Pierre Rochard (Kraken, Noded Podcast, Nakamoto Institute) and Saifedean Ammous (Bitcoin economist and author of The Bitcoin Standard) join me to talk about Bitcoin as Savings Technology and Number Go Up technology. This point is often misunderstood, so listen in for discussion on:

Cash balance

Savings technology

Number Go Up

Stock to flow

Lightning and Bitcoin developments

Pierre Rochard Links:

Saifedean Ammous Links:

Sponsor links:

Stephan Livera links:

Podcast Transcript:

Stephan Livera: Pierre and Saifedean welcome to the show.

Pierre Rochard: Thanks for having us.

Saifedean: Thank you for having us Stephan.

Stephan Livera: All right, so we are in Pierre’s house. And, I was initially just going to record this just with Pierre. But, Saifedean was around and obviously Saifedean, you’re more than welcome to join. I was really keen to hit this topic of savings technology. It is a very misunderstood concept. And, I think it ties in as well around this idea of what is a cash balance, and how has that been abused or changed in today’s world. So, do you want to open it up Pierre? What, is a cash balance? As, the Austrians would explain it.

Pierre Rochard: Yeah. So, it really represents the non use of a resource. And, that I think is the economic fundamentals of holding a cash balance. And, what it does is it builds into the economic system. First of all, your ability to impact prices in the marketplace is increased, when you have a cash balance. Which then allows for a reallocation of resources towards something. So, one example would be like if there’s a hurricane that happens.

Pierre Rochard: And, so people spend down their cash balances that they were holding. Because, they were holding those, in anticipation of any kind of event. And you hold it because of uncertainty, for unexpected events. Which, are going to be negative cash flows. You want to be in a position to be able to, in this case rebuild after a hurricane. And, so then when people are able to spend money on construction supplies, the costs or sorry the price of construction supplies goes up. And, then the whole economic structure, reallocates production towards this end. Because, now we have an increased need for it in the real economy.

Pierre Rochard: And, so that’s the, to me, the fundamental use of holding a cash balance. Is to self insure against these kinds of unexpected economic events that happen. And, there’s been like a deliberate policy, on the part of central banks. To suppress that because, they actually want people to bring future consumption and investment forward in time. So that, it makes GDP Number Go Up. And they get reelected and they have a popular mandate or whatever.

Pierre Rochard: And, so it causes all sorts of, it makes the economy much more fragile. When people are holding a lot less cash, than they otherwise would. Because, this is why there’s like financial panics essentially. Is that, there’s not enough cash in the system, because people weren’t making, deliberately they were making the decision not to hold it. Instead, they were invested in these pyramid schemes, that were built up by Wall Street.

Stephan Livera: Right. And, so there was an unsustainable boom. And that’s the theory. Now Pierre, I know you and Michael had been big on this. I’ve been sharing that article a lot, which is that Hoppe article. The Yield from Money Held Reconsidered. Which is like …

Pierre Rochard: Yeah, so this is like a very big debate within monetary economics. Is, like what is the utility of holding cash? And, so this is where I hand it off to Saifedean.

Saifedean: Yeah. I think obviously I agree with you. That the utility of holding cash, ultimately the reason people need to hold cash is because of uncertainty. So, if you knew and Mises says this, I think in Human Action. If you knew about all of your future expenses, and when you would expect them. Then you would never need to hold money. You would just tying them in a way in which your income is immediately spent.

Saifedean: But, of course we don’t know the future, and the world is uncertain. And, so that’s why money is a useful technology to have. It’s optionality, you’re able to use it to your advantage. Whatever the future brings, whatever you want. But, I think the other thing that gets forgotten about this, thanks to all of the horrible Keynesian propaganda. That is trotted out at universities and media.

Saifedean: Is, the fact that savings is the precursor step to investment. Logically, and in terms of financial planning, and also conceptually. Even at the very primitive way of trying to understand how these concepts work. First thing that needs to happen before an investment takes place, is; you need to defer consumption.

Saifedean: You need to abstain from consuming resources, that you could use to satisfy your needs now. But, then you decide to defer the consumption until later. Which, frees up the resources from being consumed, and then can have them utilized in investment.

Saifedean: And so, at the very, if we can think about it at the very simple level of imagining growing grains. You first have to not eat the grains in order to put them into the ground, and grow more grains. So, the saving is the first step toward investment. And, the way that it would work in a normal, healthy, free market economy. Is that, the hardest asset gets chosen as money.

Saifedean: People use it when they want to provide for their future self. So when, you’ve earned enough money that you can meet your most pressing needs right now. And, can afford to start thinking about your future, then you resort to storing value effectively in money.

Saifedean: Effectively, it’s a way for providing for your future self. And, so the harder the money is, the better it is at transferring value to the future. The less the uncertainty, associated with it in the future. The more you are likely to save, the more you are likely to provide for the long run. And, that in turn lowers your time preference.

Saifedean: And, then the more savings you have, the more consumption you’ve deferred. The more resources you have available for you, to be able to engage in investment. And, if we want to think about it in a sense of financial planning, initially you save some money that is there. Always in the most liquid form, in four or six months expenses. Or, one or two years expenses. That you could always have to fall back on, in case you needed it.

Saifedean: And, then once you’ve had that secured, once you’ve been able to save up that amount. Then you can have more money, that you would then take and invest. That’s money that you would then take risks on. So money, is supposed to offer you no yield. It offers no return, it offers only the ability to hold onto its value. So, it has the least risk. It has no return, but it should at least have the least risk.

Saifedean: And, the best ability to hold onto the value of the future. So, it’s a way, for you to hold onto value into the future. Rather than a way to take on risk, which is what investment is. So, investment comes at a secondary stage, but in our current GDP Number Go Up, obsessed economy. We are obsessed with just bring number up, number up, number up.

Saifedean: And so, of course you have the entire political and economic media, industrial complex. Constantly haranguing you about the need to invest, invest and put your money out in the financial system. Which, essentially makes it so that, everybody needs to be investing in order to stay, in order to hold onto their value. And, it makes it so that the ability to save value is in the future, becomes something that requires significant amount of expertise and market timing.

Saifedean: And, following geopolitical events, and so on. And, that’s just something that’s not available for the majority of people, who don’t have the ability to do that. Either it’s because they’re too young, or too old or they have other things to do with their life. Than keep following MSNBC’s, latest round of talking heads.

Pierre Rochard: I think that it leads to an effect where there’s a stronger and stronger separation. Between the financing of companies, and entrepreneurial-ism. And so, the kind of the logical end of it is this index investing passive portfolio approach. Of, like just invest without any kind of entrepreneurial calculation. You’re just putting money into a vehicle that, or you’ve given up on life in a way.

Pierre Rochard: But it, that I think has really happened. Because, of what you were describing with, in the fiat system being disincentivised from saving. If, people saved more and then only invested in a way that was tightly coupled with entrepreneurialism. Where they’re starting their own company, or they’re investing in a friend’s successful company, and it’s like a much more like, it’s not based on trying to passively make money essentially.

Pierre Rochard: It’s an active partnership type setup, where equity makes more sense. And, at this point, there’s this just strong separation in the agent principal problem. Between management of companies and shareholders, where it’s not even clear that like the returns that people talk about on the stock market. Obviously they’ve been very high, because of Fed pumping lately. But, if you go back historically, the risk return ratio is not attractive. Especially when you compare it to Bitcoin.

Stephan Livera: Right. And, look bringing it back to Bitcoin as well. So, this savings technology idea. That, I think Pierre, you’ve really done well to popularize that idea. Because, I think sometimes people got it a little bit twisted in the past. And, they thought of it more like, “oh, it’s a payments technology.” And, it is that also, it’s just that they haven’t, there’s been almost over-focus on payments. Do you want to expand on that?

Pierre Rochard: Yeah, everyone’s default Keynesian. And so, by default they’re going to be like, “Hey, this system needs to have utility. With payments, and then that will drive demand. So, then the number will go up.” And, that’s the default basic approach to Bitcoin. And, when you read Satoshi, and when you like, I’ve written things that were like, if you kind of looked at it through the right angle and right lens. You might be like, “hey, Pierre’s kind of making that argument as well.”

Pierre Rochard: And so, then there’s the supply argument. Which, we can get into later. But, I think that, yeah. Having the default Keynesian approach, and then no one really thinks about savings anymore. Because, the system has become so effective at absorbing people’s savings. So, like now you get, it started out with just like bank deposits. And, then it became like money market funds. Like now, money market funds are guaranteed to be a dollar.

Pierre Rochard: And, they’re not going to break the buck. But, really, the amount of the financial system, that’s a 100% reserve essentially. Because, the US Treasury will print as much or the Fed will print as much, as many dollars as possible to guarantee. You’ve got the whole bond market. And so, the whole, to me the whole bond market is part of the money supply. Because, it’s all would just instantly get monetized under any kind of stress scenario, QE style.

Saifedean: Yeah. I think the thing is that the promise of fiat money, was that we could just keep stimulating the economy. And, making it grow faster. And, numbers can all go up, and everybody will be happier.

Pierre Rochard: And, bailing out the fractional reserve banks.

Saifedean: And, bailing out the banks of course, and doing all of those things. Then, fighting Wars abroad and bringing democracy to people all over the world. And, doing all of these things that won’t have any actual real cost. Because, it’s just, from the magic Keynesian machine. That just generates economic value by printing new money. But, of course the real cost has always been either in the inflation, or the cost is reflected in the dropping of the value of the money.

Saifedean: And, so the way that they tried to fix that is initially to make it so that you know your checking account was guaranteed to be making money. And, that the government will guarantee your checking with something like the FDIC. And, that you’d be making 2, 3, 4% whatever, which should compensate you for the inflation.

Saifedean: So, that way we get to have the free lunch of stimulating the economy with the Keynesian voodoo. But, also not robbing people’s bank accounts. Because hey, you get your magic FDIC guaranteed 3, 4, 5%. So essentially, they tried to square that circle. Or, they tried to run this perpetual motion machine. Where, we can have the-

Pierre Rochard: It’s a proof of stake system.

Saifedean: Yeah, it’s exactly like those shitcoin scams. And, we can have the inflation, the benefits of the inflation without paying the costs. But, that led to all of the speculative activity from banking. To go from the narrow banking system to the shadow banking system. Which, effectively functioned as a casino, without explicit Federal Reserve guarantee. Which then have to become an explicit, or I mean at this point it’s not really explicit. But it’s a de facto guarantee from the Federal Reserve.

Saifedean: So now, we’ve extended it to the point where essentially all of the shadow banking system, is gambling with the same amount of money. And, it’s just, you’re constantly devaluing the money and offering people returns. And, if this does work out in the sense of, well maybe returns beat the devaluation and money. I think what people are missing is A) how much of the money is devaluation is happening outside the US. People all over the world who are holding US dollars, who are not intimately plugged into the Feds fountains of printers. And, so are not getting that sweet Cantillon effect at the –

Pierre Rochard: They’re probably paying fees to have an account open. They’re not getting paid interest, and with a free account.

Saifedean: Yes. And also, that also includes all the central banks, that watch their dollars get devalued. All over the world, and that devalues their national currencies. All of it is essentially, fueling all of these speculative bubbles, which the Fed has to guarantee. And so, ultimately you look back and you say, “we’re running all of this circus for Number Go Up.” In order to keep up the pretense that inflationism works.

Saifedean: And, to make sure that the value of the money doesn’t drop. But, all of that can be replaced with a hard monetary asset. None of these stupid games were being played under the gold standard. Because, the money itself held onto its value or appreciated by 1 or 2% every year. And, that’s fair. Well fair has nothing to do with it. But, that’s just what a free market provides. That’s what people will figure out on a free market.

Saifedean: They’ll figure out that there’s something, could be a shiny yellow rock. Or, it could be an orange digital coin. But, there’s this something that is very hard to make and it allows you to store value into the future. And, have, and expect it to appreciate slightly or to stay the same. Without much threat, of its value going down because of inflation.

Saifedean: That revolutionary technology is called money. And, if a startup were to be coming up with something like this. That just guarantees you better turn without you having to finance a giant parasitical financial and military industrial complex. To keep it running. I think that startup would make a killing, but fortunately it’s not a startup. Bitcoin does it.

Stephan Livera: That’s right. And so I think, with Bitcoin and this concept of savings technology, and one thing that we can see over time. Is some of these other cases, might get taken by say, stablecoins. For example, if someone wants to just have purely fintech and payments technology. They could use like some stablecoin. But, ultimately what they’re missing and what they can’t get anywhere else, is a money that is outside of that control.

Saifedean: It’s what I like to call the underlying technology behind Bitcoin, Number Go Up. It’s, people have thought that it was blockchain technology. But, I think that was a nice camouflage. But, really the underlying technology of Bitcoin, that’s it is just the Number Go Up. It’s, everything else can try to Number Go Up, but they can’t copy it. Because there’ll always be an incentive for people to make more of it, or more and more like it. But-

Pierre Rochard: The moment Number Go Up, starts happening for another coin. They’re going to find ways to create more. And, to somehow-

Saifedean: Exactly.

Pierre Rochard: Create forks and whatnot and dilute it.

Saifedean: There’s no coin that’s going to be able to resist the political pressure, that was put on governments to get off the gold standard. And, join the shitcoin circus.

Stephan Livera: And, it’s sort of like the Julian Simon argument of how if something is really demanded, people will find a way to make more of it. But, it’s just that Bitcoin has a way of resisting that tendency. And, I think that’s the way to maybe summarize that point.

Saifedean: To be fair it’s the difficulty adjustment, that’s the formal name of the Number Go Up technology.

Stephan Livera: Yeah. So, let’s bring it now to this concept. Because, now some people in, I guess there’s different arguments to put around here. So, some people might say, “oh look, but if it’s constantly Number Go Up, nobody will spend.” And, now that’s one of the arguments that’s going now about this idea of this so called circular economy. Now, Saifedean I think it would be great for you to touch on this idea. Is the circular economy, something that should be encouraged right now? Or, is it more like people can just HODL until they feel comfortable to spend?

Saifedean: Generally this notion that you need to spend, because of some sort of obligation to the rest of the world is just ridiculous Keynesian nonsense. You spend if you need to spend. If you think that the value of the thing that you get from the money, is better than keeping that money for another day. And, then reconsidering. And, that’s a personal decision that every person needs to make on their own. And this is, I find it silly how people discuss it on the internet.

Saifedean: As if there’s a position to be taken. That you’re either on the category, you’re either on the side of people who think that you should be spending. Or, the side of people who think that you shouldn’t be spending. And, the answer is; you spend when you want to. And,, it’s your own choice. And, that’s kind of the point of what money is, and what Bitcoin is. You decide based on your vision, of what you expect to happen in the future. And, the uncertainty that you attach to it.

Saifedean: You decide when you want to spend, and when you don’t want to spend. And, I think this is really ultimately what, how things will work in this notion. That if we just sacrifice our own convenience, by spending more Bitcoin. And, trying to go out of our way, in order to continuously replenish and spend. You’re just essentially paying more fees, to inconvenience yourself.

Saifedean: And that’s, if Bitcoin needed us to be doing these kinds of financial activism, in order for it to work. Well, it’s not going to work. If it had to count on this, it’s not going to work. At fortunately, the Number Go Up technology underlying Bitcoin, doesn’t require you to engage in these activities in order for the technology to work. In fact, what really matters is for Bitcoin to continue to grow and succeed.

Saifedean: For me, it’s the issue is; the size of the cash balances. What Pierre was mentioning earlier, in Bitcoin needs to grow. And, that’s just the way in which people will start to spend more Bitcoin. At this point, about 0.1% of all the world’s money supply, or 0.2% of the world’s money supply is in Bitcoin. Which means that when you’re trying to trade with somebody else, when you’re trying to exchange goods or services with somebody else.

Saifedean: The chances that they also want to trade Bitcoin with you, that they have a cash balance in Bitcoin. That allows them to take payments in Bitcoin, or to make payments in Bitcoin. Is roughly in the order of 0.1 or 0.2%. And, that’s why it’s far more likely than when you want to transact, you’ll be able to find people that are going to be wanting to transact with you in fiat currencies. And, that’s fine.

Saifedean: That’s just the economic reality that you need to deal with. And, I think it’s really counterproductive if Bitcoiners think that, we need to preach and harangue to people. Or, harangue people to act against their economic interests for them to work. What needs to happen is that the size of those cash balances, increase. And therefore, the possibility that you will run across somebody else who’s willing to spend Bitcoin or receive Bitcoin continues to increase. And, that’s just not something that can happen overnight. It’s not something that can happen over 10 years.

Saifedean: And, it’s incredible that in 10 years we’ve gone to from 0 to $150 billion, of cash balances in Bitcoin worldwide. It’s absolutely astonishing that people have made this much room, in their cash balances so far in only 10 years. But, it’s going to take a lot of time for this to grow. I don’t know how much time and the way that it’s going to increase, is people growing those cash balances. And, having more chance to have trades where there’s liquidity. Where they find people who also are able to trade with Bitcoin. That’s ultimately what it’s going to come down to in my opinion.

Stephan Livera: Well stated, Pierre did you have anything to add?

Pierre Rochard: Yeah, I think that until the end, the most liquidity is going to be between fiat currencies and Bitcoin. And, between Bitcoin and goods and services. And, so until fiat currencies do collapse, in the tail end of hyperbitcoinization. And so, ahead of that, we want to be, first of all, scratching your own itch. Like I think that, there’s a lot of people who are intrinsically interested in understanding of the underlying blockchain technology.

Pierre Rochard: And, enlightening and whatnot. And, wanting to contribute to that, because they just find it interesting. From the same way that people build Linux open source software. And, I think that, that also is good. Because, when we’re in this future state where, we don’t need the legacy payment rails anymore. We want to be using a really robust open source system.

Pierre Rochard: That caters to our needs, as consumers. And at that point, we will be able to spend down our cash balances, in the most convenient and liquid way possible. And, so that’s why I think that, and the other part though. Over time is that there’s a wealth effect. And so, people who got in really early and now their cash balance, as a percentage of their balance sheet.

Pierre Rochard: Has grown to a percentage of like 99%. And, they’re like, “okay, I need to rebalance here. Because, first of all, it would be nice if I had a little bit of a bigger house, or go on a vacation or whatever. And, so we’re going to see, and we have seen. And, journalists write about this as a negative of like, “oh, these old HODLers, these whales, they dumped on retail.” In 2017, they dumped $6 billion worth of Bitcoin or whatever it is.

Pierre Rochard: And, to me it’s like no that’s passing the baton. Like there’s going to be successive waves of people who get in, and then eventually they’re rebalancing and rotating out. Now, hopefully not too much, otherwise they’ll miss more upside. But, that’s just the way marginal economics works. What’s people’s marginal propensity to consume and invest and save? And, that’s just an equation, in everyone’s brain that’s subjective.

Saifedean: Yeah, exactly. And, I think also the other side is that; as Bitcoiners begin to interact with more and more Bitcoiners. And, the number of Bitcoiners increases, you’re more likely to run into people who are already Bitcoiners. And so, particularly for people who work in the Bitcoin space, who produce things related to Bitcoin. In my case for instance. In my website, I accept Bitcoin because a lot of my readers are, and the people who buy my courses.

Saifedean: A lot of these people are already Bitcoiners, and so it makes sense for them to spend some of that coin. And so, it makes sense for me to accept it. But, I don’t think it makes sense to be evangelical and missionary about it. It’ll make sense for somebody to spend their Bitcoin, when it makes sense for them to spend their Bitcoin.

Stephan Livera: Right. Yeah. And so I think one point, it’s Saifedean, you’ve got to leave us?

Saifedean: Yes, unfortunately I have to leave.

Stephan Livera: So, do you want to just quickly … yeah unfortunately. But, do you want to just a shout out where listeners can find you as well before we let you go?

Saifedean: saifedean.com is my website. It’s where I try and keep all of my focus. And, all of my work, these days. So, now I’m offering courses in economics, in Austrian economics. And, you can buy some of the previous courses and get some new ones. And, also some of my research papers, and you can also find all of the translations of my book. And, where you can buy them from. Thank you so much for having me, Stephan.

Stephan Livera: Thanks Saifedean.

Saifedean: Cheers, and thank you for hosting us here Pierre.

Pierre Rochard: Yeah, sure thing. Come back here.

Saifedean: Thank you I will.

Stephan Livera: All right. So Pierre, we’re carrying on with you. We’ve got another topic I was really keen to hear. And, I think it would be good to touch on, which is obviously not obviously. But, stock to flow. Because, there’s been a lot of discussion online, is it priced in? Is it not priced in? But, I think the first point as well, is also just to discuss, obviously if you’re into Austrian economics.

Stephan Livera: You’re talking more about Praxeological application, deductive reasoning. And, you’re not necessarily as into statistical understandings of economic law. But, how do you square that circle, in terms of not being a deductive reasoning, around stock to flow modeling?

Pierre Rochard: Yeah. I think that the Bitcoin BTC influencers, have become a price cult. And so, they’re taking this stock to flow forecast here, and staking their reputations on hitting these lofty price targets over time. Based on some crank math, and it’s all going to fall apart very soon. Now, more seriously. I think that to me the interesting question really is; what, is it correlation or is it causation?

Pierre Rochard: And, at this point I like the idea that it’s correlation. And, the essentially you have positive feedback loops that are all happening pretty much simultaneously. And so, because we are able to, because two of those feedback loop numbers are public. Which is the price and the stock to flow, that we’re able to see this relationship. If, we were able to get other metrics as well, maybe people’s price expectations.

Pierre Rochard: If, we were able to extract that from people’s brains. So, if like where do you see the price going in the future? We will be able to see similar relationships. But, and it’s actually, it’s one of Bitcoin’s fundamental properties. That we can actually see, one of those numbers. Which, is the stock to flow ratio. And so, that also sets it apart from even gold.

Pierre Rochard: You can’t see gold’s stock to flow ratio. You can’t see it for fiat certainly. And so, there’s … yeah, it’s kind of unique. Because people talk about also like, “oh, because of Bitcoin’s public on chain data. We’re able to do analytics on transactions, that we weren’t able to do before.” And yeah, true. But, this so far. Quantitatively, is like the most interesting one that’s been found on on chain data.

Stephan Livera: Yeah. And, the other interesting part is also not necessarily prediction. But, just trying to understand, why has it been accurate up until now?

Pierre Rochard: Yeah. I think that even if the forecasts are wrong. And, that something, the correlation fundamentally breaks down. And, the parameters change and it destabilizes, you still would have 10 years of price history. Where there was that correlation. So, you still actually have historical. And, it’s important to understand that Praxeology and history, are different fields.

Pierre Rochard: And so, when we’re talking about quantitatively what has been the relationship between stock to flow and Bitcoin’s price. That’s history, that’s not Praxeology. And so, there’s nothing wrong with using publicly available data to run a regression and to see this statistical relationship. I don’t see that contradicting Austrian economics, because it’s actually just, it’s completely in line with Austrian economics.

Stephan Livera: Right. So, let’s split it up then a little bit. So, if we were to say one part of this is Praxeology, would you say something like; the idea that humans will chase towards an asset with a high stock to flow ratio. Maybe that’s more on the Praxeology side, and then the actual specific price numbers. That’s more on like we’re not dealing in Praxeology in that field. That’s more in relation to analytics, and modeling, and prediction.

Pierre Rochard: Yeah, so I think so, and I think that the Praxeological approach. I think that there’s a lot we have not explained yet. Of, because this has never happened before. There was a lot of work done by scholars, Austrian scholars. Explaining the transition and the breakdown of the gold standard to the present fully fiat world standard.

Pierre Rochard: And, Murray Rothbard wrote, What Has Government Done to Our Money? There’s been lots written about this, and an analysis done of how did this happen. By what causal mechanisms? And, so there hasn’t been that scholarship for, how is it that Bitcoin was able to grow in liquidity so quickly. That’s not something that has really been studied.

Stephan Livera: With stock to flow. You could almost argue that it really focuses very much so on the miners. And, how much are the miners selling. And, I think Parabolic Trav may have commented on similar kinds of ideas around this. And, he was saying it’s almost like, there’s not necessarily a big whales that were out there selling lots of coins. Who are the people who have a lot of coins? It’s miners. And, then who are the people with a lot of expenses. It’s miners. What’s your take on that? And, is that why stock to flow potentially has been kind of accurate?

Pierre Rochard: Yeah, I don’t have a view on it honestly. Because to me that’s just too granular of trying to figure out chicken and egg problems. Because, there’s so much reflexivity and circularity in these causal mechanisms in Bitcoin. Because, it’s a self-balancing system. And so, it’s very hard to isolate. Like to me what is actually driving, whether it’s the price or people’s educational process.

Pierre Rochard: And, this mind virus that is spreading among us. Like, I would argue that it has been way more impactful than any virus that’s happened in real life. And, it’s sticking around. People are like, you don’t see people being like, “ah, I used to be interested in Bitcoin. But, now I’m not into it anymore. I lost interest.” You see people who actually start out with very little interest in it.

Pierre Rochard: And they’re like, “ah, my cousin told me to throw like 500 bucks at it. And, now it’s like 50 grand worth or something.” And, then they get interested in it at that point. And, that’s just going to continue to happen. And then, there’s the underlying properties.

Pierre Rochard: Seizure resistance is huge, censorship resistance is huge, being permissionless. And, there’s going to be a continued trend of de platforming. So, by payment processors around the world for all sorts of different stuff. So, that’s going to continue to happen. And, that’s going to drive also a lot of the transactional demand on it.

Stephan Livera: Right? Yeah. So, it’s almost like there’s just too many different factors all at play. There’s too many variables in the air, that you can’t really seize on one of them and say, “okay, that’s the most important one.” And I think, let’s bring it back to one of your favorite topics. Liquidity. So, one way to understand a potential money candidate, if you will, is how salable, how marketable is it? And, I think in modern parlance and finance parlance, we would know that as liquidity. So, what’s your view around that? And, how that develops over time?

Pierre Rochard: Yeah, so I think that it started, so Bitcoin’s liquidity started at zero. And, Hal Finney was the first participant. Right with Satoshi? He’s the first one to receive a transaction. I don’t think he paid anything for it. But, and it also, it was trading against the cost of electricity and compute at the time.

Pierre Rochard: And, so it started out nil and then built up from there. And, I think that the, the way that it was able to build up this liquidity, is what Saifedean was talking about earlier. Which is that, the unforgeable costliness that insurers it’s scarcity essentially. And, that’s to me like what was driving the whole thing. What was the question again?

Stephan Livera: And, I was also just also interested to ask about your thoughts on, where we are now with liquidity and with [inaudible 00:35:44] compared to say this time in like 2015 and 16. Where are we now today? And, then what’s the reflection for the coming year or two?

Pierre Rochard: So, I remember having conversations about how quickly financial institutions are going to get involved with Bitcoin. And, now we have $600 million being traded in 24 hours on regulated US commodities exchanges, and futures. And so, that’s something that I would never have guessed as happening so soon in Bitcoin. And, people don’t talk about it very much. It’s like not early, but they don’t understand the depth of liquidity that now exists for Bitcoin.

Pierre Rochard: And yes, the price moves around a lot for sure. But, you’re able to buy and sell in size at any point in time. And, not really move the price all that much. And, so I think that people who are managing a lot of money, they’re starting to actually see this as being big enough to pay attention to. And, that’s why people think that liquidity is like a zero to one thing.

Pierre Rochard: But, really it’s a one to n thing. And so, the network effect of it is huge. And it’s very, that’s why the US is able to abuse its position. That’s why it’s able to inflate so much, is because it has this tailwind behind it. Of having this dominant network effect, being the global reserve currency. And, so the same thing I think is going to apply for Bitcoin as well.

Stephan Livera: Right. As it builds over time. And, do you think we’re going to get really surprised to the upside? In say a year or two if we hit another, 2017?

Pierre Rochard: I think that there still needs to be a lot more infrastructure in place. Before we really start getting surprised, by Bitcoin price movements. A lot has been built, over the bear market. And there’s also, on the technical side, technical upgrades happening. And, they’re, I’ve always been skeptical of this.

Pierre Rochard: But, you hear people talk about how SegWit activation helped Number Go Up in 2017. And, I personally don’t buy it. But, I know that some argue that, that’s the case. And so, they think that like Taproot is bullish. I, don’t subscribe to it though. I just want to put it on the table.

Stephan Livera: And, look from a lightening perspective, what are you most excited about? What are you most keen to see happen?

Pierre Rochard: Yeah. Well so, I guess this is both on chain and lightning. But, I want to see on chain fees go up. I want to see full blocks. I think that Luke was right, and we should have lowered the block size limit. The block weight limit, because right now, it’s one Satoshi per byte. It’s not interesting. So, I think that we would see more lightening adoption. Now, on the other hand, I think that there’s a lot of developer work that is ongoing on lightning.

Pierre Rochard: And, so maybe it’s not ready for some kind of like mass market adoption just yet. Because, there’s still fundamental work that needs to be done and you know, Square Crypto is funding their lightning development kit. And, so you can see that there’s progress there. And, every time you look at the latest release of LND or C-lightning, there’s a long list of improvements that have occurred. So, that’s just going to continue happening.

Stephan Livera: It might be fair to say we have to get to a point where the user, most users don’t really know whether they’re spending Bitcoin or lightning. From their point of view, it’s just scan the QR and pay, right?

Pierre Rochard: Yeah. I mean you should have like three things on your screen. Your balance, a send button and a receive button. And, that’s it. That’s all you should really like know or care about. Because that’s all you’re doing with money. Is your just sending, receiving and holding it. And, it should also just kind of be tightly integrated, where if you’re a small business owner, from your phone, you’re able to connect to your BTCPay Server.

Pierre Rochard: In a very convenient manner, to where like, if you’ve got a company expense that you’re going to go pay for. You can easily do it from your phone. So, all these projects are just making leaps and bounds. In terms of how easy they’re going to make it to manage your UTXOs. By building layers and layers of abstractions. And yeah, it’s just a lot of engineering work.

Stephan Livera: Yeah, right. And, we’re starting to see that now with things like Phoenix where the channel management is done in the background. Or, things like RTL. I know Suheb and the team are looking to try and have loop in and loop out built into RTL.

Stephan Livera: So that, the merchant can quickly manage the channels more easily as well. So, I think these are some examples of multi-path payment as well. That helps you route in a way without having to worry about individual channels, and just kind of route from your overall balance.

Pierre Rochard: Yeah, that’s going to make it a lot more capital efficient. Something else I was thinking about on capital efficiency was, I heard from someone that one of the disadvantages of lightning is it’s like a prepaid system, right?

Pierre Rochard: And, so you’ve got to put money in, to be able to move money around. And, so their view was that it’s a disadvantage because there’s a cost of capital, and there’s an opportunity cost. And so thus, people are not going to want to use lightning and it’s not going to be liquid enough. But, I think that, that’s like a inflationary fiat view of a cash balance. Because, it’s okay to have a cash balance on lightning, if you’re going to have a higher cash balance anyway.

Pierre Rochard: Because your cash balance is increasing in its purchasing power, not decreasing. And, so I think that, that problem is probably overblown and that if anything, there’s going to be an excess of coins in lightning. And, that’s currently what we see, right, LNBig? , There’s probably a disproportionate amount of capital. Now, maybe if it was more efficiently distributed, then we could have faster payment routing, and fewer failures and whatnot. But, in any case, I think that then, when on chain fees start going up, that’s when it’s going to get interesting. And, that’s what I’m waiting for.

Stephan Livera: Right. And, I think it’s a fair point you make because right now many people on lightning. We’re still not really doing lightning channels and our fees on an arm’s length basis, let’s say. We’re just kind of doing it in like a hobbyist way. And, I think to your point, it’s when Bitcoin on chain fees rise, that’s when people will really start to actually account for that more.

Stephan Livera: So, you can see some people now today. Like someone like Alex Bosworth. He’s probably got a more efficiently run node, which actually does make back some fee revenue. Compared to most other people. Because, he’s actually really actively managing it, and balancing his channels and so on. Whereas the typical lightning user today, might not be doing all of those things. Or, it’s not automated enough. Is there anything else you’re kind of excited for in terms of the more Bitcoin world as opposed to like lightning specifically?

Pierre Rochard: Yeah, I think that the part that I’m recently have found to be fascinating, is the idea of Bitcoin as collateral. And, by no means am I the first person to look at or think about this. But, and there are companies that have built excellent products around it, including Kraken. Kraken, you have Margin trading, is basically using Bitcoin as collateral.

Pierre Rochard: And, you’ve got companies like BlockFi, people always bring up Celsius. Although I don’t like them, because their CEO’s a shitcoiner. And, there’s Unchained Capital here in Austin as well. Where basically, because we’re using Bitcoin as savings, and we’re also living in this fiat world.

Pierre Rochard: That it makes sense to use your big horn as collateral, and borrow against it. And, leverage up. Because, the interest that you’re going to pay on the fiat is less than the purchasing power increase you’re going to get on the Bitcoin over four years, let’s say. And so, you essentially, you’re part of the arbitrage going on between, PlanB’s model and the fiat banking system.

Stephan Livera: Right, and let’s put some numbers there. So I mean you might be paying, I don’t know. 10% interest on the loan. But, then if Bitcoin is returning 200% per year, you’re well in the clear.

Pierre Rochard: Now the problem is that you’ve got a, there’s a huge amount of risk there. And so, the loan to value ratio matters, when you start matters as well. Like if you start doing this in December, 2017.

Stephan Livera: You’re in trouble.

Pierre Rochard: Yeah. You’re going to have a completely different result than if you start doing it in-

Stephan Livera: December 2018.

Pierre Rochard: Yeah, exactly. And, so I think that you’ve got to run like sensitivity analysis, and I don’t think that there’s been enough financial modeling around this. Of people looking like, okay back testing, like here’s what would have been fairly safe. And, within the standard deviations of whatever price returns. But then, so we’re already seeing this market for Bitcoin as collateral.

Pierre Rochard: And, to me that’s part of the speculative attack that’s going to happen on the fiat financial system. Because, I used to think that the leverage would come from other assets within the economy. So, for example, like George Soros would borrow against treasuries he has in his portfolio. And, go buy Bitcoin. And, he would borrow this from commercial banks. And so, in the case of the Fed, I think that there’s like primary dealers that are hedge funds.

Pierre Rochard: And so, they’re financing their balance sheet with like this anyway. So, they leverage up and buy Bitcoin and they’re creating new money. They’re creating like new base money by doing this. And, this is what has happened in speculative attacks in the past. Where basically the speculator will borrow in the weak currency, to purchase the strong currency. And, then that kind of has its own negative cycle to it. Until the issuer of the weak currency increases interest rates.

Pierre Rochard: And so, it makes it more expensive to borrow the weak currency. And, that’s what breaks the speculative attack. Now the challenges that, the harder the good currency is, the higher the interest rate you’ve got to go. In order to break the speculative attack. So, the gamble for hyper Bitcoinization is, or one of the open questions is; in this scenario will interest rates go high enough to to save fiat currencies?

Pierre Rochard: And, then that kind of goes into like John Nash I think. Has this world where this very hard currency would live side by side with fiat currencies. So, maybe it would constrain government monetary policy. Or, we just live in an economy where there’s no USD and it’s just Bitcoin.

Stephan Livera: Right. But, the open question is; when we get there or if we get there. And, we don’t know that.

Pierre Rochard: 50 years, a 100 years, never. We’ll see.

Stephan Livera: We’ll see right. So look, I think that’s probably a good spot to end it, but make sure you shout out where can we find you online and Kraken obviously?

Pierre Rochard: Yeah. So, if you want to get paid in Bitcoin, come see the Kraken careers page. Just search Kraken careers on Google, and you’ll find it. We’ve got lots of open engineering positions. And, you can work remotely and earn Bitcoin. So, then if you’re interested in trading, if you’re trading futures in Europe use Kraken futures. And, then if you’re just trading spot we’re available all over the world. So, go check us out at kraken.com. And, follow me on Twitter @pierre_rochard.

Stephan Livera: Awesome. Thank you very much for joining me, Pierre.

Pierre Rochard: Sure thing. Thanks for having me.