WBD188 Audio Transcription

Beginner’s Guide #7: Bitcoin's Monetary Policy with Dan Held

Interview date: Wednesday 22nd January 2020

Note: the following is a transcription of my interview with Dan Held from Kraken. 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 Part 7 of the Bitcoin Beginner’s Guide, I talk to Dan Held Bitcoin OG and Director of Business Development at Kraken to look at Bitcoin’s monetary policy. We discuss how the economy works, the 21 million hard cap, the release schedule and block rewards.

“A 21 million hard cap is, I would argue, Satoshi’s most brilliant innovation.”

— Dan Held

Interview Transcription

Peter McCormack: Dan, how are you doing?

Dan Held: Doing well Peter, glad to be back.

Peter McCormack: 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 onto 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 Stephan Livera explaining what Bitcoin is at a top level, and then we did the history of Bitcoin with Marty, which it's a long history, we covered it in about an hour and 20 minutes. Now I've just done with Shinobi how Bitcoin works, so the next natural step is, as I talked with Shinobi about how Bitcoin works at a technical level, it's very important now I think to get into what the monetary policy of Bitcoin is and explaining 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 the monetary policy of my government. I didn't really care, I just lived this normal life, getting paid, spending money and living. It's only since getting into Bitcoin that I've become aware of what a monetary policy is and how important it is to have a good monetary policy. So you're ready to go?

Dan Held: Yeah, let's tackle this meaty topic! I know for a lot of people it'll be your first time and I'll try to keep it very high level to keep it really easy to digest and simple.

Peter McCormack: Yeah, super simple all the way. I feel if you go too much on, I'll try and range 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 and explain the monetary base?

Dan Held: A monetary base is simply a component of a nation's money supply. So the monetary base is kind of the more liquid funds including coins, bank deposits, and circulating currency.

Peter McCormack: And why is that important to consider? What the monetary base is?

Dan Held: So money serves three different functions. It's a store of value, medium of exchange and unit of account and the nation that has the like the US treasury or the Fed for example, they regulate that monetary base in order to influence the economy.

Peter McCormack: But having discussed what money is with Parker Lewis and my massive interest in Bitcoin, I guess we could go down a road here and explain how governments abuse the monetary base.

Dan Held: So governments through the central bank and the treasury can influence the money supply and there is a lot of incentive to print more money when the government starts to take on more and more debt as that debt is denominated in fiat money and if they print more of that money, that debt now becomes easier to service.

Peter McCormack: 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: Yes. So at a very simple level, the economy is producers and consumers, so companies that produce different goods and 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 is largely based on supply and demand.

That supply and demand, that sort of equilibrium is found through pricing mechanisms 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 it's a decentralized sort of system where no-one in a capitalist system controls the production of certain types of goods or services. It is found in a decentralized manner where each business goes out and attempts to produce what it thinks the market wants.

So for instance, an apple producer may choose to plant more apple trees because they believe that next year there will be more demand for their supply of apples. So 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 information over the availability of that asset and then for them to go make decisions based on that.

Peter McCormack: 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 much sure it's the same where 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 there, right?

Dan Held: Yeah, that's a great point you brought up that really economies exist on a spectrum of free market capitalist on one end and socialists on the other and that gradient or that spectrum is 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 plans no portion of the economy 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 kind of a deeper topic.

Peter McCormack: 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: 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. So for example, the food we eat, the drugs we take, the radio waves that we propagate information on different sort of like content standards, those are all heavily regulated. In addition, you have the federal reserve, which we'll get into a little bit later and they control in conjunction with the US Treasury, they control the US monetary policy and supply.

So that at a very basic level influences every aspect of the economy. So really there's very few examples of true capitalist systems. Capitalism survives despite governments, not because of them.

Peter McCormack: 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 as and learn more about, but there are certainly are solid arguments for actually decreasing government regulation and interference with markets.

Dan Held: That's right. At the core, the problem that governments have when they take their hand and they put it into the market is that governments are very, very poor allocators of capital and they have very, very poor information. So when I go build a business, let's say I want to go and have a dog walking service. I begin that service with the hypothesis that some people want to have a dog walker and so I do my best at 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 and I do the best of that by ingesting information in making wise decisions. Governments don't have a method to ingest every single data point about the economy. Now think about it this, when you go up to a grocery store and you go pick out your groceries for the week, you don't really even know what you're going to buy. Sometimes you go and you go to the fruit aisle and you might pick a banana instead of something else, when normally you'd go get a Kiwi.

So governments trying to guess what people will want and need, inherently structurally is a data problem. They don't have enough ways to ingest all those data points, parse through those data points and then really understand how the future projections of these data points will look.

Peter McCormack: So why is this also important to understand before we get into a lot of Bitcoin.

Dan Held: I think it's important to understand how information really dictates the economy and that really we have an economy of information rather than anything else, because everything higher than that, essentially information is the base level of function of the economy and money, and supply and demand, and consumers and producers are really just layers on top of that core fundamental reasoning.

 So I think that's a really nice base way for people to understand the difference between socialism and capitalism, is degrees of control and it's degrees of being able to ingest information and make decisions based on that and kind of everything else sits on top of that. So I felt like that was a good spot to start.

Peter McCormack: 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, it's so much more complex.

Dan Held: That's right! With different fiat banking systems, you've got a combination of like a treasury plus a central bank like the Fed, they work hand in hand to move different levers to influence the economy per their stated objectives and it's a wildly complex process and sometimes very opaque and heavily influenced by politics.

Peter McCormack: In what way?

Dan Held: So for example like the 2007/2008 financial crisis, we had every government across the world work with their central banks to influence the entire economy. So this represents again, why governments largely influencing the economy that were more on I would say the socialist spectrum, across the world rather than capitalists. Nearly every major world government stepped in to work with their central bank to fix or "fix" their banking issues that were occurring during that financial crisis.

So governments during these moments of crisis, they're influenced by their population and the population goes, "hey, we don't want to lose money" and so that all the politicians which are elected by the people then influence the supposedly non-influenceable sort of entities like the Fed and the Treasury and they pressure them to enter into different sort of strategies that would be advantageous short term, but maybe not long-term.

Peter McCormack: Right, and you talked about the levers that they have to pull and that 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 leavers don't exist, right? Those political pressures don't exist, so the market has to naturally form around the policy itself.

Dan Held: Totally! Yeah, with the existing systems, they're very pliable with the existing fiat monetary policy and it's a very pliable policy that can change at the whim of the aggregate feelings of the citizens or based on a few old white guys in a room, which is honestly how most of the policy is really dictated. Now Central banks do have a monetary policy that has a stated objective. For example, the US Federal Reserve, its 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 to move the economy per that stated objective, which includes a couple of different things like regulating how much banks have to hold in reserve, if the Fed buys US treasuries, how much or little of that they buy and then also what banks borrow and what rate of interest they borrow at from the Fed.

Now simply put, I know 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, he read the Fed minutes, which is the communication between inside the Fed essentially and they didn't really know what they were doing at the time.

By the way, this information isn't available day one, I think it's declassified five years later. So a group of a room full of individuals who most people can't name on 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. That's the current state of our monetary policy.

Peter McCormack: 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: I would totally agree with that.

Peter McCormack: Right okay. Well let's get into the Bitcoin side of things. 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, censorship resistant, I can send it to people and no one could 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 is 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: So I'm one of the rare Bitcoiners, 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 financial crisis really shook my faith in the existing system. I realized that every book I read, everyone on TV, all my professors didn't know shit and they had this whole elaborate structure built on how the Fed works, how the Treasury works, how they're able to project and somehow navigate this incredibly complex environment, which is the economy. Then you realize, "wait, they actually have no idea what they're doing!"

So for me, my a-ha moment when I said, "oh Bitcoin is amazing" was a combination of the monetary policy, 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 rare sort of trait.

Most people felt like decentralized money or cash, like digital currency was kind 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 that makes it a good gold 2.0 and not many people appreciated it back then. That's what makes it so rare, is that to me was my a-ha moment where the 21 million hard cap, that was a huge breakthrough.

Peter McCormack: 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 had been 42 million, is the fact that it is a fixed supply. It is fixed to that number, yeah?

Dan Held: That's correct. It could be 21 million, 21 billion or 21 trillion as long as it is fixed. There is a little bit of subtlety here where 21 itself might've been chosen due to a specific coding, rounding error that might happen. So there is a little bit more intention behind it than just any old arbitrary number, but a monetary policy, it doesn't matter how many units there are, just that the cap is fixed.

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

Dan Held: This is the brilliance and the breakthrough in monetary policies, that previous monetary policies are flexible. So governments and the central banks and investment banks all work together and they kind of come up with the optimal rate of inflation. But that inherently comes with several problems. 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 attempt to calculate inflation, but that excludes many different assets.

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. There's actually a term in software development on the product side, which is called, "if you can't measure it, you can't manage it." So if you have an app 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. So with an economy, choosing the proper rate of inflation is an impossible task. So first of all, ingesting data, parsing it, analyzing it and that's an impossible task.

Then, let's say if you could do that and then you could also, let's say properly manage it, well what's the proper rate of inflation? Is it 1%, 2%, 3%, 4%, 10%, 1,000%? there is no appropriate rate of inflation, it is a completely subjective term. So because it's objective, that means that the inflation rate will always be up for debate and 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: Okay, so me as an individual using Bitcoin, how does the fixed cap affect me?

Dan Held: 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 the entities that interact with that and how it all works. Bitcoins is extremely simple. Two, it means that there will never be a political influence on Bitcoin's monetary policy.

Now Bitcoin, the only reason why that monetary policy exists and it has existed from inception, is that those rules have been hard coded in and Bitcoiners have rallied around that code and that's called social consensus. So we have all rallied around that code and that 21 million hard cap 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 million, that could happen. But the likelihood of that happening is infinitesimally small due to everyone who has bought Bitcoin, has bought into the 21 million hard cap already.

Peter McCormack: So there's an influence there also in our own personal 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... Well, to have more consideration how we spend our Bitcoin.

Dan Held: Yeah, that's why often we see central banks have a mandated policy to stimulate the economy through inflation. If you keep your cash in your bank account, you're 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 you consuming later. So with Bitcoin, you have flipped this on its head where Bitcoin has a disinflationary monetary policy where the rate of Bitcoin issuance halves every four years to the total Bitcoin number of 21 million Bitcoin.

That will happen about the year 2140, 99% of Bitcoins I think will be produced in the next decade or two though. So largely most Bitcoins will be produced and after that moment, no more will be produced and that's all entirely predictable and entirely understood by all the participants and then economic system. Now what's cool about Bitcoin is that it really is a rejection of all mainstream economics, not just a rejection of like the banking system in the Fed, but of all academics. Almost nearly every single economist in the world, it's a rejection of their ideas and it goes back to an older form of economics that was popular called Austrian economics.

So there's two types of economic thought Keynesian and Austrian. Keynesian is the current modern day economics thought, which is about governments should heavily influence the economy and stimulate growth. Whereas Austrians were more hands off, decentralized sort of economics. So Bitcoin hearkens back to that day back to that sort of thought and what people worry about with a Bitcoin monetary policy is, for example, people will withhold their spending in anticipation of price increases.

That's what often worries that in a Bitcoin style economy, people would forever withhold their spending and the economy will essentially grind to a halt, as there's no one who wants to spend because the value of their coins keep increasing. With Bitcoin right now it's very early stages, so the price of Bitcoin increases dramatically. As Bitcoin succeeds and stabilizes in price, it becomes more useful as a medium of exchange and unit of account.

So in that final stage, that's when Bitcoin's monetary policy will be criticized in terms of encouraging people to hold 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. 10 years ago, that was like $100,000 and that technology didn't even exist. My iPhone today versus 10 years ago is an incredible feat and so when we look at consumer spending with electronics, electronics get cheaper and better every year, but we still buy them, 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 Bitcoin monetary policy, we shouldn't worry about people and when Bitcoin becomes like 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: 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 some of our Bitcoin. If we ever move to a world of hyperbitcoinization 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: Yeah, that's what's really cool about the implications of a hyperbitcoinistation moment or when Bitcoin becomes like the universal currency is that when I talked about earlier with prices, prices essentially convey information. So this goes back to what some of you might've read about in college called efficient market hypothesis, which is how information is reflected in the price of equities. What it really represents is like, for example the price of Apple or share of Apple today represents everyone's aggregate thought in the entire world of what Apple's worth.

All the sellers, all the buyers ingested all the information they possibly could to then just willingly decide to buy or sell a share of Apple and so that price reflects everyone's aggregate belief or 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, 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 after hyperbitcoinization when Bitcoin is the global money, the price of Bitcoin reflects the aggregate sentiment of the world's belief in risk, because holding Bitcoin contains no risk. There is no performance that Bitcoin has to do. Bitcoin doesn't have to go sell more TVs to generate more value for Bitcoin. Bitcoin is 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, every consumer has their bank account with Bitcoin in it, in a savings account with Bitcoin in it and then they are spending and lending their Bitcoin out as well. So right now what Bitcoin would be in the future of what Bitcoin will become is that the price of Bitcoin reflects the aggregate sentiment in the world. So in a bull market, the price of Bitcoin would drop as people sell or spend their Bitcoin and they can sell, spend or lend or invest.

As Bitcoin drops, the economy starts to boom because people start to take money out of the safe haven asset and put into riskier assets and then during a bust, people flee 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 and no control by any centralized system. It's every single market participant choosing to take their Bitcoin and then sell it for something else or to sell something else and hold on to Bitcoin.

Peter McCormack: 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, will have heard that Satoshi dropped the white paper October 31st 2008, then January 3rd 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: 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 schedule of how many coin newly minted coins are created in over what time horizon. So Bitcoin produces new coins through something called proof of work where Bitcoin miners purchase specialized machines and then they consume electricity and that gives the miner a certain percentage of something called a block reward and approximately every 10 minutes, the Bitcoin protocol with the miners essentially use this energy and all this cost or as Nick Szabo puts it, the unforeseeable costliness of production.

These miners, given the cost that they have already incurred, are then given a block reward, which is a based essentially on how much of the entire network's work that they did. It's sort of a randomization function, but that's how that works at a primitive level and that block reward is comprised of 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 and that within that time period. 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.

So the percentage of the block reward that is comprised of newly minted 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 limited to approximately every 10 minutes through something called the difficulty adjustment. 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 increases as well. That's a self-regulating function to make sure that all the Bitcoins are printed in the first year or that it takes too long to print all the Bitcoins and it makes sure that the supply schedule is met on a very, very precise timeline.

Peter McCormack: 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: Yeah that's a pretty good way of putting it. I think proof of work is a good way to route real world energy and tie that back to Bitcoins in the digital world. So yeah, I think that's a pretty simple way of putting that.

Peter McCormack: Before we 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: So the original 21 million hard cap or that hard cap was hard coded in by Satoshi and we don't know if that was by committee, a couple of individuals or by one individual. But as Satoshi put it, essentially he had hard-coded the rules in since day one and that was how the system was set and the Bitcoin community or people who bought into Bitcoin over the years agreed that that was a good monetary policy and have bought into that as well. 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 Satoshi set those rules in stone and everyone since then has agreed upon those rules.

Peter McCormack: 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: Yeah! What's cool about Bitcoin is that through proof of work, the only way to acquire a Bitcoin is to expend the energy and resources necessary to mint one. You can't just go out there and find a ton of gold. The incentive for everyone to hunt down gold and mine, is very, very high. So people expend a lot of energy and resources to go mine that gold.

So that's the unforeseeable costliness or the costliness to produce which makes Bitcoin... It doesn't make it valuable, but that's what's needed to generate a new Bitcoin. The only way to get a Bitcoin is to do that. Or you buy a new one, which costs about the same as it costs to mine one. If you smooth it out, the cost of mine one over time, they largely are somewhat the same.

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

Dan Held: That's a great question and there hasn't been a ton of discussion around it. And that's why I think digging into this makes a lot of sense for people because a lot of people don't realize Satoshi was a human. People like to... He's kind of this mysterious figure that has almost as quasi-Greek, godlike sort of guy and I think people don't really humanize him and to humanize him, I think a good way to look at that, a couple of different ways is one, I think the front loading was a human characteristic of his, I think he wanted to see... When Satoshi founded Bitcoin, he wrote the white paper, he coded it up, he released the code, Bitcoin didn't have a value for a year and a half.

Bitcoin is worth $0! Not a penny, not a tenth of a penny, zero and so we have to remember when Satoshi created Bitcoin, he had no idea if it was going to survive or even thrive. 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 flatter 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 issue in schedule because he wanted to see Bitcoin survive and thrive in his lifetime. He was likely at least 35 to 55 given his polymath, renaissance man-esq sort of knowledge, Bitcoin has to thrive and survive within under 30 years, otherwise you won't be alive when you 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: 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 as somebody who might be listening to this six months down the line, a year down the line and missed it. So we are here in January, we think probably around May, perhaps June, probably about May, there'll be another halving. What is the halving and why is it so important?

Dan Held: So if you want to look at best estimate over when the halving will occur, that's bitcoin.clarkmoody.com has a great Bitcoin network, sort of chart. So it's got all the different metrics on what's going on in the Bitcoin ecosystem and it has a halving estimator where he essentially tries to do his best at estimating it. So Bitcoin is regulated in terms of the new block production and it's not necessarily exactly every 10 minutes.

It's based on sort of a function that essentially means that the median block 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 halving will occur in May, but we're a little bit fuzzy on the day and the time. The reason why is the halving occurs after X amount of blocks, not necessarily about X amount of time.

Peter McCormack: What is the X expected impact of a halving every four years you'd like to say? We've got one coming soon, there'll be another one in another four and a half years. What is the expected impact? I'm guessing we can go into this thing stock to flow. There is a guy on Twitter, his name is PlanB. I have a whole show about this, so if you are interested it will 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: Stock to flow is essentially the amount of Bitcoins already issued versus the future amount of Bitcoins being issued or the current flow being issued. Essentially it's a representation of what percentage is being produced versus what percentage has already been produced. PlanB has an elaborate sort of mathematical model built around that which shows a statistically relevant correlation between Bitcoins 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. If there's more supply than demand, price goes down because there's more supply, which demand won't satisfy. So with Bitcoin, there are miners who already have some cost of buying those specialized machines and they've expended the electricity to mine that Bitcoin, they need to sell that Bitcoin in order to pay off their operations.

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 go to zero because there wouldn't be any demand for that supply produced. So what happens during the halving events is that the amount of newly minted Bitcoins in that block reward drops in half, which therefore reduces the amount of sold 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 Bitcoins 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 keeps up even more people tell their friends about how they made money with Bitcoin, then those friends go and they buy Bitcoin and then Bitcoin goes up and it's a self-reinforcing sort of a loop there.

Peter McCormack: It sounds like a clever marketing strategy for Bitcoin.

Dan Held: 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 users grows, the value per coin increases and it has the potential for a positive feedback loop. As users increase, the value goes up, which could attract more users to take advantage of the increasing value." Satoshi wrote that a year before Bitcoin ever was worth a penny. So he knew fundamentally at the core of all humans, he could rely on one variable. 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. 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 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.

So it's a really, really brilliant organic way to stimulate demand for an entirely new asset that has no marketing team. There is no Bitcoin marketing team, there's no Bitcoin ad on Facebook you going to see, maybe by a Bitcoin company, but not by the protocol. There's largely no organization that controls it, so it's a really brilliant way to pull people into the protocol.

Peter McCormack: It's so simple and so eloquently beautiful. If 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: Oh absolutely!

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

Dan Held: Yeah and we forget too that Bitcoin's monetary policy isn't singular in its function. The issuance schedule, the hard cap and the policy itself, all of these together actually does a couple of different things. One is that the block rewards protect the Bitcoin network. It incentivizes miners to behave properly versus 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 through proof of work.

So it's a representation of costliness as well. Then it also reduces political attack factors. So via the hard-coded maximum fixed supply, there is no subjectivity over how many it should be, should we have a 1% inflation rate? Satoshi removed that political attack factor from the protocol. So the monetary policy that 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 wove all this together. It's wild!

Peter McCormack: 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 will be decreasing in 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: 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 and even in a future where people are really good about their private key management, we're still going to see Bitcoins lost. So Bitcoin's over time, there's not just 21 million, there's actually a far less than that as they're perpetually being lost over and over

Who knows how many are being lost on a daily basis. Can you imagine at least maybe 10 a day or maybe a 100 a day? It may be more like 10, but it's pretty wild to think about it. Overall it's good for Bitcoiners who hold 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: So it actually rewards good security?

Dan Held: That's right. Bitcoin rewards hodlers who are very cognizant about how they store their private keys, which is essentially how they manage their Bitcoin.

Peter McCormack: 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: Yeah, that's a great question and it's part of an intense debate that's been going on in the community, especially from the Ethereum side using it as a way to attack the Bitcoiners' confidence in the 21 million hard cap. As we mentioned earlier, the block reward is comprised of the newly minted Bitcoins plus the transaction fees. So over time as the newly minted Bitcoins in those blocks drop per the halving events, the transaction fees, over time will have to replace that in order to reward the miners to behave properly.

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

As the block subsidy drops in half due to the halving events, the demand outstrips supply and there is a giant market cycle, where are the price rises 10x or 50x, that brings around more people who then buy Bitcoin and become hodlers and believe 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. So when we look over 10 years, Bitcoin's history transaction fees have increasingly started to replace the block subsidy, meaning that we don't have a lot to worry about.

Over a long time period it is very likely that the transaction fees will replace the subsidy enough, so to compensate the miners adequately, which adequately is a somewhat subjective term, since we don't know exactly how much the miners should be compensated with to protect the network. Again, this is a game theoretical attack factor, it's essentially incentivizing the miners to behave properly and we haven't seen Bitcoin attacked by a government, which wouldn't care about receiving the money.

A government wouldn't 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 modelled it out and it looks very much so that Bitcoin's transaction fees will replace the block subsidy and that these transaction fees won't be too onerous. There'll be well within the price elasticity of a normal store value transactor, 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 a 1000x higher than Bitcoin right now.

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

Dan Held: That's a great question. So everyone who has bought into Bitcoin essentially has created a shelling point or a social consensus around the rules that dictate the Bitcoin protocol and people who run full nodes are running those exact rules. So you can validate for yourself that everyone else is running the rules and if anyone ever changed those rules, like they decided to add a zero in the 21 million hard cap and change Bitcoin, they could run that, but no one else would be able to communicate with them on the Bitcoin network. They would essentially have created a fork of Bitcoin that operates independently and not with the current network rules and sort of regulations.

Peter McCormack: So this kind of proves something else that's really important that I heard about early on and when I was new to Bitcoin and I was arguing about some of the flaws. I saw that, "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: Right! We see that with many other protocols that the rules change constantly 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 baked in day one and hasn't changed at all, the confidence in that monetary policy is higher than any other monetary policy in the world. We are all more confident in Bitcoin's monetary policy, more so than even gold mining because with gold mining, we could find $10 trillion worth of gold at the bottom of an ocean in a box or you find it on an asteroid or X, Y, or Z. We don't know how much gold is 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: If anything, it will be less.

Dan Held: Correct, it's probably less than our expected in the expected 21 million issuance. So 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: So new people coming in hearing about this very early on are going to be exposed to other cryptocurrencies. It's very unlikely that it's new people hearing about Bitcoin come into the space, they start buying maybe someone in exchange and see other cryptocurrencies. It's very unlikely that they want to 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: Yeah, I think there's a really easy answer for that one and it'd be Ethereum. So Ethereum has an incredibly poor monetary policy. Most people who are fans of Ethereum are engineers and they really lacked the... There was a VC in Silicon Valley who wrote an article called "Tech Crypto Versus Money Crypto." So tech crypto is engineer focused, money crypto is ex-finance, ex-banker types, who really understand economics. Ethereum largely appeals to the tech crypto types who 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 everything they want in an app platform like the App Store replaced or the Ethereum blockchain to do everything they want. So the protocol becomes largely very malleable because of that, because it's constantly changing at the whim of all of these engineers. But none of these engineers have really a good grasp of economics or monetary policy.

So Ethereum largely ignored monetary policy or aren't really talking about it that much until 2018. I remember Ethereum coming out and almost no one ever mentioned the word monetary policy and Ethereum in the same sentence. Ethereum was a smart contract platform and ETH was the oil or the gas, however you want to put it.

So as 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 of failure with their narrative of a dApp platform, a smart contract platform or a fundraising platform. As we saw ICOs collapsed and these dApps fail to find product market fit, the Ethereum community is scrambling to find a new narrative and that new narrative is that Ethereum is a good gold 2.0 or Ethereum is a good money because of its usefulness that copper is worth more than gold because copper can be used for so many things.

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 something that's tangible, something that's real and so they're trying to make themselves equivalent to Bitcoin. This is the first time that I've seen the Ethereum community talk about monetary policy was in like early 2018 and it's where they go, "okay wait a second, we got to figure out the new narrative and we have to figure out why our monetary policy, how we can compare and contrast that to Bitcoins."

Peter McCormack: So has the monetary policy for Ethereum changed at all?

Dan Held: Yes, it's changed several times. One you've had a situation where Ethereum transactions were reversed per political pressure to reverse them. Individuals had lost a lot of money on something called the DAO hack and those were friends and co-workers of Vitalik Buterin, the guy who invented Ethereum and the Ethereum Foundation. So they reversed the transactions, which sort of violates the whole principle of why you'd have a blockchain to begin. 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 sort of equivalent to Bitcoin. Then as well, they've also tweaked 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 Ethereum community is trying to meme and trying to align themselves with Bitcoin's fixed supply monetary policy, but they don't realize that they will continually and perpetually be less.

People have less confidence in their monetary policy than Bitcoin. Bitcoin has already won, it is far too late for them to do this now. You can't just say, "hey, we have a low rate of inflation," because I don't trust that you will in the future. You could choose to change the rate of inflation, but it's about the continuity of the monetary policy that is paramount in the belief in the continuity of the monetary policy, a faith in it, and there's no continuity to Ethereum's monetary policy and there's no faith that it will continue that way. Whereas Bitcoin's is super strong. It also has the largest network effect in terms of market cap, holders of their currency, liquidity and faith in the monetary policy.

Peter McCormack: So what's really interesting there Dan, is that how you explained how Ethereum 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 bank in monetary policy, as a small group of people influencing something for what they believe is the benefit either of themselves or that or a group of people.

Dan Held: That's exactly right. It's not malicious on their part, it's ignorant. It's an ignorance that shows that they have not spent a shred of their time to understand what went wrong with the existing banking system. It's the malleability of the monetary policy that's the root cause of the problem and they don't realize that they've literally recreated the exact same thing in the digital world and that Bitcoin has such an insurmountable lead and faith in it, that there is no possible way that they could meme themselves to be equivalent to Bitcoin's gold 2.0.

Peter McCormack: Okay, so I've also heard there's this Bitcoin Cash, Bitcoin SV, there are other versions of Bitcoin. They have a very similar monetary policy and release schedule, a fixed hard cap, an emission schedule, yet they're faster and they have lower apparently lower transaction fees. So why is Bitcoin stronger than either of these two other versions?

Dan Held: 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. So Bitcoin, what we all call Bitcoin, has by far the majority of people that run that code and believe in that coin and so that coin is what's called Bitcoin. So these other communities are hard forks of that original Bitcoin code and they change it. These individuals who believe in that version of Bitcoin run that code and buy that token issued by that currency or issued by that protocol.

Peter McCormack: Okay. All right, so Dan, I've 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 pounds here or your dollars there were so volatile and what you could buy every day could swing so wildly up and down 10% or 20% ,why is the monetary policy so good and why should I believe in Bitcoin?

Dan Held: That's a great question. So one is that Bitcoin is transitioning through different stages of its product life cycle. So at first Bitcoin is mostly valuable as a store of value, it's a hard to seize asset with a very explicit and clear and understood monetary policy that can't be changed. That makes it a great store of value alongside like immutability and other sort of properties it has as a money, as Bitcoin's value increases over time and draws in more and more people. As more and more people believe in Bitcoin and are buying 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. At that point, Bitcoin's value starts to stabilize, volatility starts to decrease as the amount of speculation starts to drop off and it's just the gold 2.0 and people just use it. It's not a speculative store of value, it becomes the store of value. When that price stabilizes or the volatility drops, if it drops below the local volatility of that fiat currency that those individuals live under, then Bitcoin transitions to the medium of exchange and unit of account era.

So 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 and he felt that it was a good thing as it was that viral loop to draw people into the protocol. At that later date that volatility subsides, Bitcoin becomes more usable, not only as a store of value, but also as a medium of exchange and unit of account and so that's how I see that playing out long-term.

Peter McCormack: And 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: That's correct! The earliest participants who choose to hodl the whole time, I know plenty of very early Bitcoiners who sold all their Bitcoin at $10, because they bought in when it was a penny. So they 100x'd their money, which was a phenomenal return! Everyone's human as well, like no one can hodl forever, you eventually die. You should purchase goods and services because you need to live a life and so people need to sell at different prices and weddings and houses and cars and kids going to college etc. But Bitcoin does reward those who bought in early and who believe in it.

To hold Bitcoin this long, I've seen my net worth go up exponentially three times because 2013 had two bubbles, people forget that. I see my net worth go up exponentially three times and drop 80% three times. So with that return you have to weather that storm of volatility. Another way to think about it too is that Bitcoin itself is really stable. The protocol is nuclear grid resistant to where Bitcoin has an uptime that's greater than any other tech company in the Bay area in terms of like Bitcoin being operational, in terms of percentage of the time it's operational.

Since 2013 it's been 100% operational and it's never had any downtime. So really the price of Bitcoin is the volatility of the world coming into the stability of the Bitcoin protocol in ebbs and flows and ebbs and flows would be booms and busts because Bitcoin is stable, the protocol's incredibly stable, it's just the world figuring out what that value is and that's what's fluctuating.

Peter McCormack: 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'm going to go down this rabbit hole a bit more, would you direct me towards anything particularly you think I should be reading?

Dan Held: If you want like 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 back years back and his was mainly focused on gold and he kind of reformatted it to Bitcoin a little bit, but I felt like it wasn't well-rounded. So I took it and kind of iterated on that. I think it's a great basic way to think about how an economy works. So that's a great point that would be like a good start if you're more interested in this topic.

If you want to read about narratives, "Quantum Narratives" is what I wrote about, which kind of shows how the narrative behind Ethereum and other crypto assets have changed over time to where they've changed their meaning and what they're pointing to is. Whereas Bitcoin has continuity from origin, it was always meant to be gold 2.0, there were some individuals who thought that it was something else, but that that is the main narrative.

Then "Planting Bitcoin" is another series of articles or road planting Bitcoin touches really deeply on. Satoshi didn't just choose new species of money, he chose the season, the soil, and the gardening techniques really precisely to enable Bitcoin to succeed. Now Bitcoin is planted in the middle of the 2008 financial crisis, its genetic characteristics as a species of money were carefully chosen due to those factors that were needed to enable it 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, why does it matter? Who cares why it was planted in 2008? Now you really need to understand what the feeling was at that time and I think that really captures it well.

Peter McCormack: All right, awesome! If someone's like, "this Dan guy, he seems pretty cool, I want to follow him", where can they follow you man?

Dan Held: It's @danheld on Twitter. The name on my Twitter handle is Dan Hedl. Held is my real last name, it's not a made up name but Dan Hedl, Hedl is definitely a made up last name.

Peter McCormack: Brilliant, well listen Dan, I appreciate you have a new part of this series and yeah, good luck to everything you do!

Dan Held: Thanks Peter. Always a pleasure to chat with you and I'm sure we'll be cracking open some beers at the next conference!

Peter McCormack: Thank you, see you soon man!