The Immaculate Conception: Bitcoin vs Fiat Standard | Dr. Saifedean Ammous | EP 203

So Bitcoin only has users; it doesn't have any admins. There's nobody with a master key, and we've, you know, this is kind of the simple way of thinking about it, which is 10 years of this thing operating without anybody being in charge and with everybody who tried to change the consensus parameters—the most important parameters of the network—everybody who tried to change these ended up basically failing. Bitcoin has maintained its consensus parameters to the point where you could run it according to the same code that was available in 2009, and you could still make it interoperable with the current chain. That's something that is unique about Bitcoin, which is that it is the coin that, you know, I like to call it the Immaculate Conception. Somebody made these coins; anybody could have mined the coins from the first day they announced the currency and they said, "I'm going to start running it on this day," and anybody could have joined. Since then, everybody who got Bitcoin got Bitcoin at the market price or because they mined it and expanded resources, which roughly cost them close to what the market price was. So there are no insiders in Bitcoin.

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Hello everyone, I'm pleased today to have with me Dr. Saifedean Ammous. He’s an independent economist, as well as a leading researcher, communicator, and educator in the field of Bitcoin. He obtained his PhD at Columbia University. Dr. Ammous is the author of "The Bitcoin Standard," which was published in 2018, and the newly released "Fiat Standard." He has advised corporations on Bitcoin strategy, helping many investors perform their due diligence on Bitcoin. Dr. Ammous teaches courses on the economics of Bitcoin and economics in the Austrian School tradition in his online learning platform, saifedean.com, and also hosts "The Bitcoin Standard" podcast. Thanks very much for agreeing to talk to me today, and I'm looking forward to learning a lot about things I know very little about today. So, um, tell us maybe to begin with about your books. Let's start with "The Bitcoin Standard" and then move to "The Fiat Standard."

So "The Bitcoin Standard"—well, first of all, thank you very much for having me on. It's a true pleasure to be talking to you. Um, I published "The Bitcoin Standard" in 2018, and um, it was a book that tried to explain the economics of Bitcoin: why Bitcoin functions, why it functions the way it does, and what are the implications that you would expect from the continued growth of Bitcoin in the future. And so, um, I analyzed it from the perspective of the Austrian School, relying on the work of economists like Carl Menger, Ludwig von Mises, Murray Rothbard, Joe Salerno, and Friedrich Hayek. I think the key insights that I—well, there are several key insights, but one of the most important ones in the book is that Bitcoin is the hardest money that has ever been invented because, um, we’ve essentially thrown away. The algorithm for making Bitcoin work has been set at producing a certain number of Bitcoins over time; that’s going to end at 21 million, and there’s no way of making more Bitcoins.

I think, after 12 years of Bitcoin operating, we can pretty confidently say there’s not going to be more than 21 million Bitcoin. And so that makes Bitcoin truly unique as a monetary asset because it is the hardest monetary asset that we’ve ever found.

Let me ask you a question about that. So why is it important that that limit exists, and what do you mean by "hardest currency" compared to other currencies?

Yeah, so the hardness here refers to the difficulty of making more currency units to add onto the existing supply, and I think this is a big deal. Essentially the first four chapters of my book focus on explaining why this is such a big deal because if you look historically at money, you find that money has been a contest of survival of the hardest. People are always looking for the hardest money available, and the ones who managed to find the hardest money managed to store their wealth successfully, whereas the ones who use an easy money will witness their wealth dissipate. So people will learn, but even if they don’t learn, you know, the market will brutally teach them the lesson by discounting and reducing the wealth of the people who put in the easy money.

So the end result is that more and more wealth will be concentrated in the harder money, and that's why historically when societies that had hard money came into contact with societies that had easier money, the ones with the hard money were able to essentially buy up a lot of the resources of the easy money societies because they could continue to make more of their money and therefore the value of the money and increase the supply of it. There are many examples in my book about this—seashells, glass beads, and limestones all were used as money when industry made them scarce in certain times and places. But then when modern technology came and allowed for an increase in their supply, their value was declining.

In the 19th century, we see this happen between gold and silver too. The price of gold and silver used to oscillate around 15 ounces of silver per one ounce of gold, and in 150 years it's now—or somewhere around 100—it’s gotten to around 120 recently. So the price of silver has been declining next to gold, and I think that can be explained by the fact that gold is harder. The supply of silver is being increased at a faster rate, and there was utility in the use of silver when money was physical, but then with the creation of essentially financial instruments that were backed by gold, you could use silver, you could use gold payments for small amounts of payments as well as large amounts of payments. So that kind of obsoleted the role of silver, and so everybody went with the harder money, and then the harder money appreciated, and the easier money continued to lose its monetary status.

Okay, so let me see if I’ve got this straight. So money is an abstract store of value, and you always want it to represent value as such, so something like the exchange of labor or the exchange of efficiency, something like that. You can correct me if I’m wrong there. You have to use something to represent that abstraction, and the problem with that is that there will be people who have control over the representation rather than contributing to the value. Those could be politicians who could print money, or they could be people who find silver or find gold or mine it and so forth. So anything that can be produced that’s a representation is subject to devaluation if the production becomes more efficient. Anything that’s producible, like paper money, can be toyed with by those who have control over its distribution.

Your argument, essentially, in the Bitcoin argument in general is, "Well, here’s something that we will never get more of no matter what we do." So I’d like to know why I should believe that. And the next thing I’d like to know about that maybe is: why Bitcoin and not 200 alternative cryptocurrencies? Like, so Bitcoin can’t be produced, but cryptocurrencies can be, so why isn't that an indication of the softness of cryptocurrency, Bitcoin included?

Yeah, well these are great questions. So I think, um, initially, yeah, you’re absolutely spot on. It’s exactly that, that whatever gets chosen as money holds value because it has value on the market, but as soon as it starts getting chosen as money it gets into what I call the easy money trap, which is the people who can make more of it will try and make more of it. People will find a way, and they will make more of it. The things that have ended up being used as money were always the things that resisted that the most, the hardest. Gold did an excellent job with that because gold’s chemistry naturally gives it that property because gold is indestructible.

So, because we’ve been accumulating gold production over thousands of years, no matter how much gold we produce this year, it’s still going to be a tiny fraction of all of the stuff that we’ve accumulated over the last 5,000 years. Every year the gold supply increases by around one and a half percent, and that’s why it beat everything out. The hardest thing ends up winning, you know, whether people consciously realize that that is the case or just because of the realities of supply and demand. Every year, we’re making five percent or twenty percent or thirty percent more silver and maybe a hundred percent more copper and larger quantities of all other commodities on the market, but we’re only making one and a half or two percent gold. So over time, gold holds on to its value, and over time that ends up being the best store of value.

So, um, gold resisted that, and then gold failed for issues we could talk about when we talk about "The Fiat Standard." But then Bitcoin offers us this possibility again, which is that nobody can break this algorithm. I must say this is really the reasonable skepticism about Bitcoin is that, "Yeah, well, you know, it’s just a line of code, and then anybody can change it." It’s a line of code; you know, we can change lines of code all the time. Somebody can get under the hood and change the code, and it takes a lot of time to be able to understand why this is not exactly the case, and I try and make that case in my book extensively in the latter chapters of the book.

But if I were to summarize it, I would say this. With Bitcoin, what we had was that the person who created the code put it out there; he was anonymous. He worked on it for about a year or two, and then he disappeared. That was it. There was nobody in charge since then. It’s now been more than 10 years that he’s been disappeared, and there has not been anybody in charge of the project. What we’ve only had are users. So Bitcoin only has users; it doesn’t have any admins; there’s nobody with a master key. This is kind of the simple way of thinking about it, which is 10 years of this thing operating without anybody being in charge, and with everybody who tried to change the consensus parameters—the most important parameters of the network—everybody who tried to change these ended up basically failing.

Bitcoin has maintained its consensus parameters to the point where you could run it according to the same code that was available in 2009, and you could still make it interoperable with the current chain. That’s something that is unique about Bitcoin, which is that it is the coin that you know. I like to call it the Immaculate Conception. Somebody made these coins; anybody could have mined the coins from the first day they announced the currency, and they said, “I’m going to start running it on this day,” and anybody could have joined. Since then, everybody who got Bitcoin got Bitcoin at the market price or because they mined it and expended resources which roughly cost them close to what the market price was. So there are no insiders in Bitcoin.

And Bitcoin has operated this way for 12 years now, and um, this is kind of the sociological explanations for it. Now, to get more technical in terms of the explanations, basically Bitcoin is a distributed network, and so anybody can run the code on their own computer, and the network functions according to the consensus parameters that everybody agrees upon.

Okay, so I don’t know what those are—the consensus parameters. Can you tell me what those are? What does that mean?

Basically, the main and most important rules according to which the network runs from the beginning—and one of them, perhaps the most important institution—yes, it’s like the Constitution. Perhaps the most important one is the number of coins that are generated. We have a very strict and clear schedule of how many coins are going to be produced every day essentially in perpetuity, and if you abide by these consensus rules, then your computer can be in sync with the rest of the network, and you’re in consensus with the network, and you can buy and sell coins and you can transact coins on the network. But if you try and break those consensus parameters, you leave the coin.

So the miracle of Bitcoin, in a sense, is that it has managed to maintain these important consensus parameters for 12 years now, and it continues to get increasingly more ossified every day. Bitcoin is the most conservative thing in human history, probably. There’s not going to be—uh, it just continues to get harder and harder to change the constitution of Bitcoin, and nobody’s been able to do it in 12 years. So that’s kind of the superficial or broad picture explanation of those things, but you could also get into the software itself. You know, it’s a distributed network, so everybody needs to be in consensus with the network. If you end up breaking the rules, if you end up trying to change the rules, which a lot of people have tried to do, all that you will do is that you will end up with another Bitcoin that is out there competing on the market with the original Bitcoin, but you’ve got a lot less liquidity and you’ve got a lot less ability to compete.

We’ve seen many people try and do that, and all that has happened is that their coins have continued to change their consensus parameters. Because once you break the—you know, once you break your duck, once, then it just becomes much easier to do it, and they’ve devolved into civil strife between participants on the network, and of course they lost economic value, and the value of the network is essentially dissipated close to zero. So Bitcoin continues to get stronger because it continues to demonstrate that it can do those few very simple technological tasks, and it can do them reliably, and it can do them according to the same rules that it has been doing for 12 years. That’s kind of the value proposition: it’s immutable, it’s decentralized, and the money supply is fixed.

So that’s kind of a big deal if you put all of these together, right? And so it’s hard for anyone to make a Bitcoin substitute that can catch up to it because it’s established a kind of primacy, given its track record of reliability and its widespread distribution.

That’s part of the argument for its primacy, yes, but I think it’s more than that. It’s not just, you know, Coca-Cola and Pepsi catching up to one another or McDonald’s and Burger King. There is a fundamental issue here, which is that what you would want the most in this kind of digital currency, because after all, this is all numbers and ones and zeros, and programmers can change it. If your programmers can change the consensus parameters of the network—which basically all the other digital currencies can do at will—you know, the other digital currencies, they have these hard forks which change the consensus parameters quite frequently and particularly the successful ones, because the way that they managed to get successful was essentially through active management. They’re more like companies rather than private protocols.

The key thing is, as you said, there is a first-mover advantage, but there’s also the problem of the Immaculate Conception. You know, if you make a new Bitcoin that’s going to start from scratch, um, you break consensus parameters or you start by imposing new consensus parameters, you’re already, you know, not starting with that Immaculate Conception; you’re already starting with the idea that there’s somebody in charge. And so, there’s now—it’s not 200 coins; there’s about 10,000 coins. And if you’ve heard about any of them other than Bitcoin, it’s because there’s a small group of people that have been behind them.

As far as I’m concerned, that makes it highly unlikely that they would have a monetary role because at the end of the day, you know, what you appreciate about Bitcoin, what makes me pay attention to Bitcoin is that it is neutral money that nobody can control. You can see two banks in two different countries use Bitcoin because that means they don’t need to resort to their own legal system and their own central banks and their own regulators in order to carry out this transaction because Bitcoin is just neutral. They know, you know, you click the right buttons and then the right smoke comes out and it does the right transaction that you want.

Okay, so I’m going to recapitulate that for a moment. Because there’s something in there too that’s quite difficult to grasp, quite difficult to believe. Apart from the fact that the technical aspects are rather impenetrable for an outsider, the way Bitcoin came about seems like a story that’s virtually impossible to believe. You couldn’t make it up, right? So this unknown engineer, Satoshi, anonymous, created this, came up with this idea that no one else had ever had, implemented it, anonymized it, and then vanished essentially without a trace. I mean how much do people know about him? Are we sure he’s who invented it? What the hell was he up to? Why did this happen, and why should an outsider believe any of this? Because it does seem like the plot of a bad science fiction novel.

I will confess that I did used to think about this in similar terms, but I’ll say this: you use the wheel every day, but you don’t know who invented the wheel. We use a lot of things every day that you don’t use them because you trust the guy who made them; you use them because they have a proven track record. You know, you’ve spent your life seeing wheels working, and so you’re willing to trust a wheel next time you get into a car.

So I think, you know, that’s ultimately what—in a sense, it’s kind of bad press for Bitcoin, but like a lot of things about Bitcoin, it actually ends up illustrating its strength. Yes, this thing has a story that, you know, a PR person would tell you just don’t bother. You know, start doing something else with your life rather than try and sell this thing. It doesn’t need anybody to sell it; that’s kind of the point. It doesn’t have a story; it doesn’t have a PR person, and the fact that it has this kind of ugly story where this person just came in and disappeared and who knows what happened—nobody really knows.

You know, maybe he died; maybe he has other things to keep him busy. Maybe he’s incapacitated in some way, but ultimately it doesn’t matter because even if he were to come back today, he has no ability to control the network any more than you and I can control it. You know, he can control the code that he runs on his computer, but at this point, the project is worth 10 years without him; so there’s no reason why anybody in Bitcoin is going to defer to his judgment if he were to come back. But besides this, you know, I think the key point is that it works regardless of whether this person is part of it or not.

Okay, so I fair enough, I understand that. So advantages of Bitcoin over fiat currency, and that needs to be defined too. Fiat currency, and then I’m also curious as an outsider. You’re an advocate, I suppose, of the Austrian School of economics, and there are a variety of economic schools, and maybe you could briefly, for everyone who’s listening, outline the competing schools and what the different propositions are and why there are competing schools and why you chose the Austrian School.

Um, I’ll say this: I think the main split is between the Austrians and everybody else, as far as I’m concerned when it comes to the main most important questions because the Austrians come at the question from a different starting point, which is that value is subjective. Economic value is subjective, and that then leads to a whole different intellectual path with different methodologies and different conclusions from what you get from essentially everybody within the mainstream. When I say the mainstream, you know that includes neoclassical economists, Chicago School economists to some extent, Keynesian economists, and all other different flavors, and even Marxist economists because, on the main and big questions, I think the Austrians stand on completely different ground, which is that value is subjective.

So therefore, economic calculation is something that is done at an individual level, and it is something that cannot be done objectively by a centralized authority, which is the kind of physics envy that has plagued mainstream economics throughout the 20th century. So this leads to a difference in methodology, leading to a difference in conclusions, which is, once you understand that value is subjective, you realize the best person who should be able to achieve the important values that matter to them is the person themselves, and so you are more likely to be sympathetic to ideas that give individuals more autonomy over their own life in economic terms.

Whereas from the other schools, it’s a question of what is the optimum policy and what kind of policy should government be using. So, you know, the entire questioning of the entire premise of the need for economic policy and for the need of economic management by the government is one important difference. So if you’re working within the parameters of the Austrian economic school, does that tilt you—so that tilts you more towards appreciation of non-centrally controlled distributed networks and the emphasis on the individual actor?

That’s yes, and to the mainstream economists, this is, you know, irredeemably ideological and unscientific. But you know, to the Austrian—what’s the rationale for that though? Because it seems precisely the opposite. I mean if you’re—because it seems to me that that’s more grounded in a kind of humility. There’s no way of determining once and for all what the best thing is for the most people, so what we should try to do is establish institutions that distribute decision-making in as uncontrolled a manner as possible, I suppose.

So that’s like a rat, in some sense, that’s—is that a radically free market approach that is applied to all sorts of institutions? And the fundamental issue there is the decentralization of decision-making power. Absolutely, and this is what, you know, from the mainstream perspective appears to be ridiculous because in their mind, you know, the job of the economist is to figure out how the government can fix the economy—get rid of unemployment and eliminate wage disparities and get rid of inequality and all these other buzzwords that appear to be, you know, profound economic scientific thinking when really it’s just politics masquerading as science.

And then, so how would a mainstream economist react to that kind of statement? If you were playing devil’s advocate to help me understand how they would criticize—what do they say?

I think what they say is the Austrian School made important contributions up until the First World War to marginal analysis, but then the field advanced mathematically. You know, with the improvement in mathematical techniques that happen around the world and with the advancement of computers, there became so much more room for the application of mathematical and quantitative methods into economics, and the Austrian School failed to keep up with that, and so they’re still stuck in the past writing essays, shouting at the clouds, not making much sense.

Whereas, you know, the mainstream has moved on to this scientific management, which is, you know, once you scratch under the surface, you realize there are very few differences between modern macroeconomists’ scientific management and erstwhile socialist economists and Soviet economists and their conception of central planning. In fact, you know, one interesting anecdote: Paul Samuelson literally wrote the textbook on economics in post-World War II America and the world, and his principles of economics textbook, which first came out in the 40s or 50s, I don’t remember when the first edition was, and it continued to come out until his death about 10-15 years ago. Up until the 1989 edition, the book had continuously, when discussing the Soviet economy, the book had continuously said the Soviet economy will likely outperform the U.S. economy and it will overtake the U.S. economy within the next few years.

There’s a paper that is done that goes through all of these different editions, and as Samuelson continues to move the goalposts, you know, they were supposed to overtake the U.S. in ’68, but then by the 65 edition, they were supposed to take the U.S. in ’75 now, and then a new edition comes along, and I don’t remember the exact dates, but you know they kept on kicking the can down the road while continuously, you know, not challenging the essential idea, which is that central planning of the economy works and the Soviet Union is going to do a better job than the U.S. But their defense against central planning of the economy is that it necessitated, you know, breaking a few eggs and putting a few million people in gulags, and that’s why we don’t want it.

But it would work, and it would give us more GDP, and so this continued to be published in Paul Samuelson’s textbooks up until 1989 or 1990 or something like that. You know, students were studying this in class as the Soviet Union was collapsing, and of course, you know, this is fiat academia, fiat world. The next year they just take that section out and they continue to print the textbooks that continue to teach kids in universities around the world today that, you know, this is how economics works.

Were you trained at Columbia as a classical economist?

Yeah, I took the foundational course for economics at Columbia. Yeah, so my PhD was in sustainable development; it wasn’t entirely economics, but we took the foundational courses of economics basically.

So why did you become a deviant from that, let’s say? What was your intellectual journey? And I’m very curious about that.

Uh, well, um, so my undergraduate background was in mechanical engineering of all things, and in my PhD, it was in sustainable development, and we were supposed to study the issues of, you know, energy and society and economics and approaches from multidisciplinary perspectives. So my engineering background and then my new knowledge in economics gave me that kind of what Hayek calls the Fatal Conceit of I’m just going to pick a topic in energy economics and energy engineering economics and study it with the big brains of a Columbia PhD and then figure out what needs to be done, basically.

And then, you know, you can maintain these illusions until you actually start digging into the spreadsheets, and then you start trying to actually mathematically model the complex world outside and put it on a spreadsheet on your computer, and then you start realizing just how absurd these things are. You know, the, yeah, well, you’d think if you could do that, then you could put the stock market on a spreadsheet and run your economic wizardry and gather all the money in the world with your capability to model the economic system and predict, and yet no one can do that.

Exactly, so now one more comment about that. I mean, I see that danger of that fatal conceit lurking underneath all the discussions of climate change. Does that seem like a reasonable proposition to you? Because it’s a justification for central planning masquerading as, well, we have to save the planet; we know what’s wrong with it, and we know how to fix it, and our solutions are going to work, and they’re not going to produce unintended consequences. It’s so dire that you need to leave us alone while we do this, and we know better than you do.

Exactly, and that’s exactly how I went off the reservation because, you know, the topic of the course, the topic of the PhD, and the topic of the program was about how you can use this kind of scientific management to solve these big problems like climate change. And as I was studying, in particular, my PhD was on the topic of biofuels, you know, ethanol and biodiesel, which they make from plants, which is just an absolutely insane abomination of humanity. It's a sin that people do this. You grow crops; you use a plant for a year to grow crops, and then to process them and then to turn them into fuel when you can just get fuel straight out of the earth and much cheaper, much more, and much better quality that doesn’t degrade the car and that doesn’t destroy the other soil.

As I was studying that, I was, on the one hand, I was struck by the impossible complexity of the question, and on the other hand, I was noticing the inescapable conclusion that everything that they’re trying to do here is just making things worse. In fact, you know, the idea was that we’re going to save the Earth from climate change by replacing fossil fuels with ethanol and biodiesel, but the reality was that you were chopping down the Amazon and Indonesian palm forests and turning them into the sterile farming land. The Midwest and the Mississippi Valley over the U.S. was essentially degraded from all of its soil, and then the fertilizer that is just running off from the Mississippi is causing all these enormous damage to the Gulf of Mexico. It’s insane how much damage is being done from this attempt to sort of centrally plan things from above, and Hayek has a saying where he says, you know, we used to suffer from problems; we now suffer from solutions.

Let me ask you about that. Like, look, I’ve been struck by exactly this problem, right? This is the problem of unintended consequences and the irreducible complexity of things. So like we can talk about climate change, the problem of climate change, but those words are unbelievably deceiving because there isn’t a problem of climate change; there are 150,000 problems of climate change, and every single one of those is an unbelievably difficult problem. The solutions to those problems could well exist in terrible contradiction to one another, and so, but you get diluted; you think, "Well, climate change," well that’s easy to say; I must be able to conceptualize that. Of course, you can’t. And then it hides the fact that it hides the substructure of complexity. Now you got a glimpse of that, and that instilled in you this resistance to this fatal conceit. It instilled in you some humility. Why doesn’t that happen to other people, and why did it happen to you?

Um, that’s a good question. I don’t know. I think I don’t know; different people react in different ways. I just have an insatiable curiosity to continue to try and understand these questions, whereas what I needed to do was to just sit down and run a bunch of equations on a spreadsheet and say that this is the model. And then, you know, as long as the thing was internally consistent, then it gets the pass and then you get the degree. Maybe it was your training as an engineer?

Yes, I think actually that is a very good point. Yeah, engineers really like it. Engineers really like to build things that work, exactly, and you can’t hide the fact; like you have to trace the whole thing and how it works. You try and put—you have to conceptualize it in your brain, and it has to make sense; you know, think of the Rube Goldberg machine, whatever it is. You have to follow it through, and then you need to figure out where it breaks. So thinking of trying—trying to approach something as complex as the global energy market as an engineer approaches something like an engine, you know, a single engine. Exactly, that’s the fatal conceit because the engine is a product of human design; it’s a product of human constructive design.

Somebody sat there with a pen and paper or computer program and designed this engine, and then they iterated on it. But things that are our societal institutions are the products of human action and not human design. You know, we don’t—nobody sat down and designed the global energy market. Everybody out there is helping shape the global energy market every day with their consumption decisions and their production decisions, and everybody’s kind of reacting to everybody else’s actions in this kind of global dance that we all do together that ends up, you know, rewarding the better ideas and punishing the worst ideas, and nobody knows how it’s going to evolve.

That’s ultimately, you know, Mises’ critique of socialism is primarily about property rights. It’s the issue of calculation without property rights. It’s impossible for people who don’t own resources and who don’t have an opportunity cost to the use of resources to accurately and rationally estimate what is the best use of those resources. It has to be real. You know, Mises has a beautiful quote; he says, you know, capital is not a play; it’s not play pretend or something along those lines. It’s not a game where you can just let’s pretend that this is my capital; I’m going to allocate it. No, it has to be worth what it actually is worth to you individually so that the decision has the weight. Yes, the full weight of the reward and the full cost you have to feel in order to be able to understand the decision. If you don’t own it, then you don’t understand the cost, and you can’t make that decision.

So, that’s one hand; it’s the property rights and calculation critique. And then on the other hand, there’s the entrepreneurship critique, which is even if we manage to take over a capitalist functioning society and turn it into a socialist society today, it has no possibility for accommodating change; it has no possibility for making change happen because it has no mechanism for consumers to impose their preferences for quality and quantity of goods that they want on the producers. Right? So there’s no way of gathering information about the state of the market, absolutely, yeah, and about the future, and this is the creative role of the entrepreneur.

The entrepreneur plays a central role in Austrian economics but not in mainstream economics because in Austrian economics, you know, the entrepreneur is the one who foresees possibilities. And most entrepreneurs are likely wrong, perhaps—maybe most or maybe close to most—they’re wrong about what they foresee in the world, but some of them are the ones who build that right.

Well, then there’s a Darwinian issue there too because, look, part of the rationale for evolution, for the—for what would you say—for understanding why the idea of evolution is necessarily true in some sense is exactly the problem of the complexity of the future. It’s unpredictable in principle. You’re not going to get smart enough to predict it; that’s never going to happen. It may be that, partly because if you built a machine that was smart enough to predict that, the existence of a machine that smart would change the way that the future would manifest itself in a way that that machine couldn’t predict. And so the way evolution solves that problem is that it produces—it’s like there’s a million mosquitoes; one mosquito gives rise to a million mosquitoes, but every mosquito doesn’t produce a successful million offspring. We’d be like knee-deep in mosquitoes in no time hardly any of those mosquitoes live, and they’ve—the ones that live vary a little bit from their parents in some unforeseen direction.

If you get enough of that production of unforeseen variants, then some of those unforeseen variants can match the unforeseeable future, and that’s how— that’s exactly how entrepreneurs work, is that most entrepreneurs fail, and then when you look at successful entrepreneurs, you see that most of their ideas failed. And so what you do is overproduce and cull, and that’s not the same as logical prediction.

Now, there is some role that intelligence plays, right, because by all things considered, you’d hope that more intelligent entrepreneurs—you would predict that more intelligent entrepreneurs have a higher probability of success than less intelligent entrepreneurs, but it isn’t necessarily because they’re better able to foresee the future. You know, it might be that they’re making better rational decisions of the sort of rational decision that intelligence can make. But so it’s very interesting to me that you say that the—so the entrepreneurs, in some sense, their function is to keep the system modifying itself to keep up with the transforming present that we call the future. That’s the role of the entrepreneur.

And even psychologically, that’s the case. They’re high in openness, and open people, psychologically, overproduce ideas. They’re fascinated by ideas, and they tend to be—they have high verbal fluency; they have high fluency in the ability to generate images. So for example, someone who’s creative, if you say to someone creative, “Write down as many words as you can that begin with the letter S in three minutes,” the creative people will, on average, outperform the uncreative people. That’s—and that’s a consequence of trade openness, and that’s a consequence, in part, of its association with high levels of G fluid intelligence. So it’s just speed in some sense.

And there’s also very—the other thing that the creative people do is they’ll produce more divergent answers. How many different uses can you think of for a brick? You score that by the number of uses generated but then also by the rarity of the use that’s specified—extra points, so to speak, are given for that.

So the way that nature solves the problem of the unpredictability of the future, even within human psychological functioning, is by overproduction and culling, not by rational prediction.

Yes, and you know, one thing I think, it’s Popper who said this, but it may be apocryphally attributed to him, but it is to predict the wheel is to invent the wheel. That’s, I think, the issue of prediction; like we’re—to predict the future is to basically try and predict what the future of knowledge is, and we’re at the limit of our knowledge right now. So, you know, the invention of the wheel was a new thing; you had to actually invent it in order to be able to predict it because you didn’t even know that it was possible before you—before it was invented.

And this is ultimately—well, something new is by definition outside of your domain of knowledge; it might even be outside the axiomatic structure of your domain of knowledge if it’s new enough. And so it’s unpredictable by definition, or it wouldn’t be new, and it doesn’t matter, you know, the creativity is not—you know, it’s not like you can pick the 100 most creative people in the country and then put them in a room and tell them come up with all the creative things. The whole point is that it’s a living ecosystem in which the creativity is what makes the new ideas, and these ideas are tested in the real world. You know, they either sink or swim in the real world of the market, and it’s specifically their, you know, sinking or swimming is what determines their success because that’s all that matters.

So you need those people to be out there in every field of life in order to be able to innovate in those fields. You can’t just isolate it. And so a system that is built on central planning—and this is one of the critiques that Mises has leveled at socialism exactly a century ago, in 1922, he wrote his book, "Socialism," and until today I don’t think there has been a single socialist that has actually illustrated their ability to comprehend this point and still disagree with it. They grapple with his ideas on property rights and they made some attempts to refute him and failed, in my opinion. But on the entrepreneurship point, there’s almost complete silence because there’s no way that you can square the idea of letting, you know, every workshop worker have the opportunity to create and innovate something new and try it out because they have their own money, and then they start their own shop. You know, there’s no way that you can square that with having a committee that decides all of these workshops that are doing this unless this line of business, all of their capital, all of their work, all of their structure, all of their everything that they do has to be decided by a central authority. Those two things are fundamentally incompatible.

So we’re still walking through "The Bitcoin Standard," at least in some sense. Shall we talk more about "The Fiat Standard," the book that you’ve just released? And so let’s talk—first of all, tell everybody what constitutes a fiat currency and contrast that with Bitcoin and have at it.

Alright, so let me just conclude with one more thing about "The Bitcoin Standard" and the Austrian School because I think it’s a good recap of everything we’ve discussed so far, which is that, um, you know, practically speaking, the men where the rubber hits the road in terms of the difference between the Austrians and everybody else is in the free market conception of money versus the state’s conception of money. This is where, you know, the two worldviews are the most divergent because from the mainstream perspective, everybody in the mainstream, you know, the money is the creation of the state. The only question is what is the state’s role in the management of money?

But from the Austrian perspective, money is a product of the market, and the state—the money is not the invention of the state, and the state’s meddling in money is actually not just irrational in the sense that it can’t succeed for all the reasons that socialist central planning cannot succeed. It’s also at the root of the cause; it’s also the root cause of the majority of economic problems that all economists are concerned with. So once you—and I’ve heard your discussion with Robert Murphy, who did a great job explaining the business cycle. It’s the corruption of money that ultimately leads to the business cycle, and up until Bitcoin came about, this was an interesting philosophical discussion and economic and academic discussion.

But there was very few—there were very few Austrian economists, and the majority of everybody just went along with what the mainstream thought. But the absolutely fascinating thing about Bitcoin, one of the many fascinating things about Bitcoin, is that it is a live experiment in this question. Here we go; we have a form of money that is not produced by the state, not regulated by the state, not controlled by the state, and it’s functioning as a form of money, and it tests, you know, it’s continued survival refutes the state theory of money, and perhaps even more deliciously, it refutes the inflationist theories of money, which all of these other schools are inflationists. You know, they all argue about how much the money supply should increase and how should the money supply increase and who should be in charge of the money supply increase, but none of them has ever questioned the fundamental proposition, which is the money supply should not increase, does not have to increase.

Why did they presume that it should increase? Um, I mean intellectually, you know, the whole field is shaped from the perspective of how should the government manage the money successfully, and so there’s no way that you, as somebody who’s getting paid from the increase of the supply, there’s no—in the—the Overton window of acceptable answers for you, through self-censorship, more than intellectual capture, is, you know, how do we increase the money supply? But, you know, if there’s no money supply increase, you most likely don’t get a salary because your job is linked to that printer.

And essentially, I think, you know, a less charitable interpretation by an Austrian economist of a mainstream economist is that they’re essentially court jesters for the inflationary central banks. The central banks need an intellectual apparatus that get on TV and say, you know, we have to print all this money in order to, uh, prevent unemployment from happening and to prevent bad things from happening. But really, I think, you know, the bigger story here is the money-printing thing, of course, is highly lucrative for governments, and so, of course, governments are highly favorable of people who want that.

So Bitcoin is powerful in this regard because, a, you know, economically, it’s succeeding, and intellectually, its succeeding as well. I think it’s a massive challenge to the mainstream economics establishment. Their complete inability to explain it or to present a coherent explanation for why it behaves the way it does or why it grows is absolutely astonishing. You know, it’s been there for 12 years; it’s worth a trillion dollars right now, and the vast majority of university professors will tell you, "Oh, it’s just a tulip." Somehow they’re convinced that the fact that, you know, agricultural product prices went up for a few months in Amsterdam in the 17th century somehow invalidates the fact that we have a form of money that travels internationally and is hard and is completely outside the state’s control.

Their argument might sound bite almost—they haven’t even given it much thought because there’s not much to say. It’s argument by dismissive analogy, yes, which is very common also in the climate change discussion, as you always notice.

Yeah, I mean it’s not that I spend a lot of time looking at the climate change literature and considering solutions for various reasons, and I can never stop being more afraid of the solutions than the problem. And it’s not like I’m not afraid of the problem; it’s conceivable that human activity is producing global climate change. I think the evidence for that seems to be relatively robust, although the economic—how economically consequential that will be is subject to tremendous debate because it’s predicting out 100 years or 50 years, and like good luck with that, boys and girls.

But the solutions terrify me. So, in fact, I discussed this in "The Fiat Standard." I use this as an example of how fiat corrupts the planet, basically. So, um, in "The Bitcoin Standard," a lot of the Bitcoin stand was about government money, but you could always say more because it’s just been so enormously important over the last hundred years.

So in "The Fiat Standard," I take the same kind of analytical lens that I used in "The Bitcoin Standard" to look at Bitcoin, which was, you know, when I started writing that book, it was this obscure thing that only a bunch of weirdos on the internet had heard about, and I tried to kind of come at the same—with the same kind of lens at the fiat system and trying to ignore all the hoopla of a century of propaganda.

And well, you know, sorry, your discussion already has made me aware of all sorts of axioms of my thought that I didn’t know I had. So for example, I basically just accepted in some sense on faith the idea that money is the government’s fundamentally—the money I know we all have our money and we own it, but it’s a state construct. That’s why each country has its own currency, and so one of the functions of the government is to deal with money. And the idea that you could abstract that away from the government, any government, any conceivable government, conceivably forever, or at least forever as far as we’re concerned—it’s hard to wrap my head around how radical an idea that is.

I don’t know what that would mean if it was actually true, and I—the arguments that you’ve presented that suggest that the notion that government control of—that the government has valid control over money and maybe that that should be subject in some sense to the democratic process rather than the market process, you know, it’s going to take me a long time to think that through because that really is a radical—it’s unbelievably radical proposition.

Yes, that’s kind of why the Austrians are kind of ostracized and considered outside the pale on this issue. But think about it, you know, no government declared gold as money; gold emerged as money all over the world independently because of its properties. And then governments had to use gold in their own currencies in order to give their currencies value. You know, if you wanted your picture on a coin, and you wanted that coin to circulate and for people to hold it and appreciate it, you had to make that coin out of gold. You couldn’t just make coins out of anything and give it to people. And when people try to do that, hilarity and calamity ensued in every case.

You know, we have a long history of what happens when governments debase currency, and you know, it always happens in the same way. They begin by making sound money; they specify the weight, and they make it uniform. But then they almost always—I think every example in history has ended up with them succumbing to the temptation to increase the supply. If it was paper money backed by gold or to what they used to do previously, which is mix and base metals, wasn’t it the case that the ridges on these edges of coins were there because the coins were shaved slightly? Was that a government; was that a state function, or were people doing that to coins?

I’m sorry, I just—this is just an example of how that solid uncorruptable currency can be—you know, if you get a gold coin, you can scrape some of the gold off, and if you have enough gold coins, you can make a nice pile of gold dust, and the gold coins still work. But you have the gold, and so there’s various ways of doing that. And I read that the ridges on the outside of coins—why do they have them?

I think I’ve heard stories like that. Yeah, there are so many stories historically of governments finding creative ways of debasing their currencies. You know, the most common one is, oh no, some people are making fake currency, so give us all of your currency so we can mint it again into a new form so that we can make sure that it’s right. And then you get your currency back, and then it has five percent less gold than it used to have. That was kind of the quantitative easing that they did before, and they take some of the gold for themselves.

So that is always—that temptation has always been there, and Bitcoin is essentially the most powerful defensive technology against that. It’s an enormous quantum leap forward in the technology of money as protection of value against predation and against inflation because, you know, you don’t have to worry about whether the coin has base metal inside it; you can verify everything for the Bitcoin. And it’s fully auditable; everybody can see every single transaction, and everybody can verify the rules of the network.

So it’s the most powerful technology that we have for money, and I think it’s a natural fit to anybody who’s productive and wants to save their value into the future. And I think this is something I discuss extensively in "The Bitcoin Standard." I think that’s highly related to the time preference of individuals, which is an enormously important topic.

So historically, all throughout human history, you know, we’re always moving to a harder money because we’re looking for a better form of money, and that culminated by the end of the 19th century with everybody in the world being on the classical gold standard. Basically, the entire planet was on the same currency—now one money chosen on the market are very hard to produce, holding on to its value, offering anybody in the world the ability to save for the future essentially for free. You know, you get paid in the coin; you keep the coin safe, and then 20 years later, that coin is not only held on to its value; it’s likely appreciated more because in those 20 years, we’ve made more cars, more houses, more apples, more oranges, more everything, but we haven’t made a lot more gold.

So the gold coin remains valuable, and historically, you see this has coincided with a decline in interest rates, which from the Austrian perspective is a measure of time preference. Time preference is what determines the interest rate, and time preference is the degree of discounting for the future. So effectively, as long as we’re using harder and harder money, we’re being able to provide for the future better, and that’s reducing our uncertainty of the future.

You can be fairly confident now that the money that you worked for today, that you can save it and it’ll be there for you in five years' time when you start thinking more about yourself in five years' time. And as our technology for money has improved, our ability to save has improved, our time horizon has expanded, our time preferences dropped. We start thinking more and more about the future that encourages us to save more, to invest more, and that leads to capital accumulation, which leads to an increase in productivity.

I think the whole world was basically lowering its time preference until the early 20th century, and then in the early 20th century, this is kind of the central argument of "The Fiat Standard." By switching to an easy money where now, you know, in the 20th century we moved to government money, which has been increasing on average, I calculate at something like roughly 14 percent a year globally.

So you move from a money supply that’s being inflated in one or two percent, as the average human being in the world. You had that same gold coin; now you’re stuck with your government’s local script that is inflating at on average 14. You know, some people have witnessed 200 percent inflation.

Okay, so on average, if you just took Western democracies into account, say relatively stable societies with relatively admirable forms of government, what sort of inflation rate are you looking at? Do you know that?

Yeah, I’ve done the numbers in "The Fiat Standard." The lowest averages you’ll see are in the U.S., Switzerland, Denmark, and Sweden, and they’re about six to seven percent per year over the last 50-60 years.

So that’s really as good as it gets for fiat, as a kind of average.

So you’re constantly—you need a return of six percent or seven percent just to keep up, basically?

Yeah, and you know, seven percent is not nothing. Seven percent means you basically lose half the value stored in ten years, and that’s seven percent—that’s in the good cases. There are countries that have had an average of 200 because, you know, they had years in which the money supply went up tenfold within one year, and that has happened.

So you think about the examples of people living in hyperinflationary societies. I used to live in Lebanon until recently, and you see that when the currency collapses—you know, think about the stories about Weimar Germany or about any Latin American country or Lebanon or Zimbabwe. When you hear about their inflation, you know, the stories are of people that have been reduced to very, very, very short-term thinking. Your money, you get paid on the beginning of the month; your money is going to be worth half of its price by the end of its—by the end of the month. So you get paid, and you run straight to the supermarket.

I remember I was a kid growing up in Brazil, and I remember that, you know, on the first day of the month, the supermarkets would be overrun, and there would be people fighting, and things would be crazy because everybody’s trying to get things now before everybody else gets their paycheck and buys everything and then bids up the price. So your time horizon is shortened when your money is losing its value.

Okay, so let me ask a question about that then too. So one of the problems that the people who are concerned about the environment and about global warming are trying to solve is they’re trying to increase our sense of caring for, let’s call it, the planet—the environment, right? Global concern. Think globally; act locally. You’re supposed to be taking all these other things into account and not consuming like a madman and despoiling the planet.

But implicit in your argument, as far as I can tell, is that if you stabilize the currency so it can’t be inflated and you make people’s time horizon much longer, that they’re going to be concerned about a far greater variety of things that are distal from them, like the environment, because they can—they’re now able to do that instead of having to fight for short-term emergency survival continually.

Exactly. That’s it. So the more capital you accumulate, the more you can provide for the future, the more you can secure the present and start thinking about the future. You know, one more—you care about the future then in some sense, or can care about it. And, you know, you think about it like the fisherman who’s able to move toward building a fishing boat and a fishing rod. You know, they’re able to now rest assured that any day they just need a small amount of time to go out and catch the fish.

It’s not like the days when they had nothing and they had to try and catch them with their hands every day. And so some days you might not be able to even catch anything. So now your survival is more secure, and so you start thinking more about the future.

Money is an incredible technology for that—for lowering our time preference. That’s kind of one of my central arguments in "The Fiat Standard" that money is the best mechanism we have for moving value to the future because we know you could save a fishing boat and you can save something else, but you don’t know what’s going to happen in the future, and you don’t know if you want to move away from where you are. Money itself is enormously important because it’s very useful.

You save some money, and then it doesn’t matter what happens in your town; you take the money, and you can go away. So it protects you against the uncertainty of the future. And when that money is compromised, your ability to think of the future is massively compromised as well.

And I think, you know, the hyperinflationary examples are an extreme example of that, but I think the 20th century itself was one global slow train wreck of watching humanity’s time preference rise as generation after generation of people all over the world witnessed their currency devalued. Everybody saw it. There isn’t a single person in the world that has escaped this—doesn't matter if you live in Western Europe or Africa or Latin America. Everybody has been screwed by inflation in the 20th century, and everybody has a story in their family about somebody who saved up and worked hard and diligently, and then one day they woke up and all their money was gone. All the wealth that they worked for was gone. Everybody has gone through this, and it leaves a mark.

It leaves a mark. It tells you, you know, don’t be the sucker who saves for tomorrow because, you know, you missed out on all—you see, like in Weimar Germany. You think about the people who are punished by that hyperinflation. Those were people who were productive and who had foresight because they put away something for the future. The ants were punished, not the grasshoppers.

You know, exactly, and that’s a terrible thing to do to a society—to take the most creative people who also have the ability to delay gratification and then to just cut them off at the knees for daring to do both of those things. You couldn’t do a worse thing to a society in some sense than that—to punish people for creativity, productivity, and the capacity to save instead of the pursuit of impulsive pleasure. So it is really a catastrophe, and maybe that’s not much improved when it’s a slow train wreck rather than a quick one. I mean who knows, right?

So, alright. Yeah, I mean, the speed has varied, but I think this has been the story of the 20th century. And on the flip side of it, which is kind of the two sides of the story that I tell in "The Fiat Standard," on the one hand, you had individual productive people and businesses having their wealth robbed from them continuously throughout the 20th century because it’s constantly devaluing.

On the other hand, you had government bureaucracies being given essentially unlimited financing to do whatever they want because they were connected to the printing press, and all that you needed was to just have the right story in the ear of the right person to get the printing press to run for you. And so, you know, not only are you punishing the most productive people in society and the people that are the best at saving for the future and thinking in the future, you’re also essentially rewarding heavily people who are good at playing politics and, uh, people who can, you know, get into government and people who can use government power because you’re giving those people unlimited power.

So, naturally, you’re going to—our prime minister managed to get a billion dollars into the hands of one of the charities he’s associated with.

Yes, I’ve heard of that. Your prime minister has been an excellent lesson in what happens when the seemingly idealist people with beautiful sounding cliches get into power and then have that power foisted upon them, and then they see a great opportunity to capitalize on that, to their own benefit and to their own aggrandizement. Um, the, you know, the—and all the while justifying it by reference to their—their moral standards they hold that exceed those of everyone else.

Absolutely, absolutely. And then, you know, you think about it, first—so there’s the aspect of the corruption of the fact that, you know, playing politics pays, but then there’s the other aspect, which to go back to the energy discussion and the food discussion, which I discussed in "The Fiat Standard." These markets then become heavily regulated and influenced by a government that has an infinite printing press to the point where they’ve been made almost dysfunctional at this point.

So, if you think in terms of energy, we’ve had—and in both energy and food, you know, the current hysteria that you hear around, “Oh no, we’re going to boil the oceans because we’re driving cars,” or “we’re going to boil the ocean because we’re eating cows and cows are farting.” And, you know, four and a half billion years of Earth was doing fine until the cows started to fart, and now the whole earth is going to hell. Um, both of these hysterians, incidentally, have their roots in the inflation of the 1970s. It was when the prices of food and energy rose in the 1970s that all these cranky cookie ideas about, you know, Earth punishing us and there’s not enough resources for us to be able to live and we need to limit the global population and we’re destroying the Earth—all that stuff started to come about in the 1970s, and it was highly politically conducive at that point.

It was likely to be popular because it was providing a very useful alibi to the government when it comes to inflation. You know, the reason we’re witnessing massive increases in the price of oil and food has nothing to do with the fact that your currency is being printed and debased; it’s because we’ve reached the natural carrying limits of the earth, and we’re going to boil the oceans, and so, you know, you need to repent by moving away from consuming hydrocarbon energy, you know, oil and gas and coal and all of those things that made our modern world and the things that are the reason that we have our modern world and modern technology.

We can’t live without them; they’re 80 percent of energy consumption around the globe, and that’s not declining in any meaningful sense anytime soon unless we want to go back to pre-industrial societies. And so, you know, by fiat, we’ve tried to— we fought these energy sources for 50 years and subsidized these feel-good, uh, essentially pre-industrial unworkable technologies, which rely on biomass. So biofuels, that’s an example. You know, you’re burning plants like your ancestors 500 years ago had to do in order to survive.

Or wind, which again, you know, your ancestors could use occasionally, but it didn’t build them—it didn’t build an Apple computer and didn’t build the internet and solar energy, which, you know, also we’ve always used. But again, it won’t build you a car.

In order to have all these modern conveniences that we have, we need those energy sources, and people in the fiat world are completely dissociated from this reality. They almost wanted—they almost want to overrule thermodynamics by fiat; that we just want to—we want to have the same cars, better cars, but we don’t want them to run on fuels; we want them to run on wind and solar and all that.

And the result of that, I think, you know, when I was doing my PhD, I saw this for the grift that it was. And I was not interested in it intellectually because, you know, who cares? A bunch of people like Al Gore are going to become billionaires from this. But, you know, a lot of hucksters get rich in a lot of ways—no reason to get worked up. But now I think I’m beginning to realize this is actually a serious, serious threat to industrialization and civilization itself. I mean our planet will witness massive catastrophes and calamities if reduction—if we have a serious reduction in the consumption of these energy sources which, you know, plants are being decommissioned all over the world based on the idea that we’re going to be replacing it with wind and solar, and the result is energy prices are rising massively.

And, um, you know, energy is becoming less and less reliable, and you’re witnessing more and more grid failures.

Alright, so on to "The Fiat Standard."

Yes, so in "The Fiat Standard," looking at the way that the fiat money works from first principles, trying to understand how it works. I think that the fundamental idea is that in the fiat system, the way that you mine a new currency into existence is through lending. You—when your bank makes a new loan, they don’t take somebody else’s money and give it to you; they make new money essentially out of thin air and they hand it to you and they put it in your bank account.

So this, I think, is a very key insight. So in Bitcoin, we have Bitcoin mining, which is an extremely, uh, sophisticated industry in order to produce new Bitcoins. You know, we have about six and a quarter Bitcoins produced every 10 minutes, and um, in order to produce these, people expend a lot of resources in order to be able to make them. Roughly, the cost of making a Bitcoin fluctuates around the market price of Bitcoin, but both vary. But it’s roughly around it with gold; the same is true as well, you know. It’s costly and inexpensive to find new gold. We have to dig it and you have to process it, and it’s, uh, there.

Okay, so why bother mining it, and why not just cap Bitcoin where it is now? Why bother producing more? Why is that built into the system? Why 21 million and not just where we are now?

Well, 21 million is as good as any number. It could have been 500 trillion; it could have been five; it could have been anything. Any number is good enough as long as it’s divisible, and that’s kind of the key insight from the Austrians that made me specifically very interested in Bitcoin. Austrians were the only ones who said, yeah, the quantity of money doesn’t matter. You could run any economy on any size of the money, and then as the economy grows, the value of the money increases, and that’s a great thing; that’s the golden period. That’s the Golden Age.

So it’s sort of an—it’s sort of an illusion in some sense, the cap because, well, there’s 21 million Bitcoin, let’s say, but they could be worth anywhere from, like, two dollars to a million dollars each, and because it’s fractionable, right? So there is no—inside, in that sense, there’s no limit to how much money there is, even though there is a limit to how many tokens there are.

Exactly, there’s no limit to the value that the network can carry, but there’s a limit to the tokens that represent that value, so you don’t corrupt the tokens of the system in order to make more tokens in order to enrich the insiders. You just keep packing more value into it—into the tokens.

Okay, so why—why was it allowed to be mined at all then? So that the distribution of the coins would be a fair distribution? So that anybody could enter into the network and secure coins?

Yeah, because that—you know, if you just made the first 21 million, you know, who owns them on the first day? Who's going to be owning the 21 million? How are you going to distribute them? This is not an easy question, and I think, you know, most people wouldn’t have thought something like Bitcoin to be possible had it not—because of this issue; you know, how are you going to start off an upstart currency and give everybody in the world a new balance?

So it was to get it going, exactly. It’s, you know, it’s kind of like just for the first 130 years of Bitcoin’s history we’re gonna need to have mining, but then Bitcoin operates without any more mining, right? So you have some—you need some gold for gold to work, and so you need to have a mechanism for mining the gold, and so this is some mechanism for producing Bitcoin so that there are some Bitcoins so it can work, and they’re distributed across the people who have done the mining.

And so you already have a bit of an economy there because all those people are vested in it and it's completely open and perfectly competitive; anybody in the world can mine; anybody can bring their computer onto the network in line and, you know, benefit from the mining. And it rewards only the most successful miners; it rewards only the most economic miners because it has this thing called the difficulty adjustment, which is my favorite part of Bitcoin.

It’s really the magic glue that holds Bitcoin together, and I discuss it in "The Bitcoin Standard" and in "The Fiat Standard." Um, what happens is that, you know, if more miners try and mine copper or gold or silver, you end up with a lot more copper or gold or silver, but with Bitcoin, the more miners that get into the network, you still get the same number of Bitcoins as was predetermined earlier, but the difference is that you don’t get—uh, but it just gets harder for the individual miners to get into the network.

So it’s—it’s more like a sports competition wherein there’s one trophy, and then the more competitors get in, the trophy just gets harder to win. It doesn’t get—you don’t get more trophies handed out.

So how in the world did Satoshi figure this out? How did he—I don’t understand how he could conceptualize this. It just doesn’t make sense to me. It’s an incredible work of genius when you think about just the amount of expertise that he had to have in different fields of knowledge to bring this monster together is absolutely astounding.

Yeah, well, just the conceptualization to begin with, let alone the implementation, the engineering implementation. It’s—to be fair, I mean, this is—it wasn’t like he invented this problem. It’s a problem that had been around for many decades. People have been trying to build a digital form of money for decades, you know, since the 1970s and 80s and 90s. There had been attempts to do something like this, and the, you know, the different attempts to produce something like this always came up against a technical problem called the Byzantine Generals problem.

And then Satoshi figured out a solution to it through the proof-of-work system, which is absolutely astounding. So, tell me about that; that sounds—as we can do that without deviating too much. So what is that problem and how did he solve it?

Um, well the problem is essentially about how to get all the different nodes on the network to agree on the same version of what’s going to happen together, you know, how that—how do they all agree without having a central command authority? That’s really the issue.

And why was that the Byzantine General's problem? You know, ashamed to say it, but I’m not very much up on my history; I’m not sure where the history of the term comes from.

Okay, okay, well I won’t torture you with that then, but he solved the problem of consensus verification without a central authority. Exactly, and the way to do it was to have this expensive ritual called proof of work being performed before any of the members of the network proposes a block of transactions to be added to the record of transactions.

So Bitcoin is, um, you know, it’s a record of transactions that exists over tens of thousands of computers, and the issue is how do you make sure that people don’t put in fake transactions in this record? Well, the way he did it was that anybody anywhere in the world could come in and propose new transactions, but in order to have your transactions added, you must first solve this problem, this mathematical problem, the proof-of-work mathematical problem, and that’s actually expensive to solve.

You know, it takes your computer running for many, many hours to be able to try and figure out a solution to those things, and, you know, for it to get lucky once every 10 minutes. So you have to spend serious money in order to be able to commit to make the claim of the new transactions, and so once you know it’s like if you just allow everybody to present their record of transactions, then there’s no mechanism of coordinating between everybody whose record do we pick from all those thousands of people?

But if you put—currently, you know, the reward is about six—six and a half, seven Bitcoin, so that’s about $350,000. The Bitcoin network is giving out $350,000 every 10 minutes. You can have them as long as you provide the proof-of-work solution, which roughly costs you around $350,000 more or less.

So how do we make sure that we can all agree on all the members of the network? We don’t evaluate any claim for the transactions; we only evaluate the claim that has done the work and that has spent the money.

So why would—why would someone make that claim then if it’s so difficult? What’s the advantage to that? You get $350,000; you get six to seven Bitcoins.

How is that—how is that related? That’s the mining process; that is the mining process. That is the mining.

Okay, good.

Oh my God, that is the mining process. Exactly! So to mine new Bitcoins, you have to solve that problem. So this is why it’s portrayed as mining; it’s like those computers are digging in the ground trying to find the solution to the mathematical problem. It costs money to be able to arrive at that solution, on average, around $350,000, currently at current prices.

Um, so that’s in order to be able to make a claim to get that—you know, your claim doesn’t get looked at unless you’ve solved the problem, and it’s very cheap for everybody on the network to see that you have the right solution to the problem, but it’s very expensive to arrive at that solution. So the solution is like this very difficult key to find, but once you’ve found it, it’s trivial to verify that this is the right key because you just put it in the lock and it works.

So it’s instantaneous and very cheap for members of the network to figure out that this thing is correct. So you set up this massive hurdle, essentially. If anybody wants to come and get this reward, they first need to spend—

Why wouldn’t they just buy Bitcoin? It seems to be a lot simpler than mining it. Then if it costs $350,000 to make $350,000, why bother with the mining? Big—you know, you said it rewards more efficient people.

Exactly! The short answer is if you have a way of securing electricity at less than five cents per kilowatt-hour, then you should get into the Bitcoin mining business, uh, which is, you know, lower than most rates everywhere in the world. So if you have a source of energy that is isolated then from the grid or if you have a cheap way of securing energy, then Bitcoin is a great—mining Bitcoin is great.

But for the most—it does mean that Bitcoin is a very good way of moving resources from places that can produce electricity very cheaply to other places where electricity is more expensive. Does that actually make the electricity, the cheap electricity, much more valuable? Absolutely!

It’s—this is a weird—that’s a weird thing. It’s very weird. I think it’s going to have a very profound impact on the global energy market because for the first time in history, we have a way to sell energy that is location independent. So a lot of places in the world have a lot of energy, but it’s very expensive to get that to the population center, you know, so the north of Canada.

Mother hasn’t—so you don’t need wires.

Exactly! That’s weird! That’s a really strange thing.

Yeah, to get electricity from the north of Ontario to Toronto—it needs a lot of wires, or you need to—you know, if it was gas, you need to put it on tankers or on trains or in pipelines. All of that stuff is pretty expensive, but with Bitcoin, you just need an internet connection. You take the Bitcoin miners to where that energy is, and then you can monetize that energy and turn it into Bitcoin. It’s magic!

So what’s the net effect of that on the price of electricity worldwide? Is that—is that deflationary with regards to electricity cost