WBD028 Audio Transcription
Bitcoin maximalism with Pierre Rochard
Interview date: Saturday 4th August
Note: the following is a transcription of my interview with Pierre Rochard. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk with Pierre Rochard, host of the Noded Bitcoin podcast and co-founder of the Nakamoto Institute. We talk about Bitcoin Maximalism, the net benefit of altcoins to Bitcoin and hyperbitcoinization.
“Based on our understanding of monetary economics, the outcome will be such that most of the value will accrue to one coin and one coin will at the very least be the world reserve currency, and even more than that, the one global money.”
— Pierre Rochard
Interview Transcription
Peter McCormack: Hi, Pierre, how are you?
Pierre Rochard: Good, how are you, Peter.
Peter McCormack: I'm pretty good, thank you. Thank you for coming on. It's a transitional time for me at the moment. Just to give a bit of a background as to why I wanted to talk to you, I entered what is essentially the crypto space about 18 months ago, and my entry was into Coinbase, and there was Bitcoin and Ethereum. And, whilst I'd already heard of Bitcoin, I didn't have any deep knowledge of why one was so much more important than the other.
I've gone through a journey of looking at a lot of crypto, buying altcoins, selling altcoins, making and losing money. But in doing my podcast, I've started to see more and more people block me on Twitter, who are Bitcoin maximalists. So, I've gone on a bit of a journey to try and understand it, and it's all starting to fall into place. So, I thought this would be a good time to talk to you. And, I also think there are probably a lot of people like me who innocently think there are things okay with altcoins and such.
So, I would love to talk to you a little bit about Bitcoin maximalism, why it's so important, and thank you also for all your podcasts; they've been very helpful. So, what would you say some of the misconceptions are with Bitcoin maximalism and maximalists, and why do you think there is this battleground that exists?
Pierre Rochard: Yeah, I think that probably the biggest misconception is that Bitcoin maximalists think that essentially, it's a difference between a prescriptive, "There should only be one coin" versus a descriptive, "Based on our understanding of monetary economics, the outcome will be such that most of the value will accrue to one coin and one coin will be, at the very least, the world reserve currency; or even more than that, just the one global money".
Of course, there will always be coins on the side at the margin. I kind of see it as like a Pareto ratio of 80/20. So, I think that 80% of the value is going to go to Bitcoin and 20% of it is going to go to a mix of different, whether it's local currencies, or currencies that have specific utility, functions, or different marketing and memes around them, like Dogecoin. But that's just based on my understanding of network economics and monetary economics; it's not all that I'm just pumping my bags.
Peter McCormack: Yeah, I understand that, and I've been working my way through Saifedean's book as well. One of the very important sections in that is when he talks about when some countries were based on gold and some were based on silver, and those countries whose economy was based on silver saw mass devaluation of their currency and eventually moved to gold. And, it feels like there will be a winner-takes-all scenario with this.
Pierre Rochard: Yeah, or at the very least, a winner take most!
Peter McCormack: Yeah. So, do you see any value in any other parts of this crypto ecosystem, because now I'm coming at it with more of an objective view, I've pretty much been selling off everything and struggling to see any value outside of Bitcoin?
Pierre Rochard: I think that one of the issues we have in cryptocurrencies is that a lot of these projects essentially are successful at first, and then only fail when they try to scale. So, there's kind of a dichotomy, and I describe it as either failing to scale or scaling to fail. So to me, Bitcoin, the Layer 1 chose to fail to scale, which is we're just going to choose to not scale by not increasing the block size of it.
Then, I think Ethereum is a prime example of scaling to fail, which is that we're going to keep trying to scale until this whole thing falls apart. We kind of saw, on Medium, StopAndDecrypt has some really good articles on the properties of these decentralised networks; and essentially, the more you try to scale, the more centralised a network becomes. And the more centralised it becomes, the more vulnerable it becomes to arbitrary changes that the users can't really resist, because they're done by an oligarchy or some cabal of powerful individuals.
Peter McCormack: Yeah, one of the things that I think was a difficult transition was, there are so many different factors to understanding it. There are economic, social, political, and I'm not an economist. Actually, I used to work in advertising; I'm not really political. I find the Bitcoin project and crypto really interesting. But the knowledge required to take you from, especially if you've come into cryptocurrencies maybe in the last year or two, the knowledge you have to have to get the full understanding is quite extensive.
Do you not feel therefore it is natural for many people to float to altcoins and not really understand it?
Pierre Rochard: Yeah, it certainly is. I mean, I have this tremendous privilege in the sense that my background before Bitcoin was accounting and monetary economics. I had started reading about monetary economics when I was a junior in high school in 2006, and specifically from the Austrian perspective. But I've also read quite a bit from neoclassical and Keynesian and all these different schools of thought on monetary economics.
So, that was kind of the mindset I had coming into Bitcoin, which at the time, it was only Bitcoin. Then I learned about Litecoin and I was immediately sceptical about Litecoin. So, I've been a Bitcoin maximalist since day zero of getting involved. But I think the mindset that people come to crypto with certainly dramatically impacts their analysis of the investment opportunity, and also where they want to focus their time to be.
So, there's lots of people who came to crypto from a trading background, and so they're very focused on doing technical analysis of charts and doing day trading and things like that. So, they're on BitMEX doing 100X leverage and having a great time. So, yeah, I agree that one's background heavily influences it, and most people don't have a background in monetary economics, or in economics at all, and so then it just becomes a marketing thing of, you log onto Coinbase, as you were saying, and you look at these different logos. It might even just come down to the branding, that someone decides to buy one coin and not the other.
Then, the other thing too, because it's decentralised, there's resources all over the place. Often, they contradict each other and it's very hard to learn the ground truth of what's going on with these different networks, and which ones have the potential to accrue value in the future, and which ones are just pump-and-dumps.
Peter McCormack: That's very true, and also it can be a very unforgiving place at times. So, I made the decision to go out to Japan and interview Roger Ver, because I wanted, from my perspective, to understand where he was coming from, and I'm not a buyer or holder of Bitcoin Cash; I sold them immediately. But I wanted to understand from my perspective, as somebody trying to enter the space, and I took a lot of flak for that, and quite abusive at times as well. I understand it now, but I still don't regret the decision; does that make sense?
Pierre Rochard: Yeah, sure. I think it's unfair actually how much flak you got, and in fact I think it's unfair that anyone who comes into crypto today and starts asking completely innocent questions, that aren't motivated at all by some sort of political, or whatever it may be, the issue is that a lot of people who have been in Bitcoin, and I've only been around since early-2013, and now I'm considered to be an old person here. But really, when I joined, the people who'd been around since 2010, 2011 were the old people.
Everyone since 2011 has heard all of the arguments for and against increasing the block size limit, and it has been a perennial debate. So, on some level, people who have been around for a while don't have the patience anymore to discuss the topic, because it's beating a dead horse. So, what's unfair is that, when new people come in, they don't have this whole history, and they don't know all the arguments. So, it's completely normal for them to want to discuss it. But people who have been around for a while and understand that this is Protestants versus Catholics, they don't have patience for it. And I think it leads to a lot of unnecessary acrimony, when really it's just people trying to learn.
Peter McCormack: Yeah, and that's true actually, because I think when you first start looking at the block size debate, it's very easy to be swung back and forth, because you'll hear an argument for bigger blocks and you'll say, "Oh, yeah, that kind of makes sense. What the fuck's wrong with this?" Then, you'll hear a counterargument and, "Yeah, that kind of makes sense". I think it's probably taken me a year to fully understand why I personally would not support bigger blocks.
At one point, I thought, "Well, maybe a marginal, go to a 2-megabyte thing wouldn't have been a problem", but then I heard the debate between Jameson Lopp and Roger Ver. And the way Jameson defended block size was again really important. But I think it's very easy to be swung both sides. But for new people entering the space, it's very hard to find a very solid impartial argument, and you have to almost throw yourself into a very intolerant place and get beaten around a bit.
Pierre Rochard: Yeah, and maybe it's a good introduction to crypto, or a good hazing, to throw yourself into the debate of the block size limit. It's a great way to grow a thicker skin. Ultimately, though, at this point, I think we're in a healthier position now that we've had the Bitcoin Cash hard fork because before, it was really a family feud within the family, and now we've had the divorce and they can live in their separate houses, and there's still a lot of acrimony, but it's a little healthier, I think.
Peter McCormack: Yeah, another thing that I've also questioned with myself is, whilst maximalists hate altcoins, generally shitcoins, and I'm also starting to hate them, I also think they've probably had a net benefit for Bitcoin for a number of reasons. The exchanges have given a use case, the opportunity to make money has increased exposure. And I also went to a Jimmy Song meet-up on anti-fragility, and for me, they also increase Bitcoin anti-fragility. So, as much as they're hated, there's this perverse thing where I think they've ultimately benefitted Bitcoin.
Pierre Rochard: Yeah, and they're also just inevitable. I think the thing about altcoins is that Bitcoin can only go up in price by a certain amount, and it's kind of unrealistic to think that without altcoins, Bitcoin would be twice as valuable, because all that capital would have gone into Bitcoin; I don't think it would have. I think that Bitcoin's price is very psychological, and it would be very hard for the price to have gone to $40,000 instead of $18,000. So, all of that capital flowing into the space essentially overflows from Bitcoin into other marginal projects.
We can criticise those projects, but they do perform an important function of absorbing a bunch of excess capital that is just incapable of being absorbed into Bitcoin. Then, the other thing too is that, I see each of these different altcoins, it appeals to a different psychology and a different mindset of someone coming in. So, to me, they're all coming into the same building through different doors.
Granted, my favourite door is the Bitcoin door, but ultimately they do end up in Bitcoin in the sense that, if someone's an altcoin afficionado and they're looking through crypto, CoinMarketCap, and trying to find what's going to be the next pump-and-dump and all this, or they're reading white papers and doing fundamental research to figure out what's going to be the next big crypto, they all have a position in Bitcoin, or should. It would be bizarre to me if someone has a portfolio of crypto that has a 0% allocation to Bitcoin.
So, as far as I'm concerned, most of these people own Bitcoin anyway, and what they do with the rest of their portfolios, it's kind of their own business, and I see it as inevitable that they are (a) going to be in altcoins, and (b) going to be in Bitcoin.
Peter McCormack: Yeah, it's funny, because I've almost come to this full-circle position. I now actually think the entire situation, environment, is perfect in that, in some ways the altcoins, like we've discussed, have been great for Bitcoin; but actually, having different types of Bitcoin maximalists is also great. Having open-minded, tolerant people who will talk to you is great; but also, having the extreme intolerant types, also is great, because they will force someone like me to rethink my whole position and actually reconsider it.
Another area I wanted to explore with you, hyperbitcoinisation; you talk about that like it's an inevitability, which I think's pretty cool. Also, I once read a book Engines that Move Markets; I don't know if you know the book?
Pierre Rochard: No.
Peter McCormack: It talks about the big changes which have changed society, so railways, electricity, oil, telephones, internet. And I can almost see, in the future, an additional chapter being Bitcoin. Why for you is it an inevitability?
Pierre Rochard: So, hyperbitcoinisation is just a funny word to describe Bitcoin essentially replacing all the government fiat currencies that we're currently using as money. And, I see it as an inevitability because of a number of things. The first phenomenon to really describe is a speculative attack, and actually this phrase was coined by Paul Krugman, of all people. He was using it to describe what was happening to currencies in Southeast Asia during the 1990s.
Basically, what happens is, with a money that is weak that the government or central bank is printing more of it than they should, it's going to be decreasing in value versus other monies. And, with a fractional reserve banking system, it becomes a very profitable trade for traders to borrow in that weak currency and then sell that weak currency for a stronger currency. That process of borrowing the weak currency actually creates more of it, because in a fractional reserve banking system, when banks lend out money, they're actually creating new money, they're not just lending out existing money.
So, that actually further weakens the weak money and you have a negative feedback loop there, and then the speculator can, as the value continues to diverge between the strong money and the weak money, the speculator can sell his position in the strong money and repay his loan, which was denominated in the weak one. Anyway, I hope that the audience followed along with that; but basically, what this causes is that the weak money has to tighten its monetary policy dramatically.
We saw a speculative attack; George Soros famously did one on the British pound, when it was trying to join the European Monetary Union. And then, I would argue that there was a speculative attack against the US dollar in the late 1970s with gold. And so, the value of gold dramatically increased, because it was, in this scenario, the strong money. And ultimately, it was defeated by Paul Volcker, who tightened the dollar's monetary policy and had money supply targeting and interest rates sky-rocketed to 20%.
So, that's how a government stops a speculative attack, is by tightening the monetary policy and strengthening their currency. So, I think that Bitcoin is going to do speculative attacks against fiat currencies, and the only way fiat currencies are going to be able to defend themselves is by tightening their monetary policy; and how much you have to tighten your monetary policy is a function of how strong the strong currency is that you're competing against.
With gold, it was like, okay gold, if you think about it, as the price of gold goes up, as its value goes up, it becomes economical for miners to go out and mine more gold. And so, the production rate of gold increases to cope with this demand. Bitcoin has a difficulty adjustment every two weeks, such that the Bitcoin miners, during a bull market, can't just start printing more Bitcoins. So, there's a fixed, every ten minutes, they're going to create 12.5, then 6.25 Bitcoins with the next halving, etc, and there's nothing that they can do about that. So, that makes it so that there's a much stronger supply function on the other end, which means that to fight off a speculative attack being propelled by Bitcoin, you would have to tighten your monetary policy much more than you have to with gold.
I don't know that the financial system would be strong enough to survive such a tightening, and I don't know that there would be the political will to even do it. So, I think what will end up happening is kind of an unknowable at this point. But the inevitable result, in my mind, would be that Bitcoin would be replacing a fiat currency, one by one around the world, as it performs these speculative attacks on them. That's why I see full currency substitution, or hyperbitcoinisation, as inevitable.
Peter McCormack: Do you see a country like Venezuela as being the most likely to migrate to Bitcoin as its primary currency?
Pierre Rochard: Yeah, so plausibly, I think that the problem right now is that we're too early, in the sense that I think that Bitcoin's market depth, its liquidity, needs to increase more before this becomes a realistic scenario. A big part of that is having very good exchanges that are good fiat on and off ramps, so that speculators can be accumulating and dumping Bitcoins easily.
So, it's actually very hard, for example, in Venezuela, they have currency controls, so it's very hard to buy and sell Bitcoins there. They do have black markets, but black markets inevitably are very illiquid, because they don't have a centralised order book. And the other thing too is, the way they get their Bitcoins in Venezuela is by mining them, so they use their cheap electricity to acquire them.
So, maybe we'll see marginal adoption of Bitcoins in Venezuela, but I don't see them being the first speculative attack vector.
Peter McCormack: I'm not sure if you've seen it, there is a project by one guy, who is looking to airdrop Bitcoin across Venezuela, which comes with lots of problems, but it's kind of interesting.
Pierre Rochard: Yeah, it's interesting. I'm sceptical of this, because I just think that people assign value to things based on how they acquired it, to an extent. So, if you give something away for free, I think people assign a value of zero to it and just want to get rid of it. So, I'm sceptical of that. Now, maybe it's the case that 90% of people assign a value of zero to it, but that 10% really does their research and realises that this is a gift from Heaven, and they become evangelists and eventually, they are causing hyperbitcoinisation in their country.
Peter McCormack: One of the things that I find difficult; I've come from a background where my political view is, there's a left, there's a right. I don't really know much about economics and I worked in advertising for 20 years. And, I've found the longer I've been in Bitcoin, the less I start shouting my opinion and the more I'm asking questions. I got my first Austrian Economics book, sat downstairs waiting to be read after I've done Saifedean's.
But one thing I'm finding very difficult to picture is how a government would operate in a world where Bitcoin becomes the primary currency, and I think a lot of people can't imagine that world, because it feels so alien from where we are now. Can you talk me through the kind of picture of a government, how it operates and how the government services are provided in such a scenario?
Pierre Rochard: Yeah, so that's a really interesting question, because we can look at history books and see that even today, we can see that there are governments that essentially don't have sovereignty over their monetary policy. So, we've seen countries that have what's called "dollarisation", where the US dollar becomes their local currency, and they have no influence over monetary policy and yet, the government continues to function. So, there's definitely examples that we can look at for that.
Basically, it's that they find ways to tax value. I think the easiest and the most natural way for a government to raise revenue is by taxing real estate, because real estate ultimately can't move, and it's easily identifiable. So, whereas with crypto, it might be pseudonymous and you never know who holds how much and who's sending transactions where, without doing some very sophisticated Chainalysis, and even that's imperfect. So, it's definitely the case that taxation may become harder with Bitcoin, specifically with taxing transactions and income. But I think that taxing real estate will always be a way of raising funds for governments.
Then, the big loss is that they lost the ability to have an inflation tax, which is indirectly through a central bank, or directly, printing money to pay for government expenses. I think that that would actually be really good for accountability, because an inflation tax is arguably hidden, in the sense that people don't really feel it, and that means that governments can be very unaccountable in the way that they spend the proceeds from that. And, it would be good if really, every penny counted. I think that will increase the accountability. Now granted, it may increase inequality arguably, but we'll see.
So, I don't think that will be a challenge. Now, I think that it will cause a decrease in government expenses, and we can debate as to whether that's good or bad. I think the people on the right would argue that that's good, the people on the left argue that's bad, but we'll see.
Peter McCormack: Yeah, it's quite a complicated thing to almost picture, and it's very complicated to understand the transition when you've grown up living one life, one fiat money. And also, what is quite interesting is, I talk to a lot of my friends who've got no background, none of them own Bitcoin; and, when you try and explain the issues with fiat currency, debasement of currency, it goes over a lot of people's heads, because they've had no experience at all of any of this.
What do you think is a great way to start introducing people to these topics, people who don't have this kind of background, and start to explain to them why this is so important?
Pierre Rochard: So ideally, we wouldn't have to explain it, because it's kind of a niche topic. I don't see why everyone should be educated about monetary economics, to be honest! So, you were saying that it's hard to reason about these monetary economics concepts, but I actually think that even the bigger issue is having to reason about the price. We've never had to deal with a money appearing out of nowhere with a value of zero, and then going to having a value of billions of dollars, and then going to replacing other money. It's just historically unprecedented; we've never had anything like this before.
I think that it's actually doing a lot of brain damage to people, and it has to me as well. During the bull market, I was feeling manic, because of what the price was doing, and humans just aren't meant to cope with such dramatic changes in value over such a short period of time. It's kind of an evolutionary, unprecedented event. So, I think the price itself is hard for people to reason about, and add on top of that having to think about issues of computer science and monetary economics, it's unfair that God is doing this to us, but here we are.
I think that there's reading lists, so Saifedean put together a reading list, which is an intro to Austrian Economics, and his book itself has a long intro to Austrian Economics to deal with this issue in particular. Ultimately, I think that it's strange, because I don't think everyone should be getting involved in Bitcoin in a sense that, either they're intrinsically interested in it or not. And if they're not, then all they have to do is buy some on Coinbase or whatever, and get a Trezor and put it on their Trezor, and hold it as an insurance policy as like a hedge, and just not think about it, just walk away. That's probably the healthiest thing for them, is to just walk away. Maybe I should have walked away and done that exact same thing.
Peter McCormack: Well, it's funny you should say that, because in this section, one of my questions here is, "Is there actually an inherent threat to not owning Bitcoin personally? If hyperbitcoinisation happens, is there a chance that people are going to be left behind and there's going to be a new inequality?"
Pierre Rochard: Yes and no. Yes, just mathematically, if Bitcoin goes to having a purchasing power in today's dollars of $100 million, then we've created a new set of millionaires and billionaires who are going to be consuming resources at other people's expense; so, there's definitely that issue. But no in the sense that, the whole reason why I think this is a good thing, Bitcoin that is and its adoption, is that I think that central banks, fractional reserve banking and government fiat monies have done a lot of damage to economies, and we kind of saw that with the Global Financial Crisis. But it's much more insidious than that in how much they reallocate capital, and themselves generate inequality.
So banks, as the creators of money, are the first beneficiaries of inflation, and they are the first recipients of money. So, that itself creates inequality. And then, you have the welfare/warfare state that itself also creates not only inequality, but I think a lot of injustice around the world, in terms of arbitrarily bombing countries and killing people.
So, to the extent that Bitcoin would put a limit on the nefarious activities of governments, everyone would benefit, and I think that we would have much higher real economic growth rates, many more opportunities for people, both as entrepreneurs and as employees, to improve their lives and improve their standard of living. So, in their regard, I just think that it would be beneficial for everyone, even if they don't own any Bitcoins going into it.
Peter McCormack: That's also interesting, because that was one of the things I read in Saifedean's book, that the move away from the gold standard leads to increased wars and increased time at war, because there's more money to essentially create weapons. Also, there's another argument that is new to me that I've read a lot about, that taxation is theft and people don't want their tax -- when I met with Erik Voorhees, he was saying he doesn't want his tax money being spent to bomb people in the Middle East. I think that's something that people can't get their head round.
That's made me have to think about a lot of things, like I now have to start questioning the National Health Service, which in the UK is an institution. But now actually, by studying Bitcoin and Austrian Economics, I'm starting to realise the NHS is essentially a socialist policy that is theft from everyone else. Can you see how it can become quite confusing for people?
Pierre Rochard: Yeah, absolutely. I went through this before Bitcoin when I was in high school and I was learning about Austrian Economics. I was also taking an economics course in high school as well, and they were presenting only the Keynesian and neoclassical perspectives. I had this moment where I was like, "Why is it that I'm being taught things that, if I think logically about, seem just wrong to me and they don't make sense, and this Austrian Economics stuff makes sense; but I'm being told by my professor that it's nonsense?"
It caused a huge amount of cognitive dissonance, because up until that point, everything I learned in school I took to be true. Whether it was maths class which is like, "Okay, this is true, this makes sense", or history class, "Okay, yeah, this happened". And then I started learning about libertarian political theory and also economics, and it caused a huge amount of cognitive dissonance where, at one point, I had to sit down and decide, "Okay, do I keep going down this rabbit hole and causing myself this cognitive dissonance, or do I just rethink things and start towing the government line on this, because it seems like an easier existence to get through?"
So, I do remember going through that and, yeah, I think that it's interesting that Bitcoin is doing this. I didn't anticipate it. I thought that everyone would take Bitcoin and mould it to their own existing world view and kind of shoehorn it in, rather than actually changing their world view on things. It's gone to the point where people are changing how they eat, based on being interested in Bitcoin. They're like, "Oh, I'm going to become a vegan [or] a carnivore"; you take on an extreme view of everything!
Peter McCormack: Yeah, I've seen all these, well funnily enough, meetups, where you go and have meat, the carnivores of Bitcoin, which is also funny, because I'm a vegetarian, so I'm now questioning that! But yeah, there's so much to take on board and understand. Why is it that, because I did economics at A level, which is 16 to 18 in the UK. We were taught Keynesian Economics; not once were we ever taught Austrian Economics. Is this just some insidious plan by the government to control education, the things we hear about; or, is just Austrian Economics not widely known or understood?
Pierre Rochard: That's a really interesting question. I don't think that there's a conspiracy per se. I think that it's just that it's convenient, because this education is being provided by the government, and it makes sense that they would present arguments that are pro-government. I wouldn't expect them to be very essentially intellectually curious and wanting to show both sides of the argument, when it's clearly to their disadvantage from a government perspective.
But I don't think that it's like a cabal of individuals who decided that, "We're not going to teach Austrian Economics". It's evolved this way, and economics, there's also just a lot of debate to say what methodology economics should have. So, this has been going on for centuries, of different ways of thinking about it.
The other thing is economics is deeply tied into politics, and political economy is what it used to be called, and it is highly political. So, I think that when governments started doing public education, that was a very new phenomenon. That started in the 20th century really, where the government was handling this whole bureaucracy of teaching everyone. I think that's when you really saw divergence where Keynesianism became ascendant, and Austrian Economics became forgotten; until the internet came along and these people started connecting the dots and being like, "Hey, this is forbidden knowledge", basically.
Peter McCormack: But is it something you would have discussed with your professor and said, "This makes sense to me, this Keynesian stuff doesn't"; are they conversations you had?
Pierre Rochard: Yeah, absolutely. And the reason I don't think it's a conspiracy is because they themselves don't even know what Austrian Economics is. So, they might have one- or two-line quips about it, dismissive sentences, but if you were to probe them about, "What is praxeology?" they're like, "I've never heard the word before". So, it's not like they're taught Austrian Economics and then taught why Austrian Economics is wrong. In fact, there's just very little out there explaining why, from a mainstream perspective, is Austrian Economics wrong. They just don't even bother engaging in the argument.
Peter McCormack: Are there any solid counterarguments, or areas within Austrian Economics which are grey areas, or even yourself, that you find difficult?
Pierre Rochard: No, not really. I think that the arguments that I've read against Austrian Economics, they inevitably slip into straw man arguments, where they're refuting things which aren't actually Austrian Economics, but they're the author's idea of what Austrian Economics is. I think that's really a disservice to the profession of economics, that they haven't really taken it particularly seriously. So, if there are listeners out there who have very good arguments against Austrian Economics, I'd be interested in hearing them, but I've been disappointed so far.
Peter McCormack: Well, like I say, it's new to me and I'm trying to consume as much as I can. And, reading Saifedean's book, I'm just going through it and every page going, "Well, that just makes sense. Why has that happened?" I mean, it's only, I would say, in the last six months, I fully understand fractional reserve banking, which just seems now absolutely ludicrous. But I just don't think there are enough people who understand or question this. And like I say, it takes a long time for some people, like myself.
Okay, so that's really interesting. Just moving on, it's obviously been a crazy year, the last year, with Bitcoin and altcoins, prices going to $20,000, which is obviously insane. Do prices matter to someone like you, outside of your own gain?
Pierre Rochard: Yeah, absolutely. I think that they are the litmus test, the prime indicator for where we are in the process of replacing these government currencies. So, I see the price as very important, and I understand people who say, "The price doesn't matter. 1 Bitcoin equals 1 Bitcoin". That's fine as a sound bite, but I do agree that the price day-to-day doesn't matter, and people who are like, "There's all this good news coming out, why isn't the price going up?" or vice versa. That's nonsensical to me. I think people try to read into the markets way too much.
But the bottom line I think is that basically, the fundamental value of Bitcoin, if you want to call it that, is going up every day. To me, the fundamental value is a function of time, due to what's called the Lindy effect, which is the longer that something has been around, specifically a non-perishable good like Bitcoin, the longer we can expect it to be around. So, every day that goes by, I think the fundamental value of Bitcoin increases. And, if markets were perfectly rational and run by robots, then Bitcoin's price would go up along with its fundamental value by X% every day in a mechanical nature, a linear increase in price.
Now, because humans are deeply flawed and very emotional beings, and subject to all sorts of cognitive biases, we don't have that. So, when Bitcoin's price is going up at a reasonable clip that is justified by fundamentals, we have momentum traders that jump in. And, they pile in and then, it becomes a self-fulfilling process of the media seeing the price going up, people hearing about Bitcoin again.
I want to do a side note here. I think that with time, so you worked in advertising, there's kind of this idea that the more time someone sees an advertisement, the more likely they are to then, when they're making a decision about what toilet paper to buy, they buy that brand. So, if they see an advertisement once, they might not necessarily buy that brand. But on the tenth time they see it, now when they go in the shopping store, they're going to buy that brand.
I think it's the same thing with Bitcoin, and different people have different number of occurrences that they need to have before they buy Bitcoin. So for me, for example, it was two. I heard about Bitcoin twice and then I bought some! Some people, it's 20 or 50 times. They're like, "That thing's still around? Oh, okay, maybe there's something there, let me go read about it, let me go open an account on Coinbase and buy some".
Anyway, so they hear about Bitcoin because the price is going up and it's in the media, and they buy at the worst time possible, or really not necessarily, because the media was talking about Bitcoin at $4,000 and it was an all-time high and people were like, "Oh, don't buy at $4,000, wait for a correction". Okay, well we still haven't corrected down to $4,000. I'm not excluding the possibility that we do, but my point is that -- or, they buy at $18,000 because they're panic buying, and they think it's going to go even higher.
Peter McCormack: Or they say, "Aren't I too late?" That's the question I get asked, "Aren't I too late?"
Pierre Rochard: Yeah. So, all this to say that the price overshoots the fundamental value and has a huge run-up, and then crashes because you run out of marginal buyers and the momentum traders go in full reverse and dump, essentially. Then, it probably overshoots on the downside as well; the price goes below what the fundamental value is, and then you have a slow recovery from that bear market.
So, I think the price is important if you take into account that it's going to have these oscillations around the fundamental value, but ultimately it is a good indicator of where the fundamental value is, if you think about the mean reversion.
Peter McCormack: I guess therefore you embrace and support derivatives, you hope for an ETF, and you embrace futures, because it's wider acceptance and it embeds Bitcoin within the financial systems?
Pierre Rochard: Yeah, so there's two different points of view on things like that. One point of view, from the cypherpunk decentralisation point of view is, "If you don't own your own keys, then those aren't your Bitcoins and the government is going to seize all of these Bitcoins that are held by an ETF" or, "The futures are manipulating the price down", and all of this rhetoric. I sympathise with it a lot on an ideological level; but from an economic perspective, all of these financial instruments are inevitable, but also dramatically increase Bitcoin's liquidity, and dramatically increase the total addressable market of people who can gain exposure to Bitcoin, and ultimately are driving the price of Bitcoin up, which I think is a positive.
While a cypherpunk might not necessarily go buy the Bitcoin ETF, he or she still indirectly benefits from its existence, and I do see it as kind of a Trojan horse, you're right, that it is embedding itself in the financial system, and ultimately will help facilitate speculative attacks against that very same financial system.
Peter McCormack: And it's quite interesting that there's obviously been quite a firm regulatory lens over the whole crypto ecosystem over the last year. But it seems that there are no real problems for Bitcoin; it's everybody else who has to be worried.
Pierre Rochard: Yeah, I mean there are problems for Bitcoin, like Jameson Lopp pointed out that he got swatted, so we are seeing instances of people, bitcoiners, being burglarised, so that's no good. I don't know if that's what you mean, sorry.
Peter McCormack: No, I mean on the regulatory side of things, you know, with the SEC looking at things. It seems like Bitcoin is outside of any regulatory framework and regulatory risk, whereas things like Ethereum, Ripple, everything else, which all seem quite ridiculous now, seem to have quite a high threat?
Pierre Rochard: Yeah, I think it goes to the origin story of Bitcoin and also, it's current state of decentralisation. In terms of the origin story, that's what differentiates Bitcoin from Ethereum from a regulatory perspective. Now arguably today, they are both decentralised enough that Ethereum is no longer a suspect from the SEC's perspective; that's what they've been saying. But the origin story, the SEC people or lawyers who say that Ethereum is okay today, they themselves say that, "In the past, maybe Ethereum was a security, because of the way that it was presold to the public and issued".
So, on an ideological level, I do think that that is an attack on Ethereum's purity, if you want, of its origin story, but I don't know that it ultimately matters from an economic perspective. Now, I think that the greater threat for Ethereum is the scaling issue and will it become increasingly centralised and revert back into, not being a security, but being subject to regulations, in the sense that there is kind of a centralised entity that the government can go knock on the door of, whether that's consensus gateway, or whatever.
You have the same sort of thing with EOS, where this cabal of 21 people, not only are they easily co-opted by governments, they've become a government of their own. So now, they're talking about censoring Ponzi schemes. So, I think these are very good counterexamples when trying to explain that Bitcoin is decentralised and is not controlled by any group of people, and we saw that with NO2X and UASF last year, but we continue to see that in contrast to other altcoins.
Peter McCormack: Yeah. The Ethereum thing's really interesting, because obviously I told you, when I first used Coinbase, it was Ethereum and Bitcoin, so I looked into both of them, and Ethereum seemed interesting. It seems now just to have become a place to launch scams, and I don't really fully understand its purpose long term. One thing that I think is a shame is that Vitalik seems like a very smart guy. Is it not a shame that he isn't part of the Bitcoin community and working on Bitcoin directly all the time, rather than essentially wasting his time on Ethereum?
Pierre Rochard: Well, this kind of goes back to our discussion about the value of altcoins because essentially, I thought he's brought a lot of people into crypto who are interested in non-monetary applications of the technology, and then a lot of them that I've met personally find their way back into Bitcoin, and they become disillusioned with Ethereum, so there's value there.
The other thing is that I think it provides a pressure release valve on Bitcoin, because if Vitalik and other developers, who are very interested in issuing assets on top of a blockchain, had stayed in Bitcoin and had gotten their way of making Bitcoin more amenable to issuing "smart contracts" or DAOs and ICOs and all this on Bitcoin, who's to say that we wouldn't have had the DAO hack, where a lot of community members lost millions of dollars, and then forced a hard fork onto Bitcoin essentially and caused another split in the community.
So, I think that it's kind of good to offload all of this onto altcoins, because I think that building -- I've got to be specific here. Building a capital market, so the issuance of equity and unregistered securities onto a platform, I think creates a negative externality on the monetary applications of that platform. And so, I think that it's kind of good that those things get separated out, and I'm not excited about things like Rootstock or COLLAR coins; I'd rather those stay outside of Bitcoin and Bitcoin remain 100% focused on the issue of money and payments.
Peter McCormack: Right, okay. So, back to Bitcoin then. Obviously, I said I've been through all your podcasts. There's a lot of interesting discussion about different areas of development in Bitcoin. What projects are interesting you at the moment and why?
Pierre Rochard: So, I think Lightning is interesting, because it's related to payments. And really, I think the other developments that are happening, first of all Schnorr signatures, which is going to improve scalability and open up opportunities for further improvements. And I think the big holy grail right now is the issue of fungibility and privacy. We see a lot of altcoins that essentially market themselves against Bitcoin, in the sense that they are more resistant to Chainalysis and people trying to figure out where funds are going on the public blockchain.
So, there are developments in the works, in the pipeline, which would facilitate CoinJoin transactions, so that we have more mixing on by default in Bitcoin, and then improve, essentially have it so that you have privacy and fungibility going in and out of Lightning channels. So, I really think those are really marginal in the sense that they don't affect what I think is the primary driver of Bitcoin's value, which is its monetary policy. So, anything that doesn't affect Bitcoin's monetary policy, or the credibility of it, to me is just the cherry on top; it's not really a huge improvement for Bitcoin.
What I'm most excited about in Bitcoin is it continues to do what it's been doing for the past years, and that, I think, is enough.
Peter McCormack: Yeah, the Lightning Network obviously seems very exciting. What are the misconceptions about Lightning Network as well, because if you do search, there are plenty of counterarguments against it; is that just FUD?
Pierre Rochard: Well, no, there's lots of very good arguments against it. I think the biggest misconception about it is it's seen as a necessity. So, it's seen that if Lightning Network fails, then the value of BTC will crash, and it will be an indication that Bitcoin has failed to scale. I think that the argument that people like Saifedean make, and that I would make as well, is that let's say Lightning Network and trustless Layer 2, it's just impossible. You can have a trusted Layer 2 layer, and that would be like Coinbase, right, where on Coinbase, you can send Bitcoins from one Coinbase account to another Coinbase account, and that never hits the blockchain. And so, that Layer 2 is in Coinbase's database and it's trusted, and it's basically like how a bank works.
The risk there is that that degenerates into fractional reserve banking and we end up back with the system that we had. I think that the mitigation to that risk is that ultimately, you can settle on chain, and that banks will crop up and compete with each other and avoid the problems that we had with government oligopolies or monopolies with central banking, where essentially you have hundreds of central banks competing with each other freely on the free market, with a system that is fundamentally open, and open source, and open access and permissionless. While that wouldn't be the ideal outcome, you could scale without ever having a trustless Layer 2 system; you can scale with a trusted Layer 2 system. So, I think that's the number one misconception.
But the number two, I guess, I mean these are silly, right, which is that Lightning is an altcoin; I think that's the most absurd one! And then, that Lightning itself lends itself to fractional reserve banking; I think that's kind of absurd. That's just not how Lightning works, it's 100% reserve, and it has the same guarantees around that as Layer 1, because ultimately these are just signed Bitcoin transactions that you're transmitting around without ultimately broadcasting them to the network; but they have the same guarantees as Layer 1 has with regard to 100% reserve.
But it has major drawbacks. I think that having to be online all the time is a huge drawback and having to have a hot wallet, have hot funds, is a major drawback. And these are technical engineering drawbacks; but I think that in terms of the use case of using Bitcoins as your day-to-day money of making payments, the biggest drawback is not an engineering drawback, and this is kind of specific to the US, but I think other countries have this problem as well; it's that you have to put capital gains taxes on every time you spend your Bitcoins.
We don't have wallets that have very good accounting software that calculates your capital gains for you automatically, and so I think that's the biggest drawback and no one talks about it, the Bcash people don't talk about it and really, that's what's holding back the retail usage of Bitcoins the most, or crypto in general.
Peter McCormack: Yeah, it's funny. I think Lightning's interesting, but it's not something I'm screaming out for. I buy things with Bitcoin and they tend to be -- I've got some miners, so I pay my mining fees; I've got a guy who works with me, I pay him in Bitcoin, and whether it takes an hour or a couple of hours to confirm has never been a problem. I'm not screaming out for it and my only worry with Lightning is that when it comes out, people just don't use it as much as expected, because it's not what it's designed for, as you said.
Look, this has been really interesting. Go on, sorry.
Pierre Rochard: No, I was going to say, the other huge criticism of Lightning is how different it is from Bitcoin and arguably, Lightning is more -- if you were creating a payment solution, adding Lightning is more involved than adding Bcash, because Bitcoin and Bcash have the same structure to them, whereas Lightning is just a completely different new world, with channels and invoices and all these different concepts that you're going to wrap your head around and implement.
Peter McCormack: It's quite interesting, when I had my miners set up, when the guy first set them up, he set them up with a switcher to switch between Bitcoin and Bitcoin Cash, which was the most profitable. That's switched off, it's just Bitcoin now, but I had to transfer my Bitcoin Cash out and sell them, and I don't think there was hardly any difference in speed of transaction between that and Bitcoin. I don't remember thinking, "Oh, this was quick".
Pierre Rochard: Yeah, well they still have a ten-minute block time. But I think we still haven't really seen the competition; well, we did in December, but you'll only really see a difference in transaction fees when Bitcoin's mempool start filling up and we have a backlog in Bitcoin. That might ultimately drive more usage of Lightning, but we'll see; it's still very early.
Peter McCormack: All right. Well, look, I'm conscious we've done an hour, and it would be cool if you could close out, just tell us a little bit about the things you're working on and who you want to hear from and how people can get in touch with you, and I'll share that all out in the show notes as well.
Pierre Rochard: Yeah, so you can find me on Twitter @pierre_rochard and I'm on there probably too often. And, what I've been working on, I've been playing around with Lightning as well, and then just learning as much as I can. I just took Jimmy Song's Programming Blockchain course, I'd highly recommend it re mastering Bitcoin and trying to see basically, I want to improve the wallet situation in Bitcoin and just learn as much as I can.
Despite being around for years, it's an onion that you can keep peeling and keep learning more, so I still don't know everything, I know that I'll never know everything, but it's a lot of fun.
Peter McCormack: Well thanks for doing this as well, because my audience is probably a little bit newer to the space than, say, maybe yours, and some of these more basic questions that I know people want to ask but are sometimes a bit scared to ask, so thanks for doing it and maybe in the future, we can go into a bit more in-depth.
Pierre Rochard: Yeah, sounds good, I'd be happy to come back on.
Peter McCormack: Okay, thanks, Pierre.
Pierre Rochard: Thank you, bye.
