Bitcoin is not Paypal 2.0

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. Today, my guest is a returning one. He is Vijay Boyapati. So just for anyone who's not aware who Vijay is, he is 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." So today we talk a little bit about the phases or stages of monetary evolution, this Murchison An Adoption Theory of Bitcoin, an update on Facebook's cryptocurrency, and also this concept of horizontal versus vertical businesses. Here's the interview. Vijay, it is now, as I counted, I think it's your fourth appearance on the podcast, so that puts you into the lead above Pierre Rochard. so it's a great pleasure to welcome you back, Vijay.

Thanks, Stefan. It's, honestly, it's an honor to be on what I think is the best, Bitcoin podcast out there.

Oh, thank you so much, Vijay. That's, you know, really kind of you. And I know you've been, you know, it's been a while since we've had

The listeners would love to get your perspective on some of these questions. So I think one of the interesting questions that seems to come up again and again, and it, perhaps, it might be seen as like a minor point for some, but this question of money moving through stages, you know, the stages of evolution, right? So, and I know you have referenced this in your article, the bullish case for Bitcoin, but there is some With a 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. So do you still believe in that process occurring? And another point that you might touch on as well is, does this contrast with our excitement about Lightning and spending now?

Yeah, it's a, it's a great question, and, you know, we've, we've never seen in the history of the world a good being monetized in real time as we have with Bitcoin, and so the- We can actually learn a lot about monetary theory and economics just by observing Bitcoin and, and honing the theories that we, 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 origins of money, but I think Bitcoin has kind of refined my understanding. and, and to answer your question, I, 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, and I actually think it's tautological that money must evolve as a store of value before being suitable as a medium Something of exchange, something cannot be widely used in exchange unless it's widely valued first. I mean, why would I accept, accept something from you in exchange unless I assign some value to it first? regarding, Lightning, I think the Lightning Network is, a really important technological development in the history of Bitcoin because it paves the way for Bitcoin transitioning from a store of value to a medium of exchange. However, I, I think Lightning will, will remain Monetarily insignificant until the pool of savings held in Bitcoin is much, much larger than it is now. And, you know, the real reason that merchants don't wanna spend time figuring out how to accept Bitcoin right now Isn't really about Bitcoin fees, it's that there just aren't enough people who have meaning, have meaningful savings in Bitcoin. So if you're a baker, maybe one in a hundred of your customers own Bitcoin, and may-- you know, maybe it's one in ten if you're in Silicon Valley or, you know, 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. You remember the, the Bitcoin pizza guy who spent ten thousand bitcoins for two pizzas? People don't make that mistake as often today because they realize that Bitcoin is still early in its monetization, and there's still so much appreciation to be gained by saving rather than spending it. And it's also worth noting I think that a very large fraction of the total supply of Bitcoin is held in relatively few hands. I think it was estimated that about forty percent of all bitcoins Are owned by the top one thousand holders, and that's a tiny fraction of the world's population, those thousand people, and the local ba-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, and I, I wanted to say a little bit about this, I've written a little bit about this on Twitter as well. the process of monetization is the increasing distribution of the supply of a monetary good amongst a population. And what really matters isn't the number of people who become owners, per se, but how fully the supply of the monetary good is distributed. So for example, if a million people own a tiny, tiny amount of Bitcoin, but say ninety-nine percent of all Bitcoin is held by a single person, that's less distributed than if Only one hundred people own Bitcoin, but the supply is equally distributed among them. And as the price of Bitcoin rises, Bitcoin whales will have a, 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.

and that, that'll, 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.

Excellent answer, Vijay. I think it does sort of help clarify, and some, from some of my discussions with others, such as Michael Goldstein, I think it's, it, it might, it makes sense that it sort of moves through those stages of evolution, but I think for newbies, it might be confusing to segregate the roles of money. it, 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, I suppose what you're saying is, i-in some sense, it is doing all of those things at the same time, but it's just kind of at, at a given point in time, it's mostly store of value at that point. Would that be a character- fair characterization of what you're saying?

Yeah, yeah. And, you know, I've he-heard some people argue that the monetary, the monetary functions of store of value and medium of exchange are essentially the same thing, or, or they're just different parts of the spectrum for people's desire for money. I actually think they're quite distinct, and, 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, and, the reason you want- A medium of exchange is that you're trying to avoid the double coincidence of wants problem, and, and what I mean is that if I'm an apple farmer and you're a fisherman, say, and I, 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. 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, 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. Having something like- That allows you to reestablish life in a better place if you need to. Diamonds are, on the other hand, 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 mo- Innovation for why you use money for those different roles is different.

Excellent, Steph. I think that's a great explanation around the, that Mengerian, selection process as well. Okay, so I think we've sort of hit that topic. There was another one that I think is, it's funny, it's, it's, to me, I'm seeing some of these announcements about things like AT&T ex- quote unquote accepting Bitcoin, and I guess the question then is, is this actually bullish or is it, does this just feel like two thousand and Thirteen again.

Yeah, I mean, that I remember people were, I mean, some people, not everyone, there were a lot of people who were obsessed with merchant adoption in, in two thousand and thirteen, 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 aren't really accepting Bitcoin at all, they're, they're using some third party service to take bitcoins. Immediately sell those bitcoins for dollars and accept dollars instead. If anything, it's a marketing ploy that does very little to hasten Bitcoin's monetization. what, what we want isn't 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 reliable. This will get Bitcoin to the, to the point where, the total amount of savings that people hold in Bitcoin is much larger, it'll-- the, 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, and that's when, you know, merchants are gonna get excited, they'll say, "Hey, look, you know, most of my customers have some savings in Bitcoin now, so it actually makes- It makes a lot of sense to accept Bitcoin directly and to hold Bitcoin because it's, it's less volatile, I'm, I'm less afraid of holding it and, seeing my profits disappear if the price drops by fifty percent. so, I, I just think, We shouldn't be worrying about merchant adoption until Bitcoin is, sort of widely held and the pool of savings is much more widely distributed amongst the population.

Excellent. You speak of this whole concept of some people trying to drive merchant adoption as a marketing ploy, and, while I, I agree with you, I think it, it ends up being like that. But let me just, for the sake of argument, present this case that they might say, they might say something like, "Oh, look, if more and more..." More big companies accept Bitcoin, then it sort of triggers off in more people's minds this process of learning about Bitcoin. They think, "Oh, what AT&T is accepting Bitcoin, maybe I should go and learn about Bitcoin." but I-- 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?

yeah, I, 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. 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 grey 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. But I, I guess the, the point I'm, 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, and these are the people who become evangelists and go out and explain it to their friends and family and, and, and explain like what the value proposition is. Merchants, on the other hand, you know, they might have a marketing campaign that lasts like a week which tries to make them seem like, technologically competent, they're using the latest payment method, but they, they don't really care. They, they, they just care about, people. Buying our product. so, you know, if you go on, Bitcoin Twitter or, go on Reddit, it, it's the holders who are explaining to people why Bitcoin's im-importan't. You're not gonna see like, Walmart. or Costco explaining it, they just don't care.

Excellent. And another point that might come up, and this might be, say, someone like Sergey Kotlyar from Bitrefill, he might speak of this idea of something like owner adoption, and someone like Sergey might be a little bit more bullish on this idea of merchant adoption, but also driving owner adoption. Do you have any comments on that?

yeah, I just, I feel like, evangelism isn't a powerful enough Forced 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 to businesses, so it, it appeals to like people like you and me who have like, a very strong affinity for something like Bitcoin and so become attached to it and wanna hold and save in it. the, 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, you're not gonna get your regular mom and pop, people by evangelizing to them. They-- those people need to see a real economic reason to do it.

Excellent. And I think it's also fair to point out that for any hod-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 on where you live, tax implications as well. In most countries of the world, they will have to incur some kind of capital gain tax. So again, all of these considerations where they've got to think about this rather than just- Just waiting basically.

Yeah, and I, I, you, you brought up something I think is quite important, which is the tax consideration. And l-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, 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, the United States dollar could collapse on its own and people could start using Bitcoin because they have no other option. But, but barring that, under a fairly stable situation as we have now, buying, you, you have this economic friction when you buy with Bitcoin because if you, bought one Bitcoin at ten dollars, say, and then you use that Bitcoin, to buy, I don't know, dinner with your wife and the Bitcoin is, has appreciated, you then have to take that appreciation and pay tax on it. And, and there's a hassle, you're right, you're losing like thirty percent of the pre- appreciation to taxes. And there's also the accounting hassle, like if you, if you're doing this frequently, if you're using your Bitcoin to buy groceries or to, to go out to dinner, you have to keep track of all of that. so it's a real pain. And, and, you know, obviously the United States States government does this to protect its own currency. It's not a failsafe protection, however, there are countries like Zimbabwe and Venezuela where if the government mismanages their- currency so badly, people will seek alternatives, like in, in Zimbabwe basically dollarized, and had a monetary restandardization on the US dollar because people could no longer use the, Zimbabwean currency, so- There is a barrier to entry, and right now, in, you know, most Western countries, i, I think it is actually quite a significant barrier to Bitcoin transitioning to a, a medium of exchange. So, yeah, it's, I think that's worth paying attention to, and, understanding that people may not wanna spend because of the hassle of doing so.

Right, so I guess then for the meantime, it may be that Bitcoin's value-- Are you suggesting that it might be sort of 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?

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. what I mean by that is the, 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, ninety-nine percent of the demand for money, which sort of sets the purchasing power Money comes from holding money rather than, wanting it to buy bread or wanting it to purchase dinner. Most people actually hold very low cash balances because That 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, they take some of their cash when they, you know, need to buy something. The, the biggest actually demand for, currencies like the US dollar comes from drug dealers and, you know, foreign dictators who, like, you know, Saddam Hussein had massive pallets Of US dollar bills buried under the ground, that, those people are the real hoddlers of, US dollars. Most other people don't wanna hoddle US dollars, they'll just get enough so that they can complete the, the daily, trades that they need to do, daily purchases that they need to do. so, so I guess my point to answer your question is, I, I think even if, Bitcoin doesn't get to that medium of exchange role of money, even if that takes, you know, fifty or a hundred years and, and fiat currency 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. So I think it can actually appreciate much, much higher than gold. I think it, it could, it could, ten x, the size of gold, which would get you to a, a, a pri- a Bitcoin price in, in the millions of dollars, just by cannibalizing all the store of value assets like gold and short-term government bonds and, and things of that nature.

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 wanna just provide a bit of an update on your thoughts?

yeah, I mean, I, I don't know if I have too much extra information. I, I just think the whole effort is really misguided, to be honest. It, it, 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 in which Facebook, Facebook will offer it, and it can be done much more easily without using a cryptocurrency. I mean, Facebook could just, just use the data And assign an entry for how many Zuckbucks or whatever they're gonna call it, Globalcoin, each of its users have, and if, if they wanna allow people wanna allow their users to trade between each other, it could very quickly update those totals in their database. So they don't need to do a cryptocurrency to do this. The one advantage Facebook has is it can quickly distribute these coins to a lot of, 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 won't value what they're given. So imagine someone in America finds ten euro, a ten 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 why they're giving up something they already valued, such as dollars, for something they think is even more valuable, i.e. Bitcoins. That's, that's how real value is created organically over time. So, you know, I think it's interesting that, Facebook can do this massive distribution if they want, but I don't think that is gonna give them- that, that's not necessarily gonna create something that's valuable.

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 the, their ability to maintain a peg, right? There have been entire nation states who have not been able to maintain a peg. Is it now that they-- These guys think Solved it?

Yeah, I'm very, very skeptical that you can create a stablecoin that's not completely centralized. and I mean, Tether kinda works as a stablecoin, 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, you know, Facebook could do something like that, but that's, that's completely uninteresting, then they're just a giant bank.

t-creating a stablecoin that works independent of Facebook, that is entirely algorithmic, I honestly think is impossible, because they, 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 in, you know, theories about how you can- And do, do it, but I haven't seen one that is compelling, and I don't think anyone has really been proven in the wild, a, a stablecoin that works without some, someone controlling it. So either Facebook is gonna do something which is completely boring, which is like become a bank, and, and create a coin that's backed by whatever it is, a basket of dollars and euros or whatever they wanna do, maybe a basket of Bitcoin that would actually be useful.

or, or they're gonna do something which I think is basically impossible, or at least I, I haven't seen any good evidence that it's possible. So, yeah, I, I, I just don't think either direction that Facebook goes is gonna be a threat to Bitcoin, and, and I, I wrote a, a tweet thread about this which goes into a little bit more detail about the, the different, types of cryptocurrency or, or payment system that they could build and why each one isn't really a threat to Bitcoin.

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, 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, some obligation or other, they fail it and then they're, they're in the courts and they're in the news. all over the, all over the front of the newspaper saying, "Oh, look, this bank failed AML. Surely this will 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 the, give them that ID."

Yeah, that's a great point. And, you know, they're completely beholden to the governments, in the jurisdictions in which they, they operate. And for anyone who's worked in the financial- financial services industry, they, they all realize there's a huge, huge burden placed on companies. Companies are essentially deputized to enforce, the government's financial rules. A-and so what, 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. They won't give 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, they kind of- Create this gray area and, a-and if they believe you're not doing the right thing, they'll, they'll shut your business down or throw you in jail. and y-y-if you're Facebook and you're running a, a-money that's operating in multiple jurisdictions, you're, you're dealing with multiple governments doing their own particular- idiosyncratic thing, to regulate you. So, y-you've gotta, you've gotta juggle a lot of different,

regulatory balls at the same time. And in the, in the US al-alone, you have to deal with fifty different states, each one with their own,

money transmission regulations. and then you've gotta deal with Europe and Japan and Australia. So, I mean, it- It, it just seems like a, a, a nightmare. I, I, I would definitely not wanna be, running, you know, Facebook coin at Facebook. And this is, 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, to knock on the door and say, "If you don't regulate this properly, we're gonna throw you in jail." So Bitcoin does what it does, and it, it, it just doesn't care what governments think. And that's what makes it so powerful and so valuable. Facebook can't do that. By, by the very nature of their business, it's impossible for them to do that.

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 information to other exchanges that they are transferring to. do you believe this will drive more non-KYC options, the use of non-KYC exchanges in Bitcoin? And, and do you have any thoughts on how that develops?

Yeah, I think it will, and I think the, regulatory bodies are gonna clamp down more over time on exchanges, that 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, I think a-as Bitcoin becomes more significant both economically and politically, there's gonna be, a stronger desire from governments to, to try and control it. but cypherpunks write code and cypherpunks get around things like this, and so I think there's gonna be, movement to allow people to exchange bitcoins in a non-KYC way. I, 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 gonna develop this over time because there's a, there's a big demand for this. People want financial privacy, and every, every time you use an exchange to buy Bitcoin, they know how many Bitcoins you have, and, and that's actually kind of scary if you're Imagine you're a whale who has a few thousand Bitcoin, and, you wanna sell just a little percentage of your Bitcoin because the price has gone up by ten x or something like that. You send some, Bitcoin from your cold storage to Coinbase and you sell it, for dollars, which then you, 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, is a, 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.

Yeah, it 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- Things like not sending from the UTXO with, you know, a thousand BTC on it and being much more precise in sending only from those UTXOs that have just enough or using sort of intermediate transactions on the blockchain despite the additional Bitcoin miner fee cost, but r- doing it purely to help mask or conceal their total level of holdings.

Exactly, yeah, and I think this is gonna increase the importance of, mixing services, things like CoinJoin, Because bi- Bitcoin has this, you know, very powerful property that transactions can't be reversed, but that's also a very scary property. It means it's kind of an ideal currency for Kidnappers and, and hijackers and things like that, because you-- they can, they can steal from you and, and, and, and the theft is irreversible, whereas if someone Hacks your bank account and steals it, the bank can just call the other bank and say, "Hey, this was like an invalid transaction, send the money back." so, so people- As Bitcoin becomes, a-as the monetization of Bitcoin happens over time and, and the amount of savings that people have in Bitcoin increases, people are really gonna value the ability to transact privately with each other, so I think we're gonna see in, in the next couple of years, various privacy features added to Bitcoin and, services which make it easier to mix, mix bitcoins online.

Exactly. alright. So look, I think another good topic to touch on that you've had some commentary on as well, it's 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 the- Bitcoin or let's call it maybe the crypto horizontal versus the Bitcoin vertical.

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 the space by far. and, and most of these exchanges are pursuing a strategy of supporting as many altcoins as possible. I was gonna say Shikoin, but my, my wife has instructed me to be more polite. but you know what, you know what I'm thinking, you know what I'm thinking. So, so these exchanges are pursuing a strategy of, you know, supporting as many altcoins as possible because that's the easiest short-term profit opportunity for them to allow people to trade altcoins back and forth between each other and then collect the fees. On those trades. this is what I call a 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, long-term opportunity here is to build a new financial system on top of Bitcoin. There's a, there's a large opportunity cost for exchanges supporting hundreds of altcoins. They need to write their own code to support each token, they need to audit 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 of every token they list, to prevent fifty-one percent attacks, which have already affected some exchanges that've lost, you know, fairly significant amounts of money, to fifty-one percent attacks on, on relatively small coins. So, 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, you know various problems that could affect exchanges. And the, the kind of products that I think these exchanges should be building are, for example, margin trading, the ability to short. that, that may seem-sound strange since I'm, you know, a big believer in Bitcoin, but I think shorting is actually very important in any healthy financial market. It provides extra liquidity. And it, it allows, faster price discovery. So I think shorting is a, a, 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, And part of the reason 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 transmitter license and operators in exchange than to operate as a futures or derivatives broker. but that's where the big opportunity is, and I think exchanges should really be charging forward toward that goal instead of chasing trifles. most of the altcoins that they're supporting aren't gonna be around in a year or two, let alone five or six years. and, and we already know that there is really massive profits to be had in financialing on top, financializing on top of Bitcoin. Example is, Bit- BitMEX is an exchange that provides a derivatives product where you can make leverage bets on the future price of Bitcoin by posting Bitcoin as collateral. And BitMEX is ridiculously profitable, they, they did ten billion in nominal trading volume in a single day just a few weeks ago. And in fact, I think it's fair to say that much of the price discovery for Bitcoin happens on BitMEX, which is sort of a futures trading service rather than on spot exchanges like Coinbase. And, and that's actually pretty incredible if you think about it, because spot exchanges are what you think of as the place where the price is set, but the way I think of it is, BitMEX is the dog, and the spot exchanges are the tail of the dog. So BitMEX is wagging the price of the spot exchange. When something happens on BitMEX, it really affects the price on the spot exchanges rather than the other way around. so I, I think there's a massive opportunity for the companies that, that recognize that financializing on top of Bitcoin is where the long-term opportunity is. and another example of this is, Abra, which is a product which lets you post Bitcoin as collateral, and then you can get exposure to US stocks and other, financial assets. They, they build derivatives that sort of 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, you know, super cool. it's sort of an open question how regulators are gonna treat this, but I think they have made a correct, bet on the- The future of how this is all gonna play out, it's gonna be the financialization of the most important, most secure cryptocurrency, which is Bitcoin.

Fantastic. And I think, yeah, 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 sort of be in reference to that. And, and as you're saying, this idea of using companies like Abra to purchase or sort of- Reflects your Bitcoin into stocks is a perfect way to help achieve that.

Yeah, and I, I, I like what you said. I think people are already starting to use Bitcoin as a unit of account in limited settings, in, on exchanges, for example. And, and what I mean by that is people are thinking of their profit and losses in Bitcoin terms. So people go to these altcoin exchanges and, they'll trade back and forth on these altcoins, but really what they're looking at is, am I making Bitcoin or not? Like they, they might make a profit in dollars, but if their total Bitcoin stash hasn't increased, then they don't feel like they've made a profit. So people are measuring their, profits and losses in Bitcoin in this sort of limited world, but I think that's gonna expand and, And as the financialization of Bitcoin happens over time, I think it's gonna become a unit of account in more and more, different financial sectors and then eventually in the broader economy.

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, you know, he, he has that idea of, oh, well, the world is deciding which one is going to be The, you know, the, the world reserve currency. And so he tries to measure it across different, aspects. And I, a-as you're saying, more and more people are starting to denominate in satoshis and think of satoshis, and so that can only lead to one thing.

Yeah, absolutely. And I think it's, actually, A very powerful psy- 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 bit- is dollars, and I wanna use my dollars to buy things." whereas if you think in terms of Bitcoin, you think, "Well," Well, I, you know, I, I could buy that car from the appreciation that I've got in Bitcoin, but then I'm gonna have thirty percent 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, and I think it's that they're sort of more evolved in a sense, because they see the future, they see how people are gonna think in the future. And they're already thinking that way now.

Excellent. And that really reminds me of the way, say, Michael Goldstein might talk about it, when, you know, in his article, "Everyone's a Scammer," or in some of his appearances as well, he's spoken about, "You know, this is your one chance to try and get what we think of as the, the hardest money, the best possible money that we've seen. Are you really just gonna throw it away for something petty? You've really gotta think it through clearly."

Yeah, absolutely. It's, and especially When there's potentially, you know, several more decades of this process to occur, it's just such an exciting ride to be on. Why sort of jump off that ride and, and jump onto like fiat money? We know how the fiat story ends, we know how it al-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. Why would you jump off that roller coaster?

Excellent. And, 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 you know, 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? You still have to do an on-chain transaction. Now, personally, my, 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 L2 and Schnorr, then maybe we'll see this whole multi-party channel vision come to fruition as well. Do you have any reflections on that over the next few decades?

Yeah, I, I asked a question on Twitter a while ago, what's an un unpopular opinion you have about Bitcoin, and, and an unpopular opinion I have about Bitcoin, is that I don'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. And, you know, that That might strike some people as une-g-e-galitarian and that maybe Bitcoin is only for rich people or, you know, those kind of arguments, but I think- People sort of misunderstand what Bitcoin is and think of it as like this kind of PayPal two point zero where everyone's gonna use it as a payment system, which I think is completely wrong. Bit- Bitcoin is a replacement, for the monetary base. It's, it's a replacement for the foundation of our monetary system. So, so the way I think of Bitcoin is, it's kind of like gold combined with the Swift system. So it's, it's the monetary base, which is gold, plus the ability to, to move that monetary base around, which is, which is the Swift system. And we're at such an early stage that, to, to give an analogy, like when, when the world was on the gold standard, people didn't- You know, walk around carrying gold bricks, but, but bricks of gold, you know, the multi-kilogram bricks of gold were the foundation of the, the, the gold standard. They'd be held in vaults and sort of very occasionally moved around between people and, and, and people would have claims to a fraction of these gold bricks. and, and 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, like people, individuals owning like big chunks of the, the monetary base. That's, that's not how it's gonna be in the future, i-i-in the, in the future, I think, a-as Bitcoin is, is fully monetized. You know, bi-- Bitcoin is gonna be held by, more sort of semi-trusted institutions, and you'll have like, Institutions kind of operating a little bit like banks, but using the Lightning Network, so there's less trust involved. but, but a lot of people aren't gonna own bitcoins, on chain, they're gonna use bitcoins off chain or on Lightning, just because the reality that we face now, where people own, you know, big chunks of Bitcoin, i-isn't how it's gonna be in the future. It's just we're so lucky right now that to, to, to be able to, to go out and buy the equivalent of like a gold- brick and, and having it in our house. But as Bitcoin becomes the actual base of the world's financial system, it's gonna sort of become more like the gold standard where there'll be intermediaries that, that are sort of aggregating, larger amounts of Bitcoin and then people interacting with those intermediaries in, in various trusted or less trusted ways.

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.

Yeah, exactly, exactly. If you are, you know, running a full node and, 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, it is quite incredible, that we're at a stage where- You, you know, you can own, even a millionth of, of the monetary base. You can imagine owning a millionth of the total amount of gold, that would be like, I don't know, how, how many They would probably be worth like several billion dollars, but a regular person can go and buy a Bitcoin or a couple Bitcoins for a few thousand dollars now. So, yeah, we're in a, we're in a very privileged time, we're very lucky to be right at the beginning of this great story.

Yeah, and I guess the other thing I'm thinking now as well is Think of the, 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, 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, then they might split out some of that hardware wallet and put that into like a spending, you know, a spending wallet, they might have Lightning set up all these channels. It, it, 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 have to be very more-- they'll have to be much more judicious, 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.

Exactly. And, and I've given an analogy on Twitter before, I think, Bitcoin is the containership of value transfer. It's meant for very large scale, value- value transfers that happen fairly infrequently, for, and I, and I, I was making the point that, you know, buying a coffee with Bitcoin is, is kind of like, shipping a single Amazon package to someone's doorstep with a container ship, you just don't do that. for the last mile delivery service, you use something like Lightning, which allows you to move smaller amounts of Bitcoin for- For, for much lower fees. and in, you know, honestly, I think there will be, a, a decent amount of movement, of Bitcoin in centralized services because If I'm buying coffee, I, I don't care that I'm trusting a third party. That's not the kind of transaction where I need the, the, the transaction to be trust minimized. but if I'm, if I'm, you know, transacting a million dollars 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.

As, I think, I think I've heard Tad Drajah say this. I think he said, "Bitcoin is the money of enemies." So I think, that's a very good way to summarize it.

Yeah, yep, that's right, I agree with that.

Alright, 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, you know,

My case for, why I'm optimistic about Bitcoin and explain, explain what Bitcoin is and why it's im-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 underscore vj.

Fantastic. Well, look, thanks very much again for coming on the show, vj. Really enjoyed this discussion.

Thanks, Stefan. It's always

fun. Alright, 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, stefanlivera dot com. Also, guys, just a quick note that as I've grown the audience since I started this podcast, what I wanna 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. So if you're company and interested to advertise on the podcast and reach a discerning audience of bitcoiners with a bitcoin focused product or service, you can email me at stephanelivera at pm dot me. You can DM me on Twitter at stephanelivera or use my website contact form. Happy to talk further. That's it from me. Thanks for listening, and I'll speak to you guys soon.