Book Review of The Bitcoin Standard by Saifedean Ammous

Bitcoin is going to become the global standard for money and you need to understand the how and why. The single best book I can recommend to you is The Bitcoin Standard by Saifedean Ammous.

Here’s my video summary:

Some quick thoughts in written form:

  • Why this book? There’s a lot of altcoin/ICO/appcoin garbage out there. This book is the signal vs the other garbage ‘noise’.
  • Saifedean explains the roots of sound money and how it arises on the market as the most saleable medium of exchange.
  • He talks through the history of how we got where we are now with government currency debasement and control, which sets the scene for why bitcoin is so important.
  • We have an overview of Austrian business cycle theory and how the malinvestments create a distorted capital structure.
  • He stresses the importance of the stock to flow ratio of bitcoin versus other potential monies (fiat and gold being the big examples). Projecting out over the next 4-8 years, Bitcoin has a better stock to flow ratio and it is only getting better.

Overall, Saifedean spells out a vision of bitcoin as a high powered sound money, forming the base layer on which other layers may be built.

Go order the book today! I have ordered a physical copy myself.

Bitcoin exchange attack survival of the fittest

It is simply amazing how quickly the bitcoin world is evolving. We’ve gone from having one large exchange (Mt.Gox) being able to take the whole space down with it in 2013, to now having many exchanges capable of handling large volume (Binance, Bitfinex, Kraken, Gemini, GDAX etc).

Binance underwent a large, coordinated hack and managed to repel it. They have a summary post on their support page here: Summary of the Phishing and Attempted Stealing Incident on Binance.

However, as withdrawals were already automatically disabled by our risk management system, none of the withdrawals successfully went out.

But it looks like that wasn’t all, as they’re now putting up a bounty for information leading to the arrest of the hackers.

In this post Binance state:

Binance is offering a $250,000 USD equivalent bounty to anyone who supplies information that leads to the legal arrest of the hackers involved in the attempted hacking incident on Binance on March 7th, 2018.

This is certainly raising the stakes for would be exchange attackers. It also makes it more costly to run these hacking operations, if any one of the hacking team could defect for the bounty.

Decentralised bitcoin exchanges vs centralised exchanges

While some people believe that decentralised exchanges are the future, I’m not as convinced this will work, as there is always an interaction back with the centralised fiat banking system. This interaction back with the centralised fiat system becomes more important for anyone wanting to do significant $ volume or number of trades. There are also still some concerns about whether the decentralised exchanges can get the requisite liquidity.

I think we’re probably moving into an era where centralised exchanges exist alongside decentralised exchanges. Centralised exchanges will be used by the more legitimate, big time players who need the volume. Decentralised exchanges will be used by smaller, retail level players who want more privacy and anonymity.

Remember though, this is mostly a temporary ‘on ramp’ thing anyway. Once enough people have been on-boarded into bitcoin, we’ll see the full gamut of people just being paid directly in bitcoin, selling things for bitcoin, and normal everyday banks offering bitcoin bank accounts. In the post hyperbitcoinization world, maybe there won’t be as much need for bitcoin exchanges.

Crazy survival of the fittest game

In any case, this episode in bitcoin’s history helps show that as people attack bitcoin and bitcoin businesses, those businesses evolve different responses to attack. Rather than killing bitcoin, bitcoin ends up becoming even more hardened against that particular type of attack.

Method Of Payment Is Not Medium of Exchange

A common error in crypto land is the confusion between method of payment, and Medium of Exchange. They’re distinct concepts!

Let’s use a basic example: I want to pay you $10 AUD. I could do this by either handing you $10 AUD cash, or I could bank transfer it to you. In this example:

  • AUD is the Medium of Exchange
  • The method of payment is either the cash note I give you, or the bank transfer

But people struggle to see it this clearly with Bitcoin the payment network, and bitcoin the money/token. So then people go and commit further ‘knock-on errors’ such as thinking that bitcoin has to scale to 1 bazillion transactions/second right NOW or otherwise we lose to VISA/mastercard!

But they’re mixing it up. They’re confused. Medium of Exchange as a concept is about solving the double coincidence of wants, and also about being a more ‘saleable’ commodity or money. Method of payment is just the technical way we achieve moving that money token around.

While other people might go around making really fast, centralised payment networks – what matters is sound money. This is why bitcoin the money matters, and Ripple’s centralised, premine shitcoin doesn’t (despite Ripple’s Xrapid and Xcurrent solutions having much higher transaction rates).

For more on saleability and the Carl Menger’s work on the origins of money, see the YouTube video I did on this topic here.

Thoughts on Mt.Gox trustee mass bitcoin sales

Offering a few quick thoughts on the recent Mt.Gox trustee news: Meet The ‘Man’ Who Crashed Bitcoin In 2018 from zerohedgeThe recent bitcoin price crashes were possibly driven by the Mt.Gox trustee selling large batches of bitcoins to recover fiat money to make Mt.Gox creditors whole.

Some of the bitcoin wallet transactions overlayed on a price chart.  Bitcoin sales are assumed to have occurred soon after the bitcoin transaction to the exchange:

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Grim, but funny in a sad way:

More sales are on the way:

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Here are some thoughts:

Timing and Method

These coins were going to be sold eventually, this was just a question of when. The Mt.Gox trustee could have used Over the Counter (OTC) markets to try and sell the stash on dark pools so that it didn’t necessarily all hit an exchange at once, to limit the impact. But in the grand scheme of things, this is not a huge deal, it just means temporarily cheap coins.

What’s promising about how it played out

The fact that people were (and still are) clamouring to buy more bitcoin after each dump is a good indicator. It’s not that the demand for bitcoin died and people went to other cryptocurrencies, these people continually bought bitcoin (mostly).

The ‘strong hand’ / HODLer mentality

The truly strong hand veteran HODLers do not care. They care about the long term vision for bitcoin. Along the way, of course there will be some mass bitcoin sales, as whales sell their stash down. Even if we have more periodic cycles up/down, these are more chances to accumulate more bitcoin cheaply.

From the bitcoin maximalist view, your future net worth will be measured in BTC. So any chance to cheaply acquire more BTC now is an exciting opportunity.

Cost is what you pay, value is what you get

If anything, from the HODLer point of view, it’s a great time to accumulate more while the Mayer Multiple is low.

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Fundamentals are virtually unchanged

  • The SEC appears to be cracking down on ICO’s, but not on bitcoin
  • Bitcoin’s development is proceeding rapidly with many new technologies coming in the pipeline (see Rusty’s talk here for an overview)
  • Lightning network is coming online with many people on testnet and mainnet
  • Institutional money is still looking for ways to get into this space once custody and other related issues can be solved
  • Retail investors are just getting started and we’re probably still <5% adoption overall
  • Governments continue to inflate their fiat currencies, and continue to impose capital controls. There is also discussion of banning high denomination cash notes, which also drives people into the arms of cryptocurrencies.

Given the above, why wouldn’t I be bullish?

Coinbase creates an index fund

Today, Coinbase announced a new index fund tracking digital assets listed on the Coinbase exchange, GDAX. It is limited to US accredited investors only, which does reduce the number of people who are able to participate.

Judging from Coinbase index info here, the initial breakdown will be as follows:

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Bright side

So what does this mean for us? On the bright side, this move will increase the availability of investing in bitcoin. There will be many richer people who might have a passing interest in getting some small level of exposure to crypto/digital assets, and don’t want to spend the time learning to hold their own private keys etc. This fund is probably easier for them to buy – so it does mean more money can flow into bitcoin.

Down side

On the down side, it is pushing what I believe to be an incorrect narrative. This idea that “we should diversify across crypto assets” strikes me as a category error. It is treating Ethereum, Bitcoin Cash (BCash), and Litecoin like they are a good way to diversify instead of holding one sound money, Bitcoin.

What happens in practice is:

  • They’re not really that uncorrelated to each other.
  • All altcoins live in the wake of Bitcoin and basically ride its coat tails.
  • There is an opportunity cost to holding more ETH, BCH and LTC: You could have otherwise held more BTC.

That said, I understand that Coinbase are not a company operating under a bitcoin maximalist ethos.

Summary

On net, this is good for bitcoin in that it helps draw in more investors. But it does unfortunately push a belief or narrative that I disagree with, and I believe it will ultimately be harmful if this narrative is kept alive for too long. In the end, people will be driven by their own greed and price signals towards bitcoin and away from the others. The cream will rise to the top eventually.

For the meantime, it will be: Play stupid games, win stupid prizes.

Video breakdown of article “The Blockchain Pipe Dream” by Nouriel Roubini and Preston Byrne

Article link – The Blockchain Pipe Dream

In short: Nouriel and Preston are tarring the entire space with one brush. They’re correct that there’s a lot of overhyped products in the “blockchain technology space”. However, also not  correctly distinguishing why bitcoin exists as sound money to replace central banking and government control over money.