Bitcoin as a Savings Technology – Pierre Rochard & Saifedean Ammous on the Stephan Livera Podcast

Check out the Stephan Livera Podcast Episode Page & Show Notes.

Key Takeaways:

  • Central banks actively suppress savings (i.e., holding a cash balance)
  • On the grand scale, fewer savings results in a more fragile economy; here’s why:
    • People have limited ability to deal with unexpected events
    • Fewer savings results in distorted price signals
    • When people allot more of their money to financial markets instead of storing it as cash in a bank, there’s a greater propensity for financial panic
    • Having to constantly invest fuels speculative bubbles
  • Money is a way to hold value into the future; investment is a way to take on more risk
    • If you can’t hold value without investing, the ability to save becomes something that requires significant expertise
  • The ability to save outside of anyone’s control is missing in our economy—Bitcoin offers a solution
  • People produce more of an asset when its price rises; the same can’t be said for bitcoins

Books Mentioned:

Intro

Not Saving Makes the Economy Fragile

  • Central banks actively suppress savings (i.e., holding a cash balance)
    • “The current economic obsession with GDP means the entire political and economic media is constantly haranguing you about the need to invest and put your money in the financial markets” – Saifedean Ammous
  • On the grand scale, fewer savings results in a more fragile economy; here’s why:
    • People have limited ability to deal with unexpected events
    • Fewer savings results in distorted price signals
      • (For instance, with stored cash, people can buy things—this signals increased demand, and thus, re-allocates production. But, without cash savings, people have less of an ability to do so.)
    • When people allot more of their money to financial markets instead of storing it as cash in a bank, there’s a greater propensity for financial panic
    • Having to constantly invest fuels speculative bubbles
      • For example, if people are unable to store value by saving—as money stored as cash loses its value over time—they’re forced to invest in things like real estate to hold value. Something like this might cause housing prices to rise and other people to begin investing in the housing market, eventually leading to a bubble.
  • In The Yield from Money Held – Reconsidered, Austrian economist Hans Hermann Hoppe counters the idea that money held as cash is unproductive

Storing Money as Cash vs. Investing

  • Money is a way to hold value into the future; investment is a way to take on more risk
    • If you can’t hold value without investing, the ability to save becomes something that requires significant expertise
  • Mainstream Keynesian economics forgets that saving is a precursor to investment
    • “A good analogy is growing grains; you have to not eat the grains and plant them into the ground” – Saifedean Ammous
  • People resort to investing with a passive approach—like investing in a market index
    • This leads to a separation between entrepreneurialism and financing companies

Bitcoin is a Savings Technology

  • The ability to save outside of anyone’s control is missing in our economy—Bitcoin offers a solution
  • The default Keynesian thinking is that only a payment utility can drive demand for a currency—no one thinks about savings
  • “The magic Keynesian machine generates economic value by printing new money, but the real cost has always been in inflation, reflected in the dropping value of money” – Saifedean Ammous
  • None of this happened under the gold standard—a hard monetary asset appreciates by 1-2% every year
    • “If a startup was to guarantee you better returns without having to finance a giant parasitical financial and military complex, it would make a killing. Fortunately, it’s not a startup; Bitcoin does it.” – Saifedean Ammous

Bitcoin as a ‘Number Go Up’ Technology

  • In a free-market economy, the hardest asset gets chosen as money
    • The harder it is, the better it is at transferring value to the future
  • People produce more of an asset when its price rises; the same can’t be said for bitcoins
    • “It’s what I like to call the underlying technology behind Bitcoin, ‘Number Go Up’ … formally referred to as the ‘Difficulty Adjustment'” Saifedean Ammous
  • The notion that you ought to spend to drive an economy is Keynesian nonsense —spending is a personal decision
    • Bitcoin wouldn’t be succeeding if it relied on financial activism
  • Bitcoin’s cash balance went from 0 to $150B in 10 years
    • At this point, it represents about 0.1-0.2% of the world’s total money supply
    • As it grows, there’ll be more people willing to transact in bitcoin

Stock to Flow

  • Stock to Flow (S2F) price models could fall apart soon; here’s why:
    • Correlation doesn’t imply causation
    • S2F models rely on publicly available prices & S2F values—other metrics, such as peoples’ price expectations, aren’t considered
    • S2F analysis focuses on how much the miners are selling
  • On the other hand:
    • Being permission-less and censorship-resistant attracts people to Bitcoin, especially with payment processors increasingly de-platforming people
    • Bitcoin’s liquidity went from 0 to $600MM daily volume on regulated U.S. exchanges—liquidity has a huge network effect
  • Check out these Podcast Notes to learn more about the S2F model

Lightning and Bitcoin Developments

  • We’ll see increasing Lightning network adoption when the on-chain fees rise
  • Work is being undertaken to make Lightning ready for mass adoption; a few examples:
    • Square Crypto launched their Lightning Development Kit to increase adoption
    • Phoenix wallet enables channel management to be done in the background
    • Multi-path payments enable routing a payment through multiple channels
  • Apps shouldn’t concern users with having to choose to pay on-chain or on-lightning; it should all be done seamlessly by scanning a QR code

Additional Notes

  • Pierre is fascinated by the idea of Bitcoin as collateral and borrowing against it (already offered by companies like BlockFi, Celsuis, and Unchained Capital)
    • (The interest accrued on fiat is less than Bitcoin’s value appreciation)
  • Buying Bitcoin with collateral of current assets can be a speculative attack on the fiat financial system (similar to past speculative currency attacks); here’s how it happens:
    • A speculator borrows in the weak currency—effectively creating new money—to purchase the strong currency (this has a negative cycle to it, weakening the weak currency and strengthening the strong one)
      • The speculative attack is broken by raising the interest rates of the weak currency, making it more expensive to borrow (the harder the strong currency, the more you need to raise the interest rates to break the attack)
    • An open question in this scenario: How high will interest rates have to go to save fiat currencies?
      • Would the presence of a very hard currency constrain the government monetary policy, or will we be living in a world with only Bitcoin?