MIAMI BEACH, FLORIDA – MAY 19: Lyn Alden and Natalie Smolenski speak on stage during Bitcoin … [+]
I sat down with Lyn Alden last year to discuss questions about Bitcoin that have lasting resonance. Among them are the following excerpts focused on Bitcoin’s value and how to think about a million dollar Bitcoin thesis, and in turn how to think about Bitcoin and central bank digital currencies and what we’ve seen with the tentative launch of central bank digital currencies around the world. The transcript below has been lightly copyedited for form, but the substance of the conversation is in full. It is a partial transcript from a larger conversation.
Question: What’s the thesis behind Bitcoin’s valuation for the general public?
I think that the key thing before we get to valuation […] is what problems does Bitcoin solve? Ever since the dawn of the telegraph, the deployment of the telegraph and all other telecommunication systems that come from that, we have separated transaction speed from settlement speed by a huge margin.
If you want to settle a bearer asset with each other, like gold, that’s going to take a comparable amount of time and expense. Whereas we can 1716538408 make a transaction as easy as an internet click.
And that’s in some cases been the case ever since the late 1800s. When they invented the telegraph, they started to do Morse code transactions while still having a gold standard. And so in this century and a half plus, any fast long distance transfer involves credit- you’re going through someone’s ledger or a series of ledgers to get there. And there’s a couple of ramifications. In the modern era, if you fast forward to what the situation is now – there’s 160 different currencies in the world – actually more than that, but that’s kind of the minimum number. And each one of them is a little bubble, because they are arbitraged in the difference between speed and settlement like transactions and settlement.
And so if we think of how money flows in or out of a country, there are two main ways – one is physical ports of entry. So you can bring cash or gold through an airport but you’re obviously going to be very restricted. And you can also transfer money through wires in and out of the banking system, but of course, that’s very heavily controlled by the country.
So some countries have open capital markets, other ones have strict [capital markets], [some] have their own struggling, ever inflationary, occasionally hyperinflationary ledger, and this is not a small problem. This is dozens of countries and billions of people. Most of the developing world essentially, sometimes their fault, sometimes external things that they can’t control, but either way, people are trapped in these […] currency bubbles.
And what Bitcoin does – Bitcoin is the first method of sending a long distance value transfer quickly. It doesn’t rely on on a centralized ledger with credit, you’re going through a distributed network, you’re sending a digital bearer asset to someone that can only really be reversed with a majority miner attack, which is a different thing than credit.
And so what this means is that for example, […] you can memorize 12 words, representing your private key and bring a billion dollars with you through an airport. You can pay someone – I could hire a graphic designer in a given country and pay them with a QR code over a video call like this, or with an email or DM. So any two Internet connected points can now send value which goes around these existing firewalls.
In addition, it means you have globally portable capital. So you can have savings that you can then bring with you anywhere in a network that is globally distributed and has a hard cap supply of 21 million coins.
[Bitcoin] has the most liquidity, decentralization, and security among other cryptocurrencies. And so that has macro consequences – it solves a problem for some people that maybe those of us in the United States aren’t fully aware of – in terms of global scale, that’s a huge total addressable market.
In addition, stablecoins do a similar thing, at least for weaker countries- so the United States can have dollar stablecoins or Switzerland can have gold stablecoins or even an entity like Italy could issue dollar stable coins as a eurodollar. And basically, they can pierce those assets into jurisdictions like Argentina or Lebanon or Nigeria or any other currency problem jurisdiction where people might want to hold those assets. And those are centralized but they’re in a different hub. So whether it’s fully decentralized like Bitcoin or at least geographic arbitrage like these others, this is a relevant new technology.
And so the total addressable market of this is basically any percentage of your net worth that you might want to have in self custody and globally portable – why wouldn’t that be a few percent at least. When you run the numbers on that on 500 trillion plus in global assets, it’s not hard to hit numbers like a million dollar per Bitcoin because it’s still a tiny percentage of global assets. And it’s a scarcer asset than gold in terms of supply growth, and it’s portable.
And so the main question comes down to can anyone find a way to tactically disrupt this network, can anyone find a way to break the incentive structure and centralize this network? Can someone make a better network that does a similar thing more efficiently? And if the answer is no to those things, the longer time goes on, we kind of test all these different things, then it’s natural that it’s going to keep getting market share unless one of those disruption events happens.
Question: What are your thoughts on central bank digital currencies?
We delineate between the strongest nations and most other so Nigeria has actually been probably the most active case study and what happens when you try to launch central bank digital currency.
So they’ve launched the e-naira – a handful of years ago, [and] they’ve had very low adoption. And that was accompanied with cutting off crypto exchanges from their banking system. So it’s not illegal to own digital assets in Nigeria, but it’s purposely harder to do so. And they tried to restrict physical cash. They’ve launched the e-naira – and yet Nigeria is one of the highest jurisdictions in terms of adoption rate for digital assets. This is from Chainalysis – they don’t really segment asset by asset but a lot of that is Bitcoin and stablecoins and the long tail of other things. It is not a guarantee that when a central bank digital currency is launched, it just wins because the naira is inflationary so the e-naira is also inflationary. It comes down to that country’s inability to maintain a ledger and the willingness of those people to seek alternatives.
Now entities like the United States or China, or the European Union, or Japan, they have a lot more firepower to have a more successful central bank digital currency launch, and then it comes down to their different rules of law. So the United States has numerous kind of legal checks and balances that could slow down the launch of a central bank digital currency or the unwillingness to do so.
Whereas China being more centralized has been ahead of the curve in this and so if any country’s gonna be successful, in terms of having a high adoption of a central bank digital currency and fairly low adoption of things like Bitcoin or external stablecoins, it’s probably going to be places like China.
The way I look at it, anything that China has trouble banning has a degree of power to it. So China has quote unquote banned Bitcoin and Bitcoin mining a number of times. If they banned a centralized network, it’s just one and done, where if they ban Bitcoin, it’s like Groundhog Day – it keeps coming back. And it was kind of remarkable to see the 2021 China Bitcoin mining ban because they had previously done that a number of times before and it really stuck this time. This time they actually kind of went to the mattresses on it, and it stuck. So you saw half the network offline in about a week. And if that happened to Microsoft or Amazon and they were told you have to move your server infrastructure internationally next week, they would have major disruptions for months with their services, whereas the Bitcoin network had 100% uptime, it slowed down a little bit. After a week or two that difficulty adjustment kicked in, and it went back to normal operation.
And then over the next several months, those mining machines dispersed around the world to wherever they could get cheap power in a reasonable jurisdiction. A lot of it was North America, but also elsewhere. So the network’s actually more decentralized now. And then, ironically, after a little while, some of it reemerged in China – China is still the top second or third jurisdiction for Bitcoin mining, even though they attempted to ban it. And so that just shows sticking power. So I think there will be a period of time where Bitcoin coexists with some powerful central bank digital currencies.
But the easier it is for information to spread and the bigger that Bitcoin gets in liquidity, it should eventually reduce its volatility. Because no entity in the Bahamas can leverage it and play games with it, it becomes more widely dispersed, more liquid overall, and eventually, it becomes increasingly untenable to try to run inflationary currency against Bitcoin, especially because it can pierce borders. But again, some jurisdictions can really push back on it for a lot longer than some of the weaker jurisdictions can.
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It’s clear that Bitcoin’s place amongst tentative or lagging central bank digital currency launches is growing stronger. Originally designed to hedge against central banks controlling all currency, it’s clear that Bitcoin presents a viable alternative, one that carries with it plenty of financial upside. Other than Nigeria, perhaps no country has been more aggressive at launching a central bank digital currency than China’s digital yuan/e-CNY, yet adoption is lagging even there. The Human Rights Foundation has launched a CBDC tracker to track progress around the world. Its Chief Strategy Officer, Alex Gladstein put the thesis as follows: “In a world where CBDCs can be blacklisted, calorie-counted, set to expire, frozen on demand, and inflated away, a currency [“Bitcoin”] that is invincible to all of these things will be very valuable.”
