Vijay Boyapati, Bitcoin economic commentator, joins me to talk about:

  • Monetary stages of evolution
  • Merchant adoption of Bitcoin to receive payment – is it 2013 all over again?
  • Facebook Crypto
  • Horizontal “Crypto” vs Vertical Bitcoin businesses
  • Why Bitcoin is not Paypal 2.0

Vijay links:

Podcast Transcript (Sponsored by

Stephan Livera: Hi, and welcome to the Stephan Livera Podcast, focused on Bitcoin, and Austrian economics. Learn the economics and technology of Bitcoin, by listening to interviews with Bitcoin’s best and brightest.

Stephan Livera: Today, my guest is a returning one. He is Vijay Boyapati. So, just for anyone who’s not aware who Vijay is, he’s a well-known economic commentator in the space, coming from what I call a Bitcoin Austrian perspective, and he is probably best known for his article, The Bullish Case for Bitcoin.

Stephan Livera: So, today, we talk a little bit about the phases or stages of monetary evolution, this merchant adoption theory of Bitcoin, an update on Facebook’s cryptocurrency, and also, this concept of horizontal versus vertical businesses. Here’s the interview.

Stephan Livera: Vijay, it is now, as I count it, I think it’s your fourth appearance. So that puts you into the lead, above Pierre Rochard. So it’s a great pleasure to welcome you back, Vijay.

Vijay Boyapati: Thanks, Stephan. Obviously, it’s an honor to be on what I think is the best bitcoin podcast out there.

Stephan Livera: Thank you so much, Vijay. That’s, yeah, really kind of you. I know you’ve been, it’s been awhile since we had you on. So I know there’s been some developments since, and I thought the listeners would love to get your perspective on some of these questions.

Stephan Livera: I think, one of the interesting questions that seems to come up, again and again, and it, perhaps it might be seen as a minor point for some, but this question of money moving through stages, these stages of evolution, right? I know you have referenced this in your article, The Bullish Case for Bitcoin, but there are some with the view that it won’t proceed so much in that sort of staged fashion, and really, it doesn’t make sense to think of them as separate functions.

Stephan Livera: So, do you still believe in that process occurring? And another point that you might touch on, as well. Does this contrast with our excitement about Lightning, and spending now?

Vijay Boyapati: Yeah, it’s a great question, and we have never seen, a good being monetized in real time, as we have with Bitcoin. We can actually learn a lot about monetary theory and economics, just by observing Bitcoin, and honing the theories that we largely believe to be correct. For example, I’m a subscriber to the Austrian school of economics, and I generally also subscribe to the Mengerian story about the story about the origins of money.

Vijay Boyapati: But I think Bitcoin is kind of refined by understanding, and to answer your question, I do think, and I actually believe this even more strongly, money does proceed in various stages, in its evolution to becoming fully fledged money. I actually think it’s tautological, that money must evolve as a store of value, before being suitable as a medium of exchange.

Vijay Boyapati: Something cannot be widely used in exchange unless it’s widely valued first. I mean, why would I accept something from you in exchange, unless I assign some value to it first?

Vijay Boyapati: I think the Lightning Network is a really important technological development in the history of Bitcoin, because it pays the way for Bitcoin transitioning from a store of value, to a medium of exchange. However, I think Lightning will remain monetarily insignificant, until the pool of savings held in Bitcoin is much, much larger than it is now. The real reason that merchants don’t want to spend time figuring out how to accept Bitcoin isn’t really about Bitcoin fees, it’s that there just aren’t enough people who have meaningful savings in Bitcoin.

Vijay Boyapati: So if you’re a baker, maybe one in 100 of your customers own Bitcoin. And maybe it’s one in 10, if you’re in Silicon Valley, or in a place that’s fairly technologically savvy. And that one customer probably would prefer to save their Bitcoin, knowing that there is a huge opportunity cost to spending it rather than holding it.

Vijay Boyapati: You remember the Bitcoin pizza guy, who spent 10,000 Bitcoins for two pizzas. People don’t make that mistake as often today, because that Bitcoin is still early in its monetization, and there’s still so much appreciation to be gained by saving rather than spending it.

Vijay Boyapati: It’s also worth noting that a very large fraction of the total supply of Bitcoin is held in relatively few hands. I think it was estimated that 40% of all Bitcoins are owned by the top 1,000 holders, and that’s a tiny fraction of the world’s population, those 1,000 people, and the local baker is unlikely to ever meet one of those people. But as Bitcoin’s price rises, the ownership distribution will increase significantly. But that process takes time, and I wanted to say a little bit about. I’ve written about this a little on Twitter as well.

Vijay Boyapati: The process of monetization is the increasing distribution of the supply of a monetary good amongst the population, and what really matters is not the number of people who become owners, per se, but how fully the supply of the monetary good is distributed.

Vijay Boyapati: So, for example, if a million people own a tiny, tiny amount of Bitcoin, but say, 99% of all Bitcoin is held by a single person, that’s less distributed than if only 100 people own Bitcoin, but the supply is equally distributed among them. And as the price of Bitcoin rises, Bitcoin whales will have a pretty strong incentive to diversify the savings they have in Bitcoin into other assets, such as stocks, and real estate, and of course, Lambos.

Vijay Boyapati: That process will give the rest of us commoners a chance to get our hands on those precious Bitcoins, and when enough of us commoners have enough Bitcoins, that they represent a meaningful amount of our savings, bakers will start wanting to sell bread for Bitcoins. And that’s when I think Lightning will start becoming significant.

Stephan Livera: Excellent answer, Vijay. I think it does sort of help clarify, and from some of my discussions with others, such as Michael Goldstein, it makes sense that it moves through those stages of evolution, but I think for newbies, it might be confusing to segregate the roles of money.

Stephan Livera: It might be just confusing when a newbie thinks, “Oh, it’s a store of value, and not a medium of exchange yet,” but I suppose what you’re saying is, in some sense, it is doing all of those things at the same time, but it’s just kind of, at a given point in time, it’s mostly a store of value, at that point. Would that be a fair characterization of what you’re saying?

Vijay Boyapati: Yeah, yeah, and I’ve heard some people argue that the monetary functions of store of value and medium of exchange are essentially the same thing, or they’re just different parts of the spectrum for people’s desire for money. But I actually think they’re quite distinct, and what I mean is that the psychological motivation to use something as a medium of exchange is quite different from the motivation to use it as a store of value.

Vijay Boyapati: The reason you want a medium of exchange is that you’re trying to avoid the double coincidence of wants problem. And what I mean is that if I’m an apple farmer, and you’re a fisherman, say, and I desire fish, but you don’t want the apples I’ve grown, I’m kind of stuck. And the way I complete the trade with you is to acquire something more marketable, that you do desire, to consummate the trade.

Vijay Boyapati: So the desire for a medium of exchange is to make it possible to complete trade in the short term. On the other hand, the motivation for a store of value is to transport the fruits of your labor through space and time. So, for example, imagine you’re a refugee fleeing Europe during World War II. What you really want is something like a bag of diamonds, something that’s small and easily transportable, and is super valuable, regardless of where you are.

Vijay Boyapati: Having something like that allows you to re-establish life in a better place, if you need to. Diamonds are, on the other hand, are quite inefficient for use as a medium of exchange, because they’re irregular in size and shape, which makes them hard to find one, which is appropriately sized, to complete an immediate trade, say, for example, to buy some bread. So I really view these roles of money, medium of exchange and store of value, as different, because I think the motivation for why you use money for those different roles is different.

Stephan Livera: Excellent stuff. I think that’s a great explanation around the, that Mengerian selection process, as well. Okay, so I think we’ve hit that topic. There was another one that I think is, it’s funny, to me. I’m seeing some of these announcements about things like AT&T “accepting Bitcoin,” and I guess the question then is, is this actually bullish? Or does this just feel like 2013 again?

Vijay Boyapati: Yeah. I remember, people were, I mean, some people, not everyone, a lot of people who were obsessed with merchant adoption in 2013, people like Roger Ver. I really think it’s putting the cart before the horse to emphasize merchant adoption. Especially because big name merchants that are supposedly adopting Bitcoin are not really accepting Bitcoin at all. They’re using some third party service to take Bitcoins, immediately sell those Bitcoins for dollars, and accept dollars instead.

Vijay Boyapati: If anything, it’s a marketing ploy that does very little to hasten Bitcoin’s monetization. What we want is not more ways for people to sell Bitcoins, but more ways for people to buy Bitcoins. We need more Fiat on ramps, and the on ramps that exist, to become more liquid and ramble. This will get Bitcoin to the point where the total amount of savings that people hold in Bitcoin is much larger, the savings will be much more widely distributed amongst the population, and the price appreciation will eventually settle down, as it’s widely adopted. And then it becomes suitable as a medium of exchange.

Vijay Boyapati: That’s when merchants are going to get excited. They’ll say, “Hey, look, most of my customers have some savings in Bitcoin now, and so, actually, it makes a lot of sense to accept Bitcoin directly, and to hold Bitcoin, because it’s less volatile. I’m less afraid of holding it and seeing my profits disappear, if the price drops by 50%.”

Vijay Boyapati: So I just think we shouldn’t be worrying about Bitcoin is widely held, and the pool of savings is much more widely distributed amongst the population.

Stephan Livera: Excellent. You speak of this whole concept of some people trying to drive merchant adoption as a marketing ploy, and while I agree with you, I think it ends up being like that. But let me just, for the sake, present this case that they might say, they might say something like, “Oh, look. If more and more big companies accept Bitcoin,” then it triggers off in more people’s minds this process of learning about Bitcoin.

Stephan Livera: They think, “Oh, what? AT&T’s accepting Bitcoin, maybe I should go and learn about Bitcoin.” But now, I would say, we might think of it, like, the speculator or HODLer network effect is much more powerful than the merchant adoption network effect. But what’s your view?

Vijay Boyapati: I agree with you. I think the, as you put it, the HODLer network effect, is far, far stronger. The base of Bitcoin holders, the so-called buyers of last resort, are so passionate about Bitcoin, that one might call them zealots. And they provide a base of liquidity, that is built on an ideological conviction that will never go away.

Vijay Boyapati: Merchants, on the other hand, have almost no conviction about Bitcoin. Most of them are only looking to increase their sales. They have no particular ideological affinity for Bitcoin, besides whether it increases their profit margins. Of course, there are some exceptions. There are early adopter merchants who use Bitcoin to take payment in gray markets, such as the sale of marijuana. Those guys are much more aligned with Bitcoin, and may actually need it to complete sales that wouldn’t be possible using other means of payment.

Vijay Boyapati: But I guess the point I’m getting at here is the people who have decided to save in Bitcoin and hold their Bitcoin are much more ideologically committed to Bitcoin, and these are the people who become evangelists, and go out and explain it to their friends and family, and explain what the value proposition is.

Vijay Boyapati: Merchants, on the other hand, might have a marketing campaign that lasts, like, a week, which tries to make seem technologically competent. They’re using the latest payment method, but they don’t really care. They just care about people buying our product. So if you go on Bitcoin Twitter, or go on Reddit, it’s the holders who are explaining to people why Bitcoin’s important. You’re not going to see Walmart or Costco explaining it. They just don’t care.

Stephan Livera: Excellent. And another point that might come up, and this might be, say someone like Sergej Kotliar from Bitrefill. He might speak of this idea of something like earner adoption, and someone like Sergej might be a little bit more bullish on this idea of merchant adoption, but also driving earner adoption. Do you have any comments on that?

Vijay Boyapati: Yeah, I just, I feel like evangelism is not a powerful enough force to get widespread merchant adoption. Otherwise, someone like Roger Ver would have had much more success than he ever did in this regard. Evangelism appeals to potential ideologues, but not really the businesses. So it appeals to people like you and me, who have a very strong affinity for something like Bitcoin, and so, become attached to it, and want to hold and save in it.

Vijay Boyapati: There’s a, there has to be a strong economic incentive for merchants to adopt Bitcoin before it happens. And for that to be the case, they need to have, they need to see a large fraction of their customers have savings in Bitcoin. You might get some merchants who are libertarian, but they’re kind of on the margin, right? You’re not going to get your regular Mom and Pop people by evangelizing to them. Those people need to see real economic reason to do it.

Stephan Livera: Excellent, and I think it’s also to fair point out, that for any HODLer, they have to think about certain considerations, before they start taking some of that stash, and trying to spend some of it. Because obviously there’s privacy implications, there are security implications, and there are also, depending where you live, tax implications as well. In most countries, they will have to incur some kind of capital gain tax.

Stephan Livera: So, again, all of these considerations, where they’ve got to think about, rather than just waiting, basically.

Vijay Boyapati: Yeah, and I, you brought up something, I think, that’s quite important, which is the tax consideration. Let’s just take the United States, for example. The fact that any transaction involving Bitcoin is a taxable event means that there’s a really, actually quite a large barrier to entry, to Bitcoin becoming a medium of exchange. That’s not to say it can’t happen.

Vijay Boyapati: The United States dollar could collapse on its own, and people could start using Bitcoin, because they have no other option. But barring that, under a fairly stable situation, as we have now, buying… you have this economic friction when you buy with Bitcoin. Because if you bought one Bitcoin at $10, let’s say, and then you use that Bitcoin to buy, I don’t know, dinner with your wife, and the Bitcoin has appreciated, you then have to take that appreciation and pay tax on it.

Vijay Boyapati: And there’s a hassle, you’re right, you’re losing 30% of the appreciation to taxes. And there’s also the accounting hassle, like if you’re doing this frequently, if you’re using your Bitcoin to buy groceries or to go to dinner, you have to keep track of all that. So it’s a real pain. Obviously, the United States government does this to protect its own currency. It’s not a fail safe protection, however.

Vijay Boyapati: There are countries like Zimbabwe and Venezuela, where if the government mismanages their currency so badly, people will seek alternatives. Like, Zimbabwe basically dollarized and had a monetary re-standardization on the US dollar, because people could no longer use the Zimbabwean currency. So there is a barrier to entry, and right now, in most Western countries, I think it is actually quite a significant barrier, that Bitcoin transitioning to a medium of exchange.

Vijay Boyapati: So yeah, it’s, I think that’s worth paying attention to, and understanding that people may not want to spend because of the hassle of doing so.

Stephan Livera: Right. So I guess, then, for the meantime, it may be that Bitcoin’s value, are you suggesting, that it might be more capped to the level of what gold’s value is, until such time that certain institutional arrangements change, that permit Bitcoin to be used more readily as the medium of exchange?

Vijay Boyapati: That’s a good question. I actually don’t think much of the purchasing power of a monetary good comes from its use as a medium of exchange. And what I mean by that is, the demand to complete trades using money, that is, the medium of exchange role, is much lower than the demand that comes from the store of value use. I would actually say it’s probably 99% of the demand for money, which sets the purchasing power of money, comes from holding money, rather than wanting it to buy bread, or wanting it to purchase dinner.

Vijay Boyapati: Most people actually hold very low cash balances, because it’s actually bad to hold a big cash balance. The government’s constantly inflating the money supply, so you lose your savings that way. So most people have low cash balances, and they take some of their cash when they need to buy something. The biggest demand for currencies like the US dollar comes from drug dealers and foreign dictators who… well, you know, Saddam Hussein had massive pallets of US dollar bills buried under the ground.

Vijay Boyapati: That, those people are the real HODLers of US dollars. Most other people don’t want to HODL US dollars. They’ll just get enough so that they can complete the daily trades that they need to do, daily purchases that they need to do. So I guess, my point, to answer question is, I think even if Bitcoin doesn’t get to that medium of exchange role of money, even if that takes 50 or 100 years, and Fiat currencies stick around, I think most of the purchasing power appreciation will come just by the fact that it becomes the world’s dominant non-sovereign store of value.

Vijay Boyapati: So I think it can appreciate much, much higher than gold. I think it could 10X the size of gold, which would get you to a Bitcoin price in the millions of dollars. Just by cannibalizing all the store of value assets, like gold, and short term government bonds, and things of that nature.

Stephan Livera: That’s a good point to reflect on. I haven’t thought about it as deeply as you have, I think, and yeah, so I think, that’s probably the merchant adoption side of it. Let’s now turn to some of the comments around the Facebook crypto. So we spoke about this the last time you were on the podcast. Do you want to just provide a bit of an update on your thoughts?

Vijay Boyapati: Ah, yeah, I mean, I didn’t know if I have too much expert information. I just think the whole effort is really misguided, to be honest. It entirely misses the point of why Bitcoin is valuable. It’s centralized, it’ll need to comply with the regulatory rules in every jurisdiction which Facebook will offer it. And it can be done much more easily without using the cryptocurrency.

Vijay Boyapati: I mean, Facebook could just use a database, and assign an entry for how many Zuck Bucks, or whatever they’re going to call it, Global Coin, each of its users have. And if they want to allow people, want to allow their users to trade between each other, it could very quickly update those totals in their database. So they didn’t need to do a cryptocurrency to do this.

Vijay Boyapati: The once advantage Facebook has is, it can quickly distribute these coins to a lot of people. They have, I think, it’s something in the order of a billion monthly active users, which is a just shockingly large user base. But it would be wrong to think that, the fact that they can distribute it to that many people makes it valuable. Most people who are given something for nothing will not value what they’re given.

Vijay Boyapati: So imagine someone in America finds a 10 Euro note on the street. The first thing they’re likely to do is sell those Euros for as many dollars as they can get, and keep or use those dollars. They have no particular affinity or reason to value the Euros. People who hold or value Bitcoin, on the other hand, do so because they’ve spent the time to understand its value proposition, which is they’re giving up something they already valued, such as dollars, for something they think is even more valuable, i.e., Bitcoins.

Vijay Boyapati: That’s how real value is created organically over time. So I think it’s interesting that Facebook can do this massive distribution, if they want, but I don’t think that is going to give them, that’s not necessarily going to create something that’s valuable.

Stephan Livera: Right, yeah, and I think the other concept here, it seems a little bit, as you allude to. There’s a bit of a marketing play going on. They’re calling it a crypto, and they’re doing it as a crypto, when they don’t actually have to do it as one, strictly speaking, and there is also this question of monetary policy, and their ability to maintain a peg, right? There have been entire nation states who have not been able to maintain a peg. Is that now that these guys think they’ve sold it?

Vijay Boyapati: Yeah. I’m very, skeptical that you can create a stable coin that’s not completely centralized. I mean, Tether kind of works as a stable coin. It has some problems, but it’s completely centralized. It’s controlled by a single entity that has US dollars in a bank account somewhere in the Cayman Islands, or wherever they keep them. So Facebook could do something like that, but that’s completely uninteresting. Then they’re just a giant bank.

Vijay Boyapati: Creating a stable coin that works independent of Facebook, that is entirely algorithmic, I honestly think is impossible. Because they can work in the short term, but in moments of crisis, the algorithm doesn’t have a way of responding, and they can become very quickly insolvent. So there are various ideas and theories about how you can do it. But I haven’t seen one that is compelling, and I don’t think any one has really been proven in the wild, a stable coin that works without someone controlling it.

Vijay Boyapati: So even if Facebook is going to do something which is completely boring, which is like, become a bank, and create a coin that’s backed by whatever it is, a basket of dollars and Euros, or whatever they want to do, maybe a basket of Bitcoin. That would actually be useful. Or they’re going to do something which I think is basically impossible, or at least, I have not seen any good evidence that it’s possible.

Vijay Boyapati: So yeah, I just don’t think either direction that Facebook goes is going to be a threat to Bitcoin, and I wrote a Tweet thread about this, which goes into a little bit more detail about the different types of cryptocurrency or payment system that they could build, and why each one isn’t really a threat to Bitcoin.

Stephan Livera: Excellent. And the other question, then, is also regulation. So it’s a big, big challenge to solve, in terms of doing things like maintaining AML compliance all around the globe, right? It’s not a simple task. Banks get done for it all the time. They fail to do some sort of reporting, or they fail to do some of the obligations around risk assessment of customers, or some obligation or other. They fail it, and then they’re in the courts, and they’re in the news, all over the front of the newspaper, saying, “Oh, look, this bank failed.”

Stephan Livera: AML, surely this would be a very difficult task for Facebook, and additionally, it may drive other behaviors on the platform. So, for example, they might ask customers for ID, and then lock you out, if you don’t give them that ID.

Vijay Boyapati: Yeah, that’s a great point, and you know, they’re completely beholden to the governments in the jurisdictions in which they operate. For anyone who’s worked in the financial services industry, they all realize, there’s a huge, huge burden placed on companies. Companies are essentially deputized to enforce the government’s financial rules. And so, what governments will do is they’ll give a set of very vague guidelines, like, “You can’t have anyone who’s a terrorist use your platform,” “You can’t have anyone who’s a criminal use your platform,” “You need to make sure that people aren’t doing wash trades on your platform, or laundering money through your platform.”

Vijay Boyapati: They won’t give you any specific details on how you do this, but they’ll say, for example, “You need to produce suspicious activity reports.” And if you don’t produce enough of these, they’ll get suspicious and say you’re not doing your job. So they kind of create this gray area, and if they believe you’re not doing the right thing, they’ll shut your business down, or throw you in jail.

Vijay Boyapati: And if you’re Facebook, you’re running it, a money that’s operating in multiple jurisdictions. You’re dealing with multiple governments doing their own particular idiosyncratic thing to regulate you. So you’ve got to juggle a lot of different regulatory balls at the same time. And in the US alone, you have to deal with 50 different states, each one with their own transmission regulations. Then you’ve got to deal with Europe and Japan and Australia.

Vijay Boyapati: I mean, it just seems like a nightmare. I would definitely not want to be running Facebook Coin at Facebook, and this is the great thing about Bitcoin. It’s completely decentralized, so it doesn’t care about regulations. You can try and regulate it, but Bitcoin doesn’t have someone to knock on the door and say, “If you don’t regulate it this properly, we’re going to throw you in jail.”

Vijay Boyapati: So Bitcoin does what it does. And it just doesn’t care what governments think. And that’s what makes it so powerful and valuable. Facebook can’t do that. By the very nature of their business, it’s impossible for them to do that.

Stephan Livera: Actually, while we’re on that topic, it’s also interesting to point out some of the new discussion around the FATF, coming potential implications of additional AML requirements being placed on so-called crypto exchanges, and having to identify customers, or provide certain other information to other exchanges that they are transferring to. Do you believe this would drive more non-KYC options, the use of non-KYC exchanges in Bitcoin, and do you have any thoughts on how that develops?

Vijay Boyapati: Yeah, I think it will, and I think the regulatory bodies are going to clamp down more over time on exchanges. They already force exchanges to identify their customers, and to share suspicious activity reports with the government, at least in the United States. So I think, as Bitcoin becomes more significant, both economically and politically, there’s going to be a stronger desire from governments to try and control it.

Vijay Boyapati: But cypherpunks write code, and cypherpunks get around things like this, and so I think there’s going to be a movement to allow people to exchange Bitcoins in a non-KYC way. I don’t know yet of any meaningful ways of getting large amounts of liquidity into Bitcoin that don’t require KYC or AML, but I believe that people are going to develop this over time, because there’s a big demand for this.

Vijay Boyapati: People want financial privacy, and every time you use an exchange to buy Bitcoin, they know how many Bitcoins you have, and that’s actually kind of scary, if you’re… Imagine that you’re a whale who has a few thousand Bitcoin, and you want to sell just a little percentage of your Bitcoin, because the price has gone up by 10X or something like that.

Vijay Boyapati: You send some Bitcoin from your cold storage to Coinbase, and you sell it for dollars, which then, which you then use to buy, say, a house or something like that. Then Coinbase knows how many Bitcoins you have. And that’s actually really scary, because there are a lot of Coinbase employees, and maybe one of them goes rogue, and comes to your house and knocks on your door, and says, “Give me all your Bitcoins.” So, financial privacy is a really important and valuable thing, and I think there’s a strong incentive for people in the community to develop methods that allow people to exchange Bitcoin privately, and without going through KYC, that’s required by most centralized exchanges.

Stephan Livera: Yep, just brings a lot of thoughts all together there, because even in that example, people might get stronger and better about coin selection, right? So they might start doing things like, not sending from the UTXO with 1,000 BTC on it, and being much more precise and sending only from those UTXOs that have just enough. Or using sort of intermediate transactions on the blockchain, despite the additional Bitcoin miner fee costs, but doing it purely to help mask or conceal their total level of holdings.

Vijay Boyapati: Exactly, yeah, and I think this is going to increase the importance of mixing services, things like CoinJoin. Bitcoin has this very powerful property, that transactions can’t be reversed, but that’s also a very scary property. It means that it’s kind of an ideal currency for kidnappers and hijackers and things like that. Because they can steal from you, and the theft is irreversible, whereas someone if hacks your bank account and steals it, the bank can just call the other bank and say, “Hey, this was an invalid transaction. Send the money back.”

Vijay Boyapati: So, as Bitcoin becomes, as the monetization of Bitcoin happens over time, and the amount of savings that people have in Bitcoin increases, people are really going to value the ability to transact privately with each other. So I think we’re going to see, in the next couple of years, various privacy features added to Bitcoin, services which make it easier to mix Bitcoins online.

Stephan Livera: Exactly. All right, so look, I think another good topic to touch on, that you’ve had some commentary on as well, is this whole idea of horizontal versus vertical, in terms of business, and how it should expand in Bitcoin. So maybe just give a quick overview on your thesis there, about Bitcoin, or let’s call it, maybe the crypto horizontal versus the Bitcoin vertical.

Vijay Boyapati: Sure, so the most important businesses in the cryptocurrency space right now are the exchanges. They facilitate the monetization of Bitcoin, because they’re the on and off ramps to the Fiat money world. They allow people to escape their Fiat savings, and get those savings into Bitcoin. They also happen to be the most profitable businesses in this space, by far, and most of these exchanges are pursuing a strategy of supporting as many alt coins as possible.

Vijay Boyapati: I was going to say Shitcoin, but my wife has instructed me to be more polite, but you know what I’m thinking. You know what I’m thinking, so these exchanges are pursuing a strategy of supporting as many alt coins as possible, because that’s the easiest short term profit opportunity for them, to allow people to trade alt coins back and forth between each other, and then collect the fees on those trades.

Vijay Boyapati: This is what I call horizontal business strategy, that is, supporting coins across the board, rather than building on top of a single one, which is what I would call a vertical strategy. And I think this is a big mistake, because the real long term opportunity here is to build the new financial system on top of Bitcoin. There’s a large opportunity cost for exchanges supporting hundreds of alt coins.

Vijay Boyapati: They need to write their own code, to support each token. They need to order the code of every project, for example, to prevent a Trojan horse in the code stealing funds from the exchange. They need to monitor the security in every token they list, to prevent 51% attacks, which have already affected some exchanges. They’ve lost fairly significant amounts of money to 51% attacks on relatively small coins.

Vijay Boyapati: So there’s a big engineering cost to doing all this, which could instead be directed to building financial products on a single chain, namely Bitcoin, and there’s a tremendous savings in engineering time, from the simplicity of only supporting a single coin. And Bitcoin has the advantage that it’s by far the most secure, and its code has by far the most people auditing it for issues, for bugs, and various problems that could affect exchanges.

Vijay Boyapati: The kind of products that I think these exchanges should be building, for example, margin trading, the ability to short? That may sound strange, since I’m a big believer in Bitcoin, but I think shorting is important in any healthy financial market. It provides extra liquidity and it allows faster price discoveries. So I think shorting is a feature that should definitely be built, derivatives and futures, that is, the ability to bet on what the price of Bitcoin will be, three months from now.

Vijay Boyapati: Part of the reason that I think exchanges are shying away from this is that there’s a pretty large regulatory hurdle to overcome, before you’re even allowed to do any of this, especially in the United States. It’s much easier to get a simple money transmittal license, and operate as an exchange, than to operate as a futures or derivatives broker. But that’s where the big opportunity is, and I think exchanges should be really charging forward toward that goal, instead of chasing trifles.

Vijay Boyapati: Most of the alt coins that they’re supporting are not going to be around in a year or two, let alone five or six years. And we already know that there is really massive profits to be had in financializing on top of Bitcoin. An example is, BitMEX is an exchange that provides a derivatives product, where you can make leveraged bets on the future price of Bitcoin, by posting Bitcoin as collateral. And BitMEX is ridiculously profitable. They did 10 billion in nominal trading volume in a single day, just a few weeks ago.

Vijay Boyapati: And in fact, I think it’s fair to say, that much of the price discovery for Bitcoin happens on BitMEX, which is the futures trading service, rather than on spot exchanges, like Coinbase. And that’s actually pretty incredible, if you think about it, because spot exchanges are what you think as the place where the price is set. But the way I think of it is, BitMEX, and the spot exchanges are the tail of the dog. So BitMEX is wagging the price of the spot exchange.

Vijay Boyapati: When something happens on BitMEX, it really affects the price of the spot exchanges, rather than the other way around. So, I think there’s a massive opportunity for the companies that recognize that financializing on top of Bitcoin is where the long term opportunity is.

Vijay Boyapati: Another example of this is Abra, which is a product which lets you post Bitcoin as collateral, and then you get exposure to US stocks, and other financial assets. They built derivatives that track the price of the S&P 500. And so, you can bet on the S&P 500, and if your bet is correct, then you’ll make Bitcoin out of it, and if your bet is incorrect, you’ll lose Bitcoin. So, by using Bitcoin as a base, you allow users of Abra to make bets on all sorts of other financial products, which I think is super cool.

Vijay Boyapati: It’s an open question how regulators are going to treat this, but I think they have made a correct bet on the future of how this is all going to play out. It’s going to be the financialization of the most important, most secure cryptocurrency, which is Bitcoin.

Stephan Livera: Fantastic, and I think, I couldn’t agree more. And the other really crucial part is that we’re moving into a world that’s going to be denominated in satoshis, right? And so, things need to be priced in that, and they need to be in reference to that. And as you’re saying, this idea of using companies like Abra to purchase, or reflect your Bitcoin into stocks, is a perfect way to help achieve that.

Vijay Boyapati: Yeah, and I like what you said. I think people are already starting to use Bitcoin as a unit of account in limited settings, on exchanges, for example. And what I mean by that is people are thinking of their profits and losses in Bitcoin terms. So people go to these alt coin exchanges, and they’ll trade back and forth on these alt coins, but really, what they’re looking at is, “Am I making Bitcoin or not?” They think they might make a profit in dollar terms, but if their total Bitcoin stash hasn’t increased, then they don’t feel like they’ve made a profit.

Vijay Boyapati: So people are measuring their profits and losses in Bitcoin, in this limited world, but I think that’s going to expand. And as the financialization of Bitcoin happens, over time, I think it’s going to become a unit of account in more and more different financial sectors, and then eventually in the broader economy.

Stephan Livera: Fantastic, and I’ve heard similar comments by other individuals, such as Trace Mayer, and he talks about this idea of trying to periodically measure his net worth in multiple terms. So, in US dollar terms, in Bitcoin terms, and in gold terms. And he has that idea of, “Ah, well, the world is deciding which one is going to be the worth preserved currency.” And so, he tries to measure it across different aspects, and as you’re saying, more people and people are starting to denominate in satoshis, and think of satoshis, and so, that can only lead to one thing.

Vijay Boyapati: Yeah, absolutely, and I think it’s a… actually, it’s a very powerful psychological motive, when you start switching the way you think to thinking in terms of Bitcoin. It becomes much, much harder to sell your Bitcoin when you think that way. If you think in terms of dollars, then, as the price of, the dollar price of Bitcoin goes up, you think, “Oh, wow, I’m really rich. I should sell this, because what I really ultimately want is dollars. And I want to use my dollars to buy things.”

Vijay Boyapati: Whereas if you think in terms of Bitcoin, you think, “Well, I could buy that car from the appreciation that I’ve got in Bitcoin, but then I’m going to have 30% less Bitcoin, and it might be really hard to get those Bitcoin back, because they’re appreciating so quickly.” And some people really have switched their thinking to thinking in Bitcoin, and I think they’re sort of more evolved in a sense. Because they see the future, they see how people are going to think in the future, and they’re already thinking that way now.

Stephan Livera: Excellent, and that really reminds me of the way, say, Michael Goldstein might talk about it. I mean, in his article, Everyone’s A Scammer, and some of his appearances as well, he’s spoken about, “This is your one chance, to try and get what we think of as the hardest money, the best possible money that we’ve seen. Are you really just going to throw it away for something petty? You’ve really got to think it through clearly.”

Vijay Boyapati: Yeah, absolutely. Especially because we’re at such an early stage of its monetization, when there’s potentially several more decades of this process to occur, is such an exciting ride to be on. Why jump off that ride, and jump onto Fiat money? We know how the Fiat story ends, we know how it always has ended, and it’s not good. Whereas you have a chance now to have savings that will never be debased, and that you can take anywhere, and that no one can control, except you.

Vijay Boyapati: Why would you jump that rollercoaster?

Stephan Livera: Excellent. While we’re on that topic as well, around keeping Bitcoin what it is, and keeping the certain properties that we like about Bitcoin, that we value about Bitcoin, there is discussion around this idea of, would there be block size increases in the future? Or would there be… there was actually some recent discussion, I think Rusty from Blockstream was talking about this idea of, well, how sure are we that everyone can transact on chain, even in the case of Lightning, being able to close the channel, right?

Stephan Livera: You’d still have to do an on chain transaction. Now personally, my inclination here is that we will see some custodial scaling, so to speak. We’ll see some banks do it, like Bitcoin banks, and we’ll also see, hopefully Lightning, and hopefully, if we get eltoo and Schnorr, then maybe we’ll see this whole multiparty channel vision come to fruition, as well. Do you have any reflections on that over the next few decades?

Vijay Boyapati: Yeah. I asked a question on Twitter awhile ago, “What’s an unpopular opinion you have about Bitcoin?” And an unpopular opinion I have about Bitcoin is that I didn’t think everyone can own Bitcoin. I don’t think everyone can own Bitcoin on chain. There are just too many people, and there are too few Bitcoins, to make it economic for everyone to own Bitcoin on chain.

Vijay Boyapati: That might strike some people as unegalitarian, and that maybe Bitcoin is only for rich people, those kind of arguments. But I think people misunderstand what Bitcoin is, and think of it as like this kind of PayPal 2.0, where everyone’s going to use it as a payment system, which I think is completely wrong. Bitcoin is a replacement for the monetary base. It’s a replacement for the foundation of our monetary system. So the way I think of Bitcoin is, it’s kind of like gold combined with the Swift system.

Vijay Boyapati: So it’s the monetary base, which is gold, plus the ability to move that monetary base around, which is the Swift system, and we’re at such an early stage, that… to give an analogy, like, when the world was on the gold standard, people didn’t walk around carrying gold bricks. But bricks of gold, and the multi-kilogram bricks of gold, were the foundation of the gold standard. They’d be held in vaults and very occasionally moved around between people, and people would have claims to a fraction of these gold bricks.

Vijay Boyapati: Bitcoin is so early in its history, that regular people can own the equivalent of a gold brick, or multiple gold bricks. But that’s a very strange occurrence, people, individuals owning big chunks of the monetary base. That’s not how it’s going to be in the future. In the future, I think, as Bitcoin is fully monetized, Bitcoin is going to be held by more semi-trusted institutions, and you’ll have institutions kind of operating a little bit like banks, but using the Lightning network, so there’s less trust involved.

Vijay Boyapati: But a lot of people are not going to own Bitcoins on chain. They’re going to use Bitcoins off chain, or on lightning, just because… the reality that we face now, where people own big chunks of Bitcoin, is not how it’s going to be in the future. It’s just, we’re so lucky right now, that to be able to go out and buy the equivalent of like, a gold brick, and having it in our house.

Vijay Boyapati: But, as Bitcoin becomes the actual base of the world’s financial system, it’s going to become more like the gold standard, where there’ll be intermediaries that are sort of aggregating larger amounts of Bitcoin, and then people interacting with those intermediaries, in various trusted or less trusted ways.

Stephan Livera: Yeah, it’s almost as though, if you are the one holding Bitcoin, and running a full node now, you may be one of those institutions in the future.

Vijay Boyapati: Yeah, exactly! Exactly. If you are running a full node, and running something like c-lightning, then maybe you get to be like JP Morgan in the future, or a smaller version of JP Morgan. Because it is quite incredible that we’re at this stage where you know you can own even a millionth of the monetary base. Can you imagine that, owning a millionth of the total amount of gold? That would be like, I don’t know, like how many… we’d probably be worth several billion dollars. But a regular person can buy a Bitcoin or a couple Bitcoins for a few thousand dollars now.

Vijay Boyapati: So, yeah, we’re at a very privileged time. We’re very lucky to be right at the beginning of this great story.

Stephan Livera: Yeah, and I guess the other thing I’m thinking now as well is, think of the sheer number of on chain transactions that are required right now. We will find much more efficient ways to do that, because right now, a typical flow of someone might be, put Fiat on an exchange, buy Bitcoin, take that out into a certain wallet. They might send that into a hardware wallet.

Stephan Livera: Then they might split up some of that hardware wallet, and put that into a spending wallet. They might have Lightning to set up all these channels. There’s a lot of intermediary Bitcoin transactions that are required, but in the future, every Bitcoin transaction will cost so much more, so people will have to be very more, they’ll have to be much more judicious.

Stephan Livera: And they might do things like, import the private keys over, rather than trying to send it from one wallet to another, with an on chain transaction.

Vijay Boyapati: Exactly, and I’ve given it an analogy on Twitter before. Bitcoin is the container ship of value transfer. It’s meant for very large scale of value transfers that happen fairly infrequently, for… And I was making the point that buying a coffee with Bitcoin is kind of like shipping a single Amazon package to someone’s doorstep with a container ship. You just don’t do that.

Vijay Boyapati: For the last mile of delivery service, you use something like Lightning, which allows you to move smaller amounts of Bitcoin for much lower fees. Honestly, I think there will be a decent amount of movement of Bitcoin in centralized services, because if I’m buying coffee, I don’t care that I’m trusting a third party. That’s not the kind of transaction where I need the transaction to be trust minimized.

Vijay Boyapati: But if I’m transacting a million dollar’s worth with someone I don’t really know or trust, that’s when Bitcoin really shines. That’s where its real value proposition comes through.

Stephan Livera: As I think I’ve heard Tadge Dryja say this. I think he said, “Bitcoin is the money of enemies.” So I think that’s a very good to summarize it.

Vijay Boyapati: Yeah. Yup, that’s right. I agree with that.

Stephan Livera: All right, well, I think that’s just about all we’ve got time for. So Vijay, just make sure, just for any of my listeners who are a little newer, who don’t know you, where can they find you online, and what should they read? Perhaps The Bullish Case for Bitcoin?

Vijay Boyapati: Yeah, my long article I wrote was The Bullish Case For Bitcoin, which, where I lay out my case for why I’m optimistic about Bitcoin, and explain what Bitcoin is, and why it’s important within a monetary framework and an economic framework. So check out The Bullish Case For Bitcoin, and I Tweet my thoughts on Twitter at real_vijay.

Stephan Livera: Fantastic. Well, look, thanks very much again for coming on the show, Vijay. I really enjoyed this discussion.

Vijay Boyapati: Thanks, Stephan, it’s always fun.

Stephan Livera: All right, so that’s Episode 76. You can find the show notes on my website, and if you haven’t already subscribed to the podcast, you can subscribe, using the Apple or Android links on the front page of my website,

Stephan Livera: Also, guys, just a quick note, that as I’ve grown the audience since I started this podcast, what I want to do is make it a little bit more sustainable as an ongoing venture. And so, I’m going to more seriously look for sponsors, for advertising on the podcast.

Stephan Livera: So if you’re with a company, and interested to advertise on the podcast, and reach a discerning audience of Bitcoiners, with a Bitcoin-focused product or service, you can e-mail me at, you can DM me on Twitter, at stephanlivera, or use my website contact form. Happy to talk further.

Stephan Livera: That’s it from me, thanks for listening, and I’ll speak to you guys soon.

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