“If you look at addressable market for Bitcoin, it’s gigantic. It’s the largest market on earth, by far. The market for storing wealth and savings is a $100 trillion market, at least.”
Vijay Boyapati, a software engineer who joined early-stage Google in 2002, has become a major Bitcoin advocate, authoring one of the most read articles in support of the monetary good: The Bullish Case for Bitcoin.
It is natural for anyone to feel like they’re late to Bitcoin because they’ve seen people who’ve gotten in earlier, but the crypto-asset is only in its infancy. The addressable market is the largest on earth with Bitcoin able to serve as the world’s means of wealth storage and saving, able to reach a $100 trillion-plus market cap. Liquidity will be pulled from more traditional sectors like real estate and government bonds into Bitcoin, a secure and portable store of value. “Bitcoin as the global reserve currency takes on the role gold had in the 19th century where it’s the final means of settlement for banks and nation-states. If you believe that valuation model, you can go into the ($) tens of millions per Bitcoin because it becomes the global means of saving.”
One of the last credible threats to Bitcoin is nation-states who may see Bitcoin as a threat to their central-bank currency. Excessive regulation or outright bans will be made more difficult as adoption grows. Governments and officials will face growing pressure to accept Bitcoin because its citizens and constituents will have savings in the crypto-asset. “Imagine if you’re a congressman and 20% of your constituents own Bitcoin and you try to regulate or ban Bitcoin. You’re going to get a lot of pushback.”
LISTEN AND SUBSCRIBE
SPEAKER
Vijay Boyapati
Author
The Bullish Case for Bitcoin
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series with leading investors, creators, and thinkers, and our goal on these SALT Talks is the same as our goal at our SALT conference series, which is to provide a window into the mind of subject matter experts as well as provide a platform for what we think are big ideas that are shaping the future.
John Darsie: (00:38)
We're very excited to bring you the latest episode of our digital asset series, which is an area we've been focusing on especially over the last six months as mainstream interest in the asset class has grown. And our guest today is Vijay Boyapati, who's the author of what I think is one of the most insightful pieces. The Bullish Case for Bitcoin is the name of the essay that he wrote, and it's something that I share with members of my family and people that are just learning about the space. There's complexity to the intellectual arguments that he makes about the value of Bitcoin, but it's also very accessible for the average person. So, I would highly recommend you read that Bullish Case for Bitcoin.
John Darsie: (01:15)
But Vijay, to go more into his background, was born and raised in Australia and moved to the United States through a PhD in computer science. He never started that PhD and he took a job offer at a little firm called Google. And after leaving the much bigger Google in 2007, Vijay spent a year campaigning in the 2008 presidential election, helping to raise millions of dollars for Ron Paul. After becoming disillusioned by politics, Vijay decided to continue to seek change in the world through technology. He discovered Bitcoin in 2011, and he quickly went deep down the Bitcoin rabbit hole.
John Darsie: (01:51)
With a background in Austrian economics, he spent years thinking about the economic framework within which Bitcoin's value proposition could be understood. His thinking on the economics of Bitcoin culminated in an article, as I mentioned before, called The Bullish Case for Bitcoin, which is one of the most read articles on Bitcoin after Satoshi Nakamoto, the founder of Bitcoin, his original whitepaper. And Vijay's essay has been translated into 20 languages, and it's often cited as the most useful resource to give newcomers who are attempting to understand Bitcoin.
John Darsie: (02:23)
Hosting today's talk is SkyBridge Capital president and chief operating officer, Brett Messing, who has led a lot of our digital asset and Bitcoin research here at SkyBridge, and we're very excited to be more involved in the space and thankful to Brett for helping to lead that charge. But with no further ado, I'm going to turn over to Brett to conduct the interview.
Brett Messing: (02:44)
Thanks, John. And welcome, Vijay. I am a fanboy because I'm a geek and because it's a pandemic, I think I've read every serious piece that's been written on Bitcoin and I think yours is the best. I'm pretty excited that you're here.
Vijay Boyapati: (02:59)
Thanks, Brett. I really appreciate that. As I was saying before we started, I'm really excited that you guys have gotten into Bitcoin. It's always exciting for me to see brilliant, successful people have that light bulb go off in their head and understand Bitcoin and then get active and start building around the community, building technology or launching funds. So, I'm really excited to see what you guys are doing as well.
Brett Messing: (03:27)
Well, that's kind of you to say. We're up to about $500 million in Bitcoin and as is often the case, it doesn't feel like enough. If we had anything that was like this amount a year or two years ago, everyone would have fired us. So, why don't we use that as a launching pad, which is, as we were discussing, it feels like Bitcoin is at an inflection point. So, if I can give you a framework, which is your piece, your bullish take combined with where we are, essay question.
Vijay Boyapati: (04:06)
Yeah. I think we were talking about this feeling that a lot of people have when they come to Bitcoin is that "I've missed out" and all of the gains are in the past and not in the future. And I want to sort of break it to everyone who comes to Bitcoin. Everyone feels that way. No matter what price you buy Bitcoin at, you feel like you got in late and that's true of me, it's true of everyone. Whether it be $10 or $100, $1,000, $10,000, whatever it is, you feel late because you've seen people you know before you get in at earlier prices.
Vijay Boyapati: (04:41)
I would just say ... I'll give you a story from my earlier career when I was at Google before it IPO'd. Google IPO'd and there were a lot of analysts who said, "This is crazy. This company is worth more than Ford Motors? That is insane. This is way overvalued. This isn't going to last. It's going to crash." But really Bitcoin was at the beginning of its story, and a long story and probably 30X higher than it was at IPO.
Vijay Boyapati: (05:13)
I feel the same way about Bitcoin right now, especially because if you look at the addressable market for Bitcoin, it's gigantic. It is the largest market on earth by far. The market for storing wealth, storing savings is a $100 trillion market at least. And Bitcoin has taken 1% of that market. So, there's a lot more addressable market to take before Bitcoin reaches saturation. How much of that market will it take in the next decade, I don't know, but I think it has a lot further to go.
Brett Messing: (05:51)
When you look at the events that have happened in the last, I don't know, six, eight months from PayPal making it available to people and they're going to be rolling that out around the globe, to the Tesla purchase, to BNY Mellon getting into the Bitcoin business, to BlackRock, which do you think is the most significant in terms of the adoption curve, if you will?
Vijay Boyapati: (06:18)
I mean, I think they're all significant in their own way. They all add social proof. They all add credibility to the average investor who's looking at Bitcoin and thinking, "Well, I don't know if I trust this thing. Who controls it? What's the authority that's backing this thing?" I think each is a touchpoint, a psychological touchpoint, that everyone sees and it increases their belief that there's something to this. And for some people, they only need one or two touchpoints to sort of get onboard and say, "Yeah, I want to put some savings in this." For some people it's 10 or 20, and it really depends on whether they trust these institutions or other people that they're seeing getting in.
Vijay Boyapati: (07:03)
Elon Musk, I think he's a big one for sure. He has 50 million followers on Twitter, and he has one of the most iconic companies around. And to see that company allocate a meaningful amount of its treasury to Bitcoin is a big signal. So, I guess if I was to put my finger on one, I would say Tesla is a big one.
Brett Messing: (07:27)
Well, I guess in terms of the price move, that would sort of validate that. Right? That was I think the largest one-day move in Bitcoin that we've had, certainly in dollars. I'm not sure on a percentage basis, but the market certainly reacted to that. How do you think about Bitcoin from a valuation perspective, in terms of being too high or too low? There's a couple different models out there. Right? There's the stock-to-flow, which just to remind people, that's where you look at the amount of existing Bitcoin relative to the amount of newly produced Bitcoin and you compare it to other assets. There's Metcalfe's law. Right? That's sort of a networking effect. As more people join the Bitcoin network and Bitcoin itself become more valuable. There's using gold as a proxy, as a percentage of gold's overall market. How do you think about those, or do you, when you think about valuing Bitcoin?
Vijay Boyapati: (08:25)
Yeah. That's a great question. I think stock-to-flow is a really interesting model. I'm still not entirely sure about it. It's certainly been very predictive, and it's interesting just to observe how predictive it has been. The way I think about it is I see that there are largely four valuation models that people have used for Bitcoin over time in my observation following this market for the last decade. And I want to assign a target price to each of this valuation models so you can ballpark think about where Bitcoin should be if you believed each of these models.
Vijay Boyapati: (09:01)
The first one is that Bitcoin is basically short mania. It's a huge bubble. It's completely irrational. Bitcoin has no comparative advantage to anything else. Why does it exist? And if you believe that, then the long-term target price for Bitcoin is obviously zero.
Vijay Boyapati: (09:17)
The second model is that, and this is the model I think people held for quite a long time until the last couple of years, is that Bitcoin, it's an interesting technology and there's something to it, but it has a limited addressable market. It's only interesting to geeks and libertarians and people who want to do things in the gray market. And if you believe that model for Bitcoin, you'd think that its target price would be somewhere in the ballpark of 10,000, maybe on the higher end to 100,000, something like that. The addressable market is tech people essentially and libertarians.
Vijay Boyapati: (09:57)
The third valuation model I have and that I've observed is that Bitcoin is digital gold. It's a monetary good and its closest cousin is gold. It's a non-sovereign store of value. It's a place to store value that's not controlled by any nation state. If you recognize it as superior to gold, the attributes it has as money is superior to gold's attributes so for instance, it's much easier to transport Bitcoin and to transmit it over the wire. Then you look at gold's market capitalization, which is approximately 10 trillion and you can easily slap a target price on Bitcoin as 500,000, which gets Bitcoin to that same capitalization. And if you believe it's superior to gold, as I do, I think it's 10x or 100x superior to gold. I think you could easily see valuation from 500,000 to maybe a couple million.
Vijay Boyapati: (10:52)
Then the valuation model is Bitcoin as a reserve currency, the global reserve currency and it takes on the role that gold had in the 19th century where it's the final means of settlement for banks and nation states to settle trade between each other and settle accounts between each other. If you believe that valuation model, then I think you can go into the tens of millions per Bitcoin because it becomes the global means of savings and it's going to suck liquidity out of every major market. It's going to take liquidity out of government bonds. It's going to take it drastically out of gold. It's going to pull it out of real estate.
Vijay Boyapati: (11:35)
So, for instance, in Vancouver, Washington, which is near where I live, a lot of Chinese investors want to have some of their assets out of the country as a safe haven. What's a good safe haven? Vancouver. They can move to Canada and they can have some savings when they arrive. All of that's going to get blown away. Why would you have a house that stays empty in Vancouver when you can have it in Bitcoin? If you believe that Bitcoin is going to become eventually the reserve currency of the world, as I do, then you get very, very high target numbers for Bitcoin.
Brett Messing: (12:12)
So, Vijay, I've been accused of being overly bullish, so let's stay on this point for a second, which is the idea that Bitcoin demonetizes other assets, right? Real estate, as you pointed out. Art, as you're probably aware, most privately owned art sits in just warehouse, right, mostly in Switzerland for tax reasons. No one's looking at them. Most of it's bought anonymously. So, people aren't even getting credit for owning the art, right? So, it's clearly a store of value and I could see the monetary premium getting slowly diminished out of those assets where let's say art appreciates but the rate of appreciation goes from being double digits to mid single digits, right, where it's almost not noticeable, this demonetization.
Brett Messing: (12:56)
But what I hear you talking about becomes disruptive to the monetary system globally, right, and it seems to me, I'm doing too much talking, that Bitcoin, at least in the United States, is in a great place from a regulatory standpoint, right? Banks are allowed to do it. Anchorage has been designated the first digital bank. So, I feel like we have this one way from now until that point, which we start becoming, we, see I'm using Bitcoin and me as we, a threat. But how do you think about that regulatory risk when you combine that with your endgame?
Vijay Boyapati: (13:33)
Yeah, I think that's another great question. I think it's one of the biggest risks to Bitcoin that people should really think about when they're investing in Bitcoin. The way I think about it is how does Bitcoin or can Bitcoin get enough regulatory capture before it's seen as a threat? I think some nation states are getting that first inkling that hey, this might be a threat to our monetary policy if the world's savings start flowing into something that we can't inflate and something that we can't control. How do we control our own monetary policy?
Vijay Boyapati: (14:10)
There was an article in the Wall Street Journal a few years ago where they said, "Well, maybe the biggest threat is that Bitcoin doesn't go up but that it keeps going up and it keeps going up and then, hey, we, as central bankers thinking about monetary policy, we've lost control. The way I think about this is kind of the same way I think about Uber as a company.
Vijay Boyapati: (14:33)
Uber is a company that would go into markets where the local government and the established players were very antagonistic to Uber and the taxi lobby would lobby the local city government and say, "Look, we don't want Uber to come in and completely disrupt our business," and they were very cozy with local government. So, local governments were typically very antagonistic to Uber and what Uber would do is just barge into this city and say, "Okay, we're providing this app here. We're hiring a bunch of drivers." Users really love it, they start using it and you get this entrenched lobby, which starts saying, "Hey, you can't attack this company. This benefits us. We want this here."
Vijay Boyapati: (15:13)
I think the same thing is true of Bitcoin. We're starting to see some of that capture where, imagine you're a congressman and four years from now 20% of your constituency owns Bitcoin and you start saying, "Well, maybe we should regulate this thing or ban it." Well, you're going to get a lot of pushback. So, I think in the Western democracies the question is whether we get to that point of regulatory capture before nation states begin to crack down and I see really positive signs in that regard.
Vijay Boyapati: (15:45)
We have a senator who's very pro Bitcoin from Wyoming. I think we're going to see several more congressman in the next election and then one election hence from that a lot more because we're really transitioning from Bitcoin being this niche thing to being very widespread and owned by a lot of people in the US and when you have a lot of people with their savings in something, that's a natural protection, a natural lobby and throw in the fact that corporations are now getting into Bitcoin, large funds. These institutions have much more lobbying power than the average person. They don't want their balance sheet to be blown away by a government doing something stupid. It's kind of like it would be very difficult for a government to outlaw 401ks right now. You just can't do that.
Vijay Boyapati: (16:36)
So, the big question to me is, do we make that transition quickly enough? I am optimistic.
Brett Messing: (16:44)
No, I think that's right. I think that the mass adoption rate is the best defense against political actors. I do have to say in the short term, I have a little history in politics. I was actually deputy mayor of Los Angeles. I worry about Bitcoin not being embraced by the progressive movement. [inaudible 00:17:03] being sort of a right wing libertarian thing and I think as a community that's an important bridge for us to build soon. As you're aware there was some legislation that came out of the house that didn't go anywhere from the progressives in the house that was unhelpful to the idea of digital assets. That's something that's just on my radar screen.
Brett Messing: (17:29)
Can you talk about the recent ban in India because they seem like a nation and an economy that should be embracing Bitcoin and instead they're going in the opposite way. You talked about large democracies. Last I checked that's the largest one, right?
Vijay Boyapati: (17:47)
Yeah, I have Indian heritage. I was raised in Australia but I have Indian parents and one thing I could tell you about the Indian government is the Indian government does not trust it's people. That's the problem right there. The Indian government makes people go through all sorts of hoops just to buy a cell phone. So, the lack of trust I think is the fundamental problem there. I think ultimately it's inevitable.
Vijay Boyapati: (18:16)
India could ban Bitcoin and be the last in line, make it's population be the last in line to get Bitcoin. They're just harming their own people, in my opinion. To me it's like saying, "We're going to ban the internet because we're worried people might talk about stuff that we don't like." Okay, sure, you can do that but you can live in the dark ages for another decade while the rest of the world advances. I think their hand will be forced. When that happens, I don't know.
Brett Messing: (18:45)
Okay. Let's discuss volatility, right? It's my personal view that volatility is wrongly characterized as a risk. I view it in Bitcoin as more of an opportunity because most of the volatility has been up. As we talk today Bitcoin has moved. It was 58 on Sunday, it got to 45 today after having a 25% pullback last month. This isn't made for everybody. How do you think about the volatility? Do you think it's going to change? Just your reaction to that.
Vijay Boyapati: (19:27)
Yeah, absolutely. I just think that the criticism that Bitcoin has got that it's volatile is really nonsensical. You can't go from something that was worth zero a decade ago to being a trillion dollars without volatility. It's just impossible. I completely agree with what you're saying. It's really the other side of the coin of opportunity. There's so much upside to Bitcoin that you're going to see a bumpy ride for a while because what's happening is the volatility, especially the upward volatility is a function of new savings moving into Bitcoin.
Vijay Boyapati: (20:06)
When you have, especially in the early days when you had people like the Winklevoss twins put in $10 million into Bitcoin when the price was, I don't know, $20 or $30, that is going to have a sharp effect on the price because the supply is strictly limited and more Bitcoin won't be produced due to the extra demand.
Vijay Boyapati: (20:26)
So, that's part of the reason for the volatility on the upside and that's really magnified now with the size of the institutions who are coming in. We're not talking about $10 million coming in at a pop now. We're talking about $1.5 billion coming in at a pop when an institution says, "Hey, yeah, let's get some of our treasury into Bitcoin." So, I think that's part of the explanation.
Vijay Boyapati: (20:49)
The other part of the explanation is that the concentration of Bitcoin being held by relatively few people, say a few tens of thousands, is still quite high and that's really just part of the process of monetization. Those early owners who had large chunks of Bitcoin, they will diversify as their net worth gets into stratospheric levels and I sort of view it as an iceberg with a tide crashing against the iceberg. The price is going up, crashing against the iceberg, and eventually these ice sheets break off and that's really just a long time holder saying, "Hey, I've got 10,000 Bitcoin. I'm going to sell a thousand Bitcoin now to diversify and improve my standard of living," and that's a chunk of the iceberg, the supply iceberg falling into the ocean, crashing into the ocean and causing some volatility.
Vijay Boyapati: (21:43)
So, I think this is just a natural part of the process of monetization and I think it's going to taper off meaningfully when Bitcoin gets to the market capitalization of gold. Gold still has some volatility. In 2011 to 2014 it dropped almost 50% but it's certainly less volatile than Bitcoin.
Vijay Boyapati: (22:06)
The larger Bitcoin becomes the less volatile, I believe, it will become because when some savings moves into Bitcoin it will be much smaller relative to the size of Bitcoin.
Brett Messing: (22:17)
Mm-hmm (affirmative). Okay, that's interesting. So, the volatility it seems has tracked these cycles, right? The bull cycles have tended to start with havings, right, when the supply of Bitcoin is reduced in half every four years. We really have two data points on this and I sort of wonder ... I have tremendous respect for the Bitcoin community and all the hard work that's happened over the last decade but I wonder if that history sometimes isn't a burden when you look forward. In other words, has something changed meaningfully with the events that we've discussed and the maturation of the asset class? Have you reflected on that? Do you have any thoughts on that?
Vijay Boyapati: (23:06)
Yeah, one thing I find most fascinating is that we have never seen a monetary good being monetized in real time. This is the first time in history that we get to watch it in real time. The process of the monetization of gold took millennia. It's thousands of years before gold transitioned from being a lump of rock in the ground to being used in coinage and then backing on paper notes and so forth. So, we get to see how this works and one thing we're learning, just as you mentioned there, are these hype cycles and it's absolutely fascinating to me that they have this patent, this almost fractal like patent of increasing magnitude where if you look at the 2017 bull market and you superimpose it on the 2013 bull market it looks almost identical and to someone with an engineering or scientific mindset that cries out for an explanation, why is that?
Vijay Boyapati: (24:10)
My feeling is this is kind of part of the social dynamic of monetization that it happens in these phases where you get some cohort of people that are reachable in the cycle that have enough understanding or have heard about Bitcoin enough to be interested in investing in it and you start out with the really strongly convicted in the beginning and then you get people who are more long term investors coming along and the price starts coming up and in the final stage you see speculators who just want to make some quick profits and then you get this crescendo and parabolic move and eventually a climax and a correction and a crash and we see this over and over again. It's just the cohort of people that are reachable in each cycle grows.
Vijay Boyapati: (24:57)
So, the first cohort, who were they? They were cipher punks and cryptographers and people who understood what Bitcoin was immediately. The next cycle was libertarians and people who wanted to use Bitcoin in the gray market. Then the next cycle, 2017, was early adopters. But I think the same social dynamic applies in each of these cycles regardless of who the cohort is.
Vijay Boyapati: (25:23)
Now the cohort is corporations and institutions and it could be the FOMO phase of the cycle is dampened a little bit because corporations are a little more logical than retail investors but maybe not, maybe not. Maybe you'll see corporations and institutions have some of that FOMO too if enough of them jump on board Bitcoin. So, what happens when Google says, "Hey, yeah, we want some Bitcoin," and Facebook does? Do Amazon and Microsoft sit back and say, "Well, okay, we're just going to not have any." I think this could possibly apply to corporations as well.
Vijay Boyapati: (26:05)
Yeah, I'm not sure if I answered your question [crosstalk 00:26:09]-
Brett Messing: (26:08)
[crosstalk 00:26:08] I guess I bring a market perspective to it and when a trade seems to easy it usually ends. The easy trade right now is, okay, I'm going to buy Bitcoin at every halving and I'm going to sell it somewhere between 14 and 18 months thereafter and I'm just going to keep doing that, right? Every couple years I'll put a trade on. I might even short it two years out and whenever something looks that simple it ends up blowing people up. So, I'm just imagining and maybe it's not this cycle, a bunch of people seeling, right, anticipating that. Okay, I got it. My time, the stock-to-flow, everything's telling me it's the peak and then it just goes and it laughs at everybody. You know what I mean?
Vijay Boyapati: (26:51)
Yeah, if I was to think that the model would blow up I'd almost believe it would blow up in the other direction in that the crash doesn't happen and it just slowly, steadily continues to go up. The reason I think that is that the number of people who have become diehard Bitcoiners, regardless of price, these are people who are saying, "I don't want to save in dollars. I just don't and I'm not going to." So, that is a constant flow of capital into Bitcoin.
Vijay Boyapati: (27:22)
So, you look at someone like Russell Okung in the NFL and he's really started a trend in the NFL, several players in the NFL now, I think that's also going to grow, who say, "I want my salary in Bitcoin." So, that financial energy's going to constantly move into Bitcoin. The question for me is, do we ever get to critical mass where we don't have these corrections and it just keeps going up because there's enough financial energy to keep pushing it up?
Vijay Boyapati: (27:48)
I think that's an open question. It might be the case that it doesn't follow past trends but at this point in time it is eerily similar, eerily similar to 2017 and if you were someone who was trying to make a prediction about the future you would say, "This is scary what's happening."
Vijay Boyapati: (28:11)
I was skeptical. I was honestly very skeptical that some of these models were true, skeptical of stock-to-flow, but I'm kind of watching the price movement and if anything, it's moving faster than the 2017 cycle, which shocks me. I thought at this scale Bitcoin would have to slow down a little bit and I think what I've learned is that although it's much bigger, the size of capital moving into Bitcoin is also commensurately much bigger as well.
Brett Messing: (28:40)
But I guess there's an offsetting challenge, right, which is people talk about how on the supply side, right, so we're presently at a place where there's only 900 Bitcoin are mined daily, right? So, at 50,000 to Bitcoin, that's $45 million that has to be accumulated just to keep the price constant, right? At 500,000, right now we're up to $450 million a day of new buying that has to just come in and I guess I wonder how that ... So, the supply, it's not completely constant, right, in terms of ...
Vijay Boyapati: (29:21)
Yeah, that's a good point. The miners are marginal producers. So, they have electricity costs that they need to pay off so when they mine Bitcoin they typically have to sell it very quickly to pay for their expenses but you now have a new dynamic where companies are raising funds on public markets to pay to buy Bitcoin at very low interest rates, which is astounding to me and I think there's one company, I've forgotten what it's called, which is a mining company doing this where they're raising funds in the public markets so that they don't need to sell the Bitcoin that they mine, that they can continue to hold them.
Vijay Boyapati: (30:01)
So, you could have this double effect where not only are people buying but new supply isn't coming on the market, not just the supply was reduced by the halving but miners are holding back and saying, "Look, I don't want to sell for a while because I think this is going to go up." If their expectations change and they're able to pay their costs, their electricity bills, they might become longer term holders too. Then you get a real supply shortage and then that's when things can go incredibly parabolic very quickly.
Brett Messing: (30:33)
So, we got to talk about energy, right, because I think there's been a bunch of nonsense out there. Tether was nonsense and today there was a settlement with a New York attorney general and so I think that issue and use your time well and not dive into that. I think the concern about energy is going to be a real one and one that we're going to hear for a while. So, I guess I'd like your take on that, just generally.
Vijay Boyapati: (31:04)
Yeah, that was one issue I didn't cover in my article and as I discussed with you before we started, I'm turning my article into a book and this is one of the issues that I'm going to be discussing in the book because it is, like you say, it's a big issue. It's a big political issue. It's an issue where certainly one side of the political spectrum is very concerned about it and if that makes them antagonistic towards Bitcoin that is a cause for concern as an investor in Bitcoin.
Vijay Boyapati: (31:31)
What I would say is that firstly you need to compare Bitcoin, if it becomes global money, to the energy footprint of it's competitors and you need to look at gold, how much energy is. If Bitcoin completely disrupts gold, how much energy is going to be saved that way? Gold mining not only consumes a massive amount of energy but it's very, very destructive to the environment, unlike Bitcoin mining.
Vijay Boyapati: (31:59)
Bitcoin mining happens in data centers and typically it happens in places which are using green energy or areas where there's been a massive overbuild and is over capacity of energy.
Vijay Boyapati: (32:13)
So, I'll give you an example. Sichuan in China is a region where they had massively overbuilt, had built hydroelectric dams and there just weren't enough people there. So, that energy was essentially being thrown away. It couldn't be used because energy is not fungible unless in the form of a barrel of oil. Energy that you create in Sichuan can't be transported to Texas, it just can't happen.
Vijay Boyapati: (32:41)
So, that energy gets thrown away. So, Bitcoin is actually a great technology in a sense that it can rescue stranded energy. That's energy that's in places where it's hard to transport or get out or to use in other forms. Really where you see Bitcoin mining happening is in places where they've overbuilt and they're like, how do we use this excess capacity? Or where they may have volatility in demand.
Vijay Boyapati: (33:10)
So, in the United States there's a city called Wenatchee which is quite close to me where a number of large companies like Facebook and Google have their data centers but their usage is very bursty. They'll have a lot of traffic at one point in the day but maybe not in the other parts of the day and they have to sign contracts for a certain amount of energy and say, "We need this amount of energy, peak energy in case our demand, our servers need that much energy at a particular point in time."
Vijay Boyapati: (33:43)
When their servers don't need that much energy that energy is thrown away. So, it's really great in places like that where Bitcoin miners can set up and say, "Look, we'll take all of the excess energy that you're not using at any point in time and we'll pay for it." It is great for these energy providers to be able to sell to Bitcoin miners. It really flattens their demand. It's not so bursty.
Vijay Boyapati: (34:05)
So, Bitcoin mining has, I think, a positive effect on the energy market because it can unlock stranded energy and it can make energy consumption much more reliable for energy providers when they're thinking about investing in building out things like dams.
Brett Messing: (34:25)
I just saw a report that I think it's miners energy usage is 40% renewables. It seems to me that once we get that, right, over 50% and moving higher, will probably be the best way to address this issue, right? Who cares how much hydro or solar you're using.
Vijay Boyapati: (34:45)
Yeah, yeah, exactly and part of the problem is not just Bitcoin specific. It's just a global issue of how do we move people onto sources of energy that don't destroy the environment. It becomes the case that renewable energy is cheaper than the alternatives. That's where Bitcoin mining is going to go.
Brett Messing: (35:08)
So, I have one more question before I throw it to John who I know is chomping at the bit having read your essay again last night. At the Microstrategy conference when Ross Stevens and Michael kicked it off, Ross talked about Bitcoin the network and he specifically spoke about a company called Strike and there's a company I guess called Bottlepay in the UK and it's doing somewhat substantially similar. I'll, in a bad way, just summarize my understanding of what they claim to be able to do.
Brett Messing: (35:40)
Again, coming from LA, the idea of remittances in that market very much strikes home to me. But my understanding is that they'll be able to use the Bitcoin technology where they'll take a dollar, turn it into Bitcoin, essentially zap it to Mexico, it'll then get converted to a Mexican peso at virtually no cost almost instantaneously.
Brett Messing: (36:04)
What would that mean for Bitcoin? Could they actually do that? It sounds like Jetsons kind of stuff but it's super exciting if they can.
Vijay Boyapati: (36:15)
Yeah, so this is all technology that's built with the lightning network and the lightning network, it's like a financial layer built on top of the Bitcoin network. The Bitcoin network is the base layer, it's the settlement network and what it's really for, what it's purpose is for large scale settlement.
Vijay Boyapati: (36:34)
Now people were a bit confused about this in the early days because there weren't many users of Bitcoin and it looked like transaction fees on the base network were very low and it could be like a payment network or a credit card network but it's become very clear that that's not what Bitcoin is for. It's for settlement. It's the equivalent to gold in the 19th century. It's a means of settling between large institutions.
Vijay Boyapati: (36:59)
We'll see that more and more over time but it's still unclear to someone. The payment stuff is going to happen on the higher level, which is the lightning network, which allows people to transact without the cost of transacting on the blockchain, which is becoming more and more expensive. So, you can send payments between people near instantly at almost zero cost on the lightning network.
Vijay Boyapati: (37:23)
It doesn't have quite the trust assurances that you get on the blockchain but for small payments that doesn't matter. You don't need the same kind of level of assurance that your payment has settled when you're buying a coffee, right? You don't need that that you might need if you're a bank settling with another bank and trying to settle a billion dollars.
Vijay Boyapati: (37:45)
So, what you're saying is certainly possible and people are working on it. I think there's a great potential in this and certainly great potential for the remittance market. It's possible. The lightning network is still fairly new and I would say it's not in it's complete final form. It's technically ... It still has some holes in it. So, I think there's a lot of people working on it and it's going to be developed and we're going to see this kind of thing in the future. So, I'm optimistic about what you were saying.
Brett Messing: (38:21)
I imagine it's good for Bitcoin both in terms of it's utility but also again it's social proof, right, just in terms of everyone being aware of what Bitcoin can do for the greater good and therefore, why you should be more comfortable investing in it.
Vijay Boyapati: (38:38)
Absolutely, and it also allows people to own much smaller quantities of Bitcoin and be able to transfer them economically. If you only own five or six dollars of Bitcoin it's not really very economical to be able to transfer that on the blockchain because the fees are in the order of a couple of dollars sometimes. That's incredibly cheap if you're settling an account for $10 million or $100 million. That's a bargain especially because you can do it with a very high level of assurance very quickly but for people who want to make small transfers it's just no economic.
Vijay Boyapati: (39:14)
So, the lightning network is going to make these much smaller micro payments economic for the mass of people in countries like India and Africa and places like that.
Brett Messing: (39:24)
That's great. All right, John, you can have at him.
John Darsie: (39:26)
All right. Finally got my shot at glory here, Vijay. Again, I just want to compliment your piece, the Bullish Case for Bitcoin. If anybody watching this hasn't read it it's sort of a foundational piece in terms of understanding intellectually why Bitcoin could be valuable. You go through the same conversation and journey with everybody when they get introduced to Bitcoin.
John Darsie: (39:47)
Well, this is just funny money, it's made out of thin air. Why would it be worth anything when it's just this computer program and I try to explain. My parents have gone through this, my brothers have gone through this, who aren't in the business, intellectually about why it has value and I think, talking about the game theoretic nature of monetary goods and the Nash equilibrium within your paper. Could you just explain that? Going back to the fundamentals a little bit about why would Bitcoin, just this invention that was created 12 years ago by a pseudonymous inventor named Satoshi Nakamoto. Why would it have value going back to the history of money?
Vijay Boyapati: (40:23)
Yeah, so money is a very confusing subject for a lot of people because money is not valued in the same way that regular goods like stocks or real estate are valued. These goods are valued through cash flow, discounted cash flow analysis. How much dividends is a stock paying or how much rent are you getting from a piece of real estate and you discount that future cash flow into the present, discounted by the interest rate.
Vijay Boyapati: (40:53)
It's not valued like goods like oil or wheat, which are used in production of higher order goods like bread or oil is used for all sorts of things. Money is valuable because everyone else believes it's valuable and it's something that's called an intersubjective reality, which is, it only gets value because other people value it.
Vijay Boyapati: (41:19)
If we'd stop believing it has value then it loses it's value. So, there's this game going on at all times where people are trying to figure out which monetary good should I keep my savings in because there are a number of monetary goods out there. There's fiat, there's gold, there's now Bitcoin and you're in this constant kind of game where people are deciding, should I keep my savings in this one or should I keep my savings in this one and that's the game theoretic part. You're trying to standardize on a money because when I society standardizes on a single money that's tremendously valuable to all of society because money accounts as the foundation for all trade and savings.
Vijay Boyapati: (42:06)
So, the game theory is really people trying to anticipate what other people are going to do. So, when you are making a bet on Bitcoin you're really thinking, are other people also going to make that same bet? You're doing that really based on the attributes that make Bitcoin good as money and you say, "Well, I recognize these attributes are good and I think other people are going to recognize these attributes are good in the future." So, you jump in first in the hope that other people will jump in later on.
John Darsie: (42:40)
Right, and what are those attributes, just very quickly, that make Bitcoin such effective money relative to something like gold or fiat?
Vijay Boyapati: (42:48)
Yeah, so we've known about the attributes that make for good money since the time of Aristotle, so for thousands of years, as durability. So, wheat is not a good money because it decays over time. Portability, so cows are not a good money. They're hard to transport. Divisibility. So, can it be broken into smaller pieces to facilitate trade? Fungibility is another one. So, gold is better as money than diamonds because diamonds are irregular in shape and quality whereas gold, one piece of gold is equivalent to another piece of gold, another one is established history that the longer people have used something as money the more that people will trust that it's going to be valuable as money into the future.
Vijay Boyapati: (43:34)
I think probably the most important attribute of all for anything to be money is scarcity. You don't want to store your wealth in something that can be produced very easily or that's super abundant like sand. So, Bitcoin is superior to gold and fiat along all of the attributes that make for a good money except maybe establish history. Gold is the king of established history.
Vijay Boyapati: (44:01)
But in my mind, that advantage or that attribute is quickly diminishing for gold relative to Bitcoin because I think as people recognize Bitcoin is still around and is still working after a few decades they'll view it as a permanent institution of the world in the same way that people view the internet as a permanent institution of the world. So, that advantage of established history I think is going to be mostly gone in the next decade.
Vijay Boyapati: (44:35)
The other comment I just quickly want to make is that I think fiat money is good for transporting value through space because it can be digital and you can transmit value to another person digitally using PayPal or Venmo. Gold is good for transporting value through time and that's because gold can't be inflated and it can't be debased by governments.
Vijay Boyapati: (44:58)
Bitcoin is good at both. It's good at transporting value through space and time. So, I think it's superior to both gold and fiat money.
John Darsie: (45:07)
I want to dive into risks a little bit and you devote time in your paper to this and in your subsequent writings about what are the legitimate risks to Bitcoin versus some of the fallacious criticisms that it draws from people who either aren't invested and maybe have some FOMO and FUD in terms of missing out on the upside. But what in your view are the real legitimate long term potential risks to Bitcoin?
Vijay Boyapati: (45:33)
Yeah, that's a really important question. So, I think in the early days probably the biggest risk was protocol risk. Was the cryptography that Satoshi built Bitcoin on sound? Was the protocol he built sound? Really that was a test, an experiment that had to be done over many years.
Vijay Boyapati: (45:52)
If you go back and look at some of the early emails, the cryptographers who were first presented his whitepaper were very skeptical. They had been trying to work on decentralized money for over a decade and along comes this person that no one had heard about and said, "I've solved this problem."
Vijay Boyapati: (46:09)
But just over the years after thousands and thousands of very smart people have been trying to break Bitcoin, to hack it, to find some flaw in it we've come to understand that Bitcoin's protocol is rock solid.
Vijay Boyapati: (46:25)
In terms of real risks now I think and speaking with Brett about this, nation state attack to me is the last credible risk to Bitcoin. Are we going to see nation states wake up to the potential threat that Bitcoin poses to their monetary policy and what are they going to do about it? As we discussed, I think that's really a question of whether Bitcoin gets enough political capture, gets enough adoption that it becomes infeasible for nation states to attack Bitcoin and they have to come to terms with it and say, "Well, this is a [inaudible 00:47:02]. Bitcoin has now become a global store of value. What do we do? Do we add it to our reserves? Do we incorporate it in our monetary policy?"
Vijay Boyapati: (47:15)
So, that's an open question for me and I think it's a question that we're going to see answered over the next five to six years because the amount of savings that are going to flow into Bitcoin over the next five years is going to be stupendous. I think Bitcoin's going to overtake gold. It's going to overtake gold and I think it's going to have this geopolitical significance which will make nation states sit up and pay attention.
John Darsie: (47:40)
Right. I want to talk to you about Satoshi for a moment. Satoshi Nakamoto again is the pseudonymous creator of Bitcoin. Satoshi, to my knowledge, has never sold any Bitcoin that's attributed to him whether it's a him or her or a group of people but conceivably Satoshi is the wealthiest person on the planet if it's an individual that's walking among us.
John Darsie: (48:02)
What risk, in your eyes, do you see to Satoshi at some point in the future ripping off the mask and saying ... What you were talking about earlier is that you're basically buying Bitcoin with the expectation there's going to be greater adoption in the future and it's really a game theoretical sort of money. What is the risk that Satoshi was just running some type of scheme to enrich themselves and make themselves the wealthiest person on the planet and they flood the market with the Bitcoin that is attributed to him, her or that group?
Brett Messing: (48:32)
John, I want a shot at this one.
John Darsie: (48:34)
All right, you take it first, Brett.
Brett Messing: (48:35)
[crosstalk 00:48:35] I want Vijay goes first. He may say what I'm going to say [crosstalk 00:48:39]-
Vijay Boyapati: (48:41)
I'd love to hear what you have to say, Brett.
Vijay Boyapati: (48:44)
I'll give a quick answer. I think it's a tail risk. I think it's a very low probability event. Even if Satoshi were to reveal him or herself and say, "Look, I'm about to dump my Bitcoin on the market." It's a one time thing and it's a part of the process of monetization, the distribution of his coins. It's kind of like discovering gold in the new world. That caused inflation in Europe. That was a one time event but it didn't mean that gold suddenly disappeared from use as money. There was a period of inflation. I think the same thing would be true for Satoshi.
Vijay Boyapati: (49:18)
I think it's extremely unlikely. He has had, or she has had to financial incentive for a long time. Billions and billions of dollars. That would change the lifestyle of any person yet not a single one of those coins has moved. The other reason I think that Satoshi will never reveal themselves is this great physical risk to be known as the person who holds the most Bitcoin. You would need a huge staff of armed guards because Bitcoin has it's property that transactions are not reversible. So, if someone finds you and if you haven't really done a good job of your security they can do what's called a five dollar wrench attack where they say, "Give me all your Bitcoin or I'll take your fingers." If you have a million Bitcoin, it's a scary proposition.
Vijay Boyapati: (50:12)
This is why, honestly, a lot of large Bitcoin holders have custodied their Bitcoin with institutions rather than holding it themselves just for that fear.
John Darsie: (50:22)
Right.
Vijay Boyapati: (50:22)
So, Brett, I'd love to hear your answer.
Brett Messing: (50:24)
Same basic thing. I think the Bitcoin were destroyed when they were valueless and it was launched. Just what I know about human nature, I don't know any human being who could have the discipline to not touch it, setting aside buying a house or an airplane or a sports team. This was a noble mission. They could be solving poverty, solving the pandemic and they're sitting on all this money not doing anything when they could help so many people. It's inconceivable to me that this Bitcoin is accessible by a human being. Anything's possible but as you said, I would put very, very low odds on it.
Vijay Boyapati: (51:07)
Yeah, could I just quickly add to that point that Brett made? I think it was created as a noble pursuit because unlike a lot of these other cryptocurrencies, Satoshi announced it before he launched the network. He said anyone could mine it. In the early years he only mined it to keep the network going because there was only one or two computers on the network.
Vijay Boyapati: (51:29)
A lot of these new cryptocurrencies are what's called pre mined, like the people who create them will take a big chunk of the supply just to enrich themselves. It's very clear that that is not what has happened with Bitcoin. This is something that was created to benefit mankind and I agree with Brett. I think that the highest likelihood is that the keys to those coins were destroyed or perhaps Satoshi's dead. He's not alive anymore so I think it's an extreme tail risk that those coins come back online.
Brett Messing: (52:03)
How many coins do you think are missing? Let's assume the Satoshi's are gone. So, when we say 21 million. What's the real number of float, if you will, once we get them all mined?
Vijay Boyapati: (52:14)
Yeah, the best estimate I've seen is somewhere between three and five million are missing.
Brett Messing: (52:21)
That's a lot, right? You're turning 21 into 16 to 18.
Vijay Boyapati: (52:26)
Yeah, and of those 16 to 18 ... The great thing about Bitcoin is the blockchain is open and transparent and you can do all sorts of analysis on the flow of funds on the blockchain and you can look at Bitcoins that have stayed dormant for a long, long time. It actually gives you a sense of where the market's going. You can tell that you might be getting to a crescendo top when coins from three to five years ago start moving and people who've had Bitcoin for that long say, "It's time for me to cash out." You can look at that and see that on the blockchain.
Vijay Boyapati: (52:58)
What you'll see is that actually the set of coins that are trading on the market at any particular time is a very, very small fraction of the total supply. Most people who are into Bitcoin are in it for the long term so you don't see much movement of the total supply.
Brett Messing: (53:17)
Hmm. Thank you.
John Darsie: (53:17)
Well, I'm going to save the rest of my questions and demand that Vijay comes back for a second episode. We've had multiple episodes with the great Michael Saylor, given there was so much to talk to him about related to his decision of Microstrategy to invest what is now four plus billion dollars into Bitcoin.
John Darsie: (53:36)
So, we're very thankful for your time, Vijay. Thank you for joining us and we hope to have you back and we'll dive even deeper. Maybe after your book comes out. We'll distribute the book to our SALT community and have you back on to dive even deeper into some of the themes that you cover there.
Vijay Boyapati: (53:51)
Yeah, I'd love that. Thanks, John and thanks, Brett. It was a pleasure for me to speak to you guys. Like I said, I'm really excited that you guys are getting into Bitcoin and spreading the word and doing what you're doing with your fund.
Brett Messing: (54:03)
Thanks so much. Thanks for joining us, Vijay. This was great.
Vijay Boyapati: (54:06)
Thanks guys.
John Darsie: (54:07)
Yup. Thank you everyone who tuned in to today's SALT Talk with Vijay Boyapati, the author of the Bullish Case for Bitcoin, which again is one of the seminal writings in Bitcoin in terms of understanding intellectually why Bitcoin has value and the price cycles that it's currently undergoing over the last several years.
John Darsie: (54:27)
Just a reminder, if you missed any part of this talk or any of our previous talks you can access our entire archive of SALT Talks at salt.org/talks. You can access them all on our YouTube channel as well which is called SALT Tube. Those are all free to access for everyone.
John Darsie: (54:43)
We're also on social media. Please follow us there. We're most active on Twitter @saltconference but we're also on LinkedIn, Instagram and Facebook.
John Darsie: (54:51)
Please spread the word about these SALT Talks. Again, the digital asset space is an area that we've been doing research on for several years and we're excited to bring the leading voices in that space to you via our SALT Talk series so definitely if you're interested in learning more go to our YouTube channel and watch all episodes of our digital asset series including the aforementioned episodes with Michael Saylor, which were both tremendous conversations about his decision at Microstrategy to invest their corporate treasury assets into Bitcoin.
John Darsie: (55:18)
But on behalf of Brett and the entire SALT team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here soon.