It is often said that art makes us human. This notion becomes particularly interesting when we reach back to the edges of human history.

This is the Venus of Willendorf,1 a fertility goddess sculpture found in Austria that dates to 30,000 BP (years before present). For perspective, that makes this statue 6x older than the pyramids, 3x older than agriculture, and even 5,000 years older than light skin.2 The figurine’s proportions and cultural purpose may be mystifying, but it is unmistakably human art.

We also recognize the ancient figural depictions of animals on cave walls as something we might have done ourselves, if we lived as hunter gatherers. For example, these 30,000 BP3 drawings of Pleistocene megafauna from the Chauvet Cave in France.

Stepping back further in time, we similarly recognize ourselves in cave art. We are fond of the striking simplicity and humanizing power of hands on cave walls, etched timelessly in red ochre. For example, these handprints from Maltravieso, Spain that reach through time to proclaim “I was here, and here I lived.” In 2024, it was determined that these handprints date to 66,000 BP,4 making them the oldest known cave art in the world.

Just one problem… our species didn’t arrive in Europe until ~20,000 years after this art was made.5 Meaning, these hands belonged to Neanderthals. And yet, here they are, engaged in recognizably human art.

Why us?

For years now, a particular mystery has nagged at me. It started from an observation included in Nick Szabo’s outstanding “Shelling Out”.6 Since then, the significance of this question has snowballed in my mind.

For upwards of a few million years, there were a handful of early human subspecies coexisting on our planet. In the blink of evolutionary time, now, there’s just one. Why did Homo Sapiens Sapiens (that’s us) triumph over all other early human subspecies?

Recently, a team of PhDs from Oxford argued that the answer to this question is that humans are “generalist specialists,”7 suggesting that we were able to thrive everywhere, and that this explains our success. Remarkably circular logic. Anthropology’s cutting edge answer provides no sensible root cause of humanity’s success; by contrast, this piece will.

By rendering recent discoveries in Anthropology and Neuroscience through the lens of a lesser-known branch of Economics, this piece puts forth an interdisciplinary answer to not only the question of “why did we triumph over other early human subspecies?”, but also to the grander question of “what defines our species?” Improbably, the answer to these questions can then be used to understand today’s ongoing financial revolution — the greatest seismic shift in the history of money.

Neanderthals were humans, too

We are all familiar with Neanderthals. They’ve long been depicted with sloped foreheads and a dumb look on their face. The archetypical brutes; cavemen huddled around fires. From the beginning of our archaeological knowledge of this subspecies in 1856,8 we’ve needed an explanation for why they went extinct and we took over.

In classic Victorian fashion, the obvious answer was that we were smarter, better, more evolved. And for over a century, that has remained the prevailing view. But it doesn’t line up with the archaeological evidence.

In addition to engaging in art, there are other aspects of Neanderthals that were strikingly human. According to Chris Stringer, esteemed head of Human Origins research at London’s Natural History Museum, all of the conventional explanations for why we outcompeted the Neanderthals are wrong, including: “better tools, better weapons, proper language, art and symbolism, better brains.”9

In other words, the Neanderthal archaeological record does not reveal much difference between them and us. They would have lived lives much like us. They would have thought, felt, hoped, and dreamed. They may have even placed flowers on the graves of their dead.10 This is what artist Tom Bjorklund aims to evoke with his humanizing depictions of Neanderthals.

While Neanderthals may not have had smaller brains or worse tools, as we previously assumed, there had to have been some difference that caused Homo sapiens sapiens to outcompete. After 200,000+ years thriving in Europe,11 the Neanderthals were relatively quickly driven to extinction by the new arrivals from Africa. Why?

The history of shell bead jewelry

One thing that is quite clear from archaeological sites is that Homo sapiens sapiens collected shells and fashioned them into beads for necklaces and other jewelry. And we’ve been doing this for a very long time.

When Szabo published “Shelling Out” in 2002, the oldest evidence of this behavior dated to 75,000 BP12 at a cave site in South Africa. In the intervening years, even older discoveries have been made. Shell beads were discovered and dated to 82,000 BP,13 100,000 BP,14 and 120,000 BP15 at sites in North Africa and the Levant. In 2021, at a cave site in Morocco, 33 small seashell beads were discovered that dated to 142,000 BP.16

In just a couple of decades, our understanding of how long Homo sapiens sapiens have collected seashells to fashion jewelry has doubled, and it’s likely that older examples will be found still. It’s quite possible that this behavior began soon after our genetic divergence from other early human species around 300,000 BP (more on this later).

It’s also worth noting that these archaeological discoveries continue to be interpreted in accordance with the prevailing orthodox of Anthropology. The purpose and meaning of shell beads is described almost exclusively in terms of self-expression, status, and personal identity. For example, the co-author of the academic paper announcing the 142,000-year old beads speculates, “they were probably part of the way people expressed their identity with their clothing… wearing beads has to do with meeting strangers, you don’t have to signal your identity to your mother.”17

As an aside, this seems to be a clear example of how modern academia has become increasingly siloed in its respective areas of subject matter expertise. That’s particularly unfortunate with topics (such as this) that require interdisciplinary knowledge to make sense of complex human behavior.

Indeed, there’s no mention (or awareness) from the Anthropologists of the likely economic purpose of this shell bead jewelry. Instead, the same clueless co-author ponders, “It’s one thing to know that people were capable of making jewelry, but then the question becomes, ‘OK, what stimulated them to do it?’”

A peculiar differentiation

Before we answer the Anthropologist’s question, let’s first introduce an important observation about this behavior. While Homo sapiens sapiens actively (and prolifically) collected seashells and fashioned them into beads for jewelry, Neanderthals essentially did not.

When “Shelling Out” was written, we had not yet found any evidence of Neanderthal shell bead jewelry. Now, there appears to be a single example from a coastal cave in Spain.18 In addition, there are sparse examples of Neanderthals and other archaic humans collecting fossils, quartz, and other curios.19 This suggests that, intellectually, they had the capacity to recognize the specialness of uncommon materials, and even to engage in symbolic behavior (as we’ve already explored with cave art), but only on a limited basis. It’s not that they were incapable artists and craftsmen, just that they seem to have had a dim interest or drive to engage in these behaviors.

From the archaeological record, we can deduce that a Neanderthal walking on the sea shore would very rarely collect an ornate seashell. For us Homo sapiens sapiens, that’s almost unfathomable. Of course we would pocket the shell, take it home, and show it off. We appreciate a nice shell for its beauty, but also for its special rarity. Its scarcity. In a world of sticks and stones, wood and bones, it’s not often you come across a perfect shell. It does nothing for us, yet we appreciate and covet such things.

In this way, we are kinda weirdos.

And yet, this odd quirk appears to be the notable behavioral difference between Homo sapiens sapiens and Homo sapiens neanderthalensis. Indeed, it may explain why we are here and they are not.

The hidden economic purpose of shell bead jewelry

This is where familiarity with an arcane branch of Economics comes in. Austrian economists like Mises, Menger, and Hayek enumerated the properties and characteristics of commodity money. This meant studying gold and silver, but also earlier monetary mediums like glass beads, cloth strips, and seashells.

The Austrians observed that human societies all over the world landed on using suitable commodities as money — to transact with and to store value in for future use. They further identified the process by which a society ends up using a particular commodity as money.20

First, a commodity is appreciated by a small portion of the group and becomes a collectible. Then, the broader society starts to recognize that some of their peers value that commodity, and suddenly that commodity takes on inter-subjective value. Everyone knows that commodity is valued by some, so everyone knows it has market value, and therefore everyone begins to value it. As this process unfolds, the novel collectible begins to take on the properties of a store-of-value asset. Once the majority of a society values a store-of-value asset, it starts to be offered as a form of payment in trade. Now, the humble collectible has matured into a medium-of-exchange asset. Finally, once this commodity is the de facto currency for all trade, everything becomes priced in terms of that commodity — it is now the unit-of-account, or numeraire, for that society.

With this knowledge, our ancestors’ creation of shell bead jewelry is easily recognizable as a form of proto-money, as authoritatively shown in “Shelling Out.” The process of collecting seashells and turning them into jewelry would have been time and energy intensive. The product would have been impressive and valued — for its beauty but also for the costliness of its creation. As Szabo describes, necklaces or bracelets of shell beads could then be used to transfer wealth for important life events, like “injury compensation, peacemaking, tribute, inheritance, or marriage.”21

This mental model for shell bead jewelry provides considerably more explanatory power than Anthropology’s economically bereft consensus that this behavior, widespread across 100,000+ years, was simply because everyone likes to look good for strangers.

While Austrian economics reveals the behavioral purpose of shell bead jewelry as proto-money and further outlines the path-dependent process by which seashells grew to become money, what’s relevant for our purposes here is what sparks this process in the first place. Why do we value collectibles at all? For this, we turn to our final field of study.

The brain science of appreciating scarcity

Recent Neuroscience research has revealed a genetic difference between our subspecies and Neanderthals. In 2022, Pinson et al. published their findings about a single amino acid change in H. sapiens sapiens that differs from other early human subspecies, including the Neanderthals and Denisovans.22

The protein created from this gene (TKTL1) is involved in stimulating new neuron production in specific brain regions. In laboratory testing, the team was able to show that the mutated version shared by all modern humans (hTKTL1) caused greater neurogenesis in frontal higher-layer neocortical regions of the brain, as compared to the version of the protein shared by archaic humans and apes (aTKTL1).

Specifically, this mutated protein amplifies neuroprogenitor creation in the outermost layers on the front half of the brain (frontal lobe supragranular layers I, II, and III). When I did my undergrad studies in Neuroscience 15 years ago, these areas were well known for their unusual neuronal wiring, including pyramidal neurons and related association cortices. Pyramidal neurons link and integrate information across cognitive domains while association cortices synthesize and generalize this information into abstract thought.

With this recent discovery, we have a possible explanation for where these unusual neuron arrangements for abstract thought come from — an amino acid substitution (lysine to arginine) in TKTL1, achievable through a single nucleotide point mutation in the relevant section of Homo sapiens sapiens DNA.

We can also deduce when this mutation most likely occurred. Anatomically modern humans emerged ~300,000 BP in East Africa. Humanity’s most recent genetic bottleneck and matrilineal common ancestor, known as Mitochondrial Eve, lived ~160,000 BP, likely in East Africa.23 Given the facts, this mutation most likely occurred sometime between 300,000 BP and 160,000 BP.

What seems to have gone remarkably unappreciated by Anthropology is the functional Neuroscience of the affected brain regions, and how the resultant behavior change could make this single amino acid mutation a defining demarcation point in human evolution. In essence, this altered protein (hTKTL1) may have played a role in over-developing the specific brain regions involved in abstract thought, as compared to Neanderthals and other archaic human species. Importantly, this explains how we see occasional evidence of symbolic behavior (like art and collectibles) among archaic humans. The hTKTL1 change in our early lineage greatly increased the development of our abstract thought circuitry, and resulted in the creative explosion of culture seen with the global takeover of Homo sapiens sapiens.

In simpler terms, what this means is that modern humans are wired different. We may not have been any smarter than Neanderthals (as evidenced by similar tool sophistication and our slightly smaller brains),24 but we had a penchant for abstract thought. It seems likely that this single mutation drove the supercharging of symbolic behavior in our subspecies.

Neanderthals may have created occasional art, but Homo sapiens sapiens were compelled to create much more. But where this seems to have really mattered was with respect to having the capacity to appreciate and value scarce commodities.

This over-developed brain wiring supercharged our interest in scarce assets and our drive to obtain them. Behaviorally, this may have amounted to making us weirdos who collected seashells, simply because we couldn’t help but value their special rarity. But as we’ll explore, that odd behavioral quirk may have made all the difference for our species.

The foundational building block of human flourishing

The other clear disparity between early modern human cave sites and Neanderthal cave sites in Europe is the population density. When Homo sapiens sapiens took over an area from Neanderthals, they were somehow able to support 10x the population on the same territory versus the prior Neanderthal inhabitants.25

This has long been considered a curious fact without a tidy explanation. But the explanation has been right under the nose of the Anthropologists: shell money. The widespread presence of shells at Homo sapiens sapiens cave sites suggests that we had already developed the concept of money by the time we arrived in Europe ~45,000 BP. And this innovation allowed for much larger social groups.

In 1992, Robin Dunbar published “Neocortex size as a constraint on group size in primates,” concluding that humans have the capacity to maintain stable social relationships with 150 individuals — now famously known as “Dunbar’s number.”26 A year later, he published a follow-up paper that added language (and social gossip) as an efficiency multiplier that allows humans to manage bonds in 150-person tribes, without having to spend almost half the day engaged in one-on-one socializing.27 But this still doesn’t account for how humans do manage to live in populations much larger than 150. An additional efficiency multiplier neatly resolves this conundrum: the concept of money.

In a barter system of goods and favors, a social group can only reach ~150 individuals before the number of interpersonal relationships becomes too numerous to keep track of (note: that’s 11,175 relationships, based on combinatorial math). At this point, the individual ledgers of personal debts between counterparties become impossible for the rest of the group to help police.28

In other words, a society without money can only function if it stays limited to Dunbar’s number of 150 people — a tribal existence. Note that within this moneyless paradigm, inter-tribal relations would be generally antagonistic, with the benefits of barter overshadowed by unending grudges and blood feuds, devoid of a mutually-agreeable means of peacemaking between tribes.

By contrast, if you have the concept of money, you not only are freed from the constraint of interacting chiefly within a closed group of 150, but you also gain the necessary transactional medium for constructive inter-tribal relations.

First, with the concept of money, goods and services can flow and be paid for at the time of transaction between an infinite number of counterparties, fostering rudimentary capitalism. Money removes the need for the tribe to help police the mental ledgers of debts and favors between all counterparties, which may be the primary constraint that Dunbar’s number actually captures.

Second and perhaps more importantly, with the concept of money, multiple tribal groups can coexist in close proximity. In the same way that money can be transferred between individuals within a group for important events like injury compensation, peacemaking, and tribute, it can also be transferred for the same reasons between tribal entities.29 Thus, money provides a transactional medium for constructive inter-tribal relations, as a new option alongside time-honored violence.

Equipped with money, tribes can more easily engage in trade, as well as negotiate and maintain mutual-security alliances. In turn, these benefits naturally foster the development of super-tribal groups living in close proximity, thereby achieving 10x the population density of other early human subspecies. The coordination of such large, multi-tribe populations would constitute a clear advantage when competing for resources against solitary tribal units of Neanderthals or any other archaic human species.

Ultimately, this means that having the concept of money was the essential differentiator that allowed our subspecies to proliferate. And as we’ve explored, it’s also the key ingredient that enabled large scale population coordination to develop. Therefore, appreciating money is the foundational building block of human civilization, and consequently, of human flourishing.

While Neanderthals and other archaic humans had the basic brain circuitry necessary for abstract thinking (as evidenced by occasional art and collectibles), this latent capacity was evidently insufficient. A certain threshold of covetous interest in scarce collectibles is necessary to bootstrap the concept of money in a social group. Neanderthals and other archaic humans lacked the brain circuitry to achieve this critical mass.

And herein lies the answer to our question. The reason that Homo sapiens sapiens outcompeted all other human subspecies is that we are wired differently, and as a result, we have an exaggerated capacity to appreciate and value commodities that are hard to come by. In other words, we are wired to cherish (and covet) scarce collectibles, like seashells.

This charming quirk is actually the basis for our overpowering evolutionary advantage, as it enabled our species to bootstrap the concept of money. In turn, this unlocked capitalism and enabled the large-scale coordination of interests that we call civilization.

It turns out that it’s not art that makes us human.

Instead, our fascination with scarce assets is what makes us human.

Fulfilling a species-long quest

Whereas modern Anthropology has offered up circular logic as an answer to this question — one of humanity’s great mysteries — we have now laid out a cogent and complete alternative. Humanity’s triumph is likely due to a single amino acid mutation between 300,000 - 160,000 BP supercharging our brain centers for abstract thought, allowing for the critical mass of interest necessary to develop the concept of money, and leading to our overpowering competitive advantage of multi-tribe population coordination unbounded by Dunbar’s number.

At this point, we’ve been entirely focused on humanity’s distant past and our defining behavioral advantage over other early human subspecies. But now, we would be remiss not to take these lessons of the past and apply them to understand a phenomenon of the present.

Inevitably, we turn now to Bitcoin.

The history of money in human civilization is characterized by an ongoing process of upgrading from one form of money to a fitter, more scarce form of money. This selective pressure of monetary Darwinism stretches back at least 142,000 years, and likely much further in our 300,000-year history. With gold’s emergence as a viable store-of-value asset in the Danube valley ~6,000 BP (because of the Varna culture’s advances in metallurgy),30 the modern history of money has been characterized by the conquest of gold over all other monetary local optimums around the world, specifically because of its unmatched physical scarcity.31

But with the dawn of the digital age, it became possible to create a commodity more scarce than gold.

Bitcoin was deliberately designed to solve for gold’s weaknesses (e.g., the challenges of assaying, transporting, and securely storing a physical asset) and to improve on gold’s strengths.32 Most importantly, Bitcoin perfected scarcity. For the first time in human history, there is a form of money with immutably finite supply — the invention (or discovery) of absolute scarcity.

If you put Bitcoin in the long timeline of human history, it is the perfection of our species’ defining fascination: scarce assets. Just 16 years into its existence, we are witnessing the ongoing and inescapable gravitation of all Homo sapiens sapiens to this perfection of store-of-value scarcity. We can’t help it, it’s quite literally in our DNA to appreciate and value scarcity.

With this context, it’s no wonder that people who learn about Bitcoin become insufferably zealous about it — this is what we’ve been searching for for over 142,000 years!

Valuing scarcity is what differentiates us as a species, what makes us human. Which means that absolute scarcity is the ultimate fulfillment of our species-long quest for better scarcity.

After ~12,000 generations of mankind, somehow, we are lucky enough to be alive during this monetary transition to perfect scarcity.

This only happens Once-in-a-Species.

But they were not expecting a fortune in Bitcoin for the taking.  And they never noticed it.

This Bitcoin was stored on a paper wallet and taped to the ceiling of the home safe.  A Bitcoiner’s personal fortune was saved by the providence and foresight of a small strip of painter’s tape, snugly fastened where grasping hands would not think to look.

I heard this true story because I work in the Bitcoin custody space.  I suspect that I would not have heard this tale if it had an unhappy ending.  We tend to more readily share our wins rather than our painful losses.

Which begs the question:  how many personal stories of Bitcoin loss are out there, like scarlet letters privately borne?  A lot more than we realize.

In fact, the FBI estimates that Americans lost $5.6B to crypto-related scams in 2023, up 44% from the prior year.  What do these scams look like?

Interviews with social engineering scammers

Recently, a well-known early Bitcoiner has taken up a personal project of uncommonly raw journalism.  Somehow, Junseth’s personal contact info ended up on a list of probable crypto holders.  Apparently this list is available for sale on the dark web.  As a result, Junseth gets calls from a variety of scammers plying their unscrupulous trade.

When we worry about crypto security, we tend to think about the wrong things.  For example, people holding their coins on Coinbase take comfort in the fact that Coinbase’s security has never been hacked.  However, these same people are often persuaded by social engineering scammers to hand over their login credentials to their Coinbase account, only to have their funds stolen.  Coinbase may have excellent security, but for many, storing coins on Coinbase is not secure.

Of course, these scammers don’t simply ask.  They deceive, they impersonate.  As Junseth has now documented in two separate recorded phone calls, these scammers convincingly represent themselves as customer support staff employed by Coinbase, or Swan, or Ledger, etc.  They reach out to let you know your funds are in jeopardy, but that you can resolve this urgent crisis by following a few simple steps.  Of course, this carefully choreographed performance is a trick to get the victim to enter their login information (and disable 2FA “temporarily”) into a fake version of the real website.  

These social engineering attacks have been going on for all of crypto’s history, but the recent professionalization of this cottage industry has led to increased success.  That success has induced many more to follow suit and resulted in a recent explosion of sophisticated social engineering efforts by various groups.

Interestingly, these are not scammers in a third-world country searching for a gullible senior citizen.  In crypto, the user base tends to be fairly young and tech savvy.  Evidently, the group best-positioned to outwit this cohort is ultra-tech savvy American teenagers with the moral flexibility necessary to self-justify their financially ruinous actions.

In Junseth’s first impromptu interview, he coaxed “Daniel” into revealing that he was an American highschooler looking to make a quick fortune in order to fund a showy lifestyle on social media.  In bragging about his various exploits, the young scammer divulged some eye-opening details about the relative ease with which he conducts his attacks.  

“It's kinda ridiculous how people just give up their seed phrases.”

“There’s like infinite of these people. Stupid people. Like infinite.”

“In social engineering attacks, the victim is willingly giving up the information … if you do everything correctly, you don’t get arrested. It’s almost like there’s no consequences.”

“It’s really fun, honestly, it’s like the best job.”

Seemingly the most difficult aspect of these attacks is obtaining the customer datasets.  Once the scammers have a list of potential leads, they begin their playbook of impersonating client services or tech support of exchanges or hardware device manufacturers.  Once the scammer has socially engineered this valuable information, they can quickly sweep the customer’s account or wallet and go on their merry way.  “Daniel” claims to make these types of calls for 8 to 10 hours per day, “earning” him anywhere from $10k to $100k per day.  

When Junseth published this interview, it also served to notify Swan that they had just approved a $1.2M withdrawal of Bitcoin, which “Daniel” had bragged about achieving.  Swan was able to cancel the withdrawal in time.  

Just a few weeks ago, Junseth released yet another impromptu interview, this time with a scammer named “Ryan.”

As Bitcoin’s price continues to appreciate, the target on the backs of Bitcoin holders will grow commensurately, and the proliferation & increasing ingenuity of these scams will likely continue.

Thieves explore all options

Of course, scammers are not limiting themselves to cold calling their targets.  Swan users have recently received two separate phishing emails, intended to deceive Swan users into clicking a nefarious link and handing over their Swan login information.  Most people know not to trust this kind of email, but you can see how some small percentage of people might be fooled – it looks pretty official!

In addition to these scammers attempting to gain access to accounts, there’s the looming threat of physical world violence.  To date, there have been limited examples of thugs targeting crypto holders and forcing them to hand over their coins.  The ones that have been documented are rather horrifying (1, 2, 3).  As crypto continues its ascent (and continues to gain cultural prominence), these “$5 wrench attacks” will likely grow in number.  

The stakes are high

It’s hard to know just how many victims these scammers have actually claimed.  But without a doubt, the answer is “too many.”  For each victim, the funds lost represent the Bitcoin portion of their portfolio.  That may be obvious, but it’s extremely unfortunate for the victim if Bitcoin does what we think it could over the coming years.

It’s still early days for Bitcoin, such that the purchasing power that a person stashes away in Bitcoin today may be worth 200x in 20 years, according to Michael Saylor’s recent presentation (which used my “Bitcoin’s Full Potential Valuation” piece as its starting point and methodology).  That means that $1.2M lost today could have been worth $240M in 20 years.  

Imagine losing generational wealth… all because a social engineering scammer convinced you that they were tech support here to help.  

And it’s not much better if a user loses “only” $100k in Bitcoin today.  That could be $20M in 20 years.  What would your life look like with $20M in savings?  For the untold victims of these scammers, that kind of future has been snatched away from them.

In my opinion, the primary reason that these tragedies occur is that Bitcoin holders tend to think about the value of their Bitcoin holdings in today’s terms.  It’s easy to convince oneself that $100k sitting on Coinbase is fine.  However, if you think about those funds as possibly worth $20M in 20 years… you will take action to protect those funds with security befitting their significance.

Does this describe you?  Well, consider this a sign from the universe.  Take some time to upgrade your Bitcoin security so that none of the threats described above can ruin a future where your Bitcoin grows 200x in value.

My advice for Bitcoin security

Everyone’s circumstances are different.  But these guidelines apply for most individuals holding Bitcoin.  

1. Not your control, not your coins

   1. Historically, self-custody has been vastly safer than third-party custody

   2. Recently, the development of Multi-Institution Custody creates an additional option where the end users retain control

2. Multisig for fault tolerance and risk mitigation across multiple keys

3. Don’t have all of your eggs in a single custody basket

I’ll explain these guidelines before sharing the options that could make sense for you, depending on your circumstances and preferences.

First, the common phrase in crypto circles is “not your keys, not your coins”.  Historically, this has been excellent advice.  The biggest failures over the 15 years of Bitcoin history have been centralized exchanges that were hacked or otherwise collapsed – Mt. Gox, Quadriga, BlockFi, Celsius, FTX, and many others.  By contrast, individuals who have opted for self custody (i.e., setting up and securing their own private key / public key pairs) have suffered much fewer losses.  

That said, I have slightly updated the sage advice here.  The true spirit of “not your keys, not your coins” is to make sure that no third-party can move your funds.  This prevents rehypothecation (BlockFi, Celsius), misappropriation (FTX), loss (Quadriga), and theft (Mt. Gox).  

Historically, the only two options available to Bitcoin holders were self-custody and third-party custody.  Only self-custody ensured end user control.  However, now there is an additional model of Bitcoin custody, known as Multi-Institution Custody.  

With Multi-Institution Custody, the end user maintains control of their coins by having three institutions each hold one key on their behalf, in an arrangement where more than one key is needed to control funds.  (Note: I am biased here, since I have spent the last few years helping to build Onramp, the leading provider of Multi-Institution Custody, but I have only been spending my time on this because I think it solves a huge problem for Bitcoiners and for Bitcoin adoption as a whole.)

Second, Bitcoin addresses can be set up either as a “single-signature” address or as a “multi-signature” address.  In a single-sig setup, a Bitcoin address is controlled by a single, very long password, what’s known as a “private key.”  In a typical multi-sig setup, a Bitcoin address is controlled by three separate private keys, any two of which must sign a transaction before it is processed.  Multi-sig setups are vastly superior to single-sig setups, specifically because they inherently provide fault tolerance, enable geographic distribution of private keys, and ensure that private keys do not have to physically come together at any point in time.

Third, I have personally found it very helpful to partition my Bitcoin holdings into more than one basket.  When I had all my eggs in one basket, I spent many nights wondering if I had screwed something up or was somehow exposed to risks I was not aware of.  By splitting my Bitcoin into multiple baskets, I found that these worries dropped away.  Each basket has its own risks, but I know that even if a disaster scenario occurs with one basket, the loss will not be complete.  

That said, it’s important to also limit the number of baskets in order to keep complexity down and prevent screw ups.  Having a primary basket and a secondary basket is a great solution.  Splitting equally between three baskets also works nicely.  I don’t think I’d recommend going beyond that, unless you are extremely paranoid or dealing with generational wealth.  

The options to consider for your custody setup 

To start, it’s worth mentioning what custody options should generally be avoided:

• Keeping your coins on an exchange (or any third-party custodian)

  • As we’ve discussed, coins on an exchange are at risk from failure at the exchange level (Mt. Gox, FTX, etc.) but also from potential social engineering attacks by scammers

• Single-sig wallets (paper wallets, phone wallets, hardware wallets)

  • Coins held in this manner are at risk from social engineering scams, $5 wrench attacks, and the completely unforgiving risk of user error 

  • With a single-sig wallet, there is no fault tolerance, so losing or breaking a hardware wallet can mean a total loss of funds

Here are the options that are worth considering.  And again, I personally recommend considering using 2 (or even 3) of them in order to diversify your custody method risk:

Pure self-custody multisig

• Description: 

  • In this custody model, the user sets up their own multisig quorum using any of the available open-source wallets that offer this functionality

• Strengths:

  • Fault-tolerant setup with distributed risk across hardware wallets

  • High flexibility for power users

  • Zero cost to the end user (besides hardware wallets)

• Weaknesses:

  • Highly technical

  • Greater risk of user error

  • All technical & security burden on user

  • Reliant on integrity and functionality of small plastic devices 

  • Vulnerable to a $5 wrench attack (user holds all keys)

Collaborative custody multisig

• Description: 

  • In this custody model, the user sets up a multisig quorum via a collaborative custody provider’s interface and infrastructure (e.g., Unchained, Casa) 

• Strengths:

  • Fault-tolerant setup with distributed risk across hardware wallets

  • Utilizes well-constructed UI/UX services to streamline and clarify setup

  • Outsources a single key to the collaborative custody provider

• Weaknesses:

  • Still need to be technical enough to setup and maintain a majority of the keys in the multisig quorum

  • Majority of technical & security burden on user

  • Annual fees for the service

  • Reliant on integrity and functionality of small plastic devices 

  • Vulnerable to a $5 wrench attack (user holds majority of keys)

Multi-Institution Custody

• Description: 

  • In this custody model, the user sets up a multisig wallet via a Multi-Institution Custody provider (e.g., Onramp).  In this model, the end user doesn’t have to setup or maintain any of the keys themselves, instead outsourcing this responsibility to several separate institutions 

• Strengths:

  • Fault-tolerant setup with distributed risk across institutional keyholders 

  • Removes technical & security burden from the end user

  • Leverages institutional-grade key management and security practices for each key in the multisig quorum (i.e., no small plastic devices)

  • No keyholding institution has unilateral control, meaning that end user retains control of their coins

  • Greatly reduced risk of $5 wrench attack (user holds no keys)

• Weaknesses:

  • Involves some degree of trust in the integrity and practices of institutional keyholders

  • Annual fees for the service

Whatever choices a Bitcoin holder opts for, the important part is to prepare for a future where the underlying asset is more valuable.  Overall, I believe it’s a good idea for Bitcoin holders to mitigate the risks in their custody setup as if their Bitcoin savings is worth ~200x what it is today.  Because, in time, it may be. 

If you’re interested in learning more about the Bitcoin custody options that exist today, consider signing up for Onramp’s upcoming webinar here: The Evolution of Bitcoin Custody. I will be presenting and fielding Q&A questions.

If you found my description of Multi-Institution Custody interesting, check out Onramp’s website to learn more (onrampbitcoin.com). I’d also be happy to chat with you about your Bitcoin custody concerns and needs, just schedule a consultation & mention you’re a Once-in-a-Species reader.

Yet, incredibly, most of the world has not yet caught on.  Quality information and thoughtful analysis about Bitcoin remains surprisingly fringe.  For example, this niche newsletter reaches 7,000 inboxes — in other words, one in a million people on Earth.  But somehow, you have found your way into that slim group.  To do so required some combination of curiosity, work, openness to ideas, and a proactive curation of your information sources.  That’s rare.  And that’s why you found your way to Bitcoin and to this newsletter.

What I’m really trying to say is: take a moment to appreciate yourself.  You have some unique mix of qualities that allowed you to find Bitcoin early.  As a result, you have frontrun Wall Street, corporations, nation states, and most of the world’s millionaires.  You are early to the investing megatrend of the 21^st century — the emergence of the dominant store-of-value asset for the digital age.

Now all you have to do is not mess this up. 

How could that happen?  Well, different approaches to Bitcoin have different pitfalls to be wary of:

Trading & Leverage

There’s no way around it, trading is a losing proposition.  Unless you are an experienced Wall Street trader who cut his teeth in the most savage and cutthroat markets in the world, you are fodder for those who did.  When the sharks sit down to play poker, they want the novices to feel like they belong and have a chance.  But of course it’s a charade — a novice trader and his money will soon be parted.

Leverage only accelerates the timeline.  As Charlie Munger famously said, “there’s only three ways that a smart person can go broke: Ladies, Leverage, and Liquor.”

The reason that trading & leverage are particularly dangerous is that these methods introduce a high probability of total loss.  You don’t play Russian Roulette with your life, so don’t play Russian Roulette with the most important asset of the 21^st century.

Third-party custody

We all start here.  Because when you’re new to Bitcoin, you simply don’t know enough to do anything else.  The first step that anyone takes in Bitcoin is to convert dollars into a small slice of Bitcoin.  At that point, the job is done — you own some Bitcoin and it lives right there on Coinbase.

The tricky part is that it’s easy to get complacent.  As you continue to learn more about Bitcoin, you become vaguely aware of some of the pitfalls of leaving your coins on an exchange.  But, it has worked out for you so far… and it’s not super clear what the best alternative is, so you stick with the status quo: do nothing. 

Like a turkey feeling pretty confident in October.  

And yet, the 15-year history of Bitcoin is littered with disastrous examples of hacks, insolvencies, and fraud.  Nobody with their coins on Mt. Gox expected a catastrophic hack would result in all of their funds being irrevocably lost.  Few users expected that Prime Trust, a Qualified Custodian company, might mismanage keys and lose user funds.  And it’s easy to forget that the ~$10B fraud of FTX was quite recently the gleaming paragon of crypto exchanges — even gracing the umpires’ uniforms in the 2022 World Series. 

Beyond the risk of corporate disaster, there is a less-visible risk with third-party custody: being hacked personally.  If you leave your Bitcoin on an exchange, the exchange can do everything right and maintain proper security for your coins and you could still get hacked. 

The most common kind of hack is a phishing attack.  Usually these are laughably easy to spot and dismiss, but occasionally they are quite ingenious.  An email lands in your inbox and looks exactly like the emails you typically get from your Bitcoin exchange.  It says you have received a message, please login to your account here.  But if you click the link it offers, you will be routed to a fake login page that looks exactly like the one you’re accustomed to.  If you enter in your username and password, you have given your credentials to attackers who will use them to login to the real website and withdraw your funds to a Bitcoin address that they control.  

In this way, the biggest risk with third-party custody is that users are lulled into a false sense of security (“Coinbase has my coins”) and are vulnerable to hackers impersonating them to collect those coins.  It happens every single day.

The simple reality is that all of the above concerns can be solved by a golden rule: do not give a third-party unilateral control of your Bitcoin.  For Bitcoin’s 15-year history, those who engaged in self-custody avoided the minefield of risks presented above.  However, what is often not talked about is that self-custody comes with its own risks as well.

Self-custody

If you are knowledgeable and thoughtful, self-custody delivers vastly superior protection when compared with third-party custody.  But it is not easy and it is never perfect. 

The most obvious risk with self-custody is what’s known as the $5 wrench attack.  You can have perfect digital security, but if an attacker can physically force you to access your Bitcoin through the threat of violence, it’s all for naught.  Uncomfortably, these stories are not as uncommon as one would like.  

My own self-custody arrangement leverages best practices in key generation and combines it with a comically complex system of digital and physical safeguards across time and space.  I am confident I have solved for the wrench attack, but in doing so, I have introduced an unhappy risk that my family will not be able to access my self-custody arrangement if I was hit by a bus tomorrow.  

This raises the primary theme of risk with regard to self-custody: the possibility of too much security. 

If you had $240M in Bitcoin, you’d be living on cloud nine, right?  How about $500M in Bitcoin?  Well, there are two gentlemen in this exact situation who are very much not having a good time.  The first locked $240M in Bitcoin on a USB drive that will automatically wipe itself if an incorrect password is entered on 10 consecutive attempts.  Naturally, he lost the password and now has just one attempt left.  The second man left seven thousand Bitcoin on a hard drive that he absent-mindedly threw away amid a stack of papers.  He has been petitioning his local government for nearly a decade for permission to excavate the giant landfill where it may lay, in who knows what condition.  Both stories offer exquisite Schadenfreude for non-holders of Bitcoin (which is why they have graced the pages of these major publications), but uneasy worry for any Bitcoin holder currently engaged in self-custody.

Even if you avoid the obvious errors of these self-custody cautionary tales (e.g., forgetting password, throwing away private keys), there are less obvious considerations to ponder.  For example, do you have the technical familiarity to avoid accidental user error when operating a hardware wallet?  One of our investors and early clients at Onramp had a vivid wakeup call.   His wife walked in on him panicking over a flashing red screen on a hardware wallet.  With brusque clarity she challenged, “what are you even doing putting money on these little plastic devices?” 

And that is the reality of self-custody.  To date, it has been the better option versus third-party custody.  And if you are technically proficient and knowledgeable about Bitcoin, self-custody is the best custody option.  However, it does have its downsides and risks.  Just saying that is surprisingly controversial in the Bitcoin community. 

What you can do

The best thing you can do is invest time and energy into learning about multisig self-custody and familiarizing yourself with how to set it up with best practices.  Unfortunately, this is a considerable learning curve even for a tech savvy person. 

The other solid option is to consider multi-institution custody.  I have to admit, I am biased here — I have spent the last couple of years helping to build Onramp, the Bitcoin industry’s leading multi-institution custody solution.  

What is multi-institution custody?  With multi-institution custody, a multisig vault is created for you.  This vault is controlled by three private keys, each held by a different company.  In this way, no single company has unilateral control of the vault.  Instead, the end user retains control because only they have the authority to direct the keyholding entities.  While no solution is perfect, I believe that multi-institution custody is the best option for ~80% of people. 

Part of what is so exciting to me about multi-institution multisig custody is that it solves two big worries that I have had personally, and many other Bitcoiners must also share.  

First, occasionally a fear pops up in my mind (often late at night): is my self-custodied Bitcoin safe?  Have I done everything right?  There’s no way to ever fully know.  For the last few years, having all my eggs in the self-custody basket gave me some heartburn.  Now that I have my coins split between self-custody and multi-institution custody, I sleep much better. 

Second, because of my efforts to render a $5 wrench attack impossible, I have created a non-zero risk that my family will not know how to access and handle my self-custodied Bitcoin in the event of my death.  Luckily, multi-institution custody solves this worry for me, and I’m not the only one.  Many of our earliest clients at Onramp were individuals seeking a custody model that protected their families — in life (by making a $5 wrench attack impossible) and in death (by ensuring a seamless transition to heirs).  As a result, we leaned into solving that pain point by building inheritance planning directly into the Onramp client experience with Onramp Heritage. 

In summary

You’ve come a long way on your Bitcoin journey.  Don’t mess this up now.

• Avoid trading & leverage.  

• Shake off the complacency of leaving coins on an exchange.  

• Take self-custody if you can.  

• Consider multi-institution custody to diversify your Bitcoin custody and sleep better at night. (And if you’re interested to learn more about Onramp’s multi-institution custody offering, get in touch here or go ahead and schedule a consultation.)

As an update, I’ve paused all paid subscriptions for Once-in-a-Species.  With the growth of Onramp, I no longer have the time to deliver a quality piece of new writing every week.  However, I will continue to publish new pieces, just a bit less frequently. 

I look forward to continuing to show up in your inbox, and you can be sure that I will be loudly banging the drum about Bitcoin as the April 2024 sets in motion the next post-halving bull market.

Without further ado, here’s my latest article – hope you enjoy!

How best to describe Bitcoin?

One of the challenges about explaining Bitcoin to people is that it’s hard to define what it means for people and for the world.  Understandably, this ambiguity is unsatisfying at best and suspicious at worst.  Bitcoin enthusiasts end up looking like crazed lunatics trying to describe some elaborate and complex mess, straining to transfer their zealous belief to their bewildered audience. 

No wonder people tend to change the topic when Bitcoin comes up!

But much to the chagrin of the politely uninterested, this thing won’t go away.  It keeps coming back, stronger than ever, surging to new highs once every four years. 

So, here’s a simplified explanation of what Bitcoin means for the world and for you, in particular.

Transformative innovations sound boring

First, let’s acknowledge why it’s so hard to explain Bitcoin.  When DVDs first came out, they were easy to explain because of the narrow scope of the innovation – it’s a videotape, but better.  However, deeper, more profoundly transformative innovations are harder to explain precisely because they so dramatically change the world – the printing press, electricity, the internet. 

The truth is that the internet profoundly altered every facet of our lives, and yet people struggled to understand why nerds were so excited about “this Internet thing” because each discrete example seemed so trivial.

In a funny way, the more profoundly transformative an innovation is, the more basic and underwhelming it sounds.  The printing press made the written word more abundant.  Electricity made it possible to transmit energy to do work across town.  And as Bill Gates puts it, the Internet is “a place where people are publishing their information.”  None of these innovations sounds particularly important, and yet we all know how profoundly they transformed our world. 

Bitcoin is in this same category. 

The elephant in the room

The other quixotic challenge for an innovation that impacts everything is that people describe it based on all the things it impacts.  Which is to say, evangelists talk about tangible, salient use cases specifically because the full scope of the innovation is too expansive and abstract.  For example, early advocates of the internet talked about electronic mail, rather than the transformative digitization of the world’s information. 

There’s a classic Hindu parable that applies to expansive innovations like this:

“A group of blind men heard that a strange animal called an elephant had been brought to the town, but none of them were aware of its shape and form. Out of curiosity, they said, “We must inspect and know it by touch, of which we are capable.” So, they sought it out, and when they found it, they groped about it.

The first person, whose hand landed on the trunk, said, "This being is like a thick snake.” For another one whose hand reached its ear, it seemed like a kind of fan. As for another person, whose hand was upon its leg, said, “The elephant is a pillar like a tree-trunk.” The blind man who placed his hand upon its side said the elephant "is a wall." Another who felt its tail, described it as a rope. The last felt its tusk, stating the elephant is that which is hard, smooth and like a spear.”

In essence, sometimes things are bigger than what we can digest, particularly when we are exposed to only a small part of the whole.  This is inevitably the experience when first learning about Bitcoin. 

The truth is that Bitcoin is a number of things, but none of these discrete features satisfactorily describes the whole.

While each of these pithy descriptions is accurate, each describes just a small part of the larger innovation of Bitcoin.  This leaves us with a challenge: how best to conceptualize Bitcoin. 

I’ve thought long and hard about this, and really it is a two-part answer: what Bitcoin is & what it means for you.

What Bitcoin is

Simply put, Bitcoin is “digital gold” — designed to improve on gold's strengths and solve for gold's weaknesses.

A little underwhelming, right?  But again, profoundly transformative innovations typically sound rather basic.  At any rate, we have to unpack what this means.

The fact of the matter is that money is an endless competition between store-of-value assets.  All store-of-value assets have their idiosyncratic characteristics.  These characteristics can result in each asset being good or bad at fulfilling the properties of money:

 The story of money over human history has been an organic, free-market competition between various commodities that can be used as money.  Sea shells were not a great store-of-value since new, dilutive supply was easily sourced.  Glass beads and cloth strips and carved stone discs were more reliably scarce since their creation took hard work to achieve.  However, technological improvements eventually made it easier to create new supply of these manufactured commodity moneys and eroded their ability to store value and propagate that value through time undiluted.    But technology doesn’t make it feasible to make more of a particular atomic element.  And so, while technological advances made glass beads an unreliable store-of-value, precious metals emerged as superior commodities to store value in.  But rarest of the precious metals was gold.  And that scarcity in the earth’s crust ensures that it’s extremely difficult to dilute the existing supply of above-ground gold.  In fact, global gold-mining efforts typically add ~1.5-2% to the existing supply each year over the last century.

We think of gold as being the most precious metal because it’s beautiful, or perhaps because it was favored by kings and the Catholic church in their visual efforts to project their power, wealth, and majesty.  But quite simply, these historical preferences were already rooted in the scarcity and value of gold as a material to source and work with.

All this to say that gold is the best form of money that exists in the physical world.  And that is why it emerged as the champion in the 70,000+ year Darwinian process of societies experimenting with different forms of money in the physical world.

In that sense, “gold” is really shorthand for “the commodity with the strongest monetary properties.”  And therefore, when we say that Bitcoin is “digital gold,” we don’t mean that Bitcoin is simply valuable or reliable.  Instead, we mean that Bitcoin is the digital version of an ideal store-of-value asset.

And the thing about digital versions of analog systems is that they can be much more perfect than their physical-world counterparts.  The Internet vs. a library; digital cameras vs. film; email vs. snail mail.

“Digital gold” is no different.  In other words, Bitcoin is the digital perfection of a commodity with strong monetary properties. 

While this is the best way to conceptualize what Bitcoin is, there is a better way to crystallize what Bitcoin means for you. 

What Bitcoin means for you

For users (meaning, any individual or entity who stores value in this “digital gold”), Bitcoin is a savings technology.  (Credit to Pierre Rochard for this idea.) 

What does this mean?  The simple (and implausible-sounding) reality of Bitcoin is that it is designed to increase in purchasing power over time, specifically because of its increasing scarcity — pre-programmed and guaranteed every 4 years.

The reasons this sounds so impossible to us is that there’s never been an asset that reliably grows in purchasing power over time, specifically because it has never been possible in the physical world to immutably guarantee increasing scarcity of new supply issuance.

In other words, the way to think about what Bitcoin means for you is that it is a tool for you to leverage.  This asset is designed to get more scarce every 4 years, and these supply-demand mechanics result in Bitcoin becoming more valuable over time. 

What this means is that Bitcoin can be used to grow the purchasing power of value stored in Bitcoin and held for 4+ years.

So, how best to describe Bitcoin? Well, Bitcoin is two things.  As an asset, it is best described as “digital gold” — which is to say, a digital improvement on gold’s outstanding monetary properties.   But as a tool, Bitcoin is best described as a savings technology — a way to grow the purchasing power of your savings by riding the incredible mechanics of increasing scarcity.

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Your intuition is right, something really big is happening here.  We are living through the Digital Revolution.  The first half was the digitization of information — the Internet.  The second half is the complementary digitization of value.

If this is true, then it is the financial opportunity of a lifetime.  A chance to stake your claim on the frontier of digital assets before 99%+ of the world has figured out what is happening. 

In other words, yes, you can become rich by getting into crypto.  But here’s the catch: if you make poor decisions, you will not only end up worse off, but you’ll also squander the biggest financial opportunity of your lifetime.  The stakes could not be higher.

What’s more, there are thousands of ways you could screw this up.  It’s extremely daunting, especially because these pitfalls are hard to spot for greenhorns new to this asset class.  So let’s make it simple.  Here are the diverging paths that beckon to you, and what you will find if you venture down them:

The four paths before you in crypto:

1. Do nothing

2. Invest in the new

3. Trade to glory

4. Just accumulate boring Bitcoin

I have been down each of these paths, and I have spoken with hundreds of people about their experiences in crypto.  That makes me something of a salty veteran, with the scars to show it.  Here’s what awaits on each of these paths:

Do nothing

Most people are on this path — after all, it’s the default.  In the age of cryptocurrencies, people only participate by opting in.  Until they opt in, they remain on the “do nothing” path.  Interestingly, this is the “right” path for a majority of the time.  In the crypto market, bullish rallies are short and explosive; slow and painful downtrends make up the balance. 

But being “right” the majority of the time has been a losing strategy overall for the last 15 years.  People who remain in the “do nothing” camp are forced to watch from the sidelines as a major bull market delivers shocking performance once every four years, on average.

Importantly, this dynamic may continue for the next few decades.  It’s easy to think of the crypto market as something that has already developed, but if this new asset class is the digitization of value, then it has only just begun.  The total value of all crypto assets today is ~$1T, which remains a tiny bucket in a $900T sea of global asset value.  It’s impossible to say how large “digital value” can become in the digital age, but it stands to reason that it will be much more than 0.1% of total global asset value.

Invest in promising crypto projects

What most people do when they first transition from the default “do nothing” approach to digital assets is to adopt an open-minded and explorative philosophy.  There are 30,000 crypto projects, and the landscape is rapidly evolving.  Surely, the latest and greatest new projects offer the best opportunity to get in on the next big wave?

Well, that’s certainly the narrative that all of these new crypto projects tap into.  And they do that because this logic resonates with us.  I believe this is because we have lived through the Internet revolution, and we have collectively learned the lessons of technology investing over the last few decades.  Fundamentally, the core takeaway has been: find the handful of new companies that will be the big winners each decade.  In tech investing, fortunes were made by betting on Microsoft, Apple, Google, Amazon, Facebook, Uber, Netflix, Tesla, and so on.  Culturally, we’ve synthesized this economic reality into an investing philosophy: invest like a Silicon Valley VC. 

When we dabble in crypto, we unconsciously bring this same philosophical approach to technology investing with us.  We can’t help it — we don’t even realize that we’re doing it. 

The result is that everyone tends to seek out exciting upstarts and builds a “diversified” portfolio of crypto holdings.  This mental model is the “multicoin” thesis: 

Surely there will be many winners in crypto, just as there have been on the Internet. 

The fundamental mistake that everyone makes here is assuming that the landscape of Internet companies is the appropriate analogue to compare the landscape of cryptocurrencies to.  The Internet is built on open-source protocols for how computers can exchange information — TCP/IP, specifically.  But it’s not possible to own this kind of open-source information protocol.  As a result, the only way you can invest in the Internet is by investing in the companies built on top of this protocol.

However, cryptocurrencies are fundamentally protocols for storing and exchanging value.  The landscape of 30,000 competing cryptocurrencies may remind us of the landscape of Internet startups, but they are actually competing protocols.  Competing versions of TCP/IP.

And yet, we know from the Internet what happens when open-source protocols compete… eventually a dominant network effect emerges and that protocol becomes the standard that people and companies adopt and build on (like TCP/IP).

The result of all this is that crypto investors who “invest in the new” tend to underperform the single cryptocurrency that is emerging as the dominant network effect and value protocol standard, akin to TCP/IP.

Interestingly, individuals who manage to briefly outperform by investing in a variety of selected crypto projects (this was me from 2016-2018) tend to grow more confident that their thesis is correct.  As a result, they will cling to it longer and endure more pain before coming around to the reality that this is a competition for a singular protocol standard for digital value, and that everything else is gambling and noise. 

Trade to glory

Inevitably, many people are drawn to crypto because they want to get rich quick.  Crypto may be a rising tide and picking the flash-in-the-pan Cinderella darlings for each bull market (in 2021, Solana, Doge, and Shiba Inu) can amplify this performance tremendously, but actively trading can amplify performance even more.  If a person can jump from one winning trade to another, they can turn a few thousand dollars into a fortune.

What people don’t realize is that they might as well be entering the World Series of Poker tournament as a total novice.  Trading in markets is a zero-sum game.  You either take money from other market participants or they take money from you. 

You can get lucky for a while.  But eventually, you’ll find yourself nursing a dwindling pile of chips wondering why people around you seem to be getting rich.

Traders want you to believe that anyone can be a winning trader with a little discipline, creativity, and luck. But they don’t tell you that they spent a decade learning their craft from veteran traders on Wall Street. And they certainly don’t tell you that they rely on a steady flow of novice traders to harvest money from.

You can play their game, but you will almost surely lose.

Just accumulate boring Bitcoin

Investing in promising crypto projects (#2) and trading to glory (#3) can still be profitable in dollar terms.  The problem is that the longer people pursue these paths, the more likely it becomes that their overall portfolio begins to lag behind in Bitcoin terms.  (Remember, if a singular dominant digital value protocol is emerging… all others underperform by comparison.)

Invariably, these people who have been working hard chasing crypto performance eventually run a simple calculation: how much Bitcoin could I buy now?  For most, this number is less than they could have had if they just bought and held Bitcoin from the beginning.

And in a rush of revelation and regret, the case for holding Bitcoin suddenly makes sense.  We are all searching for investment exposure to the future of digital assets.  While we may have originally presumed that this future included a variety of different cryptocurrencies, the simplicity of the Bitcoin-only thesis becomes painfully obvious. 

Money is the mother of all network effects & tends to one.  Bitcoin is the original & increasingly dominant protocol for digital value storage and exchange.  For those of us who have been focused full-time on digital assets for 6 years, it’s increasingly clear that Bitcoin is emerging as the TCP/IP for value — and yet, most of the world still has no idea that this is happening. 

And if this is the case, why hold any other digital asset?  You’re early to the biggest investment megatrend for the 21^st century, focus on that!

It’s no exaggeration to say that most people you encounter online who loudly advocate for Bitcoin and Bitcoin only… are full of regret for not arriving at this conclusion sooner themselves.  Myself included.  I would have much more Bitcoin if I had graduated from “crypto” to Bitcoin-only even just a few months before I ultimately did.

That inevitable conclusion was painful.  It involved accepting that I had screwed up, that I had been wrong, and that I would never have as much Bitcoin as I could have had just a few months earlier.  I had to swallow my pride and shift my attitude from frustration to gratitude and enthusiasm.

Why gratitude?  Because it is still so early for Bitcoin, and that is an essential bit of perspective.  If this is the emergence of the dominant store-of-value asset for the digital age, the scale of what this asset can become is enormous.  ($10m/Bitcoin, in today’s dollars, based on my analysis.) 

In that sense, the fact that you are here now and able to recognize the potential opportunity before you is a tremendous gift — quite possibly, the greatest financial opportunity of your life.

To put this into perspective, it’s helpful to remember that there will only ever be 21M Bitcoin.  Since there are 8B people on Earth, that means ~0.0025 BTC/person.  Right now, an entire human’s worth of the emerging monetary standard for the digital age can be acquired for just $100. 

If you’re looking to get rich in crypto, perhaps the best path is right in front of you.

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Refer a friend

That’s Dan.  He’s one of my good friends from business school.  He got a 790 on his GMAT and is almost always the smartest man in the room.  We both worked at one of the elite management consulting firms before attending one of the elite MBA programs, followed by returning to elite job opportunities in the most desirable cities in America.  My B-school friend group is full of Dans — the kids who ran the gauntlet of achievement-obsessed America and cleared the highest bar every time it rose higher.  The consummate yuppie elite.

Yet they are all resistant to Bitcoin.  It has become a topic of frustrated fascination for me.  My other friend groups have largely heeded my vociferous and fervent testimony that Bitcoin is the most important asset of the 21st century.  Yet my elite MBA friends cling to dismissiveness that borders on outright hostility.  Why?

This is a complex topic, with a few layers I will try to address here.  As a starting point, let’s introduce the closest attempt at an explanation that I’ve seen to-date:

Clever and compelling, this model explains what many in Bitcoin perceive: some of the smartest people in the world think Bitcoin is going to boom, but so do some dumbasses.  Importantly, this model also explains the mockery and resistance we see from our reasonably intelligent friends and family. 

But it’s too easy of an explanation — I cannot claim to be smarter than Dan or the hundreds of other brilliant MBAs in my graduating class, not one of whom has reached Bitcoin maximalism, as far as I know.  Clearly, there is something else going on here.

First, let’s separate the $250k believers in Murad’s meme into what they really are: Bitcoin moon bois on the left, and deeply researched Bitcoin maximalists on the right.  In truth, these are two different groups.  The first group believes that Bitcoin is going to the moon largely because they believe that past performance is indicative of future results — we’ll say that this group subscribes to “Bitcoin moonism.”  The second group has come to understand the game theoretic inevitability of Bitcoin’s continued rise in the context of central bank money printing, the deterministic price mechanics of quadrennial supply shocks via Bitcoin’s halvings (and the market psychology that programmatic price appreciation precipitates), and the winner-takes-all implications of an absolutely scarce store of value asset — what we call “Bitcoin maximalism”.

The IQ framework seems to hold up decently with regard to the moon bois, but it doesn’t account for the Dans and all of the other brilliant yuppies that I know.  When I thought about what is the defining difference between the Bitcoin maximalists and my yuppie elite friends, the surface level distinctions that popped out were political (e.g., libertarianism, Trump support, second-amendment rights, Black Lives Matter).  But these stem from a deeper divide: the degree to which a person has trust in the system.  As a lifelong liberal recently cast into the netherworld of distrust of both parties that one necessarily acquires when journeying down the Bitcoin rabbit hole far enough, I feel reasonably qualified to speak to the liberal condition.  

At the heart of liberalism is a belief that the system can work, if it could just be architected well enough and administered competently and compassionately.  My personal journey to Bitcoin maximalism involved a painful dissociation from this fundamental worldview, specifically in the course of digging in to understand central banking monetary policy and the irresistible levers that come with it.  

As an aside, I went to the best business school in the world and they didn’t teach us anything about that.  For what it’s worth, I don’t think that this was a knowing or malicious omission.  I think this battle was won 100-years ago, in Keynes’ day, with the self-serving support of governments weighing heavily on the outcome.  Which is to say, my professors learned from Keynesians who themselves learned from Keynesians.  The business leaders and educators of today are completely unaware that they are passing on the shoddy propaganda version of monetary theory as a result of the largely successful ideological extermination of sound monetary theory.  

But I digress, if we take Murad’s IQ framework, split the $250k believers into their respective groups, and add the dimension of trust in the system’s ability to work, we get something like this:

If this is a reasonable representation of reality, there are a number of insights we might draw from it:

• Bitcoin maximalism is correlated with intelligence but also with distrust in the system.  Someone who is very smart and has high conviction that the system is broken is more likely to reach Bitcoin maximalism than someone lacking one of these qualities, all else equal.

• Bitcoin moonism is less sensitive to one’s distrust in the system — if you’re a dumbass, you’re a dumbass.  (But it probably helps a little to be a dumbass and distrust the system.)

• It is easier to reach Bitcoin maximalism if you are already primed for it via a pre-existing distrust of the system.  This helps explain the early adoption of cypherpunks, anarchists, and libertarians, and even the current representational skew towards Trump supporters who share a distrust of the establishment.  

• On the flip side, it is more or less impossible to reach Bitcoin maximalism while retaining any amount of trust in the system — indeed, this was my experience.  To get to maximalism, I had to first grapple with the uncomfortable dissonance of my beliefs and the things I came face-to-face with as I dug deeper into the rabbit hole, confront them rather than turn back, and ultimately tear down my entire worldview in order to resolve the dissonance and continue deeper down the rabbit hole.  Fun times.

• Of greatest relevance to our particular focus, however, is the white space in the top right quadrant.  Those with high intelligence and trust in the system’s ability to work are very unlikely to subscribe to either Bitcoin maximalism or Bitcoin moonism.  Let’s expand on this further...

The upper right quadrant of the chart also happens to be the native home of the yuppie elite.  To succeed in the educated, professional class, you have to be smart.  But it’s also crucial that you know how to fit in, be a good team player, navigate industry politics, be polite and likeable, and above all be a good foot soldier willing to sacrifice for your employer.  The requisite core belief to be able to be all of these things is trust in the system — trust that if you are a good employee and play nice with others, that you will be rewarded via promotions and social standing.  In this sense, if we were to plot where the yuppie elite live on our graph, it would look something like this:

In just the same way that Bitcoin maximalists are some combination of smart and distrusting of the system, the yuppie elite are typically smart and trusting of the system.  Some are more brilliant than others, but the ones that are less smart and still successful are typically so because they are exceptionally committed and loyal employees.

As you can see, the empty corner of our 2x2 matrix is exactly where the MBAs and other yuppie elites are.  From their vantage point, belief in Bitcoin is a peculiar phenomenon that will surely go away.  None of their yuppie elite friends believe in it, and since they don’t know much about Bitcoin, they don’t draw any distinction between Bitcoin moonism and Bitcoin maximalism — it’s all lumped together for them.  As a result, the yuppie elite tend to view belief in Bitcoin like this:

Unfortunately for them, this perspective makes them unlikely to seriously consider Bitcoin on its own merits.  Part of what makes this disinterest so resilient is that it falls into a neat heuristic pattern like many other things in the yuppie world.  The yuppie elite are accustomed to having the best information, the best education, and the quickest knowledge of and access to trends.  Yuppies believe they are the people in the know.

When you’re in the ivory tower, you think the term “ivory tower” is a silly misrepresentation of your very normal life; when you’re no longer in the ivory tower, you realize how willfully out of touch you were with the world.  Part of being in the ivory tower means being in a socially insular bubble, interacting only with other elite yuppies.  The natural outcome of this is that you tend to believe things are important and worthwhile if the other yuppies in your social network believe they are — after all, yuppies are the people in the know.  Conversely, if people outside of the yuppie social world are engaged in something but other yuppies aren’t interested in it, it must be something for people not in the know.  In this case, the lack of belief in Bitcoin among the yuppie elite combined with the significant interest in Bitcoin among non-yuppies triggers a clear pattern-recognition response: Bitcoin is for people not in the know.    

A second characteristic of yuppies also helps ensure that this heuristic label is not easily revised: as smart people who are good at navigating the world, yuppies need to understand something in order to believe in it.  That’s how they’ve done well in life so far, so that’s what they’re sticking to.  

Ironically, it’s adherence to the central ethos of Bitcoin that keeps yuppies from investing in Bitcoin: don’t trust, verify.  I have a childhood friend who is a sailboat captain for a living.  In his mind, I am one of the smartest people he knows.  When I strongly recommended that he look into Bitcoin, he bought some that same night.  He didn’t verify my thesis for himself, he trusted me.  The same is not true for my yuppie friends — they know it is unwise to invest money in something that they do not understand.  At the same time, they lack the time, conviction, and persistence to replicate my years of research.  

What’s more, Bitcoin’s surface layer provides it with a subtle camouflage.  The first hour or two of learning about Bitcoin triggers a multitude of scam red flags.  For the business and financial elite, who have honed their heuristic abilities for filtering out the deluge of noise they sift through on a daily basis in order to be effective in their professions, these red flags are a non-starter.  For their entire adult lives, they have been reinforced to think within the box (often while calling it “out of the box thinking”).  The odds that a new piece of information comes along, for which an hour or two of investigation creates more confusion than answers and yields several red flags, but actually turns out to be an outstanding investment are vanishingly small.  That’s what heuristics do — filter out the garbage based on a cursory investigation of substance.  A typical member of the yuppie elite flags Bitcoin as garbage to be ignored upon their first investigation of its merits, and because of the groupthink of yuppies only paying attention to what other yuppies are interested in, that’s where Bitcoin remains.

Of course, this will all change as Bitcoin’s mechanics continue to play out, making Number go Up.  In time, everyone will have to face the painful realization that their reasons for writing off Bitcoin were wrong.  Because of the dynamics at work with the yuppie class, it may take longer for them to come around to Bitcoin than with most new technologies or trends.

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But for folks who are only just beginning to learn about Bitcoin (or your friends and family who have yet to begin), it’s worth looking at things from a different angle to ask… why was Bitcoin created?

This topic is always in the background, but at a moment like this — with the global financial system straining in such a way that will soon necessitate large-scale money printing — it’s time to bring it to the fore.

The man

When I first got into crypto, I spent a good chunk of my time trying to figure out the real identity of the pseudonym, Satoshi Nakamoto.  I have my short list of likely candidates — some living, some dead.  But there comes a point in your Bitcoin journey where you stop trying to identify who this person is that could become the world’s first trillionaire. 

Instead, you slowly let go of that desire to know and start to understand that Satoshi never wanted to mine a million Bitcoin for himself… what he wanted was to provide consistent hashpower to the network in order for Bitcoin to attract the participation it needed.

Thankfully, Satoshi sowed just enough doubt about his identity that he achieved a plausible deniability.  I couldn’t figure out definitively who Satoshi was, which means most won’t either.  And that is a beautiful gift to Bitcoin and to the world.

We could have had a figurehead.  A person whose words the press and general public would place significance on that would be countervailing to Bitcoin’s essential governance model of decentralized consensus.  Someone whose politics, affiliations, and past speeding tickets would be used against Bitcoin, to undermine and besmirch Bitcoin’s merit.  I think Satoshi was smart enough to realize this, which is why he chose to veil his identity in the pseudonym of Satoshi Nakamoto.

What’s more, I think all his choices in creating this pseudonymous identity were meant to obfuscate and confuse.  Satoshi writes with British spelling and slang, worked on Bitcoin during American working hours, and chose a Japanese name. 

He knew what he was doing — he was fighting to keep his identity unknown, not for his own benefit, but for our benefit.  He wanted Bitcoin to succeed, as he knew it could massively benefit everyone on Earth (with the possible exception of the current political & financial ruling class), and he knew that Bitcoin needed to be leaderless to do it.

Sometimes I think about how Satoshi must have been a big fan of V for Vendetta.  You can picture him, at home on his couch in 2005 (three years before announcing Bitcoin), being moved by the film but inspired on a deeper level than the rest of us.  He must have seen a path — a model to leverage — in the protagonist’s determination to cloak his identity behind a mask and in doing so, become more than a man — the manifestation of a cause, a mission, an idea. 

At some point I stopped trying to find out who Satoshi is.  I remember deciding instead to accept the mythos of Satoshi as no longer here, dead and gone.  In time, this morphed into realizing this is something of a responsibility for all of us to propagate — to refer to him as dead — to participate in Satoshi’s desire to be gone. 

I would later come to find that this is something of a mark of a true Bitcoiner — a milestone deep in the rabbit hole.  We are all Spartacus, so that he is not.

The motive

To understand why Bitcoin was created, we have to establish the context of that time, and the history that led up to that moment. 

Bitcoin was launched on January 9th, 2009.  In the very first Bitcoin block, Satoshi deliberately embedded a newspaper headline from that week: “Chancellor on brink of second bailout for banks”.

This was the Great Financial Crisis, the largest market calamity in generations.  And the answer that politicians and experts landed on?  Bailouts.  Certain banks were deemed “too big to fail” and so they had to be saved, by printing money and handing it to these banks. 

On the surface, that all seems reasonable.  But what it actually meant was that certain mega corporations were granted protection by a select few in power from the consequences of their own business decisions.  No more level playing field — privatized profits and socialized losses. Capitalism sullied.

What’s more, money is never simply printed out of thin air.  Instead, what happens is that the purchasing power of all the existing money is redistributed.  If there are 1000 dollars in the world, and you print 100 more, you take the existing purchasing power of that 1000 and now spread it over 1100 dollars.  The original 1000 dollars now has the same purchasing power that 910 dollars used to have.  In effect, printing that extra 100 dollars directly costs the existing holders 9% of their purchasing power. 

That’s what new dollars are made of: purchasing power quietly stolen from ordinary people.

Whereas the Occupy Wall Street movement was an outraged reaction to the inequity and indirect theft of bank bailouts, Satoshi must have seen this coming.  Bitcoin may have launched a few months into the Great Financial Crisis, but he had undoubtedly been working on this solution for years by that point.  His was not a reactionary protest demanding change, transparency, and fairness.  Instead, Satoshi’s was a proactive preparation of a system that would enforce change, transparency, and fairness by creating superior financial incentives for ordinary savers vs. the existing system.

The goal

Through Bitcoin, Satoshi aimed to end the unfairness of selective bank bailouts by making no bailouts possible at all, ever.  In place of faux-capitalism, he would create a radical system of uncompromising and unflinching capitalism.  Yes, it’s harsh, but the only way to prevent the abuse of preferential power is by making sure that nobody has that kind of power, Satoshi included.

In place of a system that benefitted those who are closest to the policymakers that control the money spigot (Cantillonaires, as they’ve been termed, in reference to Richard Cantillon, the 18th century economist who first described this phenomenon), Satoshi would have a system where the money spigot was pre-defined, finite, and distributed through an objectively fair global competition.

In place of a system that rewards those who gain access to more than their fair share of newly printed money, Satoshi would have a system that rewards those who simply hold their money over time.  To actually reward savers!  Truly, a revolutionary notion (and simultaneously shameful that it took humanity this long to come up with). 

What this amounts to is a new paradigm — one where deflation is in the driver’s seat, rather than the inflationary rat race that we’ve been told is in all of our best interest (by those who benefit the most from inflationary money printing).  A new system where money saved and safely stashed away actually grows in purchasing power over time (because of that money’s remarkable properties of increasing scarcity).

A money not for bankers and political insiders, but for hardworking everyday people.  That’s what Satoshi wanted for the world.  And that’s why Satoshi created Bitcoin. 

Now all you have to do is choose which system you want to store your money in.

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Now, we’re at $33.5T.  In just 4 months, the U.S. has added $2.1T of additional debt. 

While you were enjoying the summer, the U.S. was adding $18B to the National Debt every single day. 

That’s $12M of new debt every. single. minute.

(Note: this post contains a paid section. 1/2 of the analysis is free and I think you’ll get a lot out of it. 1/2 is for paid subscribers and the motivation for me to write this in the first place. Thanks for your support!)

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Putting the U.S. National Debt acceleration in context

To put that in context, if the pace of National Debt expansion that we’ve seen since the debt ceiling was lifted in Q2 continues… the US National Debt will increase $6.5T in one year.  That’s a 20% increase in a single year. 

It took the United States 225 years to add its first $6T in National Debt; now, we are on track to add that amount in a single year.

And this isn’t even a crisis — we’re not even in a recession (yet), officially. 

Hopefully, these abstract numbers have pissed you off.  But let’s bring it down to the human scale, just to drive it home.  There are 134M full-time employees in the U.S.  Assuming a 50-year career for each of them, this means that 7,300 retire on average each day.  If the daily issuance of new National Debt this summer was instead given to retiring workers, every single one would go home with $2.5M.

Doesn’t sound possible?  Check my math!

That is the scale of the incremental debt spending going on.  Instead of your last day at work ending with you riding off into the sunset with a $2.5M check to help you enjoy your retirement, the U.S. Government is spending that $2.5M on who knows what instead.  But don’t worry… they’ll add it to your children’s tab to pay for it.

The only reason there’s not rioting in the streets is because nobody bothers to do the math shown here.

What does this all add up to?  Well, the U.S. National Debt is getting worse, fast.

When the gentlemen on the All-In Podcast talked about my charts detailing the U.S. fiscal situation, Chamath Palihapitiya called this chart at $31T “a nothing.” 

Well, EOY 2023 is already looking considerably worse.  If we continue adding to the debt at the rate we have been since June, we will add an additional $1.35T by the end of the year, for a total of ~$35T in U.S. National Debt at EOY 2023.

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• normalized annual deficits

• new interest expense

• falling tax receipts, and

• increased spending categories.

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No other event comes close to the halving’s significance on the horizon, for the simple reason that each prior Bitcoin halving has launched Bitcoin’s price to new heights.

The hard part is understanding why & remaining steadfast on the long wait for the next halving. 

Luckily, at this point, you don’t need to wait very long.  The next Bitcoin halving is in April 2024.  That’s just months away — which makes now the perfect time to learn why Christmas pales in comparison.

Here are the 6 keys to understanding the Bitcoin halving & why it’s a huge deal:

1. The Bitcoin halving means reduced supply issuance

This is Bitcoin’s supply issuance schedule.  What the hell does that mean?  Well, the day that Bitcoin launched in January 2009… there were 0 Bitcoin in existence.  Eventually, there will be a hardcapped, absolute maximum of 21M Bitcoin in existence.  But how do you go from 0 to 21M?

The creator of Bitcoin implemented a very clever method – rewarding Bitcoin to whoever provides computational security to the network (“mining”).  Even more clever, he designed this system to release half as much Bitcoin every four years. 

That’s what a Bitcoin “halving” is — a moment in time when the rate of new Bitcoin issuance gets cut in half, permanently.

2. Immutable code means the halving is guaranteed

Hardcoded into Bitcoin’s protocol is this simple mathematical expression: 

It doesn’t look like much, but it’s Bitcoin’s entire monetary policy — written in stone from Day 0.  Here’s what this expression looks like in code.

Here’s what this function says.  First, the code counts how many halvings have occurred.  A halving is pre-set to occur every 210,000 blocks (~4 years, since there is a new block every 10 minutes on average). 

Next, the amount of new Bitcoin to be issued for each new block is determined.  This is calculated by dividing 50 by 2, for each halving that has occurred. 

The result is that for the first 4 years, 50 new Bitcoin were issued to the miner of each block.  After the first halving, 25 Bitcoin were issued per block until the next halving (4 years later), when it was cut to 12.5 Bitcoin per block.

And this pattern of decreasing Bitcoin issuance every 4 years continues until 2140, when no more Bitcoin will be issued ever again.

Right now, Bitcoin’s supply inflates by ~1.8% every year.  In April 2024, the 4^th halving will happen and suddenly, Bitcoin’s supply inflation will drop to 0.9% per year.

This will make Bitcoin a “harder” asset than gold, whose supply grows 1.5-2% every year from global gold mining efforts.

3. Perfectly inelastic supply

It’s one thing to say that Bitcoin is becoming a “harder” asset, one quadrennial “halving” at a time.  But, it’s another thing to realize just how unwavering this is.

With every other commodity, you can always make more.  If the price of diamonds, gold, silver, oil, or sugar were to 10x overnight, that would create massive incentive for producers to go mine, refine, or grow more of that commodity.  (And indeed, that is what tends to happen when any particular commodity spikes in value, as the free market rises to the occasion.)

But this is not the case with Bitcoin.  No matter how badly anyone wants to create more Bitcoin, they can’t. 

The supply side of the supply-and-demand equation is completely indifferent to demand.  To use the Econ 101 term, supply is “perfectly inelastic.”

What does that look like?

Well, here’s a typical supply-and-demand chart:

Price equilibrium is set where the two lines cross – where supply and demand meet. 

And here’s what Bitcoin’s supply-and-demand chart looks like right now (note that new supply creation is completely indifferent to price):

Where it gets interesting is when the next halving comes along.  Suddenly, half as much new supply is being created, and there’s nothing anybody can do to change that.

As you can see, this shifts the point on the graph where supply and demand meet.  Suddenly, that equilibrium is set at a higher point on the y-axis, which is the market price for each unit. And the same thing happens again at the next halving, in 2028:

Importantly, this view leaves out that as the supply line moves to the left, the demand curve arguably moves to the right.  This is because Bitcoin becomes more attractive as time goes on, more people learn about it and adopt it, and the network effect grows stronger. 

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4. Price is where net demand = net supply creation

This is all well and good in theory, but let’s see what it looks like in practical terms. 

A common mistake that people make when considering the potential impact of the halving is comparing the traded volume of Bitcoin vs. the reduced supply issuance from the halving.

This is a mistake because traded volume necessarily nets out. When buyers and sellers are in equilibrium, the price of an asset goes sideways. What does the price of Bitcoin do in the ~12 months before the next halving? It goes (more or less) sideways.

It doesn’t matter that there’s been $12B of traded volume in Bitcoin markets in the last 24 hours. It could be $100B and the price would still go sideways if buyers and sellers were in balance.

But, what does matter is that, above and beyond the back-and-forth of traded volume, there’s a steady net inflow of demand every day. Because new Bitcoin supply is issued on a daily basis, the market needs to absorb this supply via net demand flowing into Bitcoin.

Right now, ~900 Bitcoin are released every day (6.25 BTC/block x 6 blocks/hour x 24 hours/day).  With Bitcoin at ~$30k/coin (as of the time of writing), this means ~$27M of Bitcoin is created and issued to Bitcoin miners every day.

That adds up.  Each month, ~$900M of new Bitcoin is being created.  For the price to go sideways (as it has been), this means that average demand flowing into Bitcoin must also be ~$900M/month.  If it was less than this, the price would drift downwards – if it was more, the price would drift upwards. 

Which is why each halving is so exciting for Bitcoin holders.

Let’s assume that Bitcoin’s price stays at $30k/coin until the next halving in late April 2024.  When the halving occurs at block 840,000, suddenly there will be half as much supply being created and going out into the market to meet incoming demand. 

There will only be $450M of Bitcoin being created each month, but $900M of demand.  This is a guaranteed, predictable, reliable supply shortage.  It will begin in April 2024.

The only way for the free market to resolve this imbalance of supply and demand (since Bitcoin’s supply schedule is completely inelastic) is for price to go up.  This supply shortage will accumulate, day after day, and naturally buyers will have to raise their bids in order to find willing sellers.

It’s pure supply & demand. 

5. Increasing scarcity leads to absolute scarcity

Perhaps the best way to drive home the impact of the halving is to think about this phenomenon from the perspective of someone trying to buy some Bitcoin. 

From this point of view, Bitcoin’s “halvings” make new coins harder to come by.  In fact, this issuance schedule creates an incredible attribute of “increasing scarcity.”

Remarkably, no other asset in the physical realm has ever provided this guarantee before. 

The result is an unthinkable property: Bitcoin gets more valuable over time.  This sounds like an impossible claim to make.  And yet, we’ve already explored the mechanics at work.

For a deeper dive into how Bitcoin’s “increasing scarcity” leads to increasing value, check out this thorough explanation of all of the mechanics along the way:

What’s more, the effect of each halving is cumulative and compounding.  When viewed on a sufficiently zoomed-out timeline, the process of Bitcoin’s increasing scarcity reveals a sequence of market cycles, with a clear overall trend of Bitcoin’s value heading up-and-to-the-right.

Nothing can stop Bitcoin’s inexorable march of increasing scarcity, culminating in terminal, absolute scarcity. 

What’s crazy is what happens to the price of an asset when there is zero new supply creation. There simply has never been a monetary good whose valuation is unconstrained by the market having to absorb new supply creation every year.

As a result of this, Bitcoin’s full potential valuation in the long-term is staggering.  Here’s my effort to quantify the potential end-state for Bitcoin:

6. Bitcoin’s marketing department & self-fulfilling psychology

Ultimately, the halvings are Bitcoin’s marketing department.  Gradual processes become normalized.  But calm equilibrium periodically punctuated by abrupt change creates excitement, buzz, anticipation.

As the halving draws nearer, Bitcoiners will talk more and more loudly.  We can’t help it — the 1000x better Olympics are finally here.

With all of this buzz, some investors will wonder, “is this supply shock going to catalyze another bull market?  Do I want to get ahead of it?”

In this way, the halvings create a psychological event.  A reliable, recurring market opportunity where demand increases because of speculative anticipation. 

As a result, this shift in behavior helps make the post-halving bull market a self-fulfilling prophecy.

It’s all just human nature interacting with increasing scarcity.  We’re simply unfamiliar with these dynamics because there’s never been an asset with these properties in history.    

Despite all the incredible reasons to eagerly look forward to the Bitcoin halvings… 99%+ of people don’t know this event will happen next year.  In fact, shockingly few people have ever heard about Bitcoin’s halvings!

The fact that you are reading this means that you are now in that 1%. That’s called information asymmetry — you have an edge on the rest of the world.

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Okay, now buckle in! Let’s get into our story…

For the last few months, things have felt a little weird out there.  Is there a recession coming?  Are we in a recession already, but it’s just not clear?  What is the Fed going to do? 

We find ourselves on strange tides in global macro, perhaps best summarized by this tweet today taking inventory of the odd coincidence of economic trends:

These trends are bizarre, but that’s because the underlying macroeconomic conditions are bizarre.

When things break in the financial system, it doesn’t happen overnight.  We remember late 2008 as a crisis that materialized overnight, just like we remember the 2020 Covid stimulus as an emergency intervention.  But we easily forget that in both cases, things were weird in the financial system ~6 months earlier.  In early 2008, Bear Stearns went under; in 2019, repo market utilization spiked and the entire financial system began to wobble. 

In macro analyst Luke Gromen’s opinion, “the beatings in [sovereign debt] will continue… until we get a repo rate September 2019 spike, except in Western sovereign bond markets.  Then, everyone’s going to say, ‘how did nobody know the Fed had broken something?’  And I’m telling you, they’ve already broken something.”

That’s the key piece.  The weirdness out there is because the Fed has hiked rates from ~0% to ~5.5% in record time. That takes the oxygen out of the room. It just takes some time for the inevitable to unfold.

The rest of this article will take a look at the factors at play that point towards the simple thesis that the Fed’s rate hikes have already broken something, it’s just slowly materializing.

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US National Debt setting new records

You probably heard the headline from last week: the US National Debt officially passed $33T.  That means that since the debt-ceiling debate was resolved in May, the National Debt has grown at a blistering 18.5% annualized rate.  To put that in perspective, if that pace continues for a full year, we will have added $6T to the National Debt.

And indeed, in the one week since the $33T mark was breached, we have now already reached $33.1T.  Including nights and weekends, we are racking up federal debt at an incredible rate of $10M every single minute.

US Treasury considers Japanification

Tucked into a recent Bloomberg discussion with US Treasury Department assistant secretary, Josh Frost, there was something new.  A statement framed as business-as-usual that is anything but: “The Treasury is expected in 2024 to start regularly purchasing its bonds” with the dual objective “to bolster liquidity in some pockets of the market and to smooth the volatility of bill issuance as it manages its cash balance.”

The subtext here is that there are not enough buyers to absorb the amount of US Federal debt issuance that will be coming on to the market.  This means that the US Treasury is prepared to step in as a “buyer of last resort” in the Treasury bond market.  This is the playbook that Japan has been running for the last few decades, stepping in with a blank check to effectively nationalize the assets that nobody in the marketplace wants to buy.

To date, the US Government has softened the impact of the bond sell-off by backstopping the private sector with the BTFP, which is effectively a blank check program to cover the considerable unrealized losses that have accrued for financial institutions holding US Treasuries, as this chart from Joe Consorti highlights.

But now, the US Government is preparing to take on the problem more directly.

In terms of major milestones in the ongoing erosion of the US fiscal position, this stands out as a major threshold.  But of course, it is being framed as just a small program that will not be used during times of crisis. 

Again, reading between the lines, this is more likely a sign that the US Treasury realizes that it needs to quietly position itself to become a “buyer of last resort” in order to prop up the Treasury bond market as interest expense on the National Debt continues to soar, driving greater deficits and the need for more debt issuance. 

From the circumstances of the US National Debt and the behavior of the Treasury, it’s evident that the sovereign debt situation is headed for more pain.

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As for why a recession hasn’t materialized yet & when it may be coming, there are some clues.

For paid subscribers, let’s dig into:

• the major drivers of the lag effect that investors should be aware of, and

• why the Fed’s Reverse Repo operations are the key to understanding why the recession hasn’t hit yet, but is on the way.

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Okay, now on with our story…

In 2022, Michael Saylor enumerated what he sees as the three biggest systemic developments that will catalyze Bitcoin’s price appreciation going forward:

1. Spot Bitcoin ETF approval

2. Traditional bank custody of Bitcoin

3. Fair value accounting rules for Bitcoin on corporate balance sheets

On the surface, the third item seems out of place, insignificant.  But accounting is the foundation of finance!  (Note: I have a Master’s in Accounting from UT-Austin, so I am biased and have long-appreciated the importance of clear accounting standards to enable corporate adoption of Bitcoin.)

With the Financial Accounting Standards Board’s (FASB) recent decision to update its guidance for digital asset accounting, I decided to quantify the exact impact this would have on MicroStrategy and others.  In doing so, I discovered that this is a much bigger deal than people realize... for reasons just under the surface. 

This article will explain why the second- and third-order effects of fair value accounting treatment for Bitcoin create huge tailwinds for the normalization and adoption of Bitcoin as a treasury reserve asset.

Now I see why Saylor views this as one of the big three, and in a few minutes, you will too.

Current accounting standard

To-date, the established accounting guidance for digital assets has been to treat them as “intangible assets,” much like trademarks, copyrights, and brand value.  This only makes sense as far as the label is concerned – you can imagine the original logic from years ago when digital assets were still completely foreign to most: “you can’t touch Bitcoin, so let’s bucket it along with other intangible assets.”

The problem with this is that the accounting standards for “intangible assets” require unrealized losses to be recognized as asset impairment (losses) in earnings statements, but do not allow for unrealized gains to be recorded as profits.  (Accounting standards like this often arise out of a desire to impose conservatism and limit creative accounting – for example, you don’t want companies to claim their brand got more valuable all of a sudden, when really, they are masking operating losses for a bad quarter.)

In other words, if a company buys $1B of Bitcoin and then the market price drops such that the Bitcoin is now worth $700m, the company has to recognize a $300m loss on its earnings report.  If, in the next quarter, the value of the same Bitcoin holdings soars to $1.5B, the company does not get to recognize any gains – instead, the balance sheet shows $700m of Bitcoin and $800m of unrealized gains from Bitcoin.

Current MicroStrategy situation

The company on the forefront of wrestling with this issue is MicroStrategy.  Three years ago, MicroStrategy adopted a Bitcoin treasury strategy – they converted all of their dollars and other instruments into Bitcoin holdings.

The strategy has been tremendously successful.  As Bitcoin’s value has grown, the value of MicroStrategy’s balance sheet has grown.  In addition, as a profit-generating company, MicroStrategy continues to convert its quarterly profits into new Bitcoin holdings. 

In effect, MicroStrategy is a Bitcoin holding company that also runs a Bitcoin-generating operating business. 

But, the success of this strategy has suffered from the optics of the existing accounting standards.  When Bitcoin’s price drops, MicroStrategy has to record impairment losses from Bitcoin markdowns. 

Cumulatively over the last three years, this has meant a ~$2B hit to earnings that isn’t real.  It’s just from the one-sided accounting treatment of Bitcoin.

This image is page six from MicroStrategy’s most-recent 10-Q report.  (The fun thing about accounting is that public companies tell you everything in their public filings.  It’s all right there, but the only people who ever read quarterly reports are accountants and Wall Street equities analysts.)

This is where the second-order effects start to come in.  These impairment losses from accounting treatment haven’t suppressed the stock price – the Wall Street analysts know how to adjust for them to properly value the underlying reality of MicroStrategy’s Bitcoin holdings.  However, these impairment losses have still hurt in a different way.

Because of the way these impairment charges are calculated and flow to the earnings statement, MicroStrategy regularly reports quarterly and annual operating losses.  In fact, here’s a Bloomberg headline from earlier this year: “MicroStrategy Posts Another Loss After Bitcoin Charge – Software firm has registered eight straight quarterly losses.”

The impact here is optics.  In essence, the “intangible asset” accounting treatment of Bitcoin has forced MicroStrategy to look like a loser despite being one of the big winners of the last three years.

Long-awaited change to accounting standards

The big news is that the FASB, after years of petitioning from MicroStrategy and others, has voted unanimously to update its guidance for digital assets to require “fair value accounting”.  This means that companies will recognize the unrealized losses and gains in their quarterly earnings reports. 

From Bloomberg:  “Under new rules expected to be published by year end, companies that hold or invest in cryptocurrency will be required to report their holdings at fair value, a measurement that aims to capture the most up-to-date value of an asset—including rebounds in value after prices dip. While the new standard will inject volatility into the earnings of companies that are heavily invested in crypto, the ability to record recoveries will be an improvement over the current practice.”

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First-order effect:  What this means for MicroStrategy

The obvious and immediate impact of this updated FASB guidance is that companies with Bitcoin treasury holdings get to mark up the value of their positions.  Practically speaking, this means MicroStrategy will get to recognize ~$2B in gains to offset the cumulative impairment losses to-date.

It’s not clear if MicroStrategy will need to recognize this gain immediately, or if they can amortize the recognized gains over several quarters.  If it was me and I had the option, I would opt to recognize $500M in gains for four quarters in a row… specifically because of what it would add to the second- and third-order effects.

Second-order effect:  MicroStrategy narrative soars

If MicroStrategy is able to amortize their Bitcoin mark-ups over several quarters, they guarantee a string of strong earnings reports.  Again, this won’t change anything in terms of their stock valuation – equities analysts know how to account for reality.  However, it will change the narrative around MicroStrategy’s performance. 

Imagine the buzz that will build if MicroStrategy reports a $500M gain for not just Q1 2024, but again for Q2, Q3, and Q4.  Even though it will be clear that it’s because of a one-off Bitcoin accounting change, we can’t help but register a pattern of success.

Here’s where it gets crazy.  Let’s say that the 2024 Bitcoin halving catalyzes a 2024-25 bull market, as I continue to expect will happen.  If the price soars to ~$150k/Bitcoin (which I think is very possible), that would mean a ~6x in the value of MicroStrategy’s Bitcoin holdings.

With the new accounting standards, MicroStrategy would mark-up the value of their holdings accordingly each quarter.  With ~$4B in Bitcoin holdings today, this could mean recording an average mark-up of $4B for five quarters in a row.

Depending on the timing of the bull market, this could mean MicroStrategy reporting an outrageous string of quarterly profits.  MicroStrategy has a ~$5B market cap today.  In this scenario, they could deliver ~8 quarters in a row of profits in the billions. 

There’s no way around it, that becomes a big story.  The financial media loves a splashy narrative, and MicroStrategy’s winning ways would be a magnet for attention.  Everyone loves a winner, and everyone wants to copy winners.

Third-order effect:  MicroStrategy’s Bitcoin treasury strategy becomes popular

If you’re a public company CFO or a CEO, you want to deliver added performance.  It can cement your career and deliver you a fortune in performance bonuses.

Over the last three years, you’ve watched MicroStrategy suffer impairment losses.  Their Bitcoin treasury strategy has looked a little crazy (even though it has worked to deliver stock performance).

But now, with the new FASB accounting standards combined with a Bitcoin bull market, MicroStrategy is suddenly a relentless winner.  What is their edge?  Can we copy that?

I don’t think that MicroStrategy’s approach will suddenly inspire a bunch of converts, but some will dip a toe.  Depending on how loud and public MicroStrategy’s success is, it may even become a topic that CFOs and CEOs are pressured to consider.  

What a change that would be from how Bitcoin has historically been viewed! 

This shift would be a massive victory for Bitcoin – all because the FASB updated its accounting standards for Bitcoin from “intangible asset” to “fair value accounting.”  And this would just be the latest chapter in Bitcoin’s ongoing journey to mainstream adoption.

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The common themes of Bitcoin art are:

• Rage at the injustices of the fiat monetary system

• A subversive streak of defiant rebellion

• An uncommon optimism about the future (in sharp contrast to the nihilism undertone of contemporary art in the mainstream)

• A cerebral element that revels in the dorky subject matter of monetary policy and decentralized cryptographic systems. 

Perhaps the most notable departure from mainstream art is the commitment to Proof-of-Work.  As an engineering design principle in Bitcoin, Proof-of-Work enables the Bitcoin network to converge on a single version of the decentralized ledger.  But the Bitcoin community has taken inspiration from the elegance of that system, and in somewhat of a rebellion from the mainstream, values Proof-of-Work as a generalized ethos. 

And that is especially true in art.  While the last century of mainstream art has been characterized by a trend towards increasing abstraction and minimalism, Bitcoin art celebrates ornate detail and the unmistakable hallmarks of time committed. 

It’s no mistake that these preferences of craftsmanship in art and design were last seen in the beginning of the 20^th century (e.g., Art Deco, Beaux Arts, Art Nouveau, the Arts and Crafts movement, and Gesamtkunstwerk “total work of art”).  This was the final era before the advent of central banking. 

Before central banking, we lived in an inherently deflationary world.  When money grows in purchasing power over time (deflation), craftsmen are incentivized to produce better work (rather than more work, more easily).  In turn, those forces seemed to foster a culture of appreciating craftsmanship and quality. 

Since the creation of the Federal Reserve in 1913, the world has been increasingly inflationary, with the opposite effects on the quality of goods but also on the cultural value of craftsmanship.

What makes the Bitcoin art world notable is that the adoption of this deflationary currency (Bitcoin) seems to be nurturing a new subculture of craftsmanship.  With that introduction, I thought it would be fun to share a selection of artists leading the way.

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Here are the 9 best artists in Bitcoin:

1. Alex Schaefer

Alex is an oil painter whose body of work ranges from landscapes to street scenes — you know, typical subjects.  But he is best known for bringing his deep contempt for banking to his work.  In his “Burning Banks” series, Alex paints ordinary retail bank branches engulfed in towering infernos.  Here is my personal favorite:

The contrast of these boring corporate outposts with the imposed fantasy of a raging conflagration is striking and uncomfortable.  The familiar and innocent medium of an oil panting is transformed into a clear message of not just unmistakable fury, but also subversive rebellion. 

By creating these paintings, Alex thumbs his nose at the establishment and sticks his middle finger up at the most powerful industry in the world.  This contempt extends to central banks as well.  His best-known painting shows the Federal Reserve branch of Los Angeles gutted with flames as a resolute mob exacts gallows justice on the central bankers.

The most badass part of Alex’s method is that he paints these fiery fantasies while standing in front of these bank branches, casually and charmingly painting right there on the sidewalk.  And it does not go unnoticed.  Alex has faced investigation from law enforcement – local and federal – trying to determine if this constitutes a threat of domestic terrorism.  But ultimately, art is free speech.

In many ways, this mirrors the relationship that Bitcoin has with the fiat monetary system.  Bitcoin stands in subversive defiance of the traditional system, merely by asserting that the status quo abuses the interests of ordinary people & proffering a fair alternative for individuals to freely opt into. 

For these reasons, Alex is the #1 best artist in Bitcoin.  You can find more of his work here. 

2. FractalEncrypt

FractalEncrypt is a pseudonymous artist known for making incredibly detailed sculpture pieces directly inspired by the Bitcoin network.  Perhaps more than any other artist, FractalEncrypt’s approach embodies the Proof-of-Work ethos at the heart of Bitcoin’s engineering design. 

In appreciation for the exquisite detail and sheer number of hours involved in designing, manufacturing, and assembling the many components involved in these sculptures, some of Bitcoin’s largest promoters have added FractalEncrypt pieces to their collections, including Michael Saylor.

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3. Cryptograffiti

Cryptograffiti is a pseudonymous Bitcoin artist who fuses the politicized street art of graffiti artists like Banksy with the anti-central banking sentiment of Bitcoin.  Much of his graffiti work focuses on warning against CBDCs, including unauthorized public signage and exceptionally cool multimedia street art.

Perhaps his best-known stunt was the signage he put up around the First Republic Bank headquarters during its downfall, including this moving billboard parked directly outside.

4. Yellow

This one is a bit different. (In fact, it was the inspiration to write this art piece.)  Yellow is the invented persona of a Bitcoin meme artist — a yellow cartoonish puppet with a thick Greek accent and lovable (and crude) curmudgeon ways.  While most of his efforts are the art of satire through memes and humorous videos, Yellow has stumbled into what I view as the defining piece of art for the last two years in Bitcoin.

Like most Bitcoiners in the heady bull market of late 2021, Yellow was excited for the blow-off top that would surely extend Bitcoin’s price above $100,000.  In his euphoric enthusiasm, Yellow pledged to host a Twitter Spaces (an audio chatroom on Twitter) every single day to play Journey’s “Don’t Stop Believin” until Bitcoin reached $100,000. 

He expected it to take a few weeks.  Nearly two years later he is still doing it.  Every single day he plays “Don’t Stop Believin,” then lampoons some recent hot topic in the Bitcoin landscape, then plays the song again for good measure.  Here’s a recent recording (note: 1:40 of silence at beginning) that features a parody guided meditation in between songs, starting at 6:30. 

By bearing this cross, Yellow has turned his overzealous pledge into a piece of performance art.  Through the denial, fear, despair, and regret of the 2022 bear market, he publicly vocalized and processed the shared emotions of Bitcoin holders everywhere.  Through 2023, his DSB project has become a symbol of the perseverance required of all Bitcoiners to make it to the 2024 halving (and the bull market it will spark). 

When the time comes, few Bitcoiners will have earned $100,000/coin more than Yellow and his DSB Proof-of-Work.

5. Bitcoin Apex

Bitcoin Apex is a pseudonymous artist focusing on pencil drawings with a stunning degree of Proof-of-Work.  Here is his most popular piece, with the artist’s commentary below.

“In this over 200 hours of work, spread over a whole month, I have drawn a Bitcoin modified version of the bronze relief by Lodovico Pogliaghi. The relief can be seen on the doors of the Duomo di Milano and was masterfully created between 1894-1908. There are quite a few bitcoin Easter eggs lovingly incorporated into the drawing.

With the extinction of hard money, the days of magnificent, masterfully detailed paintings and buildings have also disappeared. With my drawing, I want to pay tribute to the art of that era. I am a strong proponent of achievement, quality and work, much like the lifeblood of Bitcoin: proof-of-work.”

You can see more of his work at his website.

6. Lina Seiche

Lina is a graphic artist who has lovingly cultivated a cartoon comic series centered on her protagonist, the Little Hodler.  Comics have a special capacity to distill the essence of an idea and communicate it with clarity.  For example, in the first of ~200 comic strips, the Little Hodler grows wealthier by using Bitcoin as a savings vehicle while the purchasing power of a dollar millionaire shrinks by comparison.

See more of Lina’s art at her website.

7. Tip_NZ

Tip_NZ is a unique artist on this list because she is the only musician.  Tip is a self-styled “Bitcoin rapvocate.”  Her songs are thorough lyrical breakdowns of specific facets of Bitcoin education.  Each one is a marvel in terms of the sheer amount of work necessary to do the research, writing, music, and video production.  My favorites are “TIMECHAIN” and “BANK”.  Check out more of Tip’s videos on her website.

8. Brekkie von Bitcoin

Brekkie von Bitcoin is the pseudonym of a Bitcoiner who was inspired by Bitcoin’s Proof-of-Work ethos to learn the most unforgiving physical art medium: rock sculpture.  Brekkie has documented his journey and become quite skilled with a hammer and chisel.  All of his pieces are inspired by Bitcoin, including my personal favorites “Vires in Numeris” (Strength in Numbers) and “Bitcoin Infinity.”

9. Lucho Poletti

Lucho is a visual artist whose graphics span a variety of styles, but I’m particularly fond of his US Dollar-inspired Bitcoin prints.  You can see more of his work at his website.

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Thanks for your support! Okay, now on with our story…

When people first hear about Bitcoin, they tend to assume it is a curiosity, an experiment.  It feels like it just dropped down out of the blue.  At any moment it could fail because every facet of it was created on a lark — a side project of some anonymous guy calling himself Satoshi Nakamoto.

Not exactly an image that inspires confidence.

Fortunately, this is not an accurate representation of Bitcoin’s genesis.  Bitcoin was not a random creation.  It was the culmination of decades of efforts by freedom-minded technologists — from the High-Tech Hayekians to the Cypherpunks. 

Satoshi brought these building blocks together to create an Internet-native, unstoppable money.

By bringing into perspective the scale of collective effort from brilliant minds collaborating over decades to create the battle-tested building blocks of Bitcoin, our understanding of Bitcoin shifts from the default assumption that Bitcoin is a one-off experiment towards a recognition of Bitcoin as a culminating achievement — a scientific breakthrough only possible by standing on the shoulders of giants.

An Ideological Movement Takes Shape

From the earliest days of the internet, researchers took interest in methods of maintaining privacy in digital communications.  Nobody was more interested in this topic than the U.S. Government, which funded early digital cryptography research in the 70s. 

By the 1980s, these early research efforts had seeded interest in academia and the private sector.  In Palo Alto, a group that would be known as the “High-Tech Hayekians” began to form.  The members of this group were each “a rich brew of scientist, entrepreneur, programmer and philosopher… Each has a firm understanding of market principles and a deep appreciation for the general social principle of non-intervention.”  When these young men gathered, “the conversations always involved Hayekian ideas, but at the same time they almost always involved computer science.”  In other words, these were programmers who were passionate believers in free-markets without intervention — what’s broadly known as Austrian economics.

As the early 90s brought the widespread use of the Internet as a daily means of communication, this geographically localized club morphed into something bigger — a movement. 

In 1992, this group adopted the moniker of “Cypherpunks” and in 1993 had its foundational ethos codified in A Cypherpunk’s Manifesto… 

“Privacy is necessary for an open society in the electronic age. ... We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy ... We must defend our own privacy if we expect to have any. ... Cypherpunks write code. We know that someone has to write software to defend privacy, and ... we're going to write it.”

Here are some of the notable projects attributable to various Cypherpunks:

• PGP (“Pretty Good Privacy”)

  • PGP is a widely-used encryption software that allows for secure communication and file encryption.

  • The U.S. Government waged war against PGP in 1993, claiming that it could be used as a weapon and categorizing it as “munitions.”  Defenders of PGP famously printed PGP code on t-shirts and submitted it to the U.S. Government office of Munitions Control to ask if they were allowed to sell this t-shirt… the Government never responded to this bait (because they knew they would lose the ensuing lawsuit if they attempted to prevent a clear case of freedom of speech).  For a very interesting 9-minute recap of this chapter of Cypherpunk history, check out this video.

• Tor (“The Onion Router”)

  • Tor is a decentralized network that enables anonymous communication by routing internet traffic through a series of relays.

  • Tor has been successful in providing anonymity online, with the inevitable mixed baggage of protecting individual privacy for good and bad actors alike.

• BitTorrent

  • BitTorrent is the dominant peer-to-peer file sharing network in the world, accounting for 3% of the world’s internet bandwidth.

  • BitTorrent improved upon predecessors like Napster by focusing on a purely decentralized network architecture, making it impossible for law enforcement to prevent the network from operating.

The common thread between these successful projects was their use of encryption code and decentralized networking to unleash unstoppable open-source software.

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The Grail Quest for Internet Money

Despite the Cypherpunks’ notable successes, in the crusade to assert human freedoms on the Internet, the holy grail eluded them: a free-market digital currency. 

Here are some of the notable efforts to create an Internet-native money:

• DigiCash:  Developed by David Chaum in the 1990s, DigiCash aimed to provide anonymous electronic cash transactions but failed due to limited adoption and regulatory challenges.

• Hashcash:  Created by Adam Back in 1997, Hashcash aimed to combat email spam and denial-of-service attacks by introducing a proof-of-work system, but it suffered from scalability limitations and lacked a decentralized consensus mechanism.

• E-gold:  Launched in 1996, E-gold allowed users to hold gold-backed digital currency, but it faced legal issues related to money laundering and regulatory compliance.

• Bit gold:  Proposed by Nick Szabo in 1998, Bit gold aimed to create a decentralized digital currency system based on cryptographic proof, but it lacked traction and never made it out of the idea phase.

• B-Money:  Proposed by Wei Dai in 1998, B-Money focused on creating a decentralized digital currency system but lacked a practical implementation.

The common thread in these failures was that each project relied on centralized authority to create, issue, and manage currency.  These were companies, ultimately.  And companies cannot compete with the monopoly on money issuance that governments enjoy.

This fact did not go unnoticed by a particular Cypherpunk:

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.” 

- Satoshi Nakamoto, February 2009

The reason that Bitcoin succeeded where prior attempts failed is because Satoshi deliberately designed Bitcoin to solve for the weaknesses of its predecessors while leveraging the strengths of other Cypherpunk projects that were successful (PGP, Tor, BitTorrent).  Notably, this doesn’t even address the specific technological components that Bitcoin relies upon from earlier Cypherpunk breakthroughs (private key cryptography, Proof-of-Work, peer-to-peer networking, etc.).

For more on the pre-history of Bitcoin, I highly recommend this 40-minute documentary, Cypherpunks Write Code.  (Excellent production value and stylized presentation!)

Overall, I hope this post illuminates what often goes unarticulated about Bitcoin: it does not exist and thrive by accident.  It succeeds because of prior decades of work — successes and failures — by technologists aiming to enable human freedoms through open-source software development.

Personally, learning about the pre-history of Bitcoin helped me realize that Bitcoin was not a complete fluke that came out of nowhere.  Instead, it was the iteration in a long string of attempts that finally had the necessary components to survive. 

If Bitcoin didn’t have what it takes to withstand a world of hackers, opportunists, and controlling governments, it would have died after a year or two and no more than $100M in value.  On the contrary, it has blossomed for 14 years and accrued $500B in value... and it’s just getting started.

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What’s more, these missing funds were the result of not one, but two incidents of colossal mismanagement.  Court documents have now revealed the shamefully embarrassing details.

Intro to Prime Trust

Prime Trust is a crypto custodian company with the lofty regulatory designation as a Qualified Custodian.  In other words, their entire business is to safekeep cryptocurrency assets on behalf of other companies.  Some of Prime Trust’s clients included Binance US, Strike, Swan, and FTX.

But, as of June, the company is being wound down after it failed to recover from two fatal blunders.

“The Wallet Incident”

The first and biggest disaster was the mismanagement of cryptocurrency addresses that caused $76M in permanently lost Ethereum – referred to as “The Wallet Incident” in court documents. 

This was the result of a stunning oversight.  Between March 2018 and July 2019, Prime Trust used a particular set of cryptocurrency wallets.  It then migrated to a new system.

However, starting in January 2021, Prime Trust somehow started providing customers with the deposit addresses associated with the old wallet system.  What’s most surprising is that this error was supposedly not noticed until December 2021.

From that point until June 2023, the public was not aware that Prime Trust had a $76M hole on its balance sheet – in effect, $76M of customer assets entrusted to this Qualified Custodian were permanently lost.

Customer funds invested in a yield Ponzi

The second disaster that Prime Trust management oversaw was the loss of $6M of client funds (and a further $2M of Prime Trust’s corporate treasury) in crypto yield Ponzi scheme, Terra Luna.

For a refresher on Terra Luna, this was a cryptocurrency platform (Luna) with an associated programmatic stablecoin offering (Terra).  The idea was that the massive Bitcoin treasury of Luna could be used to algorithmically maintain the value of each Terra unit at a steady $1.00/Terra token & generate guaranteed yield.

This worked… until it didn’t.  Just a few months after launching, the inherent instability of this system was systematically attacked by opportunistic short-sellers with deep pockets.  The result was Terra Luna collapsed, its founder became an international fugitive for a year, and was eventually arrested at an airport in Montenegro using a fake passport where he is now serving a jail sentence.

Little did customers of Prime Trust know, $6M of their funds were invested in Terra with the ill-advised goal of generating comfortable yield on these deposits.  Instead, this decision generated an additional $6M hole on Prime Trust’s balance sheet.

New company, same people

One of the stranger aspects of this story is that the timeline is muddied by multiple changes in leadership.  Who is responsible for these egregious errors in managerial oversight?  Furthermore, who knew what, and when?  These questions are impossible to answer with the available information.

What’s clear is that Scott Purcell, the founder and CEO of Prime Trust, left the company in August 2021 – seven months after the beginning of “the Wallet Incident.”  Purcell then founded a new crypto custodian, Fortress Trust, with a very similar business model to Prime Trust.

It may be that Purcell and his team gained valuable experience in crypto custody and are better custodians for it.  For that matter, Fortress Trust has the vote of confidence of some prominent corporate clients.

Reassessing custodian qualifications

The business of custody is all about trust.  To ensure high standards among custodians, there is a formal designation that custody companies must seek: Qualified Custodian.  This credential recognizes custodians that adhere to certain practices, standards, and regulatory oversight in their operations.

However, as the case of Prime Trust illustrates, these labels are not guarantees of professional competence.  And this is especially true when it comes to the crypto landscape.  As Michael Tanguma, my co-founder at Onramp, likes to say about digital asset custody, Qualified Custodians are sometimes unqualified custodians.

The truth is that the battle-tested regulatory standards for Qualified Custodians in the traditional financial asset world… don’t map perfectly to the idiosyncratic challenges of cryptocurrency custody. The case of Prime Trust is important because it is a perfect example of how Qualified Custodian regulatory status does not ensure crypto custodian competence.

The Best of Both Worlds: Qualified Custodians & Multisig Bitcoin Custody

Fortunately, Bitcoin makes it possible to leverage the strengths of the Qualified Custodian standards while protecting against the risks of trusting a single counterparty like Prime Trust. 

Because of Bitcoin’s native properties, it is possible to custody Bitcoin in vaults controlled by a quorum of several institutions — which can include multiple Qualified Custodians. These are known as “multisig” vaults, because they require the cryptographic signature of multiple keys to control the assets in the vault.

With multi-institutional multisig vaults, custody becomes fault tolerant & immune to unilateral control by a single keyholder.  Together, these attributes solve for the two weaknesses that doomed client assets at Prime Trust: incompetent key management by a singular keyholder & misappropriation of assets by a keyholder with unilateral control.

This custody approach is like a metal alloy, stronger than each of its constituent parts. Bronze is stronger than copper or tin. Steel is stronger than iron or carbon. In my view, multi-institutional Bitcoin custody combines the strengths of Qualified Custodians with the strengths of multisig Bitcoin vaults.

And indeed, this is the type of Bitcoin custody solution that we are pioneering at Onramp. 

If you’re a HNWI or Institution looking for a Bitcoin custody solution that minimizes counterparty risk while maximizing security, schedule a chat with us to learn more.

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Okay, now buckle in! Let’s get into our story…

Every time Bitcoin’s price drops sharply all of a sudden, the same questions pop up — what big news caused this?  Is Bitcoin in some kind of danger?

These questions may have (quite understandably) popped into your mind as the Bitcoin price dropped ~11% over the last week.

And yet, seasoned Bitcoin holders barely batted an eye at this sharp sell-off.  The truth is, for folks who have been holding 4+ years, this is nothing new — in fact, it’s business as usual for Bitcoin. 

Volatility to the upside comes with volatility to the downside.  And in the grand scheme, the short-term volatility smooths out and the long-term trend is what’s left — up and to the right, as increasing adoption and increasing scarcity play out, one halving at a time.

Let’s examine the set of possible explanations for what caused this sell-off.  The range of possibilities is fairly representative for a Bitcoin price drop. Basically, we don’t know what caused it, because there are a few plausible explanations. But this time, there is a possibility that could be important to be aware of.

Possible reasons for this sharp sell-off

1. It’s natural

   1. The counterintuitive explanation for why Bitcoin’s price sharply fell is usually “no particular reason.”  It’s strange, but the longer a period of low volatility drags on, the more certain that it will end in a dramatic breakout (to the upside or downside).  This is because leveraged positions pile up during that low volatility period – betting whether the top of the range or the bottom of the range will give way. 
      
      Over the last 2 months, Bitcoin’s price became stuck between $29k and $31k.  That was plenty of time for leverage to accumulate – some traders betting that the price would break out to the upside; some betting to the downside.  When the scales finally tip one way or another, the losing bets automatically get liquidated, accelerating the momentum of the price move.  In this most recent example, that meant that once the price got below $29k, it quickly moved down to $26k.

2. It’s opportunistic liquidation-hunting

   1. The result of the accumulation of leveraged bets described above creates an opportunity for large market participants: liquidation-hunting.  For example, with the natural liquidation levels of $29k and $31k known to all, a large trader could sell in order to push the price below the $29k threshold, knowing that this would likely send the price much lower, where they could rebuy their coins for cheaper.  It’s quite possible that this was the kind of action that tipped the scales that triggered this most recent sell-off.

3. It’s the last functioning fire alarm in global markets

   1. Another more obscure possibility is that Bitcoin’s sell-off is a leading indicator to stock market turmoil on the immediate horizon.  In March 2020, when the Covid crash struck, Bitcoin was the first asset to plummet – reaching a price bottom ~2 weeks before the stock market. 
      
      Because Bitcoin is a highly liquid asset with 24/7 trading, it is the easiest asset in many portfolios to sell.  There are also no “circuit breakers” that halt trading if the price drops too precipitously.  In that sense, Bitcoin is sometimes referred to as the only true free market today – the last functioning fire alarm in global markets.
      
      It's possible that the recent sell-off is a harbinger of a sell-off to come for traditional markets.  However, in the lead-up to the Covid crash in March 2020, there were ample concerns about margin calls and a need to increase cash positions.  There has not been any chatter like that in markets at the moment.

4. It’s big players selling to buy GBTC

   1. One fairly exotic possibility is that this most recent sell-off was driven by insiders selling Bitcoin in order to purchase shares of GBTC.  Grayscale Bitcoin Trust is a pool of Bitcoin whose collective value currently trades at 26% less than the value of the underlying Bitcoin in the trust.  This is up from the 48% discount that it traded at in December 2022. 

      

      The reason that this discount is narrowing is the growing possibility that Grayscale wins its court battle against the SEC as it seeks approval to convert from its existing Trust into a true ETF, which would enable market participants to arbitrage trade to effectively eliminate the GBTC discount entirely.  In other words, if Grayscale wins its court case or the SEC allows another Bitcoin ETF (from BlackRock, for example), there’s a high likelihood of the current GBTC discount shrinking further. 
      
      And of course, if such a thing were to happen, it would be a great opportunity for speculators to scoop up exposure to Bitcoin at a discounted rate.  For that reason, it’s possible that the latest Bitcoin sell-off is some large trader selling Bitcoin in order to purchase discounted GBTC shares, in anticipation of some good news for GBTC on the near horizon.  An unlikely driver, but possible.

5. It’s Binance trying not to collapse like FTX or Terra/Luna

   1. Finally, there’s a possible explanation that could amount to a repeat of the FTX implosion causing short-term turmoil for Bitcoin but especially for the rest of “crypto.”  Except this time, instead of FTX, it could be Binance.

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Binance could be in trouble

You may recall that the killing blow that unraveled the ~$10B fraud at FTX was a sell-off of their own cryptocurrency, FTT.  FTX had created this currency out of thin air and borrowed against their portion of the supply.  This meant that they took on leverage, and that meant they had a liquidation price point.  If the price of FTT dropped to a certain level, they would have their collateral liquidated to cover the cost of their outstanding loan. 

When it became apparent that FTX was in trouble, FTT holders dumped their positions on the market.  This forced FTX to attempt to defend this ailing position by selling clients’ Bitcoin in order to purchase FTT and prop up the market.  In hindsight, it’s obvious where that kind of desperation would ultimately lead.  Eventually, the house of cards gave way and the FTX empire that had rapidly ascended out of nowhere came tumbling down.

Well, there’s another, even larger name that has risen at an incredible rate over the last 6 years to become the largest crypto exchange in the world: Binance.  This crypto exchange was founded by a daring Chinese national, Changpeng Zhao (known as CZ), who has built his empire through speedy product development and skirting regulators by frequently moving the company’s headquarters. 

Like FTX, Binance also has its own cryptocurrency, BNB.  This coin has defied gravity and reason over its life.  In fact, it is the only token that I am aware of that has dramatically outperformed Bitcoin over the last 6 years…

But zooming in on the last 3 years reveals a different story emerging. Here is the BNB chart shown in dollar terms and in Bitcoin terms over this timeframe.

As you can see, BNB’s price peaked at $650 in 2021 and is currently in the low-$200s — seemingly on the brink of falling out of the range it has enjoyed since mid-2021.  This raises an interesting question: could Binance be in trouble if the price drops out of this range?

Since June, the crypto market supersleuths have been taking note of unusual activity on Binance’s platform.  It seems that there have been periods where Bitcoin’s price has fallen to a discount relative to the rest of the market while BNB’s price has simultaneously surged. 

The speculation is that Binance has been selling Bitcoin in order to buy their own token in an attempt to prevent BNB’s price from falling below a liquidation point at $220, which Binance may have reduced to ~$200.  What raised suspicions further is that CZ has gone out of his way to deny these rumors on multiple occasions (1, 2).

It may be that Binance has fueled their meteoric ascent through genuine business savvy.  But it may be that Binance, the only crypto company whose dramatic success dwarfs that of FTX, has engaged in the same sort of playbook as FTX.  This speculation is furthered by Binance’s avoidance of having a standard financial audit performed, instead congratulating itself for its willingness to provide a “Proof of Reserves” that amounts to highlighting the firm’s assets without saying anything about its liabilities.

That’s the situation as it stands — only time will tell whether Binance is in the early stages of an FTX collapse or this is a nothingburger. 

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It will take a decade or two for the financial world to catch on & adjust accordingly.  But you get to read about it here today.

The assertions:

• Bitcoin is actually a low-risk asset

• Bitcoin will continue delivering fairly high annualized returns

• Every capital allocator on earth is using the wrong hurdle rate for their investment decisions

The concept of a hurdle rate

What do you do with a dollar?  The smart thing to do is to find a way to invest that dollar into a project that you forecast will deliver an attractive return on investment.  But how do you choose between an endless stream of possible ways to invest that capital?

From my Bain consulting and Stanford MBA days, I can say that the most common managerial framework to evaluate various capital projects is to forecast ROIs and draw a line.  Any capital projects with a forecasted ROI below that line are not worth considering; those above may be worth pursuing.

Where you draw that line is your “hurdle rate.”  Projects that clear the hurdle merit further consideration, those that do not are filtered out. 

But exactly where you set your hurdle rate at is a mixture of art and science for individuals and companies.  

How firms set their hurdle rates

There’s a surprising amount of variety in how hurdle rates get set.  Debt-financed projects need to consider the weighted average cost of capital (WACC), whereas investors working with their own capital have a bit more flexibility.  Some take the “risk-free-rate” in global capital markets – US Treasury bonds – and add a risk premium befitting the specific investment they’re considering. 

Perhaps the most common approach is the “opportunity cost of capital” — in other words, what kind of return could you get for taking on similar levels of risk elsewhere in the market? 

While neither definitive nor exhaustive, here is a rough list of the opportunity cost of capital by investment category, based on returns from the last few decades.

Overall, investors earn greater returns for taking on more risk & for locking up their capital in increasingly illiquid assets.  Private equity and venture capital funds typically lock up capital for ~10-year durations.  And of course, there’s a lot of risk involved in venture capital.  Funds either get exposure to one of the decade’s big winners and deliver above-average returns or… they don’t.  Because of the big risks involved, average venture capital returns have to be very attractive to incentivize capital allocators to take on that commitment. 

On the other end of the risk curve, we have US Treasuries.  Currently, 30-year US Treasuries are yielding 4.3% of low-risk nominal return in a highly liquid asset (no 10-year lockup, not even a 10-minute lockup).

The mistaken assumption that everyone continues to make is that US Treasuries are the correct low-risk reference point for the opportunity cost of capital.  What the finance world has not yet realized is there’s another (much more attractive) low-risk asset in the global asset landscape — it’s just widely misunderstood as a high-risk asset.

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Bitcoin is low-risk, like US Treasuries

I realize this sounds crazy to most people.  In the public consciousness, Bitcoin is wildly speculative and uncertain.  However, after 6 years focused full-time on this asset, I have come to view Bitcoin as a mechanical inevitability — every 4 years, the next Bitcoin halving ensures the asset’s increasing scarcity and resulting value appreciation.  It is just supply and demand playing out in pure free market fashion.

This is where the understanding gap comes in.  People associate Bitcoin’s volatility with risk, but risk is ultimately a measure of uncertainty.  This strange new asset is widely viewed as terribly uncertain, and yet, its fundamental mechanics deterministically create the opposite result (when viewed on a 4+ year timeframe). 

Bitcoin’s increasing scarcity is as certain as the laws of math and the forward march of time that its entire design is predicated on.  In my book, that puts Bitcoin’s degree of risk somewhere in the range of US Treasuries (if not considerably lower).

In that sense, Bitcoin could (and should) serve as a low-risk alternative to US Treasuries when evaluating what the low-risk opportunity cost of capital should be when setting a hurdle rate.  Of course, the challenge becomes forecasting what Bitcoin’s annualized return will be going forward. 

With US Treasuries, the expected return is nominally certain, but never fully known in real terms.  With Bitcoin, the mechanics driving value appreciation are certain, but the exact scale of that value appreciation is never known in advance.  That being said, we can attempt to make some reasonable estimates.

Bitcoin’s mechanics will continue delivering value appreciation

While past performance is not indicative of future results, past performance is instructive for forecasting future performance… when the mechanics that drove past performance will happen again (i.e., Bitcoin’s halvings). 

Here is Bitcoin’s annualized performance over various trailing time periods:

As you can see, the Compound Annualized Growth Rate (CAGR) has been diminishing over time.  Going forward, we don’t know what the CAGR will be, but we do know that the mechanics that drive Bitcoin’s value appreciation will be set in motion again in April 2024.  Here’s a deep dive on how those mechanics work & how they deliver reliable value appreciation:

For conservatism, let’s assume the diminishing CAGR continues over the next 4 years — 45% CAGR may not be in the cards, but I wouldn’t bet against a 25% CAGR.  (I actually think that the next 4 years has a strong chance of being bigger than the last 4 years, see this recent analysis for why…)

Bitcoin wrecks your hurdle rate

If Bitcoin delivers 25% growth per year (on average, over a 4+ year timeframe), what does that mean?  Sounds like a fairly modest number.  And yet, if these returns are low-risk because they are based on Bitcoin’s unique and certain supply mechanics… this 25% CAGR upends how every capital allocator on earth approaches hurdle rates.

Bitcoin offers venture capital returns with US Treasury risk & liquidity.  In other words, it beats the pants off of every other asset in the investable landscape.

Since a hurdle rate is rooted in the opportunity cost of capital, holding Bitcoin becomes the relevant benchmark by which to compare every other capital allocation decision.  The sensible question for investors this decade is not “will this potential investment deliver US Treasury returns plus a sufficient risk premium?”  Instead, the right question becomes “will this potential investment deliver better returns than simply holding Bitcoin?”

In most cases, the answer will be “no.” 

And yet, if the analysis here is correct, it will still take a decade of misallocating capital before traditional finance embraces this unorthodox, yet stupidly simple North Star for prudent capital allocation: the default should be holding Bitcoin.

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Okay, now onto our story!

Congratulations, everyone!  The Fed has successfully delivered the “soft landing” that they were hoping for.  Inflation is coming down, the stock market has been melting up, and it’s Mission Accomplished. 

For conclusive evidence, look no further than the uptick in mentions of “soft landing” versus “hard landing” in the media.  Surely, that is proof enough, right?

There’s just one problem: the lag effect.

When macroeconomic conditions cause the economy to grind into recession, it doesn’t happen overnight.  It takes 12-18 months for these changes to flow through to key economic indicators.  Consumer confidence doesn’t flip overnight.  Similarly, job cuts only surface as reactions to shrinking revenue, after spending tightens for consumers and businesses alike.

In fact, history shows that market observers fall for this very trap while the lag effect is slowly playing out: it looks like a soft landing, until it’s not. This may be largely because human psychology commonly underestimates the extent of the lag effect following monetary policy tightening & misattributes the resilience of key metrics to economic strength. 

Personally, I think a big reason why people underestimate the lag effect is that it’s not well defined.  It’s hard to respect a hand-waivey hypothesis that it simply takes a lot of time for monetary tightening to precipitate the high unemployment we associate with recessions. 

For this reason, I find the HOPE framework from Piper Sandler’s Michael Kantrowitz compelling in its effort to highlight and explain the lag effect in terms of the stepwise mechanics of a developing recession:

• Housing – activity peaks in advance of rate hikes, begins to slow in anticipation of rate hikes

• Orders – slowdown in consumer confidence & manufacturing comes next

• Profits – consumer & business spending tightens, causing corporate profits to sag

• Employment – slowdown in profits necessitates headcount reductions; unemployment spikes

In terms of this framework, I think it’s reasonable to say that we are currently somewhere between P and E.  In that sense, we have not seen a spike in unemployment.  However, it seems foolish to claim that the lack of high unemployment is evidence of a successful soft landing.  Instead, it stands to reason that the job losses have just not yet materialized.  It may be that this time is different, but that’s not a bet I’d be quick to take.

In fact, if unemployment were to spike, it would probably be preceded by employment data beginning to underperform expectations.  As it happens, we have seen negative Nonfarm Payroll revisions for 6 months straight, which hasn’t happened since late 2007 and early 2002 (at the start of notable recessions).

These factors are gloomy enough in their own right.  However, we also have to layer in the US fiscal situation to this picture…

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Interest & Debt Issuance

The math is not very kind.  The US has normalized multi-trillion-dollar annual spending deficits.  These have added up to ~$32.7T in US National Debt.  For a full breakdown on the US fiscal situation, check out this recent deep dive. 

Now that the Fed has hiked interest rates to 5%, this means that the US National Debt’s effective interest rate is inching upwards as existing debt rolls over at the current rates. 

In fact, $9T of the US National Debt will roll over in the next 18 months.  This will increase annual interest expense by ~$300B on top of the ~$400B increase already added over the last 18 months. 

Together, this $700B in incremental annual interest expense is roughly the size of the annual U.S. Department of Defense budget (~$800B).  In other words, the Fed’s interest rate hikes effectively mean that the U.S. has to find the money to pay for an entire extra military, despite the fact that we don’t have any money because we haven’t balanced the budget in 22 years.

So where will it come from?  We are issuing more debt.  Last week, the U.S. Treasury updated its expected borrowing estimates for the rest of the year.  The official numbers?  To make it through the next 5 months, the U.S. Treasury anticipates needing to borrow $1.85T through new debt issuance.  That’s in addition to the ~$1.3T of new debt issuance since the debt ceiling was lifted just two months ago.

Together, that’s more than $3T in new debt issuance to get through 8 months.  In response to these latest estimates, major ratings agencies took the long-overdue move of downgrading the U.S.’s credit rating.

But what happens when this new debt is issued?  While it ultimately expands the monetary base in the long-term (driving inflation), the short-term impact of debt issuance is that it soaks up dollars in the financial system.  When the government issues debt, they are effectively asking the market to hand them dollars today in exchange for a contract to receive more dollars in the future.  In other words, debt issuance is a liquidity sponge.  And that is perhaps the most compelling reason why the “hard landing” is likely still coming.

It's probably no coincidence that the debt ceiling standstill that dominated the first half of 2023 coincided with an unexpected equities rally.  While the U.S. Treasury was unable to issue new debt for ~6 months, all the liquidity that would have been soaked up by that new debt issuance was instead left to bid up existing equities.

But that is changing now.  For this reason, Stan Druckenmiller sees the back half of 2023 as likely to be starkly different to the front half of the year, with the liquidity dynamics pointing towards a hard landing on the way.  Here is his recent explanation…

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So we diversify, thinking that’s the prudent thing to do.  But, invariably, the more you proactively learn or the longer you stay in the market, the stronger your understanding grows that there’s only one asset here worth holding: Bitcoin.

If you are new to cryptocurrencies, a lot of pain and heartache can be spared if you lean in to understanding why. 

Here are the three key reasons why Bitcoin is the only cryptoasset worth holding:

• Digital scarcity is a one-time phenomenon

• Money is the mother of all network effects & tends to one

• The Crypto Catch-22 precludes any genuine competition to Bitcoin

Considering these topics could be the difference between cementing a Bitcoin fortune or squandering the massive opportunity before you.  Let’s dig in…

Digital scarcity is a one-time phenomenon

You can’t store value on the internet.  The internet is just information - expressed as 0s and 1s - translated by your computer into words and images.  The problem with information is that it can be copied & pasted.  That’s the defining attribute of information — it is dematerialized, which grants it the incredible dual characteristics of speed-of-light transmission & infinite replicability. 

But this replicability doesn’t work for value. 

For value to exist natively on the internet, there needed to be a finite system within the unbounded internet expanse, one whose architecture tamed informational replicability in order to create a system of digital scarcity. 

And that was the breakthrough invention of Bitcoin.

The reason you can’t copy and paste Bitcoin is that a Bitcoin is not a jpeg made up of 0s and 1s.  Instead, when you own a Bitcoin, what you really own is the consensus view of every computer on the Bitcoin network that you have authority over 1/21M of the Bitcoin supply.  In that sense, you don’t own anything tangible; you own an inalienable property right.  And ultimately, that is the essence of value — unilateral control over something finite.

This system of value consensus comes with a minor problem.  Although it is impossible to copy value within the confines of this walled-garden system, it is still possible to copy & paste the entire system.

And of course, information that can be copied… can be replicated infinitely.  There is minimal marginal cost to spinning up a brand-new copy of the original system.  And that’s what we’ve seen in digital assets.  Bitcoin is the original instance of a system of digital scarcity.  Every other cryptocurrency is a copy of this system of digital scarcity, dressed up with various bells and whistles to make it seem different, new, and better. 

When I first made this graphic in 2021 to highlight the endlessly replicable nature of cryptocurrencies, there were ~7,000 total cryptocurrencies.  Now, there are ~30,000.  4x more in just 2 years.

In that sense, if someone purchased a fixed % of a new cryptocurrency in 2021 that featured no supply dilution over time… their % ownership of the total supply in the “copy of digital scarcity” market has still been diluted 4x.  That’s 75% debasement in just 2 years.

Granted, this assumes that all crypto projects are equally valuable.  Now let’s consider the realities of value…

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Money is the mother of all network effects and tends to one

Network effects apply whenever the value of a system increases as the number of users increases.   (Telephones, the internet, Facebook, etc.)  Metcalfe's Law describes the value of a network as proportional to users^2.

Money is the mother of all network effects — we gain wealth by choosing to value the form of money that others value, and we lose wealth if we choose wrong.  (Beanie babies, tulips, NFTs.)  Because of this pressure, money tends to one. 

That is why gold emerged as the singular worldwide monetary standard after 70,000+ years of free market experimentation with various commodities as money.  It was the hardest commodity to make more of and therefore the most reliable store-of-value for hard-earned wealth.

The result of this is that humans store ~40x more wealth in gold (~$12T total value) than the #2 store-of-value commodity, silver (~$300B total value).

This is called a Schelling Point, a game theoretic focal point.  When humans store wealth, they intrinsically select a store-of-value that they anticipate others will value in the future. 

With that in mind, let’s update our graphic above to show the relative valuation of existing cryptocurrencies, represented by the size of each circle.

Consider what would happen if you showed the graphic above to 100 people and asked them to pick which circle was most valuable.  Better yet, which circle they thought the other 99 people would pick.  That’s the Schelling Point, whether or not market participants have realized it yet.

The Crypto Catch-22

Aside from Bitcoin’s strengths as the singular digital scarcity & dominant network effect, it’s worth reflecting on the weakness of Bitcoin’s competition.

While the marketing for any particular cryptocurrency will highlight its feature set and flashy specs, these all amount to bells and whistles.  What matters is a simple question: which asset do people choose to hold as a store-of-value?  Bitcoin has a big lead. 

As such, every altcoin created since Bitcoin has been playing catchup.  And yet, what is required in order to catch up precludes any altcoin from being a genuine competitor to Bitcoin.

In the celebrated satirical war novel, Catch-22, the protagonist wrestles with an air-tight paradox of military policy: if a soldier has gone crazy, he doesn’t have to go on missions; but, a crazy soldier has to request to be excused, and this request demonstrates that he is not crazy.

Well, every upstart project in the crypto landscape faces their own impossible paradox as they attempt to catch up to Bitcoin – the Crypto Catch-22:

• You can’t catch Bitcoin without a leadership team and a marketing budget

• With a leadership team and marketing budget, you are a company masquerading as a decentralized protocol

The end result of this is quite clear: almost every one of the 30,000 crypto projects trying to get a foothold in the market is, to use SEC Chairman Gary Gensler’s pet term, a DINO project (“decentralized in name only”).  They have leadership teams working to guide the project with the objective of delivering an investment return for holders of their crypto token.  By the unambiguous definition of the Howey Test, this means they are companies offering unlicensed securities.

This violates securities law, and in all of these cases… there’s a centralized leadership team that the SEC can hold responsible.

And indeed, we have now entered the era of enforcement.  Just this week, the SEC sued the exquisitely obnoxious founder of HEX for 3 counts of securities fraud & told Coinbase’s CEO that “every [crypto] asset other than Bitcoin is a security.” 

To summarize:

• Bitcoin is the invention of digital scarcity & every cryptocurrency since is a replica copy of that system

• Money is the mother of all network effects & Bitcoin has already won

• All challengers to Bitcoin are ultimately companies promoting unlicensed securities offerings & the SEC is coming after them

Now, with your hard-earned money at stake, pick which circle others will value most.  But don’t take too long, because 99% of the world is currently making the same decision.

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While the Bitcoin community continues to battle it out, we will turn our attention to the most important Bitcoin development this summer.  Otherwise, in the ongoing squabbling over S2F due to last week’s Once-in-a-Species post, you might have missed it.

The announcement

On July 18^th, Presidential candidate RFK Jr. spoke at a fundraising event for Heal-the-Divide, a PAC founded (and funded) by early Bitcoiners beginning to flex their considerable Bitcoin wealth to shape political policy.

In the speech, RFK Jr. announced his administration’s plan to “exempt the conversion of Bitcoin to the U.S. dollar from capital gains taxes.”

Additionally, he announced his intent to back a small portion of the US National Debt with hard assets (including Bitcoin): “My plan would be to start very, very small, perhaps 1% of issued T-bills would be backed by hard currency - by gold, silver, platinum, or Bitcoin.” 

As for his reasoning for this unorthodox proposal, he elaborated, “Backing dollars and U.S. debt obligations with hard assets could help restore strength back to the dollar, rein in inflation and usher in a new era of American financial stability, peace and prosperity."

This is a big deal.  Let’s unpack what it all means.

Shifting the Overton Window

First of all, make no mistake, this proposed policy will not happen.  Not yet.  RFK is too fringe of a candidate to have a shot at the presidency (or is he?).  Even if he won, this is the kind of campaign trail promise that stands no chance of being implemented.  But that’s not the point.

What matters is the trend.  A few years ago, politicians would never have hitched their wagon to Bitcoin.  Now, fringe politicians are embracing the Bitcoin community and receiving tremendous attention and support for doing so.  Every other politician is seeing this.  Some are thinking “maybe I should tap into this too.”

Years ago, no politician would advocate for Bitcoin.  Now, fringe politicians are advocating for Bitcoin.  In a few years, mainstream candidates will do the same.

What began with Cynthia Lummis winning a seat in the Senate with support from the Bitcoin contingent has grown to politicians like RFK Jr, Vivek Ramaswamy, Ted Cruz, and even Ron DeSantis courting Bitcoiner support.

In this sense, what we’re witnessing is not a proposed policy that will succeed or fail.  Instead, we are witnessing the shifting of the Overton Window — what policy points are viewed as legitimate options to talk about in the mainstream arena.  This RFK Jr. announcement is a big milestone in that ongoing process.

Bitcoin is now a part of the national policy conversation.

This particular proposal will fail, but this moment is already a big win for Bitcoin because it sets the precedent for a proposal like this to succeed in the future.  But what exactly would a policy like this mean?

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Capital gains taxes for Bitcoin

Although this was a minor part of RFK Jr.’s remarks, removing capital gains taxes on Bitcoin transactions would be a major leap forward for Bitcoin adoption.  (Admittedly, RFK Jr. only specified this policy for Bitcoin to USD transactions, but that would effectively remove capital gains tax considerations for all US Bitcoiners.)

Currently, any transactions in Bitcoin must be booked against the tax basis of those assets, creating a realized gain or loss.  This information must be dutifully logged and captured in any individual or organization’s tax filings.

This status quo is a hassle for users and a major impediment to Bitcoin adoption.  For now, most people interact with Bitcoin as a buy-and-hold portion of their investment portfolio.  In my opinion, this continues to be the wisest and most valuable way to use Bitcoin — a savings vehicle, not a spending currency. 

However, Bitcoin can and will also grow to be a preferred medium-of-exchange.  This is part of the path-dependent process when any fledgling asset takes on the emergent properties of money.  First, it is simply a collectible, then it grows to become a reliable and trusted store-of-value asset.  Only once a large group views it as a preferred store-of-value asset will it then be used as a currency between parties in trade — a medium-of-exchange.

The current classification of Bitcoin requires the logging of taxable events whenever it is exchanged.  This new proposal would remove that major inconvenience and barrier to Bitcoin’s adoption as a medium-of-exchange in the United States.

While this idea is radical in the United States still, it has already been implemented in smaller jurisdictions with considerable success, most notably in El Salvador.  Although it will surely be quite a few years before the United States follows suit, the idea is now officially part of the national political conversation.

Backing US Government debt with Bitcoin

The splashier part of RFK Jr.’s statement was the proposal to back a portion of the US National Debt with hard assets.  It will come as no surprise that I think he is right — such a move would restore strength to the US Dollar and usher in an era of greater financial stability.  This is because the alternative is business as usual — deficit spending and unbacked money printing — which will continue to erode the United States’ fiscal strength and ultimately decimate bondholders.

Again, RFK Jr.’s proposal won’t happen.  Not yet.  But it may happen in the future as Bitcoin continues to become a more mainstream topic. For now, the S.S. Fiat System is only listing to the side a bit, so few feel a need to rush to the Bitcoin lifeboat. But unfortunately, ignoring the problem of incessant deficits and escalating national debt will not right the ship. At some point, the Bitcoin lifeboat may look extremely attractive.

And again, while the US won’t be engaging in such a strategy of central bank Bitcoin purchases anytime soon, El Salvador already has, and other nations ostensibly will too.

But what if it were to happen?  The US National Debt is now $32T.  1% of that is $320B.  Bitcoin is a tiny $600B asset class.  Obviously, if that amount of buying pressure was pointed towards Bitcoin, it would send Bitcoin’s price soaring.

And it doesn’t even have to be the US, necessarily. Several mid-size countries could adopt an El Salvador strategy to create the same ~$320B of buying pressure. And the positive signal of this would generate even more global demand for Bitcoin — the numbers get pretty crazy, pretty quickly.

Capital inflows and valuation multipliers

How do you purchase $320B of an asset whose total valuation is $600B?  Slowly and methodically over years.  But even then, you would quickly exhaust the pool of willing sellers.  To find more willing sellers, you’d have to raise your bid price in order to entice holders to become sellers.  This is an incremental process that plays out in free markets as price discovery.

Part of this process is that each time an incremental trade is executed at a higher price, it raises the total valuation of all existing supply.  This creates a multiplier effect — when $1 flows into Bitcoin, it doesn’t raise the value of existing Bitcoin by a total of $1. Instead, that $1 raises the value of all Bitcoin by (the change in the market price of 1 Bitcoin) * (21M total Bitcoin).  And of course, this is also offset by the inverse effect during market downtrends — when $1 flows out of Bitcoin, it drops the value of all existing Bitcoin.

The amplification effect in the bull markets nets out with the amplification effect in the bear markets, but not completely.  Overall, Bitcoin’s 14 years has been characterized by net new adoption — net inflows of capital.

As a result of this, the amplification force is net positive.  Here are some sensible data points to approximate the scale of this multiplier effect:

• 2.6x - Luke Mikic

• 3.3x - Willy Woo

• 5x - CryptoVizArt

• 118x - Bank of America

The Bank of America figure is obviously an outlier, as it seems to have been calculated near the top of the 2021 bull market when willing sellers were especially few and far between.  For the most part, I think numbers in the 2-5x range are reasonable and more accurate. 

Here’s what each of these multipliers would mean if the US backed 1% of its National Debt with Bitcoin…

If RFK Jr.’s proposed plan is set in motion, it could send Bitcoin’s price to anywhere from $68k to $1.8m. And that’s with no other demand at all.

But of course, if the US started using Bitcoin to partially back its debt, every individual, business, and sovereign nation would be inclined to start adding Bitcoin to their portfolio strategies as well.

Such a tipping point of positive endorsement could easily magnify that $320B allocation 10x, to $3.2T, or even more.

While the US won’t be doing this anytime soon, this type of policy could be set in motion by another sovereign nation, or several.  A few mid-size countries adding Bitcoin to their central bank balance sheets could easily amount to $320B in nation-state buying pressure in the coming few years, and the positive endorsement of these actions could easily inspire 10x more global capital to do the same.

In that case, the numbers in the table above would all need a zero added — just $320B in central bank buying pressure could inspire $3.2T in global demand, sending Bitcoin’s price to $680k or higher. Hypothetical, but not an outlandish scenario.

And that would still be just the beginning for Bitcoin.

However, I also knew it would disappoint at some point.  For this reason, I have long characterized it as “specifically wrong, directionally correct.”

The S2F Model defined the excitement and anticipation of the 2020-21 Bitcoin bull market.  Fast forward a few years and the S2F Model has become deeply unpopular — the subject of derision — an example of overhyped statistical extrapolation that fell flat on its face. 

This is understandable, but it is also unfortunate.  And frankly, unwarranted. 

By spurning the S2F Model, people toss out the baby with the bathwater. 

A life-changing insight about Bitcoin as a savings vehicle is buried at the heart of the S2F Model. Understanding it could be the key to your financial future.  That’s what this piece will explore.

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What is the S2F Model

In 2019, a Dutch investment professional using the pseudonym of “PlanB” (B for Bitcoin) released a Bitcoin price forecasting model.  This price model was directly inspired from a section included in Saifedean Ammous’ seminal book, The Bitcoin Standard. 

Here is the relevant page that PlanB built upon… which happens to sit adjacent to the page where I took inspiration for my Bitcoin pseudonym, Croesus.  (Thanks, Saifedean!)

The core idea is simple.  Every commodity has a certain amount of circulating supply (stock) and an amount of new supply created every year (flow).  Dividing these two numbers yields a stock-to-flow ratio for a given commodity. 

What PlanB did with this concept was novel and bold.  He turned it into a predictive valuation model.  To do this, he created a regression analysis to find a line-of-best-fit for the major store-of-value commodities.  This was his result:

As you can see, the stock-to-flow ratio of a commodity is an excellent predictor of how valuable that commodity is.  (Note: each axis is logarithmic, meaning exponential.)

To frame it differently, this chart suggests that a commodity with lower annual supply creation is a vastly better store-of-value asset and attracts exponentially more capital.  

The reason that PlanB’s work got so much attention and catapulted him to millions of Twitter followers is that he projected this observed statistical regression forward to create a Bitcoin price forecast.  This Stock-to-Flow Model predicted a stair-stepping of Bitcoin’s value every four years.

It’s worth remembering that when the S2F Model was first released, Bitcoin’s price was $4k.  Bitcoin had just spent the prior year crashing from its $20k peak in 2017.  Most of the world was confident that Bitcoin was headed to zero.  Despite this prevailing gloom, PlanB released his audacious model suggesting that the 2020 halving would send Bitcoin’s price rocketing towards a $55k price equilibrium.

Here’s how the Bitcoin price has performed versus this original version of the S2F Model (the stair-stepping line) since its March 2019 release.  Pretty darn good!

Despite the objectively strong performance of V1 of the S2F Model over the last four years, the S2F Model has fallen from favor.  In fact, expressing support or praise for the S2F Model now invites mockery and contempt.  (I will get a lot of shit for writing this piece.) 

What happened?

Set up for disappointment

In my view, the S2F Model and its creator made two missteps:

• Set specific price targets

• Raised those targets

First, PlanB designed the visual output of the S2F Model as a specific price line, rather than a probabilistic range.  This was a double-edged sword.  On one hand, the simple line very effectively communicated the model’s predictions.  However, people wanted to believe in PlanB’s astonishing price predictions so badly that they turned them into promises. 

Second, the biggest mistake that PlanB made was that he revised the S2F Model upwards – not once, but twice.  V1 of the S2F Model predicted that Bitcoin’s price would gravitate to $55k/BTC in this halving era (2020-2024), then the model’s inputs were revised for V2 and that price prediction was upped to $100k.  PlanB later released the even-more-bullish S2FX price model. 

All in all, millions of people were expecting a specific price, and for most of them, that number was $100k.  When that number wasn’t reached, the mob turned angry.

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Why the S2F Model fell short

Models aren’t promises.  They are math applied to an existing data set to offer a probabilistic representation of the future.  Importantly, these models generally assume all other conditions will remain constant.  But that’s not reality. 

Here are a few real-world forces that could have caused the S2F Model to underperform expectations:

Macroeconomic headwinds

• Last bull market was characterized by a combination of major headwinds that, in my opinion, prevented Bitcoin’s price from extending into a blow-off top in the ~$125k range.

• Had these headwinds not existed, maybe we would have reached six figures.  Would there still be so much bitter hate for the S2F Model then?

• For what it’s worth, I believe that last cycle’s headwinds are turning into next cycle’s tailwinds.  Check out the full analysis in this recent piece.
  

Asset class inertia

• When all the Bitcoin in the world was worth $1B, it was very easy for Bitcoin’s total valuation to double.  A single investor could decide to make a sizable allocation.  At $1T in valuation, it will be much harder for Bitcoin’s total valuation to double.

• In other words, the larger that Bitcoin becomes, the more inertia its valuation will have to change. 

• Greater inertia doesn’t prevent something from getting to where its going, it just causes it to take longer to get there.  It may be that as Bitcoin gets larger, it takes longer than four years for the changed stock-to-flow reality of each halving to be fully digested by the world, for human behaviors to adjust accordingly, and the Bitcoin price to reflect this process.

• In some ways, I think we’re already seeing this effect.  Right now, Bitcoin’s stock-to-flow ratio is roughly equal to gold’s.  However, gold’s total valuation is 20x greater.  This gap isn’t because gold is a better store-of-value, but instead because it is a familiar and trusted store-of-value.  It would take a generation or even two before Bitcoin’s valuation caught up to gold’s if they continued to have equal stock-to-flow ratios.  (But, luckily, that is not the case.  Bitcoin’s stock-to-flow ratio will continue to get 2x better every 4 years.)

In both of these scenarios, it’s not that the S2F Model was wrong, it’s that the S2F Model did not assume interference from any extraneous forces.  It worked in a vacuum, but not in the messiness of reality. 

That’s not the fault of the S2F Model — that’s on us for expecting the clean and prompt actualization of theoretical math.

Long live the Stock-to-Flow Reality

With a few big caveats added, I believe the stock-to-flow conceptual model is still valid. 

Of course, these party-pooper caveats take away the splashy marketing flair that made S2F such a viral hit.  (That’s why I have nowhere near PlanB’s 2m Twitter followers!)

Here they are:

• No specific price targets

  • Yes, I understand that specific price targets were the whole allure of the S2F Model.  But it’s also why you turned on it.

  • The truth is, we don’t know what Bitcoin’s price “should” be.  PlanB gave you a statistical midpoint in a probabilistic range, but you interpreted it as a promise. 

• There is a ceiling

  • Part of what was mesmerizing about the S2F Model was that it dispassionately projected the ~10x stair-stepping of value every 4 years without end.

  • Of course that’s not going to happen in real terms.  It could happen in a Weimar hyperinflation scenario, but then fiat pricing loses its meaning anyway.

  • Let it go, there is a ceiling.  But that’s fine, because the ceiling for Bitcoin is still so incredibly high.
    

• This might take a long time

  • Part of the appeal of the S2F Model was that it predicted a snappy adjustment to the changed stock-to-flow economic reality after each halving.  The data reflected that in the early years, but it may not be reasonable to expect such rapid change as Bitcoin grows larger.

  • Instead, allow yourself to accept that Bitcoin can only grow in valuation at whatever rate the bell-curve of technology adopters progresses. 

  • At the end of the day, Bitcoin’s price is a reflection of human behavior reacting to changed economic reality.  And that process could take a generation or two.

What are we left with?  Well, a much less sexy version of the stock-to-flow model.  Something that looks like this:

But, at the heart of this version — the Stock-to-Flow Reality — lies the core idea from the original model.  This is the secret to Bitcoin & why it is the best savings vehicle ever created.

Increasing scarcity means value stored in Bitcoin grows in purchasing power over time.

Additionally, this stripped-down Stock-to-Flow Reality also helps to explain why gold’s value is still 20x greater than Bitcoin’s — in fact, it suggests that there’s just a lag between the moment when Bitcoin became gold’s equal (the 2020 halving) and the eventual result of the world adjusting its behavior to properly value Bitcoin as gold’s equal. 

In other words, Bitcoin is already as good of a store-of-value asset as gold — and yet, you still have time to front-run the rest of the world figuring that out.