Peter McCormack (4:01)

Dan, how are you doing?

Dan Held (4:02)

Doing well, Peter.

Dan Held (4:03)

Glad to be back.

Peter McCormack (4:04)

Good to have you back, man. I knew I had to get you as part of this series. So as you know, I'm doing this beginner's guide to bitcoin. I've done a few parts now. So we started with why we need bitcoin with Andreas, and then we talked about what money is with Parker Lewis and moved on to bitcoin's prehistory and the cypherpunks. Because before we get into bitcoin, I thought it was worth people knowing about what the previous attempts at creating digital money were. Then I had Stefan Navarro explain what bitcoin is at a top level. And then we did the history of bitcoin with Marty, which is a long history we covered in about an hour and 20 minutes. And now I've just done what with Shinobi, how bitcoin works. So the next natural step is, you know, we've talked with, as I went with Shinobi about how bitcoin works at a technical level. You know, it's very important now, I think, to get into what the monetary policy of bitcoin is and explaining that, explain that to people and why it's so important. Because I think for some people, this is going to be one of the first times they even consider a monetary policy or what it is. I know myself, I was completely oblivious to, you know, the monetary policy of my government. I didn't really care. I just lived this normal life getting paid, spending money and living. Only since getting into bitcoin, I've become aware of what a monetary policy is and how important it is to have a good monetary policy. So you ready? You ready to go?

Dan Held (5:19)

Yeah.

Dan Held (5:19)

Let's tackle this meaty topic.

Dan Held (5:21)

I know for a lot of people.

Dan Held (5:22)

It'Ll be your first time.

Dan Held (5:23)

And I'll try to keep it very high level, keep it really easy to digest and simple.

Peter McCormack (5:28)

Yeah, super simple all the way. I feel if you go too much, I'll try and rein you in. All right, so we've batted some ideas back and forth before we recorded, and we felt like the good starting point is to explain what a monetary base is. So do you want to lead us off explaining the monetary base?

Dan Held (5:45)

Yeah. Monetary base is simply a component of a nation's money supply. So the monetary base is kind of.

Dan Held (5:51)

The more liquid funds, including coins, bank.

Dan Held (5:53)

Deposits, and circulating currency.

Peter McCormack (5:57)

And why is that important to consider what the monetary base is?

Dan Held (6:00)

Right. So money serves three different functions. It's a store of value, medium of exchange, and unit of account. And the nation that has, like the.

Dan Held (6:09)

US treasury or the Fed, for example.

Dan Held (6:11)

They regulate that monetary base in order to influence the economy.

Peter McCormack (6:16)

But having discussed what Money is. With Parker Lewis and my massive interest in Bitcoin, I guess we could go down a road here where we explain how governments abuse the monetary base.

Dan Held (6:30)

Right.

Dan Held (6:31)

So governments, through the central bank and the treasury, they can influence the money supply. And there is a lot of incentive.

Dan Held (6:41)

To print more money when the government.

Dan Held (6:43)

Starts to take on more and more debt, as that debt is denominated in that fiat money, if they print more of that money, that debt now becomes easier to service.

Peter McCormack (6:54)

All right, before we start talking about Bitcoin and the Bitcoin monetary policy and how it's so different, can you just go into a bit of detail about how the economy works?

Dan Held (7:04)

Yeah. So at a very simple level, the economy is producers and consumers.

Dan Held (7:08)

So companies that produce different goods and.

Dan Held (7:11)

Services for consumers, those consumers could be other businesses or individuals. And essentially what they do is they produce items that other people or businesses need or want. That's very, very basic how the economy works. And that production of goods and services.

Dan Held (7:27)

Is largely based on supply and demand.

Dan Held (7:30)

And that supply and demand, that sort.

Dan Held (7:32)

Of equilibrium is found through pricing mechanisms.

Dan Held (7:35)

To where the price can help different market participants allocate resources as they naturally seek to find the highest reward for not only goods and services, but wages as well. So really, like, it's a decentralized sort of system where no one, in a.

Dan Held (7:51)

Capitalist system, no one controls the production.

Dan Held (7:54)

Of certain types of goods or services. It is found in a decentralized manner.

Dan Held (7:58)

Where each business goes out and attempts.

Dan Held (8:00)

To produce what it thinks the market wants. So, for instance, a apple producer may.

Dan Held (8:06)

Choose to plant more apple trees because they believe that next year there will.

Dan Held (8:10)

Be more demand for their supply of apples. Really, at the most primitive level, a capitalist economy is not controlled by any centralized system and instead is coordinated by prices in which different businesses and consumers use prices as a way to reflect.

Dan Held (8:30)

Information over the availability of that asset.

Dan Held (8:32)

And then for them to go make decisions based on that.

Peter McCormack (8:35)

But what you're really talking about there is a free market, whereas we know the history of, certainly the history of the UK where I am. That's not necessarily true, and I'm pretty sure it's the same way you are. But we had a history of nationalized services where the government would dictate the supply of certain items, for example, utilities or train services. So that isn't a good situation though, right?

Dan Held (9:00)

Yeah, that's a great point you brought up that really economies exist on a.

Dan Held (9:04)

Spectrum of free market, capitalist on one.

Dan Held (9:07)

End and socialist on the other.

Dan Held (9:09)

And that gradient or that spectrum is.

Dan Held (9:11)

Really Just different degrees of control. So in a socialist system, the government plans every single aspect of the economy. And in a capitalist system, the government.

Dan Held (9:22)

Plans no portion of the economy.

Dan Held (9:25)

And the entire economy is run in a decentralized fashion. What we actually have in America and the UK is somewhere in the middle. It's not necessarily capitalist and it's not really socialist. Some people call that crony capitalism, but that's a deeper topic.

Peter McCormack (9:41)

And even outside of nationalized services, you do have government interference with regulations and rules about certain industries and business, for example monopoly laws, or even to the extent that you might have certain trade restrictions.

Dan Held (9:55)

Yeah, I mean when we look at even the US economy, I would say it's near socialist. Nearly every aspect of the economy is managed by a government.

Dan Held (10:05)

So for example, the food we eat.

Dan Held (10:07)

The drugs we take, the radio waves that we propagate, information on, different content.

Dan Held (10:13)

Standards, those are all heavily regulated.

Dan Held (10:15)

In addition, you have the Federal Reserve, which we'll get into a little bit later, in conjunction with the US Treasury. They control the US monetary policy and supply that at a very basic level influences every aspect of the economy. Really. There's very few examples of true capitalist systems. Capitalism survives despite governments, not because of them.

Peter McCormack (10:40)

Yeah, almost certainly. And there are very solid arguments coming usually from the more libertarian minded, which people get into Bitcoin who aren't libertarian will certainly come across this and learn more about. But there are certainly solid arguments for actually decreasing government regulation and interference with markets.

Dan Held (10:59)

That's right, yeah.

Dan Held (11:00)

At the core problem that governments have.

Dan Held (11:02)

When they take their hand and they put it into the market is that.

Dan Held (11:06)

Governments are very, very poor allocators of capital and they have very, very poor information. So when I go build a business.

Dan Held (11:13)

Let'S say I want to go do have a dog walking service, I begin that service with the hypothesis that some people want to have a dog walker.

Dan Held (11:23)

And so I do my best at.

Dan Held (11:25)

Ingesting information to then influence my decision making in my company to produce enough goods or services that essentially give me a profit margin. So I have a financial incentive to make money and I want to do my best at that.

Dan Held (11:41)

And I do the best at that.

Dan Held (11:42)

By ingesting information and making wise decisions.

Dan Held (11:46)

Governments don't have a method to ingest every single data point about the economy.

Dan Held (11:51)

Now think about it this way.

Dan Held (11:53)

When you go up to a grocery.

Dan Held (11:55)

Store and you go pick out your groceries for the week, you don't really.

Dan Held (11:58)

Even know what you're going to buy. Sometimes you go and you go to the fruits, fruit aisle and you Might.

Dan Held (12:03)

Pick a banana instead of something else when normally you go get a kiwi. So governments trying to guess what people will want and need inherently, structurally is a data problem.

Dan Held (12:16)

They don't have enough ways to ingest all those data points, parse through those.

Dan Held (12:19)

Data points, and then really understand how the future projections of these data points will look.

Peter McCormack (12:27)

So why is this also important to understand before we get into the world.

Dan Held (12:30)

Of Bitcoin, I think it's important to.

Dan Held (12:32)

Understand how information really dictates the economy.

Dan Held (12:36)

That really we have an economy of information rather than anything else, because everything higher than that, essentially information is the.

Dan Held (12:44)

Base level of function of the economy.

Dan Held (12:47)

And money and supply and demand and consumers and producers are really just layers on top of that core fundamental reasoning. I think that's a really nice base way for people to understand the difference between socialism and capitalism. Its degrees of control and its degrees of being able to ingest information and make decisions based on that. And everything else sits on top of that. So I felt like that was a good spot to start.

Peter McCormack (13:13)

Yeah. And when we get into the monetary policy of Bitcoin, we will reveal how beautifully simple it actually is. Whereas if you try and analyze the monetary policy of the US or the UK or even the European Central Bank, I mean, it's so much more complex.

Dan Held (13:29)

That's right, yeah. With different fiat banking systems, you've got.

Dan Held (13:33)

A combination of a Treasury plus a.

Dan Held (13:35)

Central bank like the Fed. They work hand in hand to move.

Dan Held (13:39)

Different levers to influence the economy per their stated objectives.

Dan Held (13:43)

And it's a wildly complex process and sometimes very opaque and heavily influenced by politics.

Peter McCormack (13:49)

In what way?

Dan Held (13:51)

Well, so for example, like the 2007, 2008 financial crisis, we had every government across the world work with their central.

Dan Held (13:58)

Banks to influence the entire economy.

Dan Held (14:02)

And so this represents again, why governments.

Dan Held (14:05)

Largely influencing the economy that were more on, I would say, the socialist spectrum.

Dan Held (14:09)

Across the world rather than capitalist.

Dan Held (14:11)

Nearly every major world government stepped in.

Dan Held (14:14)

To work with their central bank to fix or quote, unquote fix their banking issues that were occurring during that financial crisis. And so governments, during these moments of.

Dan Held (14:26)

Crisis, they're influenced by their population.

Dan Held (14:28)

The population goes, hey, we don't want to lose money. And so the government, so all the politicians which are elected by the people, then influence the supposedly non influenceable sort of entities like the US like the Fed and the treasury, and they pressure them to enter into different sort of strategies that would be advantageous short term.

Dan Held (14:49)

But maybe not long term.

Peter McCormack (14:52)

Right. And you talked about the levers that they have to pull and you're now laying out with the pressure of politics and keeping the population happy. As we move into discussing Bitcoin's monetary policy, those levers don't exist, right? Those political pressures don't exist. So the market has to naturally form around the policy itself.

Dan Held (15:13)

Totally, yeah. With existing systems, they're very pliable. With the existing fiat monetary policy, it's.

Dan Held (15:18)

A very pliable policy that can change.

Dan Held (15:20)

At the whim of the aggregate feelings of the citizens or based on a.

Dan Held (15:27)

Few old white guys in a room.

Dan Held (15:31)

Which is honestly how most of the policy is really dictated. Now they do have central banks, do have a monetary policy that is a stated objective. For example, the US Federal Reserve stated objective is to maximize employment, enable stable prices and moderate long term interest rates. So while that is the objective, they rely on, I would say decent levers.

Dan Held (15:58)

To move the economy per that stated.

Dan Held (16:00)

Objective, which includes a couple different things like regulating how much banks have to hold in reserve.

Dan Held (16:08)

The Fed buys US Treasuries and how.

Dan Held (16:10)

Much or little of that they buy. And then also what banks borrow, what rate of interest they borrow at from the Fed. Now, simply put, in moments of crisis, the Fed really doesn't know what they're doing. And I think Parker Lewis, who you've had on earlier, had a really great, I forget if it was on your podcast, but he dived really deeply into.

Dan Held (16:34)

He read the Fed minutes where this.

Dan Held (16:37)

Is the communication between inside the Fed essentially. And they didn't really know what they.

Dan Held (16:43)

Were doing at the time.

Dan Held (16:43)

And by the way, this information isn't available day one, I think it's declassified.

Dan Held (16:48)

Five years later, a room full of individuals who most people can't name on.

Dan Held (16:53)

The street dictate billions of people's lives and we don't even know what they said or what they thought about until five years later.

Dan Held (17:01)

That's the current state of our monetary policy.

Peter McCormack (17:04)

So tell me if this is a fair observation, then would you say fiat money is socialist money and that Bitcoin is capitalist money?

Dan Held (17:10)

I would totally agree with that.

Peter McCormack (17:12)

Right. Okay, well, let's get into the Bitcoin side of things. Okay. So again, for me, when I first got into Bitcoin, I had no consideration of monetary policy. I was like, this is cool decentralized money I could buy. Oh yeah, censorship resistant cool. I can send it to people, no one can stop me. It can't be seized. This is really cool and interesting, but it was a good while after that I actually considered that there's a monetary policy and even became aware of what it is and what it meant. So for anyone new, why is it important that bitcoin has a monetary policy?

Dan Held (17:45)

Yeah.

Dan Held (17:45)

So I'm one of the rare bitcoiners.

Dan Held (17:48)

Back in 2012, I studied finance in undergrad during the 2008 financial crisis. I graduated in 2010. So that was right smack in the middle. And being in school in the 2008.

Dan Held (18:00)

Financial crisis really shook my faith in the existing system.

Dan Held (18:03)

I realized that every book I read, everyone on tv, all my professors didn't know shit.

Dan Held (18:11)

They had this whole elaborate structure built.

Dan Held (18:13)

On how the Fed works, how the treasury works, how they're able to project.

Dan Held (18:18)

And somehow navigate this incredibly complex environment.

Dan Held (18:22)

Which is the economy. And then you realize, wait, they actually have no idea what they're doing. And so for me, my aha moment when I said, oh, bitcoin is amazing.

Dan Held (18:33)

It was a combination of the monetary policy.

Dan Held (18:36)

A 21 million hard cap is, I would argue, Satoshi's most brilliant innovation. The 21 million hard cap drew me to it. And in 2012, that was a pretty.

Dan Held (18:46)

Rare sort of trade.

Dan Held (18:48)

Most people felt like decentralized money or.

Dan Held (18:52)

A cash like digital currency was kind.

Dan Held (18:54)

Of the cool thing about IT, or Gold 2.0. But Gold 2.0 isn't valuable unless there's a monetary policy that ties with it.

Dan Held (19:02)

That makes it a good gold 2.0.

Dan Held (19:04)

And not many people appreciated it back then. That's what makes it so rare, is.

Dan Held (19:10)

That, to me, was my aha moment.

Dan Held (19:12)

Where 21 million hard cap, that was a huge breakthrough.

Peter McCormack (19:16)

So the 21 million hard cap itself is one of the key pillars of the monetary policy then. And we should explain what it is. And also just add into that it doesn't really matter that it's 21 million or if it have been 42 million. It's the fact that it is a fixed supply. It is fixed to that number.

Dan Held (19:32)

Yeah, that's correct.

Dan Held (19:34)

Yeah, it could be 21 million, 21.

Dan Held (19:35)

Billion or 21 trillion as long as it is fixed.

Dan Held (19:40)

And there is a little bit of.

Dan Held (19:42)

Subtlety here where 21 itself might have been chosen due to specific coding rounding errors that might happen.

Dan Held (19:49)

There is a little bit more intention behind it than just any old arbitrary number. But a monetary policy, it doesn't matter.

Dan Held (19:56)

How many units there are, just that the cap is fixed.

Peter McCormack (20:00)

And why is that? Why is it so important to have a fixed cap?

Dan Held (20:04)

Right. This is the brilliance and the breakthrough in monetary policy is that previous monetary policies are flexible. So now governments and the central banks and investment banks all work together. And they kind of come up with the optimal rate of inflation.

Dan Held (20:21)

But that inherently comes with several problems.

Dan Held (20:23)

One is that it's an impossible problem to solve. There is no way to even properly calculate the rate of inflation. For example, in the United States, we have something called cpi, which is an.

Dan Held (20:37)

Attempt to calculate inflation. But that excludes many different assets.

Dan Held (20:41)

I believe it excludes food and energy, and it also excludes real estate and equities. So capturing inflation or even measuring it is a really difficult issue. And there's actually a term in computer, like in software development on the product side, which is called if you can't measure it, you can't manage it.

Dan Held (21:00)

So like, if you have an app.

Dan Held (21:01)

And you're trying to track the number of signups you're getting, if you don't measure that accurately, you can't manage to either raise or lower the number of signups. And so with an economy, choosing the.

Dan Held (21:15)

Proper rate of inflation is an impossible task. So first of all, ingesting data, parsing.

Dan Held (21:21)

It, analyzing it, that's an impossible task. And then let's say if you could do that, and then you could also, let's say you could properly manage it.

Dan Held (21:28)

Well, what's the proper rate of inflation?

Dan Held (21:30)

Is it 1%, 2%, 3%, 4%, 10%, 100%?

Dan Held (21:36)

There is no appropriate rate of inflation.

Dan Held (21:38)

It is a completely subjective term. Because it's subjective, that means that the.

Dan Held (21:44)

Inflation rate will always be up for.

Dan Held (21:46)

Debate because of that. That means that the monetary policy will always be malleable. And typically people in power will move that monetary policy to be malleable to their benefit.

Peter McCormack (21:58)

Okay, so me as an individual using Bitcoin, how does the fixed cap affects me, Right?

Dan Held (22:04)

So what's nice about that is first, you can easily understand your monetary policy in one sentence. 21 million. That's it. That's all you got to know versus the existing Fiat system where you've got this deeply lengthy explanation around how the monetary base and the monetary policy and.

Dan Held (22:25)

The entities that interact with that and how it all works.

Dan Held (22:29)

Bitcoins is extremely simple.

Dan Held (22:31)

Two, it means that there will never.

Dan Held (22:32)

Be a political influence on Bitcoin's monetary policy. Now, Bitcoin, the only reason why that monetary policy exists and exists and has existed from inception, is that those rules.

Dan Held (22:46)

Have been hard coded in and bitcoiners.

Dan Held (22:49)

Have rallied around that code, and that's called social consensus.

Dan Held (22:53)

So we have all rallied around that code and that 21 million hard cap.

Dan Held (22:56)

And that is very core to the ethos of Bitcoin. If all the bitcoiners came together and decided to change the 21 million to 22 that could happen. But the likelihood of that happening is.

Dan Held (23:08)

Infinitesimally small due to everyone who has.

Dan Held (23:11)

Bought Bitcoin has bought into the 21 million hard cap already.

Peter McCormack (23:15)

Right. So there's an influence there also in our own personal spending and spending habits. Because the current economy encourages us to spend for a couple of reasons, to keep the economy ticking over. But secondly, with inflation, our savings can lose value and depending on where you are in the world, it can lose value very quickly. But this is flipped on its head with Bitcoin. Right. There's an encouragement to save and only to use money to have more consideration how we spend our Bitcoin.

Dan Held (23:44)

Yeah. That's why often we see central banks have a mandated policy to stimulate the economy through inflation.

Dan Held (23:53)

If you keep 2%, if you keep your cash in your bank account, you're.

Dan Held (23:56)

Losing 2% a year versus putting it into, as they call it, productive assets or stimulating consumerism, where you go purchase items because you want to spend today versus saving and consuming later.

Dan Held (24:12)

Bitcoin flips this on its head where.

Dan Held (24:14)

Bitcoin has a disinflationary monetary policy, where Bitcoin, the rate of bitcoin issuance halves every four years to the total Bitcoin.

Dan Held (24:24)

Number of 21 million Bitcoin.

Dan Held (24:25)

And that will happen about the year 2140, 99% of Bitcoins, I think, will.

Dan Held (24:30)

Be produced in the next decade or.

Dan Held (24:31)

Two, though so largely most bitcoins will be produced and after that moment no.

Dan Held (24:36)

More will be produced.

Dan Held (24:37)

And that's all entirely predictable and entirely understood by all the participants in that economic system. Now what's cool about Bitcoin, Bitcoin is that it really is a rejection of all mainstream economics, not just a rejection of the banking system and the Fed, but of all academics, almost nearly every single economist in the world. It's rejection of their ideas.

Dan Held (25:02)

It goes back to an older form.

Dan Held (25:04)

Of economics that was popular called Austrian economics. Essentially, in Keynesian economics, there's two types of economic thought, Keynesian and Austrian. Keynesian is the current modern day economics.

Dan Held (25:16)

Thought, which is about government should heavily.

Dan Held (25:18)

Influence the economy and stimulate growth. Whereas Austrians were more hands off, decentralized sort of economics.

Dan Held (25:25)

And so Bitcoin hearkens back to that.

Dan Held (25:27)

Day, back to that sort of thought. And what people worry about with like a bitcoin monetary policy is for example.

Dan Held (25:36)

People will withhold their spending in anticipation of price increasing.

Dan Held (25:42)

And so that's often worried that in a bitcoin style economy, people would forever withhold their spending and the economy would essentially grind to a halt as no one wants to spend because the value of their coins keep increasing.

Dan Held (25:58)

With bitcoin right now, it's very early.

Dan Held (26:00)

Stages, so the price of bitcoin increases dramatically. As bitcoin succeeds and stabilizes in price, it becomes more useful as that medium exchange in unit of account. So in that final stage, that's when.

Dan Held (26:11)

Bitcoin'S monetary policy will be criticized in.

Dan Held (26:13)

Terms of encouraging people to hoard versus spend. However, as we've seen with consumer electronics, consumer electronics, like my TV, I've got a 65 inch TV on my wall, it's $1,000. Ten years ago, that was like $100,000.

Dan Held (26:31)

And that technology didn't even exist in my iPhone. My iPhone today versus 10 years ago is an incredible feat.

Dan Held (26:38)

And so when we look at consumer spending with electronics, electronics get cheaper and.

Dan Held (26:45)

Better every year, but we still buy them.

Dan Held (26:47)

Even though we can anticipate that they will become cheaper and better in the future, we still need to consume now because we're humans and we have needs. So in a bitcoin economy or in a bitcoin monetary policy, we shouldn't worry about people. When bitcoin becomes the standard medium of exchange and unit of account for everyone in the world, we don't need to worry about the implications of that because people will intuitively spend if they need to. They're not going to withhold spending until they die and shrivel up in bed.

Peter McCormack (27:15)

Well, yeah, and it might change the types of goods that people are making and creating that exist within the economy. Because at the moment we have this kind of choice. We have fiat money and we have Bitcoin and we have the choice which to spend. And you, like, I will most likely most of our time be spending our fiat money, but occasionally spend our bitcoin. If we ever move to a world of hyper bitcoinization and bitcoin is the only currency that has value that we can use, we won't be able to survive without spending some. So we'll have a choice of what to spend it on.

Dan Held (27:47)

Yeah, that's what's really cool about the.

Dan Held (27:49)

Implications of a hyper bitcoinization moment. Or when bitcoin becomes like the universal currency.

Dan Held (27:55)

Is that like when I talked about earlier with prices? Prices essentially convey information. So this goes back to what some of you might have read about in college called efficient market hypothesis, which is how information is reflected in the price of equities and what it really represents. Is for example, the price of Apple, like a share of Apple today represents.

Dan Held (28:16)

Everyone'S aggregate thought in the entire world.

Dan Held (28:18)

Of what Apple's worth.

Dan Held (28:20)

All the sellers, all the buyers ingested.

Dan Held (28:23)

All the information they possibly could to then willingly decide to buy or sell a share of Apple.

Dan Held (28:29)

That price reflects everyone's aggregate belief or.

Dan Held (28:33)

Information about the company. It reflects all future growth projections. It reflects all future concerns over the company's growth. And so that's what's so cool about Bitcoin, is Bitcoin inherently due to its really incredibly resilient architecture, you know, it's decentralized, it's incredibly hard to shut down. Monetary policy can't change. Bitcoin is a safe haven asset. It's a gold 2.0. And what's cool about that is in the future, when Bitcoin is after hyper Bitcoinization, when Bitcoin is the global money, the price of Bitcoin reflects the aggregate.

Dan Held (29:10)

Sentiment of the world's belief in risk.

Dan Held (29:13)

Because holding Bitcoin contains no risk.

Dan Held (29:16)

There is no performance that Bitcoin has to do.

Dan Held (29:18)

Bitcoin doesn't have to go sell more.

Dan Held (29:20)

TVs to generate more value for Bitcoin.

Dan Held (29:23)

Bitcoin just is. It's the base level of risk, it's the risk free rate of return which essentially for Bitcoin is holding Bitcoin. And what that does is it re architects the world economy around a more information efficient way. So let's say every business out there has a cash reserve of Bitcoin.

Dan Held (29:45)

Every consumer has their bank account with.

Dan Held (29:47)

Bitcoin in it, in a savings account with Bitcoin in it.

Dan Held (29:50)

And then they're spending and lending their.

Dan Held (29:52)

Bitcoin out as well. So right now, in the future, what Bitcoin would become is that Bitcoin, the.

Dan Held (30:00)

Price of Bitcoin reflects the aggregate sentiment of the world.

Dan Held (30:03)

So in a bull market, the price of Bitcoin would drop as people sell or spend their Bitcoin and they can.

Dan Held (30:12)

Sell, spend or lend or invest.

Dan Held (30:15)

So as Bitcoin drops, the economy starts to boom because people start to take.

Dan Held (30:21)

Money out of the safe haven asset.

Dan Held (30:23)

And put into riskier assets.

Dan Held (30:25)

And then during a bust, people flee.

Dan Held (30:28)

From the riskier assets back into the less risky asset like Bitcoin and then Bitcoin's value rises. So in the future, Bitcoin sort of self regulates the entire world economy with no input necessary from an external party.

Dan Held (30:43)

In no control by any centralized system.

Dan Held (30:46)

It's every single market participant choosing to take their Bitcoin and Sell it for something else or to sell something else and hold on to bitcoin.

Peter McCormack (30:57)

Next up, I talked to Dan more about Bitcoin's monetary policy. But before that, I do have a message from my amazing sponsors. And the first up is my newest sponsor, Kalman Law, who are getting involved with the podcast for the month. And if I get myself into any bitcoin bullshit, then these are the guys are going to be calling. It is a firm which is run by Bitcoin OGs out of New York. And unlike those crypto lawyers you hear about, these guys understand bitcoin and fintech. And most importantly, if you're going to be a bitcoin company, you got to accept bitcoin, right? And this law firm accepts payment in bitcoin. One of the partners, Zachary Kelman, he's known for drafting a bill submitted to the US Congress in 2014 and aimed at exempting on chain Bitcoin transactions for US regulations. The other funding partner is his brother, Daniel Kelman. You might know of him, he was on my podcast before he was part of my Mount Cox series. He helped me understand the complexities around civil rehabilitation. The Kelman Law team is staffed with lawyers with expertise in litigation, dispute resolution, anti money laundering and US and international corporate structuring for fintech businesses or companies of individuals operating in the bitcoin space. So listen, if you are a fintech company, if you have a dispute relating to bitcoin, maybe somebody owes you some bitcoin or you just need some legal advice related to fintech or bitcoin. Open up your email and drop a message to Infoelman Law. That's K E L m a n dot law Kelman with one out, not two. Or head over to their website which is www.kelman.law. also, this show is brought to you by Dropbit, the only mobile wallet I use for sending and receiving bitcoin. Have you downloaded the wallet yet? Have you tried it out yet? Have you had a play with their Lightning implementation? It's pretty damn cool. I've been working with these guys now for coming up to a year actually. And you know what? The growth has been amazing seeing how many people are now using Drop it and also how much they've developed the app. So so many things have come. Firstly, they got all the basics in there, all the basics of sending and receiving Bitcoin, your QR codes and sending to an address that all the basic things you would expect. But they level it up with the ability to text bitcoin to people or tweet bitcoin to people. And the implementation of Lightning is so super simple. The way you move bitcoin between your bitcoin wallet and your lightning wallet, I think they smashed it, to be honest. It's my favorite that I've seen. Also, you can now buy bitcoin within the app directly within your drop bit wallet. Seriously, if you haven't downloaded or played with drop it, what are you doing? Go and check it out. Now it's available for the iPhone and Android.

Dan Held (33:30)

Just.

Peter McCormack (33:30)

Just head over to dropbit app, which is D R O P B I T app.

Peter McCormack (33:38)

Okay, so let's go back one step as well. So we've Talked about the 21 million hard cap being part of the bitcoin's monetary policy, but people who have heard the previous shows would have heard that Satoshi dropped the white paper October 31, 2008. Then January 3, 2009, he drops the protocol, but the protocol doesn't launch with 21 million bitcoins available to people. So we have something that you mentioned, is the release schedule. Talk about what that is and how it works.

Dan Held (34:07)

Yeah, so bitcoin's release schedule is essentially the amount of bitcoins produced per block. And that's the monetary policy of bitcoin is bitcoin's production curve, or the release.

Dan Held (34:17)

Schedule, or how many newly minted coins.

Dan Held (34:19)

Are created and over what time horizon. And so bitcoin produces new coins through something called proof of work, where bitcoin miners purchased specialized machines and then they consume electricity.

Dan Held (34:32)

And that gives the miner a certain percentage of something called a block Reward, approximately every 10 minutes, the Bitcoin protocol with the miners.

Dan Held (34:41)

Miners essentially use this energy and all this cost, or as Nick Szabo puts.

Dan Held (34:46)

It, the unforgeable costliness of production. These miners, given the cost that they have already incurred, are then given a.

Dan Held (34:53)

Block reward, which is based essentially on how much of the entire network's work that they did. It's a randomization function, but that's how that works at a primitive level.

Dan Held (35:04)

And that block reward is comprised of.

Dan Held (35:06)

The block subsidy, which is the newly minted bitcoins, plus transaction fees, or the fees that users paid to send their bitcoin on the network within that time period.

Dan Held (35:16)

And so in the beginning, the block reward was mainly comprised of the block subsidy. And over time, every four years, the amount of newly minted bitcoins drops in half.

Dan Held (35:29)

And so the percentage of the block.

Dan Held (35:31)

Reward that is comprised of newly minted.

Dan Held (35:33)

Coins continually drops over time. And so that's how new bitcoins are produced. And that's how the schedule looks like. Now that number of blocks is strictly.

Dan Held (35:45)

Limited to approximately every 10 minutes through.

Dan Held (35:48)

Something called the difficulty adjustment. And so, as more and more machines join the network to mine bitcoin, the difficulty or the amount of energy that's needed to produce those bitcoin also increase as well. That's a self regulating function to make sure that all the bitcoins aren't printed in the first year, or that it.

Dan Held (36:09)

Takes too long to print all the bitcoins.

Dan Held (36:11)

It makes sure that the supply schedule.

Dan Held (36:13)

Is met on a very, very precise timeline.

Peter McCormack (36:17)

So somebody listening for the first time might be like, huh, what? Proof of work block rewards. But really would you say a simple way of explaining this is that the block reward is a way of designing the release of bitcoins into the ecosystem and that the proof of work mechanism is a way of giving them value?

Dan Held (36:39)

Yeah, that's a pretty good way of putting it.

Dan Held (36:41)

I think proof of work is a good way to root real world energy.

Dan Held (36:45)

And tie that back to bitcoins in the digital world. And so, yeah, I think that's a pretty simple way of putting that.

Peter McCormack (36:52)

Right. Before I go into the next question, because we should really cover one other part. This is a monetary policy, but there is no central authority. So how is this governed?

Dan Held (37:03)

Right.

Dan Held (37:04)

So the original 21 million hard cap.

Dan Held (37:06)

Or that hard cap was hard coded in by satoshi and we don't know if that was by committee, a couple individuals or by one individual. But as Satoshi put it, essentially he.

Dan Held (37:17)

Had hard coded the rules in since.

Dan Held (37:19)

Day one and that was how the system was set. And the bitcoin community or people who.

Dan Held (37:26)

Bought into bitcoin over the years agreed.

Dan Held (37:29)

That that was a good monetary policy and have bought into that as well. You know, when you buy a bitcoin, you don't want to change the monetary policy to print more because that will make your bitcoin worth less. So essentially that has essentially Satoshi set.

Dan Held (37:44)

Those rules in stone and everyone since.

Dan Held (37:45)

Then has agreed upon those rules.

Peter McCormack (37:48)

So there's no real benefit to any of us of having new fiat printed. It's usually a benefit to a small group of people or certain group of people. And also it's politically motivated. But in this scenario, there is no benefit to anyone holding bitcoin to have new bitcoins printed.

Dan Held (38:05)

Yeah, what's cool about bitcoin is that.

Dan Held (38:07)

Through proof of work, the only way.

Dan Held (38:08)

To acquire a bitcoin is to expend the energy and resources necessary to mint One very mining. You can't just go out there and find a ton of gold. The incentive for everyone to hunt down gold and mine it is very, very high. So people expend a lot of energy and resources to go mine that gold. So that's the unforgeable costliness or the costiness to produce makes bitcoin, doesn't make it valuable. But that's what's needed to generate a new bitcoin. And the only way to get a bitcoin is to do that, or you buy a new one, which cost about the same as it cost to mine one. If you smoothed out the cost to mine one over time, they largely are somewhat the same.

Peter McCormack (38:50)

Right. Okay. So you talked about a 21 million hard cap, but you also talked about the fact that within the next 10 years, 99% will have been mined, but yet it won't be 2140 till everything's mined. So why is the release schedule front loaded so much?

Dan Held (39:08)

That's a great question.

Dan Held (39:10)

And there hasn't been a ton of discussion around it.

Dan Held (39:12)

And that's why I think digging into this makes a lot of sense for people, because a lot of people don't realize that satoshi was a human. People don't really. They like to kind of. He's kind of this mysterious figure that is almost this quasi, you know, Greek godlike sort of guy. And I think people, you know, really don't start. They don't really humanize him. And to humanize him, I think a good way to look at that a couple different ways is one, I think the front loading was a human characteristic of his. I think he wanted to see, you know, when satoshi founded bitcoin, like, he.

Dan Held (39:50)

Wrote the white paper, he coded it up, he wrote the white paper, he released the code. Bitcoin didn't have a value for a year and a half.

Dan Held (39:58)

Bitcoin was worth zero dollars. Not a penny, not a tenth of a penny, zero. And so we have to remember, when satoshi created bitcoin, he had no idea.

Dan Held (40:07)

If it was going to survive or even thrive.

Dan Held (40:11)

So I think I totally hypothesize that Satoshi looked at the different rate of issuance that he could have. He could have bitcoins produced in a more flat fashion where maybe it would take much longer to produce all the bitcoins or a different sort of slope of issuance, or he could have had them produced faster. But I think he chose this issuance schedule because he wanted to see bitcoins survive and thrive in his lifetime. He Was likely at least 35 to 55 given his polymath. Renaissance man esque sort of knowledge, bit like knowledge.

Dan Held (40:51)

Bitcoin has to thrive and survive within under 30 years. Otherwise you won't be alive when you.

Dan Held (40:57)

See your baby sort of come to fruition. So that's my hypothesis. Why Satoshi chose his issuance schedule was because he wanted to see it before he died, see if it would succeed.

Peter McCormack (41:08)

So the way that schedule adjusts is that every four years we have something called a halving. Now we've got one coming up now, but let's just put this into context. So somebody might be listening to this six months down the line, a year down the line and missed it. So, you know, we are here in January, we think probably around May, perhaps June, but probably about May, there'll be another halving. What is the halving? Why is it so important?

Dan Held (41:31)

Yeah, so if you want to look at the best estimate over when the havening will occur, that's bitcoin.clarkmoodie.com has a great bitcoin network sort of chart.

Dan Held (41:43)

So it's got all the different metrics.

Dan Held (41:45)

On what's going on in the bitcoin ecosystem. And it has a halvening estimator where he essentially tries to do his best at estimating it. So bitcoin is regulated in terms of the new block production. It's not necessarily Every exactly every 10 minutes. It's based on a sort of function.

Dan Held (42:03)

That essentially means that the median block.

Dan Held (42:05)

Is found every 10 minutes. But there's a wide variance to how long it takes to find a block. So we can say with certainty that the halvening will occur in May. But we're a little bit fuzzy on the day and the time. And the reason why is it's the happening occurs after X amount of blocks, not necessarily about X amount of time.

Peter McCormack (42:26)

What is the expected impact of a halving? You know, every four years? Like I say, we've got one coming soon, there'll be another one in another five or four and a half years. What is the expected impact? And I'm guessing we can go into this thing stock to flow. You know, there is a guy on Twitter, his name is Plan B. I have a whole show about this. So if you are interested, it'll be in the show notes. Check it out. But why is stock to flow so important? And how does that relate to the halving?

Dan Held (42:50)

Yes, Dr. Flow is essentially the amount.

Dan Held (42:53)

Of bitcoins already issued versus the future.

Dan Held (42:55)

Amount of bitcoins being issued or the.

Dan Held (42:56)

Current flow being issued.

Dan Held (42:59)

And essentially it's a representation of like, yes, what percentage is being produced versus what percentage has already been produced. And plan B has an elaborate sort of mathematical model built around that, which shows a statistically relevant correlation between bitcoin's price and the issuance schedule. I think is the easiest way to put that for any price in the world. Essentially, it represents all the buyers and sellers coming together. So if demand perfectly meets supply, that price will stay static. If demand outstrips supply, the price goes up because there are more people chasing less units of that supply.

Dan Held (43:45)

If there's more supply than demand, price.

Dan Held (43:47)

Goes down because there's more supply which outstrips which demand won't satisfy. So with bitcoin, there are miners who.

Dan Held (43:57)

Have already have sunk cost of buying those specialized machines and they've expended the.

Dan Held (44:01)

Electricity to mine that bitcoin.

Dan Held (44:03)

They need to sell that bitcoin in.

Dan Held (44:05)

Order to pay off their operations.

Dan Held (44:08)

So that is a constant selling pressure that's put on the network. So every day there at least needs to be enough people buying those coins from the miners, otherwise the price would.

Dan Held (44:18)

Go to zero because there wouldn't be any demand for that supply produced. What happens during a halving event is that the amount of newly minted bitcoins.

Dan Held (44:28)

In that block reward drops in half, which therefore reduces the amount of sold.

Dan Held (44:34)

Supply on the market on a daily basis. And this is technically a per 10 minute basis, but if you think about it, in a day, it's just a little bit easier to imagine. So on a daily basis, the amount of bitcoin sold drops. If demand stays the same, then the price starts to creep up. As the price starts to creep up, people write more and more about the price creeping up. As the price creeps up even more.

Dan Held (44:58)

People tell their friends about how they.

Dan Held (44:59)

Made money with bitcoin.

Dan Held (45:00)

Then those friends, they buy bitcoin and.

Dan Held (45:03)

Then bitcoin goes up and it's a self reinforcing sort of loop there.

Peter McCormack (45:11)

It sounds like a kind of a marketing strategy for bitcoin.

Dan Held (45:13)

Yeah, I would say that satoshi baked in a viral loop into the core protocol to where he even talks about this. Where Satoshi goes, as the number of.

Dan Held (45:22)

Users grows, the value per coin increases. It has the potential for a positive feedback loop. As users increase, the value goes up, which could attract more users and take.

Dan Held (45:30)

Advantage of the increasing value.

Dan Held (45:33)

Satoshi wrote that a year before bitcoin.

Dan Held (45:35)

Ever was worth a penny.

Dan Held (45:37)

So he knew fundamentally at the core of all humans, he could rely on one variable.

Dan Held (45:43)

He could plug in this one variable into his model to make bitcoin succeed. And that's greed. He knew humans can't resist making money. And that is entirely why bitcoin has succeeded, is due to that volatility, people.

Dan Held (45:57)

You know the 21 million hard cap means that the as prices increase, no more bitcoin will be produced. So as demand outstrips supply, that supply becomes increasingly more valuable and the prices rise.

Dan Held (46:08)

And that price rising is a signal to everyone else that this thing is valuable. And then people, via speculation, try to buy and sell it to make money.

Dan Held (46:19)

It's a really, really brilliant organic way to stimulate demand for an entirely new.

Dan Held (46:24)

Asset that has no marketing team. There is no bitcoin marketing team.

Dan Held (46:29)

There's no bitcoin ad on Facebook.

Dan Held (46:30)

You're going to see maybe by a bitcoin company, but. But not by the protocol. And there's largely no organization that controls it. So it's a really brilliant way to pull people into the protocol.

Peter McCormack (46:43)

It's so simple and so elegantly beautiful. I could imagine if you asked the government to write or a central bank to write down their monetary policy, you'd be presented with a book.

Dan Held (46:55)

Oh, absolutely.

Peter McCormack (46:56)

But all we have here is a hard cap, a release schedule, and how they're being released.

Dan Held (47:02)

Yeah, and we forget too, that bitcoin's.

Dan Held (47:04)

Monetary policy isn't singular in its function.

Dan Held (47:08)

The issuance schedule, the hard cap, and the policy itself, all of this together actually does a couple different things. One is that the block rewards protect the bitcoin network.

Dan Held (47:20)

It incentivizes miners to behave properly versus.

Dan Held (47:23)

Trying to reorganize transactions. So the newly issued bitcoins protect the network. It ensures a proper sort of release of coins over time to reach that maximum of 21 million. And those coins can only be produced.

Dan Held (47:37)

Through proof of work.

Dan Held (47:38)

So it's a representation of costliness as well. And then it reduces political attack vectors. So via the hard coded maximum fixed.

Dan Held (47:47)

Supply, there is no subjectivity over what.

Dan Held (47:51)

How many there's should be.

Dan Held (47:53)

Should we have a 1% inflation rate?

Dan Held (47:54)

Percent?

Dan Held (47:55)

Satoshi removed that political attack factor from the protocol.

Dan Held (47:59)

So the monetary policy, the issuance schedule, the proof of work mechanism, they all are so intricately intertwined that when you examine it, it's pretty incredible that satoshi.

Dan Held (48:12)

Wove all this together.

Dan Held (48:14)

It's wild.

Peter McCormack (48:17)

Yeah. Okay. There's a couple of questions I have left remaining in terms of the supply. So the first one I want to ask about is I've heard about lost bitcoin. I've heard that estimates up to maybe 4 million have been lost. And look, over time more will be lost, though I expect that it will be a decreasing rate as it has more value and people would be more careful. But what is the impact of people losing bitcoin on the supply?

Dan Held (48:42)

Yeah, it's a forever lost supply. So that reduces the hard cap not from 21 million, but even lower. So bitcoin technically, with humans, humans tend to forget things.

Dan Held (48:55)

And even in a future where people are really good about their private key.

Dan Held (48:59)

Management, we're still going to see bitcoins lost. So bitcoins, over time, there's not just.

Dan Held (49:06)

21 million, there's actually far less than that as they're perpetually being lost over and over.

Dan Held (49:11)

I mean, who knows how many are.

Dan Held (49:12)

Being lost on a daily basis.

Dan Held (49:14)

Can you imagine at least maybe 10 a day, maybe 100 a day, maybe more like 10. But it's pretty wild to think about it.

Dan Held (49:25)

Overall, it's good for bitcoiners who hold.

Dan Held (49:27)

Bitcoin because it reduces the amount of supply in the market. And Satoshi actually talks about that as well early on. He goes, it's essentially a gift to everyone else because you've reduced the amount of supply.

Peter McCormack (49:37)

So it actually rewards good security.

Dan Held (49:40)

That's right, yeah.

Dan Held (49:41)

Bitcoin rewards hodlers who are very cognizant.

Dan Held (49:45)

About how they store their private keys, which is essentially how they manage their bitcoin.

Peter McCormack (49:49)

Okay, so my final question on this is, I was going to ask you what happens when all the bitcoins are mined. But actually I think a better question is what happens when nearly all the bitcoin is mined? Because I think the implication is going to be the same. At some point the miners are going to have to switch from just relying on the block reward.

Dan Held (50:07)

Yeah, that's a great question. It's an intense, and it's part of an intense debate that's been going on in the community, especially from the Ethereum.

Dan Held (50:13)

Side, using it as a way to.

Dan Held (50:15)

Attack bitcoiners confidence in the 21 million hard cap. As we mentioned earlier, the block reward.

Dan Held (50:21)

Is comprised of the newly minted bitcoins.

Dan Held (50:23)

Plus the transaction fees.

Dan Held (50:25)

So over time, as the newly minted.

Dan Held (50:28)

Bitcoins in those blocks drop per the happening events, the transaction fees over time will have to replace that in order to reward the miners to behave properly. So bitcoin is essentially secured by the.

Dan Held (50:40)

Incentivization method of these block rewards.

Dan Held (50:43)

These block rewards need to have a high enough incentive, a financial one, to reward the miners. And so people worry about once all the Bitcoin are mined, miners will only be compensated through the transaction fees. And so I spent a lot of time digging in on this idea and there's actually a really beautiful organic relationship that happens here.

Dan Held (51:06)

As the block reward drops in half.

Dan Held (51:09)

Due to these have or sorry. As the block subsidy drops in half due to the halvening events, the demand outstrips supply. There's a giant market cycle where the price rises 10 or 50x. That brings around more people who then.

Dan Held (51:27)

Buy Bitcoin and become hodlers and believe.

Dan Held (51:29)

In that monetary policy. There's more volume, which means more and more participants can buy and sell it. And that also means more transaction fees.

Dan Held (51:37)

And so when we look over 10.

Dan Held (51:38)

Years of Bitcoin's history, transaction fees have increasingly started to replace the block subsidy.

Dan Held (51:44)

Meaning that we don't have a lot.

Dan Held (51:46)

To worry about over a long time period.

Dan Held (51:49)

It is very likely that the transaction.

Dan Held (51:51)

Fees will replace the subsidy enough so to compensate the miners adequately, which adequately is a somewhat subjective term since we.

Dan Held (51:59)

Don'T know exactly how much the miners.

Dan Held (52:02)

Should be compensated with to protect the network. Again, this is a game theoretical attack vector. It's essentially incentivizing the miners to behave properly. And we haven't seen Bitcoin attacked by.

Dan Held (52:13)

A government which wouldn't care about receiving the money.

Dan Held (52:15)

A government would want to burn the money. They would buy the machines, use the electricity, and they wouldn't care about making a profit. So long term, I modeled it out.

Dan Held (52:24)

And it looks very much so that.

Dan Held (52:26)

Bitcoin's transaction fees will replace the block subsidy. These transaction fees won't be too onerous.

Dan Held (52:32)

They'll be well within the price elasticity of a normal store of value transactor.

Dan Held (52:37)

Which I looked at wires, gold transfer, real estate transactions and offshore banking. And the price or the transaction fee for those sort of transactions are 1000x higher than Bitcoin right now.

Peter McCormack (52:49)

So these rules sound great, they all sound brilliant. It's great monetary policy, but what enforces it? What stops somebody cheating the system?

Dan Held (52:57)

Yeah, that's a great question.

Dan Held (52:59)

So everyone who has bought into Bitcoin.

Dan Held (53:01)

Essentially has created a shelling point or.

Dan Held (53:03)

A social consensus around the rules that.

Dan Held (53:06)

Dictate the Bitcoin protocol. And people who run full nodes are.

Dan Held (53:11)

Running those exact rules. And so you can validate for yourself.

Dan Held (53:15)

That everyone else is running the rules.

Dan Held (53:17)

And if anyone ever changed those rules.

Dan Held (53:19)

Like they decided to at a zero in the 21 million hard cap and change Bitcoin, they could run that, but.

Dan Held (53:27)

No one else would be able to.

Dan Held (53:28)

Communicate with them on the bitcoin network.

Dan Held (53:30)

They would essentially have created a fork.

Dan Held (53:31)

Of Bitcoin that operates independently, not with the current network rules and regulations.

Peter McCormack (53:38)

So this kind of proves something else that's really important that I heard about early on when I was new to bitcoin and I was arguing about some of the flaws I saw with it. Hey, I'm new to bitcoin, I'm here to fix it. That old meme. But actually, one of the most important things, therefore, about Bitcoin is the conservatism that it is hard to change, because if it is too easy to change, then these rules could be messed around with.

Dan Held (54:03)

Right? And we see that with many other.

Dan Held (54:05)

Protocols that the rules change constantly.

Dan Held (54:07)

And there's something that's called the Lindy effect, which is over time, how likely is something to continue to exist over time? And Bitcoin's monetary policy, since it was.

Dan Held (54:17)

Baked in day one and hasn't changed.

Dan Held (54:19)

At all, the confidence in that monetary policy is higher than any other monetary policy in the world. We are all more confident in Bitcoin's monetary policy, more so than even gold mining, because with gold mining, we could.

Dan Held (54:34)

Find $10 trillion worth of gold at.

Dan Held (54:37)

The bottom of an ocean in a box, or you find it on an.

Dan Held (54:42)

Asteroid or X, Y, or Z. We don't know how much gold is.

Dan Held (54:45)

Out there, but we know exactly how many bitcoin are out there and exactly how many will be produced in a very precise function.

Peter McCormack (54:53)

If anything, it will be less.

Dan Held (54:55)

Correct.

Dan Held (54:55)

Yeah, it's probably less than our expected.

Dan Held (54:58)

Than the expected 21 million issuance. That is a phenomenally confident answer we can give around a monetary policy which then strengthens the belief in bitcoin, because we can trust it. We can trust that monetary policy, and it strengthens the resolve never to change that monetary policy.

Peter McCormack (55:17)

So new people coming in, hearing about this very early on are going to be exposed to other cryptocurrencies. It's very unlikely that new people hearing about bitcoin come into the space, they start buying maybe some on an exchange and see other cryptocurrencies? It's very unlikely that they won't take a look at them. So are there any good examples of other cryptocurrencies which have a poor example of monetary policy and what the implication of that is?

Dan Held (55:42)

Yeah, I think there's a really easy answer for that one. It'd be Ethereum. So Ethereum has an incredibly poor monetary policy.

Dan Held (55:50)

Most people who are fans of Ethereum.

Dan Held (55:52)

Are engineers and they really lack the as. There was a VC in Silicon Valley who wrote an article called Tech Crypto versus Money Crypto.

Dan Held (56:03)

So tech crypto is engineer focused.

Dan Held (56:05)

Money crypto is ex finance, ex banker types who really understand economics. And Ethereum largely appeals to the tech crypto types. They like to tinker with things, they like to poke and prod and change things. They're engineers, they're meant to go build things. They like to build apps and they want to. They want everything.

Dan Held (56:27)

They want an app platform like the.

Dan Held (56:29)

App Store, Play Store, or the Ethereum blockchain to do everything they want. And so the protocol becomes largely very malleable because of that, because it's constantly.

Dan Held (56:39)

Changing at the whim of all of these engineers.

Dan Held (56:42)

But none of these engineers have really a good grasp of economics or monetary policy.

Dan Held (56:49)

So Ethereum largely ignored monetary policy, or.

Dan Held (56:52)

Just a very primitive at all really talking about it that much until 2018. I remember Ethereum coming out and almost.

Dan Held (57:01)

No one ever mentioned the word monetary.

Dan Held (57:03)

Policy and Ethereum in the same sentence. Ethereum was a smart contract platform and.

Dan Held (57:07)

ETH was the oil or the gas.

Dan Held (57:08)

Wherever you want to put it. I wrote an article called Quantum Narratives, which essentially covered narratives and how they ebb and flow in the crypto space. Because I've been around since 2012 and the Ethereum community has seen a lot.

Dan Held (57:25)

Of failure with their narrative of a DAPP platform, smart contract platform, a fundraising platform.

Dan Held (57:31)

As we saw ICOs collapse and these Dapps fail to find product market fit Ethereum. The Ethereum community is scrambling to find a new narrative. And that new narrative is that Ethereum.

Dan Held (57:42)

Is A Good Gold 2.0, or Ethereum.

Dan Held (57:44)

Is a good money because of its.

Dan Held (57:47)

Usefulness, that copper is worth more than.

Dan Held (57:50)

Gold, because copper can be used for so many things.

Dan Held (57:53)

And we're only seeing them pivot to that narrative as their narrative around dapps and everything collapsed. So they're desperately grasping at straws for.

Dan Held (58:00)

Something that's tangible, something that's real. And so they're trying to make themselves equivalent to Bitcoin.

Dan Held (58:06)

And this is the first time that.

Dan Held (58:07)

I've seen the Ethereum community talk about monetary policy was in early 18 is where they go, okay, wait a second, we got to figure out the new narrative.

Dan Held (58:16)

And we have to figure out why.

Dan Held (58:17)

Our monetary policy, how we can compare and contrast that to Bitcoins.

Peter McCormack (58:22)

So has the monetary policy for Ethereum changed at all?

Dan Held (58:25)

Yes, it's changed several times.

Dan Held (58:27)

One, you've had a situation where Ethereum transactions were reversed per political pressure to reverse Them individuals had lost a lot of money in something called the dao hack. Those were friends and co workers of.

Dan Held (58:42)

Vitalik Buterin, the guy who invented Ethereum and the Ethereum Foundation.

Dan Held (58:45)

So they reversed the transactions, which sort.

Dan Held (58:48)

Of violates the whole principle of why.

Dan Held (58:49)

You'D have a blockchain to begin with. Second, they've tweaked the inflation rates through several different mechanisms. One is that Vitalik pushed out in Ethereum an improvement proposal around a fixed hard cap which would make Ethereum somewhat. People would make it somewhat sort of equivalent to Bitcoin.

Dan Held (59:09)

And then as well, they've also tweaked.

Dan Held (59:11)

The rate of issuance. They've got something called the difficulty bomb and that requires some voting by a group of a small group of developers over the exact rate of issuance per block. And so what's funny is that the.

Dan Held (59:26)

Ethereum community is trying to meme and.

Dan Held (59:28)

Trying to align themselves with Bitcoin's fixed supply and monetary policy. But they don't realize that they will.

Dan Held (59:36)

Continually and perpetually be.

Dan Held (59:39)

Less people have less confidence in their monetary policy than Bitcoin.

Dan Held (59:43)

Bitcoin has already won. It is far too late for them.

Dan Held (59:45)

To do this now.

Dan Held (59:46)

You can't just say, hey, we have.

Dan Held (59:48)

A low rate of inflation because I.

Dan Held (59:50)

Don'T trust that you will in the future.

Dan Held (59:52)

You could choose to change the rate of inflation.

Dan Held (59:54)

It's about the continuity of the monetary.

Dan Held (59:56)

Policy that is paramount.

Dan Held (59:58)

The belief in the continuity of the.

Dan Held (60:00)

Monetary policy, the faith in it. And there's no continuity to Ethereum's monetary.

Dan Held (60:05)

Policy and there's no faith that it.

Dan Held (60:06)

Will continue that way. Whereas Bitcoins is super strong, it also has the largest network effect in terms of market cap holders of the currency.

Dan Held (60:14)

And liquidity and faith in the monetary policy.

Peter McCormack (60:18)

So what's really interesting there, Dan, is that how you explained how Ethereum has has tinkered with their monetary policy and how the decision making around why and when to tinker with it exactly reflects what you described as wrong with central banking monetary policy. It's a small group of people influencing something for what they believe is the benefit either of themselves or a group of people.

Dan Held (60:45)

That's exactly right. And it's not malicious on their part. It's ignorant. It's an ignorance that shows that they.

Dan Held (60:52)

Have not spent a shred of their.

Dan Held (60:54)

Time to understand what went wrong with the existing banking system. It's the malleability of the monetary policy.

Dan Held (61:01)

That'S the root cause of the problem. And they don't realize that they've Literally.

Dan Held (61:05)

Recreated the exact same thing in the digital world. And that bitcoin, Bitcoin has such an insurmountable lead and face in it that.

Dan Held (61:15)

There is no possible way that they could meme themselves to be equivalent to Bitcoin's Gold 2.0.

Peter McCormack (61:21)

Okay, so I've also heard this is Bitcoin cash, Bitcoin sv. There are other versions of bitcoin. They have a very similar monetary policy and release schedule. You know, a fixed hard cap, you know, an emission schedule. Yet they're faster, they have lower, apparently lower transaction fees. So why is Bitcoin stronger than either of those two other versions?

Dan Held (61:43)

That's a good question. So the only reason why Bitcoin exists and has a community is that individuals have decided all to run the same code and buy the same asset or the token that comes with that code. And so bitcoin, the one we all.

Dan Held (61:57)

Call bitcoin, has by far the majority.

Dan Held (62:00)

Of people that run that code and believe in that coin. And so that coin is what's called Bitcoin. And so these other communities are hard forks of that original Bitcoin code and they change it.

Dan Held (62:11)

And these individuals who believe in that version of bitcoin run that code and.

Dan Held (62:16)

Buy that token issued by that currency or issued by that protocol.

Peter McCormack (62:21)

Right. Okay. All right. So, Dan, I got one more question. If this is such a great monetary policy, why is the value of Bitcoin so volatile? Why should I trust in it? Because if my pound here or your dollars there were so volatile and what you could buy every day could swing so wildly up and down 10, 20%, why is the monetary policy so good? And why should I believe in Bitcoin?

Dan Held (62:43)

That's a great question. One is that Bitcoin is transitioning through different stages of its product life cycle. At first, Bitcoin is mostly valuable as.

Dan Held (62:53)

A store of value.

Dan Held (62:54)

It's a hard to seize asset with.

Dan Held (62:57)

A very explicit, clear and understood monetary policy that can't be changed. And that makes it a great store.

Dan Held (63:02)

Of value alongside immutability and other other sort of properties it has as a money.

Dan Held (63:08)

As Bitcoin's value increases over time, it.

Dan Held (63:10)

Draws in more and more people.

Dan Held (63:12)

As more and more people believe in.

Dan Held (63:14)

Bitcoin and buy into Bitcoin, Bitcoin becomes more liquid, which then draws in more and more people. Eventually, Bitcoin reaches a market capitalization where now the number of market participants is extremely large, let's say 30% of the worldwide population.

Dan Held (63:29)

At that point, Bitcoin's value starts to.

Dan Held (63:32)

Stabilize the Volatility starts to decrease as.

Dan Held (63:36)

The amount of speculation starts to drop.

Dan Held (63:37)

Off and people are it's just the gold 2.0. People just use it.

Dan Held (63:42)

It's not a speculative store of value.

Dan Held (63:44)

It becomes the store of value.

Dan Held (63:46)

And when that price stabilizes or the volatility drops, if it drops below the local volatility of that fiat currency that.

Dan Held (63:54)

Those individuals live under, then bitcoin transitions to the medium of exchange and unit of account era volatility at this point in time is entirely predictable. Bitcoin going from zero to a 10 trillion market cap wasn't going to be this perfectly linear function. It was going to require some volatility. And it was even predicted by Satoshi that there would be volatility.

Dan Held (64:16)

He felt that it was a good thing as it was that viral loop.

Dan Held (64:18)

To draw people into the protocol.

Dan Held (64:21)

At that later date that volatility subsides.

Dan Held (64:24)

Bitcoin becomes more usable not only as a store of value, but also as a medium of exchange and use unit of account. That's how I see that playing out long term.

Peter McCormack (64:33)

It rewards those who believe in the future who get in early enough to speculate on it becoming this better global form of money.

Dan Held (64:42)

That's correct. The earliest participants who choose to hodl the whole time. I know plenty of very early bitcoiners, Very, very early bitcoiners who sold all.

Dan Held (64:51)

Their Bitcoin at $10 because they bought in when it was a penny. They hundred x their money.

Dan Held (65:00)

Phenomenal return.

Dan Held (65:02)

And everyone's human as well.

Dan Held (65:03)

No one can hodl forever.

Dan Held (65:05)

You eventually die. You should purchase goods and services because.

Dan Held (65:09)

You need to live a life.

Dan Held (65:10)

And so people need to sell at.

Dan Held (65:11)

Different prices and weddings and houses and.

Dan Held (65:13)

Cars and kids going to college, et cetera.

Dan Held (65:16)

But bitcoin does reward those who bought.

Dan Held (65:19)

In early and who believe in it.

Dan Held (65:20)

And they reward to hold bitcoin this long.

Dan Held (65:24)

I've seen my net worth go up exponentially three times because 2013 had two bubbles. People forget that. I've seen my net worth go up exponentially three times and drop 80% three times. With that return, you have to weather.

Dan Held (65:40)

That storm of volatility. Another way to think about it too.

Dan Held (65:44)

Is that bitcoin itself is really stable. The price protocol. The protocol is nuclear grade resistant to where bitcoin has an uptime that's greater than any other tech company in the Bay Area in terms of bitcoin being operational, in terms of a percentage of the time it's operational. And since 2013, it's been 100% operational it's never had any downtime. So really, the price of bitcoin is the volatility of the world coming into.

Dan Held (66:11)

The stability of the bitcoin protocol in ebbs and flows. And ebbs and flows would be booms.

Dan Held (66:16)

And busts because bitcoin is stable, the.

Dan Held (66:19)

Protocol is incredibly stable.

Dan Held (66:21)

It's just the world figuring out what that value is and that's what's fluctuating.

Peter McCormack (66:27)

Well, listen, there's a lot to take in here. I've got my life to live, I've got to work, I've got to keep an eye on my kids, I want to watch a bit of football. But if I want to learn a bit more, if I want to go down this rabbit hole a bit more, would you direct me towards anything, anything particular you think I should be reading?

Dan Held (66:41)

If you want a really basic primer on economics or how the economy works, I wrote a piece called the Information Theory of Money. This was largely borrowed from George Gilder. He wrote this years back and his was mainly focused on gold and he reformatted it to bitcoin a little bit, but I felt like it wasn't well rounded. And so I took it and iterated on that. I think it's a great basic way to think about how an economy works. So that's a great point.

Dan Held (67:08)

That would be like a good start.

Dan Held (67:09)

If you're more interested in this topic. If you want to read about narratives.

Dan Held (67:14)

Quantum narratives is what I wrote about, which kind of shows how the narrative.

Dan Held (67:17)

Behind Ethereum and other crypto assets have changed over time to where they've changed their meaning and what their point is. Whereas bitcoin has continuity from origin, it was always meant to be Gold 2.0. There were some individuals who thought it was something else, but that, that is the main narrative.

Dan Held (67:34)

And then planting Bitcoin.

Dan Held (67:36)

Planting Bitcoin is another series of articles I wrote. Planting Bitcoin touches really deeply on that. Satoshi didn't just choose a new species of money. He chose the season, the soil and the gardening techniques really precisely to enable bitcoin to succeed.

Dan Held (67:53)

Bitcoin is planted in the middle of.

Dan Held (67:54)

The 2008 financial crisis. Its genetic characteristics as a species of money were carefully chosen due to those factors that were needed to enable its survival. So I think that's a really great way for someone new to bitcoin to really understand the go to market strategy and why bitcoin.

Dan Held (68:13)

Why does it matter?

Dan Held (68:16)

Who cares why it was planted in 2008? You really need to understand what the.

Dan Held (68:20)

Feeling was at that Time and I.

Dan Held (68:22)

Think that really captures it well.

Peter McCormack (68:24)

All right, awesome. And if someone's like this Dan guy, he seems pretty cool. I want to follow him. Where can they follow you, mate?

Dan Held (68:31)

It's a Dan Held on Twitter is the handle. The name on my Twitter handle is Dan Hettle.

Dan Held (68:36)

Held is my real last name. It's.

Dan Held (68:39)

It's not a made up name, but.

Dan Held (68:41)

Dan Heddle Heddle is definitely a made up last name. Brilliant.

Peter McCormack (68:45)

Well, listen, Dan, I appreciate you having you a part of this series and yeah, good luck to everything you do.

Dan Held (68:49)

Thanks, Peter. Always a pleasure to chat with you and I'm sure we'll be cracking up. Open some beers at the next conference.

Peter McCormack (68:54)

Thank you. See you soon, man.

Peter McCormack (68:58)

Okay, so what did you make of that one? I think Dan did a great job of outlining the flaws in our current economic system and how bitcoin can address these. And again, if you found this a little hard to follow at times, don't worry. There's plenty additional content in the show notes. And like with the protocol with Shinobi, my recommendation is just keep with it via osmosis. This will all become natural over time. As you go down the rabbit hole, some of these concepts will all start to link together like a jigsaw puzzle. As I said when talking to Dan, until I got into bitcoin, until I went down the rabbit hole, I basically ignore things like monetary policy and how central banks work. I didn't even care. It just, just wasn't something in my life. I didn't really know how money worked or how it served. And in this current structure of government money, we're constantly being told that 2% or 3% inflation is a positive thing and shows that the economy is thriving. But really, when you look into it and you listen to people like Dan, you realize that in reality it's just constantly devaluing your savings and the current system may not be in your interest. And maybe bitcoin is a better alternative. I know I keep saying it, but this was another monster show. Massive thanks to Dan. If you've got any feedback, please do reach out to me. My Email address is hellohatbitcoindid.com Also, thank you to everyone who supports the show. Whatever you do, if you share the show out, you leave me a review. And if you come on Twitter and you shout with me, it doesn't matter. It all helps. But if you do want to support the show, if you're a regular listener, please do head over to my website. It's whatbitcoindid.com. click on the support section. It explains everything there. Anyway, I hope you have a great weekend, and I'll be catching up with you next week.