Q A

Speakers: Marty Bent, Michael Goldstein, Justin Moon, Dhruv Bansal, Gideon Powell, Tuur Demeester

Date: August 16, 2019

Transcript By: Bryan Bishop

Q&A session

https://twitter.com/kanzure/status/1162436437687623684

MB: I have a podcast called Tales from the Crypt where I interview people working on and around bitcoin. I have spoken to many of these gentlemen on the podcast as well. I want to focus on, many of these presentations were focused on history and prehistory of bitcoin. For this Q&A session, let’s talk about the future of the bitcoin standard. Michael, I want you to talk about the future of the bitcoin standard on a sound money point standpoint, like not having to chase for a store of value like houses.

MG: Marty mentioned like how people think about real estate, art, stuff that people chase in order to store value today. How will that look in a bitcoin world? If we had a bitcoin heavy world, I would expect a lot of that investment to decrease at least in the sense of people doing it simply to get a return. The reason for this comes back to the stock to the flow ratio. Houses and art do not have good stock to flow ratios, especially the art that gets traded these days. Zoning laws hold back houses. You have areas in San Francisco where people can’t make houses. But that’s a matter of policy, and it could change tomorrow, and if it did, then those assets decrease in value. Because of this, houses are not a good way to be thinking about the storage of value except in relation to something like the US dollar which is continually losing value. Houses are one way of getting around that. I think modern art is just a big money laundering scheme, which is a whole different can of worms. When you have a money that can be reliably expected to not be diluted, you don’t have to be chasing returns to the marketplace in the same way. I think it’s a tragic thing in our society that a normal person has to sit around and think about 401ks and all this crazy investment stuff when they should just be able to stuff money under their mattress and know it’s good to go. If they were to do that, they would lose value very fast. Compoud interest is the greatest force in the interest; they would lose half their value in 36 years. Having a money that does not have that, gives better opportunities for people to not engage in investments that would simply chase away inflation.

Q: What about art?

MG: I highly endorse Saifedean’s book, but a lot of modern art was funded by the CIA to make us seem way more creative than those Soviets. So they just started pumping money into all of this stuff. None of this art is any good. People can tell me all they want about how this famous art is, but he was just splattering paint on a canvas. That is not proof-of-work. Something like Michael Angelo’s being suspended from the ceiling for 15 years and creating a masterpiece; that’s proof-of-work and that’s why 500 years later it is still valuable and why I still think it will be valuable in 1500 years. The only reason I can suspect that people are trading these paintings for $10’s of millions of dollars, when it’s just heroin junky scribblings, is because they just artificially bump up the price to just funnel money through.

JM: One of the values of not having to do the manipulations to maintain your wealth is that, this situation attracts a lot of brilliant people into finance. A lot of aerospace engineers and quantum physicists don’t go work in real innovation and the material world, instead they get hired as quants and they trade forex which doesn’t really move our civilization forward. I think that would be a really interesting thing about the bitcoin standard. You can take all of these Caltech graduates and try to make flying cars and rocketships. Do the real stuff, not just trading forex or whatever.

Q: A couple questions. Parker was talking to me earlier about the possibility for using bitcoin for transactions. There are some teams in bitcoin working on credit cards. How is bitcoin going to become more prevalent in society?

MB: How does bitcoin become a medium of exchange where you can go buy coffee?

MG: I don’t know which specific company he was mentioning; but there’s Lolly, and another one called Pay. I don’t think they are in Austin. They allow you to get cash back in credit card payment, in bitcoin. So you get paid in bitcoin for using your card. I don’t know how that happens behind the scenes, but I like getting free bitcoin.

TD: For spending bitcoin, there’s the challenge that you are being taxed on every bitcoin transaction. Earning is fine, you just hold it. If you have a startup focused on helping people spend bitcoin, well, we’ve seen a lot of startups funded by VC money or something. To some extent, the market has not appreciated that the main function of bitcoin is store of value right now. Spending it is really down the road, it’s going to be the last phase when it’s a form of money. I think saving is huge, and borrowing against it is huge, which is what Unchained Capital does. That’s very powerful. I think the market is getting smarter about taxes. A lot of the crypto hedge funds in 2017 were doing the traditional 2-20 way and doing a lot of trading and basically generating a lot of taxes for their investors because everything was short-term capital gains tax. When you’re talking about applications for bitcoin, we’re still in the reality where every cent you spend with bitcoin, or exchange, or even like-kind exchange for another token, that is still a taxable event.

GP: The coolest company I’ve seen is– you have heard about the lightning network. It’s kind of a layer 2 application, which I am not qualified to talk on. You can see gaming, you see War of Warcraft and those global games– you can have a currency on there, and you can use your QR code to open up things and bitcoin can be that standard for gaming. You need an economic incentive. Visa/Mastercard works great. I am very satisfied with my credit cards and how they work, but definitely not satisfied with money as a store of value. I anticipate gaming as being the first where I can play on my computer and buy a weapon from someone in Shenzhen and that transaction is instantaneous. That’s where I am anticipating more than just credit cards.

Q: For the guys who have done the work on the bitcoin code, what are some of the big things that need to change— what could you see as being a massive step up to take it to the next level? Or is this thing fairly static? Second question is, how much of an advantage is West Texas, like the negative gas prices, relative to the rest of the world. Also, what are the most exciting projects for developers?

DB: I’ll do the first one and pass it on. I don’t have the best view of this personally. I got into bitcoin from a tech perspective in 2014-2015 which was fairly early, but I missed some early parts of bitcoin’s history. Andrew Poelstra was at an event at our office once, and I asked him a similar question. I asked him, did bitcoin come out with everything it needed to be successful long-term in your view? He’s a Bitcoin Core developer and has put a lot of thought into this. Or was it fundamentally broken and you had to add things? His answer was really interesting. In his view, Satoshi delivered something that was “close enough”. What was delivered was broken in a lot of ways; like programmability, Satoshi in many people’s view, delivered something that was too programmable. So we have cut back on that, and a group of coders over the 2009, 2010, 2011, learned a lot about distributed systems. A lot of learning was done about how things like a blockchain would work. One didn’t exist previously; so we didn’t know what the rules should be. Satoshi got really close, made some mistakes, and those got corrected over time. Once we fixed the immediate problems, what else does it need to continue to grow? Like supporting the lightning network to let high frequency payments happen? There were some changes, and some of those were easy to make, some of those were controversial. I won’t get into the history of it. Andrew’s conclusion was that in his view, today bitcoin has all the features it needs that essentially through some cleverness, it seems that he feels he has the freeodms to program what he needs to program. Not infinite freedoms, bitcoin remains conservative, but he believes he has sufficient freedoms to build all the things he’s imagining.

BB: Many of the interesting features were quickly disabled, and then were later fixed and re-enabled like timelocks.

TD: I find timelocks super exciting. As an asset manager or investor perspective, it’s the idea of not only having collaborative custody, but there’s also a time element too where I store my bitcoin with the bitcoin bank as it were, and for any transaction to go out, it needs one of my signatures involved and if I decide that I don’t trust this bank anymore, there can be a mechanism whereby after say 6 months, the full complete control reverts to me, even if I don’t do anything for six months. So I can then redeem my coins. But maybe I lost my keys, and the same mechanism can revert back and give complete control back to the bank. So there’s really powerful tech there that is possible, and it’s coming out fairly soon, that really takes into— asks the question like, what does it mean to be a custodian? Is this bank really holding my coins? I have ultimate control; maybe for legal purposes, an attorney would argue yes they are a custodian, but maybe that’s the best of both worlds where legally speaking they are custodians, but strictly speaking I always have the option of exiting and my assets are never frozen if I don’t want them to be. Lightning network is like a new generation of developers coming in, most of them are a little bit younger, I think it’s going to be huge. The excitement is palpable. I think most of the initial use cases are going to be for off-shore markets and young kids in Mexico who want to play games on their phone or something. That’s just the play phase, I think it’s going to be something serious over time. Privacy improvements are also coming. At first, everyone said bitcoin was completely anonymous and for criminals, but now we have a phase where people are saying no bitcoin isn’t anonymous and you can track the coins. The real story is that the developers have continued to work on privacy so that the story will eventually be, yes, you can have genuine pseudonymity or anonymity in the bitcoin space. Over the long run, that will be positive.

GP: We started in West Texas with cheap power. When you’re transmitting power over greater distances, more infrastructure is required, and ther’es more power loss. If you fly low, you will see wind farms for days and solar. That was the first iteration, really in West Texas. Another thing is well it’s too hot in texas? That’s just not true. Bitcoin, the Antminer S9, that was the AK47 of the bitcoin world. It is an incredibly resilient computer. Humidity is a much bigger deal than actual heat. West Texas had the humidity. So we introduced water vapor and we can drop 20 degrees out of the air. Moving forward, we think all of Texas can be at play. In three to five years, you will probalby see immersion cooling. You can get under 3 cent power in Texas, it will just take you 3 to 5 years.

MB: Bitcoin mining in particular could lead us to a completely energy efficient society. Basins outside of West Texas, you have natural gas fracking, you have oil fields where they had to flare, you know this here in Texas, and bitcoin mining in particular creates an incentive to show up and cap the flair and use that to mine bitcoin. You can save emissions, and make money on the gas that would otherwise be wasted, and on top of that it creates grid stability as well.

MG: I think bitcoin is going to usher in a whole new investment revolution because there’s this excess energy in places where prior you had to deal with the fact of transporting energy. If you have energy in the middle of nowhere, it’s only useful if you can get it back to civilization. With bitcoin, the way you send it back to civilization for use, is economic value. You now have bitcoin that you can spend for things. You might have people setup new habitable locations that were not previously habitable, because they form around those things, but the important thing is you’re injecting more economic value into this through the energy production. And that’s at the basis of every single structure in the universe. When you’re innovating energy production, you’re innovating the base layer of all of that. We will see hte gains from that enter into every single piece of industrial society and it will be absolutely glorious.

GP: Bitcoin mining, we’re just the most fungible manufacturing operation in the world. West Texas is nowhere near the middle of civilization. If bitcoin mining goes away, those will become hubs. Steel manufacturing, anything reliant on geo-electricity. China is subsidizing their electricity to beef up their manufacturing, and we will dominate them in the coming decades because we will build up so much spare capacity of energy. Off-shore wind? Bitcoin miners will be the lead tenants to get stuff. Chile, tons of wind, tons of solar, but nobody lives there. Bitcoin miners could be the lead tenant in 2 cent power down there, but yeah, we’re going to dominate. The revolution is just getting warmed up.

Q: Asset management and wealth management as it applies to this space? If we’re all on board with the vision of sound money, Naval Ravikant has famouly said that money and time are how we transfer wealth and additionally wealth is how we generate money for ourselves while we’re sleeping. If we have a lot of bitcoin, what do you see around the corner or in the mid-term in terms of new ways to put our new sound money to work? It’s an archetype asset class. How do you see the future developing?

TD: Everyone is pointing at me. Well, I would say that is one of the questions for bitcoin investors. You have bitcoin, and you stake your claim, and this is the anchorage I have on bitcoin island, and you don’t really want to give that up, you want to see if you can get rewarded for deferral of gratification. I think there’s various ways to enhance bitcoin returns. For setting up my fund, we were thinking about this for a long time. There’s liquidity, investors might want to redeem so you need to be ready to honor that. There’s security, which is huge, if you are going to lend out your bitcoin somewhere then that interest that you earn is not going to mean anything if that place gets hacked. There’s counterparty risk, which is a little bit different, like an entrepreneur that might default on their loan. There’s also plays with derivatives where you can sell out-of-the-money call options. You can sell a bet that a certain market price will happen at a certain date, and only if you lose the bet you’re forced to sell the bitcoin. That’s one way to get rewarded. But you have to think about counterparty risk and liquidity risk. One of the ways we ended up choosing for the fund is to really use bitcoin to short the dollar. That’s kind of our core strategy. It works really well from a tax perspective, because the bitcoin that you have undermanagement, you just don’t liquidate it. You use it as collateral, you borrow dollars, and then you buy more bitcoin with those dollars. So the BTC appreciates, you sell it, you pay back the loan, whatever’s left is pure alpha it’s the gain. You have ot manage your risk and make sure if there’s a steep decline, you still need sufficient collateral to honor that loan. Over time, I am very bullish on the lending market. Right now I am a bit worried about re-hypothecation of obligations like lending out bitcoin to a custodian and then they give me a loan… that’s something to be aware of. Also, institutions that are writing out loans that are not fully collateralized, that scares me a bit. What if the market takes a downturn, or they get into trouble? I want loan agreements that are fully secured, which I think are the most conservative ones to engage in. To be transparent, we work with Unchained Capital for most of the loans and we may not get the best interest rates but I trust the process and that’s important to me, that the coins are actually where I know they are safe. I think there will be bitcoin bonds long-term to invest in, but I don’t right now trust the counterparties. For example miners, if I buy a bitcoin using a future deliverable in bitcoin that is sold to me at a discount now so that I can technically make more bitcoin by doing that, I want to see that that mining operation is sufficiently hedged and yes there’s some products to hedge against price volatility but not many miners seem to be doing that, so it makes me wonder how much risk I am exposed to.

GP: The reason why miners aren’t using options, it’s expensive to hedge, too many unknowns. As private individuals who care about the future of society, we have a moral responsibility. Bitcoin is going to $1 million in our lifetime. What are we going to do with that newfound wealth? We have to proliferate liberty on a much larger scale. If you think about it from just pure profit motive, I think– not just that, but what should I do with my other portfolio? How many investments are interest rate driven? We’ve been on the wrong side of— like in 2011, when is this going to collapse? I wouldn’t touch real estate, that’s completely rent seeking. There’s no reason buildings should cost as much as they do. You’re not seeing innovation, you’re seeing rent seeking. What else is interest rate driven on this cheap money train?

Q: How much bitcoin has been lost or stolen?

TD: About 4 million, according to Chainalysis about 3-4 million.

Q: Since the financial crisis, there’s many other currencies that blow up. Venezuela had a mass influx of bitcoin users. Brazil, Argentina, Turkey, do we see any unusual bitcoin activity leading up to the blow-up? We have $17.5 trillion of negative yielding sovereign debt. It’s a 5000 year experiment about to go horribly wrong, but they keep perpetuating it. How does the bitcoin world… Let’s say you’re a fund manager in Switzerland, you have negative interest rates in Switzerland, people paying you to store gold, physical swiss francs, how much money can go into the bitcoin world, before you have a real loss of confidence in the fiat system?

MG: The price of bitcoin is going to skyrocket.

Q: Who will facilitate that?

GP: All the exchanges, black markets, OTC desks, etc.

Q: So this old world is going to die, and this new world is going to get created. There’s people looking for an escape, and we don’t have enough confidence in the infrastructure to support this….

DB: I think what you’re describing is true, and also sad. People don’t use bitcoin probably because they don’t use it, and it’s still easier to buy food and medicine in dollars. That’s just a practical answer. We’re only 10 years into this experiment. I would estimate the total number of bitcoin users is at 50 million or use. How many of those people own any more than $10-100? I would argue only a small number. It always feels like, how much higher could this go? I worry about too much adoption too quickly. I don’t think bitcoin is ready to have a billion people using it daily. Part of this is the lack of second layer networks to expand transaction capacity and scalability. I think it will be a bad experience for most of us to try to watch bitcoin try to onboard 100 million people in a country that is experiencing a tragedy, they will be pretty disappointed. Maybe in 10 years bitcoin will be able to handle that. We’re all building tools, educational materials to prepare the world for those kinds of outcomes. But right now, it’s just not ready.

MG: I don’t hope for a monetary collapse like that, either. Just securing bitcoin is a difficult problem we’re trying to tackle. Hopefully they keep pushing that fiat system for as long as possible, so that we can slowly eat the fiat world instead of everyone having to panic.

MB: The Argentina fiat money dropped by 20-25%. I asked a few people in Argentin a few days ago, and they were straight with me: most people in Argentina are just storing their wealth in dollars. As humans, we were born in this weird inflection point in history and we’re just trying to figure out how to operate in a world where bitcoin exists. You have to rewire brains, and have people think about, what is money first. Chinese yuan, many people were talking about the devaluation of it driving money into bitcoin, and the charts look correlated, but if you look at Chinese exchanges, it’s trading at a discount actually.

TD: The early rally like 3000 to 9000 was driven by China, but then again, because there was the clear correlations. More recently I’m a little less certain, but I do hear that the way Chinese people invest in bitcoin is through tether where they pay for the premium that way, and then they get to Binance and buy bitcoin. Going back to 2013, I have ocnsistently seen that every time a country is in financial trouble, you can see there’s higher demand for bitcoin in those areas. I think that possibly because it may crash, there’s a bit more trepidation, people gravitate more to dollars even more than usual. The 21 trillion dollars and the negative yielding bonds are a tidal wave. Bitcoin is a black hole that can absorb all the value in the world. How to make it happen? It will be OTC desks and guys on the phone, if the demand’s there then people will be happy to make a market.

Q: So we’re talking about permissionless innovation. I am a huge proponent of it in Texas. I am not quite an anarchist, but it fits with my temperment and values in my life. The problem with permissionless innovation is that by bypassing gatekeeping, you might undervalue other areas of business. In crypto, a great example is the poor usability and poor UI across the board. Do you have any thoughts on how we can leverage economic incentives and get permissionless innovation to drive improvement in these less sexy areas?

GP: I think the conflict is that often you’re better off buying bitcoin than investing in bitcoin companies. The growth curve should be going down eventually, so investing in companies should get more appealing. It’s all about grappling whether to invest in bitcoin directly, or invest in bitcoin companies. Square in the last year has been doing great, but we need more.