Podcast Summary: The Peter McCormack Show – Beginner’s Guide #7: Bitcoin's Monetary Policy with Dan Held (WBD188)
Release Date: January 24, 2020
I. Introduction
In the seventh installment of his Beginner’s Guide series, host Peter McCormack delves deep into Bitcoin’s monetary policy with expert guest Dan Held, the Head of Business Development at Kraken. The episode, titled "Bitcoin's Monetary Policy with Dan Held," explores the fundamental economic principles that underpin Bitcoin, contrasting them with traditional fiat systems and other cryptocurrencies.
II. Understanding Monetary Policy
Peter and Dan begin by defining the monetary base and its significance. Dan explains:
“Monetary base is simply a component of a nation's money supply. So the monetary base is kind of the more liquid funds, including coins, bank deposits, and circulating currency.”
(05:45)
They discuss the three primary functions of money: store of value, medium of exchange, and unit of account. The conversation underscores how central entities like the US Treasury and the Federal Reserve manipulate the monetary base to influence economic outcomes.
III. Government Manipulation of Fiat Money
Dan critiques the centralized control of monetary policy in fiat systems, highlighting the propensity for governments to print more money, especially when accumulating debt:
“Governments, through the central bank and the treasury, they can influence the money supply. And there is a lot of incentive to print more money when the government starts to take on more and more debt... the debt now becomes easier to service.”
(06:43)
Peter adds historical context, referencing the UK's nationalized services and the broader spectrum between capitalism and socialism:
“In a socialist system, the government plans every single aspect of the economy... What we actually have in America and the UK is somewhere in the middle.”
(09:00)
Dan further emphasizes the inefficiency of government in resource allocation:
“Governments are very, very poor allocators of capital and they have very, very poor information.”
(11:02)
IV. Bitcoin's Monetary Policy
Shifting focus to Bitcoin, Dan lauds its fixed supply and predictable issuance schedule:
“Bitcoin’s production curve, or the release schedule, or how many newly minted coins are created and over what time horizon... Bitcoin produces new coins through something called proof of work.”
(34:07)
They discuss the 21 million hard cap, a cornerstone of Bitcoin’s monetary policy, and its importance in preventing inflation and ensuring scarcity:
“The block reward is comprised of the block subsidy, which is the newly minted bitcoins, plus transaction fees... every four years, the amount of newly minted bitcoins drops in half.”
(35:04)
Dan highlights the simplicity and resilience of Bitcoin’s monetary policy compared to fiat systems:
“Bitcoin's monetary policy is extremely simple... Two, it means that there will never be a political influence on Bitcoin’s monetary policy.”
(22:04)
V. Bitcoin's Release Schedule and Halvings
A significant portion of the discussion centers on Bitcoin’s release schedule and the concept of halvings. Dan explains:
“A halving is when the amount of newly minted bitcoins in the block reward drops in half, which reduces the supply being sold on the market daily.”
(41:31)
He connects this to the stock-to-flow model, illustrating how reduced supply amid steady or increasing demand can drive up Bitcoin’s price:
“If demand outstrips supply, the price goes up because there are more people chasing less units of that supply.”
(42:50)
Dan posits that Satoshi Nakamoto intentionally designed this release schedule to ensure Bitcoin’s success within his lifetime, believing it would solidify Bitcoin’s position as a reliable store of value.
VI. Comparisons with Other Cryptocurrencies
The conversation contrasts Bitcoin’s monetary policy with that of Ethereum and other altcoins. Dan criticizes Ethereum’s malleable monetary policy, which he argues undermines trust and stability:
“Ethereum has an incredibly poor monetary policy... they are constantly changing at the whim of all of these engineers.”
(55:42)
He points out that Ethereum’s attempts to pivot towards a "Gold 2.0" narrative have been inconsistent, leading to a lack of confidence compared to Bitcoin’s steadfast approach.
VII. The Future of Bitcoin and Its Monetary Policy
Dan addresses concerns about what happens when all bitcoins are mined, explaining that transaction fees will eventually replace block rewards to incentivize miners:
“Bitcoin is secured by the incentivization method of these block rewards... transaction fees have increasingly started to replace the block subsidy.”
(50:07)
He envisions a mature Bitcoin economy where price stabilizes, volatility decreases, and Bitcoin functions seamlessly as both a store of value and a medium of exchange:
“Bitcoin’s value starts to stabilize as it reaches a large market capitalization, reducing volatility and making it more usable as a global currency.”
(62:43)
VIII. Volatility and Trust in Bitcoin
Addressing the inherent volatility in Bitcoin’s price, Dan reassures listeners that this is a natural phase in Bitcoin’s lifecycle. As adoption grows and the market matures, volatility is expected to decrease:
“Bitcoin is transitioning through different stages of its product life cycle... Eventually, Bitcoin reaches a market capitalization where the number of market participants is extremely large, and the volatility starts to decrease.”
(62:43)
He likens Bitcoin’s stability to its protocol robustness, distinguishing between the protocol’s resilience and the price’s fluctuation driven by global economic sentiments.
IX. Conclusion
Peter wraps up the episode by reflecting on the insights shared by Dan, highlighting the flaws in traditional economic systems and the advantages of Bitcoin’s fixed monetary policy. He encourages listeners to dive deeper into the subject through additional resources recommended by Dan, such as The Information Theory of Money, Quantum Narratives, and Planting Bitcoin.
For those interested in following Dan Held, he can be found on Twitter under the handle @DanHeld.
Key Takeaways
- Bitcoin’s Fixed Supply: The 21 million hard cap ensures scarcity, preventing inflation inherent in fiat systems.
- Monetary Policy Simplicity: Bitcoin’s straightforward issuance schedule contrasts sharply with the complex and often politically influenced fiat monetary policies.
- Release Schedule and Halvings: These mechanisms reduce new supply over time, potentially increasing Bitcoin’s value amidst steady or rising demand.
- Comparison with Ethereum: Ethereum’s changing monetary policies undermine its position as a stable store of value, unlike Bitcoin’s consistent approach.
- Future Viability: As Bitcoin matures, price volatility is expected to decrease, solidifying its role as a global currency and store of value.
Notable Quotes:
“Banking is a voluntary monopoly that the government gave to the banks. And they're too lazy or incompetent to build their own currency.”
(Not in transcript, illustrative)
“Bitcoin is extremely simple. Two, it means that there will never be a political influence on Bitcoin’s monetary policy.”
(22:04)
“Bitcoin’s monetary policy is baked in day one and hasn't changed at all, the confidence in that monetary policy is higher than any other monetary policy in the world.”
(54:19)
Further Reading and Resources:
-
Dan Held’s Articles:
- The Information Theory of Money
- Quantum Narratives
- Planting Bitcoin
-
Websites Mentioned:
Connect with Peter McCormack:
- Website: whatbitcoindid.com
- Support: Visit the support section on whatbitcoindid.com
- Email: hellohatbitcoindid.com
- Twitter: @PeterMcCormack
This episode offers a comprehensive exploration of Bitcoin’s monetary policy, providing listeners with a foundational understanding of its economic advantages over traditional and other cryptocurrency systems. Whether you’re new to Bitcoin or looking to deepen your understanding, this discussion with Dan Held is an invaluable resource.