WBD705 Audio Transcription
Part 3: How Bitcoin Fixes Money with Lyn Alden
Release date: Monday 4th September
Note: the following is a transcription of my interview with Lyn Alden. 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.
Lyn Alden is a macroeconomist and investment strategist. This interview is the final of three shows where we discuss Lyn’s amazing new book: Broken Money. In this show, we recap the flaws in the modern financial system, and then we discuss the potential of Bitcoin as a decentralised solution with its ability to allow hard asset money to move globally at speed.
“As the first time where hard asset, bearer asset money can move at the speed of telecommunications globally…it’s one of the first technologies in money that can improve it that’s not centralising, it’s arguably decentralising, and that’s what makes it different from than the past 200 years of monetary innovations.”
— Lyn Alden
Interview Transcription
Peter McCormack: All right, Lyn, are you ready to complete the trilogy, the broken money trilogy?
Lyn Alden: Happy to.
Peter McCormack: Brilliant, okay. Well, listen, congrats again on this book. I cannot wait for it to get out there and see what people think, but my expectation is that everyone will be blown away. And thank you for doing this with us. We've loved making these last two shows and we're very glad to make this third one with you. So, in summary, we've got a summary where we're at so far.
The modern financial system, this is how we've summarised how it works. The money supply continues to inflate; purchasing power is gradually siphoned away from savers to those near the source; the system rewards large, well-connected entities at the expense of the smaller ones; liabilities gradually shift from the private sector to the public sector; the process presses volatility and then it all comes at once. How's that?
Lyn Alden: That's a good summary, and I think probably the other half of the summary is why we got to that point; that's a really good summary for what. I think the why is basically that, you know, for thousands of years, humans have been trying to make gold and silver easier to use, so they have various divisibility or transportation limitations. And so for thousands of years, proto banking has been a convenience tool over that. And in the past several centuries, full-service banking has been a more elaborate tool over that. But the problem is that that increasing level of abstraction basically caused major issues between the amount of claims for those metals and then underlying metals. And then this all expanded dramatically during the telecommunications era, so ever since the telegraph became implemented throughout the second half of the 19th century.
During that environment, they were eventually able to just drop precious metals altogether. And so we've been in this system where physical money is too slow to deal with the modern global economy, but these fiat currencies are too arbitrary, inflationary, and have other issues to serve a similar role. And of course, the problem is far more compounded in the long tail of developing currencies, because the current market is basically 160 different fiat currencies in the world, the top handful lose value slowly, and then for most of the others, wherever you are born in the world, you're in this little currency monopoly. And if you happen to be born in a bad one, then accumulating capital is way harder than it should be, and all the global payment frictions are way harder than they should be.
Peter McCormack: Would you say it's fair, on the why, to say half of the why is because of people trying to improve gold and trying to improve the function of money? Could we also say, half of the why is because of human greed and stupidity and that the flaws in the system allow people to exploit it, and getting to what we're ultimately heading to, which is talking about Bitcoin, is that it not only improves on the technical issues, but it also protects against the greed and stupidity a bit more?
Lyn Alden: Yeah, I think that's a fair description. I think the challenge is that most of these solutions that made money easier to use were centralising, and with centralisation comes corruption and basically more ability to play games. And so, what I think is relevant about Bitcoin as the first time where hard asset, bare asset money can move at the speed of telecommunications globally, what that does, it's one of the first technologies in money that can improve it, that's not centralising, that's arguably decentralising. And that's what makes it different than say the past 200 years of monetary innovations.
What we talked about before, the concept of technological determinism, which is that if we were to rerun humanity multiple times, would this be like a weird anomaly that happened or would it usually end up like this; and my argument is, it would normally end up like this. The set of technological capabilities, combined with incentive structures and human greed, makes it really hard to run a money system when transactions can move at the speed of light, but physical settlements of hard money can't. So, this century-and-a-half window is a weird window to navigate, but it's a window that would come up over and over again for any civilisation that reaches this type of complexity. And what's interesting about Bitcoin is it's potentially the closing of that era. If it's successful in the longer run and at scale, then it's the first time where digital settlements are just as fast as digital transactions, basically. That can de-abstract, simplify, and decentralise the money system.
Peter McCormack: One of the interesting things about Bitcoin is that with all these other forms of money, it's the greed and the stupidity that has allowed people to exploit the money. And I know we're going to get into it later when we talk about shitcoins, but as people haven't been able to exploit Bitcoin, you know, they've tried but haven't been able to, part of the way of exploiting it has actually been to clone it, to try these shitcoins, that's how the greed has continued and it's a slightly different way of exploiting it. It's almost exploiting the breakthrough in the technology and the marketing behind it, rather than the technology itself.
Lyn Alden: Yeah, that's a good way of putting it. And with precious metals, the thing there is that each one has a certain degree of scarcity, and then there's only a certain number of them. Each one is an atomic element, so it's not like you can just make tons more precious metals. The challenge from Bitcoin, and one of the things that the critics have pointed out from the beginning, is that no one stops you from making a duplication of it. There's no limit to how many different cryptocurrencies can exist. And so they rely on network effects, depth of liquidity, their own unique properties, to establish such a degree of dominance that near identical new entrants are not really going to have a chance. And so, this bootstrapping period is this phase where we see if the technology is strong enough to resist all those types of challengers and establish a certain degree of network effect and liquidity and dominance, and all that, in order to become truly scarce and gold-like.
Again, I would defer to technological determinism in the sense that I think any time this type of technology gets developed, if we were to rerun these past 15 years, multiple times, I think you'd get an explosion of shitcoins every time. I think we were lucky that the first one was good. I mean, I can imagine worlds where the first one was not good, and it had some sort of big flaw or Satoshi is a scammer. You know, he's smart, but not ethical. And you can imagine different scenarios where maybe the first one's not the one that achieved critical mass. But we were in one where it is. But I think it's natural that people are going to experiment. I think we have to try all the wrong answers to prove why the right answers are they are, so we can theory-craft what the right answers are. But I think that in practice, people have to learn through iteration.
So, I think if you were to rerun this, I think you'd always have attempts at Turing Complete blockchains, I think you'd always have attempts at sacrificing decentralisation for more throughput. I think those are the two big variables that would keep getting explored, as well as can you eliminate the energy and do proof of stake or other types of governance. And my analysis, and the analysis of many others, is that Bitcoin is near perfect as it is, and we're lucky that the first one was well-designed and ethically distributed and launched in this fair way, and that the first one happens to have really maximised this decentralisation. So, I think this is a process that Bitcoin has to go through to prove itself.
When I first discovered Bitcoin over a decade ago, that was my initial concern all along. That's my view, the biggest risk is, I was always interested in it, but my main thing was, I don't know if this is going to be able to survive the sheer number of dilution attempts. And when you looked at it in 2010, 2011, 2012, even a few years after that, it's hard to make that determinisation. But several years ago is when I started to conclude that, yes, I do think that Bitcoin is robust enough and well-designed enough and that it's achieved a certain degree of critical mass that it has a very good runway ahead against all these dilution attempts.
Peter McCormack: Okay, well listen, before we get into Bitcoin itself, we do want to cover a couple of things before there. We want to talk about the financialisation of everything. I know now, I even feel this here in the UK, I don't save anymore. I used to save, but when you're getting 10%, 11% inflation, it incentivises you to spend as well. I mean, I look for alternative investments, but I am incentivised to spend as well. How big a problem is this?
Lyn Alden: It took me a little while to fully understand the argument about money and time preference and saving, because my anecdotal experience was that when I was young, I was a teenager, I got interested in equities pretty early, and so my opportunity cost was always mentally stocks, it was never cash. So, even though cash was devaluing, I was lucky to have the dollar, but still, I view the dollar as inflating away, but I would kind of mentally price things in terms of owning stocks for 20, 30 years. But when you travel the world, most markets don't have very good equity markets. The United States stock market's kind of special in that regard. Most other countries, people are more likely to save in real estate. That is there for ones that are able to do that. But then, of course, the challenge there is that real estate's very illiquid.
For example, when I talk to my friends and family in Egypt, it's a very different environment because the Egyptian stock market is not nearly as robust and long-term successful as the United States stock market. And so your choices are mainly, hold in something that gets inflated away, invest it in illiquid real estate, which many do, and then you have almost like ghost cities sometimes, because there's overbuilding and buying and holding empty properties for lack of what else you're going to do with it. But the idea is that Egypt's had very good population growth, so eventually it'll be filled. Of course, there's risk of malinvestment or risk of derailment. Or they can do things to try to get external monies, like physical dollars on the black market, Bitcoin, stablecoins, whatever the case may be. Gold is fairly popular. Of course, the problem with all those is that they're prone to price swings, they're liquid, they're less efficient. And so it's actually, I would argue, very damaging not to have a ubiquitous, standard, liquid, appreciating savings unit in a country. It's very hard for countries to build capital.
I think we talked about this last time, I think one way to describe that is to point out how many countries, how few countries, have officially transitioned from developing countries to developed countries. So, if you look at an index, like MSCI, or if you look at the FTSE, they rank countries based on certain metrics; are they developed or developing. And there's very, very few countries that transitioned from developing to developed. A handful of small countries in Asia have done it and that's about it. This whole 50-year fiat currency era has had very little transition from developing to developed countries. So, I would argue that it's actually quite challenging, it's the exception to the rule that a country is able to accumulate enough of its own capital in this type of environment to get escape velocity. I think that's how I think of it as one of the biggest problems with the system.
Peter McCormack: So, I was aware that if you were middle or upper class in Argentina, I was aware, made aware of how people protect their wealth, what they use as a store of value, etc. But I said, what do the poorest people do? I was told they buy bricks. So, what happens is, once you've got money, you buy bricks, you maybe buy cement, you maybe buy tiles, and you just collect them up. At the point where you've got enough bricks or tiles, you build another floor, another room on your house.
Lyn Alden: Yeah, and I've actually seen a little bit of that in Egypt as well. Yeah, it's a similar environment, though, even buying sometimes depreciating things like cars or bikes, because it's still better than cash, it's still some degree of workable capital that's a little bit more tangible. And it's a problem when saving is not easy. And another challenge that people do is, if they don't have enough money to have a bank account, because the problem with bank accounts is that if you don't have much money, it's not worth it to the bank to deal with the administrative overhead with your small amount of deposits. And so, a lot of impoverished people in countries that have low banking rates, they're literally just holding physical bank notes as some of their savings. So, they're getting the full devaluation without even the interest that bank-holders or bondholders have. So, even the bank-holders and the bondholders are not doing great, but the physical cash holders are doing even worse in those types of environments, and yet that's one of the only things that's accessible to them.
Peter McCormack: Well, yes, so again, back to Argentina, the reason people don't leave money in their bank account is because of, I'll pronounce this wrong, but the Corralito, or it's what happened back I think it was in 2001, where overnight the government went into the bank accounts of every business, every person, and just stole all their money. And so people were telling me, "No, I keep my money in a tin buried in my garden", which is fascinating.
Just back to this financialisation of everything, in these inflationary environments, we do have these distortions of money because people don't save. Where does the money end up? Because we do have these growing economies, we have a growing GDP; where does the money end up; what are the money flows now?
Lyn Alden: Well, so in terms of actual capital accumulation, humanity has been able to grow despite frictions, and so just sheer technological growth and energy proliferation have been able to enable some degree of improvement throughout most of the world, despite this. So, when we look at the actual money itself, mostly a lot of it gets challenged, it gets siphoned to the top. And of course it varies based on the country's different fiscal policies. But when you have a very flexible ledger like that, where the amount of units that this whole thing is nominated in is very flexible from the top of the decision stack, what you tend to see is money gets in the hands of government officials, in the hands of well-connected wealthy elites, and then a lot of them, what they'll do is they'll store money overseas, the classic offshore bank account, or properties in Miami, for example. They'll buy offshore real estate, illiquid things, as well as offshore liquid accounts. And so in many cases, the people that have the most access are the ones siphoning it away and then also protecting themselves the best from this dilution that's happening to everyone else.
A big thing I like to emphasise is that in addition to savings being diluted, because you'll see people say, well, "That's what investments are for, that's what's interest is for", and all that, and it's partially true if you can access them, which again, outside of the US and Europe, it's harder. You have fewer options, especially if you want to keep it somewhat liquid. But the other challenge is that there's a unit bias with wages and stuff, and there's a unit you have to denominate a contract in, right? If you have a sponsorship, especially if it's longer term, you've got to denominate that in something. And then imagine if you're a more physical, low-margin business. You're buying supplies, you're selling finished goods, and you have to navigate the fact that you're trying to lock in long-term, inexpensive supplies that are denominated in some sort of unit. You're selling them generally in a more flexible pricing, and you have to navigate that.
So, as inflation goes up, things get less organised because you can't make as long-term commitments and you have to renegotiate things way more frequently, so you have all these frictions. And then two, if you're a wage employee, in many cases you're only getting a negotiation attempt once a year. In an inflationary environment, the burden is always on the employee because the status quo favours the employer. You're the one arguing as an employee that you deserve a raise. And if official inflation, let's say it's a developed country even, let's say official inflation is 3%, but when you look at actually scarce assets, so what is the inflation rate of houses? And if you remove the long tail of deflationary technology and stuff, you say, what is the inflation rate of actually scarce goods? It might be 5%, 6%, 7%. And if you're making the case as an employee that you need a wage increase, it's very hard to keep up with that.
Then you see unnecessary levels of job movement, because people are often better at negotiating a higher salary if they change employers because there's unit bias, there's anchoring bias associated with an employee that worked with you before. So they say, "Well, you earned this much last year, why should you earn 7% more this year? You haven't gotten 7% more experienced". And it's because, well, 6% of it is just keeping up with the price of houses, for example. So, it creates a disadvantage for employees. Where, if you had a deflationary environment or a zero-inflation environment, that inherently gives more power to the employees because then the status quo is more on their side.
Peter McCormack: Which is why we need this scarce asset, liquid scarce asset, which itself is available to everyone globally, outside of the state, that can protect themselves. So, let's talk about Bitcoin. I did want to talk about the long-term debt cycle, but I might save that to the end, because essentially we're getting Bitcoin at the end of a long-term debt cycle. But with Bitcoin itself, when you were working on the book, how much did you look at the previous technologies where people attempted to try things similar to Bitcoin; and how did you kind of see that as becoming the jigsaw puzzle that Satoshi pulled together?
Lyn Alden: So for years, even before the book, I've looked into this quite a bit. I did obviously another round of research for the book and you start with just Satoshi's sources, work back from there. Also, Nakamoto Institute is a really good library of information. There's a bunch of these places online that you can find these big stockpiles of information. And what you see when you look through that is it wasn't -- Bitcoin often to outsiders looks like this thing that came out of nowhere. You know, it's either a miracle or it's a scam depending on their view of it, that just came out of nowhere. Whereas when you look at it, it's actually just one further innovation. It just so happens it's the piece that finally made it work, right?
So, technology often comes in stepwise changes. We think of it as like this gradual improvement up, but usually it's like you get nowhere, you get nowhere, and then you have some key innovation, you know, the discovery of electricity, the invention of the semiconductor. Michael Saylor has used the analogy before that humans couldn't do anything with flight for a very long time, but when we finally got hydrocarbons and aluminium in a little over 50 years, you go from Wright Brothers to the Moon because you finally had the right pieces. And with Bitcoin, what Satoshi did is a lot of the pieces leading up to that were, even in the early 1980s, there was research by Chaum and others basically trying to figure out how to maintain a ledger or database between mutually untrusting parties. And you had various growth in different types of encryption, though throughout the 1980s and 1990s, that was a really big deal.
Then you had the invention of proof of work by Adam Back, and then you had the concept of digital scarcity. And Satoshi's major contribution to this already multi-decade history was to say, well, how can we further decentralise it? Because a lot of the big problems was, they could make a scarce unit, they could make this really cool ledger, but they couldn't quite decentralise it. And so, the combination of the difficulty adjustment with proof of work, that's kind of Satoshi's major contribution to this whole thing, as well as just thinking through the details of how to make it work. He had to choose, like the block size and all that was partially based on bandwidth considerations and stuff like that. Like, what is the rough math that can make this work on a reasonably distributed scale? And so basically, when you look at the full story of Bitcoin, you see these roughly 40 years of development ahead of it until it finally really comes together in something that truly reaches what has so far been a pretty significant scale.
Peter McCormack: Yeah I'd add one more thing that I think Satoshi did that was clever and very important, which was disappearing. I still I still can't understand how he managed to do this, and I say him, but how he managed to do this anonymously and disappear. I think it's incredible, because most secrets end up being found out. But I think the disappearing and leaving it to a community forced the decentralisation further.
Lyn Alden: I agree. And it's hard to know how intentional that was. Some of it was, he seemed to have been spooked. And so, whether that was a grand decision all along and he used that as an excuse, or it's hard to say what went through his mind when that happened, but either intentionally or accidentally, the fact that he did that was amazing. And then, of course, the fact that he never spent the coins, whether he died, whether he burnt the private keys, or whether he's still holding them and just had the discipline never to touch them. And it's possible he re-emerged in the industry as himself, right, and wanted to keep working on it, but as himself. And there's like this, he wants to be Bruce Wayne now and not Batman any more and that's I think that's actually one of his most amazing things, is that he was careful enough not to get formally doxed.
So, people have different theories about who it might have been with, with different degrees of evidence, but there's no kind of slam dunk case for who Satoshi is out there, because he was careful enough, at least with these past 15 years, of no one ever being able to formally figure it out.
Peter McCormack: If we've got nocoiners who've listened to part one and two and got them here all to part three, one of the interesting things is trying to explain to people the pillars of Bitcoin that make it so important. It's really hard trying to get people who don't want to know about Bitcoin to really care. I've tried again and again, and some people just aren't receptive of it. But when I do, there are these particular pillars I try and discuss, and you've covered these in different ways in your book. I try and talk about the monetary policy and why that's important, that Bitcoin is permissionless and censorship resistant, and again why that's important and giving use cases. I try to talk about the scope of decentralisation, and then more recently I add in self-custody and I often tag on multisig with that.
Let's work through these. Explain to me, I'm especially interested with you as a macro thinker what you think of the monetary policy and why you think it's so important. For me it's just I love the fact that it's a monetary policy with two rules: fix them at 21 million and an issuance rate that halves every, I can't remember, was it 280,000 blocks? It's every four years anyway. No, 210,000 blocks, isn't it?
Lyn Alden: Yeah.
Peter McCormack: Yeah, I mean that's the monetary policy. If you try and think of the monetary policy of the Bank of England or any other central bank or any government, you've got hundreds, thousands of rules and caveats. Here we have a policy with two rules. But you as a macro thinker, can you explain what it is and what you think of it?
Lyn Alden: I think I would separate it into two parts. One is the obvious and one is the subtle. So, the obvious is the one that people in developing countries see more readily than people in developed countries. So, if you have a good enough currency, good enough payment systems, you might think why do we need Bitcoin. This is something you see quite often. Whereas if you live in a highly inflationary regime, if you live in an authoritarian regime, if your currency is just not accepted anywhere internationally, and you're constantly dealing with cross-border frictions, if you'd like to move around, if you're a refugee and you want to be able to bring wealth with you, or you foresee the future that you might be in a case where you have to bring wealth with you, and therefore you have a tool that you might want to get into in advance, these types of the permissionlessness, the resistance to debasement are more obvious to people in less privileged monetary environments.
So, when you tell someone, "Hey, there's this global ledger, this decentralised cloud of money, and you can bring your money anywhere in the world, you can send your money to anyone in the world, unless someone can capture over 50% of the hashrate on a sustained basis, it's very hard for anyone to do anything about it", that's kind of the obvious things that Bitcoin solves, and it does it in this oddly simple way of what you pointed out, two rules basically, for how the monetary policy operates, and then a handful of rules for how censorship could happen or mostly is very resistant to happening.
The more subtle complexities of why Bitcoin's important, even in developed countries, those are the more challenging ones to explain. And actually, that's why I think the matrix analogy is such a good one. Matrix memes have been very popular in the Bitcoin community because when you're totally immersed in a system, it's very hard to see the system, because the system's all around you. And so, that gets to my other points around, if the source of money creation is highly flexible and if the logistics of money creation are easier to give to well-connected people, it's going to go to well-connected people. So, even when intentions are good, money still tends to go to well-connected people. And of course, if intentions are corrupt or bad, it'll flow to well-connected people even more aggressively.
So, what you see, for example, is during the 2008 Financial Crisis, it was much easier to bail out the top 25 banks and give them access to inexpensive credit and some capital assistance during an emergency than to bail out millions of different homeowners, right? And so they do this top-down style of bailout. Banks are better off than homeowners, and that's why you get a lot of growing populism, growing discontent, Occupy Wall Street, Tea Party, and get all the different responses to that. And then even during the 2020 Pandemic and all that, they tried in some ways to do a more bottom-up type of bailout. So, okay, this time we're going to do stimulus cheques, we're going to do childcare tax credits, we're going to do all that. But at the same time, when they did, credit seized up, right? So, when that whole, all that stuff happens, everything gets locked down, financial markets break, credit freezes.
So, what do they do? Well, the Fed goes and buys corporate bonds. They literally buy bond ETFs. And what that does is with a flick of a button, they can unfreeze the entire bond market, which large corporations use to raise capital. But then the question is, what about all those millions of small businesses that rely on tiny individual banks to serve as their line of credit? How do you get them all to open up? That's a far more distributed, decentralised system that's further away from the source of money creation, the logistics of dealing with it are much harder. So, corporations got credit assistance and unfreezing of credit markets faster than small businesses did. And that's number one.
Then, when they tried to actually address that, they said, "Okay, let's do the PPP program. We'll give money to small businesses to help cover their employees", and it sounds like a good idea. And of course it did save a number of important small businesses. But when you actually run the numbers, there's been studies on this, something like two-thirds of the benefits went to the top 20% of the population. So, a lot of times they were law firms, which were not impacted by COVID, and they said, "Yeah, we have 30 employees, we're going to have to lay them off if we don't get money". And then they get money and then they never had to lay anyone off anyway. So, the $0.5 million they got just goes to the three people who run the law firm. They're already wealthy. So, person A gets $3,000 in stimulus benefits and some child tax credits, whereas these people each got six figures.
So, when you look at that kind of distribution, it's either intentionally or unintentionally, sometimes a combination of both, it's always easier in this kind of flexible monetary environment to channel more and more money to the top.
Peter McCormack: So, that must mean that you've thought about the consequences of Bitcoin long-term. Yeah, I've ummed and ahhed with this idea of hyperbitcoinisation and not having sovereign currencies. I still believe for a long time we will, but I do imagine a scenario where we have both; they have this kind of symbiotic relationship in that Bitcoin forces a more responsible treatment of sovereign currencies. But how do you think about this long term then? Do you think Bitcoin will bring back the natural boom-and-bust cycles that essentially governments have tried to stop happening? It almost feels like governments have tried to stop economic crises, they try to stop crashes, they try to stop what we saw in Ray Dalio's, what's the name of that thing he did, Danny, remind me?
Peter McCormack: Yeah, I can't remember, he talks about the short- and long-term debt cycles.
Lyn Alden: Oh, the Economic Machine?
Peter McCormack: Yeah, the Economic Machine, and in that he talks about them. But it feels like it's not politically popular to allow us to have the bust part of a boom and bust, and therefore they kick that can down the road continually for political reasons. But in doing so, we've built up a much bigger debt position. Do you feel like Bitcoin will enforce natural economic cycles back?
Lyn Alden: I think if it gets big enough, yes. So basically, not all of the cycle but a significant part of the cycle I would argue is due to the abstraction money. So, central banks, they cut interest rates, they encourage all this credit growth. And then when you start to get inflation, they tighten up everyone's interest rates and then they can't pay them, and then they help contribute to the bust. And when people examine the Great Depression, for example, they look, it all crashed, the central bank and the government had to come in. It's like, "Well, let's stop and look at the prior decade, and we see how they contributed to forming that bubble in the first place". So, you wouldn't have that size of a crash if you didn't have that degree of a bubble. So, if you didn't have that many claims for money relative to base money, you didn't have that indebted of a system, crashes are softer and more natural. And so, I think in the long run, that's relevant.
I think that when we go back to the kind of the obvious improvements of Bitcoin versus the more subtle ones, at a smaller scale, Bitcoin can solve the obvious problems faster. So, Bitcoin doesn't have to be widely accepted as a unit of account, for example, in order to help someone save money long term or have more portable wealth and all that. The other benefits of Bitcoin only would come if Bitcoin becomes ubiquitous enough that contracts start to become denominated in it. So, if we go back to my prior point about, say your wages are denominated in inflationary currency, that problem only gets fixed if your wages are denominated in Bitcoin, if that becomes ubiquitous enough that that happens. Until then, Bitcoin is useful as a savings asset, as a decentralised payment network, as a portability enhancer. But some of those more subtle benefits only come if it achieves some degree of hyperbitcoinisation, if it's basically a more ubiquitous type of money that's pushed out all other monies.
So, when I think about this kind of thing, I often think about the more subtle things that are harder to see, like the burden of proof for employers versus employees, where the unit of account influences that; or the ease of distributing money to well-connected people rather than unconnected people. And a final point, another subtle thing, is that once you're big enough where you're close to the source of money creation, and specifically if you're big enough to have access to capital markets, so you can raise money with bonds rather than just banks, you now have a much lower cost of capital. And so, in this type of inflationary, flexible credit environment, it inherently favours big entities. And so what we see, for example, is that a number of businesses, you can make a whole business, the entire kind of multi-decade trend of private equity, is really about leveraged buyouts.
So basically it's saying, a larger pool of capital says, "Okay, what do we have? We have low cost of capital. So, we'll go acquire all these small- and medium-sized businesses that have higher cost of capital, and we'll make use of the fact that we have lower cost of capital". So, you see more and more consolidation over time. And then even if it's not acquisitions, it can be displacement. So, for example, in the United States, we have two large hardware stores, Lowe's and Home Depot. If you go back 50 years, we had a much larger assortment of smaller hardware stores. And what happened was, these large enterprises were able to move across the country. And some of that's natural, some of it is, it's easier to go to a large hardware store, a brand you know, which is recognised as a national chain there. But the fact that they have an inherently lower cost of capital is a foundational, almost insurmountable difference.
Even on a hard money standard, larger and more diversified entities are going to have some degree of a lower cost of capital, but it's a much smaller advantage in that hard money environment, especially because leverage is used less. So, in an environment where, for lack of a better way to describe it, being able to short the currency is a key part of wealth accumulation, whoever has the best access to do that is a lot more rewarded in an inflationary and flexible system. And that's the kind of subtle matrix thing that's hard to explain to people in a tweet. You can point to developing market currency devaluations and things like that. That's easy to be like, "Okay, here's why Bitcoin's useful". You can have all the tangible obvious examples where Bitcoin is useful, but some of these more structural issues in developed countries are the ones where it's hard to articulate it outside of a long article or book.
Peter McCormack: Yeah, and perhaps referring back to what you said about how many developing countries have become developed countries, there is the chance that we may see one in El Salvador, and I don't want to be hyperbolic about it, but the country's taken a risk. It said, "We're a Bitcoin nation", it's been accumulating Bitcoin. If Bitcoin does continue to grow and the value of Bitcoin increases, there is a density of Bitcoin in that country that doesn't exist in other countries: one, the part the bit that's held by the state; and secondly, the bit that's held by people in El Salvador. And, look, we know it's not everybody and I know they got their Cheevo handouts, they didn't all claim them or maybe sold them; but the as sovereign currencies lose value, as the dollar loses value and Bitcoin increases in value, it could be this weird scenario that El Salvador is a country that has lifted out from being a developing country to a developed country. You can picture it.
Lyn Alden: Yeah, I think the path that they're attempting is one of the ones that has been successful before. If you look at Singapore, for example, or Dubai when they're in an environment where they're small enough and they basically say to the world, "We want to be a hub for businesses and things like that to come here". That's historically been one of the strategies that some of these countries can use. And then when you combine that with accumulating hard capital, that should be successful at least in those set of strategies. There might be other criticisms obviously around human rights or governance centralisation and that kind of thing, but some of their technical business and capital decisions, I think, are in line with some of these types of countries that have been able to break out.
If we look at examples of countries that have been able to move along the developing to developed path, the handful that have done it in the past 50 years, one of the only formal ones would be South Korea. One of the two major classifiers still considers them developing because of certain legal details, but I think that mostly doesn't make sense. South Korea went from developing to developed. Then China, Taiwan, they're classified as developing still, but for many practical purposes, they've pretty much reached developed status in many ways. And so, they've been able to kind of climb that ladder. Also, Singapore was able to do it. So, there's been these handful of Asian countries that have been able to do it.
But when you look at how many countries there are out there, it's a shockingly small percentage of the number of countries that have been able to climb that ladder in the past 50 years. Especially if you say, okay, let's take away oil. Let's say you don't find just this massive treasure trove of oil in your country, or something like that, the percentage that have climbed that ladder is strikingly small. And I think El Salvador is taking some of the initial steps that would make that possible. And we just have to see; this is a multi-decade process, so you have to see how well they can stick with it.
Peter McCormack: Well I wonder how many of these countries have actually had their head held underwater anyway through the IMF and World Bank. We won't get back into that, I've covered that with Alex Gladstein, but I think that's part of the problem as well. So, when you think about Bitcoin, you obviously have a high level of conviction, as I do, as Danny does, that we've all built up over time by not only understanding Bitcoin, but understanding the problem with fiat currencies. Where do you think the risks are; what do you think are the most significant risks to the success of Bitcoin?
Lyn Alden: So, I think that there are a handful of risks. I think that as we talked about earlier, that dilution risk has always been a major risk. It's always the question of, is Bitcoin good and unique enough to crowd out everything else and to achieve a depth of liquidity and network size that makes it un-contestable? So far it's been able to do that. It's only ever really had one challenger of anywhere near the same scale; no other one even comes remotely close. And so, it's so far it's been very good in that track. The other areas are if major governments got very aggressive on Bitcoin, like if you had the United States and Europe just kind of take their gloves off and just try to go full, like just try to kill this thing as much as possible, I don't think they'd be successful, but I think they could slow it and cripple it enough that it could greatly extend. Basically, all the risks would massively amplify and the duration of the whole project would be extended.
Now, part of the incentive mechanisms, especially in relatively free societies, is that there's a lot of mechanisms that prevent that from working. When you look back at the era of America's gold ban from the 1930s to the 1970s, they did that with a supermajority. So, FDR, when he came into power, at one point in Congress, he had something like 70% of Congress was on his side. That was kind of an unheard of level of concentration of power, like a supermajority. So, that's more of an exception to the rule. It's very hard to do that kind of thing without that sort of unusual supermajority in these types of countries. So, it's something I monitor, but it's something to consider. But I think in some ways, another risk I look at is the supply chain risk. So, the fact that only a handful of foundries in the world make high-end semiconductors. This is not just a Bitcoin problem, this is a tech concentration problem, especially given current geopolitics. But one of the clever ways governments could try to attack it is going out to the supply chain and control the production of ASICs. That's one of the weak spots.
Then I think lastly, it would be things like unforeseen technical bugs that are bad enough to damage Bitcoin's reputation. So, there's been bugs in Bitcoin's past. Luckily none of them were catastrophic, either because they were fixed quickly or ahead of time. Over time, the codebase has hardened, but there's still ongoing risks of any sort of live project. And then, of course, there could one day be a quantum threat, and then there might have to be some sort of fork to make it resilient to that. And any time you have to change, that'd be considered like a shiels-down moment, you know, it's a period of vulnerability there where consensus could differ, there could be schisms, there could be challenges to make that possible. So, I think it's not a risk-free asset. It's something that has to be monitored, but that I think all the pieces are there. And I think it at least has the tailwind of technological determinism on its side, which is not necessarily to say that Bitcoin has to win, but that this kind of technology I think is in some ways inevitable, and if you kill it it'll try to keep coming back. It's something that exists now, it's out of Pandora's box.
Peter McCormack: Love it. Okay, and then what about the specific downside risk of not even failing but being slowed, and I'm asking really specifically about CBDCs? Because one of my major issues with CBDCs is that as somebody pre-Bitcoin, who was very much a consumer of mainstream news and politics and just lived in an entirely different world, I'm maybe not as hardcore as some bitcoiners, but I'm certainly more suspicious these days. A CBDC is this kind of thing that can be easily sold to people as just an evolution of the technology, better technology.
I mean, look, we went to a place today, I took the kids to a crazy golf place, and it was like, "It's card only, we are cashless". So, people are getting used to cashless venues. A CBDC is a very easy thing, I think, to sell to people who don't consider the downside risks of things like this. How much did you cover this in the book?
Lyn Alden: So, I had a whole chapter focused on the downsides and the problems of CBDCs and some of the other chapters around it were kind of adjacent to it. So, I actually kind of finished the book talking about CBDCs and then talking about human rights including financial freedom more broadly. So, that was all kind of combined together. And I viewed it as a fork in the road because as I described before, most technologies that make money easier to use have also centralised money more and more. And with Bitcoin, it's the first real opening to further improve money, but this time without centralising it. Whereas CBDCs are more like the natural evolution of the prior path we were on, which is another era of even greater ease of use, but then even greater centralisation. It's kind of in some ways the capstone of that whole trend. Basically governments have complete control top to bottom of the currency. And so I do think that's a significant adoption risk.
You kind of put that in the government ban risk, not that they would ban it, but that they would have enough taxation rules and propaganda and things like that to marginalise Bitcoin to a certain degree, or at least slow it down or contain it while they have successful adoption of CBDCs. And if that's the case, then you have a situation where Bitcoin still is a useful asset for people who really, really need it, but some of the full benefits don't get distributed because people are still kind of stuck in these fiat currency silos. And they have the continued risks of debasement and siphoning off of value towards the top, and all sorts of problematic cross border things and censorship.
On one hand, it's funny, because the more countries try to use the negative powers of CBDCs, the more they make it obvious to people why they would want to leave that system. So, it's like the worse they make their product, the better Bitcoin looks. Whereas if they make the product and it's very benign, like say the United States today or Europe today, our systems in a lot of ways suck, but they're benign enough to a lot of people that they don't see why they need Bitcoin, especially when you have Bitcoin is taxed, Bitcoin has a little bit more of a UX challenge, Bitcoin, when you factor all those things in, people consider the current system workable enough.
I've been somewhat happy with what I've seen out of like Nigeria, where they've launched a CBDC that's been very unsuccessful. It had very low adoption rates in its first 18 months. That's somewhat of an exception, perhaps, you can argue that other countries would be more successful with it. But I think it shows it's not a slam dunk, that especially if it's not used well, people can adapt pretty quickly. And so, I think there could be a period of CBDCs, but I think that every single time they try to restrict things or any inflationary period or debasement period is just going to continue to market Bitcoin.
Peter McCormack: There's so much I've skipped, honestly, but that's probably a good thing. Anyone listening, buy the book, just go and read the damn book. There's so much we skipped. Each episode we've made, we've jumped through so much because we want to try and cover as much as possible to give people the best overview. But there are a couple of things I do want to finish off on with you. I want to talk about valuing Bitcoin, but before we get into valuing Bitcoin, I think it's a really important question, but really important question not for Bitcoin holders because they're patient, but it's a really important question for people who are considering Bitcoin or open to Bitcoin or Bitcoin-curious, because I think one of the biggest blocks to adopting Bitcoin right now is somebody looks at Bitcoin, they're like, "Oh, it's $30,000. I can't afford one of those".
We all know the meme, "You could buy a fraction of a Bitcoin", but at the same time I think people worry, "Oh, I'm too late, I've missed the boat", etc. With these people, and you're explaining Bitcoin to them, how do you explain valuing Bitcoin?
Lyn Alden: It's funny, my first ever article of Bitcoin was back in 2017, and it was on this topic. It was like, "If these things are successful to various degrees, what are they worth?" And back then, I wasn't even just Bitcoin-specific, I covered Bitcoin, Ethereum, because it was kind of my one of my earlier touches with the industry. And it was like, to the extent that any of these are successful, I was like, "What would they be worth? Or what is the range? Or what kind of method of thinking can we arrive at to determine a range of what they could be worth?" And I went over a couple of different ones.
In some ways, the simplest one that I think is the most instructive is percentage of global assets or compared to competing assets. So it's basically saying, "What percent of global wealth might want to be in Bitcoin?" And another way of phrasing that is, "What percentage of your liquid net worth would you want to be in a self-custodial, globally portable asset? Even you might choose self-custody, you might not, but to varying degrees what would what percentage of your net worth would you want that in?" And I think a reasonable answer is, a lot higher than the current number. The current number is significant, but it's a tiny fraction of 1%. And so if you say, what if the answer is 5%? What if it's 10%? You get the comically large Bitcoin market capitalisations, even if Bitcoin just becomes this asset that people in general want a few percentage of their liquid net worth in.
You can also compare it to other currencies. So, you can look at their base money or their broad money and say, how big are they; how big is Bitcoin? Bitcoin has been climbing up the scale of monetary scalability, liquidity, network effects, and so it kind of keeps getting higher and higher in terms of what country's monetary base it's bigger than. And I think one idea is to think, okay, is it better or worse than those currencies overall? And therefore, if your answer is that it's better, you should expect it to probably keep climbing that stack. So, I think those are some of the ways to think about it.
Then there's obviously a problem with unit bias. So, when you see $30,000 Bitcoin, that seems expensive, whereas when you denominate it in sats, it doesn't seem expensive. That's more of a unit bias problem. I think that's only fixed with time and education. I also think it helps when exchanges or brokers give you the option of displaying it in Bitcoin or sats or even making sats the standard and then you can toggle it back to Bitcoin if you want to. I think those types of minor UX things are relevant and some of them have done that. So, I think that whole education process is so important to say, "Look, this is how few people meaningfully own Bitcoin. This is how tiny Bitcoin is relative to global assets, how tiny it is relative to gold, how tiny it is relative to major currencies. And if you study the properties enough, if you're convinced that it's a really good asset, that gap, that delta between what it could be versus what it is now, is wide enough that it's still, in my view, very undervalued compared to its long-run potential".
Peter McCormack: Okay, right, final question. When you think of a Bitcoin world, and I know you've written about this, but what I'm most interested in is not describing that Bitcoin world, but what are the changes that you want to see? What are the things that you see that Bitcoin fixes that most excite you?
Lyn Alden: So, I think starting from the obvious ones is in, say, half of the world that lives under different shades of authoritarianism or half the world that lives under places that have literally hyperinflated in our lifetimes, which is dozens of countries, people think of Weimar when they think of hyperinflation or they think of Zimbabwe, but it's happened to dozens of countries since the 1980s, and those are very populated countries in many cases. And then other countries have dealt with significant double-digit inflation. So, I think the obvious thing is that it initially serves as a portable savings asset that's also censorship resistant. That's kind of the obvious characteristic. And even if it only ever gets to that point and only ever solves that problem, that's already a huge contribution to humanity. It's basically inherently an asymmetric kind of individual empowerment technology that I think is just a good thing for the world that exists now.
Then the longer run would be that if it can get bigger than that, if it can truly crowd out other monies and start becoming a true unit of account, which I think is a long way off should we reach that point, but that's where you get the full benefits because that's where you get things like wage earners are now on equal or superior footing than wage payers because the anchoring bias is now in their favour. Even if their salary never changes, it's still appreciating in real terms. And so, like what we talked about before, if you can't easily siphon money off the top and give it to the corporations and the wealthy and the well-connected and the banks, that's an improvement. And even if you only get halfway there, like even if you don't displace currencies but you remove some percentage of monetary premium from currencies and put it in things like Bitcoin, it at least reduces the scope with which those things can occur, even if you don't reach the full unit of account situation.
I think the last thing is, because you mentioned you wanted to touch on the long-term debt cycle. I think one point worth making is that people assume that the currencies we know in, say, the United States, Europe, and Japan, that the way they have been for the past 40 years are going to roughly be what they are for the next 40 years. We kind of assume that this is like a stable equilibrium. Whereas when you look at, say, Ray Dalio's research in the long-term debt cycle, and the research I've done on it, I've done elaborate research on that for the past probably four years now, it shows that they have increasing instability in their system. They're basically designed where they get more and more public debt growth relative to GDP, and then the problem is that if they ever want to raise industry rates, as many of them have been doing now, the deficit completely blows out, and you get more and more fiscal-driven inflation, fiscal dominance, and you risk getting these uncontrolled inflationary environments. And you can kind of think of them as minor forms of Argentina.
So, like to your point, people look at Argentina and they think inflation has been ongoing so long, how do people still put up with it? It's just this structural background thing that they have to deal with. And you could reach a point in developed countries where their debt and deficits are so large and they're constantly being monetised by the central bank, then you just have a higher background level of inflation and it becomes more obvious to more people, and you get kind of emerging market characteristics in these advanced countries. And maybe it's not on the level that we see in Argentina, but it's directionally the same type of concept where it's like inflation's constantly above target, they never seem to know how to get it under control. You know, they might be able to say, okay, technology and other things are deflating the long tail of stuff, but all of the desirable energy intensive scarce assets are going up dramatically in currency terms. And Bitcoin can prevent a lot of that.
Bitcoin is like a release valve that people can turn to if they find themselves stuck in these environments that might be more inflationary in the future than we've grown accustomed to in our lifetimes.
Peter McCormack: Lyn, amazing, and thank you so much for doing these shows with us. Honestly, it's so good. Anyone listening, go and buy the bloody book. Please go and buy the book. There's so much we skipped, there's so much more information in there. Lyn, one last time, tell people where to find the book.
Lyn Alden: So, it's available on Amazon, Broken Money, and in time it'll be available in other bookstores as well.
Peter McCormack: Well, listen, I can't wait to see the book tour, I cannot wait to get my own copy. Again, just thank you and congratulations and yeah, good luck. I can't wait to see what the next book is as well.
Lyn Alden: Thank you.
