How is #plebchain doing? 🫡
not if the credit bubble is against a weak currency and the collateral is actually bigger.
What government would "pop the credit bubble" in this particular example?
SPECULATIVE ATTACK: How does Bitcoin gain further adoption?
The idea is simple - people borrow fiat and buy bitcoins. This process creates a self-feeding doom loop which erodes fiat's value and propels Bitcoin's value.
As the expected value of bitcoins solidifies in people's minds and fiat continues to be debased in front of them, it becomes appealing to borrow fiat via a loan whose value they believe will erode at a faster rate than the interest rate they're paying.
At that point, it becomes a no-brainer to perform a carry trade - borrow the weak local currency using whatever collateral a bank will accept, invest in a strong foreign currency like Bitcoin, and pay back the loan later with realized gains.
In this process, the banks create even more of the weak currency, amplifying the problem.
The effect of people, businesses, or financial institutions borrowing their local currency to buy bitcoins is that the bitcoin price in that particular currency would go up relative to other currencies.
EXAMPLE: Let's say that middle-class Peruvians trickle into bitcoin. Thousands of buyers turn into millions of buyers.
They borrow Peruvian Sols using whatever unencumbered collateral they have – homes, businesses, gold jewelry, etc. They use these Sols to buy bitcoins. The price of bitcoins in Peruvian Sols goes up, - a premium develops relative to other currency pairs.
A bitcoin in Peru might be worth $23k, while in the U.S. it trades at $22k. Traders would buy bitcoins in the U.S. and sell them in Peru for a $1k profit. They would then sell their Peruvian Sols for dollars.
This would further weaken the Peruvian Sol, causing import inflation and losses for foreign investors.
The Peruvian central bank would have to either increase interest rates to break the cycle, impose capital controls, or spend their foreign currency reserves trying to prop up the Sol's exchange rate. Only raising interest rates would be a sustainable solution, though it would throw the country into a recession.
As of February 2023, Bitcoin's market cap was $424B and Peru's GDP was $223B. Who would win that fight?
There's a huge problem with the Peruvian central bank raising interest rates: bitcoin's mean historical return is 93.8% per year (as of 2023). Even if investors expected future return is 1/3 of that - 31%, the central bank would have to increase interest rates to unconscionable levels to break the financial incentives of the attack. There's no way the Peruvian economy would be able to sustain an interest rate greater than the mean historical return of Bitcoin.
The result is evident: everyone would flee the Sol and adopt bitcoins, due to economic duress rather than technological enlightenment.
This example is purely illustrative, it could happen in a small country at first, or it could happen simultaneously around the world.
Who leverages their balance sheet and how is impossible to predict and it will be impossible to stop when the dam cracks.
But it doesn't stop there - a speculative attack such as this is prone to spread and cause contagion.
Because it pushes the price of Bitcoin up dramatically, different citizens with slightly-stronger local currencies are incentivized to perform the same sort of attack, especially after seeing that such a thing worked out. They may buy bitcoins simply because they want to speculate on their value, but the reflexivity of this action works such that the reduction in demand for their local currency would actually cause higher-than-expected inflation and thus begin creating a problem with it.
The feedback loop between fiat inflation and bitcoin deflation will throw the world into full hyperbitcoinization.
-- an excerpt from Speculative Attack (2014), its 2-minute version can be found here: https://2minutebitcoin.org/blog/bitcoin-speculative-attack-on-the-dollar-2014
A traditional empire exports security - it acts as a policeman in the local area (or world), ensuring the law is followed.
Similarly, one of its basic functions is to honor private property rights.
Bitcoin's #1 value proposition is itself security too - but decentralized security.
It acts as an alternative and immediately outcompetes less-competent states that do not enforce property rights well.
-- an excerpt from the Saylor Series Episode 2 - the Rise of Man through the Dark and Steel Ages, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/saylor-series-episode-2-the-rise-of-man-through-the-dark-and-steel-ages-robert-breedlove
It is hard to see a lot of use for some kind of general “blockchain technology” outside of its application in Bitcoin as a currency and store of value.
In Bitcoin, the blockchain is a way of solving the double-spending problem without privileging any party as to the creation of new units or of the establishment of a consistent history.
This is an extremely costly and complicated way of maintaining an accounting ledger.
How often does one really need to do accountancy in this way?
It is only a good idea when the game being played is so important that no one can safely be put in the position of referee.
There are not a lot of things that one would really need that for, but there is a good argument to be made that a blockchain is a reasonable alternative to the monetary system under which the rest of the world is currently oppressed, at a minimum the monetary system at a geopolitical level.
There are no applications of blockchains which do not involve
a double-spending problem.
A blockchain that was used for an application with no double-spending problem is nothing more than a database, so you could just replace it with a distributed hash table.
People have also used the blockchain for timestamping. This only works because Bitcoin has become well-known as a point of reference. If you had a need for timestamps, you certainly wouldn’t invent a blockchain to do it.
-- an excerpt from It's Not About The Technology, It's About The Money (2016), its 2-minute version can be found here: https://2minutebitcoin.org/blog/bitcoin-is-about-the-money-not-the-blockchain-technology
Things can be forgotten. Nothing is guaranteed - missing a key insight can have you waste 1,000 years!
- average life expectancy in Rome around 100 A.D was 72 years! (civilization, sanitation, aqueducts, roads). Then Dark Age happens and it plunges down to 30 years. It only recovers to 70+ years in mid 1900s in the U.S.
- The way Romans created concrete was [lost up until 2017](https://www.nature.com/articles/nature.2017.22231)! It is stronger than the concrete used today
- The Chinese invented the printing press 2,000 years ago. Gutenberg got it just in 1453.
- 100 A.D. the Trajan knew the world was round, then 1,400 years later Europe pre-Columbus thinks it’s flat
There is always the possibility of significant civilizational regression if we ignore learnings we’ve accumulated over time.
We believe we are living in such an era with relation to Sound Money.
Humanity has forgotten what it’s like to have money that doesn’t lose value, and deludes itself into thinking such a world cannot work.
-- an excerpt from the Saylor Series Episode 2 - the Rise of Man through the Dark and Steel Ages, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/saylor-series-episode-2-the-rise-of-man-through-the-dark-and-steel-ages-robert-breedlove
The skyscrapers in New York are constructed from the value extracted by financial intermediaries.
As they say in Vegas - those hotels aren’t built by winning gamblers.
The nature of an intermediary is one that can extract perpetual profits from anyone doing business in its network.
And that’s what money is - a network of trust. This is why the governments have been so keen to monopolize it - it gives them essentially unlimited power and wealth, as they possess the ability to confiscate the wealth of their citizens.
They extract rent - siphon value off - for the privilege of protection.
That’s not necessarily a bad thing - but it becomes so once it’s a non-consensual rate - i.e, you have no bargaining power, and it’s too much.
-- an excerpt from the Saylor Series Episode 2 - the Rise of Man through the Dark and Steel Ages, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/saylor-series-episode-2-the-rise-of-man-through-the-dark-and-steel-ages-robert-breedlove
Oil was about kerosene and lighting → heating → automobiles.
Cars were its killer app. They enabled the density of a city (commute in and commute out). They even changed people’s self identity - cars today are an avatar of who we are - a status symbol.
Critically - Oil was not only an energy producer but also an energy storage device - it was a battery.
Oil was kept in tanks as a battery. To this day it is one of the best batteries, with no leakage of charge!
Regardless of Bitcoin’s future ascent, or descent, the long-dated monetary liabilities of individual Americans are denominated in U.S. dollars.
Tackling their collective, fiat-based societal retirement challenge head-on leads to an interesting and important question: “what do you have to believe to be true for Bitcoin to be your vessel for savings?”
The answer: point to point – meaning, from today until your long-dated liabilities (e.g., your retirement spending) start coming due – and regardless of USD paper currency volatility along the way – you only have to believe one thing; that USD will depreciate relative to Bitcoin over that time period, as it has ~80% in the last two years (2018-2020) alone.
Remember that the most important trades are the ones we make with our future selves, that our search for eversounder money is an individual, intuition-based optimization, and that, instinctively, we know our survival depends on durably storing of our life force.
In this context, is it any surprise that millennials voting with their dollars, and with more distrust for traditional institutions than their forebears, have already made Bitcoin “the millennial savings account”?
-- an excerpt from the Stone Ridge 2020 Shareholder Letter, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/stone-ridge-2020-shareholder-letter
In a way of looking at it, a store of value is captured energy that does not decay.
The invention of cereals (stabilized starch) and later frozen food both unlocked humanity the ability to store food energy for longer periods of time.
These were essentially stores of value - captured energy that would not decay. They took the entropy out of food.
Similarly, fiat money today can be seen as a high entropy storage device. It bleeds value (energy) continuously.
Bitcoin contrastly can be seen as a deep freeze - the absolute zero of storing your monetary energy. It sucks all the entropy out of it, knowing you are guaranteed the same percentage fraction of the money supply of all time -- something no other asset in the world can offer.
-- an excerpt from the Saylor Series Episode 2 - the Rise of Man through the Dark and Steel Ages, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/saylor-series-episode-2-the-rise-of-man-through-the-dark-and-steel-ages-robert-breedlove
In our current system, **money creation** and money destruction is mainly done through private banks. New money is created when these banks create credit, and through fractional-reserve banking they only keep a small fraction of deposits in reserves.
The financial system then becomes hopelessly intertwined - if too many borrowers default on their loans, the **entire system** will fail – even for customers who never agreed to have their deposits invested in risky schemes.
This intertwining creates **terrible incentives** through a severe disconnect between risk and reward for the financial sector.
The government becomes obliged to bail out banks once they get into trouble from risky lending, which drives banks to take even more risk knowing that their potential losses are capped, but their upside is not.
- an excerpt from the 2-minute version of An Honest Account of Fiat Money (2018) posted in https://www.2minutebitcoin.org/blog/an-honest-account-of-fiat-money-2018
few #plebchain
The unique utility that money gives us stored optionality - the ability to defer the decision of what to receive in exchange for your work/goods.
This explains why people value money with gold-like properties more - they enable this behavior much better.
Someone who does not want to use money must, by definition, have a very good idea about what he wants to get in exchange for his goods/services.
- an excerpt from the 2-minute version of It's Not About The Technology, It's About The Money (2016) https://2minutebitcoin.org/blog/bitcoin-is-about-the-money-not-the-blockchain-technology
Everything Satoshi did in inventing Bitcoin was non-original – his genius was in seeing how combining a specific set of previously solved problems could, together, solve certain unsolved problems – except **the Difficulty Adjustment**. The Difficulty Adjustment is Satoshi’s most underappreciated breakthrough - a truly genius application of game theory.
Suppose Bitcoin’s price rises, creating an incentive for more Bitcoin miners to mine because their rewards are greater.
More hashpower will join the network and on average, blocks will be mined faster than 10 minutes, therefore Bitcoin will be minted more often.
In this case, the Bitcoin protocol will automatically raise the difficulty of mining, such that the creation of new Bitcoin, and the timing of transaction verification, does not accelerate beyond its preset schedule (about every 10 minutes).
Analogously, suppose Bitcoin’s price falls, and higher cost Bitcoin miners turn off their machines. The Bitcoin protocol will automatically reduce the difficulty of mining, such that the creation of new Bitcoin, and the timing of transaction verification, does not decelerate below its preset schedule.
The Difficulty Adjustment is what drives Bitcoin’s **salability across time**.
Unlike gold, even amidst periods of surging demand for Bitcoin, Bitcoin miners have no ability to mine Bitcoin faster, making unexpected inflation impossible. Forever.
Typical of Satoshi’s understated style, the Difficulty Adjustment was described in just two sentences in his original Bitcoin whitepaper: “Mining difficulty is determined by a moving average targeting an average number of blocks per hour. If they are generated too fast, the difficulty increases.”
The Difficulty Adjustment has now been continuously tested for fourteen years, at total global network power levels ranging from a just a few laptops, all the way up to enough energy to power New York City, and with lots of total network power volatility along the way.
The total network power volatility is what requires the Bitcoin protocol to continually adjust the mining difficulty, akin to continually adjusting the number of digits of the product of the two primes. And, astonishingly, just as Satoshi designed, no matter the global mining capacity, or its variability - a new block is verified every 10 minutes.
Tick Tock, Next Block!
-- an excerpt from the Stone Ridge 2020 Shareholder Letter, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/stone-ridge-2020-shareholder-letter
Banking is inherently unstable. Bankers are making it up as they go. There are numerous examples throughout history that prove this, each with different outcomes.
Numerous examples to keep you going:
1. [Cyprus Banking Crisis](https://en.wikipedia.org/wiki/2012%E2%80%932013_Cypriot_financial_crisis) (2013) - Cypriot banks got in deep trouble due to Greek debt exposure, leading to bank runs and capital controls. Uninsured deposits were controversially used to rescue the banks through a "bail-in."
2. [IndyMac Bank](https://www.bankinfosecurity.com/indymac-inside-story-bank-failure-rebirth-a-1432/op-1) (2008) - During the 2008 financial crisis, IndyMac, a California-based bank, saw depositors withdraw over $1.3 billion in just 11 days, leading to its collapse and takeover by the FDIC.
3. [Northern Rock](https://www.suerf.org/studies/2141/the-failure-of-northern-rock-a-multi-dimensional-case-study) (2007) - The first UK bank run in 150 years happened when the subprime mortgage crisis hit, with depositors withdrawing ÂŁ1 billion in only three days.
4. [Argentine Financial Crisis](https://economics.rabobank.com/publications/2013/august/the-argentine-crisis-20012002-/) (2001) - A huge bank run during the economic meltdown led the government to freeze bank accounts and convert dollar-denominated accounts to pesos, causing many to lose their savings.
5. [Barings Bank](https://www.e-education.psu.edu/ebf301/node/569) (1995) - London's oldest merchant bank went under after rogue trader Nick Leeson caused over ÂŁ827 million in losses, leading to a run on deposits and the bank's eventual bankruptcy.
6. [Continental Illinois](https://www.atlantafed.org/cenfis/publications/notesfromthevault/1604) (1984) - Risky lending practices led to a bank run and the collapse of the seventh-largest US bank at the time, requiring a massive bailout from the Federal Reserve.
7. [Banco Ambrosiano](https://en.wikipedia.org/wiki/Banco_Ambrosiano) (1982): Nicknamed "God's Bank" due to Vatican ties, Banco Ambrosiano collapsed because of fraud and a run on deposits, leaving a $1.4 billion hole in its balance sheet.
8. [Herstatt Bank (1974)](https://en.wikipedia.org/wiki/Herstatt_Bank) - A bank run on this Cologne-based bank, triggered by massive forex trading losses, led to its collapse. An event widely referred to as the Herstatt crisis, this highlighted the importance of settlement risk in foreign-exchange markets and was a key factor that led to the worldwide implementation of real-time gross settlement (RTGS) systems
9. [Bank of United States (1931)](https://en.wikipedia.org/wiki/Bank_of_United_States) - During the Great Depression, a run on the Bank of United States caused it to fail, making over $200 million in deposits inaccessible for its 400,000+ depositors and worsening the economic crisis.
10. Great Depression Bank Runs (1930-1933) - After the 1929 stock market crash, a series of bank runs swept the nation, [causing over 11,000 banks to fail](https://thegreatdepressioncauses.com/great-depression/banks/) and wiping out about $140 billion in savings (in today's terms).
Bitcoin mining has the potential to bootstrap the development of cheap, clean energy infrastructure in remote areas, possibly leading to a more sustainable energy future.
The ultimate conclusion about Bitcoin is that a global network of rational economic actors operating within a voluntary, opt-in currency system would never collectively form a consensus to debase the currency they have all independently and voluntarily determined to use as a store of wealth.
It's not just code that dictates there will ever be 21 million bitcoin - it's the game theory surrounding much of our daily lives.
That can't be understood overnight by any individual.
It is a reality that is reinforced and strengthened over time by reading more and seeing it repeatedly work, every 10 minutes.
- an excerpt from the 2-minute version of Gradually, Then Suddenly (2019) https://www.2minutebitcoin.org/blog/gradually-then-suddenly-bitcoin
The foundational fallacy is that people try to explain money in physical terms when it is purely a sociological phenomenon.
Gold is not valuable because it is durable, fungible, portable, and scarce; it is valuable because of the **self-sustaining tradition** around it.
Its properties enable this, but don't guarantee it.
The same applies to Bitcoin. It’s why you can't copy Bitcoin's value by forkingthe blockchain and adding extra features - the shared socially-reinforcing belief of billions of people is impossible to replicate.
Similarly, if a new metal better than gold was found - it wouldn't inherit all its value.
- an excerpt from the 2-minute version of It's Not About The Technology, It's About The Money (2016) https://2minutebitcoin.org/blog/bitcoin-is-about-the-money-not-the-blockchain-technology
