Is there a future for bitcoin? An investor and a skeptic debate – The Verge

Posted: April 9, 2021 at 2:22 am

Todays episode of Decoder is about a very big idea: bitcoin. The Verge has been covering bitcoin since we launched in 2011. And since then Ive heard many loud, powerful voices talking about how its going to be the future of something. Everything. Maybe nothing at all.

To be honest, Ive been a bitcoin skeptic: over the past 10 years weve seen the value of bitcoin skyrocket, but very few actual uses for what should be a revolutionary digital currency. But that value keeps going up, and it feels like we might be at an inflection point for the bitcoin story. And there doesnt seem to be a lot of gray area between the people who think bitcoin is going to change everything and the people who think its nonsense.

For this episode, I had two conversations. First I spoke to a bitcoin investor. Then, a few days later, I spoke to a bitcoin skeptic. In each conversation, I tried to play the other role but without the usual yelling and chaos that seems to characterize bitcoin debates.

The investor is Nic Carter. Hes a general partner at Castle Island Ventures, which funds startups that are building on top of the bitcoin infrastructure to make payments more accessible. Basically, making sure bitcoin can function like a currency.

The skeptic is Steve Hanke. He is a professor of applied economics at the Johns Hopkins University and senior fellow and director of the Troubled Currencies Project at the Cato Institute. He has also advised other countries on how to deal with hyperinflation and how to stabilize currencies.

In the end, my biggest question about bitcoin is whether people are interested in it because its bitcoin or because its worth a lot of dollars.

Here we go.

This transcript has been lightly edited for clarity.

Nilay Patel: Nic Carter, youre a general partner at Castle Island Ventures. Welcome to Decoder.

Nic Carter: Thanks for having me. Im really excited for this.

NP: You have kind of an interesting history. You were the first crypto-analyst at Fidelity. Now you manage investments into the bitcoin ecosystem at Castle Island Ventures. I want to start at the very beginning. What drew you to bitcoin and crypto, generally?

NC: It wasnt anything super dramatic. It wasnt like my family had our wealth confiscated by some tyrannical government or anything. As much as I, weirdly enough, wish I had a great bitcoin origin story, I dont, but I just was attracted to the playful community initially on Reddit, believe it or not. And I thought it was really cool to tip people through the internet and do P2P payments that werent being cleared through any traditional financial medium.

That was really interesting and exciting to me to have that instant, final settlement on internet payments. And then it was only with time and it took me a long time that I came to realize that there was actually a deeper, sort of philosophical underpinning behind the project, that it was a real monetary project, and it was tightly intertwined with some normative views on economics and the role of central banking in society.

NP: I want to pull back out of that. Im really interested in your perspective on what the normative aspects of central banking are and how they might change with bitcoin. But just help me out from the very beginning. How would you define bitcoin at this moment in time?

NC: So the thing about bitcoin is that we have a bit of a definitional problem because the word bitcoin actually refers to a number of different things, and that causes confusion. So on the one hand, its a protocol.

Its a set of rules that people opt into to send value through a communications medium in a final way so you get final settlement. And on the other hand, its also a financial asset, so bitcoin is the name of the monetary unit that circulates within the bitcoin protocol.

That doesnt make a lot of sense to a lot of people, but the bitcoin network is such that, really, theres only one native currency that is changing hands on the bitcoin network, and we call that bitcoin.

And as of today, all of the bitcoins are worth about a trillion dollars. So thats our problem, is that we use the same word to refer to the network itself and to the actual medium of payment on the network.

NP: I think theres a lot of focus on the dollar value of the outstanding bitcoin right now. But one thing that strikes me is there is the bitcoin network; theres the Ethereum network; theres Dogecoin, which Elon Musk just tweeted about, and it spiked in value.

Theres a wide variety of cryptocurrencies and now crypto assets, right? The NBA is selling highlight clips as non-fungible tokens, or NFTs, for a quarter of a million dollars, right?

So theres all these crypto assets and crypto networks and cryptocurrencies. Bitcoin still seems like the center of that conversation. How do you think it relates to all of the others?

NC: Bitcoin is the alpha and the omega. I mean, its the originator of this whole thing. Bitcoin is the reason we have the word blockchain, right? Bitcoin kicked this whole thing off in 2009. It was the first public blockchain, the first cryptocurrency. It wasnt the first digital cash project, but it was the first successful one; the first decentralized one; the first one that people realized, Wow, we can actually transact outside of the purview of the state here. We dont necessarily need financial intermediaries.

And bitcoin has this great set of embedded values and this commitment to genuine decentralization, and genuine distribution of governance, such that no one individual or entity can co-opt or change the network. And it has this extreme resilience and robustness and this unwillingness to change or be changed by anyone.

Thats what gives it a lot of strength. Thats what a lot of the clones of bitcoin and the competitors and the alternative cryptocurrencies lack, fundamentally. Most of them are set up by corporations, venture investors, that try and own a huge percentage of the initial stake, things like that. And they have CEOs and foundations and leadership. Bitcoin is much more organic, which kind of explains its sticking power. Its this real phenomenon that people can align with. And all of the competitors, theres certainly some interesting technology out there. But its not surprising to me that bitcoin has endured in the way that it has because its kind of unique in terms of its own trajectory, its history.

And I think people really align with that. They align with the unique circumstances of its launch.

They like the fact that its pretty decentralized. I think, ultimately, bitcoin is our best shot to basically strip some of the power from governments, in the monetary context, and from large financial institutions for that matter.

NP: Why should we strip the power from governments in the monetary context?

NC: Because they misbehave. Because they mismanage their currencies, and in the US, things seem pretty much okay. Inflations not too bad. But the US experience, the experience of Americans, is not the typical experience for people globally, right? Were only something like 4 percent of the population. Your average person on the planet Earth probably does not have a high degree of trust in their banking sector. They may be living under inflation or conditions of monetary repression.

They might have to deal with capital controls, which exist so that their government can manage exchange rates. So because central banks tend to misbehave, because they tend to plunder the currency of savers in order to achieve their own government aims, we have plenty of reason to be skeptical of monetary authorities.

And I would actually extend that to the Federal Reserve. I mean, the Fed is not behaving in a way that I think is consistent with good objectives for society. My interpretation of what theyre doing is that their actions are actually worsening inequality, but thats a whole different conversation. I think the very fact that sovereign currencies do fail and you see hyperinflations, I think that justifies the existence of an alternative thats not state-controlled.

And historically, gold has been that alternative. And its actually quite a good alternative, I would say, but bitcoin just improves upon golds qualities in some critical respects.

And I think its totally valid to propose one alternative which is not state-controlled because ultimately, thats just a tool for freedom, and you cant mandate that anyone use it. Its a free choice to opt into it, but I think its really inspiring that probably around 100 million people worldwide have opted into the system so far.

So what does a Bitcoin critic think of this decentralizing potential, specifically in the context of places outside the U.S.?

Now is a good place to bring in Prof. Steve Hanke. As I said at the top, he is a professor of applied economics at the Johns Hopkins University and a senior fellow and director of the Troubled Currencies Project at the Cato Institute.

NP: Steve Hanke, Welcome to Decoder.

Steve Hanke: Great to be with you, Nilay.

I wanted to start the conversation addressing the big promise Bitcoin seems to be offering: that there can someday be a stateless or decentralized currency that can replace the US Dollar.

Right off the bat, Prof. Hanke tells me that: A) Bitcoin is not a currency; And B) Bitcoin is not really decentralized.

SH: Everybody says that bitcoin is decentralized. It is not decentralized. Its heavily centralized; 99 percent of all the transactions occur on centralized exchanges, which well get into that later, because that leads to all kinds of issues about potential vulnerability in terms of privacy.

According to Prof. Hanke, there are three criteria for something to be considered a currency: a reliable unit of account, a medium of exchange, and a store of value.

SH: And to become considered a currency, it has to be a reliable unit of account, a reliable measuring rod. And obviously, bitcoin has a problem in that area. It is highly volatile. Just in the last week, its shed about 25 percent of its value from its all-time high, so its very volatile and moves around. Its not a very stable system, if you will, and its a yardstick thats moving around all over the place. That means two things. Its not used to price current transactions, and thats what a unit of account is, something thats used as a unit that can be assigned and used as a price, to price current things, or price inventories and things like that.

So unit of account is a very big thing. Its a big bugaboo for bitcoin. Its a big bugaboo, by the way, for many so-called currencies. Many national currencies produced by central banks are not used as reliable units of account.

And thats why, if you look at transactions for commodities, for example, almost all the commodities in the world are traded in US dollars. That is the unit of account thats used for corn, oil, soybeans, you name it. Most people dont realize, its also used as an invoicing currency, the US dollar, for many manufactured goods. In other words, if you go to England, for example this is a good example we have British pounds sterling. And when you go to Germany, and what does Germany use now, they use the euro. But what is the invoicing currency for about 35 percent of the manufactured goods in England? Its a US dollar.

So if youre going to replace anything with bitcoin, it would be the US dollar, to put it into context. Thats what were talking about.

The second currency criteria is a medium of exchange, and bitcoin is not used as a medium of exchange. Its not used because its very expensive. Transaction costs are very high, so about the only places that you find that are places experiencing hyperinflation like Venezuela, or very high inflation like Argentina, maybe Zimbabwe, these kinds of places. But its not used because its very expensive to use.

The third item in the currency criteria is a store of value, and the store of value, of course, its no good. Its not safe. There have been a lot of infringements and lack of trust, and its extremely volatile. So on all those three criteria, basically, you cant check the box, for bitcoin.

NP: Lets take them in order. Unit of account is really interesting to me. Youre saying in most places around the world, youre making a large transaction, youre making a series of repeated transactions for commodities or manufacturing, you are working across currencies. The backstop is the dollar.

The argument here is, well, the reason the backstop is a dollar is because those currencies are unstable. They might be mismanaged by the central banks of those countries, there might be hyperinflation, there might be all kinds of shenanigans. The currencies might collapse. The dollar is stable because the United States does a good job, or a reasonably better job, maybe not even a good job.

Bitcoin solves the problem in those countries. It is decentralized, you can see it. It might flow in a volatile way against the dollar, but compared to a mismanaged currency in an unstable country, it might be a much better bet to clear some of those repeated transactions, to be more secure in terms of knowing who is making the transaction with who, preserving a ledger. There are lots of benefits of bitcoin as a currency compared to the unstable currencies that we currently backstop with the dollar.

SH: Well, I would argue, number one, in these countries where you do get some usage of bitcoin, they are not used as units of account in those countries, like Venezuela. The dollar is the unit of account. Everything will be priced in dollars, you pay for it in bitcoin. So bitcoin comes in and is used for transactional purposes there, but its very costly to do it. And people who are doing it are very inefficient. Lets put it this way, they are really speculators, theyre not transacting.

It comes in, and it got started in these places due to the fact that the local unit of account, the Venezuelan bolvar, has completely disappeared. Its not used. The unit of account used in Venezuela is a US dollar. And by the way, I have very good sources on the ground in Venezuela, and today as we speak, with inflation, as I measured, over 2,000 percent in Venezuela, about 80 percent of all the transactions are actually done in US dollars. And bitcoin, at most were talking about a fringe footnote thats picked up by bloggers and bitcoin fanatics and that kind of stuff, but its peanuts. Its really irrelevant. It doesnt make any difference. Eighty percent, in Venezuela, of all transactions [are] in US dollars.

And the only reason you get other units being used, like the Venezuelan bolvar, its small change. Lets say you have an $85 bill thats invoiced to you. And to pay, youve got four $20 bills and you hand them over to whatever you bought. But youve got $5 left over, and there is a small change problem. There arent that many $1 bills running around in Venezuela. So the small change, what do they do? They use bolvars. For the $5 differential and residual in that transaction, they would use bolvars. And bitcoin is somewhere way off in the horizon someplace. Its more or less kind of an academic footnote, but it is used to some extent. And its used because of hyperinflation, and its attractiveness for basically speculators, not people really doing transactions.

NP: I think my question there is, what you were describing with the dollar and the bolvar is a bad system for most Venezuelans, right? Thats not an ideal monetary system for the average citizen of Venezuela to participate in.

The opportunity to participate in a more decentralized system that is perhaps free of interference from the government, or free of actually having to have cash, like physical cash, and whatever elements around you. That seems like a better system. Why wouldnt you want to transition to a better system from a broken financial system that relies on a weird exchange rate between the bolvar and the dollar, and the dollar isnt even your currency?

SH: Well, the ideal system for someplace thats hyper-inflating would be to do officially what spontaneously has already occurred. What spontaneously occurred is dollarization; Venezuela is dollarized at the tune of about 80 percent of all transactions. And savings, its even a bigger percentage. Of course, the savings are safe in Miami or someplace else, not in Caracas, but theyre in dollars. Thats what the big lumps of savings, or cash thats held by corporations in Venezuela, its in US dollars.

So the ideal thing to do would be, Nilay, to officially dollarize and get rid of the bolvar completely. The day you would do that, hyperinflation would end immediately, and youd end up someplace like Panama thats officially dollarized, they use the US dollar. Ecuador is officially dollarized. El Salvador is officially dollarized. There are 37 countries around the world that are officially dollarized. They use some other currency rather than a home currency.

NP: I think this leads right into... In my previous conversations about bitcoin, you just quickly arrive at nationalism concerns. You quickly arrive at international relations concerns. If you are a country and your currency is unstable, giving up your monetary policy to the whims of the United States seems like a bad idea.

If youre a citizen of one of those countries, you are 5,000 steps removed from the value of the currency that you hold. I just see the incentive to say, you know what, Im going to go to the different decentralized system that does not have state actors on top of me, acting on a whim.

SH: Well, I was a state counselor in Montenegro in 1999, an adviser to the president, [Milo] ukanovi. And we had a hyper-inflating currency, it was called the Yugoslav dinar. Because in those days, Montenegro was still part of the rump Yugoslavia. ukanovi decided and there was a strategic thing in this, and it was nationalistic he wanted to exit Yugoslavia, and he also wanted to do so in a way that would be very popular with the population. So how do you do this? My advice was that you make the German mark legal tender.

And if you did that, you would stop hyperinflation immediately. It would be very popular. So we did this, it smashed inflation, and started the first step towards independence, actually. It wasnt viewed as a dependency thing, it was viewed as a way to get out from the stranglehold of [Slobodan] Miloevi in the rump Yugoslavia. And so that was that particular case.

Look at Panama. Panama is actually a big financial center, theyve been dollarized for over 100 years. To put it back, Nilay, into your context, this is a problem politically. I completely agree with you. But if you adopt the US dollar, one argument has said, Oh, gee, we dont want to be dependent on the US government and so forth. So thats a negative. But its actually a positive: youre telling me that these local central banks are more reliable than the US Federal Reserve? And why does everyone in the world use the US dollar as a unit of account? Well, right now its the best alternative. And by the way, if we go back 2,000 years and look at [the] history of currency, theres always one dominant international currency. Always one.

And the US came into the picture after World War I. The dominant currency before World War I was the pound sterling, that was the international currency. They got into trouble because of financing requirements and burdens associated with World War I; sterling became very unstable. And as that started happening, that instability, the US dollar became a competitor, a challenger. And what youre arguing here, your conjecture was, well a decentralized non-sovereign currency I wouldnt call it a currency because it isnt ... bitcoin isnt a currency.

Recently, somebody said, Well, whats the fundamental value of bitcoin? Does it have a fundamental value? And to have a fundamental value not the market value; the market value is whatever the value in the price of bitcoin, thats the market value. The fundamental value is zero. Because to have a fundamental value, you have to have an asset that generates some kind of free cash flow that can be discounted back into present value, and bitcoin doesnt. Now, people say, well, other currencies dont have a fundamental value. Well, if you look at money in the United States, broadly defined, the most broad measure is M4. M4 is computed and calculated reliably at the Center for Financial Stability.

That has 14 components, and a currency is only one, very small component at the one end. And at the other end of the 14 youve got Treasury bills. So in that sense, the US dollar has a fundamental value. It is comprised of 14 components, and 10 of them pay interest and four do not.

NP: Im not going to do better at financial system regulation than you are, but let me push back on this from the perspective of a regular person. The interest rate in this country is very low; it has stayed low for a long time. If you have a dollar, the purchasing power of that dollar goes down over time. That is what most people experience. You put your money into a savings account, youre making a tiny fraction of interest compared to just putting it into the stock market, in an index fund. If you put it into bitcoin, you have massive gains over time, right? It has just gone up because more people believe that it will become a challenger currency.

So the idea that the dollar per your M4 definitions, generates value from the perspective of a regular person, does not hold. It might hold in a larger financial ecosystem, because the Treasury would print more money. But from my perspective, I just have some dollars, the best thing I can do is spend them on something that might generate value. If I have some bitcoin, the best thing I can do is hold it because it will itself increase in value.

SH: Well, my conjecture is that I think eventually it will enter a death spiral and go towards zero, towards its fundamental value.

NP: Why do you think it will go into a death spiral?

SH: Oh, because therell be many superior alternatives in the crypto space that will move bitcoin out of the picture. And I know exactly how to design them, they arent there yet right now.

Picking up our conversation with Nic Carter, I wanted to know why anyone would spend bitcoin. Its happening all the time but I just cant figure out why if all it does is appreciate in value.

NP: Well, let me ask you this. I dont have any bitcoin. For our ethics policy, were not allowed to own stock, and we extended that to cryptocurrency because we cover it, and we do have the ability to affect the prices. So I dont have any.

But if I did have some bitcoin, why would I ever spend it at this point in time?

NC: At this point in time, you probably wouldnt want to. And so its not really a widely offered or used or employed medium of exchange at this stage in its life cycle, and thats okay. Right now, the focus is more on getting it up to speed as a large-scale monetary good. And then maybe once it is more mature, we can develop ways to spend it. But if you expect it to appreciate relative to the dollar and I think we all do, or most bitcoiners do, rather thats a deflationary thing, and you dont necessarily want to spend. I think thats totally fine.

We expect this experiment to play out over the course of decades. Its the same way that you dont really spend gold, but gold is worth $10 trillion in the aggregate. The fact that its not used in a retail payments context, no one buys coffee with grains of gold, that doesnt delegitimize gold as a monetary good. It just means that people are using it more as a way to store value over time, especially relative to sovereign currencies.

NP: But I think this brings you back to your core definitional problem. Youve described bitcoin and gold as monetary goods. Youve also described them as currencies. I think bitcoins initial philosophical underpinning was a new kind of currency, a replacement for cash, untraceable, free of government and corporate constraints. I cannot think of a reason to use it as a currency at this time. I can think of a reason to hold it as an asset. When do you think the shift to actually using it as a currency would arrive?

NC: Yeah, its a good point. And a lot of bitcoiners, we actually fought a civil war over this exact question, a largely bloodless civil war, thankfully.

NP: [Laughs] I hope so.

NC: Well, yeah.

NP: When you say largely, that implies there was some.

NC: Well, things get really heated on Reddit and the bitcoin talk forums and Twitter, but this was a great question that people in the bitcoin community struggled over, right? Because if you want to create a peer-to-peer digital cash, is that even compatible with the way the bitcoin network works?

And unfortunately, or for better or for worse, bitcoin can only throughput so much data per unit of time, right? Bitcoins divided up into blocks. We have about 144 blocks a day, or they max out at about three megabytes.

And because transactions carry a payload of a few hundred bytes, that means you can only squeeze so many transactions into a days worth of blocks, and thats there for good reason. Its because you dont want to overwhelm the network with data, because then nobody would be able to run a node and participate in the network, right?

So theres a physical constraint, which limits the transactional throughput of the network, right? We have to keep that in mind. Some people wanted to lift that constraint and embrace this vision that you promote here and some people would say the original vision of Satoshi.

I might contest that, but hes not around to clarify what his vision was, which was to facilitate cheap, fast payments on the internet, especially for small-dollar transactions. And that tribe kind of lost the battle, I would say. And the tribe that won was one that said, Look, we want to do that too. We just want to pursue it in a more measured way whereby we introduce layering into the system.

And so thats really the key concept to understand is, at the base layer, you have a fast-settling settlement network, which you might think of as equivalent to sending a wire transfer, right? You send a wire, it costs you $15. Its kind of annoying, but once youve done it, that payment is totally final. Theres no reversing it. The money really settles between banks. Same thing with bitcoin. Once youve done it, its pretty much final within 30 minutes to an hour.

Then the way the payments system works in the real world is we introduce many, many other layers on top of that. So you have ACH [Automated Clearing House], and then obviously banks kind of sit on top of that, [the] Fedwire network. And then the banks themselves, youve got payment processors on top of them. And then you move up five rungs in the ladder, and you get to you making a Venmo or a PayPal payment to me, or you get to you making a credit payment with a merchant. That payment doesnt really settle immediately. It takes some time to settle. A credit card payment might settle in 90 days, 120 days. The settlement is occurring on the base layer, but the financial messaging and the financial settlement are totally distinguished from each other, right?

So thats the way bitcoiners really began to think about it too was, lets distinguish payment and settlement. We can settle large transactions on the base layer. Thats suitable if you want to send a billion dollars from Mexico to the Philippines, and you want to have it settle within 30 minutes, and everybody can trust that it cleared. But if youre buying groceries, you probably actually dont need final settlement for that transaction. Thats a low stakes transaction. You dont need to employ this powerful, utility-scale infrastructure to do that. So this was the alternative vision of bitcoin that emerged. And I grant that its complex. And its not that intuitive, and it doesnt even sound that much like the way Satoshi [Nakamoto] described bitcoin.

Thats okay. Things evolve, right? We are discovering product market fit. How should this protocol actually interact with the real world, real constraints that exist in the world? And I think the way to do that is to mirror the layered approach of the payment system. And thats kind of the way that people are thinking about it today.

Its not mature yet. We dont have these half dozen layers that I described that work in the payments stack. We do have some emerging second layer solutions, but thats sort of the current thinking around this, is that not every transaction needs that final settlement. And so well have more convenient payments networks that are built on top and that settle to bitcoin.

NP: One of the things that strikes me about that comparison is one, it does look an awful lot, or sound an awful lot, like the existing layers of the payment infrastructure that banks control, and second, youre describing it as product market fit, which is language that as a tech product person I deeply understand.

Product market fit is not predictable for people. Slack started as a video game company and then they made Slack, and the investors were just along for the ride, and now theyre invested in a B2B software company that got bought by Salesforce. That was not what they thought they were doing when they sat down at Slack the first day. They thought they were making a video game.

NC: Totally.

NP: Banks and governments to some extent are far more predictable for consumers, and theres a democratic process, that if you hate one presidents financial policy you can at least vote for the other guy. Its very hard to participate in bitcoin governance, or even understand the fights between the tribes you are talking about.

It might be more democratic in that the decision-making is more decentralized, but in another way it just seems far more opaque, complicated, and unpredictable, and I just dont know how to reconciles that initial vision of fast-clearing payments for regular people with the opaque chaos I sometimes hear about from the bitcoin community.

NC: No, thats a fantastic point, and theres this concept, the tyranny of structurelessness. Have you come across this?

NP: Yes.

NC: This characterizes decentralized communities, especially cryptocurrencies where governance is not codified. There is a lack of hierarchy, and its bewildering for people oftentimes when they try to determine who has power in bitcoin, how much power do the core developers have relative to the minors, and the economic node operators.

The answer youll get is, Well, just read the bitcoin stock exchange, or subscribe to the mailing list. Its completely incomprehensible jargon. There have been efforts to reckon with that and identify the power structures, but there is a real structurelessness. I think its sort of beautiful in a chaotic way that its this organic, collaborative, open-source phenomenon. It sounds esoteric and difficult to penetrate when youre hearing it from me, but the debates really do happen in the open. Its just they dont happen in a specific place. Its just this constant low-grade warfare on Twitter, and mailing lists, and at conferences, and so on.

NP: Wait, let me stop you, if I was to say, where should I invest my money? And you say, one quality of the asset that youre investing in is constant low-grade Twitter warfare, my instinct would just be to run the other way.

NC: Yeah, its not at a stage in its development where its that well understood by society, but I would say thats where the opportunity is, right?

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Is there a future for bitcoin? An investor and a skeptic debate - The Verge

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