29 Comments

This was the best work you’ve done on BTC. I got into BTC in 2014 from disillusionment with the financial system and hopes of something better. Long story short, after a deeper economic education and spending time amongst the Hodlers, I’ve come to realize that the BTC as money narrative is simply absurd. I actually think you’re being too kind to Bitcoiners in this note. They have fully and religiously bought into the narrative that they are offering a more accessible financial system, but deep down they all know they simply seek new bag holders. The one thing I’d add is that not only would BTC as money not work because of its inelasticity, but all on the BTC standard would also be accepting feudalism with a bunch of tech bros at the top…and Michael Saylor as a modern day Mansa Musa

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Great comment other than the 'seeking new bag holders'. My read is the HODLers truly believe & practice their religion. Much like my elderly farmer grandpa & his friends have long practiced the religion of sliver & gold. It appears to me the religious movement is adding patrons annually, so number go up?

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“Seeking new bag holders” was probably overzealous. But agreed and what I meant was that they are far more into the number go up than they lead on, as evidenced by the Twitter victory dances every time BTC is up 2% on the day. Cheers!

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I think it was bang on

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The one great financial bubble in U.S. history was the Civil War - what became known by the people who lived through it as the War of the Rebellion. A country that spent and collected $60 million gold dollars in 1860 would owe 50 times as much "money" 5 years later. Nothing else comes close. For Presidents Trump and Biden to have matched Lincoln's record, the Treasury's current IOUs would have to be 12 times what they are now, and our war dead would have to be equal to the Soviet Union's in 1945 at the end of the war against Germany and its allies.

Yet, somehow, 1866 was the beginning of the rise of the American financial empire, not its end.

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founding

Mike, I always enjoy reading your work. Even when we disagree it gets me thinking, questioning my thesis etc. which has value.

a few questions:

How did Bitcoin fail in providing a trust-less transaction?

Are you referring to the Mr Gox price manipulation or some other period of extreme volatility that created a temporary significant barrier to using as means of exchange or the area noted where fees have become a significant barrier to further adoption even use in the example you provided?

There are a number of on exchange measures relating holding period to recent transactions that can help provide some insight into whether HODLers are accumulating or liquidating. Have you investigated that in addition to ETF flows? It could help with analysis of whether retail is being used for exit liquidity.

wouldn’t gold have the same hard cap issues in terms of its maximum mine-able reserve? I realize all hard currencies typically run into some form of Triffins dilemma, so alternatively it really is up to us

BTC bugs to promote a viable use case other than number go up? This is hard because greed does create industry and use case at least for a time. Eg gold rush and shovel manufacturing, ultimately I would assume a surplus of shovels resulted but there had to have been some technological improvement or efficiency discovery in production… perhaps the creation of a different alloy or handle creation that had benefits in the economy elsewhere after the gold bust?

How do halving dates and miner spend, to pay operating expense and taxes, -the inflation component of BTC interplay the deflation component-with halving dates on rewards, and final hard cap of 21mm?

I do agree that levered QQQs carry significant correlation to BTC price returns. But the correlation is not stable and has actually deteriorated over the last 2 years, real interest rates, credit spreads and various measures of liquidity and of course exchange address are also very helpful and more stable factors to regress. A great, serious source is Tim Peterson With Cane Digital. Discussion or even debate between you two could probably provide a lot of value.

Finally if hard cap really does increase instability then why the consistent decrease in volatility and the concavity in log Bitcoin prices series over time? This is getting back to drivers if return sans levered QQQs I think.

Again thanks very much for sharing your thoughts with us, and I hope this received in a curious and constructive way.

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The last year it cost anywhere from $1 up to $37 to make a transaction. If transactions were the point of focus, the community would long ago updated the code, or moved to a functional coin. Yet all coins which prioritize the transactional experience have been floundering in price since 2017.

Given the network is already overloaded by people moving their coins between bucket shops, what is there of interest besides "Number-go-up Technology"?

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founding

I'm not sure that consensus update of the code is that clear cut. The very issue with ordinals raised in Mike's article bears witness to that. Attempts to simply update the code in the past (even when it appeared in the best interest to do do) resulted in hard forks, and one or the other fork withered and dies without sufficient network size. Not sure that the on-exchange data points to "people moving coins between bucket shops" I haven't seen any evidence of that but would be interested if you do. I have done research in the past on miner nodes vs. degree of economic freedom and institutional strength. The result was pretty clear that there are many people who do not live in the developed world and enjoy the same level of convenience and safety in their banks or transfer networks that those of us in developed countries take for granted. Whether they are using crypto as rails for capital flight outside of those borders or to facilitate an exchange or transfer is hard to tell from the data, it's anonymous after all, but you can see the significant relationship between the two factors, we just can't determine causality from a regression.

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Mike, I love you're writing on many topics but I always seem to fail to grasp what you mean when you say certain things about bitcoin. For example:

"It’s amazing to me that 15 years into this “experiment” no one has modeled the game to its conclusion." -- what is the conclusion? Will you model it for us, or point me to where you have in the past?

"a perfectly hard monetary policy with no ability to change supply in response to demand is simply a bubble waiting to burst." -- why? What is the economic theory underpinning this belief? At the very least, it can only be a theory and not proven or provable, because the world has never actually seen a perfectly hard fixed supply asset prior to bitcoin, right? So we can't know for "sure" how this plays out?

Thanks in advance!

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Long-term fan here. When discussing the BTC ETF numbers, I believe the commentary may be a bit harsh. I wonder if you replace BTC with Uranium, whether the commentary would remain the same.

https://farside.co.uk/?p=997

Here are the net inflows into BTC after discounting GBTC outflows. They still look really healthy to me and on track to be one of the best ETF launches in history.

For the record, gold ETFs have bled $2B since the beginning of the year.

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I agree with you. But, Tether seems to supply enough Tether crypto to keep the Ponzi in Bitcoin going. Personally do not see any intrinsic value in any crypto though they do seem to feed one another. If proper accounting and regulation was instituted I do not believe that any would have value IMO. Also, Crypto exchanges going under seems to support this IMO.

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Mike, In assessing BTC I think you have to also take into account the Lightening network - a layer 2 protocol that will allow people to move small amounts of value quickly, securely and inexpensively. Its the Lightening Network that is being built on top of the bitcoin network that will help bitcoin scale. Outside of the US and Europe, most of the worlds remaining monetary systems are terrible. A criticism routinely heard in countries with bad monetary systems and that are using btc is that using and holding bitcoin on a daily basis is problematic because of its volatiliy and cost. Right now Lightening developers are working on ways to move stable coins - USDT or USDC or future US dollar stable coins on the Lightening network. Over time it is possible and maybe likely that, like silver in the 19th century dollar stable coins will be used for everyday purchases and bitcoin, like gold in the 19th century will be used more as a store of value. It seems to me the on-going debasement of the dollar - on average 6-7% per year - will continue to incentivize people to seek very hard assets like bitcoin to protect themselves against that debasement. A protocol that allows you to move both btc and dollar stable coins around the world securely, 24/7, and in the case of dollar stable coins - inexpensively - seems a big improvement on the monetary systems that exist in most countries. I think the protocol seen in this context offers a substantial amount of utility for many people in the world and that looking at bitcoin alone without considering Lightening and the work that is being done by developers to make bitcoin viable leaves out an important part of the bitcoin promise.

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Me thinks this lady protests too much.

It’s very clear that this experimental asset known as bitcoin is great for accelerating the global dialogues around more ethical and fair monetary systems.

It is high time to shake up the status quo around monetary policy that has gradually become distorted and corrupted.

Please have a debate with Lyn Alden or at least Jim Bianco.

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I think money needs three essential properties:

1. constrained elasticity - the ability to use collateral to create new supply. the loan creation mechanism of western money keeps incentives aligned, preventing runaway creation of new supply while allowing appraised collateral to underpin commerce

2. legal framework of contract enforcement. contracts without threat of violent enforcement that causes collateral to change hands or balance sheets to suffer impairment is mostly useless. wasting electricity and computing power to run an unenforced ledger is laughably pointless and misguided.

3. transactional efficiency.

while i would concede that todays western fiat does a mediocre job at all these, bitcoin and gold both clearly fail on all fronts.

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founding

Help me understand what you are trying to say on point one, "the loan creation mechanism of western money keeps incentives aligned, preventing runaway creation of new supply while allowing appraised collateral to underpin commerce." Having worked in banking for 20 years my perception and experience is that loan creation is a very poor mechanism for aligning incentives, especially as loans became securitized. The securitization process created even more problems with collateral, truthfully appraised collateral and consensus agreement upon what date valued collateral is appropriate to determine underlying value (ie problems with mark to market). Rehypothecation and perfecting a lien on collateral post securitization is even more difficult. As nascent as the technology may be smart contracts and tokenization do present potential solutions to these problems.

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Your experience is appreciated, but if you buy any form of debt, are you not concerned with both the solvency of the borrower and the value of their encumbered collateral? Securitization of loans just transfers risk away from the originator onto whoever buys the loan.

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founding

Yes, it transfers the risk away from the originator which takes away from the value that should be created during the underwriting process. IOWs the originator is concerned more with volume than with quality so long as they don't have to warehouse the credit on their balance sheet. Only a very sophisticated buyer of debt can cherry pick in that way, but at some point, your broker or counterparty is going to get frustrated with you and choose index buyers or less discerning buyers over transacting with you. With securitization came indexation of high yield, bank loans, even "private credit" -lol. Even stepping away from the index a manager wants AUM as it is a key determinant in their profitability, so you now have large flows to invest, and MS style and pension consultants are going to ruin you if you have too much cash. You are forced to buy large pools, and you can't be that discerning about what's in those pools when you do that. This is one of many very good arguments MG makes on how markets don't scale with flow very well, in fact it causes them to be inherently unstable.

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founding

Also if a bank is originating a lot of mortgage loans the GSEs can nit pick your underwriting well after orig. date and start putting those mortgage loans back to you (forced repurchase) even though they accepted them at time of purchase. The servicers can also have to forward P&I payment on defaulted, nonperforming loan pools meaning you are no longer a conduit for cashflow between borrowers and investors but having to pay those missed payments out of your own pocket. This has and will bankrupt servicers again. IOWs securitization gives the illusion of shifting risk, but because the counterparties are so intertwined and the govt can change the rules it really magnifies the end risk through moral hazard.

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That's a great insight, thank you. I've long wondered what stands in the way of originators doing the old wink wink nod nod and massively inflating appraisal values before flipping the new loans.

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I agree with pretty much everything you're saying. Banking is failing at it's core function which is to create money in a discerning way. The fact that most buyers of debt can't find enough debt to buy and\or can't\won't do their DD, still doesn't negate the risks of owning debt, (as Iceland taught us the party eventually ends). My point was that I don't see how hard money solves this. Hard money, by design, can't do a great job of providing the world with yield bearing assets or facilitating commerce in growing economies. I am all in favor of cryptographic ledger systems, but hard money is absolute folly.

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founding

I think it's more nuanced, you have to expand credit in line with economic growth to avoid those old hard money depressions. You can extend credit based on some other base layer asset. The problem then seems to be to me that creating fiat off of BTC just re-creates the same financial system that currently exists. I don't pretend to know how all this works out, but I have always thought that the Feds would coopt the technology at some point. Which seems to be what is occurring now.

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A lovely write-up. I wish you had compared to tulip bulbs, too, as an alternative.

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Let’s say Bitcoin is worthless. But does thinking that - or making sophisticated arguments to support that idea make you money? I think Bitcoin is only worth what someone is willing to pay for it, but I think the same holds true for all financial assets. In some context you could argue that they are all worthless. But who cares. Honestly. Traders trade price, not being right about an idea of value.

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Excellent analysis (also style points for forcing me to search the meaning of "tally sticks").

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Feb 18·edited Feb 18

Mike, you should really debate Burt Malkiel on a podcast. I heard him on a podcast last week saying passive could get to 95% of the market and it would be fine. And the 5% active traders would still be enough to create a efficient market that always reflected "all publicly known information". Malkiel does not believe passive is distorting markets at all.

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Michael, once again you’ve sparked readers latent synapses. Beyond butcoin, to coin a phrase, you’ve presented us with real food for thought regarding spreads between futures and spot prices and the gaming the gaps for real yields. Makes some of us, perhaps, think tangentially of any possible parallels on-going in the now fashionable Treasury “basis trade”. Inquiring minds want to know.

How may that symbiotic relationship foster increased production of Treasury supply ?

Onward, as to Congress “fixing” anything, especially Weights & Measures :) most notably those later delegated to the Federal Reserve, it seems the scales have been “fixed” to benefit the house, Congress and Bipartisan Administrators :)

Thinking back to June 2003, Greenspan’s 1% solution and ensuing historic manic market bubble in “Shelter” assets, and 2007-8 bust thereafter, one cannot help but see today broader markets peaked critical state on the verge of avalanche.

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Oh, forgot. There is a good essay that explains destructive behavior in society from a game theory perspective that might just be applicable to bitcoin.

It´s called meditations on moloch. It´s a good read but a bit long but worth the time

https://slatestarcodex.com/2014/07/30/meditations-on-moloch/

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The weakest part of the bitcoin paper IMO is that it in no way considered what would happen after adoption by monetary authorities. You need a massive apparatus to ensure people spend the hardest currency on earth, but that apparatus never thinks to just split the chain with new rules that benefit it and mandate you use that instead. Now apply this to wars. "The End of History" is the starting point of BTC.

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