Gradually, Then Suddenly – Unchained Capital


This is the first of a weekly series I have decided to write on the topic of bitcoin, inspired by my friends marty bent and saifedean ammous. Education is such a critical aspect of bitcoin and I hope that by distilling my own thoughts I can help others speed their way to understanding a complex subject. I have titled the series gradually, then suddenly. As Hemingway wrote about bankruptcy, it’s also how government-backed currencies hyperinflate, and often how people come to understand bitcoin (gradually, then suddenly). writings will generally stick to bitcoin, but will also include monetary and food economics, as these histories are deeply intertwined. because I will try to be concise, the series will communicate my main conclusions and opinions instead of presenting every detail that led to them; my intent is to provide insight into my thought process and provide a roadmap if others are interested in learning more. my hope is to reach a broader audience (beyond those who have been formative in my own journey) and help people on the fringe better understand why so many of us are so focused on bitcoin as a topic. the views presented are expressly my own and not those of unchain capital or my colleagues. hope you enjoy & send your comments.

bitcoin is money

or rather, bitcoin has become money (for me). It was a slow process that involved unlocking a number of mental blocks along the way, but it started with the question: what is money? that is the beginning of the real rabbit hole. and not speculation, I’m looking for a rabbit hole-type blockchain-going-to-change-the-world lottery ticket. At the root level, it’s down the rabbit hole trying to answer the question, “why is the dollar in my pocket money?” Why do hundreds of millions of people trade their hard-earned real-world value for this piece of paper (or digital representation) every day? is a hard question to ask and harder to answer, one I’ve come to realize everyone must approach in their own way, on their own timeline and guided by their own life experiences. people have to be interested in that question to even begin to understand bitcoin.

Reading: Gradually then suddenly bitcoin

“what is money? that is the beginning of the real rabbit hole.”

For me, the path involved first understanding why gold was money. that involved understanding the unique properties that made something a better or worse form of money and what differentiated money as a unique economic good compared to most other types of economic goods. the bitcoin standard was formative for me exploring the questions, not as gospel, but as a basis for thinking about the problem statement. When I applied that foundation to my own life experiences and my own understanding of the existing financial system and its flaws, only then did it start to become intuitive. and that is something that may be obvious (that bitcoin is intuitive like money) to those who have been thinking about it for years in relation to monetary principles, but it is also true that bitcoin is not intuitive. it’s extremely unintuitive until it becomes intuitive and then over time it becomes hyper-intuitive.

As part of my process, I found it useful to consider bitcoin in relation to two tangible guide posts: gold and the dollar financial system. does a (bitcoin) share the properties of b (gold or dollar, respectively)? is better than b? because what makes money is not absolutism; it is a choice between storing value in one medium or another, always involving trade-offs. Without understanding the flaws in the existing financial system (be it the dollar, euro, yen, bolívar, peso, etc., respectively), I could never have gotten bitcoin to be money in a vacuum.

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while working at deutsche bank during the financial crisis, i had no reference point to understand what was really going on. Ten years later, and having worked in the restructuring world and at a macro hedge fund, it was only then that I began to develop a clearer understanding of what had actually happened in 2008 and 2009 through my own research. From the great financial crisis, the fed and specifically the impact of quantitative easing (see here), I came to the main conclusion that the root of the problem was that the financial system had been leveraged roughly 150 to 1 (too much debt and too little dollars) and that the incredible degree of leverage was only made possible by federal policy that had systematically prevented deleveraging of the entire system over the course of the three decades prior to the crisis. moreover, it became clear that the solution (quantitative easing) simply made an unsustainable credit system metastasize for the next ten years, making the future inevitable. I became convinced that whether bitcoin survives or not, the existing financial system is working on borrowed time and that, one way or another, something other than the status quo will be the inevitable way forward.

“it became clear that the solution (quantitative easing) simply caused an unsustainable credit system to metastasize over the next ten years, making the future inevitable.”

then i found out that bitcoin has a fixed supply. developing an understanding of how and why that is possible is the foundation for understanding bitcoin as money. doing so requires a significant personal investment in understanding how economic incentives are intertwined with bitcoin’s technical architecture and why bitcoin cannot be “counterfeited” or copied (or rather, why the incentives are so strong to cooperate and why the opportunity cost is too high). defect). it’s a long road, but it will eventually lead one to understand that a global network of rational economic actors, operating within a system of voluntary, voluntary currency, would not collectively and overwhelmingly form a consensus to debase the currency that they all hold freely. independent and voluntary. determined to use as a store of wealth. this reality (or belief system) underpins and reinforces bitcoin’s economic incentives, technical architecture, and network effect.

so it’s not just that the software code dictates that there will only be 21 million bitcoins; it is understanding why that monetary policy is credible and resilient and how bitcoin achieves verifiable scarcity. that cannot happen overnight for any individual. you can’t explain it to someone at a cocktail party. it is a reality that is reinforced and strengthened over time only by experiencing the incentive structure and seeing it work over and over again, every 10 minutes (on average). when compared to the workings of the dollar system or even the fundamentals of gold, bitcoin as money becomes more intuitive.

“bitcoin exists as a solution to the problem of money that is global”

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In summary, when trying to understand bitcoin as money, start with gold, the dollar, quantitative easing, and why the supply of bitcoin is fixed. money is not simply a collective hallucination or belief system; there is rhyme and reason. bitcoin exists as a solution to the money problem that is global and if you think that the deterioration of local currencies in turkey, argentina or venezuela could never happen to the united states. dollar or a developed economy, we are simply at a different point on the same curve. bitcoin represents a fundamentally different structure and a more resilient path forward, but you need to understand where we’ve been and how we got here to know where we’re going.

hayek writes about the price mechanism as the largest knowledge distribution system in the world (the use of knowledge in society). when the money supply is manipulated, it distorts global pricing mechanisms which then communicate “bad” information throughout the economic system. when that manipulation goes on for 30 or 40 years, it creates massive imbalances in the underlying economic activity, which is where we are today. Ultimately, the failure of gold was the dollar, and the failure of the dollar is the economic distortion that led to and has been exacerbated by QE. bitcoin promise is the solution for both. Because the supply of bitcoin is fixed and cannot be manipulated, it will eventually become the most trusted pricing mechanism in the world, and consequently the largest knowledge distribution system. the volatility seen today is but the logical path of price discovery as adoption increases by orders of magnitude and we move toward that future state of full adoption.

“establishment economists make fun of the fact that bitcoin is volatile as if you could go from something that didn’t exist to a stable form of money overnight, it’s completely ridiculous.”

– vijay boyapati in slp

next week: copying bitcoin, the audacity to try to print your own money.

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