The Blockchain Debate Podcast

Motion: Bitcoin is a scam (Jorge Stolfi vs. Lyn Alden)

January 01, 2021 Richard Yan, Jorge Stolfi, Lyn Alden Episode 21
Motion: Bitcoin is a scam (Jorge Stolfi vs. Lyn Alden)
The Blockchain Debate Podcast
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The Blockchain Debate Podcast
Motion: Bitcoin is a scam (Jorge Stolfi vs. Lyn Alden)
Jan 01, 2021 Episode 21
Richard Yan, Jorge Stolfi, Lyn Alden


Jorge Stolfi (@jorgestolfi)
Lyn Alden (@LynAldenContact)


Richard Yan (@gentso09)

Today’s motion is “Bitcoin is a scam.”

At the time of recording and release, Bitcoin reached its all time highs. And it just seems that every few weeks, a traditional financial institution or a well-known investor is announcing their interest in the orange coin.

Simultaneously, some skeptics continue to insist that this is all a mirage.

There seems no better time to visit this fundamental topic on the boundary of our entire industry.

Today’s debaters include a computer science academic and a macro investor. I am especially appreciative for the former to appear on this show and be willing to engage. Outside perspectives can be very sobering at times.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Debater bios:

Jorge Stolfi is a computer science professor at the State University of Campinas in Brazil. His specialty includes computer vision, image processing, function approximation methods, graph theory, computational geometry and other fields. He is a vocal opponent of Bitcoin. In 2016, he submitted a letter to the SEC outlining what he perceives as similarities between Bitcoin and fraudulent penny stocks or ponzi schemes. Jorge received his Ph.D. in computer science from Stanford in 1988.

Lyn Alden runs an investment research service for both retail and institutional investors at Her focus is on fundamental investing with a global macro overlay, with a specialization in currency differentials and equity valuations. She also manages financial operation of an aviation simulation research facility.

Show Notes Transcript


Jorge Stolfi (@jorgestolfi)
Lyn Alden (@LynAldenContact)


Richard Yan (@gentso09)

Today’s motion is “Bitcoin is a scam.”

At the time of recording and release, Bitcoin reached its all time highs. And it just seems that every few weeks, a traditional financial institution or a well-known investor is announcing their interest in the orange coin.

Simultaneously, some skeptics continue to insist that this is all a mirage.

There seems no better time to visit this fundamental topic on the boundary of our entire industry.

Today’s debaters include a computer science academic and a macro investor. I am especially appreciative for the former to appear on this show and be willing to engage. Outside perspectives can be very sobering at times.

If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.

Source of select items discussed in the debate (and supplemental material):

Debater bios:

Jorge Stolfi is a computer science professor at the State University of Campinas in Brazil. His specialty includes computer vision, image processing, function approximation methods, graph theory, computational geometry and other fields. He is a vocal opponent of Bitcoin. In 2016, he submitted a letter to the SEC outlining what he perceives as similarities between Bitcoin and fraudulent penny stocks or ponzi schemes. Jorge received his Ph.D. in computer science from Stanford in 1988.

Lyn Alden runs an investment research service for both retail and institutional investors at Her focus is on fundamental investing with a global macro overlay, with a specialization in currency differentials and equity valuations. She also manages financial operation of an aviation simulation research facility.

Motion: BTC is a Scam

Richard: [00:00:00] Welcome to another episode of the Blockchain Debate Podcast, where consensus is optional, but proof of thought is required. I'm your host, Richard Yan. Today's motion is: Bitcoin is a Scam.

[00:00:20] At the time of both recording and release of this episode, Bitcoin reached its all-time highs, respectively, and it just seems that every few weeks, a financial institution or a well-known investor from the traditional finance world is announcing their interest in the orange coin. Simultaneously, some skeptics continue to insist that this is all a mirage. There seems no better time to visit this fundamental topic on the boundary of our entire industry.

[00:00:49] Today's debaters include a computer science academic and a macro investor. I am especially appreciative for the former to appear on this show and be willing to engage. Outside perspectives can be very sobering at times for our industry. If you're into crypto and like to hear two sides of the story, be sure to also check out our previous episodes.

[00:01:10] We featured some of the best-known thinkers in the crypto space.

[00:01:13] If you would like to debate or want to nominate someone, please DM me @blockdebate on Twitter. Please note that nothing in our podcast should be construed as financial advice. I hope you enjoy listening to this debate. Let's dive right in!

[00:01:28] Welcome to the debate. Consensus optional, proof of thought required. I'm your host Richard Yan. Today's motion: BTC is a Scam.

[00:01:37] To my metaphorical left is Jorge Stolfi, arguing for the motion. He agrees that Bitcoin is a scam. To my metaphorical right is Lyn Alden, arguing against the motion. She disagrees that Bitcoin is a scam. Welcome, Jorge and Lyn!

[00:01:52] Jorge: Thanks Richard for the invitation, I'm happy to be here. Glad to meet you, Lyn.

[00:01:58] Lyn: [00:01:58] Yeah, thanks for having me as well. And nice to meet you too.

[00:02:01] Richard: [00:02:01] Great. So, here's a bio for the two debaters. Jorge Stolfi is a computer science professor at the State University of Campiness in Brazil. His specialty includes computer vision, image processing, function approximation methods, graph theory, computational geometry, and other fields. He is a vocal opponent of Bitcoin. In 2016, he submitted a letter to the SEC outlining what he perceives as similarities between Bitcoin and fraudulent, penny stocks and Ponzi schemes. Jorge received his Ph.D. in computer science from Stanford in 1988.  

[00:02:34] Lyn Alden runs an investment research service for both retail and institutional investors at Her focus is on fundamental investing with a global macro-overlay with a specialization in currency differentials and equity valuations.

[00:02:51] She also manages financial operation of an aviation simulation research facility. 

So, we normally have three rounds, opening statements, host questions, and audience questions. Currently, our Twitter poll shows that 62% agree with the motion and 27% disagree with the motion. After the release of this recording, we will also have a post-debate poll.  Between the two polls, the debater with a bigger change in percentage of votes in his or her favor wins the debate.

[00:03:18] So normally I would ask you to give your opening statement, but this time let's try something a little bit different. So, let me first enumerate the ways in which Bitcoin has been attacked as a scam. Because there are many. And then I will have Jorge go first. And you can add to this list, and then you can choose from this list to elaborate on attacks you consider to be the most fatal, or attacks that you think the common defense from Bitcoiners have been the weakest in your mind.

[00:03:48] And then Lyn, I will have you respond accordingly with your opening statement. So, let me just enumerate very quickly.  So, A: valuelessness. So, there's no intrinsic value for Bitcoin because there's no natural demand for using it. There’s no industrial utility for it.

[00:04:02] B: waste of energy. Huge amounts of electricity is necessary to sustain the network. This takes energy away from other productive uses and excessive production of electricity. Unduly harms the environment. C: lack of decentralization. Hash power concentration in country with total control over private sector, I'm referring to China, of course, and C1: miners can collude in forking to new chain and paralyze old chain with empty block attacks against the will of users.

[00:04:33] C2: this is also in regard to lack of decentralization, the 51% attack problem with collusion of miners. D: deficiency as MoE. So, slow finality, high transaction costs as a medium of exchange. E: deficiency as SoV store of value, too high of a volatility. F: deficiency, as you owe a UoA, unit of account, no adoption, and measuring value for goods and services.

[00:05:00] Okay. And G: false scarcity. Some claim that the 21 million cap is not real. The protocol may need to allow for more block rewards beyond the 21 million to secure the network because transaction fees won't be sufficient to sustain miner interest. This is G1, and then G2: Bitcoin can be easily forked. Finally, H: Bitcoin's price rise is attributable to fraudulent pumps from unbacked Tethers. So, that's a long list and this list will be shared with the listeners and has already been shared with debaters. So we can refer back to this during the debate. Okay. So now time for opening statement, Jorge, please go ahead and tell us what are the reasons are why you think Bitcoin's a scam look at the list that we sent you, what's missing from the list,

[00:05:44] what would you like to add to it, and which ones do you want to pick out to highlight?

[00:05:48] Jorge: [00:05:48] You have a very good list of reasons why people should not give a second thought about Bitcoin. Either as a medium of exchange, as a payment service, or as a investment instrument or whatever. But I think you’ve left out the main reason why Bitcoin is a scam, which is that it is a Ponzi scheme.

[00:06:12] It does not like that it has some features of a Ponzi scheme, or it resembles a Ponzi scheme. I think that it is literally a Ponzi scheme, because, number one: people invest in it because they expect high returns. Number two: that those high returns are confirmed by the people who wish to cash out and they receive those high returns.

[00:06:38] Number three: however there is no source of revenue that generates money that will go back to the investors and would provide for those profits. So, number four, the only source for those profits that are paid out there is new money that is invested by investors. [00:07:00] Then number five: the operators of the system, the miners, in this case, they take a big chunk of that new investment money for themselves and will never give it back.

[00:07:12] Okay. So those five properties, these five features, are the very definition of a Ponzi scheme. The last three, that is: no source of revenue that comes back to investors, that new investment money is used to pay back earlier investors and that operators take a big chunk of that new investment money—

[00:07:35] those three features, they are the reason why no sane person would want to invest in a Ponzi scheme; because those three features, they mean that investors as a whole, they lose money. They are guaranteed to lose money because they put money in, some of it goes to the operators and the rest is just shuffled among themselves.

[00:07:56] So they cannot ever take out more than what they put in. In fact, not, up to now and in the future, they will only be able to take out a lot less than what they put in. Okay. So that's the reason why I think that Bitcoin is a scam as an investment instrument.  And Bitcoin is also a scam as a technology; the blockchain technology is a technological scam.  But that's secondary, because that doesn't do as much harm to mankind as the investment scam does.

[00:08:32] Because, you can estimate how much money the operators are taking out. Each day they are taking out at least 20 million dollars per day. And since the thing started, they have taken out something like 15 billion dollars. That's very easy to estimate: just look at the price and how many coins they produced.

[00:08:55] And, well, there is the assumption that most of those coins, they have been sold, then they are not holding them; but that's reasonable considering that the competition between them is such that they have very small profit margins, even in the most cheap places, with cheapest electricity. So also, that's not as big as Madoff Ponzi yet because I think the estimate for the those numbers for Madoff at the peak where something like people had invested between 19 to 70 billion dollars, I think.  That were lost.

[00:09:30] Richard: [00:09:30] okay. Jorge. I think this might be a good logical breaking point for Lynn to jump in and address and then feel free to come back and point out other bullets that you want to highlight after. Lyn's response. Lyn, would you like to respond to this? What do you say to the accusation that BTC is a scam because it is a Ponzi scheme with ultimately not enough money being able to come out of the system because the early participants would have taken the money out of the system?

[00:09:58] Jorge: [00:09:58] No. Okay. That... the operators take out money from the system. That's why what the investors take out is less than what they put in.

[00:10:07] Lyn: [00:10:07] If you look at how a Ponzi scheme operates, they rely on secrecy and deliberate fraud. Whereas, we can look at some of the alternative protocols today and see, for example, that they do very large pre-mines for themselves and to enrich the founders. And then they launched the rest of the coins out in the market.

[00:10:24] And so they profit from that. It does have in many ways clear signs of being a Ponzi scheme. However, if you look at how Bitcoin was launched, Satoshi, whoever that was, whether it's a group or an individual, they put out a white paper ahead of time explaining how to do it even before they did it themselves.

[00:10:39] And then months later they launched the Bitcoin protocol with proof of no pre-mining. And so they, they had the Genesis block timestamped with the headline of that day. And, of course, it's open-source. It's transparent, it's verifiable. And then Satoshi operator, early miners operated enough mining capacity to maintain the network.

[00:11:00] Most of those coins were not spent. And so over time, we have this transparent independently verifiable public ledger that people are freely able to buy and sell. And then, of course, miners verify the transactions. And we have a variety of participants on the network securing it and ensuring that it continues to meet the consensus rules.

[00:11:21] And so over time, the bullish case for Bitcoin as it is growing into a store of value. And so, in the early phase, when it starts off as a very small market capitalization, it has a lot of upward potential to appreciate in price, should that network effect continue to grow.

[00:11:36] with more and more users and with just a variety of increase in price for the scarce number of units on the network. And over the long run, we've seen that play out for roughly 12 years now. And of course, there's no guarantee that will happen in the future.

[00:11:49] But so far it has a pretty long track record of doing so. And I got a chance to read Jorge's SEC letter that he sent. And that was sent back in 2016. And so for example, Bitcoin's gone up when 3000% in value since then in dollar terms more than 5000% in Brazilian currency terms.

[00:12:08] And one point that he brought up is that he point out that, he basically made the argument that Bitcoin is not a commodity. And instead compared it being similar to money in a bank account, however, he contrasted that by pointing out that he said that for cash and a bank account, he wrote that the government is morally obligated to preserve the purchase value of that cash to a reasonable degree. Which I think is interesting because if you look at the the historical value of fiat currencies over the long run without exception they, they've lost, virtually all of their value over any sufficient, long period of time.

[00:12:41] The best-case scenario is that they lose value slowly. The worst-case scenario is that they lose value quickly. And for example, this year alone, we saw that both the United States and Brazil increase their broad money supply by roughly 25% and while having interest rates that are below the inflation rates.

[00:12:56] So you're effectively guaranteed to lose purchasing power with your cash and therefore Bitcoin investors and other, just investors broadly, basically face a number of choices. We have cash as an option. We have equities as an option. We have gold. We have real estate. And we, of course now we have Bitcoin as well.

[00:13:13] And so when investors are making all these different comparisons for where they want to store value, the case for Bitcoin essentially is that you're investing into this network effect, it's accessible by anyone with an internet connection around the world. It's unconfiscate-able, it's verifiable, it's transparent.

[00:13:30] And whatever kind of pros and cons, all these different investments have, I think Bitcoin has proven itself to fit very well into this landscape. Since inception and then particularly this year.

[00:13:40] Richard: [00:13:40] Okay. Great. Lyn, actually, I think there's a point of that, that Jorge raised that was not directly addressed. And that's his concern. It sounds like in general with non-income generating assets, because his definition of a Ponzi scheme here is that there's money going into the system and ultimately the money is not being returned.

[00:14:02] And in this case, he's actually talking about a negative income-generating asset, right? He thinks that the money is going to the miners who take the money. And basically, that money is not coming back into the system. And he thinks that this is a problem. Are you able to tackle this particular problem directly?

[00:14:22] Lyn: [00:14:22] I think it's one of those things where if you define Ponzi scheme sufficiently, broadly, you conclude almost anything. By some metrics, then gold is a 5,000 year Ponzi scheme, right? Because it's this store of value. It basically stores up work and energy. It takes, you have to mine it, you have to verify it from time to time.

[00:14:40] And it's basically a store of value that's decentralized, there's no kind of authority over gold. It's basically this decentralized saving method. And by that extension, if you look at the modern banking system, if you were to have even a 10 or 15% of the participants take their cash out at once the entire system collapses, it's basically designed so that it can never be ended.

[00:14:59] And so sure if you define something as sufficiently broad, you could argue that almost anything is a Ponzi scheme. But for Bitcoin, in particular, I don't really view any different than gold in that sense where, there's some degree of energy usage and profit-making people within the network that is basically, mining it and verifying transactions and keeping the system going.

[00:15:19] But overall, it's proven to be a very strong store of value because even though there are small transaction costs, you're basically buying into a scarce asset and so in a world where fiat currencies are rapidly losing value, in a world where equities, of course, some of them have risks.

[00:15:36] They often trade at very high evaluations. People often rely on using things like real estate and equities as a store of value, which is, not in some ways, their original intent because they lack alternatives because cash is such a poor medium for storing long-term value that they're basically forced into other forms of

[00:15:53] wealth preservation. And so I think by that metric, I would not consider Bitcoin a scam, especially because it's fully transparent, it's open source. And it was basically compared to many other protocols. It was launched in one of the most fair ways possible.

[00:16:06] Richard: [00:16:06] Do you have retort to that, Jorge?

[00:16:07] Jorge: [00:16:09] Yup. Let's see. First of all, secrecy and centralization are not essential characteristics of Ponzi schemes. They... most Ponzi schemes that happened so far, they were based on a secret method of trading or whatever, but that's just because there was no way to do a decentralized Ponzi scheme.

[00:16:31] And so Bitcoin, I can grant you that, it is maybe the first decentralized Ponzi scheme. But those five features that I enumerated, they are the definition of a Ponzi scheme. And so other things that, um, well, that you say, people say, “everything is a Ponzi scheme”? That's not true because, say, for currencies, for instance, they fail already the first condition: no one expects to make profit by investing in dollars.

[00:17:00] There is… and second condition: there is no one that feeds that expectation (that doesn’t exist) by paying off big profits to people who have decided to cash out from dollars. So currencies are not Ponzi schemes. They are not meant for investing, so they should not be compared to Bitcoin as an investment, when you are discussing investment.

[00:17:22] The fact that Bitcoin’s value has, Bitcoin’s price has been going up since I wrote that letter—that is not impressive, because Madoff Ponzi had... its value went up for 25 years. It kept going up more than the stock market. That doesn't mean anything, whether it is a Ponzi scheme or not.

[00:17:45] And finally, but the most important thing, I don't see how one can call an investment instrument a store of value, if it is obvious and guaranteed that the money that investors um, get out of it will be billions of dollars less than what they put in. That's not a problem with gold,

[00:18:07] that's not a problem of course with the stock market or real estate or anything else. It is a feature of Ponzi schemes. Of lottery. There are other kinds of negative-sum games like lotteries and pyramid schemes, and multi-level marketing schemes that all have that same feature, that money that comes out is always only a fraction of the money that people put in;

[00:18:32] but they have very different mechanisms for reaching that goal, let's say.  The mechanism that... Bitcoin is a negative-sum game that works exactly like a classical Ponzi scheme, except that [instead of] one person with a secret method of trading there is this open system that is so obfuscated that investors simply cannot see that is Ponzi scheme.

[00:18:54] Richard: [00:18:56] So I want to focus on the negative cash flow part. Is there not an analogy in gold mining where the gold miners also need to get compensated for their action in digging up the gold? And then obviously there's also storage costs and so forth. We can talk the magnitude in terms of what that is between gold and Bitcoin, but it just seems like there's that component in gold already.

[00:19:23] Jorge: Should I answer? Well, gold is a complicated case, but basically: if there were no speculation, if people could invest in gold in the same way that they invest in soybeans or oil, namely, they buy from producers at a low price and then sell to consumers at the higher price that, that's a kind of speculation is actually a service to the market because it equalizes the cycles of production and consumption, and so on.

[00:20:00] And then there is a sort of revenue for that kind of speculation, which is the difference between the price that consumers pay and the price that producers receive. So that's the difference is money that goes to the speculators, to the commodity middleman, I don’t know how to call it. Now, of course, gold, on top of that,

[00:20:21] has a big speculation thing that's sort of like Bitcoin. But since it has a basic price, which is determined by that equilibrium between consumption and demand, it can… the speculative component of the price cannot go so far. I think now it... right now it is about five times the fundamental price, the market price of gold.

[00:20:44] So I think it is a very bad investment because the price is more likely to go down than up. But I don't think it qualifies as a Ponzi, really; because it's hard to make it fit with those five features that I enumerated.

[00:20:58] Lyn: [00:20:58] Actually, there are two points I can point out. So, I'll compare one to gold and one to cash. So, if you look at gold, this is a carry on the questions you were asking him, basically gold, you basically have to pay people to explore for it, mine it, then you have to pay refiners to refine it.

[00:21:13] And then of course from time to time, if you're in any way transporting it or moving it between counterparties, you're paying people to verify it. And sometimes even remake it. So, you melt it down and remake it, that's one of the most ultimate forms of verifying. And so that whole process has certain costs.

[00:21:30] And therefore, if you were to buy gold you’re basically buying it at a small markup because you’re buying minted bar or minted coin that’s been verified by someone and mined out of the ground. And then whenever you try to, exchange that for something else, you're again, going through some sort of costs you're paying transport costs, verifying costs, transaction costs, whatever the case may be.

[00:21:51] And therefore you're basically getting fewer ounces out of that system than you started with. And however, that contrasts with the fact, that compared to fiat currencies,

 [00:22:00] the production rate of gold is very low as a percentage of the existing gold. We can say that as a high stock to flow ratio and due to its scarcity therefore it tends to hold on to its value over the long run despite some of these frictional costs in the system.

[00:22:14] And again, if you look then at fiat currencies, for example, the reason people don't expect to get more out of them is that they have such a terrible track record of holding value. So over the long-term, it used to be that savings accounts would pay you an interest that exceeds the inflation rate generally at least in a functioning system. But over the long run, that's the tier rated. And now interest rates are so low that they don't even keep up with inflation.

[00:22:36] So you're basically guaranteeing loss in the system. And also banks often have transaction fees. When you send someone money with PayPal, especially if it's a business transaction, you're paying a percent fee your bank has, all sorts of fees.  There are frictional costs in that system as well.

[00:22:50] And so basically there's all the people that are working to keep that system operational are of course being compensated for their contribution to that system. And so Bitcoin, essentially, it's very similar to gold in that sense and that you're holding something that, sure, it does have these very small frictional costs, but that, over the long run you want to manage.

[00:23:08] That's why, for example, I wouldn't recommend trading Bitcoin frequently. But that's contrasted with the fact that if you look at fiat currency, which goes up in volume very quickly due to currency debasement while also having transactional fees, Bitcoin still has some of those same frictional costs, but because it's a scarce entity it tends to hold its value very well.

[00:23:29] Richard: [00:23:29] Yeah, so Lyn basically gave an answer to you and she referenced gold and cash in terms of the outflowing qualities in parallel to when you were referring to as a Ponzi scheme. So, we'd love to hear your response, Jorge.

[00:23:44] Jorge: [00:23:44] Yeah... first, people don't have an expectation of profits when investing in dollars, it's not because the banks have a bad track record and that...  By design national currencies lose value to some small percent, or something like that, rate every year; precisely to discourage people from investing in it.

[00:24:07] So please, let's not compare investing in Bitcoin with investing in dollars; because keeping your money in dollars is not “investing in dollars”, it is “not investing your dollars”. Okay?

[00:24:21] So it’s…  National occurrences are not Ponzi schemes; again, because they failed the very first criteria: people don't expect to get... don't invest in them because they expect to make a big profit in them. And then second, as for gold: it's true, right, both gold and Bitcoin have a cost of production;

[00:24:43] the difference is that, uh,  gold also has a source of money, which is: consumers will buy gold too for use in jewelry and in industry and other chemical products and so on. And then Bitcoin doesn't have that. So, there is money coming into gold from outside, but there is not money [...] that compensates the cost of producing the gold.

Should compensate at least. But Bitcoin doesn't have any money coming in that compensates the cost that goes out to the miners. Gold is complicated because of this huge speculative bubble that is built on top of the basic commodity, investment commodity nature of it. But... so I would rather not discuss gold.

[00:25:34] But I would say that people who invest in gold expecting to profit probably don't understand that much about it anyway.  Okay. So, I doubt that there are people, at this point, who are investing in gold because they expect to profit from it. So that also should disqualify gold as being a Ponzi.

[00:25:56] Richard: [00:25:56] Okay, Lyn, feel free to respond.

[00:25:58] Lyn: [00:25:58] I can do one more short one just to maybe streamline it a little bit. So it sounds like your argument, the intention is a key part of it. And so if we look at how the networks actually function, whether it's the fiat currency market or the gold market they function in a similar way to Bitcoin in the sense that there is a frictional cost for continuing the operation of the system.

[00:26:17] In terms of verifying transactions, in terms of creating new units of those systems. And so, in that functional sense, Bitcoin is not really that different. Now as for the argument that gold has the use case whereas bitcoin does not, Bitcoin’s primarily use case in that sense, other than as a store of value or a medium of exchange, essentially on central payments

[00:26:38] and people in markets where, you know, their transactions can easily cut off by the government or banking system Bitcoin represents basically a trustless peer-to-peer way to transmit value to someone. And because that network has grown pretty significantly over, you know, the past decade or so it's an increasingly trusted and verifiable system.

[00:26:57] It goes around any sort of central authority that could try to block that, other than of course closing the entire internet in the region. And basically, and then if you go back to the original points, okay, Bitcoin's actual functional difference, isn't really that different than the other ones, it comes down to intent.

[00:27:13] And so if you look at Bitcoins you know never promised investment returns, people recognize the technology for what it was that it started out as like an E-cash and the people over time decided to use it as a store value or as something that they thought would catch on and grow their wealth over the long-term.

[00:27:30] And so that can apply to anything. People use wine as a store of value or as a speculation. People use gold. People use all sorts of things that they think are worthwhile. And so, in some of those of course have characteristics that make them worthwhile. And so I think from a Bitcoin/gold perspective, the argument is that it basically operates in a similar way that gold or fiat currencies do, but of course, it has some unique features that make it in the bull case superior to them.

[00:27:55] And that even though returns were not promised within the original white paper itself people naturally flock to it as the hardest form of money as one of the superior for the value compared to some of the alternatives like equities, gold, the fiat currencies, which you said yourself are just not very good for the value.

[00:28:13] Richard: [00:28:13] Okay. Thank you, Lyn. So, in the interest of time, let's move on. Now, this question is for you, Jorge. You had mentioned on Twitter that you don't think the 21 million supply cap is actually fixed. And this is a big deal for Bitcoiners because scarcity is one very important reason why they choose to invest in this particular cryptocurrency.

[00:28:35] Now, can you elaborate for us how this number can be changed with just a soft fork, as you mentioned on one of your tweets?

[00:28:44] Jorge: [00:28:44] Changing it with a soft fork... you have two ways. One of them is the miners... if you have a cartel of 51% of the miners, they can set any fee policy that they want. And particularly they can use a, I think what's called the demurrage tax which is you... the amount of that you have to pay to transfer your Bitcoins is a function of how old they are.

[00:29:13] So if you have had ... if your Bitcoins have been sitting there for a year, then you pay 2% of those Bitcoins; have been sitting for two years, then you pay 4%. That has to be compounded tax and compounded on a block-by-block basis. So that when you're moving your coins around

[00:29:37] it doesn't change how much you pay. Yet. And what that does is that It essentially gives to the miners a revenue that is a fixed percentage of the total number of Bitcoins in existence—forever.

[00:29:52] Richard: [00:29:52] Sorry, just to clarify this, the demurrage tax you're speaking of, you're saying somehow the code can be changed so that any Bitcoin that sits on some address for a certain period of time, we'll need to remit some additional fee to the miners?

[00:30:06] Jorge: [00:30:06] Yeah. If they don't remit… I mean people... there would not have to be a general revision of all wallet apps out there. It's just that the miners say “by the way, now, if you want to move your coins you have to pay this much tax”. And then people would have to enter manually that amount of tax, or compute it, whatever.

[00:30:30] Richard: [00:30:30] Did you arrive at this conclusion by examining the code or looking through tech docs?

[00:30:38] Jorge: [00:30:38] No. That's a basic factor that has been known since the beginning. If you have a cartel with 51% of the hash power, they can impose any fee policy that they want. So, the miners, that cartel of miners, will have to change their code to verify automatically whether a transaction is paying that tax. And if it's not paying that tax, they throw it away.

[00:31:04] Richard: [00:31:04] You also mentioned in your tweet that it is possible to increase the block reward with the soft fork through an extension record trick like that use for SegWit. Are you able to basically draw a parallel between this and the SegWit soft fork?

[00:31:20] Jorge: [00:31:20] The technical description of that is a bit longer. I could send you the link to the Reddit article that describes it and all discussion about it, but basically, you create an extension record in which you put, you create those new coins in that extension record. So, people who have the old wallets and the old code, they will not just see that reward,

[00:31:46] they will think that everything is okay. And people who download a new wallet will see those coins and they will see no difference between those new coins on the extension record and the other coins in the normal records. So, they will start spending them and mixing them. And then people with old wallets will have to upgrade in order to receive payments from those new guys.

[00:32:11] That's basically the idea, but I don't think that we can discuss it, all the details here; since it is a technical thing.  I dunno, I think maybe it's better to do it in writing them.

[00:32:22] Richard: [00:32:22] I'm sure there's also an economic response to this as well, but Lyn, would you like to respond to this?

[00:32:28] Lyn: [00:32:28] Sure.  I primarily focused on the economic response there, of course, Bitcoin developers that can go into far more technical details than I could, so I would leave it to them. However, I think we saw in 2017 how some of these incentives play out. And Bitcoin works on basically game theory and incentive

[00:32:43] that, with the implicit view that the majority of participants on the network would not self-sabotage their own value. And Bitcoin's value relies on the scarcity of the units and on the decentralized node network and having sufficient hash rate to make 51% attacks very costly and difficult to achieve.

[00:33:02] And so one way to think of it is that mining is a very capital-intensive business. It takes a lot of electricity and energy and of course hardware to generate a block. And so if you risk having that block rejected by the consensus node network, that would be a terrible sunk cost.

[00:33:18] And we saw, for example, in 2017 when they were looking into to do the second SegWit, the vast majority of mining hash rate was in favor of going through that hard fork. Whereas the node network was in disagreement to it because it would have made it much harder to run a node.

[00:33:33] And so despite the fact that the miners, they had far more than 80% of the hash rate in favor as well as the major exchanges, that was still called off because the node network disagreed. And so rather than actors coming into self-sabotage themselves in the network, they did not change that.

[00:33:51] And for example, if you were to invest in a company you're analyzing the risk of that company, you could say, for example, as a tail risk, what if the majority of employees just decide to self-sabotage the company? So, they go again to throw in incentives, they go again to their paycheck.

[00:34:05] They go again to their stock options and they just try to bring down the company. So that, of course, that would be a tail risk to maybe consider. But of course, it'd be a very low probability risk. And so, I think it's important to monitor the health of the Bitcoin network. And so, for example, when I was looking at it in late 2017, I did not invest because I considered that there would be a somewhat heightened risk in the networks.

[00:34:26] of course, we had the big price run-up in 2017. We also had the hard fork between Bitcoin and Bitcoin Cash. But then I think it became significantly de-risked over the next two years as it was shown that Bitcoin cash lost value compared to Bitcoin as the Bitcoin network continued to grow, it's network effect.

[00:34:42] The ecosystem of surrounding companies around it, including hardware manufacturers and all sorts of layer two protocols continued to develop, and Bitcoin's in a really healthy state now where we've seen in practice what happens if you have shenanigans between the nodes and the miners and what we saw in 2017 was that 

[00:35:00] trying to go against the full node network is just it's unlikely to happen because if you're going to put a lot of capital into generating a block, you better be sure that it's accepted by the consensus network.

[00:35:10] Richard: So Lyn, I really enjoyed your example of employees, rebelling against the companies self-sabotaging their interests. But I think Jorge pointed out something a little bit different in talking about the block size war in 2017. It sounds like from his tweets, he believed that was not actually not what happened.

[00:35:29] It wasn't that the users were rebelling such that the miners advocating for the changes that they wanted eventually relented. It was a different story altogether, some kind of war between Blockstream and Bitmain, but I'm sure Jorge can tell the story better. Jorge, would you like to point out what might be missing?

[00:35:49] Jorge: Yeah, I think that what you, that your summary agrees with what I think. There was,... it is true that the miners, at the beginning, they wanted an increase in the block size, but at the very end of the block size war, there was basically only Bitmain, that had something like 25% of the total hash power, holding out.

[00:36:14] And the only reason why they were able to hold out, is that Blockstream had coded..., 

[00:36:21] Richard: [00:36:21] Can you elaborate on what you mean by holding out?

[00:36:24] Jorge: [00:36:24] Yeah that's where the point, ... Blockstream had programmed  SegWit so that it would only activate after 80% of the miners said in the blocks “I'm ready for SegWit”. And so, Bitmain was refusing to do that, and, since they had more than 20% of the hash rate, was there was the danger of SegWit not activating when it should.

[00:36:49] And so then a bunch of relay nodes who were loyal to Blockstream, they threatened to sabotage the work of Bitmain. Any blocks that Bitmain may not produce, they will be blocked, censored by those relay nodes.  But the threat never actually happened because Bitmain relented to, at the very last minute and probably because the other code that they wanted

[00:37:20] to see implemented was found to have two fatal bugs. I don't know if they were put in there, on purpose or not. But so, these threats by the relay nodes, that supposedly forced Bitmain to capitulate, never actually... was never actually carried out. If it did happen and it was successful then it would be a 0% attack. And then there would be a bunch of people who have no mining power at all, and they can force users to accept some change to the protocol that some developers decided. In that whole story, there was never… the users were never consulted. Holders were never consulted, just Blocks[tream]...

[00:38:11] It was a war between Blockstream and Bitmain, and with the help of those relay nodes that professed, announced that they were loyal to Blockstream. So...

[00:38:24] Richard: [00:38:24] So hold on. But the reason why the hard fork did not take place, then, in this case, it sounds like it's basically the miners changing their minds. Would you say that's the case?

[00:38:38] Jorge: [00:38:38] Yeah, but that happened for most miners, a majority of the miners agreed to SegWit rather than SegWit2x, which was the variant with larger block size. They agreed to SegWit before Bitmain and before the UASF movement.

[00:38:58] Richard: [00:38:58] Yeah. So, it sounds like eventually, the party proposing the hard fork is Bitmain with its SegWit2X, and that did not come through because they didn't have sufficient hash power.

[00:39:09] Jorge: [00:39:09] Yeah, that's the final game. But before that, most miners wanted then... It just started with most miners agreeing to an eight-megabyte block increase. But no SegWit. And then Blockstream refusing that, and fighting against that, until they reached the... Then there was the meeting in Hong Kong where Blockstream representatives and miners representatives agreed on, as, basically SegWit2X.

[00:39:38] But then Bl[ockstream] refused to comply with that. So between... the other miners went along with Blockstream and Bitmain just held out to the last minute.  That's my view of what happened.

[00:39:53] Richard: [00:39:53] And was the disagreement, one of economics, for example, SegWit, for example, Blockstream felt that the 2X hard fork would eventually sabotage the value. Maybe there are second-order effects from the feedback from the users and that's why they didn't budge.

[00:40:10] Jorge: [00:40:10] No, well, the code for Segwit2X was buggy.  It would have failed right away if it had been activated. Yeah, so we cannot, that, that's sort of ...

[00:40:25] Richard: [00:40:25] So my takeaway from that whole story is that there seems to not have been a pristine instance where the users have successfully rebelled against miners, AKA powers that be, to make drastic changes to the protocol that would basically do this economic value sabotage. So that's my takeaway, but that also does not contradict Lyn's point, that the users do not necessarily have resort to basically prevent the economic attack. Does that make sense, Lyn?

[00:41:02] Lyn: [00:41:02] Yeah, I think so.  I think the system played out in a healthy way, and of course, we can let a developer, historians go into, all of the detailed story behind that. But basically, there wasn't sufficient hash power to force a change. If a mere bug was the only thing then, the hash power that was in favor of it could have resubmitted it without a bug.

[00:41:20] We've had many years since then, they could've tried again. And, but you know, from what we saw, sufficient hash power to enact a change, especially because it would've, it would have, potentially self-sabotaged the network. The last thing they want to do is try to force the change that the node network doesn't view as consensus and risk disrupting their investment because miners are in general, are quite long on Bitcoin.

[00:41:42] And there wasn't sufficient, self-sabotage and risk-taking for the network to be disrupted.

[00:41:47] Richard: [00:41:47] Okay, great. So, let's move on to the next topic. This is still related to the 21 million supply capital. So, and this question's for you, Lyn, some people are concerned that the fees market would not be sufficient to incentivize miners to continue to hold up the security of the network in the future when block reward drops to near zero.

[00:42:08] So there might be, there might come a time when Bitcoin needs to hard fork and increase its supply cap and provide some kind of perpetual block rewards, similar to ethereum. And investors are rightly worried about that because immutability or not changing the protocol is held up as the holy grail of Bitcoin. What do you say to this kind of concern?

[00:42:35] Lyn: I think that any transition comes with the degree of risk, right? Because you're going from one phase to another.  The way it works now of course is you have the block reward, and you have transaction fees And so over time, that would shift more and more towards transaction fees. And so as long as the Bitcoin network remains healthy, as long as the market cap is sufficient that those transactions are sufficiently high value.

[00:42:56] That a transaction fee remains a small percentage of the network. Then it can be maintained with sufficient hash power to ensure its security. And, if you look at all the second layer systems that are being developed, of course, there's liquid, there's lightning. And so, they make it so that smaller transactions can be done off-chain leaving on-chain transactions for large value or high important transactions where paying a transaction fee is fine because it's still a small percentage of the settlement that you're trying to do. And in a similar way that, for example, we don't go around using wire transfers to pay for cups of coffee, right? So, we have these settlement layers that are expensive that have a pretty significant fee on them.

[00:43:37] We instead use second layer protocols to do most of our smaller transactions, whether it's credit cards or PayPal or whatever the case may be. And we leave those settlement layers for larger transactions. And so, Bitcoin's increasingly being developed towards that direction where, you know, the blocks that the transaction throughput for on-chain transactions is inherently limited.

[00:43:56] And over time that will be increasingly useful for large, important transactions, and smaller transactions can be off-chain. And so, in that model, the transaction fees can maintain a pretty small percentage of transaction volume while still being sufficient to provide security to the network.

[00:44:13] Richard: Did you want to say something, Jorge?

[00:44:14] Jorge: Yeah, that... this two-layer plan was the original plan that was the foundation of the creation of Blockstream, [in] 2015, 2014. That's what Blockstream was set up to do: change the original design by Satoshi into that two-layer design with a very limited capacity on the first layer.

[00:44:43] It was a complete disaster because, Blockstream never admitted it, but any network engineer would tell you that a congested network is a broken network.  So, by holding the block size fixed, by preventing the increase in block size, Blockstream essentially killed the only prospect of Bitcoin as being a payment system.

[00:45:09] It was a bad payment system before, now it is completely unusable as a payment system. And the second layer that was supposed to appear, the only candidate is the Lightning Network, which has been there for, I dunno, four years already, was always stuck in several fundamental problems with the concept

[00:45:32] that no one knows whether, how, and when they can be solved. This second layer is a mirage that's been used like part of the general obfuscation to get people, to convince people, to continue to invest in Bitcoin—nothing more.

[00:45:51] Richard: [00:45:51] So the way I see it is that at a time when block reward approaches zero, the way to continue to incentivize the miners is to have sufficient frequency of transactions. It doesn't matter what the transaction amount will be per transaction, but the frequency of transaction needs to be high in order to produce enough fees to take care of the miners. So, Lyn, this question's for you. Has anyone done a study or have you seen a study about how much the transactions, how frequent the transactions will need to be in order for the network to continue to be healthy for the miners to stay interested when the block reward drops?

[00:46:34] Lyn: [00:46:34] Yeah. So, it's actually, it's not about frequency, t's about basically the amount of value being transmitted per block. And Bitcoin has a pretty low limit for the number of transactions, uh, that can happen. But the amount of value that can be transacted, uh, with any given period of time has no upper cap because those transactions can be arbitrarily large.

[00:46:53] And so the key concern is making sure that the transaction fees don't become a problematic percentage of the amount of value being transmitted. And if you have a certain monetary value being transmitted over the course of a block, you wouldn't want that to go above say, 1 or 2% because that would be a very costly, high friction transaction.

[00:47:14] And so far, we have lightning network that already works, it’s still being developed, improved upon and people literally use it to transmit value. And so, it's already working, it's being developed. And the reason it's not even being more used is because so far, the transaction fees on a Bitcoin are still very low as a percentage.

[00:47:32] So there hasn't been sufficient need to further use those second layers as much. So, arguing that Bitcoin is inherently limited due to network congestion would be like arguing that wire transfers are inherently limited because it never congestion. But of course, that's because those don't scale well, and that's what other layers are for.

[00:47:49] So in the same sense that the banking system has multiple layers, Bitcoin can easily have multiple layers, and there are a lot of hard technical problems, but there are constantly being developed and worked on and there already are use cases of those.

[00:48:01] Jorge: [00:48:01] I disagree completely about the Lightning Network working. Because the goal of the Lightning Network is to build a payment system that scales better than a bare Bitcoin. It's not enough that it can transmit some payments—that, okay, okay, that, it does. But the question is, can it scale to a hundred million users making 10 payments per day or something like that?

[00:48:30] It can't. And, trust me, I know the problems, the technical problems are very hard, and there is absolutely no expect... no reason to believe that they can be solved. And no matter how long people work on them, they just stare at them, and they have no ideas about how to solve them. And that has been going on for years now.

[00:48:51] And also, I... really question, whether, for example, bank wires have limited capacity. They don't, banks can transmit as many bank wires, as many wires as they needed to. That's not what is limiting the use of bank wires; and that's not the reason why people use credit cards—[they] have other advantages,

[00:49:15] they're more convenient, whatever, etc., but capacity of the bank wire system, is certainly not the problem.

[00:49:23] Richard: [00:49:23] Okay. So, Lyn, if you don't have a response, then let's move on to the next question.

[00:49:28] Lyn: [00:49:28] Sure. I would just point out that, bank wires, they're primarily used for larger settlements. And so, their limitation is not that there's an inherent limitation. It's that they're expensive and timely to do. And people reserve those for more important transactions. And then they reserve the quicker payment methods for smaller transactions.

[00:49:45] And so in a similar way that Bitcoin is ideal for large permanent transactions that, they can't be reversed and that transmit a lot of value. That's what these other side chains are for. So liquid is already functioning, lightning already has use cases, and because the 

[00:50:00] transaction fees have not become a problem yet,

[00:50:01] we haven't seen a large spillover onto the lightning network yet. Because it hasn't been heavily required yet for many people's purposes, which is basically storing value in Bitcoin rather than trying to transact with it frequently.

[00:50:14] Jorge: That’s so, in the United States? That you have to pay, and they're expensive, bank wires? Here in Brazil, I pay nothing for a bank transfer and use them for paying purchase from the internet, outside, I don't know, $25, $50 or so.  Is that different in the United States?

[00:50:34 ] Lyn: There’s a couple of different systems. There are wire transfers that can be costly. But then, of course, there's electronic checks, which are far cheaper. And then there's things like PayPal, Venmo, credit cards that are pretty cheap.

[00:50:44] Jorge: No, but I'm saying well, transfers between banking accounts to other banks or to the same bank. They are free here.

[00:50:52] Richard: It is true. I think no coiner generally point to the fact that outside of America, a lot of bank transfers actually are quite cheap. So, in China, for example, I know with Wechat Pay and Alipay it's effectively free and instantaneous. And it sounds like the same thing in Brazil. And but in the US the wires do take hours to settle and they charge on both sides.

[00:51:16] Both banks will charge you. Yeah. So I suppose in that sense I actually saw the side with Jorge there in the sense that comparing Bitcoin with wire is not necessarily the right juxtaposition. Ultimately Bitcoin's not vying for becoming a payment system. I know that narrative has changed somewhat originally the white paper saying peer to peer payment system or electronic cash system.

[00:51:41] But now we've shifted to just a store of value, which I still think Bitcoiners would believe is still a very powerful narrative and sufficient reason for investing.

[00:51:50] Lyn: The underlying network is optimal for stored value and then additional layers can keep it as a payment network as well. And so, if you look at the original white paper, people often debate about what his intentions were because it was presented as E-cash, but then you also, for example, put a lot of space in the white paper for how to make operating a node as compressed as possible.

[00:52:10] And the attempts to basically grow the block size, which makes nodes much harder to run. And therefore, it makes the network less decentralized, less healthy, the core Bitcoin people would say that differs too much from Satoshi's original vision.

[00:52:23] And that's why a lot of people wanted to keep the block size small. Keep the nodes easy to run and then shift over those higher frequency transactions to other off-chain solutions.

[00:52:34] Richard: I think one thing noteworthy; I want to point out is Bitcoiners pay a lot of attention to the cannon, right? The way Satoshi or white paper has envisioned this will ultimately play out. And so, I think on the flip side, there's a lot of resistance to drastic changes that undermine the original vision, because that would mean that sufficient changes are being brought out with Bitcoin that it no longer resembles the original ideal.

[00:53:04] So just to play devil's advocate, Lyn, if let's say. For whatever reason, Bitcoin had to undergo hard fork in order to increase the supply, and they'll say there are legitimate reasons for it. Maybe there's not enough transactions or maybe there's quite a lot of demand for using the network, but for whatever reason, a second layer that was - isn’t playing out and so forth and the hard fork happens. What do you think will happen to the price of Bitcoin?

[00:53:30] Lyn: [00:53:30] So it would depend on the status of the network at that time, if there is sufficient consensus between the miners and the nodes that they wanted to say, implement a small change to the production rate of new Bitcoin, that theoretically could go well due to the consensus rules and the way that the

[00:53:45] Bitcoin culture's developed, It's unlikely that change would be accepted. One thing to point out is if you get to a point where in the current system that you're shifting more and more towards transaction fees, if Bitcoin is still a fairly small market cap with small in quotes, cause it's over 400 billion, but if it does remain a pretty small market cap that could become more of an issue if some of these side chains don't take off, but as Bitcoin continues to grow in market capitalization, as more users use it, the transaction volume per unit of time in terms of the amount of value being transmitted is pretty high and that can keep the transaction costs down. So I don't think that as long as developers and users continue to grow the network and to, reach a large enough state that, that will ever be necessary to maintain the security on the network while also keeping transmission fees pretty manageable.

[00:54:31] Jorge: We have a completely different view of what the culture of the Bitcoiners, Bitcoin community is. I would say that the vast majority of the Bitcoin investors, they don't really know, don't even care about the 21 million limit. They just see the price going up in the charts and they invest because they think that will go up even further.

[00:55:00] So I think that maybe, I dunno, 70% of the Bitcoiners don't think any deeper than that. And I have seen several developments that, in Bitcoin, that should have made a rational market community of investors just flee Bitcoin.  Including the creation of this layer of non-mining relay nodes between users and miners.

[00:55:30] That's something that was added to the system after Satoshi left. And that change—I could go on and why it was made, but it was made for the wrong reasons—but it basically broke completely the security model of Bitcoin. With those relay nodes, the system just doesn't work the way that Satoshi thought it would work, because... and the UASF threat was a demonstration

[00:56:00] that this layer of nodes creates the possibility of a 0% attack, not just a 51% attack. And then there was this takeover of Bitcoin by the Blockstream and the imposition of this re-design based on two layers, but the second layer still doesn't exist. And the intentional congestion of the first layer.  It's not just they think that the bigger blocks will be bad for miners.  That's just an excuse.

[00:56:33] The real motive is that Blockstream thought that there would be a thing called the “fee market” that would reward the miners by people paying higher prices to get faster service.  That was their, that was the motivation for keeping the block sizes small. And that didn't happen. The fee market didn't appear.

[00:56:55] It's just chaos. Anyway, so all those changes—that actually broke, made the original Bitcoin system worse and broke, basically broke it—they should have scared all the investors away. But they didn't. Investors didn't care at all about things that happened, technical or economical. in Bitcoin space, to the system. So I think that it's reading too much to think that, if the block size, if the block reward is increased, people will flee.  They haven't fled for things that are much worse than that.

[00:57:36] Richard: [00:57:36] Okay. Cyberpunk, technocrats aside, Bitcoin has now received attention from quite high profile thought leaders in traditional investment communities. So this question is for you, Jorge, the likes of Paul Tudor Jones, Stanley Druckenmiller they really don't have a whole lot of reason to change lanes and look into Bitcoin, which is dramatically different from the types of investments they've looked at for decades of investing. What do you think are their blind spots?

[00:58:09] Jorge: I don't pretend to understand what are their motivations, but first of all, there aren't that many of those yet. I always see the same three names or three or four names. You brought up.  Remember that guy from Overstock, I forgot his name. He was the Tudor Jones of today.

[00:58:30] Remember Fortress Investment that they bought in 2015, they bought, they invested several million dollars in Bitcoin. And then that was the only red line in the next quarterly report. So, they quickly sold the Bitcoins to Pantera, I think. Okay. So not impressed by those guys yet.

[00:58:52] Okay. And also, there were many savvy investors who invested in Madoff’s Ponzi and laughed when the critics said “This looks like it is a Ponzi”. And they said,”Come on”. You know, this lasted, I don't know, 20 years or so. So, for instance, also, I mean ... like Square. I think it is Jack Dorsey who was responsible for the investment of Square into Bitcoin; and Jack Dorsey, I think he's doing that for ideological reasons. Maybe mistaken, but I think he is still a cypherpunk at heart, or something like that. And Michael Saylor from MicroStrategy, they have lots of, … there are several scenarios that one can imagine why that particular purchase of $500 million dollars from.. MicroStrategy’s cash reserves could have been a very good deal for him personally, rather than for the company.

[01:00:01] I'm not yet impressed by those names moving into Bitcoin.  And then there may be people who just know that it a Ponzi, but if they think, “Hey, I know that there are 2 million people who are investing maybe $10 a day into the Ponzi, because they just don't understand that it is a Ponzi, that maybe I can take... that adds up to $20 million a day. So maybe I can make a good profit by taking money from those guys.”

[01:00:32] Richard: Okay. So, Lyn, from your vantage point, as someone helping individual and institutional investors, what are you seeing in terms of adoption from the thought leaders from the traditional investment community?

[01:00:44] Lyn: So I'm seeing increasingly that they're viewing it as something worthwhile to have as a small portfolio position to basically diversify some of their other investments. It could be for a variety of reasons. One, they're worried about having cash that's earning interest is below the inflation rate while the broad money supply goes up rapidly, it could be due to concerns about very high equity valuations

[01:01:03] so that they're concerned about the store of value of equities, just because, when they're highly valued, they often fail to store value as well as when they're more reasonably priced. Same thing with real estate, same thing with gold. And so many investors are finding Bitcoin.

[01:01:17] Of course this is a variety of different investors. Some of them, they might want to trade it. They might want to hold it for six months. Other ones want to hold it for several years. But a general theme is that a lot of them want to have it as a percentage of their portfolio. And if you go back to an earlier point with any investment, there's always a spectrum of information.

[01:01:32] There are high information investors and low information investors. And so for example, there, there are people investing in stocks that don't know how a stock split works or that. They couldn't tell you the price-earnings ratio of any of the companies they hold. They just, they look at the price and just, they're looking at investors on TikTok or whatever the case may be, and they're buying it, the Robinhood account.

[01:01:50] And so there's that type of investor. But then of course you have more professional investors that are looking at different valuation methods or they might be using sophisticated trading philosophies, whatever the case may be, that there are people that are examining that and making a more informed decision about the fundamentals of that investment.

[01:02:06] And I think the same is true for Bitcoin or pretty much any other investment where you have some people just buying it on Coinbase, whatever the case may be and just they hope the number goes up. Whereas you have other people that are examining the network effect, examining the fundamentals, examining the technology and in their view, making a decision about the health of that network, about the

[01:02:25] adoption potential of that network. And of course, with any investment, there's a risk but I would invite people to go look at some of the things that for example, lightning labs are doing, and some of the other developments on lightning network, I think the overall ecosystem continues to get better.

[01:02:38] I think the lending system's getting better. I think the hardware wallets are getting better. I think some of the multi-sig solutions are getting better, all the different sorts of security applications out there. And so, the surrounding ecosystem, as well as some of those secondary layers as well as just looking at the fundamentals of Bitcoin itself and analyzing that compared to gold or compared to equity as a store value, looking 

[01:03:00] at some of the use cases of how people are using it to say, you do international payments or, get around blocked payments as well as just having self-sovereignty over their access to the ledger. I think that there are a lot of investors that are viewing it from a pretty much fundamental lens.

[01:03:15] Richard: [01:03:15] Okay. So, I think what's on a lot of Bitcoiners’ mind is what kind of announcement that we'll be seeing from other institutional investors coming down the pipe. That would be very published information for this space, and judging by the price action around all-time high, this time around as opposed to the end of 2017

[01:03:33] it just seems that the pricing is in a narrower range and the amount of time that we're hovering around all-time high has been significantly longer. And I think there's just a lot of speculation that there is just a broad mandate of buying Bitcoin from institutional types that are now driving down the volatility.

[01:03:53] And obviously these institutions won't announce that they're buying Bitcoin until they have secretly amassed the stash and want to try to do more PR to pump up the price or they're required legally to disclose their holdings. So, do you think that the current price action very much reflects the involvement of institutions purchasing Bitcoin without announcing anything and therefore some kind of announcement will, a floodgate of announcements will be coming in later down the line?

[01:04:23] Lyn: It depends. If you look at big sources of buying, Grayscale is buying a very large amount of Bitcoin relative to how much is mined. We're also seeing a lot of purchase volume from CashApp and from PayPal. And then of course you have one-off things like a Microstrategy bought a very large amount of Bitcoin.

[01:04:39] We see for example Ark Invest is very bullish on Bitcoin. We see Bill Miller's bullish on Bitcoin we've seen of course Druckenmiller, Tudor Jones. They've come out and favor Bitcoin.

[01:04:49] So we're seeing somewhat of a proliferation. We're also seeing more activity in the options market on the major institutional options market. And so, there is a lot of professional money that's interested in it. But a lot of it also is Grayscale.

[01:05:01] And of course there are institutional investors in Grayscale and there are retail investors in Grayscale. So, I do think that by - in some metrics. The market is less driven by retail investors this year, a little bit more driven by a combination of retail investors and some of the more professional money.

[01:05:16] And one thing I'd point out is that a lot of people comparing it to 2017, but if you look at where it is and the supply halving cycle and where it is, and that kind of that four-year halving cycle, it goes through. It's more like early 2017. And of course, that's not to say that the price has to continue going parabolic, but it is to say that Bitcoin spent a lot of time in late 2016 and early 2017.

[01:05:34] It was spent a lot of that time at all-time highs and that's because it had a supply halving. Demand was still pretty strong and there are a lot of people are holding onto their investment. And so that drove the price up. And we're seeing a similar action now where you still see a pretty significant of coins that have been held for one year or more.

[01:05:51] Some of them were slowly selling. Many of them are not. We see a lot of demand from some of these bigger buying sources and we just had a halving event back in May. And so, I still think it, in many cases it's earlier in that, if we're gonna use 2017 as a comparison, I still think it's earlier in that time period.

[01:06:07] Richard:Okay. So, let's pivot a bit with our questions. Some skeptics say that Bitcoin's price increase this year is largely a result of pumps from unbacked Tethers. So obviously Tether has been known to have under collateralized their float and has even been accused of crypto price manipulation in court cases, at least in the past. What is your take on this? Starting with Lyn.  

[01:06:32] Lyn: When it comes to Tether, I think it's an issue where people hear something one time and then they go back to repeating it over and over again, even if new information comes out. And there was a study back in 2018 by Griffin and Shams that alleged a connection between Tether and Bitcoin price that had a pretty narrow sample period.

[01:06:49] There was a later study that year, by Wei, that basically showed the opposite that there was a lack of correlation between Bitcoin prices and Tether creation. And then there was a 2020 study by Viswanath-Natraj and Lyonsthat also showed a lack of correlation over a broader sample period.

[01:07:07] And so at best the literature is mixed to see if there's any sort of real correlation there. And actually, the evidence weighs more towards that there’s no correlation. People still go back to the earlier study and assert as though it's a fact that Tether is manipulating Bitcoin.

[01:07:23] And so I think that needs to be dispelled. Second of all, if you look at, just this year alone, who is buying Bitcoin? And if we look at, for example, Grayscale alone, pretty much purchased as many Bitcoins as were mined just on their own. And of course, they, that's for all of their holders of that particular asset, then we have Square’s Cashapp,

[01:07:42] they were also a completely massive buyer of Bitcoin relative to the new supply generated again for all of their clients. Then we had a Micro Strategy. So once a fairly small software company, they purchased something like 70,000 Bitcoin this year, which is in the ballpark of, 20 to 25% of all Bitcoins that were newly created this year.

[01:08:04] And then of course later in the year, we had PayPal come in and some of the other services for their clients. They were buying a massive amount of Bitcoin and these are verifiable. And those four buyers alone bought way more Bitcoin than were mined this year, which means that some of their Bitcoin had to come from existing holders.

[01:08:20] And like any commodity, when you have demand outpace supply, it drove the price up. And so, people can point to Tether and say, it's all Tether manipulation. But I think that really misses the forest for the trees, which is we can just see how many people are buying, how many people are selling,

[01:08:35] and we saw that like many previous bull runs in Bitcoin. The buyers just outweigh the sellers.

[01:08:41] Richard: [01:08:41] Okay, Jorge?     

[01:08:42] Jorge: [01:08:42] I don't have much to say about Tether because I don't know exactly the most important thing, which is how much of the USDT that they are creating is backed by real dollars. And we know that they have created in a very short time, about 21 billion USDT which in large part, they're being used to buy Bitcoin on Bitfinex which is apparently owned by the same people.

[01:09:15] That's certainly driving up the price of Bitcoin. But it remains to be seen how much of those USDT is really backed by dollars. There is a dollar input into the Bitcoin market through USDT or whether it is just USDT being created out of nothing. The worst-case theory is that they are creating those USDT out of nothing, buying Bitcoins in Bitfinex with them, and then selling Bitcoins for real dollars, on their exchanges.

[01:09:51] So that will be Bitcoin will then be a way for them to convert fake, unbacked USDT into real dollars. And if that is true, then they're probably making billions of dollars out of nothing through that scheme.  

[01:10:08] Richard: Okay. Great. So just to reel back a little bit, so we focus on the debate topic today. The reason why I was asking Lyn about the price action and institutional interest is because it just seems that for something to become a store of value, there are a few keywords to consider, right?

[01:10:26] So one is a social construct, one is a self-fulfilling prophecy, one is a network effect. It just seems that when there's enough stakeholders out there pointing at this thing and saying, this has value and this thing already has a tech layer built around it to provide the infrastructure for that social layer to blossom that would basically be the main story of how Bitcoin is going to develop. And when I think about this, I think about modern art, for example. They're modern art pieces that trade for extremely high value.

[01:11:01] There's obviously a scarcity of such objects. They hold a value quite well, but there's also a matter of them not being well understood by a lot of people. I feel that some art collectors or financiers might also have a genuine interest in modern art, an appreciation for the technique, but a lot of them don't.

[01:11:23] And when the public has a chance to invest in a fraction of modern art, a lot of them don't care about the art either and I suspect a lot of them will also jump in. I feel that there seems to be some kind of parallel here. It's almost as if. Investment managers suddenly discovered modern art as an asset class.

[01:11:40] And there's proven scarcity and it's easy to transport, easy to store, and easy to divide. They will also jump in as well.  What do you say to that line of thinking? 

[01:11:52] Jorge: (laughs) I don't think we can discuss arts as an investment properly because there are absolutely no economic principles that can be applied to it.

[01:12:02] It's like the salaries of baseball players. How can you do any economic analysis on those things? But, about Bitcoin, I think we can do a very clear and simple... In fact, I think the only number from the Bitcoin economy that has any meaning and that you can estimate with some accuracy is how much money the investors in Bitcoin are losing. They are losing at least $20 million dollars per day and they have lost so far $15 billion dollars, and that's only going to increase. So, I really don't see how anyone can call something a store of value if it is obvious and evident that the money that people will be able to take out of it is a lot less, it's billions of dollars, less than what they put in. So, I don't know what else I could say.

[01:12:58] Lyn: I'd like to respond to that. So, one thing I do is I, for example, I've looked at a lot of bank investments and so I've of course invested in banks over the years. And one thing I point out is that they extract hundreds of billions of dollars a year from the system that includes payment fees. That includes wealth management fees that include all sorts of fees for operating the fiat currency system. That's literally hundreds of billions of dollars extracted for banks and paid out to dividends to shareholders. And so, anyone participating in that system is also paying very large fees to basically operate in that system, whether it's wealth management or whether it's payments or whatever the case may be. In addition, if we look at the store value aspect, I agree that art is an awkward store value. But that's because investors don't have many ideal stores of value.

[01:13:45] And in a world where industries are below the inflation rate, the money supply is going up rapidly, investors increasingly turned to things like stocks, real estate, wine, precious metals, and fine art, anything that could be considered somewhat scarce to store long-term purchasing power.

[01:14:01] And so Bitcoin basically represents another way to do that. And I think a lot of the criticisms I've heard of Bitcoin today because can so easily be applied to the other systems. I don't see them as very compelling knockdowns of Bitcoin as a value proposition. So, as I've, granted before that there are of course friction costs for using the system. But then the question becomes, how do those frictional costs compare to many of those other forms of storing value?

[01:14:26] Jorge: Banks render a service, and that, the fees that they collect are usually because of that service, like the interest that they collect from loans. That's because loaning money, lending money is a service, it’s an important service that has value for people who perceive it. Bitcoin, ... one point that also should be mentioned is that, is that any value that Bitcoin could have as a carrier of value in the future—settlement layer for a bigger payment system that's promised to come 18 months from now for two years already—that service, the value of that service, is collected by the miners; not a penny of that goes back to investors.

[01:15:19]  If that was that such a value, generated by the payment system as a service, that will not come back to investors. And again, I refute the comparison with gold or with currencies, because one of the things that I told already.  Gold in particular has a source of income from outside the system, which is consumption. Bitcoin doesn't have that. It only has costs.

[01:15:50] Richard: Okay. I think this goes back to the earlier part of our discussion in the interest of time. I am going to move on and ask one audience question 

[01:16:00] and then have the two of you do concluding remarks.

[01:16:03] So to the audience question, this is from Nat Depaw on Twitter. The question is for Lyn. In a world where Bitcoin is a global currency, how do governments stimulate during tough times? Like during the global pandemics? So, if I may interpret this question a little bit, I think this person is posturing a post hyperbitcoinization world where Bitcoin has become the main currency used day-to-day by the citizenry. And then the problem is that you can't print the additional money to stimulate the economy in the same way FDR did during World War II and The Great Depression.

[01:16:38] So the question is what do governments do then?

[01:16:41] Lyn: So I would answer that in two parts. One is I focus on Bitcoin primarily as a store of value. And it basically can reach several trillion dollars, some market capitalization before we even begin talking about a potential hyper bit quantitation future, I think. And so that's, it's a good long-term way of thinking to look ahead and have these thought experiments ahead of time.

[01:16:59] But I think at that point, Bitcoin would have gone up tremendously in price. If you ever get to that reality. But going back to answering that question, if you look at how fiat currency systems stimulate now there are basically two methods. One is you can tax from the wealthy and then use those funds to pay for stimulus.

[01:17:17] Or you can print money. And therefore, indirectly you're taxing anyone that holds basically the currency or the bonds. And so rather than extracting them in the nominal sense, you're extracting their purchasing power because you're diluting, their holding within that currency or that bond system.

[01:17:32] And in a fiat currency system, you have that option. You can do one or the other. And we've seen both this year, for example, many countries in the world have printed money to throw at things. And then anyone holding that cash has basically lost purchasing power. Similarly, we've seen some countries like Argentina, for example, propose a wealth tax, which basically they'd extract capital from one part of the economy that they think is doing fine and try to put it somewhere else.

[01:17:54] So I, in theory, if you had a hard money system, if you did want, if the government did want to use some sort of stimulus, essentially, they have to do it in the honest way, which is they'd have to Basically tax one group and then spend that on funds that hopefully democratically elected leaders decide to use it for.

[01:18:10] Richard: Okay, thanks for that answer. Okay. So, let's move on to concluding remarks. So, this will be an opportunity for you to synthesize your thoughts and maybe mention a few things that you've picked up from the other side that you have not considered before - if any. And we will begin the concluding remarks with, Jorge?

[01:18:30] Jorge: [01:18:30] Okay. My position is still the same as in the beginning. Bitcoin has all those five characteristics that I listed that fit perfectly the definition of a Ponzi scheme. Particularly the fact that there is no revenue from outside the system that can come back to investors; that the investment of investment money is being used to pay profits to earlier investors; and that the operators of the system take out a very big chunk of that new investment money. So those three characteristics, make it a Ponzi, make it very obviously a stupid investment, because how can you... It destroys the discourse that it is a store of value.  Because how can one say that well, something that you put money in and then you take less money out, can be a store of value?

[01:19:27] So all the other things, I mean that people compare it to currencies. I think that we should not even discuss currencies here because they are not... national currencies are not made for investing. They are not an option for investing. They are, the governments don't want people to invest in currencies.

[01:19:49] Gold is a complicated matter. This is basically a commodity with a big, speculative bubble on top of it, but this still doesn't qualify as a Ponzi scheme. It would be a bit stretching to call it the Ponzi scheme. Whereas Bitcoin is totally a Ponzi scheme, by the definition. Okay. So there are all those other 12 items that you listed,

[01:20:13] all of them, I think are good research for not paying attention to Bitcoin. But the fact that this is a Ponzi scheme is the main problem with it.

[01:20:22] Richard: OK, thank you. And Lyn?

[01:20:25] Lyn: One point I, I certainly agree with Jorge on is that governments do everything in their power to make their currency rather unattractive as a store of value. And so, they de-incentivize people from storing value there because they want people to store value elsewhere.

[01:20:36] The world's basically in a condition where it's rather starved for stores of value. And so, it's got equity, it's got real estate, it's got precious metals, it's got art, whatever the case may be. And I would argue that Bitcoin operates in many ways like the fiat currency system, but better.

[01:20:51] And so for example, in the fiat currency system, it basically involves all these people trading these paper or digital dollars, or, whatever the currency we're discussing, 

[01:21:00] and those don't have any sort of intrinsic value on their own. Like you can't, you can't really do anything with a dollar,

[01:21:05] but it's our medium of exchange, our way of transmitting and storing value. And of course, there are institutions that are involved with verifying and processing those transactions, or, making money from storing those, whether in a bank account or wealth management, or whatever the case may be. Similarly in Bitcoin, you have this system of a scarce number of units and then you have minors that are verifying those transactions.

[01:21:27] They're putting capital in and they're collecting a fee for doing so, so far those tend to be pretty low transaction fees relative to the cost of the value that is transmitted. And so, I view it essentially the same way. Similarly, there are increasingly sophisticated custody solutions. So, for example, one of the things you've seen a rise with the past several years, we've seen Fidelity, for example, come out with an institutional-grade custody solution.

[01:21:53] We just saw an announcement from the largest bank in Singapore. That they're launching an exchange for digital assets for credit and institutional investors. and it also will come with an institutional-grade custody situation. And so, Bitcoin is in a similar place where there is this ecosystem built around it.

[01:22:10] Of course there are critical parts like miners, and then there are additional layers like custody solutions and other sorts of providers. And they extract value basically for providing value to the system, just like the fiat currency banking system, just like the gold mining network, just like the people that verify gold transactions or ship gold.

[01:22:28] And think that frictional cost is inherent with any system. But that, unlike the fiat currency system that is designed to devalue or unlike some of these other stores of value that are not optimal for storing value but are still being used as such for lack of other alternatives.

[01:22:42] Bitcoin is setting itself up, I think, as a very attractive long-term store value with an inbuilt payment system and it can be used globally it’s totally open-source, it's verifiable, and it’s transparent. And it was launched in such a way by Satoshi that there was no pre-mine. So, there was no direct Ponzi scheme, the white paper didn't promise any sort of high returns.

[01:23:03] In fact, he put the white paper out before he even began it. And so, I think it was launched in the fairest way possible. And I think it's a pretty interesting invention. And I think that the health of the network is great.

[01:23:14] Richard: [01:23:14] Great. Thank you both for coming to the debate today, Jorge and Lyn. How can our listeners find both of you, starting with Lyn?

[01:23:22] Lyn: [01:23:22] So I’m  at And so I analyze a variety of different investments.  And I'm also on Twitter @LynAldenContact. 

[01:23:29] Jorge: [01:23:29] I am on Twitter @JorgeStolfi. I am on Reddit, mostly, as JStolfi all together. Just okay. I am a professor at the University of Campinas so if you want to find me there I have a webpage there, I think just Google it and you would find it.

[01:23:50] Richard: Okay. Great. Thank you. So, listeners, we would love to hear from you and to have you join the debate via Twitter. Definitely vote in the post-debate poll. Also, feel free to join the conversation with your comments on Twitter. We look forward to seeing you in future episodes of The Blockchain Debate Podcast, consensus is optional, proof of thought required. Thank you, Lyn, and thank you, Jorge.

[01:24:10] Jorge: [01:24:10] Thank you very much for inviting me.

[01:24:11] Lyn: [01:24:11] Yeah, thanks for having me. And thank you, Jorge, for debating.

[01:24:14] Richard: Thanks again to Jorge and Lyn for coming on the show. I think you all know where I stand on the topic, but I tried my best to remain neutral as the host. As I mentioned, I like Lyn's example of how a Bitcoin investor only has to worry about miners self-sabotaging the network, as much as a stock investor, having to agonize over employees, trying to topple a portfolio company. Jorge insisted that Bitcoin is a Ponzi because of the value leaking nature with the miners' arrangement to follow up on this

[01:24:47] there's a lot of chatter on Twitter, around why BTC doesn't fit the literal definition of a Ponzi. So, Preston Byrne did an article and acknowledged this, but he categorized BTC as a fresh kind of cash grab scheme in its own little category. This is an article that I recommend, and we'll put it in the show notes.

[01:25:07] What was your takeaway from the debate? Don't forget to vote in our post-debate Twitter poll. This will be live for a few days after the release of this episode and feel free to say hi or post feedback for our show on Twitter. If you like the show, don't hesitate to give us five stars on iTunes or wherever you listen to this.

[01:25:25] And be sure to check out our other episodes with a variety of debate topics, Bitcoin store of value status, the legitimacy of smart contracts, DeFi, PoW vs PoS, and so on. Thanks for joining us on the debate today. I'm your host Richard Yan. And my Twitter is @gentso09. Our show's Twitter is @blockdebate. See you at our next debate.