Bitcoin rationalism

 

Going down the rabbit hole

You may have noticed of late that my perspective in Bitcoin vs Altcoins has started to shift in favor of the original cryptocurrency. This is primarily in response to finally going down the rabbit hole of what Bitcoin actually is for the first time in earnest.

 

In all honesty, until now I had never researched Bitcoin. I had always just taken it for granted and assumed that Bitcoin was a slow, lumbering dinosaur which represented the original cryptocurrency idea but was stagnant in its growth. I bought into the concept that its governance was defunct, the technology was outdated and that the Ethereum-Bitcoin flippening was inevitable.

 

I now believe this perspective couldn’t be further from the truth.

 

Over the past two months I have invested hundreds of hours in reading books and articles, listening to podcasts and seeking out perspectives on the bullish and bearish cases for both Bitcoin and Altcoins.

 

By far the most informative sources are podcasts which provide the highest bandwidth information. I highly recommend the following:

• Off the Chain – Pomp’s podcast (+ Newsletter)
• What Bitcoin Did – Peter McCormack (the six part series on Mt Gox is essential listening)
• Tales from the Crypt – Marty Bent (also has a great newsletter)

 

What I enjoyed the most from this process was listening to the journey of the many great minds in this industry. The stories of how people got into crypto, where their research and learnings have taken them and the variety of cross sections they represent. Stories come from the [insert ticker here] maximalist communities, regulatory bodies, securities and fund management industry through to developers and technologists from multiple protocols (ETH, MKR, ZEC and GRIN are the ones which stood out to me as the most informative).

 

I feel as though I have absorbed perspectives from all across the industry. What I was amazed at was the frequency and consistency of one particular story common to around 90-95% of commentators:

1. Start with Bitcoin.
2. Become enamored with the world of altcoins and the opportunities they present (I was here in Feb 2019)
3. Begin to establish that immutability, security and sound money are the killer app for cryptocurrency.
4. Return to Bitcoin (now I am here).

 

I cannot ignore that there may be some bias in the podcaster’s choice of guests. However, given the broad scope of experience and sectors they cover, I simply cannot ignore the consistency and rationale of the arguments laid out by some of the smartest minds in the industry. Furthermore, the arguments of competing protocols simply did not change my perspective.

 

I must emphasize, that in no way does this discount other cryptocurrency projects and the DeFi and Digital Securities industries. Quite the contrary, I believe the three pillars we focus on at RSC are all huge industries in the own right and worthy of our capital. There are opportunities everywhere. However, this is a marathon and arguably one which will be run for 100+ years (and potentially for the rest of human history).

 

I believe the market for sound, immutable money is just so much bigger than anything the world has ever known.

Bitcoin rationalism

I think maximalism in all its forms is a defense mechanism when people do not want to hear any alternative to their bias. Maximalism blinds you to the alternate truths and new perspectives. Ultimately, it results in you being wrong eventually and wondering why you got left behind.

 

I want to introduce a concept of Bitcoin Rationalism (after Lily Liu on WBD). This is the perspective where you reach a full understanding the Bitcoin value proposition, accept that the killer application is sound money and yet still remain open to the opportunities and innovation that this creates in the industry which surround it.

 

In this way, you can see that whilst Bitcoin (in my eyes) may have the potential to absorb a large portion of value in this world, there are opportunities and emerging trends and industries which themselves are unicorns. To ignore them is financially irresponsible. Like artificial intelligence and the internet in the 90’s – it’s a great idea, but the timing was wrong.

 

Stay open minded and you will succeed in all your endeavors.

Sound money

What I had never appreciated is that Bitcoin’s simplicity and firm goals are what actually makes it not only the most important cryptocurrency, but arguably the most important technology in human history.

 

First let’s define some concepts:

• Immutability and Uncensorable – This is a function of decentralisation and consensus where having carbon copies of information in many places which cannot be altered by any one party makes data secure and final.

 

• Hard Money – The hardness money is a measure of how difficult it is to produce more of it. Fiat currency is easy to print (if you are the government). Silver is more abundant than gold but harder to obtain than fiat currency. Gold is extremely hard to produce due to its naturally low abundance, expensive and toxic mining process and is thus currently the hardest money in history. Hardness is a function of stock to flow ratio (inverse of inflation rate) and the physical cost/difficulty to produce the monetary unit.

 

• Sound money – Sound money combines the above two concepts and adds in the difficulty of spinning up a new producer which would change the inflation rate. Central banks can change the inflation rate of fiat currency at a whim and are subject to political pressure = unsound money. Silver and copper mines are cheaper and easier to establish thus when price rises, producers rapidly act to create supply and equalize the price which adds uncertainty to inflation levels. Gold mines are long term and expensive investments and thus gold inflation is relatively constant and difficult to alter artificially = confidence as a store of value and thus = sound money. Gold and silver are also assets selected by the free market as stores of value and are largely incorruptible by individual cartels or governments, any restriction is generally localized although reserves in vaults can still be seized.

 

Sound money as the basis of an economy is the cure to Keynesian economics, inflation and rampant debt. The civilization’s in history who did not tamper with their monetary inflation policy flourished.  However they all eventually collapsed following period of time where their currency becomes debased. This happened to tribes around the world when they encountered European settlers, to the Romans when they reduced gold content of their coins and most recently in the post WW1 era at the end of the gold standard. If gold was not hard money, why do the central banks hold so much in their vaults and do global settlement every 7-10years by shipping containers of the stuff at great expense?

 

This is discussed in “The Bitcoin Standard” which whilst an opinionated read – is a great study of the history of money.

 

Sound money allows people to save their wealth with confidence it will maintain its purchasing power into the future. This allows for people to lengthen their time horizon for investments without worrying that their dollar today is worth less than their dollar tomorrow. Inflation means spending it now is preferable to saving for tomorrow. People shouldn’t need to invest in real-estate, stocks, bonds and commodities just to preserve their wealth as a hedge against inflation.

 

The free market has chosen gold as the default store of value and the best money we have had to date. Yet we are subject to being paid in an asset which devalues every day we hold onto it.

The bitcoin standard

So what is Bitcoin’s value proposition and why do I believe it is the only asset in the 100 year race?

• Bitcoin is the most decentralised and secure piece of software ever written and is immutable by design. General consensus is that we have past the point of no return where even with all the computing power in the world, you wouldn’t be able to wind back more than a few hours of the Bitcoin clock.
• Bitcoin has proven its security as it has been attacked socially, politically and by hackers since the day of its inception. Its game theory is second to none in aligning incentives that benefit the network
  • Hash rate has quadrupled since the $20,000 peak to 42 petahash/s. The Bitcoin network security is not going anywhere
  • Even a nation-state level attack is largely understood to be futile as there are nodes on the network who will rapidly switch the mining power out of the affected mining pools, and maintain an unadulterated copy of the ledger.
  • Furthermore, the attacking nation state would make profits of 2-3x the cost of the attack if they use their mining power for the benefit of the network rather than its destruction. If a nation wanted to destroy Bitcoin, the best time to have done it was yesterday.
• Bitcoin has proven itself as having all the characteristics of a superior store of value to gold as discussed in the RSC newsletter a few weeks back.
• Bitcoin has a fixed supply, a reliable and mathematically provable inflation rate and will ultimately become deflationary with the highest stock-to-flow ratio of any asset on earth
• Bitcoin is un-confiscatable. You can carry your life savings in a brain wallet and nobody can ever stop you.  
• The multitude of false narratives around bitcoin are easily debunked:
  • More people launder crime money with USD than Bitcoin
  • Bitcoin uses less energy per day than all the data centers running the modern financial system globally
  • Hash rate is growing irrespective of price
  • Bitcoin is completely neutral – it is accessible to anyone and is indifferent to the character of people using it.
• Finally, Bitcoin can be verified and trusted to behave exactly the way the code is written. Its slow development is a feature not a bug. It is reliably consistent and will be around with the cockroaches at the end of days so long as it exists on a single hard disk.

 

Money is one side of every transaction. Just imagine if you never needed to worry about investing to maintain purchasing power. Imagine if you could be confident that your wealth would maintain its value indefinitely. Bitcoin has all the necessary properties to facilitate this economic revolution, and nobody can stop it. Keynesian economists, Warren Buffet, Bill Gates are all Fiat currency maximalists. They will get left behind.

 

Stay open minded and stay rational. But always remember, money is the biggest market on earth, and Bitcoin is money.