … Well, in some sense it wasn’t the first. If you look back at some of the prior efforts and attempts to make digital money, there are many prior attempts. If you look at BitGold, and Wei Dai’s B-money, and there have been non-crypto versions like Liberty Reserve and eGold. They got shut down. You can understand here how Bitcoin is special in that sense.

Anyway, back to this Hoppe essay. He actually quotes a section from Mises’s theory of money and credit. He’s talking about how there’s this convergent towards a single, most easily resolved, and readily accepted commodity because he’s saying, “One by one, less salable commodities getting knocked out, until finally you’re left with the most salable one.” In some sense, it’s a very maximalist argument within Bitcoin’s idea of monetary maximalism. It’s this idea of convergence towards the best one.

Another good essay that you really should read is Vijay Boyapati’s The Bullish Case for Bitcoin. You can find that on his Twitter real_vijay and if you just Google that, you’ll see that. Also I have interviewed Vijay, so check out some of those interviews with Vijay. Obviously, I’m not going to recapitulate the whole essay here but some of the key points that I drew from that essay were some of these concepts around monetary properties.

So, coming back to what we were saying about what is something that makes it more salable? Well, it’s these concepts around how durable is Bitcoin? How easy is it to back up? How easy is it to send? How easy is it to verify, but how difficult is it to counterfeit? So, Bitcoin does this through software. So, it makes it very easy for people to verify, so long as they run their full node software.

You can compare this to things like gold. Where in the past, there actually have been historical examples of people trying to coat the inside of it with tungsten and then the outside with gold, so to try and trick people obviously. So, there are some difficulties associated with verifying the correctness or the soundness of that gold. That’s one example.

While we’re talking about some of Vijay’s contribution in Bitcoin, I really like one of the points he makes here that some people, they fall into this trap of thinking, “Oh, I want the next Bitcoin.” As Vijay explains, Bitcoin is the next Bitcoin. It’s extremely difficult to dislodge the network effects, and we should also understand that there are strong opportunity costs associated with holding any particular money.

So, as you can see in some of the writings on the Nakamoto Institute in the mempool, it’s not just switching between social networks and having multiple accounts. If you hold more of currency A, that means you necessarily can hold less of currency B. So over time, again like we’ve been explaining, there’s this tendency that towards convergence of the best one.

As my friend Pierre Rochard, also a prior guest on the show has explained many times, you’ll see him explain on Twitter this idea of liquidity begets liquidity. So, even a small incremental difference in liquidity in currency A over currency B, will tend to reinforce itself such that currency A, all other things equal, tends to win out in that market for money.

Now, another good resource that if you want to learn more about Bitcoin, you can’t get past this one. It’s Saifedean Ammous’s, The Bitcoin Standard. Now, Saifedean is also a past guest on my show. He was the first guest, so episode one and episode 69 off the top of my head. He makes many contributions and many explanations within the book, The Bitcoin Standard. I think for a newbie to money, really a lot of the discussion is around the history of money. Also, another key focus of his is his focus on this idea of stock to flow ratio.

Some of the points around history of money, just around this idea that it took certain government interventions to make fiat money work. Some examples that he brings up around stock to flow really should be considered like this point of what is the inflation rate of that money? So quick examples, if you think of most fiat moneys, they might be inflating at five, six, 7% or even more per year. Whereas, gold historically has inflated at 1.5 to 2% per year.

Then Bitcoin on the other hand, had most of its inflation at the start. Every four years, the new incoming supply halves. This is an event known as the halvening or the halving where the block subsidy halves in Bitcoin. What this means is that over time, its inflation rate would drop far, far lower than anything else we’ve ever seen.

This is important to understand because again, going back to that point of salableness through time and space. If you know that the supply of this cannot inflate beyond 21 million, what Bitcoin software does is it algorithmically determines the supply such that it can never go more than that. Then what we’ll see and I guess where we are today, technically Bitcoin’s inflation might be around 4% now, but if you account for lost coins, it might be five or 6%.

Then after the next halving obviously, that would go down to somewhere in the 2to 3% range. Then after the next halving after that, it will go down to 1 to 2%. Then, next halving it will be even more scarce than that. So then, you have to consider what people are going to think about decades from now. This is a multi-decade phenomenon. Well, they may well prefer to store value within Bitcoin because it’s better than their alternative of keeping it in some other money.

That is one key concept to understand around that. So, the other thing is Saifedean raises some historical examples in his book. So, you’ve got to go through that book to understand them. Just a quick example is European settlers who came to Africa, and there were certain African groups using glass beads as money. Then, the thing is the European settlers had glass making technology. So, they were able to just go home, produce glass beads, bring them to Africa, and then essentially get the African people’s wealth at pennies on the dollar essentially because they were able to make that money.

The lesson then is as Saifedean says, “It’s difficult to insulate yourself against the risk of somebody using a money that’s harder than yours.” This is also again going to this idea of you want to be using the hardest money. If you’re not using the hardest money, you might be susceptible to having your wealth essentially raided from you at pennies on the dollar, and there are multiple examples there around. I think the Island of Yap, the Rai stones as well. So, you can have a look at the book for that.

Next one is Murray Rothbard. Murray Rothbard obviously has many, many contributions. Probably, one of the best from a Bitcoin point of view is his booklet called What has Government Done to our Money. In his book, Murray Rothbard talks about monetary history and how banking got corrupted and centralized. So, you can understand a little bit further around how it came to be. How we ended up in this scenario that actually the money that we’re using now is more like an aberration. For thousands of years, people used gold as money. How was it that we got on to this system of using paper money that’s actually not backed by anything?

So when people talk about this idea of intrinsic value, really we should understand from an Austrian point of view is value is in the eyes of the beholder. It’s subjective value. Another way to think of that would just be, “Well, what’s gold backed by?” It’s ultimately, it’s those monetary characteristics and that concepts of salableness that matter more. In that sense, it’s not a belief system, rather it’s more like what is more salable? What’s most liquid? What has the best properties around it? So, I think that is one way to think about it.

Another idea that you see from Austrian economics is that it’s not necessarily the money supply that matters. Quick thought experiment, if we had 1,000 monetary units in our little economy and then I click my fingers and then tomorrow, there’s 2,000 monetary unit, but everyone who has whatever money, it just got doubled overnight. Would our net wealth change? No, it’s just the monetary units that have changed. I hope that’s clear.

What we’re trying to get to here is just to explain that inflation in the way it’s done today by the fiat money as enabled by Central Banks, by legal tender laws, capital gains tax laws, et cetera, the real problem is what’s called Cantillon effect. So, the Austrians explained that as … Well obviously, it was named after this guy. I think his name is Richard Cantillon.

The point is to understand this. Those closest to the monetary spigot, as in those people who received the new money first, get to benefit because they are spending the new money at today’s purchasing prices, and before it’s flowed out to everyone else and those effects have properly reflected in the prices of everything else.

What typically happens in this case is in the fractional reserve banking system, the banks and the people getting loans and the governments, those are the people closest to the monetary spigot. So, they are the ones benefiting. So, a good essay actually if you’re interested to understand a little bit more on this is Daniel Sanchez’s Inflation is Sipping Your Milkshake.

So, that’s a really great explanation of how it’s constantly causing that difficulty for people because it’s quite difficult for someone who say on a fixed wage to count for that or to stop the effects of that on their own spending power, whereas other people depending on where they are placed in relation to the monetary spigot, the creation of the new money, they can better insulate themselves from the negative effects or even benefit from that.

So in some sense, the people who Occupy Wall Street and so on, there’s some kernel of truth in that, that the system is unjust. It’s just that it takes a certain of economic knowledge and understanding to perceive that really, one of the big problems of inflation is, is Cantillon effects. Another point that Austrians would raise is around this idea of the Austrian theory of the business cycle which maybe we’ll get into that later.

So, another few points that I wanted to touch on is, and some of this comes from Murray Rothbard’s Man, Economy, and State. In that tome, there’s a discussion around this concept of reservation demand. Understand it’s that the value of something comes from when people are hoarding it in some sense. The fact that people want to hoard it is what gives it more value. So, one of the essays from the Nakamoto Institute also has something like, I’m Hoarding Bitcoins and You Can’t Have Any.”

So, that hopefully helps people understand that really that’s where the value of something comes from. It’s not just the pass through value of people using it as a transaction because then, they could just pass through it and not store any value in it. That brings us back to some of those points we were making before as well around consumption right now versus investment and cash balance.

Also in Man, Economy, and State, there is some discussion around this idea of money prices can preexist. So, that one essentially means that … Some people bring up this idea of, “Oh well, you see, at least gold can be used for other things. So, even if the monetary value of it went down, there would still be industrial use of gold in jewelry, and computers, and other technology.” The point I think Murray Rothbard makes within Man, Economy, and State is that actually money prices, people can use the day before as a reference point, if that makes sense.

We could understand it more like Bitcoin just has more of what we might call monetary premium. So in the early days, people might have bought it. This is a bit of a cool nerd value or, “Okay, this is digital money.” Then over time, people came to perceive value in Bitcoin, and it became more and more liquid as an asset. So, that is probably one rejoinder that I think a Bitcoin Austrian would have this idea that, “Oh okay, but you can’t actually do stuff with Bitcoin. So, it’s all resting on a sham and it’s all going to collapse.” Well, not quite because the money prices can preexist, if that makes sense.

Then, I think another thing just while we’re on this idea. I wanted to just touch on some of the ideas around salableness. It’s not just the pure market price of the money, but rather how saleable it is. Some examples that we’ve seen in terms of real word’s empirical validation of some of these ideas. There was recently an analysis done by a fellow named JP Thor. He wrote it up basically talking about the true dominance of Bitcoin.

People like Vitalik of Ethereum would criticize Bitcoin saying all the Bitcoin dominance is falling, but actually if you look at the real liquidity on how many people are trading into and out of Bitcoin, it’s over 80%. That sort of aligns with this idea of the Pareto Rule, the 80/20. So, that’s one way to conceive of it is that actually what matters more is the salableness, not just the straight up value of it.

Although obvious over time because Bitcoin is just so, so scarce and it is so, so small in the global sense, so Bitcoin now is whatever, like 100 billion, where its global markets let’s say M3 broad money would be 90 trillion global wealth as measured by Credit Suisse. A couple of years ago, would have been in the 270 or 280 US trillion dollars. Bitcoin is still tiny, tiny drop in the bucket compared to the globe. So because it is so, so scarce, we anticipate that if we’re right about all this, that the price will dramatically rise because that’s the only way some of the other people can come into it.

So moving on to now to Huerta de Soto’s book, Money, Bank Credit, and Economic Cycles. So, this one’s a fantastic book. It really just delves deep. It’s a long book. So, you’ve got to work your way up to some of these longer texts. I recommend just checking out some of the shorter essays and working your way into some of these bigger texts like Money, Bank Credit, and Economic Cycles, Murray Rothbard’s Man, Economy, and State, Ludwig von Mises’s Human Action. They’re some of the top level texts.

Anyway in this book, Huerta de Soto talks about this concept of expansion of credit beyond the amount voluntarily saved. So, what he’s trying to explain here is that that is the true driver of credit, fiat money, economic boom and bust cycles. So, this is the Austrian theory of the business cycle. Now, what that’s doing is essentially drawing together all these disperate threads and waving it together in a really cohesive way. So, it requires you to understand things like consumer goods versus capital goods, capital structure, interest rate theory, and the way that this causes a certain malinvestment. So, it causes a distortion of the capital structure and it causes a cluster of entrepreneurial errors.

So, it’s not just like in the normal market where entrepreneurs will make mistakes and we expect that. What this is doing is that essentially it drives a cluster of entrepreneurial errors and that is what we perceive as the economic boom and bust. So, Huerta de Soto basically prosecutes the full reserve Austrian Bitcoin banking case. That is essentially the case that banks should be fully reserved.

Now, this does not mean there would be no credit. It just means the accounts would be distinct. It means let’s say, I have a demand deposit account that should be fully accessible to me at any time. If I go to the bank and put a term deposit or some sort of time deposit, then that is not available to me at any time. So you can see with banking, they give you the interest account and in the current fractional reserve world, they do give you access to that at any time because they’re using probabilistic models based on how likely are people to go into a bank run or pull out their money.

What the full reserve Austrians would say is that essentially, this expansion of credit beyond the amount voluntarily saved and the amount foregone in terms of foregoing consumption, that is what drives this overall cycle. So, that is why Huerta de Soto believes fraction reserve banking is fraud, and that it drives these economic boom and bust cycles.

Now personally, I’m not as sold on the idea that it’s necessarily fraud. It could be openly disclosed, however I do believe it does drive economic boom and bust cycles. Further discussion around this is also going to like the history of money and banking, and how it was as Murray Rothbard explains and also as Guido Hülsmann explains that it was really government interventions that made this fractional reserve banking all possible. So things like legal tender laws, things like the existence of a central bank as a lender of last resort which existed to basically help prop up these banks whenever they were not able to meet their actual liabilities to their customers and a range of other things.

Things like implicit and explicit bailout guarantees, bail-ins. What else? Various other laws, things like financial surveillance laws, all of these things help push the system into the way it is now, which creates all this moral hazard risk, rather than individuals actually scrutinizing their banks and saying, “Oh hey, if I put my money in ABC Bank versus XYZ Bank, I think ABC are more likely to be a good stable bank. Whereas maybe XYZ I think they’re doing fractional reserve, I want to be more skeptical of them.” Whereas what the government does, it comes in and tells people, “No. We’ll just make you whole. So, don’t worry. Just put it into any bank.”

What happens and what that does is that it drives an overall system risk. Rather than letting isolated banks fail, they try to save those banks but then at the risk of making more of a systemic risk, if that makes sense. So even in that book, Huerta de Soto even talks about examples of credit expansion, even pre-the Federal Reserve. So, there are few examples in there.

Also if you’re interested, there’s a really good talk by Tom Woods if you Google it or YouTube it. I think it’s called Economic Cycles Before the Fed. So, it all comes back to that point that they’re making which is always look for that expansion of credit. That was the fiduciary media, the amount of credit extended to the people, to entrepreneurs in the economy, beyond the amount voluntarily saved which is what drives that boom and bust cycle. So, I’m not going to go too much more into depth on that. I mean, you can do entire episodes on that but I’m just giving you hopefully a flavor of just a way to understand what are some of the key points the Austrians would consider on this.

Now, also consider Guido Hülsmann. Guido Hülsmann, is a fantastic economist, and he is a past guest of my show roughly I think episode 50 or 51. So, some of his big contributions, I mean he’s written many things and done many talks. I recommend looking him up online as well on YouTube. From a writing point of view, Deflation and Liberty which was his excellent, excellent essay and his phenomenal book The Ethics of Money Production.

So, Deflation and Liberty is a really good book because essentially he explains why people should not be so skeptical of deflation. Yes, it’s true that there might be some instances of what might seem bad deflation, but once you consider them more fully, you can understand that actually some of the reasons for that bad deflation were the prior inflation. So, what people are doing is they’re blaming the symptom, but not understanding what was the real root cause of that inflation to begin with, which as we’ve explain was around that credit expansion. So, that’s a really good booklet to read.

Now, The Ethics of Money Production is one of my favorites that we touched on some of the topics from that book in my interview with Guido. In that book essentially, Guido talks about the history of money and how government interventions were what made money today what it is. So, we talked about how money quality deteriorates because of these interventions that we explained earlier that changed the game in terms of how people consider what money they will use.

Another really interesting chapter from that book is around cultural consequences of fiat money. It drives different behaviors in the way we think, in the way that people think, and the way they invest. It also drives changes in the way governments act because governments have more easy access now to things like warfare and welfare state funding, which in turn drives changes in the way you and I think about our own futures and how we will either save or not save for our own future.

Also, what that also can do when you think about it is that the government can crowd out private provision of some of these things. So for example, the government provision of welfare states can crowd out the private versions of these. So good book, if you’re interested on this is From Mutual Aid to the Welfare State by David T. Beito. So, that’s also a good one if you’re interested to understand some of that.

Okay, so now moving into some of the Satoshi Nakamoto Institute material. So, highly recommend you check out the Nakamoto Institute. There’s a range of good articles. I’m just going to talk through some of the mempool articles. There’s some like Bitcoin’s Perfect Monetary Policy, which is an explanation around that algorithmic curve. There’s Pierre Rochard’s, End the Fed: Hoard Bitcoins.

This one, Michael Goldstein’s essay, Everyone’s a Scammer. So in this essay, Michael is talking about how there had been many, many hacks and scams in the Bitcoin space, some of which appealed to kind of Bitcoiners and others. They just appeal to people who are trying to get rich quick. In any case, you should take this heuristic that many people are trying to scam you out of your Bitcoins basically. Once you understood some of these theories around hyperbitcoinization and future bitcoinization of the world, then it’s on you to now consider and think deeply before you spend any of your Bitcoin whether this is truly what you really want.

A couple other points, there’s a really good article called Speculative Attack on Nakamoto Institute. This one’s by Pierre. It’s a great one, recommend reading it. It’s essentially just around this idea that over time, as Bitcoin’s returns rise by holding it, then it becomes more and more difficult for central banks, because then they have to raise their own interest rates to very unconscionable levels.

Another point to consider would be Bitcoin’s Shroud of Subtlety and Allure. This one is touching on this principal agent problem. So if you work in a government, you don’t necessarily have the power to just shut Bitcoin down straight away. As you learn more about Bitcoin, you yourself as an individual might want to look after your own family and your own friends by getting more Bitcoins for yourself. This in fact is what we saw in the past with things like some of the Silk Road investigators who got done doing dodgy things to try and get their own Bitcoins.

There are certain kind of stories that I’ve heard around Venezuelan government officials trying to take Bitcoin mining and equipment for themselves. There are all these kind of examples of people who, well theoretically you might say, “Oh, the government is like this big monolithic entity,” but it’s really not a monolithic entity. It’s made up of individuals, and each of those individuals has their own incentive as well.

Another point to touch on is Pierre Rochard’s article. I think it’s called Bitcoin Governance. It’s essentially, it’s an explanation of how Bitcoin is a peer-to-peer network. It’s this inter-subjective social consensus of what Bitcoin is. So in that sense, people run a full node. They run the Bitcoin software that they believe represents the transaction and block validation rules of Bitcoin that they believe to be Bitcoin. So things like, no more than 21 million and so on.

Through this kind of idea of a schelling point on society that people have to try in game theoretically, figure out what software they will run that such other people will also run that same one, and that’s what Bitcoin is. If you’re interested on more discussion for that, make sure you check out my interview with Pierre Rochard. I think it’s number 12 off the top of my head but have a look.

Next one is some of Trace Mayer’s points around … He’s written many great things over the years, but one concept that he’s quite famous for is this idea of The Seven Network Effects of Bitcoin. So, we should understand that there are all these seven self-reinforcing network effects of Bitcoin that make it more and more powerful. It makes it even more difficult for somebody else to make a new coin that will come out an topple of Bitcoin. That’s why we haven’t seen anyone topple Bitcoin in the 10 years it’s been around.

His seven network effects are speculation, merchant adoption, consumer adoption, security, developer mindshare, financialization, and world reserve currency. So, I think the most powerful one is obviously speculation. So as people speculate on it, it drives some of these virtuous cycles, virtuous upward cycles. We should also consider that there are very, very strong developing network effects here as well because people want to build something that’s going to last. If they’re going to build on top of something, they want to build on something that will last.

Another concept that’s often being used, and understood, or thought of by Bitcoin is as popularized by Nassim Taleb is this idea of The Lindy Effect. The longer that something has survived or an idea has survived, the longer we should expect it to continue to survive. These are all kind or reasons driving towards using Bitcoin and building on top of Bitcoin rather than trying to start some next Bitcoin, so to speak.

Now, just going to touch on a few problems that many newbies who come in and they start thinking about altcoins. Really, just be honest about your intentions because many newbies I’ve spoken to were really just looking for a 10x, or they felt that missed out on Bitcoin. I think they weren’t necessarily willing to admit that, but if you reflects more deeply, that’s probably what it is.

The other one is often like unit buys. They think, “Oh, I can buy 10 whole Ripple coins, but I can’t buy a whole Bitcoin because as I make this, I’ve said it’s around 8,000, but they don’t understand that you can buy fractions of Bitcoin. So, that’s why within Bitcoin is this whole meme now of Stacking Satoshis, fractions of Bitcoin.

The other problem with many of these altcoins is that they are centralized. They are not as immutable as they claim to be. The government could, if it wanted to threaten or influence someone to try and change the rules of the game, and so that is why Bitcoin is very much about running your own full node, so that you are verifying. The problem with some of these altcoins is that essentially as like that Warren Buffett saying, “You only find out who is swimming naked when the time goes out.”

Some of them are basically crypto-larping. They are live action role playing. They’re not actually decentralized, and you would only realize this when the tide goes low, that the tide goes out that these people are basically swimming naked. They’re not actually decentralized. It’s just that their project has not gotten big enough or it’s not subversive enough that a government would want to shut them down. So, there’s a little bit of dishonesty out there in relation to how easily hackable, or attackable, or changeable these coins are.

We’ve spoken about some of the problems with blockchain technology and that goes back to the idea of not being technologically efficient. Some of that stuff refer back to Nick Szabo, Money, Blockchains, and Social Scalability. Also, there’s this narrative of “tokenize the world”. That alone is not bad, but I think what some people get caught up in is they think that just because there have been massive gains for Bitcoin that “oh there might be big gains for this tokenization project”, when really the gains would be for the asset holders of that token, like the actual property ofor the stocks or whatever that’s actually being tokenized.

That one, it’s just I think people are perhaps deluding themselves a little bit when they start getting caught up in some of this tokenize the world and exactly how big that market would be and how important is that anyway. That’s a few things there. Now, there is this question of how dominant would Bitcoin become in this world because while there is this idea of the Pareto Principle, the 80/20, this sort of power law idea that there’d be one dominant money at 80%, and then maybe the other 20% would be some of these other altcoins. We don’t really know, maybe some of it would be gold.

In our view, even if it was only 80% so to speak, it would still be a Bitcoin denominated world. Who knows, there might still be altcoins and so on, but ultimately, it would just be a Bitcoin denominated world. Personally, I wouldn’t bother with trying any of these other altcoins because I think none of them really is a real contender like Bitcoin is.

Yes, hopefully that helps explains a little bit around that. Some people also talk about this idea of maybe, “Oh, maybe we’ll find new uses for money and the old rules don’t apply anymore.” Again in my view, I think this is ignoring why we hold money. As I explained earlier, why do we hold money? It’s because it’s uncertainty perceived about the future.

There are other people who raised concerns that all Bitcoins now being used directly for transactions right here and right now, but the Bitcoin Austrian view would be, “No. Well, this is going to take time. It’s going to take time. It could be decades before this thing goes big and you’ve got to appreciate that money moves through stages as well.” So, Jevons wrote about this. I think Nick Szabo has written about this, and also I think Vijay Boyapati touches on this as well. They all talk about this idea referring back to Jevons of money moving through stages. So it’s collectible, then to store a value, and then to medium of exchange, and then to unit of account. That’s one way to think of that.

Another I think insight that should be considered is Murray Rothbard’s insight, and I think other Austrians have also made this point as well, but essentially Rothbard made this point that the defining and ultimate use of money is its function as medium of exchange. All other functions are subordinate to this. So some people confused it a little. They tried to disaggregate the functions of money. So, talking about this is the function that store of value, and this is the function of unit of account, when really it’s all subordinate to medium of exchange, coming back to which one is the most salable. Which one is the actual one that matters the most?

So hopefully, that discussion was useful to you and educational. I think the first investment that anyone should make is in their education on Bitcoin. So, rather than just running out and buying it, you’ve got to really read a little more deeply and understand the case for Bitcoin. So, if you only have time to read one article, I recommend my friend Vijay Boyapati’s article, The Bullish Case for Bitcoin.

If you got time for a series of articles, then I recommend the Nakamoto Institute Crash Course Guide to Bitcoin Political Economy by Michael Goldstein. If you have time to read a book, then you really cannot go past Saifedean Ammous’s book, The Bitcoin Standard. So, I’ll put the links to those in show notes, and also I have done podcast episodes with all of the above. So, make sure you check those episodes out.

If you’re also interested to quickly on board and understand Bitcoin, I actually recommend just binging through my podcast series. If you’re a new listener, just go back and listen from the first episode, and I think that will actually be a faster way to quickly get up to speed on what Bitcoin is and why it’s important, and understand more about the economics and technology of Bitcoin. So, if you’re one of my more regular listeners, make sure you share this episode out with your Bitcoin newbie and Bitcoin intermediate friends.

Also, give me some feedback if you enjoy this. You can find me or follow me. My DMs are open on Twitter. My handle is @stephanlivera. I’ve also got a contact page on my website, stephanlivera.com. The show notes will be there for this episode which is number 71. So, that’s it for me guys. Thanks for listening and speak to you soon. Bye.

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