Blocktime
Your go-to Bitcoin podcast hosted by Pierre Rochard, VP of Research at Riot. Tune in weekly for thought-provoking discussions, exclusive interviews, and a deep dive into the disruptive power of Bitcoin.
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Blocktime
Episode 37: Pierre on Bitcoin's Role in Transforming Finance and Sovereignty
Tune in for an exploration of Bitcoin’s potential to reshape the economic hierarchy, offering a beacon of stability in an era of rampant consumerism and inflation. Our conversation with Pierre brings to light how the core principles of transparency, accountability, and reliability, intrinsic to Bitcoin's DNA, are revolutionizing traditional financial systems.
The episode discusses Bitcoin's influence on El Salvador's economy and the strategic investments by visionaries like Michael Saylor. The global trends in Bitcoin accumulation and the mining industry's symbiotic relationship with the energy sector are dissected, setting the stage for Bitcoin's potential to become a ubiquitous unit of account. Join us for a journey that concludes with reflections on Bitcoin's decentralized nature and its enduring value proposition, inviting you to extend the conversation through social media. This episode is a treasure trove for those seeking to grasp the full spectrum of Bitcoin's impact on the future of money.
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Welcome to the Block Time podcast produced by Riot Platforms, where we take a deep dive into Bitcoin, bitcoin mining and the grid 101, but also looking at some current events from 2023 and 2024, so that we can kind of see what the trends have been, the narratives, as this year unfolds. So I want to first start with really what I think is the most important question around Bitcoin what problem does Bitcoin solve? What problem does Bitcoin solve? Bitcoin's often accused of not solving any problems, which I think is quite inaccurate. So Satoshi laid it out pretty well it's about trust and specifically about the distrust that a lot of people have around this central banking experiment that started in 1971, although it started earlier, but really in 1971, we went off the gold standard and now we're on this pure fiat monetary system, and there's a number of problems that have become apparent with this system over time. So first of all is wealth inequality, because in the fiat system, you have a set of folks bankers and politicians who have a monopoly on issuing currency. This actually redistributes wealth through inflation from savers to bankers and politicians, who then can go spend that on votes or lend it out, and that lending out also leads to another problem, which is the tremendous financial instability and misallocations of capital that we've seen under the fiat system fiat system For my generation. We remember 2008 and the housing bubble there. We also, more recently, can look at some of the banking issues with Silicon Valley Bank last year.
Speaker 1:And the other problem, though, is really around, as I mentioned, inflation. It's not just the wealth redistribution that's a problem there. It's also that it misaligns incentives, and so what inflation does is that it tells people go spend your money right, don't hold your money, go spend it right away before it loses value. And while some central planners might see that as beneficial for short-term stimulating the economy, ultimately it's not good for people, because it pushes people into living paycheck to paycheck and not having the financial resources to be able to withstand unexpected circumstances, for example, covid.
Speaker 1:When COVID hit, they had to print lots of money because people had been spending all their money, so they didn't have the savings needed to tide them over an unexpected event like a pandemic. So the other problem that Bitcoin solves is really relating to the precedent, or what happened before the fiat standard, which was the gold standard. In the gold standard, the most effective way to secure your gold was to hand it over to the US government and then they would put it into Fort Knox and defend it for you with nuclear weapons. Now that was effective until, obviously, the government decided to not redeem gold anymore and we were all stuck with this paper money. With Bitcoin, you have a tremendous amount of technology that allows you to have decentralized custody, so we'll talk about that.
Speaker 2:Pierre, quick question Do you think if the government had ever not taken that action to go off of the gold standard, we would be in the predicament that we are today? What would today look like if we were still on the gold standard?
Speaker 1:That's a great question. So I think that we would have a stronger dollar, so we would have had less inflation over the past decades, and so it's hard to tell the counterfactual. But I think that we would have a more stable financial system and that we would have more prosperity in the United States. But the gold standard itself had its flaws. So I don't want to portray the gold standard as being perfect. There are valid reasons for why we left it, and you know, perhaps one of those reasons which is really interesting in the context of Bitcoin is that a lot of gold gets mined abroad. Specifically, south Africa has the most economically available gold supply. Africa has the most economically available gold supply, and so under a gold standard, you still have inequality of issuance, that South Africans, by virtue of the Earth's geology, suddenly have more wealth than they otherwise would. And with Bitcoin, the issuance happening through energy is more widely distributed, because you can generate electricity through different technologies anywhere in the world, whereas you can't mine Bitcoin anywhere in the world, regardless of the technology you have, because there's just no gold in the crust in most places. Go dig in our backyard. We just find limestone around here in most places. Go dig in our backyard. We just find limestone around here. So I think that, from the US perspective, you know they can issue US dollars and so they certainly want that revenue going to you know themselves. So I think that the Bitcoin more evenly distributes the issuance process throughout the world than gold did.
Speaker 1:So let's take a look at how Bitcoin solves these problems. Mainly, you know the distrust, right, because, let's keep in mind, whether under a gold standard or under a fiat standard, you have to trust the people holding the gold, you have to trust the people issuing the dollars, and that trust has been violated repeatedly, especially if we look abroad other fiat currencies, hyperinflations, lots of instability due to the necessity of that trust. So how does Bitcoin solve the trust problem? I think it does it really effectively by having three core values Transparency, accountability and reliability. So, transparency Bitcoin's code is completely open source. You can go on the internet, to GitHub, lots of other places as well, and you can see the source code. Right, what is the actual protocol? What are the rules that are embedded in the system that anybody can run so you can review, audit and contribute to Bitcoin's development without needing to sign a nondisclosure agreement or having to work for a corporation, right, it's an open source project. It's not a business, a bank, it's not a government right Now.
Speaker 1:The other key part of the transparency is around the public ledger, the blockchain. So this too you can use the software, compile it and then download the entire history of Bitcoin's ledger, all of the transactions that have happened since Bitcoin launched in 2009, and verify those transactions to make sure that no new Bitcoin has been added to the ledger unexpectedly. There is an expected issuance of Bitcoin. We'll cover that, but we want to make sure that the rules are being followed and that there's not excess of additional units being added to the ledger.
Speaker 1:The second accountability is really about your self-sovereignty, meaning that you can operate and use Bitcoin in a completely self-contained manner from the comfort of your living room. Meaning that you can run the node software and the wallet software and you can hold the keys all on your computer, which it goes beyond being your own bank, because you're really your own central bank, because you have root access, you have total you know, admin access to the system from your perspective. And then, if everyone has that and there's hundreds of thousands of Bitcoin nodes out there now, if everyone has that and there's hundreds of thousands of Bitcoin nodes out there. Now, if everyone has that, then that means that you can't control how other people use Bitcoin. You can only control how you use Bitcoin and obviously you want to try to use it in a way that's compatible with how other people are using it. That way, you can transact and trade with them. But really, this highlights the decentralization aspect of Bitcoin. That enables you to hold the software accountable to your needs and to your vision for what the Bitcoin protocol should be. And it also gives rise to a famous line that you'll hear in the Bitcoin community not your keys, not your Bitcoin. So if you don't have the private keys, that means that you don't control those Bitcoin. Perhaps you have an IOU, right? Somebody has promised you Bitcoin and they're holding the keys. But this is a fundamental aspect of the system. Only the private keys and providing a digital signature from those private keys will allow you to unlock the Bitcoin at the monetary layer.
Speaker 1:Third is reliability. So all of this decentralization is incredibly valuable because it removes single points of failure. Valuable because it removes single points of failure. So if your node is not on and you've turned it off for whatever reason, that doesn't affect my node. My node continues to function, and so, if you multiply that out to the thousands of nodes that are out there, the Bitcoin network is operating 24-7, 365, zero downtime. It's really just one of the most reliable systems humanity has ever created. Arguably it's unprecedented in its reliability. It is a global system, so it's operating on every continent, and maybe one day somebody will bring a Bitcoin node up into space and we'll have some space-faring nodes, but already you can use, for example, elon Musk's Starlink satellites. You could sync a Bitcoin node by connecting to a satellite. The other aspect of reliability is really something that differentiates Bitcoin from all other cryptocurrencies, something that differentiates Bitcoin from all other cryptocurrencies, which is that Bitcoin has the most conservative development process that is focused on the security and the stability of the system.
Speaker 1:Other cryptocurrencies are interested in adding features, adding new use cases. They really want to be at the cutting edge of innovation, and there's some merit to that. But when it comes to a monetary system, there's a lot of interest in having a monetary system that is stable and reliable, and so Bitcoin's development process is strongly aligned with that and enables Bitcoin to even though it's the oldest cryptocurrency, right. Well, I'll add, it's the oldest successful cryptocurrency. There were other systems before Bitcoin that failed because they didn't have the key insights of Satoshi Nakamoto on how to make the system work. But when we look at the amount of competition there is today, there's thousands of tokens that are vying to increase their market share and despite that, bitcoin continues to be number one because it has so many really compelling properties for the users. For the users, this has led Bitcoin to grow astronomically.
Speaker 1:So, over the 14 years of well, now 15 years of existence, bitcoin has grown from having a market cap value of zero. Right At the beginning of January 2009, when Satoshi kicked off the system, btc was worth zero dollars. So all the BTC that were on the ledger which was not very many because it started at zero and then Satoshi started adding 50 Bitcoin at a time, those were worth nothing. Today, all of the Bitcoin on the ledger are now worth upwards of a trillion dollars. This is just a phenomenal success story, and this is why I think Bitcoin is not only it's a macro asset, because it's a trillion dollars, it's also what I call a growth currency. So it is increasing in adoption over time. It started at 0% adoption. Today I'd say maybe it's at 0.1% adoption. We're still in very early days, but nevertheless it has accrued tremendous value.
Speaker 1:And Bitcoin isn't just growing as a store of value, it's also growing as a medium of exchange. So when we look at the use of the Bitcoin blockchain, we see that while Bitcoin market cap is a trillion dollars, the projected settlement value for 2024 is almost 18 trillion dollars. You can think of this like the Bitcoin system's GDP. It's not a perfect measure of activity right, there's some activity in there. We might say it's duplicative or it's spam or whatever you want to call it, but nevertheless, the reality is that there is $18 trillion worth of Bitcoin that was unlocked and locked back up in smart contracts using Bitcoin transactions throughout 2024. The the amount of activity on Bitcoin really exceeds anyone's expectations at this point and contributes to kind of upgrading it from a science experiment to an actual global monetary system that is competing with other currencies.
Speaker 1:Now this growth has been very volatile.
Speaker 1:It's not a straight line up. So over the past 15 years we've had several what we call halving cycles. So what is a halving cycle? A halving cycle is looking at Bitcoin's monetary policy. So 50 Bitcoin were getting added every 10 minutes at the beginning and then that got cut in half after four years. So in 2012, it went from 50 to 25. In 2016, it went from 25 to 12 and a half. In 2020, it went to 6.25. And in one month it'll be at 3.125 Bitcoin per every 10 minutes. So these halving cycles are hard-coded into Bitcoin's node software. So when you're verifying Bitcoin's history, you're verifying that these halving cycles, or that these halvings, are being respected. Now, an interesting phenomenon has been that these supply shocks that cut issuance in half seem to be causing some price volatility and it seems like they have kicked off the bull markets. So when we look at the 2012 supply shock, arguably it caused the 2013 bull market, which saw Bitcoin skyrocket to almost $1,200. Seems quaint. Today, now $1,200 is like we would consider that to be a bear market.
Speaker 2:I wish I'd put $1,200 in at that time. Yes, yes Me too.
Speaker 1:Yes, yes, me too. I think I did pick up, you know, fractions of a Bitcoin at that point, but I was busy paying off my student loan debt, so I couldn't buy a whole Bitcoin. And that's an important thing to know, too, is that you can buy 100 millionth of a Bitcoin right? That's one Satoshi, so Bitcoin's highly divisible. You can buy Bitcoin $th of a Bitcoin that's one Satoshi, so Bitcoin's highly divisible. You can buy Bitcoin $5 at a time.
Speaker 1:Now, the 2016 halving perhaps kicked off the 2017 bull market, where we saw Bitcoin skyrocket to almost $20,000. For Bitcoin Again. Today, that seems like a bear market, but we were euphoric at the time. Now, the 2020 halving did kick off a bull market, but this is a really interesting change that we saw in this previous cycle, which is that the all-time high for this cycle was actually very recent. It was this month, in March, due to the ETFs, where we saw Bitcoin go to $73,000, which was greater than the $69,000 that we saw in 2021. So perhaps the halvings are having less and less of an impact relative to other market phenomena, like the ETF launch, for example. So we'll see. With this having perhaps it'll kick off an even greater bull market, or maybe the timings will be different and the cycles will be different. So while history repeats itself, it doesn't always repeat itself. Sometimes it just rhymes.
Speaker 1:Now, what happened in 2023 that really set us up for this tremendous recovery and bull market after kind of scraping the bottom at $17,000. I see three tailwinds that happened last year. The first is really about Bitcoin's competitor. I consider the US dollar to be Bitcoin's number one competitor, and so I think US dollar monetary policy is something to watch closely, because you know, if we're talking about dollars per Bitcoin, half of that equation is dollars. The other half is Bitcoin. So let's talk about dollars for a second.
Speaker 1:With COVID, we saw a tremendous amount of money printing of dollars. This did cause inflation. Now, the other thing it caused was a change in expectations about future monetary policy. The expectation shifted to that monetary policy would tighten in order to rein in inflation. The interest rates would increase, and so that actually put a damper on demand for Bitcoin. Despite the marketing around Bitcoin being an inflation hedge, we have to keep in mind that people don't just look at the past and present. They also look at the future of what's going to happen, and if there's inflation, well, that means that interest rates are going to rise and that's going to make the dollar more competitive versus Bitcoin In 2023, we saw that reverse, meaning that expectations about future interest rates shifted from tightening an increase in rates to loosening or, at the very least, going sideways. And so, with that shift in expectations, that contributed to tailwinds for Bitcoin or Bitcoin's exchange rate with the dollar.
Speaker 1:The other big change that happened and now it's a full year ago, in March of 23, was the SVB Silicon Valley Bank crisis, where we saw that the increase in interest rates had created a big hole in the balance sheet of banks. Because banks had loaded up on treasuries right bonds, they were told it was risk-free. Go buy lots of treasuries. And when they put these on their balance sheet, they put them on at a low interest rate. When interest rates increase, that mechanically decreases the value of a bond that is a fixed rate instrument, and so, with this hole in their balance sheet, they were insolvent.
Speaker 1:And when you have an insolvent bank, all you need is just one little match to light a big fire. Because we saw a bank run. People were trying to pull billions of dollars out of Silicon Valley Bank in a very short amount of time because they didn't want to be the last ones out, because the last ones out were not going to get their money, because there was not enough money, because the value of the bonds had gone down. So naturally what happens in the fiat system when there's a run on the bank is that it goes into defensive mode. And by defensive mode what I mean is lots of money printing, because they don't want this to cause a contagion effect where you see your friend at SVB panicking and pulling all their dollars out and your bank might be safe and sound. But Relatively.
Speaker 1:Right relatively to Silicon Valley Bank. But you still feel that panic, you still feel those animal spirits and you go pull your money out of your bank and suddenly you have a cascading snowball of people pulling all their money out of the banking system and the banking system collapsing right. So regulators want to avoid this. Bankers want to avoid this at all costs. So what did they do? They backstopped the SVB deposits. They said don't worry about it, we'll make everyone whole, we'll print lots of money, we'll lend out lots of money. But it got people thinking maybe Bitcoin has some utility of a problem beyond just the speculative aspect of its price. It solves the problem of being able to be your own bank, of self-custodying your own monetary asset, so that you don't have to trust SVB, you don't have to trust the FDIC or the Federal Reserve to bail out your bank. Instead, you can sleep safe and sound knowing that your Bitcoin are on your private keys and you're running your own Bitcoin node and the system is stable. Another interesting catalyst that we saw developed in 2023 was that the litigation around JBTC, which was a quasi ETF. It was an almost ETF that just happened to have very high fees and also to have a structure that was very Hotel California-ish, that is, that Bitcoin could go into GBTC but Bitcoin could not come out of GBTC, and that asymmetry caused a lot of volatility with what's called the discount or the premium between the value of GBTC and the value of the underlying Bitcoin. So before 2021, it was a premium, meaning that GBTC was trading at a higher price than Bitcoin, and so people would buy Bitcoin and then put it into GBTC and then sell GBTC, and that caused GBTC to grow tremendously. But in the bear market, it flipped to do a discount because people were trying to sell their GBTC. It flipped to do a discount because people were trying to sell their GBTC, but there was no way for a redemption process to get the Bitcoin out, and so it traded almost at a 50% discount, meaning that if Bitcoin was at $17,000, gbtc was equivalently at let's say, $9,000. Gbtc was equivalently at, let's say, $9,000. That caused a lot of pain for people who were using GBTC as collateral for loans, because then, when they wanted to, or as the value of the collateral decreased, the lenders started getting squeamish and wanting their money back squeamish and wanting their money back and it just caused a lot of trouble in this financial uh financialized layer of uh the ecosystem.
Speaker 1:So, thankfully, um well, through litigation, gbtc had to unfortunately, they had to sue the SEC, uh to convert JBTC into a proper ETF that could be redeemed for Bitcoin. And you know, this really highlights a problem here, which is that the SEC's refusal to approve an ETF caused a tremendous amount of investor damage, and a lot of investor harm came due to the SEC's intransigence, which was really driven by politics rather than policy, and that's really unfortunate. But ultimately, the SEC lost in federal court, and so that enabled GBTC to convert into a proper ETF and recover from that negative 50% discount fully to a proper 0% discount or premium. So now GPTC really tracks the price of Bitcoin minus the fees that they take, minus the fees that they take, and that was really positive for Bitcoin itself, because that meant that all of the players who were really under a tremendous amount of pressure were now in a position to be able to continue their financial activities and contribute to the ecosystem.
Speaker 1:Okay, so let's now hop into 2024, where not only did GBTC unlock a lot of value by getting rid of its discount, it also paved the way for lots of new ETFs to get issued, and the most successful ETF of those has been BlackRock's ETF iBit. Blackrock is arguably the most influential financial institution in the world. They have a tremendous amount of assets under management. Their leader, larry Fink, is seen as a leader in the industry and a spokesperson for the industry as well. He has made a couple of points. One, he has done a great job of doing marketing for Bitcoin. He goes on TV and he talks about how Bitcoin is digital gold, how investors should add Bitcoin to their portfolio.
Speaker 1:Now, obviously through iBit. From his perspective, but from my perspective, you know you should be putting it on your cold card, on your own private keys, but nevertheless, he's doing a great job of drumming up support for Bitcoin. And the other thing he pointed out was that Bitcoin the Bitcoin ETF has been the most successful ETF launch in the history of ETFs. The amount of pent-up demand there was for this product was just totally unprecedented. So, as we see, the ETF sales and marketing continue to kick into high gear.
Speaker 1:I think that's going to be a huge positive catalyst for Bitcoin in 24. We've only seen the tip of the iceberg Below the sea. What's going to happen is that the ETFs are going to get added to more and more investment platforms to more and more funds, to even other ETFs, so what you'll see is composite ETFs, right, so you might have a technology ETF that starts adding a Bitcoin ETF to its holdings, and so it's going to have a very multiplicative effect in terms of how many people are holding Bitcoin and through many different vehicles. You're even starting to hear about public pension funds saying that they need to explore how do we add Bitcoin to our portfolio through these ETF products so that we can meet the needs of our pensioners.
Speaker 2:Quick question, Pierre. I kind of already have an idea of what the answer would be to this, or at least I have an obvious answer to this. But you mentioned Larry Fink going on and evangelizing Bitcoin. What is the difference between a crypto token picking up a celebrity and having them shill their token versus Larry Fink talking about Bitcoin?
Speaker 1:Yeah, that's a great question. So I think we saw Kim Kardashian shilling a token last cycle, tom Brady as well. So I think the big difference is that Larry Fink is somebody who is not a Hollywood celebrity, but he's a Wall Street celebrity, and so in terms of a monetary asset, that's whose endorsement you want to have. If we were talking about fashion and perfumes and Larry Fink came out and said, hey, I've got a new line of dresses, I think that he'd be laughed out of the room, and so you know, it's kind of people, to put it obnoxiously staying in their own lane, right, and so this is very much in larry fink's lane of looking at, um, what, what makes sense to invest in, uh, whereas other celebrities, um, perhaps we should take it with a grain of salt when they tell us to buy a token that is number 7332 on a coin market cap yeah, I guess guess.
Speaker 2:My obvious answer was credibility, obviously.
Speaker 1:Larry.
Speaker 2:Fink, like you said, has credibility in the financial marketplace. But the other answer that I had in my head was that there isn't any direct incentive for Larry Fink to be talking about Bitcoin, as compared to some other Hollywood celebrity talking about a crypto that inevitably will benefit them majority if they own a lot of it.
Speaker 1:That's right, and what we've seen with celebrity endorsements quite often is that, as you said, they'll get granted a significant allocation of the token for free, essentially because the token is getting created out of thin air. Nobody gave Larry Fink lots of Bitcoin for free, essentially because the token's getting created out of thin air. Nobody gave Larry Fink lots of Bitcoin for free. Right, he's had to attract those Bitcoin, and the other part of it, too, I think is really important is that the celebrities they're going for the pump and dump right, so they're waiting for it to pump and then they dump all their tokens onto retail investors. Larry Fink is looking at it from a multigenerational, long term holder perspective. Blackrock doesn't do pump and dumps, blackrock does multi decade, even centuries outlook of OK, how can we be good stewards of capital of okay, how can we be good stewards of capital? And he's not going to be, and his clients are not going to be advised to be trading in and out of Bitcoin willy-nilly. So something that we've seen with the ETF adoption is a rotation out of GBTC into other products like iBit, mainly because of the lower fees, but also because of the credibility right that BlackRock just has a greater brand name than Grayscale does, the sponsor of GBTC. Another big trend that I think is going to continue, and has continued so far in 2024 is accumulation from very public whales. So Michael Saylor has been accumulating Bitcoin, both on his personal account and also through his public company, microstrategy. They've been buying. I think they now have more than 1% of the total Bitcoin supply. So every opportunity Mr Saylor gets, he smashes that buy button. And we see similarly in El Salvador, their president Bukele. He's been accumulating Bitcoin for the people of El Salvador. He has now more than $400 million worth of Bitcoin in his treasury, which is just. It's astonishing for this Latin American country to have $400 million of Bitcoin. It really is a tremendous blessing for their people and that trend is going to continue and really accelerate because El Salvador has seen a huge increase in their GDP growth by attracting more capital because of not just their crime reduction but also their forward thinking tax policies. He has passed big tax breaks for people who invest in cutting edge technology in El Salvador who invest in cutting edge technology in El Salvador. Now, the other part of this is the tremendous conviction these two have on Bitcoin. So, similarly to Larry Fink, we see them on TV talking about and on Twitter, obviously, talking about why they think Bitcoin is a good idea and why they're putting their money where their mouth is.
Speaker 1:The third big catalyst is, of course, the halving. It's happening next month or, if you're listening to this late, maybe it's already happened and, as I mentioned, this does create a bit of a supply shock, right that we're cutting in half. How much Bitcoin gets added to the ledger every 10 minutes? The other aspect of this that I want to point out here is that today we're at 93.6% of the supply is on the ledger. It's been issued, so 19.7 million of the 21 million Bitcoin have been added to the ledger.
Speaker 1:And over the next 12 years, right. So looking at it to, you know, the next three cycles, in the next three cycles, by the end of the next three cycles, we're going to be at 99% point something of the supply on the ledger, and it just goes to show that Bitcoin scarcity is not a theoretical thing about. In the future, you know, there will be a limited supply of Bitcoin. It's really in the here and now that we're now down to the last gold rush period, that we could say these are the last pieces of Bitcoin that are going to get issued by the miners. Now, it's important to point out, mining will continue because of transaction fees right, and we're going to talk about that, but I just want to highlight here that Bitcoin scarcity is continuing to increase and that's going to be a tailwind for Bitcoin's value as well its purchasing power.
Speaker 1:Last little bit of data point here Bitcoin being a global phenomenon, that is, that Bitcoin adoption isn't just happening in the United States, it's not just on Wall Street, it's not just in El Salvador, it is global and decentralized. So, number one here, ranked by Chainalysis and they're not just looking at Bitcoin here, they're looking at the wider cryptocurrency ecosystem when is this growing the most? Number one is India, number two is Nigeria, number three Vietnam, number four the United States and number five Ukraine. So we see here that this is every continent on the world is represented, except maybe Antarctica, I guess.
Speaker 2:I didn't hear any European countries in that. I mean Ukraine is an Asian technically.
Speaker 1:Well, we're going to get into a geographic debate here about Ukraine.
Speaker 1:Yes, so you're right, I cut it off. If I had included the top 10, I think we'd have some Europeans in there. I will say, though, that I think that Europe needs to start pulling its weight a little more, and that they've been laggards here, and I think part of that is perhaps due to a lack of research on their part. I think that they really need to dig into Bitcoin a little more to see the advantages and the problems it solves. That we started today's episode with, and also, you know, I also wish we had an African country on the top five as well.
Speaker 1:We're hearing about a lot of Bitcoin mining growth in Africa, because they have some very remote hydro dams that are very underutilized, and so they'll build a hydro dam that is providing 10 times more electricity than the village currently needs Now. In the future, as they grow, they'll need more, but currently, you know, it's overproducing, and that means that the cost of that hydro dam has to be amortized over that small amount of demand. So, with Bitcoin mining now, you can spread the cost over a greater pool of demand, and that lowers it for everyone, and so I think that there's a huge development story here happening in Africa. That is a big trend that we'll see continue to grow.
Speaker 2:Maybe I misheard you, was Nigeria not in that top five?
Speaker 1:Oh yeah, it is Nigeria is in Africa folks. Oh wow, not in that top five. Oh yeah, it is Nigeria is in Africa folks. Oh wow. So congratulations to all the entrepreneurs in Nigeria making Bitcoin adoption happening.
Speaker 2:But I have heard of that hydroelectric stranded generation and it's a really great use case scenario for Bitcoin miners.
Speaker 1:That's right, and correct me if I'm wrong. South Africa, or, sorry, south America, is not represented here. No, but we did talk about El Salvador.
Speaker 2:So I figured they'd be close to that top five.
Speaker 1:There's also a tremendous amount of Bitcoin mining activity that is moving to Argentina because of their latest election results that kind of opened the country up. They have a lot of energy resources there, and there's a huge hydro dam in Paraguay that we're seeing lots of Bitcoin miners flocking to because it, too, is overproducing electricity relative to local demand Another stranded energy asset. So, yeah, we'll look forward to seeing that continue to grow globally. Okay, so let's talk about what the mining industry's revenue looks like. So Bitcoin mining has two purposes. You know we talked about the problems that Bitcoin solves. Now let's talk about the problems that Bitcoin mining solves. The first one is about preventing seniorage. Seniorage is a technical concept from monetary economics and it refers to the profits the monopoly profits that the issuer receives if they're able to maintain their monopoly right. So typically, the monopoly for a fiat currency is maintained through anti-counterfeiting laws. So if you try to compete with the mint by buying an Epson printer and printing $100 bills, you'll go to jail because that is violating anti-counterfeiting laws. Now that's great for the monopolist. That means that they get to print a dollar bill that costs half a penny and then you know its value is $100. So they've got a 99.99% profit margin on their issuance, because then they have an unfair advantage over everyone else. And Bitcoin is the metaphor I've been using lately because it connects well with the energy industry is that the traditional fiat system. You can think of it kind of like how the old world of electricity functioned, where you had this vertically integrated monopoly, a monopoly utility that was regulated, but ultimately they were not competitive and they didn't deliver the best quality and at the lowest cost. And so what Bitcoin does is that it creates competition in the issuance such that you don't have any kind of excessive profit margins from having a monopoly on issuance, and that allows you to have a much more even distribution of the Bitcoin than you have of the fiat. Now the other problem that Bitcoin mining solves is about transaction finality, so we don't want anyone spending the same Bitcoin twice, right, the double spending problem. In the traditional fiat system they solve this by having centralized clocks, but if you have a centralized clock that is finalizing transactions, that means that they can cheat, so they can actually add transactions that shouldn't be there, and they can also reorder transactions to perhaps manipulate the ledger. Bitcoin mining is a decentralized clock, so that allows us to order transactions in a way that not any one miner can control, because ultimately, over time, all the transactions that are fee paying and are valid will be able to find a miner to include their transaction in their block. Now this actually ties into what the top line mining revenue is. So the first problem of issuance being solved is what's called the subsidy sometimes, but I don't really like that term and then that gets added to the transaction fees that are paying for finalizing, for providing transaction finality, and that's the total Bitcoin revenue. Now we multiply that by the exchange rate to get the dollar revenue right. What's the purchasing power of this? And the third equation that's really important is looking at how much market share a miner has. You have to look at not only that miner's hash rate, but you also have to look at the global hash rate, how much Bitcoin mining is happening throughout the world, and that'll give you an idea of what percentage of the pie any given miner has. So what are driving these factors?
Speaker 1:Now, the Bitcoin dollar exchange rate. As I mentioned, you know, half of that is the supply of new Bitcoin, the supply of new dollars as well, and then the other half of it is really on the demand side. How much demand is there for a store of value? And with ETFs launching, we see that the demand is increasing. As holding your own keys and using multi-sig gets easier, that's also a source of new demand for a store of value.
Speaker 1:The second is on the transaction fees what is driving the transaction fees? Second is on the transaction fees what is driving the transaction fees? So Bitcoin's transaction fees are set in a decentralized way, as you can imagine. You know, there's not one person out there saying here's what the transaction fee should be. Rather, there's competition. There's competition between Bitcoin miners supplying block space, and then there's competition between transactors who are demanding block space, and what we see is that that competition does drive transaction fees up when there's a lot of network congestion, and it also drives transaction fees down when there's an abundance of block space and there's not network congestion. That's what this chart shows is that the utilization rate is a metric for congestion on the Bitcoin network of transactions competing to get into the next block. And interestingly though, when we look at Bitcoin's history, while the transaction fees in dollar terms on average have increased the transaction fees in dollar terms on average have increased the transaction fees in Bitcoin terms have gone sideways. So this is really just reflective of the fact that Bitcoin gets more expensive to use, not because of Bitcoin, but really because of the purchasing power and how it's interfacing with the outside world.
Speaker 1:And this is the last slide I want to leave us with, which is looking at Bitcoin's trajectory. When my friend Murad put together this chart, it was probably like five years ago. We were at the yellow star here, and over the past couple of years, I think that we've really entered into this upwards vector, going towards a reliable store of value, with the increased liquidity, the increased decentralization, the greater confidence people have in using Bitcoin, the reliability confidence people have in using Bitcoin, the reliability and, of course, also the financialization, the regulatory clarity that we've gotten with these Bitcoin ETFs launching. And so now I think that we're really entering into this next vector, which is going from a very reliable store of value to a very widespread medium of exchange. And so, as Bitcoin establishes itself in everybody's balance sheet before you know it, it's establishing itself in everybody's statement of cash flows right of people spending and earning Bitcoin. So you know that's, I think, ultimately, how Bitcoin becomes a unit of account and a global money is through this process of monetization.
Speaker 1:That happens over time. There's no shortcuts here. I think that it really is a matter of time, and it makes me very bullish on Bitcoin, especially as we see all these trends converging on what I think will be a really great 2024. So thanks for joining us today. Curious Gabe, did you have any parting thoughts and questions?
Speaker 2:I actually did no-transcript that they should be interested in it. What are you saying? I mean, this person has no idea. They just know that Bitcoin is valuable and it's a digital currency and they have no idea.
Speaker 1:Yeah, so I think that the key aspect of Bitcoin is that it's a decentralized alternative. All of the existing systems, when it it comes to money, are centralized and you have to trust someone else. With Bitcoin being decentralized, the only person you have to trust is yourself. So with that comes a lot of responsibility, but it also, I think, comes with a lot of opportunity and freedom, and so that's really, to me, the bottom line is that Bitcoin is about giving the users of the system freedom that they don't have with centralized systems, and so whether that alternative is appealing to you or not often comes down to do you want more freedom in your life, do you want more responsibility, or are you kind of just happy with outsourcing all of that and trusting other people? And if you trust other people, good luck.
Speaker 2:That's good, that is a good elevator pitch, and the second part of that is you know most people will say well, I don't see how something that I can't hold is valuable.
Speaker 1:So the truth of the matter is that, while Bitcoin is intangible in the sense that it's software and it's kind of ephemeral virtual system, at the same time we have to keep in mind that software is electricity that is on a hard drive in a computer, and those things are physical phenomena and that, furthermore, so you know, to me software is something that is tangible, because I've written a lot of software and I you, and so it can be 12 words, and you can take those 12 words and you can stamp them onto a metal plate that has a higher melting temperature than gold does, and so, in that regard, you really can make Bitcoin be tangible like that.
Speaker 1:It comes with trade-offs, but it's a really great way to back up your Bitcoin as well, so that it's resistant to fire and flood, which electronics are not, if anybody has experienced that, and so I see their point. I agree that holding one ounce of silver or gold has a really interesting experience to it, and it makes a unique sound when you drop it onto a table. But it's the 21st century, folks, we're digitizing everything and information, and that's the other part of it is that, yes, there are downsides to being intangible like that, but the upside is that you're able to send Bitcoin to the other side of the world no problem, right, at a very low cost. If you tried to ship that gold to the other side of the world, you might not even be able to write that. The other person might not have a postal address that can be delivered to, but if you have a Bitcoin address, then it's not a problem at all. So it comes with its advantages as well, is what I'd say.
Speaker 2:And so usually my answers are these and you can tell me if they're baseless or wrong.
Speaker 2:But when someone says it's intangible and you can't hold it, I say that the value comes from those that have assigned it value and have created it, in the sense that it requires capital and true, honest hard work to buy a mining machine, to connect it to the network and to pay for the electricity that has mined that coin. And in that sense that's where, I say, is the beginning of the value. And the other part of the value is, like you said, with the dollar and it's not backed by gold, that the reason it has value is because you and I both say it has value.
Speaker 1:That's right. Yeah, the academic term is intersubjective consensus.
Speaker 2:There you go. Much better sounding than what I had to say.
Speaker 1:So each person's perspective onto the world. That's really what backs Bitcoin's value. And with the mining, it's really interesting when we look at the history of Bitcoin having value. So, as I mentioned, it started with zero value and people were mining it and, you know, they were consuming a very small amount of electricity because it wasn't energy intensive at the time, consuming a very small amount of electricity because it wasn't energy intensive at the time.
Speaker 1:But then you started seeing people saying, hey, I'm not really interested in mining this, can I just buy some from you? And then when they were talking about, okay, yeah, you can buy it from me, but I don't really know what valuation to give it, I don't know what price to give it, well then they would back out well, what's the cost? Oh well, it's, you know, half a penny per 1000 Bitcoin. And that was the kind of the. It solved the chicken and egg problem, right. It kickstarted from zero value to half a penny, to one penny, and then it was a big deal when Bitcoin hit $1. When you could buy one Bitcoin for $1, people are like, oh wow, this system has gone mainstream. If only they knew. If only they knew.
Speaker 2:Yeah, I wasn't around back then.
Speaker 1:But I've read the forum posts. There's like archaeology involved there. Yeah, great points.
Speaker 2:Awesome. Well, yeah, that's basically all the questions that I had. That's kind of. What I wanted to contribute was those very low level, you know, introductory questions.
Speaker 1:Yeah, yeah, very well, and if our audience has any questions, feel free to DM us on Twitter. I'll make sure that our DMs are open on the BlockTime account or on my account right At Bitcoin Pierre. Feel free to reach out with any questions. Feel free to reach out with any questions, always happy to take audience questions. And also don't forget to like, subscribe and share the podcast with all your friends and family or professional contacts who are interested in learning more about Bitcoin, and you know it's a really great time to be doing that. So thanks all, and we'll see you again next week.
Speaker 2:Thank you.
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