Podcast Summary: The Peter McCormack Show – Beginner’s Guide #2: What Is Money with Parker Lewis (WBD183)

Release Date: January 7, 2020

Introduction

In the second installment of his Beginner’s Guide to Bitcoin series, Peter McCormack delves into the fundamental question, "What is money?" To unpack this complex topic, he invites Parker Lewis from Unchained Capital as his guest. This episode is essential for anyone looking to understand the nature of money, its historical evolution, and why Bitcoin represents the next logical step in its development.

Understanding Money: A Fundamental Question

Peter McCormack opens the discussion by reflecting on his personal journey. He admits that, like many, he never deeply contemplated the nature of money until his involvement with Bitcoin compelled him to do so.

"I personally had never really thought too much about money. It was just this thing. I got paid at the end of each month and I spent during the month." (00:00)

Parker Lewis echoes this sentiment, emphasizing that Bitcoin forces individuals to revisit and question the very essence of money—a question that wasn’t widely considered before the advent of cryptocurrencies.

"Bitcoin forces people to ask that question. It is a very difficult question both to ask and to answer." (05:50)

Historical Evolution of Money

Parker Lewis provides a comprehensive overview of the history of money, tracing its evolution from barter systems to modern digital currencies. He highlights that money emerged as a tool to facilitate trade, overcoming the inefficiencies of direct exchanges.

"Money is a tool that humans created very organically to facilitate one purpose. It was trade." (21:03)

He explains how various forms of money—such as gold, silver, and eventually fiat currencies—were adopted based on their ability to meet specific criteria that made trade more efficient.

Properties of Sound Money

The conversation delves into the essential characteristics that make a good form of money. Parker outlines several key properties:

1. Scarcity

   • Definition: Limited supply ensuring that the value isn't easily diminished.
   • Importance: Prevents the devaluation of money over time.
   • Example: Gold's inherent scarcity compared to easily producible items like nickels.

   "If the price of copper was to double, the copper is quite easy to produce, so the rate of production would increase very rapidly and... this can't happen with gold." (33:14)

2. Durability

   • Definition: The ability to withstand physical wear and tear.
   • Importance: Ensures money remains intact over time.
   • Example: Gold is highly durable, whereas some metals can rust or break.

   "Bitcoin is highly durable... durability in the idea of Bitcoin is that if holding Bitcoin and securing Bitcoin was too difficult for people, and if people were losing their Bitcoin left and right..." (61:14)

3. Fungibility

   • Definition: Each unit is interchangeable and identical to another.
   • Importance: Facilitates ease of exchange without discrimination.
   • Example: One Bitcoin is equivalent to another, unlike certain physical assets.

   "Bitcoin is fungible because at a network level, the network views every Bitcoin as the same." (61:36)

4. Divisibility

   • Definition: Can be divided into smaller units without losing value.
   • Importance: Allows for precise transactions of varying amounts.
   • Example: Bitcoin can be divided into 100 million smaller units.

5. Transferability

   • Definition: Ease of transferring ownership from one party to another.
   • Importance: Enhances the efficiency of transactions across distances.
   • Example: Bitcoin can be sent instantly over the internet, unlike physical gold.

6. Low Rate of Change

   • Definition: Stable supply growth ensuring minimal inflation.
   • Importance: Maintains the purchasing power of money over time.
   • Example: Bitcoin's fixed supply of 21 million ensures its scarcity remains intact.

Comparing Gold, Fiat, and Bitcoin

Peter and Parker engage in a comparative analysis of gold, fiat currencies, and Bitcoin, evaluating each based on the properties of sound money.

• Gold:

  • Pros: Highly scarce, durable, and fungible.
  • Cons: Physical bulk makes large transactions cumbersome; susceptible to centralization issues.

• Fiat Currencies (e.g., USD, EUR):

  • Pros: Easily transferable and divisible; backed by governments facilitating widespread use.

  • Cons: Unlimited supply potential leads to inflation and devaluation; lacks true scarcity.

    "There is no potential cap on the supply of dollars. When the Fed creates dollars, it literally clicks a button on a computer screen and can generate $400 billion in a quarter." (49:14)

• Bitcoin:

  • Pros: Finite supply (21 million), highly divisible, digital and thus easily transferable, and inherently decentralized.

  • Cons: Early stages of adoption require users to manage security (e.g., safeguarding private keys).

    "Bitcoin is the end game. It is the most perfect form of money that has ever existed." (73:18)

Parker emphasizes that Bitcoin combines the best attributes of gold and fiat without their respective drawbacks, making it a superior form of money.

The Impact of Monetary Policy and Inflation

A significant portion of the discussion centers around the consequences of unrestrained monetary expansion inherent in fiat systems. Parker elucidates how the ease of printing money leads to inflation and, in extreme cases, hyperinflation—as witnessed in countries like Venezuela, Argentina, and Turkey.

"The source of all fiat hyperinflationary events is the fact that the cost to create money in a fiat system is marginally zero." (49:46)

He argues that Bitcoin's fixed supply prevents such scenarios, ensuring that money retains its value over time.

Bitcoin as the Future of Money

The conversation transitions to why Bitcoin represents the future of money. Parker outlines Bitcoin's fixed issuance rate and its diminishing inflation rate, culminating in a zero inflation rate upon reaching the maximum supply. This predictable monetary policy is contrasted with the arbitrary and often inflationary policies of fiat systems.

"Bitcoin is the end game... it has the optimal money supply and monetary policy." (33:14)

He also touches on the technological advancements that make Bitcoin both durable and fungible, ensuring its viability as a global currency.

Challenges and Solutions for Bitcoin Adoption

While lauding Bitcoin's advantages, Parker acknowledges challenges such as durability in the digital realm. He discusses the importance of secure storage solutions like hardware wallets and multisignature setups to prevent loss of funds.

"We are increasingly finding better and better ways to secure Bitcoin so that they're not lost." (61:36)

Moreover, he highlights the generational shift towards a digital economy, suggesting that as newer generations grow up in a virtual environment, the acceptance and understanding of digital currencies like Bitcoin will naturally increase.

Conclusion and Further Resources

Peter wraps up the episode by reflecting on the enlightening discussion, emphasizing the importance of understanding money's nature to appreciate Bitcoin's role fully. Parker recommends several resources for listeners eager to delve deeper:

• Books:
  • The Road to Serfdom by F.A. Hayek
  • The Use of Knowledge in Society by F.A. Hayek
  • The Bitcoin Standard by Saifedean Ammous
  • Essays by Nick Szabo and the Satoshi Nakamoto Institute

"If you want to learn more about money,... you can access it through Unchained Capital's blog." (81:38)

Peter encourages listeners to explore these materials and participate in the ongoing evolution of money by considering Bitcoin as a viable alternative to traditional fiat systems.

Key Takeaways

• Money is a Tool for Facilitating Trade: Understanding money's fundamental purpose is crucial to evaluating its forms and functions.

• Sound Money Characteristics: Scarcity, durability, fungibility, divisibility, transferability, and a low rate of change are essential for effective money.

• Fiat vs. Gold vs. Bitcoin: While fiat currencies offer ease of use, their unlimited supply poses risks of devaluation. Gold presents true scarcity but lacks convenience, whereas Bitcoin combines scarcity with digital efficiency.

• Monetary Policy Implications: Unchecked money creation in fiat systems leads to inflation and economic instability, a problem mitigated by Bitcoin's fixed supply.

• Bitcoin's Future Potential: As digital integration deepens, Bitcoin stands poised to become the next dominant form of money, offering a stable and decentralized alternative to traditional currencies.

Further Exploration

For listeners keen to expand their understanding, Parker Lewis suggests the following resources:

• The Road to Serfdom by F.A. Hayek
• The Use of Knowledge in Society by F.A. Hayek
• The Bitcoin Standard by Saifedean Ammous
• Articles and essays from the Satoshi Nakamoto Institute
• Graduate series by Parker Lewis available on Unchained Capital's website

Join the Conversation

If you found this summary insightful and wish to delve deeper into the topics discussed, tune into the full episode of The Peter McCormack Show and explore the recommended resources. Engage with the community by sharing your thoughts and questions at hello@whatbitcoindid.com.

Disclaimer: This summary is intended for informational purposes only and does not constitute financial advice. Please conduct your own research before making any financial decisions.