82. Q&A seminar

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September 1st 2021.

In this episode, Saifedean takes questions from regular seminar attendees on bitcoin price models, fungibility, and central bank digital currencies. How have Saifedean’s mental models for bitcoin’s price evolved over time? Does the ability of governments and private analysts to monitor on-chain bitcoin transactions pose a threat to its fungibility and adoption? What do central bank digital currencies mean for the economic system?


Podcast Transcript

Student: [00:04:16]Hey, Saif! I just posted a question in the chat and I would highly appreciate to know what your thoughts are on this topic.

Saifedean Ammous: Yeah, how important is fungibility for a good money? Do you think this could be an attack factor against Bitcoin in the long-term? I understand that this gets better with taproot and it turned out. However, what happens if government exchanges refuse to adopt these changes in the short term… Can you imagine an outcome where Bitcoin succeeds but fungibility is completely broken and this leads to censorship on the [00:05:00] chain itself? How would that play out?

I think I have a slightly unpopular opinion in between circles. I’m not sure if we’ve discussed this before in this podcast. I think we discussed it in the seminar but before we had the podcast. That opinion is that basically fungibility is nice to have but it’s not a must.

I can see Bitcoin succeeding with eventually every single address ownership being public. I don’t think that this is impossible. The other thing is there’s no censored Bitcoin. There’s no way in which Bitcoin succeeds and becomes censorable. So either it breaks down or if it works, it works uncensored.

There’s no middle ground here. But the interesting thing is, [00:06:00] inevitably privacy on chain is a losing battle with Bitcoin. And I think it’s a losing battle with any other cryptocurrency. It’s not like any other crypto can fix it because ultimately, if you’re running a blockchain, you’re going to be running a distributed system.

So the distributed system, in order for it to function, it’s going to have to have a limit on how many transactions are distributed. I discuss this in The Bitcoin Standard, there’s no way that a system of 10,000 computers having to agree every 10 minutes on a record of transactions is going to be able to process as many transactions as a system of one centralized computer.

Because one centralized computer can essentially do infinite transactions, 15002nd because it’s just a computer and it’s running on its own. But if you have to coordinate with 10,000 other [00:07:00] computers, each step of the way, you’re going to be much slower. So there’s no chance that we’re going to have all of the world’s transactions running on chain.

It’s always going to be limited. But demand for holding Bitcoin is far, far higher than demand for transacting Bitcoin on chain. So people will, and I think the last few years proved this indisputably, people will very gladly pay to hold Bitcoin with custodians. A lot of Bitcoins are held by custodians and third parties.

Bitcoin is permissionless. You can’t stop people from buying Bitcoin for other people. You can’t stop people from buying Bitcoin and keeping it in custody. And also you can’t stop custodians from buying Bitcoin and selling IOUs to it and they don’t really affect Bitcoin. Coinbase [00:08:00] could go out of business tomorrow or Coinbase could turn out to be a Ponzi scheme, for instance.

I don’t mean to pick on Coinbase, but I’m just saying, any particular Bitcoin exchange could turn out to be a Ponzi and they could run away with the money. That doesn’t hurt Bitcoin, it hurts people who trusted them. But I think what’s inevitably going to happen as the demand for Bitcoin increases, we’re going to get more and more second layer solutions. And then on chain entities, where we’ll inevitably become more and more de-anonymized. Because on chain transactions will become settlement transactions.

So it’ll be more and more like public companies. On chain will be preserved for Fidelity and Coinbase and Nydig and OKCoin and all these big Bitcoin banks transacting with one another. And then on their own second layers, [00:09:00] that’s where individual transactions come along and that’s where anonymity can be baked in.

For instance, one particular exchange might allow people anonymity on their transactions. And of course, lightning is the better example. You’ll be able to conduct your lightning transactions with anonymity, between you and your lightning nodes and your lightning peers.

But you know, most likely you will be using a second layer solution based on lightning but the on chain transactions of your lightning nodes, which is basically your bank, they’re likely going to become more and more de-anonymized over time. Think about it this way, transaction fees are just going to rise and demand for Bitcoin is going to rise.

So imagine Bitcoin is at one million dollars a coin, we still only have about half a million transactions a day. So we’re going to be [00:10:00] needing a lot more transactions. We’re going to be getting a lot more transaction fees in that kind of world. And most likely what ends up happening in that world is individuals are priced out of using the blockchain.

So yeah, you can pay transaction fees if you want to but It’s a little bit like you’re running your sailboat through the Suez Canal. You can do it, but very few people sail through the Suez Canal because it’s very scarce, it’s very expensive and you’re competing with giant shipping boats that carry tens of millions of dollars worth of economic goods.

So on the one hand, it’s you and your family looking to go from the Red Sea to the Mediterranean Sea on your summer vacation, how much are you willing to pay for that to go through the Suez Canal rather than just taking an airplane. Versus, you are going [00:11:00] to be taking a few minutes of the use of the canal.

How much are you willing to pay versus the shipping companies that are moving $20 million worth of cars and electronics from Asia to Europe through the Suez Canal? They’re likely going to outbid you. So I would imagine just like the Suez Canal doesn’t witness a lot of hobbyists and just like you don’t see a lot of individuals commuting to work through the Suez Canal, I don’t think we’ll see a lot of individual transactions on Bitcoin in a Bitcoin standard.

So I think I’m okay with that world because I don’t get angry at things that I can’t control. And because I think it still [00:12:00] doesn’t undermine Bitcoin’s operation. In fact I think this is perhaps a feature of how Bitcoin operates.

Think about it this way, imagine if all of the transactions of the world’s major financial institutions and the world’s central banks were out in public. Wouldn’t that be a good thing? I think it would be a good thing because all of those institutions are answerable to the public. All these larger institutions, they have other people’s money.

And so would you be happier to have a look at your local central bank’s balance sheet? I think in a free market for central banks, central banks will compete by offering their clients full visibility of their books. This is how much money we have, this is how much money you have, here’s where we’re storing it.

And this is how much money [00:13:00] we settled this day with that bank and this bank. And then if everything is out in the open, anyone can audit it. I think that’s good for their accountability and for their inability to play stupid fiat games.

 I guess what I’m saying is I don’t think it’s a bad thing, I don’t think the anonymity gold is necessarily a good thing. I don’t think gold was money because it was anonymous. I think gold was money because it was hard, it had a high stock to flow ratio. I think Bitcoin without anonymity is still great because it’s still hard money.

And I think given the difficulty of closing it down and given the fact, this is the key thing that I keep going back to in The Fiat Standard, given the fact that you can always settle and [00:14:00] clear Bitcoin internationally without resort to government clearance mechanisms without needing to resort to government airports, government courts, government parliament, government regulatory agencies, government central banks, you don’t need any of that stuff for Bitcoin.

But that’s what makes Bitcoin survive. Here’s how to think of it, if Bitcoin continues to grow and it’s not attacked, it’ll grow and it’ll likely become more deanonymized. If they try to crack down on it, then they’re going to prevent it from growing into the global base layer for the white market monetary system, but it will still function successfully with a lot of number go up technology for those who use it anonymously or semi-anonymously, black market and gray market.

So you’ll still continue to have a Bitcoin market [00:15:00] and you’ll still have the price go up because the supply is dropping every four years. So think about it this way, the anonymity is possible and useful if Bitcoin is under attack. And so if it is under attack, the anonymity will allow it to survive and allow it to continue.

And if it’s not under attack, then eventually if the attack dies, if the attackers give up, if the attackers go broke and the Bitcoiners buy them and buy their children in slave markets, then the attack stops and Bitcoin stops being anonymous because it becomes the white market. So I guess what I’m saying is that, you can’t beat Bitcoin, it’s like with the difficulty adjustment Bitcoin adjusts to be what it needs to be in order to survive.

And I think Bitcoin gives us privacy [00:16:00] not because it allows us to have privacy on chain, I think Bitcoin gives us privacy because it bankrupts all the crazy intelligence agencies and government monopolies that go after people. There was no financial surveillance under the gold standard. And Switzerland was the last country that had financial secrecy because it was the last country that was on the gold standard.

When gold is money, government doesn’t have the ability to engage in such retarded bullshit. There was no war on drugs, there was no war on all kinds of stupid bullshit that we take for granted today. Governments that try this kind of stupid bullshit are going to lose money to governments that don’t. Having said that I will say this, I think perhaps the market does want free market surveillance, but perhaps there will be things like that.

And I think such things can happen in a perfectly normal, peaceful and free market way [00:17:00] where everybody is happy. So for instance, you can imagine that in a place, say a Muslim country, people will just not want to deal with the financial institutions that deal with gambling websites or alcohol or pornography or whatever, we can imagine many such scenarios in many religions and cultures.

And yeah, you can see a world in which you get to audit your financial institution and you get to see its settlements and you get to see that it doesn’t deal with, for instance your bank doesn’t take accounts for anybody who is in online gambling and that it only deals with other banks that don’t deal with online gambling.

You know, you can see these kinds of things entered into voluntarily where people who don’t want to [00:18:00] get into online gambling, they all use Bitcoin banks that don’t use online gambling. And people who want to gamble, they use online banks that have gambling and you can see how these things will be perfectly peaceful.

You sign up to this bank, you agree that you’re not going to ever spend any money on gambling and if you don’t want to do it, if you don’t want them to tell you what to do, you can just go to the other bank that allows you to do it with them, but with this bank you don’t. And I can see this developing and I can see it being a much more effective way of fighting crime and fighting illegal and criminal behavior than government centralized control because this would be distributed.

It emerges out of the free market. You as a bank, you don’t want to be involved with child pornography and so you’re very careful about this disassociating with anybody who might be into [00:19:00] child pornography. And I think a lot of Bitcoiners tend to think in terms of financial inclusion means everybody gets to run the money that they want and do the transactions that they want.

But I think financial freedom also means financial exclusion. Meaning that yeah, you want to live in a world in which you don’t support, in any way, people who engage in behavior that you don’t like. In the case of gambling and alcohol and such things, you’ll end up with a peaceful separation where people who don’t want these things deal only with financial institutions that don’t have them.

But I think in the cases of things that are universally abhorrent like child pornography, you will practically end up with something comprehensive, that no banks will process payments for those people. And any bank that gets caught processing these payments will end up in in [00:20:00] a lot of trouble with its customers.

Student: Saif, you talk about the price of Bitcoin. I’m sure you have some kind of model you’re focusing on or some framework. Could you maybe elaborate a little bit about that?

Saifedean Ammous: I’ll say this, initially when I first got into Bitcoin, once I went from being a smartass skeptic who knew why it wouldn’t work and started to consider the possibility that might work, immediately there’s a shift from smartass skeptic to a complete bull tied moon boy. It’s not like you go through shades of gray. You go from being Nouriel Roubini to being ParabolicTrav or one of these most bullish people on Twitter where it’s just moon moon [00:21:00] moon tomorrow.

Because once you think this is going to work, then it’s only a matter of time before everybody else realized that it’s going to work. And one day we’re going to wake up and everybody had realized that this is almost the image, one day you go to sleep and there’s a Bitcoin price and then you wake up the next morning and people realize that while you were asleep and now there’s no more Bitcoin price.

And all of your dollars are worth zero and Bitcoin is worth infinity. So this is the pricing model that I began my Bitcoin adventure with. Once you think it’s happening, then it’s just going to shoot straight up to a zillion overnight.

And then, you wake up the next morning and welp the dollar’s still there. The next morning, yep the dollar’s still there. And then you start normalizing the fact that hang on, maybe this dollar thing is not going to go away overnight. There was a bear market, I bought at the top of this bear market for [00:22:00] a couple of years.

So then you noticed start doubting whether this will actually work because people were getting it, they went from a dollar to a thousand in about a year. It’s not that far of a distance to go from a thousand to 10 million. Should have just continued at the same rate, what the hell happened, why did they stop?

So then it becomes complicated, you have a little bit more of a nuanced perspective on it, that alright maybe it will take time and this is when you start developing more thoughtful idea about how it works. It takes time for Bitcoin to propagate.

And it’s not like an app like WhatsApp or any kind of technology product that you have on your phone, in that once somebody likes it they just download it and they’re using it. And you know, these apps can go very viral very quick. So Instagram went from zero to a billion users or a few hundred million users in a [00:23:00] very short period of time.

When you think about Bitcoin, it’s not a new app, it’s an upgrade on the old app that we have, which is money. So it’s just a newer way of doing money and upgrading money is much more and complicated than just upgrading one particular piece of software, because money is one half of all of your transactions.

Money is involved in everything. And so everybody has a cash balance and everybody has accounts, various accounts and their personal accounts as well as their business accounts, that are all denominated in their local currency and probably some other currency, the dollar or whatever.

So everybody’s on a fiat standard and your balance sheet is on a fiat standard and all of your liabilities are in fiat and all of your assets are in fiat and all of your arrow is in fiat and all of your customers are paying in fiat so. And this is a running machine, so it’s like you’re trying to change the engine on the machine while the machine is running.

[00:24:00] You have invoices coming in everyday, you’re making payments out every day and it’s all in fiat and you can’t just stop the machine, replace the fiat with Bitcoin and then deal with it, because you still have to make all the payments and you don’t want to turn away your customers and tell them, you can only pay me with Bitcoin.

They’re used to it, you don’t want to have to wait until they learn about Bitcoin. So you have to continue to use fiat, especially if you’re running a profitable business, you don’t want to mess with it, you don’t want to mess with the success. So you will continue to use fiat, but it’s a gradual process of you switching your balance sheet into Bitcoin.

And it happens, different people do it at different rates, different speeds, depending on their degree of conviction and depending on the amount of spare cash they have lying around, depending on the risk they’re willing to take and depending on their time horizon how much they’re willing to sit on it.

So some people [00:25:00] jump all in, some people go in with gradual amounts, some people who jump all in get wrecked and lose 80% over the next two years, as happened with me basically. But I didn’t go all in, and some people jump in, go all in and then get 10x in a year and their value goes up a lot.

The overall trend is, what happens is that the value of cash balances in Bitcoin is increasing. This is what we see. So this is what I called the pricing model of number go up, which is really a very powerful moment for explaining Bitcoin.

It says the price is likely to be higher in the future than it is today. And I think it’s a very strong model, jokingly, we call it number go up but my whole book can be summarized in those three words. Number go up, The Bitcoin Standard, all of it explains why number [00:26:00] go up is a feature of this system.

 It’s an indispensable engineering feature of how Bitcoin functions. Number has to go up in order for Bitcoin to work as I explained in my book. And if Bitcoin works, the number has to go up. In The Fiat Standard I clarify basically how I arrive on the fact that number go up.

I think ultimately we have the halving in Bitcoin, which means that every day, the number of Bitcoin being produced each day is going to be around one half of what it was four years earlier. So every day, look four years earlier, the number of that was being produced was double.

So four years on, if Bitcoin continues to operate, that’s all that Bitcoin needs to do is to continue survive and for the inflation schedule to continue to hold, then we know that the new marginal supply being produced today, which today is around 900 [00:27:00] coins, is going to be half of what it was four years ago. Four years ago Bitcoin was making 1,800 coins.

So if Bitcoin has survived for four years and it’s monetary policy is intact, the marginal supply is going to be half of what it was four years ago and the marginal demand will almost certainly be higher. Because Bitcoin surviving four years means that the people who heard about it four years ago are now more likely to put money into it. People who put a little bit of money four years ago are more likely to put more money.

As it continues to survive, Bitcoin at 80 years is less of an investible asset than Bitcoin at 12 years. And Bitcoin at 16 is going to be more of an investible asset, and when it’s 20 and so on. So every four years you have more brand recognition, more safety track records, and therefore almost certainly more demand.

So you would expect that you would see that the price has never gone down on a four year scale. [00:28:00] And in fact, if you look at the charts in The Fiat Standard, if you pre-ordered The Fiat Standard you can see these charts in chapter 18, it’s in the beginning of the last chapter.

If you look at the four year performance, the price today they compared to four years ago, the average has been over the past four or five years. The average is about 20 fold. So Bitcoin is usually 20 times higher than what it was four years ago. That value has never been under five. We’ve never had a day, except there was one day, there was literally one day in which the value today on that day was less than five times higher than the value four years ago. One day in 2017, I think it was four times higher, it was 4.3.

And only for [00:29:00] 100 days was it less than 10 times. So for practically the vast majority of Bitcoin’s life, the price after four years is more than 10 times higher than what it was four years earlier. This is always the case with Bitcoin.

It’s never under 5 except for one day. So this for me suggest that there’s something there that’s going to drive the price up. So this became my second price model. The first price model is moon tomorrow, the second price model is number go up, but you remain agnostic about how much it’s going to go up, how fast it’s going to go up.

You never know and you never rule out move tomorrow, but then this guy PlanB comes along and he has his model of Bitcoin valuation based on the stock to flow ratio. I’m not sure if you’re [00:30:00] familiar with that model, yeah that’s worth looking into.

I’ve generally been skeptical of statistical analysis of economics, I studied this kind of stuff extensively in my PhD and came to the conclusion that the majority of economists are basically wasting their time doing regressions that tell us nothing about nothing. They’re just getting publications and wasting the world’s time and resources on papers that nobody reads.

So I was naturally very skeptical when this stock to flow model came about because I thought, he’s trying to predict the price based on the stock to flow ratio and the idea behind that model came to him after he read my book, so he’d read my book and that’s when he came across stock to flow and then he thought to model it.

It’s not something that I have thought about because in my mind, quantitative modeling is not going to tell us [00:31:00] anything more interesting than what qualitative analysis can tell us. So analysis tells us stock to flow, the higher it is the higher the price is going to be.

But I didn’t think we’d have a relationship. And I immediately assumed if you did have a relationship, it would be like almost every relationship you see in economics. All right, there’s a correlation but you know, you probably need to over specify the equation by adding several different factors in order to fit the data into the model and make it look robust and not random.

And most likely it’ll break down in a few days or weeks or months trying to fit the data. So I was naturally skeptical of this but then this guy had published his model, it’s now been two and a half years and the model has performed incredibly well. Some people are being critical of it now because it’s a little [00:32:00] bit off, but the thing that they missed, this is a model that’s looking at Bitcoin price going from under $1 to $60,000 so far, and it’s predicting it all the way to a million.

 And so it’s not likely to be very precise, that we’re going to have the same exact number, but we look at the margins of error and we look at the relationship, we see that it makes very clear falsifiable predictions. It says you’re going to get a pump in the price after the halving and the price is going to go up significantly.

And that’s exactly what happened. So it was pretty astonishing for the first year after the model was there, the price spent the entire year oscillating around the model. So the model’s prediction would have been around $8,000, $9,000 and then the one standard deviation area was basically the range of the price throughout that year [00:33:00] which was between about 4,000 and 14,000 or something like that.

So the price was really within the one standard deviation. What the model is saying, what the one standard deviation tells us is that this is where you would expect to find 67% of observations. And that’s the one standard deviation. And then within the two standard deviations, you’d find 95% of all observations.

And so as long as we’re getting 95% within that band around the price, the two standard deviations, as long as we’re getting 95% of our observations in there, then the model is continuing to be falsified and it’s not being injected. Once we spend a significant amount of time outside of those two standard deviation bands, then the model is rejected.

So my initial intuition was that this model was going to be rejected very quickly and I thought it was silly. And yet, the guy made a very precise prediction. He drew the [00:34:00] line, he said this is where the price is going to go and the price just continued to oscillate around it. So for the next year, from the publication of the model, the price was around the range.

And then the model predicted after the halving the price would shoot up and that’s exactly what happened. The price started to go up right at the time that he expected or a little bit later, a couple of months later, but it did go. And the model, we would have expected it to get to the point where it’s in the range between 50 and 200,000, around 100,000.

So 100,000 is the price for the next three years or so and the range between 50 and 200,000. Again, this sounds like it’s a big range, but it’s really not. It’s actually remarkably precise because Bitcoin could be anywhere between zero and 10 million or a hundred million dollars and yet we’re seeing this model [00:35:00] in this exact area. This very tiny range around 100,000 is the place where the price is going to be. Which it did in previous cycle where it said it was somewhere around 9,000, 100,000.

So I think this correlation is too strong to be dismissed as curious. And I think I can’t dismiss it as curious and instead I’m thinking of it in terms of what could explain this relationship, what could explain the fact that this is a market where anybody could buy and sell at any price that they want and yet they continue to buy and sell within this range.

And I think what it’s telling us is that the stock to flow is not just a qualitative metric in the sense of the higher it is than the higher the price. I think what it’s telling us is that it’s a property of an economic good. The percentage of its supply that is arriving from new producers [00:36:00] versus from miners effectively, versus the percentage of the supply on the market that is liquid but is being held by people, by holders.

And the more that an asset is held by holders, the more that a market is dominated by holders, the more of a monetary asset this is. The more the market is dominated by miners, the more of a market commodity this is. And so what we’re seeing is the transformation of Bitcoin into a monetary asset. With the stock flow rising, the amount of value that can be stored in Bitcoin is rising.

I think this is really my model for explaining. Imagine when Bitcoin had an inflation rate of 10%, when the money supply was increasing at around 10%, which was the case in 2017 and 2013 bit was increased at around 10%, imagine if in that world Bitcoin had a market cap of $10 [00:37:00] trillion. So the price of Bitcoin was around half a million dollars.

When Bitcoin is half a million the supply was worth around probably $600,000 per Bitcoin and the total market cap is around 10 trillion. That’s a lot of money. Imagine 10 trillion that would require that there’s a new 10% of 10 trillion is being added onto the markets. So that’s worth a trillion dollars.

So not only would we need people to hold the trillion dollars of Bitcoin, we’d also need a new $1 trillion to come in during this year in order to keep the price at that level. And so I think that’s really what the stock to flow model is showing us. That there’s a market reality that is enforced by the quantity of new supply in relation to the existing liquid stock balance.[00:38:00]

A good can’t be good money and it can’t be the world’s monetary prime asset chosen on the flea market if people have to suffer 10% inflation during that year. Because that means you hold it and you’d expect it to get diluted by 10% during the year. And so there’s only so many people that are willing to hold onto a monetary asset like that.

Plus of course, there’s a limiting fact that very few people have heard about it. So on the one hand you’re getting more brand recognition and name recognition, but I think what this model is telling us is that it’s really the stock to flow more than just time itself, because this model is outperforming a pure time model, which says Bitcoin’s price rises as a function of time.

And this is outperforming it precisely because it has these jumps next to the halving where the stock to flow rises. What this is telling us is that it’s not time that’s driving the Bitcoin price, it’s the stock to flow that’s the real driver. And that’s [00:39:00] because the stock to flow changes the type of good.

When you go from 10% inflation to 5% inflation, now suddenly you have a much bigger number of people that are willing to hold onto this asset because it’s going to require less and it’s going to come with less devaluation. So more people would be likely to hold it, but it seems there’s a limit on how much money can be held and I think it seems to be determined by the real market value of the daily reward.

That’s really what this model is telling us that as Bitcoin’s price goes up, Bitcoin becomes more inflationary. So right now we have 900 coins being produced at a price of $1 million per Bitcoin today, we’d have $900 million worth of Bitcoin being produced every day. So if you want it to maintain that price, not only do we have to have a lot of people holding on to $20 trillion worth of holders, [00:40:00] we’d also need a new billion dollars every day to buy all the new Bitcoins.

Eight years from now, we’re not going to have 900 coins being produced every day, we’re going to have 200 coins. So then at 200 points, price of 1 million becomes less absurd. If we’re just producing 220 points a day, then at a price of 1 million, that’s only 220 new million dollars of money everyday in order to maintain that price.

So it seems that what this model is telling us is that there’s some kind of range around which the price is going to oscillate with each cycle that’s largely determined by the inflation rate. So you can think of it as, during the previous three years, in the previous cycle, 9,000 to 10,000 was the predicted price at an inflation rate of around 4%.

That’s how much the market would handle. At a [00:41:00] 4% inflation rate we have 1,800 coins a day. And so 1,800 coins a day at around $10,000 a coin is around $18 million a day. That’s what Bitcoin could handle roughly around that range. So it could go up significantly. It could go up from 18 million for a few days during the peak of the bull market.

It could go up to a hundred million dollars a day of new money coming in, the price goes up, but we can’t maintain that money because leverage and people get wiped out and then the hype dies and people move on to other things. And so we’re going to crash from a hundred million and also if it drops, if the price drops at the bottom of the market where we dropped around, I think 4,000.

At 4,000, we have 1,800 coins at 4,000, each that’s about $7 million a day. That’s kind of not a lot of money. So $7 [00:42:00] million a day when it gets to that point, the prices drop to the point where the new coins being produced on a small amount. So it’s only $7 million a day, so then even at a small amount of demand for Bitcoin, there’s enough demand to eat up all the coins that are being produced and then start the price rising again and bringing it close to the average.

So it seems what this model is telling us is that the inflation rate is largely determining the market capitalization of Bitcoin. It’s determining how much new supply is being produced and therefore the market price multiplied by that supply gives us an idea about the new demand. And it’s telling us that the new demand is kind of range bound by this.

So I think if you listen to this model, if it continues, what the model is basically saying is that we are going to be getting another 10x increase every [00:43:00] four years. We add a zero to the price roughly every four years. There’s really no limit on how long it can continue because, we could have a Bitcoin that’s worth $100 million and still Bitcoin would be a pretty small money because there’s no limit on how many dollars we can have, remember!

We could have a world in which the price of a can of Pepsi is a million dollars and a Bitcoin is a billion dollars. It’s hard to disentangle the effect of inflation in the model, but maybe what it is telling us is that something about the price of Bitcoin is psychological, the first bull market was around the 1000 mark.

The second one was around the 10,000 mark and this third one maybe we’re going to a hundred thousand, we’ll see. To be honest, I don’t think I can dismiss this [00:44:00] Stock-to-Flow model. We’ve had the PlanB on this podcast before, I’d urge you to go and listen to that. He’s a very interesting fellow. The fascinating thing is there are a lot of reasons why it should break down and yet it doesn’t.

And that’s really the interesting thing here. So yeah, theoretically as inflation picks up, you’d expect the model maybe to break down to the upside, the price goes up even further, but it hasn’t happened yet. In fact, what we’ve been seeing is, we looked like we were going to break to the upside a few months ago.

But instead, I’m going to say break, leave the one standard deviation band, but now we’ve left it to the downside, even a lot of the inflationary stuff. I think perhaps what I’m saying is that maybe it’s not so much that the model matters in terms of market valuation as much as it is about market psychology.

It’s just these [00:45:00] big banner members of Bitcoin at 1,000, Bitcoin at 10,000, Bitcoin at 100,000, a lot of people set their new target at that. When Bitcoin hits 10,000 I’m going to sell them, buy a car, buy a house or whatever and that’s when the bubble bursts, maybe that’s what’s happening. You end up having faster inflation.

Student: Okay. What are your thoughts about CBDCs? Do you think they are sustainable? Do you think they are a threat to Bitcoin, if central banks issue their own cryptocurrencies? What are your thoughts?

Saifedean Ammous: Yeah, I think in theory, if central planning works then central bank digital currencies should allow central planning to work much more efficiently. But in reality, because central bank does not work, central bank digital currencies will allow [00:46:00] it to fail more efficiently.

So think about the example of the Soviet Union, essentially what the CBDCs are is just the Soviet central bank being paraded with all kinds of interesting technobabble. But what they’re doing is just the same model as the Soviet central bank, the Gosbank. It was one bank in the Soviet Union, and everybody had an account with that bank and that bank knew everybody’s money.

And therefore that bank would manage the economy very efficiently and prevent recessions and prevent evil capitalists from doing evil things that you evil capitalists usually do. And so of course if you read Soviet economic textbooks, Soviet newspapers or Keynesian textbooks or Keynesian newspapers throughout the 20th century, all of these idiots [00:47:00] believe that the Soviet Union was successfully planning their economy and that the Gosbank was building a successful miracle.

Famously, and I mention this in The Bitcoin Standard, Paul Samuelson the author of the most important fiat economics textbook that has been taught in most universities over the past 60, 70 years, Paul Samuelson in his textbook, he wrote the first edition in the 1950s and up until 1989 printing, obviously university professors they keep updating the same stupid textbook over and over again, by changing a couple of numbers and then selling a new one with huge markups.

As the versions were continuing to be published year after year, every time you would repeat the point that the Soviet economy shows that central planning works and that central planning is possible and that central planning is more efficient as a way of producing economic [00:48:00] growth.

And the usual stupid Keynesian viewpoint on this is that central planning is better for economic growth but it’s not good for economic freedom and personal freedom and that’s why Western economies, we don’t want to tie communism. It works economically, but it’s bad for personal liberties.

And that’s why we don’t want to, because we’re democracies. And so we’re willing to go with the inefficient inferior system of capitalism because we don’t want to end up being a dictatorship. This is the kind of stupid propaganda that started in Keynesian textbooks and this is what people like Paul Samuelson are writing even up until 1989, when the Soviet Union was falling apart.

So this is the kind of framework that wants to build CBDCs. They think when we have control over all the money in the economy, we will make sure that it won’t be crises, there won’t be problems, everybody will get the UBI, there won’t be [00:49:00] corruption with welfare, we’ll know how everybody’s getting all of their money efficiently and therefore everything would be fixed.

There won’t be poverty and there won’t be business cycles. We will just build the new wave economy. The new neoliberal/Keynesian/Marxist utopia of you will own nothing and it will be happy. In that kind of world, I think these people have these ideas about how they’re going to build this system and they think that having the central bank digital currency will allow them to make it more efficient.

But I think what makes an economic system function is not the efficiency on the central plans, it’s the freedom of individuals to be able to transact as they see fit, to sell and buy things at their valuation. In particular when it comes to capital ownership, it’s the ability of capital owners to decide for themselves how they want to allocate and use their capital. [00:50:00] That’s what makes a capitalist system function.

That’s what makes economic production and anything else is not going to figure out how to produce and use capital efficiently. Because as I discussed in Principles of Economics, in my textbook and in The Bitcoin Standard to a certain extent, in order to know how to allocate economic resources, you need the calculation.

You need to get on a calculation around those resources. In order for people to be able to make a calculation, it can’t be a game. It can’t be hypothetical calculation, it can’t be people guessing about the different valuations. It has to be people who own things making real life decisions about those things.

It has to be real opportunity cost. The person making the decision about how to use it has to have, in order for them to be able to know the true costs, they have to be the one who is paying the full cost. They have to be the one who’s accruing them [00:51:00] to all the benefits. If that’s not the case, then you’re not going to get economic calculation.

And so therefore you’re not going to be able to have a large-scale economy where economic production is, across society between strangers who don’t need to interact. They don’t need to interact and be directed. This is how it works. The only way that a market economy can work is if every person is able to perform economic calculation on their purchasing decisions and their productions and their capital ownership. Without that there is no economic calculation. So I think we’d be in for a terrible world.