Introduction

Patrick: [00:00:51] Yes, this week is Saifedean Ammous, author of the book, The Bitcoin Standard. This was one of the most interesting conversations I've had in the world of cryptocurrency, primarily because we don't talk about Bitcoin or crypto until about 25 minutes into the talk. Instead, we focus on history, economics, sound money, low time preference and gold, all interesting topics. Saif's thinking on cryptocurrencies, other than Bitcoin, which is that they are worthless is unique and thought-provoking. His reasoning around why gold shouldn't be compared to the returns generated by assets like equities was also compelling. If you followed my hash power episodes, this is a new and differentiated interpretation of Bitcoin as a technology with a store of value use case specifically. Like the hash power documentary, this episode and other hash power singles are brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please visit fidelity.com. Please enjoy our conversation.

What is Sound Money?

Thank you so much for being here with me today. I think a great place to start would be for you to begin with a description of sound money. It's such an important central concept in the book. This will probably be the least technical of the various cryptocurrency conversations I've had, which is refreshing for me. I'm certainly no economist, but your take on Bitcoin and its role in sort of the modern world is fascinating. So I think sound money is the perfect place to start because it's such a pervasive concept in your writing.

Saifedean: [00:02:37] Okay. Well thank you. I agree. That is a great place to start. So I borrowed the Austrian economist's definition of sound money as being money whose acceptance and value are won on the free market by people willingly accepting it in exchange, as opposed to unsound money, which is imposed with the threat of violence or whose acceptability or values is imposed with the threat of violence. This is what I think is the separating criteria of what separates sound from unsound money. Now it so happens to be that if you let the market decide, if people have the choice and want to decide to use money, there are some pretty good explanations for what ends up getting chosen. So historically the most common example of what has been always chosen as money was gold, although it's not the only thing that has ever been chosen as money.

When people have the freedom to choose the monetary instrument that they want, they will tend to choose the thing that is the hardest to make, or what is called as hard money. So the hardest money ends up being chosen as sound money, and it ends up being chosen as the money of the market and is therefore, usually the soundest money. And the reason for that is quite simple that if your money is easy to make, then it's very easy for others to make more of it, increase the supply of it, and that will then punish or tax anybody who uses that money as a store of value. On the other hand, if the money is hard to make, it's hard for people to inflate its supply in response to increasing demand, and so the people who use it as a store of value, won't witness it get devalued a lot.

Patrick: [00:04:25] Perhaps just not to take it for granted. If you could give a couple examples, maybe each of this concept of hard versus easy money and touch on this concept of not being able to be a source of profit. So sort of creation of new money, representing a small portion of the overall stock.

Saifedean: [00:04:41] Yeah, exactly. So if you look historically why gold has been chosen as money, it wasn't a coincidence and it wasn't because it's just yellow and shiny and nice. It's specifically about its economic properties and particular about the fact that because gold does not ruin, its stock is accumulating over thousands and thousands of years, there's no way to stop gold from being gold. It's the most chemically stable element, I think. So the supply of gold that we have produced thousands of years ago is still around today. And so we keep adding to that supply of gold and that constitutes the gold markets of all of the gold that's being held everywhere in the world today.

So when people use gold as money, it's not easy for gold miners to increase the stock piles of gold that exists on the market because the stockpiles of gold that we have are the product of thousands of years of gold production. And so no matter how much we up the production of this year, it's always going to be a tiny little, well not drop in the ocean, but a small percentage. In fact, if you look over the last 80 years or so, 90 years, we see that gold production has pretty much always been at around the one or 2% of global supplies of gold. In other words, the total stock pile of gold that exists on the planet every year we add about one or 2% to it, but that would lead to the stockpile doubling around every 50 or 60 years or so. And that's basically what has been happening. And so if you look at the numbers for gold production, they continue to increase, but they increase less than any other metal. And that's really the key thing.

With all these other metals, with all the other materials that could have been used as money, if anybody ends up choosing it as money, it'll be quite easy and straightforward for the people who make it, for the people who produce it to make more of it, increase the supply of it and then drop the price, cause the price to drop. So in a sense, people can either figure this out and understand it and then start putting their money in what's hardest, but I think the vast majority of people never even think about it. It's a naturally emergent outcome of markets. You end up choosing money as gold because people who don't end up having no more wealth left in the long run. If you chose to put all of your wealth in copper, that just means that the price of copper goes up, and when the price of copper goes up, copper miners can continue to produce more and more copper.

Now, unlike gold, copper ruins and rust, and gets used up and gets destroyed all the time. And so the stockpiles of copper that exists in the world are tiny compared to the new mining production. Well, not tiny, but they're around the same order of magnitude. So if copper production were to increase significantly because people are using it as money, the production of copper could rise significantly and the price will come down again. The only thing that resists this thing, which I call the easy money trap is gold because it's the hardest thing to produce. And so this ends up... People don't have to even believe in it, it's harsh economic realities that imposes itself. If you choose any other form of money, you're going to witness your money lose value and your wealth lose value over time and that's going to impoverish you.

So the best example is countries that were stuck on the silver standard by the late 19th century, like China and India suffered enormously from the fact that their currencies were effectively silver and their value dropped significantly as the whole world was shifting more and more towards the use of gold as money. Another example I mentioned in my book, examples of, I would say the limestones that were used in the Yap Island, which you can see the photo of on the cover of my book and also glass beads in Western Africa. These were very rare in Western Africa because they didn't have advanced glass making technology, but once Europeans started coming there, they found that these glass beads were very valuable because Africans use them as a store of value. So they were valuable probably beyond their market value in Europe or their cost of production in Europe. And so Europeans would bring large quantities of them from Europe to Africa and use it to buy things.

And these glass beads later on came to be known as the slave beads because with these enormous quantities of beads that the Europeans could get, they were able to buy so much of the property of Africans that they ended up eventually buying slaves as well with them. And so this is a pretty sobering story about just the harsh economic reality of hard versus easy money. Choose easy money and your value is leaking out of your wealth generation after generation or year after year. Whereas if you choose harder money, you are able to accumulate wealth and save and accumulate value and improve year over year.

Impact of Time Preference on Your Life

Patrick: [00:09:36] So let's dive pretty deep into this idea of time preference. So having done such a nice job of defining both sound money and the importance of it being hard, let's talk now about the benefits of having that be the standard. You read a lot about what you call the Bella Polk in late 1800s and under the gold standard, kind of global gold standard. Let's get into the reasons why this might be attractive in contrast to the system that we're sort of all familiar with, which is government fiat money, its potential downsides, according to your theory.

Saifedean: [00:10:07] Well, I think at a very simple, basic level, before we even get into time preference, the best thing about this, the best thing about having the hard money is that if you live in a society with hard money, if you want to make money, the only way that you can actually have wealth and have access to goods and services from others is to go out and produce something valuable to others. So if you live in a society in which money is hard, and that you can't just print money, you have no choice, but to be useful to others. You've got to go get a job, give people a haircut, cook for them, grow food for them, whatever, find something useful for others. So a society of hard money, is a society in which everybody puts their head down and works and gets productive. On the other hand, the problem of a society with easy money is that it's possible for you to get rich without having to actually be productive towards others.

And that's why historically in many cultures, you digging for gold or gold mining is being looked down upon as a profession. There are negative connotations to it, which has been you're trying to get rich by digging for treasures or digging for gold, which doesn't really add value to anybody and doesn't really help anybody. It's kind of an antisocial way of getting rich because fundamentally the quantity of money that we use as a society doesn't quite matter. We could run the entire money supply of the entire world on any quantity or any money, as long as we keep dividing it into smaller units. So the important thing is that everybody has to work. In the case of money that's easy to produce then people just end up spending a lot of time on producing these forms of money and mining them. Effectively, you can understand that as being why gold emerges as money, because it's mining, it's so hard, so uncertain, so unpleasant and so toxic for people involved in it and highly unlikely to offer positive returns because it's so rare and it's so uncertain that it just ends up not taking up a lot of time. People don't spend a lot of time in gold mining and instead they go and get real jobs.

In the modern Fiat economy with government money, we have something equivalent to digging for gold or finding treasure as a way of making money, but it's far more perverse and that is using government magic printer as a way to obtaining money. That just allows people to get rich by expropriating wealth of others without having to produce something themselves. So if you think about it, a lot of the world economy today survive purely because it has access to money printing from the local central bank. If you're connected to the central bank in one way or the other, if you're connected to the government, if your business is subsidized, or if your business has special credits, if you're able to borrow at a lower rate than everybody else, that's effectively a license to print money. And so as a result, modern fiat societies, just more and more of people's time and activity goes towards rent seeking, goes towards trying to secure funding from the government, goes towards figuring out how to make government newly printed money come to me and not to you.

It's a negative sum game in which people think that they're going to get rich by stealing from one another and everybody ends up stealing from everybody else, and then thinking they're smarter than everybody else, but effectively everybody's just stealing from themselves. In the long run, even the winners from this game are kind of losers because it leads to an increasing number of people not being productive and instead being engaged in these rent-seeking bullshit jobs, a survivor who's just purely dependent on the government money printing.

So that's the first part of it, but more importantly for me, and probably the reason that I've been so interested in this stuff and why I'm really fascinated by this. And the roots of this go back to reading a book by an old Swiss banker called Ferdinand Lips, that's the name of the banker and his book is called Gold Wars. I cite within my book extensively. In that book, he gives an incredible perspective on the role of gold as money and how civilizations thrived when they had the hard money and how they collapsed when they didn't. When you read that book, you come up with an idea that there's something cultural as well about this sound money story and about this hard money issue. And I think the way that I formulate is also based on the work of another economist, an academic Germany economist called Hans-Hermann Hoppe. He wrote a book called Democracy: The God That Failed, and the first chapter of it discusses time preference. That was also very influential in my thinking and I sort of linked the two concepts together.

So the time preference refers to how much an individual values the future compared to the present compared to the future. So somebody with a high time preference prefers the present a lot more than the future. Somebody with a low time preference prefers the present more than the future, but not as much as the other person does. In other words, the person with a high time preference discounts the future heavily, they think very little of the future. And so the lower your time preference, the more of a future-oriented person you are. And I think it's pretty unfortunate that we as economists, don't spend more time on this concept because I think it's an enormously important concept. I make sure to teach it in every one of my classes, no matter what the topic of the class is, I always make sure to sneak it into one of the lectures where I talk to them for about 30 minutes about time preference, delayed gratification, and the timeframe of your decisions, whether you're a short-term oriented person or whether you are longterm and what this means and the consequences of it.

There's quite a bit of research on it, but unfortunately not so much in economics, a lot of it's in psychology and in other fields, but there's pretty impressive correlations that you can find between people's time preference and their ability to succeed in life. You don't need academic studies to tell you this, you just need to start becoming aware of time preference and start experimenting with your life yourself to see the impact of shifting towards a very high time preference and making decisions with no regard for the future or doing the opposite and thinking of the future and having less regard for the present. I mean, anyone who's been alive has obviously experienced the impacts of future orientation versus present orientation and can tell you. It's pretty significant. And the way that I see it, in economics, we talk about the trading you do with others, but the trade that you perform with yourself every day, with your future self, the trade you perform with your future self are by far more significant to your well-being in the long run than anything you do with anyone else.

I mean, you'll trade with say 10, 20, 50 people a day, you are a part of a big division of labor in a company that has thousands of people. Well, yes, but for all of the trades that you conduct with all of these companies and individuals you deal with every day, the number of these trades and the influence of them is nowhere near as important as all of the trades you conduct every day with your future self. When you wake up in the morning and decide it would be nice to stay in bed and just relax all day in my pyjamas at home, but I have stuff to do. If I care about my future, if I want to have a house, if I want to provide for my family, I want to have dinner on the table at the end of the month, I got to get out of bed and go and work. That's a low time preference decision. You've favored the future over the present.

So every day you're making thousands of these decisions. Should you buy the more expensive car right now and enjoy it or save more money for the future? And if you have a low time preference and you're always making future-oriented decisions, you're highly likely to end up succeeding in the long run. Whereas if you have a high time preference and you continue to make decisions oriented towards the present, you're highly likely to screw things up in the long run. I think the archetype for this is like all these professional athletes who get really rich, really young and then they make enormous amounts of money more than they could've ever imagined making and yet a few years after they retire, they're broke again. They've spent more money than they could have even imagined how much they could be making from the sport and yet they managed to not just earn it all, but spend it all. Because if you're just always focused on the present, if you're always focused on what satisfaction can I get right now, there's no amount of money that could go into your pocket that you would save, because globally there's always more fun to be had. There's always a bigger boat, a bigger house, another car, another sports car. You can always keep finding things and if you're short-term-oriented, you won't be able to save a single dime from that amount of money.

In the long run, you can complain about what others have done to you and how others have shortchanged you in life and how others have done terrible mistakes towards you, but you know what? None of these other people are going to be able to affect you as much as you affect yourself. And then you make these decisions with a future orientation, you are most likely to have a much better future than if you make it with a short-term orientation, regardless of what anybody else does. Thinking of it this way, once you understand this aspect of it, I personally think is the most valuable lesson economics ever taught me.

Patrick: [00:19:59] It reminds me of that phrase, easy choices, hard life. Hard choices, easy life. And it's a great point in the conversation to kind of tie this idea of time preference and the fact that maybe sound money imposes a lower time preference on, let's say people, individuals, but then more broadly on society and how that then manifests. So maybe talk about the late 1800s as a period of on the gold standard explosion of technology relative to, as you explore in the book, sort of the preference for spending, it's consumption and debt that we've seen more recently, declining savings rates. The manifestation of these things I think is critical at a societal level.

Saifedean: [00:20:35] The value of money is very important towards the determination of individual's time preference. And the reason is quite simple. If money is expected to hold onto its value into the future, people are more likely to hold onto it and to save for the future. Whereas if money is expected to drop in value, people are more likely to spend it right now. So because time preference is positive, it's always positive, meaning that any individual will always prefer today over the future. If I offered you $100 a day or $100 a year from now, assuming absolutely no change in purchasing power, you would prefer to take them today because time preference has to be positive because fundamentally what it really comes down to is that you are not immortal and you could die in that year, but also you prefer to consume it earlier in your life rather than later, because if you get it now, you can get to enjoy more of your life with that extra money than if you don't.

So, because our lives are limited, our time preference is positive. We always prefer the present. So the only way that I could get you to give up the $100 today for a payment next year is if I pay you a little bit extra, and that's where interest rates come from. Fundamentally, according to Boston School, interest rates are a reflection of the fact that time preference is plausible. That's why we have interest rates. So if we live in a society with hard money, then interest rates are a natural market phenomenon, they're a naturally emergent market price. And believe it or not, such places exist. Saying this to people who live in modern economies with central banks is like telling people who live in the Soviet Union that it is possible to have a free market in potatoes. You don't need the potato board to tell you how many potatoes to eat every week. You can just have a free market, and then you can buy all the potatoes you want and grow all the potatoes you want and pay for them. And that's how the credit market works. That's how the money market works in a hard money economy.

If somebody wants to borrow, they need to find somebody who has put up savings. And so the interest rate is the price that the borrowers needs to pay to the saver, so that the saver would forego consuming the money today and put it into the investment, put it into the saving or into the loan. In other words, the interest rate is a naturally emergent price. And so the tendency of civilization, or what Hans-Hermann Hoppe, in his book, he calls the lowering of time preference as being the process that initiates civilization. When we start lowering our time preference, we start thinking of the future, and then we start saving more. And because we start saving more, that means more and more capital is available for people, more and more resources that are available so people can invest more. And then with more investment, you get a higher level of productivity.

In a hard money economy, you would get a lowering of interest rates through people saving, through people deferring consumption, through people thinking about the future. So people basically giving up 10 apples today so that they would have 11 apples tomorrow. And this leads to more and more capital accumulation, this leads to more productivity because when you work with a higher level of capital, you're more productive. So this is really the process of civilization. We forego consumption, we delay gratification, that frees up resources to be invested. We invest those resources, that gives us capital goods, the capital goods allow us a higher level of productivity.

So we have a higher amount of output next year. And then we reinvest more and more of it and then the quality of life continues to improve over time. So easy money or artificially manipulated money like the one that we have today, comes and basically begins the reversal of this process slowly because it artificially manipulates the price of money downwards. In other words, it artificially manipulates the interest rates downward by effectively inflating the supply. Effectively, once the interest rate is lower, the money supply is going to increase. We can explain this relationship either through the fact that the money supply is increasing and the value of the money is declining, and so people want to hold less money and prefer to spend more, which means people are more likely to spend, which could explain the consumerism today or the other flip side of explaining it, which is just the other side of the same coin and the same explanation, Is that it's the artificial manipulation of interest rates.

When central banks set interest rates artificially low, that just makes it cheaper for people to borrow and it makes it less rewarding for people to save. And so the end result is that central banks encourage people to get into more and more debt, fewer people are saving, and so people turned towards this modern existence of consumerism. For our generation, for our people my age in the 30s and 20s and 40s, the majority of these people don't really have the conception of saving. Pretty much, even as you start getting richer and you start earning more money, people don't pay off their debt. People just get bigger debts. You move into a bigger home with a bigger mortgage. People think this is just-

Patrick: [00:25:54] Business as usual.

Saifedean: [00:25:55] ... Yeah, business as usual, but it wasn't always like this. 100 years ago, you couldn't just get into debt for anything. If you needed a house, you have to work your way into the house and have to build it yourself or you had to save for it.

Problems with Gold

Patrick: [00:26:08] I wonder if I could try to very briefly summarize your thoughts thus far, and then we can... I'm impressed with how far we've got in the conversation without using the word Bitcoin. Do you want to build a bridge from all of what we've talked about to Bitcoin today? So I think the way to summarize it would be that you've got these elemental concepts of hard and sound money, their impact on time preference. And the fact that the lowering of time preference itself is sort of like the civilizing process that I think I heard you say somewhere, it's what separates us from apes, right? That we're able to invest for the future and delay gratification, and that the more of that that's happening pervasively at the societal level, the better outcomes we'll have longer term, the better improvement in quality of life, et cetera.

So I remember reading a decade ago about the gold standard and gold as money and becoming really fascinated with it, and ultimately sort of having to abandon it because quantitatively, if you look at gold's performance, its stability as a store of value, at least in the period that most people have been alive, and thinking about this, let's say since the early 1970s, has been long-term volatile by which, I mean, it has a couple of decades in the '70s and 2000's where it has tremendous appreciation. And then from 1980 to 2000, it goes nowhere. It goes down a lot and it's gone down more recently. And so I feel like people's opinion of gold as a, let's say an asset class, something that can be invested in or bought or held pales compared to something simple like say global equities, which have been more consistent in the return that they've delivered to investors. So if I'm an investor today, which I am, and I've got savings, because I've got a lower time preference, my view is I don't want to buy gold. I want to buy productive companies, let's say, at reasonable prices.

So that's something I'd love to get your opinion on is kind of squaring the performance, if you will, of gold and maybe hear why Bitcoin is interesting to you relative to gold, which has been around so long and proven to be valuable. So let's start talking about those concepts now, maybe how you first came across Bitcoin and how you square this idea of gold's performance, if you think about Bitcoin as a digital gold, with the performance of other asset classes.

Saifedean: [00:28:09] Moving on to Bitcoin, I think where Bitcoin is interesting because it's, in a nutshell, it's just a digital, decentralized technology for doing gold's job. It's just the simpler, faster, cheaper way of doing what gold does. That's Bitcoin's importance for me. And in fact, there's nothing wrong with gold as money. The only thing that was wrong with it is that it's physical and bulky and then it requires centralization, and the centralization meant because gold clearance is expensive, carrying gold from A to B, moving it around tends to be expensive, that gives an enormous amount of economies of scale for people to use central clearance for payments. And so eventually we stopped using physical gold and we were using papers backed by gold and all these paper became more and more centralized as trade started to expand and as communications started to expand, it was only natural that we would centralize gold in locations and then trade pieces of paper and credit instruments backed by it instead of it.

Now that centralization is the problem because the problem with gold then became the governments took it over. They confiscated it in large quantities across the world and the central banks all over the world now own it. Now the thing is gold is still money because central banks still own it. Every central bank in the world either has gold or has a currency that is backed by gold until today and central banks between them own about a sixth of the world's gold market. And so the way the goal's monetary role was, I wouldn't say was completely destroyed, I'd say that it was subverted so that only central banks have it, and that individuals are forced to use pieces of paper that are not fully backed by that gold. And as a result, we've seen in the 20th century, the value of all currencies has collapsed next to gold. In the long run, today, no currency has 3% of the value that it was redeemable for in gold in 1971. No currency has maintained more than 3% of its value. So they've all lost more than 97% since 1971 or maybe 95%, if there's a couple of outliers here or there, but they've practically all been devalued once governments have the ability to devalue them by de-linking them from gold.

Now, in terms of the performance of gold, I mean, I think this is kind of besides the point, gold is not a productive asset. Of course engaging in productive activity is going to be more profitable in the long run. Now, the case for holding gold is the case for holding money and the case for holding cash balance. And I think people miss the point when they say, "Who needs to hold money when you can just buy stocks and bonds and commodities and all these amazing financial instruments that stock markets offer?" And the point is that for me is a little bit like saying, "Who needs a home when you can just buy a fast Ferrari, or you can just buy a fast sports car?" The cars today are much faster than homes, and so you don't really need a home. And I think the value of money is that it is the thing that is the most liquid and the thing that has no counter-party risk, the thing that is saleable for its own sake. The term that Carl Menger uses is saleability. The fact that you can always take money to the market and people will take the money.

And so that in its own self, people need to have a certain amount of cash balance in money that they can be certain is going to hold its value into the future. And then once that is secured, you can then invest in things that offer a return, but also incur risk. The problem is that once you take away from people this idea of being able to have something that will hold value without risk and without return, then everything they have has risk. And so everybody is effectively less safe because you don't have that safety net of being able to have say, six months expenditures in savings that you're not risking at all because in case things go really bad, you still have enough food for six months or for two years or whatever. But I think the complete mischaracterization of the idea that people who believe in sound money believe in sound money over investment. It's complete non-sequitur. The point is that you want to have a cash balance for uncertainty, for the future, so that you can have something that is secure and then you invest. I think if people had that safety, they would be able to take more risks in their investment. And I think more likely the kind of risk that people would take is that you would see more individual initiative.

Once you've got a couple of years of expenditure saved and you know that these won't lose their value, then you can go into say, setting up your own business. So having all of that money out there, that's just trying to beat the inflation is just fuel for bubbles, because if all of that money goes into housing and then people start investing a lot on housing, then housing makes great returns. And then more and more and more of that money flows into housing, which was that was the point then. If you remember during the housing bubble, the point was that housing was one way to beat inflation, housing is a store of value. You save your money in your house. Make your house your saving account. A house is a crappy saving account. A house is a great place to live, but as a saving account, it's not ideal because it's not very liquid. You need to find somebody to buy it and you can't sell off small chunks of it. You can't sell chunks of your house off most of the time for most people.

And so it's not liquid, it's not divisible, it's not where you want to have your safety net. It's not suitable as a safety net, but because everybody's speculating on it, so then everybody starts making good returns on it. More and more people start piling into that market, and then it keeps appreciating until of course, then more and more supply of houses gets made and then the market crashes. And that's the story of-

Patrick: [00:34:39] That's your original point.

Saifedean: [00:34:41] ... That's effectively the Austrian business cycle theory. It's once cheap money is available, people start using speculative investment as a way to beat inflation, and that leads to bubbles in specific sectors. And then overproduction in these sectors will bring the price down and then will ruin everybody's investment. And so you would not have that if you just have this one little basic thing for storing value into the future. And then if you need to buy a house because you know you want to live in a place and you like that place and you can afford it, you go and you buy a house, you save money and you buy a house. If you want to invest in a business, you go and you invest in a business. So I think that kind of world, investment and the financial markets would be far more sane and they would be far less of a gambling place where effectively you can just make money by anticipating the psychology of how people are going to switch from one place to the other.

Why Bitcoin Could Win

Patrick: [00:35:37] That's a great answer to the original question of why consider gold if equities have done so much better? How might this transition happen? So if we were to somehow move the world, let's say, or individual countries more towards a sound money standard, let's say it was based on Bitcoin. How do you think this will be precipitated? It seems to be a massive threat to powerful governments who are able to print their own currencies. I'm not trying to be political about it. It just seems obvious that that is a nice thing to be able to control and to do as a source of power. I'm thinking about the ability to wage war or something. How might that change? It seems a long shot just from the cheap seats that this transition will be easy or fast. So how do you think about the move from where we are today back to a sound money policy and why might that happen?

Saifedean: [00:36:25] Obviously, I don't have a crystal ball. I'm not going to pretend that I have one. So I don't like to make predictions about the future or how Bitcoin is going to unfold. But effectively my book just starts from the starting point that this thing has been working for about nine years. It's almost 10 years now. And it does exactly what it says on the tin and it's been doing it reliably for nine, 10 years. Maybe we should start taking it seriously, thinking about the economic implications of it. Now, whether it's going to take over the world or not, I think is an open question. And also I should clarify, my book is not an invitation for people to go out and buy Bitcoin. Bitcoin is extremely, extremely risky, and I wouldn't advise anybody to have a lot of exposure to Bitcoin because it's extremely volatile. You don't want to have your entire, I mean, maybe you do it's up to you to make that choice, but for most people it's probably not healthy to be exposed to large amounts of Bitcoin in your portfolio.

So I'm not trying to get people to use Bitcoin. If Bitcoin does win, it's not going to be because I'm telling people about it or I'm evangelizing it or anything, it's going to be because of its own economic property. Just the economic reality that it will impose because of its scarcity, I think would be, if it does win, that's going to be the reason that it wins in my opinion. So in my view, what I think is... I have two main ideas here that I don't think this is necessarily going to be ugly, that it's not going to... there's a temptation that this will lead to terrible hyper-inflationary crisis and the whole world is going to look like Venezuela as Bitcoin takes over. There's that strand of thinking, which I think is probably inaccurate. And then there's the idea that governments are going to crack down on it and try and destroy it, and then it's going to be pretty ugly for Bitcoiners. And I think there are reasons to believe that that might not be the case on both counts.

On the case of governments clamping down on Bitcoin, I think the better metaphor to think about it here is that this is just an entirely new technology. Technology is not something that you can legislate away. You can't just ban it because technology creates its own economic reality. It imposes its own economic reality on the world. And so I guess a good example would be, or an analogy would be when gunpowder was invented, governments didn't go and just say, "Let's ban gun powder because that would render our sword ineffective." If you did that as a government, you didn't ban gunpowder, you just made your enemies pick up gunpowder and use it on you. So effectively, at the end of the day today, nobody was able to clamp down on gunpowder and every inch of the world today is ruled by somebody who's got gunpowder somewhere.

So I think it's better to think of Bitcoin as this kind of new technology. So governments have gold, governments have currencies, governments settle things between one another. And I think eventually they'll likely recognize or they'll have to come to recognize the economic reality of what this thing is, which is that it's just a new form of gold, and if you use it, you're able to perform global settlement with money that is nobody's liability across the world in under one hour, which is not really possible with gold.

And so in the very long run, I don't know how this is going to play out. I don't know what governments are going to do, and I don't particularly follow what governments do about Bitcoin because I don't think it ultimately matters, but I think in the long run, the people who utilize it are going to have an advantage over others. And so I don't really see governments clamping down on it. Particularly, another reason for that is that people within government themselves are getting into Bitcoin. And so this is quite common that particularly for instance, in third world countries, the government might be issuing warnings about Bitcoin, but the rich people and the people in government in that country are the ones who are buying Bitcoin in that country as well. And you also see this in the U.S., a lot of congressmen and a lot of politicians are already getting into it.

And you already see the emergence of a small interest group behind Bitcoin in the U.S. There are probably more Bitcoiners in the U.S., than there are corn farmers. And corn farmers are just a small little motivated pressure group and they are obviously extremely influential in U.S., politics. Obviously, that's a bit of a stretch of an example. There are many other special interest groups that are not as effective as corn lobbies, and so it doesn't mean the Bitcoiners are going to be as effective as corn farmers very soon. But the point is that once you've gotten a small motivated minority that cares about something, it becomes an extremely ineffective mechanism for political success to try to oppose that thing. It's just that if you went and took on the corn farmers, or if you took on the special interest group or any kind of small little minority, they'll lose all of the people who care about this, and you will not gain any of the other people who don't really care about this. The majority of people don't like that there are subsidies to corn, but they don't care about it enough to make it worthwhile for a politician to go up against the corn lobby. It's the intolerant minority idea and in democratic politics, particularly the U.S., system, it's quite effective.

So we have that aspect of it that makes me think that it might just continue growing peacefully without the governments clamping down in a very ugly way. Secondly, there's this idea that also I think comes from a lot of the gold background of Bitcoin, which is that money is going to collapse. And I think the problem here is that there's the analogy that we're going to end with hyperinflation, and then people will switch to Bitcoin. That may well be the case, and it's certainly unfolding in Venezuela and in Zimbabwe today. Those countries have hyperinflation and it can be horrible. I think we're probably going to see more countries experienced hyperinflation over the coming years. For as long as fiat money exists, there will be hyperinflation. History shows that very clearly.

But I think if Bitcoin continues to grow, if Bitcoin becomes the new gold of the new digital global economy, then the people moving onto it are not being deprived of a monetary standard. It's not like in Venezuela today, or in Weimar, Germany in the 1920s, wherein the collapse of the currency meant effectively the return to barter. It meant effectively the collapse of the division of labor. The collapse of a market. People went back to a primitive society. And if you put people in modern civilization back into that state, the human toll is going to be terrible. People are going to be dying in hospitals and people are going to be malnourished. And the effect on society is going to be absolutely terrible because we can't maintain modern society without the division of labor, without the ability to trade and coordinate, and we can do that without the money.

So when the currency collapses, it's rightfully devastating, but we're not going to collapse into Bitcoin, or we might, but I don't know, my crystal ball doesn't work, but I think there is a possibility that we don't have a global economic collapse. Instead, we have a global economic upgrade effectively. In that, one by one people switch to the Bitcoin economy. And so the old economy is still there, it's still working for the people who use it, but the people who switched to the Bitcoin economy experience the joys of hard money and the joys of inflation resistance, and that is the national settlement on the base layer and a global decentralized system of international clearance for payments.

I think that's just going to be like the move from newspapers to reading websites on the internet. It's just when you're scrolling online, it allows you for such a richer experience than picking up a piece of paper every morning and getting your hands dirty with ink. In the long run, that one is going to win. It's just going to continue to grow, whereas the analog version is going to continue to wither away. The interesting thing about this, and incidentally, I've begun publishing an economics research newsletter or research bulletin. I've already written the first one and I'm finishing up the second one as we speak. And in this one, I talk specifically about this. I think an interesting way of thinking of it, I get into this in more detail in the paper and won't have much time to explain it here. But the global monetary system that we have built around the dollar is built on the idea that creating credit creates money. Money is credit. In this kind of system, the money supply is made up of debt. In other words, when a bank engages in maturity transformation or in fractional reserve banking, they are creating new money. When a bank makes a loan, if the bank is fractionally reserved, when they make that loan, they are issuing new money. So the money supply is increasing.

The flip side to that is that when a loan is paid off, the money supply contracts. And so there is a possibility of, I don't know if this is extremely crazy, but this is the sort of stuff that I get into in the newsletter. There is this possibility out there that we just have an orderly upgrade where everybody pays off their debt and the global dollar monetary system just continues to shrink. You pay off your debt, you move on to Bitcoin and you start being more productive and you start accumulating more wealth. And your Bitcoins appreciate because Bitcoin is at a stage of monetary growth where the value is likely going to appreciate more.

So over time, say after 10, 20 years of slowly migrating to Bitcoin economy, eventually your Bitcoin holdings become much bigger than your dollar holdings and dollar debts, so you pay off your debt. And then your neighbours and cousins and friends all hear about this and they all start getting into it, and then everybody just goes and starts paying off their debt. And so now your local bank is just losing business because you're paying off your debt to them. And now you're functioning, the majority of your finances are working on the Bitcoin network with Bitcoin financial institutions, and you're securing financing with Bitcoin and you're doing all of these activities that you used to do with your traditional bank. Now you've migrated over five, 10 years or whatever 20 years, maybe you're migrated towards using Bitcoin more and more.

So fewer people are using the traditional banks, and that just leads to a decline in the growth of the money supply, possibly even a contraction of the money supply and a contraction to the banking system and a contraction of the monetary system. And we could just see Bitcoin offering us a way out of this mess of the global monetary system run by governments, where governments print money, where people just from anywhere in the world can effectively get on this rocket ship that takes us to this new kind of economy on hard money decentralized all over the world with nobody being able to control the money supply. And I would imagine massive increases in productivity and prosperity and peace and cooperation amongst people as a result of that.

Alternatives to Bitcoin

Patrick: [00:48:20] We haven't talked at all about alternatives to Bitcoin, the elegance of Bitcoin, as a system with this kind of interesting balance between math and cryptography and miners and owners, and the sort of preset supply schedule. Is all really what appealed to me about this world to begin with, it just seems very elegant. Of course, there have sprung up countless thousands of potential competitors call them Altcoins or whatever else you want. And my guess is that you're quite dismissive of their potential relative to Bitcoin's potential. But I would be curious just to hear a little bit more about your thinking there, maybe even specifically around close cousins of Bitcoin, things that are trying to solve the same problem, to the extent there are those alternative coins. I'm not well-versed enough to know. I'm thinking less here of something like Ethereum and more of something like, I don't know, a Monero or Zcash or something. I'm curious your take there?

Saifedean: [00:49:10] Well, briefly, I find it hard to dig around the bush, so I'm just going to put it out there. I'm part of a fundamentalist cult, if you want to call it, or many people do call it, fundamentalist cult of people who just think Bitcoin is all we get. From this entire episode of what people think is this transformative blockchain technology, we are a group of people who have spent the last four years or so telling people, "No, no, no, there's no blockchain technology here. There's no other coins. There's no other uses of this. Bitcoin is all you get. Either Bitcoin works or it doesn't. And nothing of these other currencies and projects that build on its success or ape it, or copy its software method in any way." It really is, Bitcoin is the one shot that we have at making this work, and none of the others are going to do it.

And I know this sounds extreme and sounds crazy, and you wouldn't be the first to point this out. And of course, before your commenters start hating me, I assure you, I have heard every single one of these 1990s internet analogies that you can come up with about Bitcoin being the MySpace and Ethereum being the Facebook, or that Bitcoin being the AOL and all the other ones being. That's fine. And arguing from analogy is not an argument. I think analogies can be useful as ways of expressing a position, but it's not a way to refute an idea by just coming up with an analogy, because anyone can analogize anything for anything. But the point is this, what Bitcoin has created is the idea to send value digitally and to send it directly from one party to the other. And it only does that because it has managed to build an extremely intricate system of incentives and rewards and that is extremely expensive to operate. I mean, Bitcoin burns an enormous amount of energy and electricity every day in order to continue operating. And it's necessary for this giant Rube Goldberg machine if you want to produce the outcome of every 10 minutes, one megabyte of transactions. We added onto this record and once it's confirmed, we keep adding onto it. And then we follow one just long chain so that we have all the transactions and everybody can keep track of everything.

So engineers don't just put things together for fun. Engineering, if you need to build anything, whether it's a car or a house or whatever it is, you put things where they belong to perform a job with a specific purpose. And every single part of this bitcoin architecture of the idea for making bitcoin work was there for a reason and it all fits together. And that reason is to create this idea of the ability to transfer value from one place to the other, without having to rely on a central party. It's possible to transfer value digitally if you rely on a central party that holds the funds that I want to send to you, but Bitcoin allows me to send you funds effectively without us having to trust anybody in the entire world. It's exactly like a cash transaction.

Now, the only way that it does that, as I was saying, is because of this complicated structure that it has, but functionally, without getting into the details of what that structure is, why it matters functionally, is that that structure allows us to have a system that nobody can control, that nobody can censor it. Nobody can come in and say, "Oh no, we don't want Saif sending money to Pat. We're going to freeze both their accounts. We're going to take their coins." Nobody can do that and nobody can change the money supply. And that for me is the most important thing about it. The fact that nobody can change the supply of Bitcoin from 21 million is really the most astonishing thing about it. I get into explaining why it can't be changed or why it's hard for it to be changed in the book, but I can express it in a much simpler way, which is that nobody can force you to run Node software that you don't want to run. And so, as long as you want to keep your 21 million Bitcoin supply limit, then you get to keep it. Nobody can force you to run it.

So if you and I want to keep running the Bitcoin with 21 million coins, we can keep running it as long as our Nodes want it. And it's a very strong selling point for everybody on the network because they joined for it and defection from it is almost certainly going to fail. So obviously nothing is certain in life, but I think the possibility of Bitcoin maintaining its inflation schedule, its supply growth schedule credibly as it has for the past nine, 10 years, I think this is probably much higher than any kind of credibility you would get from any other kind of money out there. Who knows what the U.S. central bank or the European central bank are going to do with their currencies over the next 20 years? I think we have a much better chance of guessing with Bitcoin. So this is what makes Bitcoin valuable.

Now, in order for somebody to be able to compete with Bitcoin, they need to compete with that. So all of the coins that are competing on things other than that are completely missing the point. When they talk about more transactions or faster this, better anonymity, or all that stuff, that's beside the point. It doesn't matter. What matters is, can it be not controlled by anybody? Can you actually credibly claim that nobody can control this? And that's really the problem that Altcoins have. And the reason that I dismissed them all completely, and I genuinely mean it when I say that none of them matter, any of the other currencies that circulate, I genuinely mean it when I say it. And it's not just because I'm a Bitcoin fun, I've given these things thought. I didn't always think that. I heard about them and I researched them for a very long time, but I've come to the conclusion that it's almost impossible for any of them to even matter because quite simply, once Bitcoin was invented, once that technology for digital transfer of value had been invented and was out there, then anybody who wanted to use that technology could have already gone and used it.

If you wanted something that wasn't controlled by anyone and that thing is there or we could use it and it works fine, but why would you not use it and set up your own? If you set something up on your own, you're going to incur costs and there's no market demand for a second, less secure Bitcoin because the security of Bitcoin has always been a function of how many people are using it? How many Nodes run the software? And how much hash power is going into the mining of it? And so Bitcoin has always been ahead of all of its competitors, and so all of the organic market demand would naturally go to Bitcoin. So the point is that it's trivial to recreate the Bitcoin code, it's trivial to make a copy of it, but nobody has any reason to join that copy over Bitcoin, because Bitcoin has already accumulated a much longer track record in credibility and claim to neutrality. So the only way that anybody would join your other coin, of course, is if you market it, if you invest in it and market it and find a way to sell it to people, and that's effectively what all these other coins are.

If you've heard of any of them, if you've heard of any one of the thousands of Bitcoin knockoffs that are out there, then you've only heard of it because there's a group of people behind it that are actively marketing them. And so most of these have foundations like an actual foundation and the number of people who are behind these projects are always a small little number of people at the core and who can practically control this project. And we've seen this with what is considered the biggest competitor to Bitcoin, which is Ethereum. We saw how trivial it was effectively for the people behind it to hard fork it, or change the software for it because fundamentally there's a small group of people that control it. And that's true of all of them, because anybody who wanted to get into just the technology of the transfer of value over the internet, they went and worked on Bitcoin. So Bitcoin has continued to be the only true large scale open source process that has continued to grow, and also very importantly because the guy who created it disappeared and it continued to grow.

So it always had that wind in its sail. It always had that momentum of being the base that is attracting all the people who want to work on this new technology. Whereas all of the others have only grown in a very artificial, top down, afterthought way, of a small group of people trying to market it and flipping out. And frankly, it's been so many years that we've been hearing all of these coins come up with all of these stories about how they're going to revolutionize all sorts of things, and yet until today, there is not a single one of these coins that does anything that Bitcoin cannot do. I mean, functionally speaking, they all do the same thing, but for you as a consumer, there's a shared ledger of transactions and you got a private key and a public key, and the privacy allows you to change the ownership of the coins on that ledger from one public address to the other. That's what they all do and none have been able to introduce one extra capability that is commercially viable beyond this.

And so after a while looking into it, it seems pretty clear to me that the only thing these things can do is enrich the people who make them, but I can't really see any value for them because none of them will ever be able to step out of the shadow of the people that control it. And none of them will ever be able to credibly claim to be controlled by nobody. I think that's the key thing. The inability of... It's like if you create that Frankenstein, you can't just say I don't control it anymore because how do we know it? Well, with Bitcoin, we've seen how hard it was for people who thought they control Bitcoin to change anything about Bitcoin. And particularly, there was a huge drama about Bitcoin last year when the majority of the miners, the manufacturers of the mining equipment, the people who own the mining equipment and the majority of businesses that work with Bitcoin, and most of the big profile, high profile celebrities known in Bitcoin, they all got together and they decided they wanted to fix and change and improve Bitcoin by increasing the size of the blocks in Bitcoin and they failed miserably. They couldn't change it.

Bitcoin is so incredibly hard change that you have to really follow it for a few years to get a real good sense of just how hard it is to change it. And no other currency can claim that. And if you can't claim that, then there's really no point behind any of the other things that you're doing, because whatever it is that you're doing can be far more efficiently done with a centralized service, which is what all these coins fundamentally are. I mean, they could be doing what they want so much cheaper with a centralized service, but they want to pretend to be decentralized and that just makes it so much more inefficient. But in the reality, Ethereum's competition is not Bitcoin, Ethereum's competition is Amazon Web Services. And the cost of running an app on Ethereum compared to Amazon Web Services is about a million fold or 100,000 fold or something like that, because that's just the nature of distributed computing. You're performing the app on thousands of different computers that need to keep continuing to sync with one another. It's completely hopeless, I think, this notion. So I'm highly, highly skeptical about it.

I've been saying this for many years and I've gotten an enormous amount of abuse from it, from people on Twitter for it. It's been years of people telling me, "Oh, no, but this coin is different because it does this and this and that, and or this blockchain project is going to be different." I still eagerly await the day to see that anything comes out of this entire space that does anything that Bitcoin cannot do that is commercially viable.

Role of Gold in Saifedean's Portfolio

Patrick: [01:01:25] It's a fascinating take on, what's become an enormous, certainly financial casino in terms of people, "investing in or buying coins," Bitcoin included. Everyone always wants to get rich without doing any real work, and this has been the sort of perfect proving ground for that type of behavior. All your comments really center on this idea that it's very hard to tamper with. And you talked earlier about gold and we've talked a lot about sound money, and the beauty of gold is that no matter what human beings want to do, we're not going to change the fundamental properties of gold and its availability and the difficulty or cost of extracting it from the ground. And that's what makes it sort of naturally we gravitate towards it as a source of sound money. And you also talked about what the advantages of Bitcoin are over gold, so we kind of established those two ideas.

Given all of this, I'm just curious, personally, if you own gold? There's this phrase at a prior podcast, as David Salem made me aware of, which is that diversification is the only rational deployment of our ignorance. And Gold's been around for 6,000 years, like you said, and Bitcoin for 10. So I'm just curious, given that your argument's really centered around sound money and the inability of humans to tamper with in a centralized way that sound money, if you do own gold?

Saifedean: [01:02:37] Yes, I do. As you said, gold's been around for thousands of years and I think it's still the prime money of humanity. I don't understand the Bitcoin technology well enough to trust it entirely. And I keep reminding people of this and I should be reminding them more often that Bitcoin is software and software has bugs, and we never know what might happen. Just a couple of days ago, there was a new bug discovered. It could have been exploited, may have been exploited, may have caused some headaches for Bitcoiners. It's not entirely out of the question that Bitcoin could be destroyed in one way or the other through hostile attack or through just software failure. So it would not be the first pretender to the throne of gold that would have faced that fate. Gold's been around for thousands of years and history is full of people who have come along and said, "We've figured out a way to make money that is better than gold or we've figured out a way to... Let's use paper, it's much better than gold." And all of these experiments have failed in the end and Gold survived. So it's not out of the question that that might still happen again.

Also, gold is far more distributed all over the world. It's far more liquid, far more and more people around the world own it than Bitcoin. And so it's got an advantage over Bitcoin in that sense and it could well be. In my book, I discuss how people are always talking about how Bitcoin is going to die or what could kill Bitcoin or governments could shut it down. And in my book, I think I present the idea that all of these kinds of threats that revolve around governments shutting it down are, I'm not saying impossible, but they're difficult because they run up against economic incentives. They're as difficult as the Soviet Union trying to make planned economies work. You're flying against human incentives and humans will find a way around you. Even if you put guns to their heads, they'll find a way. Drug prohibition is an example of this and command economies are an example of this.

But what I think would be effective towards destroying Bitcoin, or at least stalling its growth effectively is reducing its demand through reducing its value proposition by having sound money. If the governments of the world would shift to a gold standard today, I think that would be the most effective way to stop Bitcoin. Yeah, it would definitely be because the whole world has gold, the entire planet has gold everywhere, and it's far easier to move to using that as the medium of exchange that everybody uses all over the world than to wait until everybody buys Bitcoin and Bitcoin appreciates. That's going to take a while for that to happen. Just even purely from a logistical perspective, how do you get 7 billion people to buy something and hold it? And so it might just be the case that Bitcoin continues to grow and starts really scaring governments and governments that are in inflation, if they continue to suffer, say from hyperinflation and Bitcoin hastens the fall of a few currencies into hyperinflation, it could be that the remaining currencies realize the importance of what's going on and then get their act together and decide, "Okay, maybe we've moved back to the gold standard." That's still a possibility. So I would not write off gold's monetary role yet. I'm still a gold-bug at heart. This doesn't always sound very popular with Bitcoiners when they hear it, but-

Patrick: [01:06:10] Just a few closing questions to what's been a really enlightening conversation. The first would be, if I had to sum this up in terms of what you believed in and I'm positively surprised in how you kind of think about hedging your bets or diversifying your thinking. But one thing you seem sure of is that lower time preference is a good thing. And I'm curious if you apply that in any other interesting ways, whether it's in your work or your personal life, and if there are changes that you've made you view as positive, that are the result of this philosophy around lower time preference?

Saifedean: [01:06:41] Yeah. I'm finding it hard to identify or pinpoint one specific example of where I've applied this, but it's definitely changed the way that I make decisions in general. I mean, it makes you start thinking of life more in the longterm in everything. And so I guess you could say I got married and I got a daughter. That's probably a lower time preference for me. There's your one thing where you can pinpoint it, I guess.

Patrick: [01:07:08] Sure, sure. My closing question for everybody is to ask for what the kindest thing that anyone's ever done for you is?

Saifedean: [01:07:15] The kindest thing? I can't imagine anything would beat my mom and dad putting up with my childhood and feeding me and educating me and answering all the questions that I used to torture them with.

Patrick: [01:07:28] Wonderful. Well, thank you so much for your time. It's been, as I said, enlightening. I appreciate it.

Saifedean: [01:07:32] Thank you so much.