Here’s my talk at the Friedman Conference 2018 in Sydney:
I noticed a lot of people whinging about the Bitcoin price – realised from one of my friends that this is probably the first Crypto Bear Market for a lot of people. Here are some thoughts from a guy who has been there, done that:
Here’s a new update weekly update video, links below:
1. Neil Woodfine tweet storm on ICO’s
2. Blockchain firm R3 is running out of money, sources say
- Article on Fortune.com
3. Dandelion++ – Bitcoin privacy
- Dandelion++ paper by G Fanti et al
- G Fanti interview on BlockDigest re: Dandelion – https://www.youtube.com/watch?v=ZGgyW9rCqto
- Original dandelion paper: https://arxiv.org/pdf/1701.04439v1.pdf
- Github discussion here: https://github.com/bitcoin/bitcoin/issues/6568
4. Increasing Bitcoin-Privacy using the Lightning Network OR How to delete the origins of your Bitcoins by Toronex
5. Betterhash, mining protocol by Matt Corallo
Made a recap of some interesting bitcoin articles that came out over the last week:
1. Bitcoin: Past and Future By Murad Mahmudov and Adam Taché.
2. Digital Gold / Digital Cash network effects by Pierre Rochard
3. Exploring Lightning Network Routing by Bryan Vu
If you’ve got any feedback for me on this video format, let me know in comments or DM me on twitter.
The IMF is an interventionist, socialist institution. But nevertheless, their capitulation to the coming bitcoin hard money reality continues. We would never have seen analysis like this out of them just a few years ago.
See: Monetary Policy in the Digital Age by Dong He from a June 2018 IMF publication.
To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies.
Unlike the value of fiat currencies, which is anchored by monetary policy and their status as legal tender, the value of crypto assets rests solely on the expectation that others will also value and use them.
However, they lack three critical functions that stable monetary regimes are expected to fulfill: protection against the risk of structural deflation, the ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle, and the capacity to function as a lender of last resort.
- ‘Protection’ against structural deflation – this belies a misunderstanding on the types of deflation. There’s good/benign growth deflation, and there is the ‘bad’ credit deflation – which is most often brought about by fiat money credit expansion in the first place. For more detail, see Joe Salerno’s An Austrian Taxonomy of Deflation.
- Ability to respond to shocks in money demand – This is based on the fallacy of ‘monetary stability’. There is no such thing. We live in a constantly changing world and human/consumer desires shift, as do prices, and people’s level of certainty about the future. Central bankers trying to reduce all the volatility and small failures in the world just creates more risk of the Talebian ‘black swan’ massive failure like we saw in the GFC or the Great Depression, which were caused by government monetary intervention.
- Lender of last resort – similar to above. By stopping individual bank failures and not letting them go under, moral hazard is created. Consumers stop caring about the soundness of their money, and the banks they leave it with. It’s better to not have a lender of last resort at all.
If crypto assets indeed lead to a more prominent role for commodity money in the digital age, the demand for central bank money is likely to decline.
In other words, if central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets—then the central bank’s monetary policy becomes irrelevant.
How should central banks respond? How can they forestall the competitive pressure crypto assets may exert on fiat currencies?
As IMF Managing Director Christine Lagarde noted in a speech at the Bank of England last year, “The best response by central banks is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.”
Central banks must maintain the public’s trust in fiat currencies
Today I listened to the podcast, What Bitcoin Did episode 17 with Samson Mow. Samson did well to present the Bitcoin vision as contrasted with the BCash vision.
Some of the ‘Devil’s Advocate’ questions posed by the podcast host Andrew did come off with a bit of a socialist undertone and to my mind, a false sense of balance. From my viewpoint, it was giving the BCashers too much credit. But maybe that’s just the Bitcoin ‘Core’ maximalist in me speaking. I agreed with Samson’s sentiment that BCashers present BCash in a dishonest light:
The main problem I sensed underlying the questioning was this idea that on-chain layer 1 priority transactions should be affordable to all people, always, and they should have the same level of security provided by cold storage. Even where they are from a developing country with lower income. But Samson was put into a tough situation when answering this, as we generally recognise Bitcoin needs a fee market to survive long term. While we want the fees on layer 1 Bitcoin to be accessible, there can be no guarantee or central planning of this.
Optimistically, here are different ways this could play out instead:
- As spelled out in this fascinating Lightning Labs post, Lightning User Experience: A Day in the Life of Carol
Ideally, users like Carol will manage balances, payments and deposits without having to understand the underlying technology, and the experience will be cheaper and more convenient than existing payment technologies (checks, credit cards, physical cash, etc.)
- People might rely on their retail crypto-bank app to run the bitcoin wallet and lightning node ‘behind the scenes’ for them – thus rendering the layer 1 transaction fee less of a problem as it would be batched up for spending by the crypto-bank.
- People stay on ‘layer 1’ Bitcoin, running their own full node and using Bitcoin for the large transactions only, such as buying a house or a car. Bitcoin kept in a vault / deep cold storage as a family store of value.
Sound money and capitalism is the mission. There’s not an obligation to make everyone equal or to give them equal right to the high priority fast transactions. This is the simple reality of designing Bitcoin to be government-resistant. Attempts to naively scale on-chain will risk the centralisation, and eventual co-opting of Bitcoin by government.
To me, this expectation for everyone to have the best level of convenience and security with no cost trade off is almost reminiscent of when socialist people blame capitalism for needing to work to live. In their view, they are ‘wage slaves working for the man’ so they can get food, shelter, clothing etc. But really, this is the problem we are in due to nature. It’s not the fault of the capitalists, and if anything, the capitalists are helping alleviate the problem. They’re the ones making us wealthier overall to have enough food, shelter and basic necessities like Wi-Fi and social media to shit post on.
So too with nature, it’s not the fault of Bitcoin, Bitcoin core developers or Blockstream that the government is out there, and if given a chance to co-opt Bitcoin, it will do it.
If you’re interested in further discussion on Bitcoin’s future and fees, I recommend you see Rusty’s post: The Three Economic Eras of Bitcoin. I think Rusty shows great foresight in the discussion, to show that once this current subsidy era ends, there may come another battle to inflate Bitcoin beyond the original supply. For this reason, a fee market should develop.
Ultimately, Bitcoin will not bend to the will of people who say ‘gib me’. It will continue being the hardest money to ever exist. We will all have to adapt to that.
Bitcoin is rapidly normalising in all of our minds. A 9 year old has never known a world without Bitcoin. And the longer Bitcoin survives, the more likely it is to continue. This is the Lindy effect, the concept Nassim Taleb popularised:
The Lindy effect is a concept that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
Notice how we’re seeing it more and more in pop culture.
We’re seeing it in Marvel comics:
We’re seeing it used in modern TV shows, like Billions:
We’re even seeing it in school exams:
What happens as this continues to normalise and people think of using cryptocurrency as a way to and store and transfer money anywhere globally in a low friction, unstoppable way? The feedback loop will be immense once it really kicks off.
I don’t think it will take much to kick this off. Imagine if people started putting 1-5% of their portfolio into Bitcoin? Or if there were a banking crisis and bail-ins, with Bitcoin holders unaffected? Or if a central bank bought in and announced its position in BTC holdings? Or just the continual buying and holding of bitcoin over time, slowly but surely building upwards pressure on the price.
The people who win will be the ones who can buy and wait patiently.