63. Bitcoin efficiency and cost-benefit analysis
We often hear bitcoin is a waste, but rarely will someone present a full accounting of all the costs and the benefits associated with bitcoin. In this seminar, based on a chapter from upcoming The Fiat Standard, Saifedean attempts a full accounting of the costs that go into making bitcoin work, from electricity to infrastructure, and compares them to the benefits bitcoin provides: appreciating savings, money transfer, and most importantly, obsoleting fiat money, with its massive costs. We estimate fiat inflation costs the world around 2.5% of global wealth per year, and has incalculable costs with rising time preference, economic distortion, activist government, and conflict. We also discuss how to best think about bitcoin’s efficiency, and why it can be approximated by the stock-to-flow ratio!
[00:03:39] Saifedean Ammous: Hello, welcome to another episode of the Bitcoin standard podcast seminar. In today’s seminar I wanted to discuss one of the chapters of my forthcoming book, the Fiat standard. I’ve just finished writing the Fiat standard and I’ve launched the Kickstarter where you can pre-order the book and get access to the first draft of the book. And pre-order it for delivery as soon as it is out, which should be in November or December. We’re going to have it ready for Christmas time. And you can also order signed copies and you can order bulk copies as well starting now, basically. So go to academy.saifedean.com/kickstarter, and you’ll find the link if you want to order the book.
Today, I wanted to talk about the penultimate chapter in the book, the chapter next to last. And this is kind of Something that occurred to me as I was finishing the book that I really started to think about it in critical terms.
And I decided to add this chapter, even though it wasn’t really included in the original outline that I had. But it is a chapter that discusses [00:04:39] Bitcoin in terms of the costs and benefits of Bitcoin. And so it’s inspired by all the recent debates that you keep hearing about Bitcoin wastes so much electricity and Bitcoin wastes so much energy.
And Bitcoin is such a waste of resources and people should in fact be banned from using Bitcoin or Bitcoin should be stopped. And the Bitcoin is immoral. And of course this kind of thinking, it’s not proper economic thinking. The problem with this is that it’s an emotional reaction to one aspect of Bitcoin.
But it misses all kinds of other aspects that are related to the economics of it. So, the old French economist Frédéric Bastiat used to say the difference between a good economist and a bad economist is that the good economist looks at the seen and the unseen consequences of something. Whereas the bad economist focuses on the unseen.
A couple of centuries later, we still have a majority of economists who focus only on the [00:05:39] seen and ignore the unseen. They don’t think about the ramifications of economic actions that take place. I think this is a great example obviously because a lot of people are very angry at Bitcoin consuming energy, and a lot of people think that this is something that is up for debate, that can be changed about Bitcoin or can be banned. Good luck to them on that. Bitcoin is a free market. Anybody can enter it, anybody can use it. And anybody can mine it in any way that they want from anywhere they want. So the idea that you could regulate Bitcoin miners and what Bitcoin miners do I think is quite fanciful.
But regardless of whether they can get away with regulating them or doing it, let’s discuss the merits of the argument. Let’s put aside the question of whether these kinds of political attacks on Bitcoin can succeed and just think about the merits of the argument itself.
Is Bitcoin a waste? What are the costs of Bitcoin and what are the benefits of Bitcoin? So I thought about this long and hard. And I was to a very [00:06:39] large degree influenced by Michael Saylor who discussed this in an interview he did with Kitco. He had a very good framing of it, which was also influenced by and shared by Blockcap Mining, which is a company that I work with has an advisor. The CEO of the company Darin Feinstein, he’s also been making these points repeatedly. I’ve synthesized some of their ideas and try to make it into a bit of a coherent cost benefit analysis.
Think clearly about what it is that Bitcoin costs the world and what Bitcoin gives the world. So. What are the costs of Bitcoin? Let’s see. Well, first of all, we think, we have a pretty good estimate of how much electricity Bitcoin spends, and it is somewhere in the range of a hundred to 150 terawatt hours.
So this much electricity is spent on Bitcoin, wasted on Bitcoin, if you want. A lot of people like to think of it as a waste. But we’ll see now [00:07:39] why this is not very accurate. There’s no difference between this electricity and any electricity you use in that they’re all the same. You pay people who generate it to connect it to your house, and then you use it to make machines do things for you. And Bitcoin is just a bunch of machines that run on electricity. Well, Bitcoin is more than that, but Bitcoin has a lot of machines that run on electricity. And we can estimate roughly that I think it’s consuming around, some people say about 120,000 terawatt hours. We could give it a 100 to 150 terawatt hours as a rough estimate.
It might not be entirely precise, but it’s quite precise in the grand scheme of things, because this is a very large number. Which is an enormous amount of electricity. That’s a lot of electricity. There’s no questioning that aspect of it. It’s an enormous amount of electricity. It’s larger than some small countries. And it’s being produced all over the world to run on Bitcoin. So how much does that cost? [00:08:39] Well, we know from thinking about Bitcoin mining and from if you’ve ever tried to invest in Bitcoin mining, or if you know, people who are into Bitcoin mining, you know that the most important thing about profitability in Bitcoin mining is having cheap electricity. So the cost of this electricity is significantly lower than the cost of the electricity that you and I pay to have our houses enter into the modern world. This is much cheaper because Bitcoin has a very important property which makes it unique among all economic uses of electricity in that it can buy electricity anywhere in the world. It doesn’t need to be connected to any particular grid. You want to live somewhere that has electricity. You want to be next to a grid. Factories need to be next to places that generate electricity.
But Bitcoin doesn’t. Bitcoin can buy electricity by simply having the electricity used at the spot where it is produced to run mining machines, which send out data. So [00:09:39] Bitcoin will turn your oil or gas or hydroelectric energy into digits, zeros and ones, and beam them across the world.
In that sense bitcoin ends up having inevitably an enormous advantage in terms of being able to buy electricity that is much cheaper than other electricity. And we know that only cheap electricity is used in Bitcoin, because of the way that the difficulty adjustment works. And so on the chapter before, this is chapter 15 I discussed the difficulty adjustment of Bitcoin. And this is really in my mind that as I said, in the Bitcoin standard, this is probably the most genius part of the Bitcoin design and the glue that holds the rest of Bitcoin together. And we’ve had a whole podcast discussing the difficulty adjustment. I think it was maybe number five or number three or four or something like that where we discussed the Bitcoin difficulty adjustment.
But the short summary of it, is that because the difficulty of mining Bitcoin is constantly adjusting. It is constantly [00:10:39] making the highest cost of electricity on the network less profitable. And so as the price of Bitcoin rises, more and more people enter the network and more and more people mine.
But what ends up happening is the difficulty of mining Bitcoin rises. And then as a result, the quantity of output in terms of bitcoins that you can get for the electricity that you’re contributing will decline because more and more people are on the network. We can’t make more Bitcoin. You just end up getting fewer Bitcoin for the electricity that you put in. And so when the difficulty goes up, the profitability of most miners who are mining on expensive electricity, they’re the first to go. So all the expensive electricity on the network will start to become unprofitable. The amount of Bitcoin that you’re making is not enough to pay the electricity bills that you’re paying. At a certain point that’s what ends up happening with the difficulty keeps rising. And so [00:11:39] because of that, the only miners that are able to stay in the game in the long run are the ones who have very cheap electricity. Ultimately, this ends up being a lot of hydroelectric power because this is the main problem with hydro electric power, which is that it is situated near waterfalls and areas that are isolated from society and trying to move the electricity to society and cities and factories that need it is quite expensive because moving electricity is very expensive. You need wires or you need an expensive grid.
Or if it’s another kind of electricity like gas, stranded gas, that’s another one. If you have stranded gas, it’s hard to move it to places where it is required because it’s very cheap by weight. And so the cost of shipping it to remote locations ends up becoming pretty prohibitive.
So Bitcoin can buy all that cheap energy. So it’s a lot of hydro. I think methane flaring, there’s probably going to be some of that. So the methane that when they dig for oil, most cases, they end up burning a lot of the methane because it’s not worth transporting. So that [00:12:39] methane, instead of being burned because you can’t transport it, it can be used to mine bitcoin.
And all power plants that have excess capacity because say demand in the region has declined over time. Or because new power plants are being built. These power plants can mine Bitcoin with excess capacity in order to keep operating. So these are really going to be the main sources of electricity that Bitcoin consumes. And so we can estimate the price of electricity that goes into Bitcoin is somewhere around two to 5 cents per kilowatt hour I would say. So at a hundred to 150 terawatt hours, two to 5 cents per kilowatt hour, then we’re talking about two to $6 billion of electricity are being spent on Bitcoin per year. This is roughly the amount of money that is being spent on electricity. It’s a $2 billion to $6 billion of Bitcoin.
Maybe if the electricity is a little bit more expensive then maybe we could say $10 billion as an extreme estimate, but I think it’s more likely to be closer to the $2 billion mark. That’s the amount of electricity that [00:13:39] Bitcoin would consume per year at current levels. Of course, it still might go up over time. But that’s where we are right now. This is the cost of electricity that we pay. And as I said, it’s electricity that’s mostly spare, that wouldn’t be used for anything else because it can’t be moved.
And all the electricity that can be connected to civilian and industrial demand is going to be driven off the network because that electricity has a high opportunity cost which can’t compete with the electricity that’s off the grid and that’s, the stranded hydro electric power and so on.
That’s the cost of electricity, but then we can also measure the total cost. Because in order to make Bitcoin operate, you don’t just need electricity, you need to build the mining facilities and you need to pay rent and you need to pay engineers to install those things. And so there’s a lot more expenses that go into running bitcoin and making it operational. And so if we’re going to think about what these costs are, I think a good way of estimating the total costs [00:14:39] incurred by miners is to measure the total reward received by miners over a particular period of time. Because mining is an extremely competitive industry. And miners are going to operate at something close to break even, or maybe they’re going to be profitable for a while. They’re going to maybe lose money for a while. But overall I think, some will lose money. Some will make money. But the value of the reward that they get is going to be close to the value of the resources that they have spent. Most likely most Bitcoin miners are in profit. And so we can imagine that it’s probably a little lower than the reward. The cost that they’ve spent is probably lower than the reward because most miners are in profit and Bitcoin has been going up enormously over the past 10 years.
So the cost is probably lower than it, but I think we could take as an upper bound, we can measure the total cost of Bitcoin as the total value of all [00:15:39] the rewards received by miners since the inception of the network. So all the Bitcoins that have been produced, plus all the Bitcoins that have been paid as transaction fees valued at their dollar price on the day in which they were produced. I think this is a useful metric to keep. And that adds up to around $30 billion so far. So if you measure the total amount of money that miners have made from Bitcoin, by measuring the dollar value of bitcoin rewards on the day that these rewards were produced. And then you add them up for all the days over Bitcoin’s lifetime. You end up with something in the range of $30 billion. So that’s how much money we’ve basically collectively spent on Bitcoin. I think this is a good idea of an upper bound estimate of how much money has been spent on Bitcoin.
So people have put $30 billion as an upper bound of resources into Bitcoin. Probably under 10 billion of that is electricity. [00:16:39] Of course the other major costs, which I forgot to mention is the mining equipment itself, producing the mining equipment itself is a significant part of the costs of miners. I think this is an estimate of the cost. So Bitcoin has cost us $30 billion as a civilization, which it’s no joke. It’s a fifth of the wealth of Jeff Bezos, roughly. So, we could tax Jeff Bezos 20% of his wealth and we’d have a whole Bitcoin network running. If we wanted to use these people’s language against them. You know, why not just tax Bill Gates, Elon Musk and Jeff Bezos, and then we can have all the Bitcoin that we want. What do you guys think? I think this is perfectly reasonable. If it’s only $30 billion, Jeff Bezos has got that money and he won’t be poor if he pays $30 billion, he’ll still have $120 billion left or whatever. So, perhaps this is how we should make people think about Bitcoin costs. Obviously I’m joking, $30 billion is a lot of money. And, Bezos’s money is his money.
It has nothing to do with [00:17:39] Bitcoin and we have no reason to compare it with it. Economic value is not up for economists to decide. Economic value is determined by people. And their actions. So this I think is a good estimate of the cost of Bitcoin, $30 billion. So what are the benefits of Bitcoin? What has Bitcoin given us for all these $30 billion?
. the first thing that Bitcoin has given us is a lot of savings. We have a lot of people around the world who are holding a lot of coin. And that coin is worth significant amount of money today. It’s worth something in the range of almost $800 billion at the time of recording right now. It was worth about a trillion up until a few weeks ago. So somewhere in the range of around a trillion dollars of economic value has been created. I’m sorry, a trillion dollars of savings have been created. So we have a trillion dollars of saving and by extension that means yeah, trillion dollars of market value. [00:18:39] And we can say that the trillion dollars is an estimate, a lower bound estimate of the market value. Well currently let’s say 800 trillion, but hey, what’s a couple of hundred trillion dollars between Bitcoiners it’s all dollars anyway.
But, you know, we’re in that range of the 12 digits. So Bitcoin is in the range of the 12 digit getting into its 12th digit right now. So we’re almost at a trillion dollars. We have a trillion dollars of savings around the world. And we have people who value Bitcoin. The total sum of economic valuation that is attached by humanity to Bitcoin exceeds that number of 800 trillion.
And we know that for sure, because you know, these people hold those coins. And they could sell them right now for the Bitcoin going price. But they choose to continue to hold those coins. So the fact that the price right now is where it is, which I think is at $40,000 a coin right now. And we’ve got about 18 and a half million coins.
That means that the total market cap, the value of all of these coins is being held by people who [00:19:39] value those coins more than their market value. Otherwise they would have sold. Of course, there are some lost coins that minimize the sum. But, it’s somewhere between half a trillion and a trillion, it’s been somewhere between half a trillion and a trillion for the past four months or so maybe. So that’s roughly the range of savings that have been created. So basically Bitcoin so far is an enormously efficient machine for the creation of savings. Can think about it as a savings factory where you put in electricity and you get savings out. And you put in $30 billion of electricity and infrastructure to build the savings plant. And you get a trillion dollars worth of savings. So you’re getting something like 30 fold return. There are people out there holding about a trillion dollars worth of Bitcoin and all the humanity had to pay for that trillion was about $30 billion worth of [00:20:39] Bitcoin. So we’ve got a 30 X return, a 30 fold return on investment roughly on the amount of infrastructure and energy and electricity that has been spent to make Bitcoin happen. So, this is really how we can think about it.
Bitcoin’s total security expenditure, total expenditure in order to secure and operate Bitcoin and verify the transactions over the past 12 years of Bitcoin’s existence has cost people somewhere around $30 billion and it has given us a trillion dollars worth of saving, which people value at around a trillion dollars or more. Which I think is a pretty good bargain because, what better technology for saving have you invented? I would like to ask all of the smart asses who think Bitcoin is wasting electricity.
I mean this not in the sense of Fiat academics sitting in their offices and wanking for lack of a better world. Wanking of some meaningless mathematical equations about that would offer a [00:21:39] better money than Bitcoin. I’m talking about an actual working product, accessible to people in Venezuela and Lebanon and Zimbabwe and Turkey and Brazil whose currencies are currently being decimated. Like what better technology is there for those people to store their wealth into the future? How can 60 year old Brazilian about to retire, how does he guarantee himself that he’ll have enough money to eat if he happens to live for another 10 years?
What actual working products do you have that beat Bitcoin in this regard? And you can think about it in an aggregate perspective, how much electricity we’ve put in and how much savings we’ve gotten out. And you can also think about it from a returns on investment perspective. On average, Bitcoin is doing 200% a year over its first 10 years.
So, which better technology do you have that has had a longer, more reliable record with better returns? Answers on a postcard readers. Not going to [00:22:39] bother, give you the address because you don’t need it. This is an enormously efficient machine for creating savings. And it’s one that is badly needed because we live in a world in which currencies are constantly being debauched.
And if you want to measure the efficiency of Bitcoin security, you can think about it in terms of the $2 billion electricity costs per year to the a $1000 billion or a trillion dollars that are secured. Or you can think about it in terms of the daily expenditure. So currently we spend about at current price, there’s about $30 to $40 million of bitcoin mining reward, including new Bitcoin and transaction fees that are being given to miners every day. So that’s the amount of Bitcoin that we’re producing today.
And if you compare that to the value that it is securing. So, we need to pay $30 million a day in order to secure a trillion dollars of savings. Or if you think about it a year round, yeah, it’s something like a billion or $2 billion in security expenditure [00:23:39] in order to . Make the network continue to operate. No, I think actually it’s higher at current levels, probably around $5 to $10 billion at current levels. I haven’t put in the final numbers yet because I wanted to put in an updated calculation and I’m getting a new data set to make it up-to-date before I publish it with the most recent numbers, but, the cost of the mining reward currently is roughly in the range of, I think around two, 3 billion per year with a market cap that’s around a trillion.
I figured you could measure Bitcoin efficiency in this regard as the mining rewards versus the market cap. Which is going to give you a number that is very similar to the Bitcoin stock to flow. So we can think of Bitcoin’s efficiency as being the stock to flow of Bitcoin because if we think of the engineering problem that Bitcoin solves is securing savings.
The value of the saving is the stockpiles of Bitcoin. And the value [00:24:39] of the security spending is the flow of new Bitcoin. Currently it’s very similar because the security spending is not identical because the security spending also includes transaction fees. But overall so far transaction fees have mostly been under 5% for the majority of Bitcoin’s life. So Bitcoins efficiency has been very close to the stock to flow because the new mining reward, the value of all the expenditure on mining that we’ve produced this year is equal to the total number of Bitcoin that are produced, the new Bitcoin. So if you divide the stockpile of existing Bitcoin by the new production you get the stock to flow ratio and you get the same answer if you’d do it with Bitcoin or with dollars because the dollars cancel out.
So we could think of the efficiency of Bitcoin as being the stock to flow ratio. We can think of the stock to flow ratio as being a measure of the efficiency of Bitcoin, because it tells us how much money Bitcoin can secure at what cost. It tells us the ratio between the [00:25:39] stockpiles and the cost. That’s like an engineering parameter of Bitcoin’s operation, almost like the engineering parameters of an engine’s operation. The way that Bitcoin works is that there’s a certain number of coins outstanding, and there’s a certain number of coins being minted every day. And so that ratio between the new coins to the existing coins is the ratio of the cost of security to the existing secured coins.
In other words, it’s the efficiency. It’s how much money are you spending on securing Bitcoin? Which is how much money the miners are spending, which is roughly equal to how much reward the miners are getting compared to, as a percentage of the total existing Bitcoin that are being secured. So currently we have 18.6 or 18.7 million bitcoins out there.
And we’re producing what is it? At this point it’s about 600,000 bitcoins I think is the annual production at this point. And the number escapes me. Well, after the halving we’re doing.
Well, it wasn’t the first one. Was it? [00:26:39] Two and a half million, and then we have three halvings. So, yeah, so about 600,000, it’s about 600,000 coins a day. So, yeah, so the stock to flow is 18 million over 600,000, which is roughly going to be equal to the stock to flow. This is the stock to flow. So this is the ratio of the value that is being secured to the cost of securing it. And so thinking about Bitcoin’s efficiency and this is based on what Michael Saylor was saying in his interview.
Thinking about Bitcoins efficiency in engineering terms has helped me uncover perhaps the economic and statistical significance of the stock to flow ratio because it seems to be that it is pretty significant in determining the price because it is fundamental element of how the network works.
If the stock to flow rises that means that the stockpile that can be secured for every new dollar of inflation, for every new dollar of security spending, for every new dollar of inflation [00:27:39] that gets added onto the market, that means we can secure an X more money. Because think about it. This ratio tells us how much new coins are being produced. How much new inflation is coming on. How much new money we need to come in in order to buy up the coins at the market price in order to keep the network secure. So thinking about that in this way can really help you see why the stock to flow ratio can really be a pretty accurate measure of the market value of the network because it reflects a fundamental engineering reality of how the network works. And that’s the distinction between the outstanding stockpile and the new production. And the higher that ratio that means that you have less inflation to worry about compared to the stockpile.
And that’s exactly the argument in the Bitcoin standard on the importance of the stock to flow ratio. When the stock to flow ratio is low, that means that there’s a very high amount of inflation compared to the existing stockpiles [00:28:39] and such an asset is unlikely to take on a monetary role because it’s inefficient at playing the role of money.
On the other hand an asset which has a higher stock to flow ends up having a large supply outstanding for a small amount of new production. And therefore you can store a lot of value in it and not witness significant inflation and devaluation. And that’s why it attracts more and more value, and that’s why it grows and becomes more and more monetized. And that’s what we’re seeing with Bitcoin.
And in fact it could be that the strong correlation between Bitcoin’s price and Bitcoin stock the flow which we’ve also discussed on this podcast before so look back for a stock to flow and Peter will add the links to this episode in the show notes. Thinking about the efficiency of Bitcoin helps us uncover the significance of the stock to flow in this regard. And it’s a model that correlates the market price of Bitcoin to the stock to flow to the ratio of Bitcoin stockpiles to new production and finds a very strong, persistent relationship. So that’s the second kind of benefits from Bitcoins. So we have secure savings and [00:29:39] we have appreciating savings.
The savings are going up as I said, at a rate of two hundred percent per year. And then, another benefit of it is of course that we can send money with it. And you can think about the efficiency of Bitcoin in sending money in terms of the cost of sending money with Bitcoin. So think about moving a billion dollars with Bitcoin for a dollar of value. That’s an enormous amount of economic utility. And for people who have used Bitcoin to move money around the world, that utility has a lot of value.
It’s not very easy to think about quantitative ways in which we can estimate the economic value so far of moving these transactions. We could think of transaction fees perhaps, but I think the value of these transactions is far higher than the transaction fees that people have paid for them right now, because I know people who have made lifesaving transactions and paid 20 cents in transaction fees. It’s not just the 20 cents that is the value. So there’s an enormous value there, which is pretty hard to [00:30:39] quantify, but again, most of the benefits and the costs, well, the costs are easy to quantify in the Bitcoin case, but the benefits are hard to quantify, but whatever quantification you can get is still many orders of magnitude higher than the costs. So just simply the savings, you know, if Bitcoin had no other benefits. Just the fact is it is a way of making savings, you know, think of Bitcoin as a factory for manufacturing savings.
And it produces savings worth 30 times the cost of the resources that go into this production process. So whatever value global money transfer adds to that is a bonus. So we were already doing 30 x and wait, there’s more, there’s a lot more. The other main value proposition of Bitcoin of course comes from any unseen benefits of Bitcoin, the really, really unseen benefits of Bitcoin. And that is the replacement of Fiat. So thinking about Bitcoin, right now we’re looking at rookie numbers, let’s be honest here, you know, Bitcoin’s [00:31:39] only consuming a thousandth 0.1% of the world’s energy or something like that.
There’s going to be more energy consumption. Prepare yourself psychologically for this number to go up. It’s going to go up just like all numbers in Bitcoin are always going up. So there’s going to be more electricity and if you think about Bitcoin growing into the world’s only monetary system how can you really justify it? Is it just the value going up? Well, I think it’s more than just the value going up. It’s also the economic benefits of the fact that people now are no longer having to use inflationary Fiat garbage money. And this is a big deal. And in fact, I did a calculation, which I think this might be the first time that I see somebody do this.
I think in retrospect, it sounds now like it’s an extremely obvious bunch of numbers that needs to be run. But what is the cost of Fiat inflation around the world? Well currently there’s about $90 trillion of money, [00:32:39] $90 trillion of government money in the world. So if you measure the money supply of all the world’s countries, it adds up to around $90 trillion. This was, I think 2019 data so now it’s probably much higher, but let’s say it was let’s stick with 90 trillion dollars.
And this stuff is being devalued at a rate of if you’re lucky 7%, you know, If you happen to live in one of these countries with good monetary policy and good rule of law then your money supply is only expanding at around 7% per year. In many places, it’s going up at 200% and 300% and 500% per year. And in some places going up at 10%, 20%, 30%, 50%. So we have the whole range of numbers for the increase in the money supply. And if we were to take an average, a conservative estimate would be that the average is around 10%. I think that’s highly conservative. You look at the dollar over the past few decades, [00:33:39] it was at 7%. So if we take that as the baseline and then remember that all the other currencies are going to come in at higher rates or most of them are going to be at high rates. There’s a few, very few number of currencies with small populations that have lower rates, maybe Japan, and a couple of European countries. But the vast majority of the world is living in crazy banana republics where the money is going up at double digits and higher. So I think 10% is quite conservative estimate and I’m working on estimating this precisely by measuring increase in the money supply across the world’s currencies and calculating a weighted average of this. So I’ve got somebody working on running these numbers. So getting a weighted average, where we weigh each currency by its value in the market and then we weigh it’s devaluation or it’s inflation every year, it’s supply inflation every year in order to get an estimate of the global money supply increase every year weighed by currency. We don’t take [00:34:39] an average where say the Lebanese Lira gets the same weight as the US dollar.
And so then you end up with an average inflation rate of maybe 100% to 200%. We’ll weigh them by relative size. So if you’re just adding the U S and Lebanon. You’re going to get essentially the same answer as if you were just looking at the U S because Lebanon is so tiny. The Lebanese Lira in particular is so tiny compared to the US dollar, but if we ran these numbers, I think we’re going to get something around in the range of 10%. So something like 10% of that value is bleeding out of Fiat money. 10% of Fiat money value is being bled out every year roughly. Because the money supply is increasing. And of course, as we discussed at length in the Bitcoin standard, there’s no good reason for the money supply to increase. You could stop the money supply from increasing and all of the current benefits from seigniorage that flow to governments and banks and big borrowers, big creditors, essentially, as I discussed in The Fiat Standard, all of these [00:35:39] benefits would accrue to the holders of the currency as the currency appreciates. We would have money that appreciates at two, three, four, five, maybe 6% per year.
And that would benefit everybody. This is the really best way if you want universal basic income, if you think universal basic income is a good idea. This is a hundred times better because you’re getting excellent value for your money because your money is constantly appreciating. So instead of our money constantly appreciating, and of course, this is why we don’t measure the CPI. The CPI tells you how much prices are changing. And of course the CPI is massively problematic for many reasons. And we’ve also had an episode on the CPI. We’ll include the link in the show notes. But even assuming the CPI was correct, the CPI tells you how much prices have increased, but if the money supply hadn’t increased, then prices would have dropped.
So the level of money supply really is a better estimate of just how much your currency is losing value because it’s a measure of how much the supply is being increased. So all else being equal, this is how much the currency would lose [00:36:39] value. Of course, all else isn’t equal, but this is the best estimate I think that we can get because the currency supply is being devalued. And so everyday your share of the pie is declining because there are more tickets being issued for the same pie.
So by this measure, we’ve got $90 trillion of money around the world every year being devalued to the tune of 10%. So that’s about $9 trillion. That’s the cost of fiat. So if Bitcoin replaces Fiat, it’ll save us a cool $9 trillion a year just in the cost of operating the Fiat standard. That’s the inflation, that’s the price that we have to pay to run the Fiat monetary systems to finance the governments and the connected cronies. You have to pay this enormous amount of money. This is what we’re paying all the time. And in fact the estimate of money was at $90 trillion that I used. The estimate of total global wealth is $360 trillion. So money is about a quarter of the world’s [00:37:39] wealth. And so every year we’re losing 10% of a quarter, which is 2.5%. So basically every year the world is losing around 2.5% of its wealth to government money inflation.
Tell me again bitcoin is not worth it. 2.5% of the world’s wealth. Imagine everything that we have worked for as a species for all of our human history, all the capital that we’ve accumulated, all the work that has been done by everybody living and everybody who’s died in order to give people $360 trillion worth of wealth that they’re holding onto. And every year. We lose two and a half percent. So obviously as the numbers increase, as the money goes up the value stolen goes up and as the inflation goes up. But I think it’s a good rough estimate if quarter of global wealth is in money I think 2.5 is a good range of the estimate. Maybe a little bit lower, maybe a little bit higher, but it’s in that ball range. We’re [00:38:39] losing a few percentage of world wealth every year in order to run this monetary system, this insane monetary system.
So Bitcoin offers you a way to opt out of that. And so, before we get to that, actually one very important point to keep in mind here is that when you think about the $90 trillion that are liquid money wealth, that’s only a quarter of global wealth. But guess who owns most of that? Well, not who owns most of that. Most of that money will obviously be owned by the rich because they will own it. But it forms a much bigger percentage of poor people’s portfolios than rich people’s portfolios.
Because rich people don’t hold money. So yeah, they’ll have a lot of money compared to poor people. But it’ll be a very small amount of money compared to their assets because they hold hard assets. They hold real estate, they hold bonds, they hold stocks. They hold things that hold on to value much better than the money of the government.
And the people who hold government money are [00:39:39] people who generally can’t afford much assets and people who can’t afford to hold much else. So that money, not only is it an enormous amount of money, it’s an enormous amount of money that’s being taken away predominantly from the poorest people in the world.
The poorest people in rich countries, but also the poorest people of poor countries. Everybody’s being robbed by inflation and they’re being robbed infinitely more than other people. Because they are the ones who are holding onto the cash. So effectively, this is a system of reverse Robin Hood that is depriving the poorest people of the value of their money and sending that value essentially to government and to connected industries. It’s not accurate when I said that everybody is hurt by inflation. Some people obviously benefit. Some people will win from this deal because they are benefiting from the new money that is being created. So we are losing every year around 2.5% of global wealth predominantly from the world’s [00:40:39] poorest. And it is being used to finance governments and their cronies who are predominantly the world’s richest. I mean in every country the government is generally staffed by the richest people. And they’re very well connected to the richest people.
And the people who benefit from central bank inflation are usually the richest people. So this is just one thing that Bitcoin fixes. So think about a Bitcoin takes $30 billion of value to give us $1 trillion of value. And fiat on the other hand is costing us every year $9 trillion of lost value. So if Bitcoin were to increase to have market valuation of $90 trillion, which is about a hundred fold where it is today, if Bitcoin was to appreciate about a hundred fold in value, meaning every Bitcoin would be worth $4 million roughly then the market value of Bitcoin in today’s dollars would be a worth the total value of all the world’s money supply.
So if that were the case, if all the world’s poor could hold onto Bitcoin, instead of holding onto [00:41:39] their government’s inflationary money then you would have a world in which people are not losing 10% of their liquid wealth every year through inflation. We’d have a world depending on when this happens it’s going to be 1% or less than 1%, most likely, you know, if it happens anytime after 2025, it’s going to be less than 1% of world’s wealth being lost to inflation, to secure the network. And that’s it. And then that’s a far, far more efficient system. Because the stock to flow continues to decline, the new Bitcoin that is being produced continues to decline in quantity compared to the existing stockpile. And so Bitcoin continues to become more and more efficient and better at holding on to value than Fiat. So it’s already at 1% when Fiat is at 10%. And it’s only going to go down further. It’s only going to become more and more and more efficient. Fiat bleeds around 10% per year. Bitcoin is bleeding currently at 2% per year and it’s going to eventually get to zero.
So [00:42:39] that does sound like a bit of a big deal. But of course it doesn’t end there, there’s more. It’s not just the cost of the inflation. There’s also all of the economic distortions that are caused by Fiat money. This is all the stuff that I discuss in the Bitcoin standard and in the Fiat standard.
First of all, think about time preference. People’s time preferences rise because the value of their money is constantly declining. And so therefore they don’t think of the future as much because they can’t save for the future. They can’t provide for the future. And so their attentions are more likely to turn toward the present in all manner of decision-making. And if you’ve been to a place that has experienced hyperinflation, you’ll see how people’s minds shift from thinking about life overall and long-term goals and what you want to do with your life. You have to by necessity shift your entire mental focus to think about daily survival.
You don’t have a way for providing for the future. The money you have is basically a melting ice cube. Everything is getting too expensive. And you’re struggling to make ends meet. And [00:43:39] it’s very hard to think of the future. So think about the implications of high time preference. Of how much fiat money has raised the humanities time preference and how much that has cost us in terms of capital accumulation instead of saving. We don’t save. We spend a lot and we borrow a lot. And how much that has cost us in terms of people committing crime and becoming basically high time preference rather than being productive people.
So that does entail an enormous cost. There is of course the cost of the business cycle, which is caused by the manipulation of interest rates as I discussed in the Bitcoin standard. All of these crises are constantly happening because of the fact that this money can be manipulated by governments from the Austrian perspective.
And then some Fiat economists estimate that the financial crisis of 2008 costs every American $70,000 in lifetime earnings. Or roughly a total of $21 trillion. So when you remember that Fiat is going to have one of these massive financial crisis, every couple of decades you throw in a couple of dozen [00:44:39] extra trillion dollars for all these kinds of crises. And the tab adds up more and more. And of course there’s the capital destruction that comes from the fact that people don’t have a place where they can keep their value. They must invest in order to try and beat inflation because money is constantly losing value.
And so as a result, they will invest in a business that destroys capital as long as it does not destroy it as quickly as Fiat money does. So if your money’s inflating at 10% per year, a business that pays you negative 5% per year becomes a good investment. And so people will invest in it rather than hold onto their value and wait for a good business that pays you a positive 5% next year.
You will just take whatever you’ll get. And so a lot of bad businesses get capital and a lot of money is spent on destroying capital. And that’s just how fiat works and that also is added up to the tab. And then we have the cost of Fiat governments, which is an important part of the Fiat standard book. So you can think about just how much extra costs there is to the fact that Fiat allows governments [00:45:39] to exist. Now here of course if you speak to a statist or Keynesian economists, they’ll tell you that you need to think about the costs and the benefits of Fiat. And government spending is a benefit of Fiat because government is taking all of that money, but it’s using it. It’s doing things with it. And therefore, it’s not entirely wasted.
I don’t think so. I think if it was burned, if that money was burned, it would be much better. That would be the cost, but in fact, government spending is the worst part of government expropriation. If you ask me, what is the ideal tax? For me the ideal tax is a tax that goes straight from the citizens to the president’s Swiss bank account. This is the best form of taxation. Because it does not interfere with the economy. The worst kind of taxation is where the money’s taken from productive people and then given to bureaucrats to spend, because then you’re just giving those bureaucrats the ability to centrally plan and micromanage the economy which is going to have enormous costs as well. So we can’t really think of government spending as being a [00:46:39] good thing about Fiat because all of that money is being used, it’s making markets less responsive to people’s actual demands because the resources are being taken from the people who need them and being given to people who are deciding what to do with them. Deciding for them on their behalf, what they should do with them.
And it is distorting markets. So, think about that kind of economic distortion and the cost of having all these governments. And in the second section of the book we have a part on fiat food. We have a part on fiat energy. All of these aspects of life in which government interferes it can distort the markets in an extremely destructive way because it has this magic printer that allows it to do whatever it wants with all of the money that it has.
And then the next cost of course, maybe the biggest of them all is conflict. Is the fact that we’re going to have a lot of conflict on a Fiat standard because Fiat is, it’s essentially monetary might makes right. Ultimately what determines the [00:47:39] validity of any banks ledger in the world is that the U S federal reserve says so. The US federal reserve can take all of your money in whatever bank it is, in whatever country it is.
They can stop any transaction you have, and they can confiscate your money. So there’s no physical aspect to the money problem in the Fiat system. There’s no proof of work there. It’s all proof of might. The U S has the world’s strongest army and has military bases all over the world. And if the U S says this transaction by this bank is wrong, well then that transaction is wrong. And if your government’s going to take it up with US, it might end up having to deal with military. That’s ultimately what it comes down to and Fiat shills and Fiat apologists are pretty open about this.
You know, they’ll tell you. No, no, no, no. Fiat works because government says it does. Fiat is money because government says it is. That’s what it means. It means that you’re making all economic value in a society determined [00:48:39] by power. It’s not by production and it’s not by peaceful exchange. It’s not by consent. It’s not by people making things and trading them with one another and then whoever makes the best and most things ends up with the most money.
No, it’s a loyalty scheme and the points are assigned arbitrarily. The more the system takes on the character of Fiat, the more it becomes arbitrary and the more it is arbitrary the more valuable the positions of power are. And the more valuable the positions of power are the more bitter and costly the conflict that people will engage in in order to take that. So, really the reason Fiat politics is so bitter is not because those people, actors in Fiat politics repeating whatever their handlers tell them is effective campaigning.
It’s not that they have serious major differences on policy. They all generally agree that everything needs to be funded and everything needs to get more money. Nobody has to actually make [00:49:39] choices. Nobody has to offer any kind of opportunity costs calculation because you can have everything. Everybody wants to print. All of the people in politics are geared in that way.
Because basically the way that the system works is that power determines what is money. People are going to spend a lot of power in order to try and be the ones in power. So that’s why domestic politics is so bitter all over the world. Because the winner gets to control the printer. So the winner can assign and create monetary value at will. The winner can just take their opponent’s money from the bank.
They can shut down everything for them. When you make money political, you make the mechanism for assigning value in society political. You dedicate people’s energies away from economic production, away from trade, away from consensual production, toward political conflict. You direct people’s attention toward let’s fight each other.
Because if I win, I’m going to have the printer and worst of all, if I don’t win, he’s going to have the printer. And then he’s going to do all kinds of horrible things to me. So [00:50:39] really 90% of the fun, maybe 99% of the fun of Fiat politics is the printer. Everything else is details. You have the printer, it’s party time. You don’t have the printer, you’re in deep, deep, deep, deep trouble. That entire equation is ended if you have something like Bitcoin, because if you have something like Bitcoin, you want to have money? You need to produce value. That’s it. That’s how it works. If you end up in government you can’t just print money. You have to take money from citizens. So you have to tax people. You have to ask for the money before you spend it. If you want to launch a war, you have to first get people to pay you the money that you can use to pay the soldiers to go fight the war before you fight the war, you can’t just print the money and then let them handle the paycheck through inflation. It won’t work. So war becomes far less common. And conflict becomes far less common because the stakes become much lower. That’s really the key thing.
The more people discover Bitcoin, and this is why I’m really like, I think it’s a [00:51:39] fundamentally transformative technology for human life. Is because it really changes the incentives to cooperate for humanity. Before Bitcoin we have to have the payment rails of any monetary system. They have to effectively be coupled with politics and we have to accept that the people in power would always have a degree of power over everybody else. Degree of monetary and economic power over everybody else because they have the printer and they have the rails on which the money travels. Bitcoin takes that away. It makes it an apolitical technological solution. And therefore the stakes for politics and the stakes for war become far less. You don’t get to control the world’s monetary system if you win a world war. And that I think might do more for peace than anything.
And I think when you want to really calculate the cost of that, the cost of a monetary system that is so volatile and that will explode conflict that can kill millions and hundreds of millions. [00:52:39] It’s killed hundreds of millions of people all over the world in the 20th century. Hundreds of millions of people were killed by governments in conflict and in war in the 20th century.
So, I don’t think you can put a price tag on that.
These are the costs and the benefits of Bitcoin. As you can see, the few billion dollars we spend on electricity every year come out to look like such a wonderful bargain by comparison. Wouldn’t you agree?
Peter Young: So given what you were saying around about the value being worth at least 800 trillion US dollars or whatever it is. Sorry, $800 billion . Couldn’t you apply the same logic to the sum of US dollars in the world and say people choose to hold them therefore, the Fiat monetary system is worth that much to that many people and therefore the benefits outweigh the costs.
Saifedean Ammous: Yeah, I think you can apply this to the dollar, but only to some extent. The place where this comparison breaks down is that the dollar is not sound money that has won its place in the market through free competition. It is a monopoly. There are legal tender laws that prevent competition and that [00:53:39] prevent you from building banking infrastructure around other competitor monies. You can’t just go and set up a gold bank. Bitcoin changes this, obviously, because Bitcoin would just went ahead and did it. But people who tried to build gold alternatives to the Fiat banking system didn’t have much success with it. And I think that’s really why you can’t really say the same about the dollar, because it’s not truly a free market product. It’s a monopoly.
But still, I think given current political realities, and given the trade-offs involved, given the current economic landscape, people value it to that extent, I think, yeah, people currently value dollars by the market cap of dollars.
Attendee: Something Bitcoin brings is that people don’t think about is actually a brand new language. In other words the communication of the price mechanism, is this is the first time we’ve had a pure kind of saying the same thing, as you said, when you were talking about [00:54:39] you’re logic to the $9 trillion. It’s a really intangible unseen thing that you andhave a way to think and think and communicate over distance and time. But not just that, but without having to worry about trust. Truly. Kind of hard to touch and feel.
Saifedean Ammous: I guess we could say that we can measure that is that this frees us up from the conflict because the conflict comes from people having to trust each other. And from people being in a position where they must rely on one another, we must share the same network. We must use the one monopoly central bank in a country. And that creates a lot of conflict. So we could think of the cost of conflict as really being the cost of the trust maximization of the Fiat system. By being based on having to trust people and having to elect people and having to have them appoint correct people into place so that they don’t destroy our money, you end up creating a lot of [00:55:39] conflict, which can end up being extremely expensive.
All right. Well, thank you guys for joining today, I hope you enjoy this and I’ll see you in our next seminar on Wednesday. Take care.