69. The Bitcoin Machine
In this episode Saifedean talks to regular seminar attendees about why bitcoin operates like a machine. They discuss why – like a washing machine – bitcoin continues to serve people who use it regardless of whether they understand the mechanics of how it works, why bitcoin’s critics are analogous to luddites, and why money should be understood as a private market good, rather than a public good.
- @s2fmultiple on Twitter
- For Ludwig von Mises’ definition of money as a medium of exchange, see “Media of Exchange and Money”, Chapter XVII, in Human Action
- For Murray Rothbard’s explanation of the nature of money see: The Emergence of Indirect Exchange, Chapter 3-The Pattern of indirect exchange in Man, Economy and State
- This passage from Mises’ The Theory of Money and Credit provides an explanation and refutation of the state theory of money
[00:03:40] Speaker 1: We are going through a tough period. This guy probably is not going to last beyond this year, but in a meeting of maybe 50 minutes, I managed to persuade him or at least, I used an analogy that I think it clicked with him, and I said look, Libya has loads of billions outside of the country in UK, in Europe and America.
Most of the accounts are frozen. You can’t access it. You can’t really use it, even if you want to fix a big issue in Libya, you can’t have that money to fix that issue. So like, what if you put less than 1% of the oil that you sell whether it’s on a monthly basis or a weekly basis or whatever into Bitcoin, and you kind of have that money, cause you’re going to have the sovereignty, you’re going to have this amount of money that you’re free to use solving issues with electricity, with whatever issues that the country is facing, that you cannot fix with the money that you have abroad.
[00:04:40] And it actually clicked with him. He was like, wow, can I actually do that? Would I have that much control? Yeah well, basically with Bitcoin, yes the other side has to accept it or somehow you, you need to convince the other side, but there’s many ways of, they don’t have to really get Bitcoin on the other side, you can pay them other ways.
But you have sovereignty over your money. And you’re free without having a task permission from any other government to use that money. So it worked he was interested. He said let’s see how we can do a proposal about this, but I went home and I was like, with this ideas that like, I would continue, obviously I’m gonna continue.
I’m throwing some sort of like bullet points into this proposal, but at the same time, any moment things could go really bad in Libya and war could start and this guy would no longer be there anymore. So it’s just sad, but that was my experience in that.
Saifedean Ammous: Yeah. And like, and, [00:05:40] and really think about it not so wouldn’t you rather have the Hashemites in Lybia?
Speaker 1: Yeah, yeah. Libya is a big mining place. We have subsidized electricity, very, very cheap oil or fuel. That is basically generators that would be actually cheaper than water for fuel. And we hold about 0.6% of the whole Bitcoin mining in the world.
And in terms of numbers, Libya is the highest in the Arab nations and in north Africa and all of the Gulf nations and Saudi Arabia and all of this stuff. So mining is huge. Mining is there, there’s a growing community it’s been growing for quite a long time, but as we say, whether they would like it or not it’s happening.
So that happened without them like, basically talking about it without the government actually helping through it, but it actually grew and it’s there.
Saifedean Ammous: Jordan actually, they don’t have a mining industry. Although it would work for them because they have over-invested in a whole bunch of stupid energy projects.
They did [00:06:40] a bunch of renewable bullshit in the middle of nowhere that is too expensive to connect to the grid they realized, of course after they spend shit tons of money on it. But they don’t have mining. A friend of mine is trying to talk to the electricity company to get one of their extra plants.
I think it’s shale. I think it’s some kind of fossil fuel that they’re using somewhere, and they have extra capacity to mine it, but it’s not going much. But I’m trying to talk about that too. I mentioned it in the orange bill to the crown prince. I think the difference is really quite remarkable in the fact that, you know the Hashemites are going to be there for a while.
It’s very different from other countries. There’s an enormous amount of legitimacy around the king because ultimately he’s the son of the prophet. He’s the descendant, direct descendant of the prophet. So people really find it hard to go against him which is a good thing, it means he can plan long-term.
Daniel Prince: One other quick story for you Saif, I was chatting with a guy, I’m going to have him on [00:07:40] the show tomorrow morning, I was put in touch with him. He’s just escaped to Canada himself. Originally Russian, moved to Canada, grew up in Canada, now escaped Canada, and setting up in Montenegro and they have a company called Bitcoin Reserves, which is going to service high net worth individuals within European countries.
He was telling me, I can’t pronounce his surname, don’t ask me. But he was telling me that since he moved to Montenegro, I’m sure he said it was the finance minister that he had met, who told him that he had over 90% of his net worth in Bitcoin.
Now I’m thinking all we need now is these heads of states or presidents or Kings or whatever to start. That will happen, right? I’m sure they’re all going to have NAIB very, very closely monitoring what’s going on in El Salvador. And [00:08:40] conversations are going to start at that high level, which is amazing.
This could all happen way quicker than we were expecting.
Carrington MacDuffie: Yeah, there may be a critical mass thing, you know. I mean a certain amount just has to happen organically. And then maybe there’s a tipping point with certain people coming in.
Peter Young: I wish I could chuck in a similar anecdote at this point about having had conversations with British chancellor of the Exchequer, but I’m afraid there’s nothing to add there.
Daniel Prince: Oh, come on. What are you doing over there? What’s the point in having a (???) delegate? Seriously mate, you and Neil? I mean, you got to step this up.
Peter Young: I know man, it’s a complete failure, isn’t it?
Saifedean Ammous: This new one, what is the new health minister? He’s got nothing to do with health, which I don’t know if it’s a positive or a negative, I haven’t really followed, but I heard somewhere that he’s kind of anti lockdown or something like that. [00:09:40]
Peter Young: No. I mean, it’s in the same way that people, I mean, people used to say Boris Johnson was a libertarian, a closet libertarian that was just pretending to be mainstream to get elected.
I mean, they’re all exactly the same. And all of these people, this is the thing about British politics that they don’t, we don’t really have a tradition of people having abackground in the thing that they become minister of. It’s basically just how close they are to the prime minister and how senior they are. One of the most senior positions is home secretary.
And so the fourth most senior person would just become home secretary. There’s very little to do with, oh this person’s worked in health.
Saifedean Ammous: Yeah, it’s like competence matters in these businesses.
Peter Young: It’s quite comical sometimes. They will announce it, there’ll be a cabinet reshuffle and they’ll be like, oh yeah this guy did some transports, now on education, I think it’ll just sort of come out and give this statement saying [00:10:40] she’s really looking forward to giving, to doing all of these random things with education. Dude, you just found out about this five minutes ago, you all decided what your new policies are. It’s kind of comical to watch.
Saifedean Ammous: Yeah, it’s comical everywhere. I don’t know, man. The world is just becoming one big sick prison. There’s nowhere to go.
Daniel Prince: Saif, you’re going to record this? You got anything in mind?
Saifedean Ammous: No, not really.
Daniel Prince: I think the new fed is fucking genius! I think he’s going misunderstood.
Carrington MacDuffie: You mean what are people taking it to mean?
Daniel Prince: It looks like you’re recording Saif! The whole difficulty adjustment kind of apifany that was, the new fed meme that Saif put on it. And I know just watching , what was it? It was settled at like minus [00:11:40] 27% or something, 28%. Then the next day, the estimated difficulty adjustment was like minus 41.
And all of a sudden it just clicked. I was having a coffee in a cafe and he just clicked. He’s like, holy shit, Wall Street are going to start building derivatives around the difficulty adjustment. This is it! This is where Bitcoin, the financialization of Bitcoin begins and the difficulty adjustment is the metric.
And so I put that on a group and Saif was all over it, straight away, #newfed. if you think about it, it’s fucking perfect. That’s the new fed. That’s the new, instead of releasing interest rates or whatever, once a month or once every other month, whenever the fuck they feel like it, it’s written in stone.
Saifedean Ammous: Once every two weeks.
Daniel Prince: Once every two weeks, once every however many blocks, we have the the estimated date. We have this estimated percentage change, which is going to fluctuate [00:12:40] day to day, which markets can be made around, and have final settlement on and no argument over, once that is done, that is done. Everything gets settled. All the derivatives get settled around it.
This is the financialization of Bitcoin and everything else just like trickles down from that. And it just started blowing my mind and then yeah, Saif threw out the #newfed meme on the group. And we don’t have to read through minutes anymore. Like, what’s the fucking point? It’s there. It’s all there in front of your eyes and no one’s controlling it.
Saifedean Ammous: Anyone can look it up. And the interesting thing about it is that, you can think of the difficulty as being the one numerical summary of the real world that Bitcoin takes. Bitcoin has one input from the real world, other than the transactions, all of the mining and all the economics of it and all the market of it.
There’s only one [00:13:40] input and it’s just how much hash rate we throw in. And it takes all of that, and every two weeks it looks at it and it gives it an estimate and it says, yep this is this number, this is how tough you guys are. This is how hard you try to mine Bitcoin, this is how much you want Bitcoin.
All right, I’m going to give it to you that hard. It has no idea what’s going on out there. In terms of people buying and selling, people investing in mining, people banning mining in their countries, people transferring their miners halfway around the world. All of that’s going on, but you know, it has no way of telling except through the hash rate.
So it just has the hash rate to estimate how much people are trying to mine this thing. And that gives it effectively, that’s the way in which Bitcoin understands its own market value. You know, people are mining so hard right now that [00:14:40] these six and a quarter coins plus transaction fees that we’re giving out, I’m speaking in the name of, sort of doing the internal monologue of the Bitcoin network here, so humor me for a minute, but we’re giving out six and a quarter of Bitcoin, and this is how much people want them. This is how hard people are working for them. This is roughly how much they can Expand on them in terms of resources.
It’s amazing that you think about it. This really summarizes everything that takes place in the world market for Bitcoin, like everything, all the buying, all the selling, it all boils down to this. It determines how much people are mining and it determines how much hash rate there is, and therefore it determines the difficulty.
And so the difficulty is always adjusting to keep the output constant, regardless of what is going on in the world. We’re making one block roughly every 10 minutes and we’re giving out this many Bitcoins, according to schedule. And that’s it. And it’s amazing [00:15:40] because , what’s astonishing about it is that this could work as a game between 10 people and it could work as a global monetary system.
It doesn’t matter. We just raise the difficulty of the math problems. There’s just so many numbers out there for us to tap into that we can just keep making it harder and harder. And the system continued to scale. That’s the limitation on Bitcoin scaling effectively.
It’s just finding a limit to numbers. You know, if we get to a point where we find all the numbers that are out there and that we can’t raise the difficulty anymore, then yeah, I guess Bitcoin stops caring, but I’m pretty sure we still haven’t found the limit to numbers. There’s no highest number in the world, so it can just continue to grow infinitely because the difficulty continues to rise no matter how much economic value comes on the network. It’s amazing.
Daniel Prince: And it’s all based on truth, like you said, like the hash rate, it can never lie. That’s all it [00:16:40] knows. I mean, we can have as much conjecture around it in the world as we like. We can have miners, hedging, but like you say, if people are moving miners from China to the US or wherever else they’re locating to. And this is a costly operation, but if there was a really good derivative market based around the difficulty adjustment.
They could have very highly skilled traders, financeers or consultants helping them make decisions on what they’re going to do. The whole market blows up. You’ve got speculators and traders, wherever, whether it’s in hedge funds or in main street banks or Wall Street. It doesn’t matter. They can conject as much as they like, and they can argue about it’s going up, it’s going down.
But ultimately when it comes to that final block of that epoch, that’s it. It’s settled. Move on, guys. You got another two weeks. Go start the whole thing again. [00:17:40] There’s no minutes. There’s no he was wearing a red tie when he walked in. There’s no what color suit was he wearing? It’s it’s pure and it’s blowing my fucking mind Saif. It’s amazing.
Saifedean Ammous: It really is. And I think it’s naturally going to develop. I’m not so sure about the state of the market in this regard, but I think it’s inevitable that it’s going to develop as a way for miners to invest. And for Bitcoin, for entities that hold Bitcoin and want to hedge in certain ways, I think there’s definitely going to be a role for it, particularly for miners.
It’s almost inevitable that this is going to happen. And if you think about it, it’s going to be a good measure of how the network is growing for a very long time, along with the price, because it’s going to be highly correlated and related to the price. It’s quite amazing, yeah,
Carrington MacDuffie: Another thing, branching off of this for just a moment, I was just thinking as Dan, you were talking, how we talk about Austrian economics, [00:18:40] libertarian economics being based on subjective value, right? That value is a subjective thing. But we have our money is actually really subjective. So what they’re trying to impose is a situation where value is imposed from top down, right?
This whole marches thing that they’ve got going on, but the money itself is really subjective, right? And what we really want is the opposite where our value is recognized for its subjectivity. That that’s a really valid thing, but the money itself is not subjective. I’m not sure that’s the right word for it.
But to say that Bitcoin is not subjective, do you know what I’m trying to say, that it can’t be manipulated.
Saifedean Ammous: Yeah, it doesn’t care. It’s amazing. It’s just economic truth, you know. It’s free markets and anyone can do whatever they want and anyone can affect this in any way that they want. You can make these numbers go up by buying yourself and by mining yourself, [00:19:40] or you can ignore them and you can take, or you can short them.
But, talk doesn’t cut it. And that’s the amazing thing about it. It’s amazing that it’s just a machine and over time, people will have opinions about monetary policy are going to start looking like people who talk to their cars and talk to their machinery, just expecting their machineries to do things that they’re absolutely not set up to do. Like talking to the washing machine and trying to have a conversation with it.
And you know, how do you feel today? Do you want to wash today? Do you think we can do two loads today? Or do you think you had enough? Because we did two yesterday. What do you think? This is what it’s going to look like if you’re still thinking that you have an opinion on monetary policy. If you have an opinion on the washing machine, press the right buttons and you get the right laundry, done.
And that’s how it works. There’s no emotions there. There’s no talking, you just [00:20:40] do what the machine requires and it’s done. It’s going to be amazing watching humanity learn to accept monetary policy as a new machine that you just learn how to deal with.
Nathan Reed: The other day at the end of the seminar with Patrick Moore, you did a great job of leading him right into to be curious about Bitcoin. That was really good, but when he looks at it and sees this phenomena, he’s going to recognize it. It’s going to impact.
Saifedean Ammous: I think so, I hope so. I think I’ve also come to this conclusion, like talking to people who come at Bitcoin from the perspective of, well you know, nobody’s going to want to learn all of this complicated bullshit about private keys and public keys. And I think the best way that I’ve managed to communicate this to them is again, the issue of the machine.
At some point learning how to work an oven was stupid and complicated and [00:21:40] the same was true for a washing machine. And the same is true for a car, it involves all kinds of weird things. You have to pour liquids down the car and then press things with your hand and put a key somewhere.
And then step on things, you know, who’s got time to learn all of these complicated rituals, you know. But eventually you realize that the alternative is you spend a lot of time walking and waste a lot of your time in walking, or you realize you spend a lot of your time washing with your own hands, or you have a lot of dirty clothes.
And you realize, no, figuring out how to work those buttons is a better option. And that’s why everybody eventually learns to read and write, well not everybody, but you know, a lot of people do. Read and write and do math and figure out how to run a washing machine and figure out how to drive.
Effectively it is a better way of living your life because it allows you to economize much more, [00:22:40] you know, these machines, all of these machines, they allow you to trade off your time, to trade off your money for time. You know, you buy the washing machine once and it gives you 10 years of laundry time. You know, the time you would have been using for doing laundry is now gone.
And you’re left with free time in which you can read books or develop relationships with your friends or family, or do all kinds of things that many people could not afford to do because they had to wash with their own hands and they have to collect firewood with their own hands.
That’s what machines do. They save us time and they get things done. And Bitcoin is an enormous global machine distributed all over the world. Think of it as one big giant washing machine for, one big giant plumbing really is what it is. It’s plumbing. It’s one big giant plumbing structure for money and for economic value.
And it’s one big plumbing system that exists all [00:23:40] over the world for moving value around and you may not like the rituals, but over time, you’re going to realize that these rituals involved with using Bitcoin for private keys and public keys, all of that stuff and addresses you know, it’s going to be easier than dealing with the consequences of manual monetary policy, just like whatever complications the washing machine involves.
It’s still much better than dealing with having to wash with your own hands. It just wins. Most people who have the option, the vast majority of people who have the option between washing their clothes with their hands and washing their clothes with a washing machine, choose the washing machine. And higher productivity does that.
And I think people need to start thinking about it this way. And I, and this is one of the things that I really like about Michael Saylor’s glorious entry into the Bitcoin world, is that it really reframed the discussion in engineering terms, which is really helpful because frankly, even I get a [00:24:40] little thinking that we could take it a little bit overboard with the political and economic and social implications of Bitcoin.
That there’s a very powerful engineering case out there for explaining Bitcoin as a monetary system, which I kind of do in the Bitcoin standard. But I think Michael Saylor does an incredibly more powerful job in explaining it in that sense. It’s just a much more advanced machine than all of the bullshit that we have.
We have tried all the other things. Gold is very expensive to move around. Government money is inflationary. Bitcoin is not inflationary and it’s very cheap to move around. And you can yell, you can shout, you can cry, you can cry harder, you can cry much harder. You can’t change that very real reality.
You know, you can refuse to believe it, you can refuse to think about it, you can stomp your feet [00:25:40] like a child and say I don’t want to play this game, but it won’t change the reality. You know, if you’re going to put your money in government money, and if you’re going to play government money games, you’re going to be burned with government money prizes.
And there’s no prizes for guessing what those prizes are. It’s very well known. You get into government money, you’re going to get significant reduction in the value and your businesses need to continuously outperform a very high threshold, very high hurdle rate in order for you to be making good returns. And if you have gold, you’re paying enormous amounts of transaction fees, and you’re still not keeping up with inflation in real terms.
You’re not even keeping up with the prices of lumber and most agricultural and commercial and industrial goods. Gold does better than most industrial goods, I think. Well, it depends on what timeframe, but it’s not doing very well. Bitcoin on the other hand is protected from inflation and you can move it around and it has enormous upside growth [00:26:40] in liquidity.
So, has a machine for storing and moving value into the future and into space across the world, is quite literally unmatched, and people just need to start accepting it and understanding it. And it’s sad that for the world’s midwits, for the people who take their understanding of the world in terms of just looking at how others behave, I think a majority of people think like that they, they don’t want to work themselves too hard in thinking about what’s actually going on.
And so they just look at the people around them and they take cues and they see somebody who looks like they know what they’re doing and they just think, all right, let’s just listen to that guy. And it’s sad because those people like they can’t get past finding fault in Bitcoin and Bitcoiners and their own personal problems with Bitcoin and Bitcoiners enough to just understand that it’s a machine and it [00:27:40] doesn’t give a shit about you and what you think.
You’re effectively out there trying to talk to people’s washing machines and tell them you shouldn’t do one more load a day or you should go on strike. It’s a machine and people can use it and benefit from it. And if you don’t want to use it, you’re only hurting yourself. It’s sad that a lot of these people, they get stuck in the world of Bitcoin from the fact that they see a bunch of people on Twitter or on Reddit or on the internet, or on TV talking about Bitcoin enthusiastically.
They switch on their negative defensiveness and it challenges their status programming and they just become hostile to it. And it’s sad that we’re seeing, it’s really the Luddites, you know, there was a point in the industrial revolution when peasants would organize times at night where they’d meet up and go to factories and destroy the factories because they were worried that machines are going to take their jobs.
And this was a serious problem in England for a certain point in time. And really the nocoiners are going to be remembered like that. When we first [00:28:40] invented, what in a few hundred years I think is going to be known as money. You know, the word Bitcoin is going to be money and effectively everything else was going to be crappy shit we used as a substitute for money before we managed to actually build proper money.
There’s going to be a little footnote in history. Just like we spoke about the Luddites right now, there’s going to be people, you know, talking and joking about, there was a point in time when we first invented the grand machine of money, well a bunch of people thought that they could talk this thing down and they were pretty angry at it and they were shouting at it and they thought no, this thing can’t work, won’t work.
And it’s too volatile. It’s going to go to zero. And really, it’s amazing. The more that you think about Bitcoin, the more time you spend thinking about Bitcoin the more you realize just how much of a machine it is, the more completely idiotic most no coiner discussion on Bitcoin [00:29:40] begins to sound like, what are you people talking about?
Why do you think your opinions matter? Today, Steve Hanke was going on about how something is wrong in El Salvador , he’s talking about in Lebanon how the only place, the only thing that can fix Lebanon is a currency board. At the same time, he thinks Bitcoin’s a stupid idea.
And it’s amazing. Like people in Lebanon can’t get a currency board because in order for them to get a currency board, you need the same criminals who are in charge to give up power and hand over the power and hand over the money printer and all of their resources, all their ability to continue to finance themselves and their militias and their support bases.
You’re telling them, excuse me sir, please hand me all of your wealth and power while I give it to a committee of seven people who are going to just run a dollar stable coin. Hanke has been trying to make that happen in Lebanon for quite a while. [00:30:40] And his currency board idea has gotten exactly zero liquidity, exactly.
There is not been a single Satoshi that went into his currency board stable coin in Lebanon. It hasn’t started operating. There’s no prospect of it operating. Nobody wants to do it and it’s just not happening. And it’s happened, he’s done it in like what, three countries or something like that in his life.
To give him credit, you know, he did fix hyperinflation in a couple of post Soviet countries. But you know, that was a kind of unique situation where people knew they didn’t want inflation, butthey were so traumatized by years of socialism that they didn’t know how to run a free market or a relatively stable currency.
But there’s not a lot of popularity and a lot of popular uptake for central banks and governments handing over the reigns of power to Steve Hanke and his friends. On [00:31:40] the other hand, Bitcoin liquidity continues to grow in Lebanon. Lebanese people continue to buy more Bitcoin and they have more Bitcoin today than they did a year ago and much more than they did five years ago.
And it continues to grow. Lira liquidity, local shit coin’s liquidity is declining while Bitcoin liquidity is rising. And it’s hard to estimate how much there is of both, but I ran the numbers a couple of days ago and we’re currently, two years ago is when troubles started in Lebanon two years ago exactly.
The lira was still at its pegged price of 1,500 liras per dollar, which has been at for about 28 years or so. And then two years ago, there was a dollar shortage in the market and the price of the dollar started to rise. It’s been two years now and now the price of the dollar is 18,000.
So we’ve gone from 1,500 to 18,000 liras per US dollar. [00:32:40] So that’s a, roughly 92% devaluation. Ahmed is here is from the front lines of inflation. Am I correct? Are we still at 1800 or did we hit 20 18,000 or do we hit 20,000 Ahmed?
Ahmmed: Yes saif, it’s around 18,000
Saifedean Ammous: Okay, so still at 92%, meanwhile, in those two years, the US dollars rate to Bitcoin has gone roughly five fold up.
So it was about $8,000, I think, five years ago. I have the numbers, but I forgot, but yeah, it was around four fold. I think it was four fold. Yeah, it was a 300% increase in the price of Bitcoin, 92% reduction in the market value of the lira, so Bitcoin is basically up 50x.
So at this point, if two years ago, Bitcoin was worth 2% of the Lebanese Lira. You know, the amount of Bitcoin in Lebanon was worth 2% of the [00:33:40] Lebanese Lira and people didn’t buy or sell any Bitcoin or lira, people didn’t add to their Bitcoin positions over the last two years then we’re, if it was 2%, then it’s now 50%.
If you’re on the numbers, I said 2% goes up four fold, and then the 98% loses 92%, comes out to roughly 50% each. So there might be as much Bitcoin liquidity in Lebanon today, as there is lira liquidity. And of course, it’s only a matter of time. It may have happened, but it’s only a matter of time before this happens.
There’s only one way left for the lira. It’s only going to go down. It won’t go up. There’s no return for the lira, no currency goes back from 18,000 to 1000. These things don’t work that way. And then of course, you know, if you look at it politically, there’s absolutely no chance whatsoever that there’s any kind of political reform coming in any shape or form. They’re [00:34:40] running the money printers like crazy.
The money supply has gone up seven fold in the last two years, it’s gone up seven fold. It was at five trillion liras I think, or something like that, and now it’s up to 35. There’s a lot of zeros when you’re dealing with the lira, I forget, but it’s up five fold, whatever order of magnitude it is, and that’s the physical mind.
They literally just out there printing cash and handing it out to government employees. And there’s no sign that this is going to stop. So it’s just going to continue to decline. On the other hand, the dollar and it is doing much better, but not that much better. It’s still also number go up.
The wrong number goes up, the supply is always, constantly going up. Whereas Bitcoin, the supply is only increasing at one or 2%. This is a one-way street that we all know where this is going. It might take another year and it may already have happened. That may take another 10 years, but the amount of Bitcoin liquidity in Lebanon is going to be [00:35:40] larger than the amount of lira liquidity in Lebanon at some point.
And Lebanon is one example now, but that’s just going to continue I think, eventually I don’t see a reason why it’ll stop. It’ll happen in Lebanon. It’ll happen in many other countries. And this machine just continues to grow. You know, washing machines continue to get adopted. People, continue to import and build and export and buy all of these washing machines because they’re useful.
They help them save on time. And that’s I think, the technological reality people needs to come to terms with. They need to just separate the fact of what their opinion is, what the textbook says. This is a machine. Think about it as a money vending machine that exists in every corner of Earth.
Anybody can buy it anywhere. There’s a money vending machine where you can put in all of your local shit coins and get hard money [00:36:40] out. You may not like how it works. You may have very strong ideas about the design parameters, about the user experience. Nobody gives a fuck. It doesn’t matter. Go build a better product, make Bitcoin easier.
Tell people if you have something productive to say, but at this point, you’re the weird guy who tried to convince people to stop using washing machines because the washing machines are mean. You’re the weird guy who tried to stop the textile machines and tried to break them because you thought they’re going to be bad for humanity.
It’s just a machine, separate your emotions from it. It’s a machine and people will use it because it works, because it serves them. Now try and learn some humility and understand why it helps them, why it serves them. Why is it that your currency board has not reached the level of adoption the Bitcoin has [00:37:40] reached at this point, which has exceeded, probably possibly exceeded the local currency and may well exceeded in, in the next few years.
Why is it that all over the world Bitcoin is running around $600 billion of market capitalization whereas your currency boards have, what is it, 2 small Eastern European countries or 3 smaller Eastern European countries that have adopted this many, many years ago. That’s the way to start thinking about machines. Why is it that everybody in the neighborhood is getting a washing machine? Because they can now afford to learn to read because they finally have time to read because they don’t have to wash their own clothes.
Think about it, wouldn’t reading be nice? Wouldn’t having some savings be nice? It’s amazing. These people don’t see it, and it’s only going to get funnier and I’m here for it. I’m here to make fun of them every week on this podcast, on Twitter, day in day out [00:38:40] and it’s for their own good.
Eventually they’re going to see it. And I think the earlier they get exposed to the idea that they’re being complete fucking idiots the earlier they’ll snap out of it. So it’s for their own good.
Carrington MacDuffie: Don’t you think Saif that it’s kind of a, it’s really an adolescent point of view because when you’re an adolescent, most people anyway are terrified of peer pressure.
And they’re just going to go with what you were starting out this whole, most recent rant kind of saying, is that people will listen to what other people are saying and just kind of model their behavior, their thoughts on that, right? And that’s a very adolescent kind of point of view and that’s how most I think people function.
They’re not really forward-thinking, that’s just the way the human race seems to be. I have a question for you about stock to flow model. And if you feel that it correlates or see that it correlates , how you think it correlates through this time of maybe I don’t know, maybe this time could have been predicted or was by some people, but by this time [00:39:40] of lockdowns and you know, economic breakdown and everything, how do you see that model correlating with these times?
Saifedean Ammous: I think that it’s still pretty much holding on. If you look at it at the, let me dig it up, if you look at the error margin, the standard deviations, the predicted price has not been out of the one standard deviation for pretty much seven years. I think it was January, 2014.
Yeah, January, 2014 was, or maybe February, 2014 was the last time that it was at the top of the, it was outside the two standard deviation models, two standard deviations error margin, which is pretty incredible. What (???) says is that it has a 67% confidence in the one standard deviation range.
So that’s the dark blue [00:40:40] band. If you’re listening to this, go to S2F Multiple on Twitter, @s2fmultiple and check out the Bitcoin data stock to flow and price chart. So you see there’s the prediction, which is the black line. And then there’s the dark blue one standard deviation and the light blue, two standard deviations.
So we’ve been outside the one standard deviation for the last few weeks. We were outside it for a few months longer than now, during 2018 and 2019, we spent a few months there. But the last time it was outside of the two standard deviation was in January, 2014. And the two standard deviation confidence interval is a 95% confidence.
What this model is saying is that it has 95% confidence that the price is going to be between the narrow between the, in the range of the light blue and 67% confidence that it’s going to be in the [00:41:40] dark blue. And it’s so far been massively outperforming it, because it’s spent far more than 67% in the one standard deviation range and spent far more than 95% in the two standard deviation range.
So what this is really saying is that think about all of this stuff that has happened to Bitcoin over the last three, four years, you know China banning mining, liquidating half of the hash rate from the network. Elon Musk buying in, and then talking shit about Bitcoin, Michael Saylor coming in, the COVID liquidity crisis when there was a big market sell off.
All of that stuff with all these things, every single one of these things was still within the two standard deviation margin of error, and almost always been within the one standard deviation margin of error. So this is pretty incredible in my mind and in my mind You know, for it to be rejected, it’ll have [00:42:40] to spend significant amount of time outside the two standard deviation range, which means that the price is going to have to drop under 30,000 for several months, or maybe a year under 30,000, or it’s going to have to go above 300,000 for over a year.
And that might sound like it’s such a large range, but it really isn’t because this model has been holding from a price of under a dollar, all the way to a price of $65,000. And so there’s always going to be a wide range and it is a wide range when you look at it now, but it’s not that wide of a range actually, because there’s an enormous amount of values under it, under $30,000 where the price could be.
And yet it seems to still be holding to this kind of estimate. And it’s suggesting that, whatever’s happening in the real world, the dynamics of the market [00:43:40] of Bitcoin, because of the set number of Bitcoin, because there’s only a fixed number of Bitcoin being made every day.
The dynamics of the market are going to trend around having this range of value. Based on past performance, you project it forward, you see that it’s going to jump up and it’s going to go up by a certain degree. But yeah, it seems to still be holding so far. I think it’s pretty fascinating.
Carrington MacDuffie: That’s a pretty strong case for it. When you consider everything you just said, elon Musk and Michael Saylor and you know, the lockdowns, these are pretty dramatic effects, you know? So I’d say that’s a strong case, yeah. Dan, go ahead
Daniel Prince: Yeah, thanks. Just thinking about it. Saif. Trying to pull it all, circle back around to where we started this, and we’re talking about, we’ve been on this one house before talking about the STF and you know, did the debates rage far and wide on Twitter, [00:44:40] you know, all your models are broken, they are all destroyed and whatever else and your classic meme of looking at praxeology and the S2F model, but then like bringing it back to an economic model that has this constant, which we’ve never had before to look at one of these things and tying it back to the hash rate that we started talking about.
Have we ever seen the STF model overlap with the difficulty adjustment? And how that has played a part in this whole thing, because I would love to see that chart just out of interest and you know, have you ever seen anything like that? And if not, what do you envision it might look like?
Do you think it would make sense to what we’re seeing with the S2F or, you know, is that the constant? Is that what we’re revolving around, like we began talking about?
Saifedean Ammous: Yeah, it’s interesting. I haven’t really seen it plotted with the difficulty I must say. But I think [00:45:40] basically you could see the dynamics of mining might, at least in retrospect, this isn’t very useful as a predictive tool probably, but in retrospect, you can see, well it probably is actually, you can see that the times where the model was at the bottom of the one standard deviation range into the second standard deviation the range, you know, the light blue area, when the model was around there, these are the times when you have minor capitulation.
This is the time when a lot of miners are no longer able to pay their rent because the price of Bitcoin is so low that if they sell a Bitcoin to pay for their bills, they won’t be able to pay for the rent and the electricity and the staff and all of that stuff that’s involved.
So when you put it this way You see that when that happens, that’s when the price bottoms basically for a while. And then after that, it shoots up. So that’s the point at which the difficulty [00:46:40] is adjusting downward. When you get these adjustments in difficulty downward, which happens, say at the end of 2018, you remember the end of 2018, there was a big crash.
So the price, if you look at it, the price shot up during the bull market, it shot up into the second standard deviation range. And then it crashed, and then coiled around the predicted price. Then the models predicted price was around eight, 9,000. It coiled around for a while, and then it crashed toward like November, 2018.
It crashed down to five and 4,000 and it spent a few months there, end of 2018, early 2019, it spent a few months at that low range. And during that, that’s when a lot of miners got wrecked, that’s when a lot of miners had to liquidate. A lot of mining gear was going offline.
And as a result, the hash rate was dropping and the difficulty adjustment adjusted downward. But then once these miners were wiped out, then miner selling declined and [00:47:40] the price began to recover. And we went back to the predicted price, to the black line and the predicted price of the model.
This isn’t investment advice, and again, this model is extremely fascinating, but this isn’t trading advice, don’t go out there and mortgage the house and bet on it. But we’re witnessing this kind of dynamic now where miners are having to liquidate. And in this case, it’s kind of artificial because it was China that you know, the Chinese ban of mining is what’s caused this to happen.
But it still has the same result, which is that miners have to set a lot of Bitcoin and that’s causing the difficulty to drop and the price to drop. But I think, you know, when that finishes, I think we’re likely going to see a reversion upward, but we’ll see. Because I think the way the dynamic works on the other side of this is that when the capitulation of miners happens, they sell a lot of Bitcoins.
And the price drops, but then the difficulty adjusts downward, if you look at it, I was running the numbers earlier today, if you look at [00:48:40] mining difficulty right now, it’s similar to where it was in September, 2019, or in the end of 2019 almost, or late2019, early 2020, something like that.
That’s where the difficulty is right now. And that’s where the hash rate roughly is. At that time, the mining reward was double what it is right now, but the price was about a quarter of what it is right now as well. Actually even less than a quarter. It was like a fifth of what it is now.
That means that the mining rewards at that time, you know, for a specific amount of hash rate at that time, it was not nowhere near as profitable as now. Now’s a much more profitable time. So what this means is that a lot of miners can hold a lot of their coins. They don’t have to sell a lot. And so this is kind of the spur of the recovery, which is that it leads to a lot of profitability for miners.
So miners don’t have to sell. So then the earlier oversupplying the market where miners were selling [00:49:40] too much is now countered by, after those miners were wip ed out and they capitulate and they’re no longer swimming, then the remaining miners are selling less. And because they’re selling less, that causes more of a spike upward.
I think we could perhaps see that. Maybe we will, maybe we won’t, but you know, the model, in order for it to stay interesting for me it’s already done incredibly. In order to situate the current price in place where whatever happens is going to stay in that range, it’s hard to see it dropping significantly under 30,000 for a very long time, I think perhaps. Could be wrong, but you could see why that might not happen because it seems that there’s a lot of demand to be able to keep mining out new coins at this price.
Finally just one interesting tidbit is it was only what was it, [00:50:40] three months ago when the model was going to get invalidated on the upside and now is getting invalidated on the downside, the fact that it can get invalidated on the upside and on the upside, on the upside and downside within the space of three months is I think the biggest testament to how well it’s been performing.
Daniel Prince: Yeah, it’s amazing. And like, did these theories, what are your thoughts around these theories that China did this and currently loading up on Bitcoin, and the reason they did that was to tank the price so that he could get Bitcoin at a lower price and are currently loading up on it.
And if you play this out in a year’s time, They could do the absolute reverse, right? They could turn around and say, right, you can all come back and we will guarantee you 2, 3, 4 years, whatever it is, free energy, because I literally could do that. Everybody’s settled back in [00:51:40] the US now, wherever else they’ve gone.
And the same thing would happen. They would all go offline. They would chase the zero cost. China could even turn around and say, we will even rehouse. We will give you free, like they could do anything. What would happen? The price would tank, right? Because the miners would go offline. Then they could just carry on buying up at lower prices again. Am I thinking crazy shit here? Or is this some kind of, I mean, it’s great for Bitcoin in the long run
Saifedean Ammous: Yeah, I think that the hole in that theory is that if China says, hey miners can come and have free Bitcoin, that’s not going to cause the price to tank because the miners that are in the US if , you know, hypothetically this happens, they’re going to move to China.
They’re not going to be liquidated and broke. They’re going to be making money because of the fact that they’re going to go to a place that’s so cheap, that is compelling. They won’t be needing it. If they have to sell a lot of Bitcoin, they wouldn’t do it. Like [00:52:40] when you think about all of these kinds of games, whether they’re trying to manipulate, if you try to justify from the sense of, they’re trying to manipulate this in order to make more Bitcoin, you quickly realize that if they thought about this seriously, they would they would just stack as many sats as they can.
And they wouldn’t play these stupid games. You know, if they wanted to stacks they would’ve taxed the miners in sats, you know, they would have just said, all right, you shut down or we get to supervise every single block and every single hash and we get a cut and we get 20% of all the hashes. I think if they wanted more Bitcoin, this would have been far more profitable.
And of course the miners would have preferred to do this then to move. And they could have stacked a lot of sats, but no, I think they just decided to nocoin, it was a premeditated decision to no coin.
Daniel Prince: And it was all captured in the hash rate anyway, to bring it back.
[00:53:40] Saifedean Ammous: 60% drop in hash rate. Water off a duck’s back.
Daniel Prince: It’s not lost on me, your washing machine analogy either to use Bitcoin as the washing machine for dirty fiat into the cleanest asset that we’ve ever had. Because this is something I’ve been thinking about. You were talking about the midwits and the Luddites and whatever else, and it just constantly fascinates me that these guys carry on the way they carry on.
At what point do, during econ 101 or a macroeconomic PhD course, do they teach the sunk cost fallacy? Do they leave that to like the last semester, is that the irony, because like these guys now, you know, that’s what’s going on, right? If they’re 40, 50, 60 years of age, the sunk cost fallacy of facing up to a whole career term of the lies [00:54:40] and shadowy behavior and shady behavior.
They can’t face this truth of what’s facing them. So I would love to know, at what point does that get taught?
Saifedean Ammous: It rarely gets mentioned. Sunk cost fallacy is not mentioned all that much. Opportunity cost of course is the one that is the real glaring emission right there. I mean, they do mention the new conflict, but if they read about opportunity cost in college, everybody would drop out, everybody who takes economics would drop out.
It’s not a sustainable business model to bring people into class, charge them money in order to tell them why they shouldn’t have paid you money. I should have used their time more wisely. So it doesn’t get a lot of play. And in fact, economics has just a bunch of math.
Essentially, fiat science devolves into just formulas, math that means nothing, but, you know, you’re out there and you’re proving that you can do the math and you can solve [00:55:40] the equations and that’s it. And just political posturing basically you know, poor people shouldn’t be poor and we should give people jobs and people who get paid more and just kind of like kindergarten, Make-A-Wish hour where everybody sits around and talks about how they would like to see the world.
That’s, that’s what it is basically.
Christian Kameir: Saif, can I ask a basic question? How do you personally define money?
I go with the Mises on Rothbard’s on this. Money is a generalized medium of exchange. Anything can be a medium of exchange, money is a generalized medium of exchange. There’s no clear definition and clear objective definition what constitutes a money.
Because generalized is a relative and subjective term. But medium of exchange has a precise definition. Medium exchange is something that you buy with the intention of buying it. Is this thing from an investment, you know, an investment [00:56:40] yields returns and consumption, that is something that you buy because you wanted for its own sake, but a medium of exchange is something that you buy purely in order to exchange later on for something else. So that’s a medium of exchange. And now, among these media of exchange, a few will, very few will be money, will be general media of exchange.
Saifedean Ammous: All right. Well, we’re running over time for today. It’s getting late over here. Anybody else have anything else they want to talk about?
Daniel Prince: Yeah, one last question. Is it coming home?
Saifedean Ammous: Looks like it, I don’t know. England’s going to win the tournament.
Daniel Prince: Come on. You know it, you know it to be true.
Saifedean Ammous: I know, I mean Liverpool won the league, so maybe England will win this.
Daniel Prince: I want an insightful Saifedean answer, is it coming home?
Saifedean Ammous: You know, I have to admit this is the first international tournament that I [00:57:40] haven’t been able to watch regularly since 1988, since the European championship in 1988 I’ve watched every tournament, but not this one. Having said that, I mean, I think, yeah, it’s just the French were strong favorites in my opinion, but they messed it up. They have too many egos in the squad and it didn’t work out.
And the Spanish don’t look too good. The Italians, they look good, but they don’t have as much big game quality as the English do. Like the English have a lot of players who’ve played champions league finals and champions league later rounds more than the Italians, I think.
So it seems they have more experience and may be able to pull it off better. But you still can’t write off the Danes,
Daniel Prince: Home advantage both games.
Saifedean Ammous: Yeah, and it’s amazing now they’re going to let 60,000 people pile into Wembley and then still go back to lockdown. It’s incredible.
Just because probably because UEFA told them, you know what, we’ll go move somewhere with fans. And I said, no, no, no, no. It’s okay. We can get 60,000 people into a [00:58:40] stadium, but then we’ll go back to locking them like cattle. It’s so sad.
Daniel Prince: Absolutely. All right, mate. Thanks!
Saifedean Ammous: All right, I’ll see you guys on Wednesday. Take care!