Founder & Partner – Morgan Creek Digital Assets. They call me Pomp. Oct 31 Murad Mahmudov: The Ultimate Bitcoin Argument The following is a transcript of a conversation between Anthony Pompliano and Murad Mahmudov, one of the highest conviction Bitcoin Maximalists in the world, about what Bitcoin is, how it works, the importance of its deflationary monetary system, why all Fiat Currencies are doomed to fail, and how central banks and institutions should be thinking about Bitcoin. You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Murad Mahmudov Anthony Pompliano : All right, guys, I am here with Murad. We are going to do our best to create a podcast episode that becomes the de facto episode you can send to people when they ask “What is BitCoin, and why is it important?” So Murad, tall task in front of us but thank you for coming. Murad Mahmudov : Thank you for having me, Anthony, pleasure to be here.
Pomp: Absolutely. All right, so before we get into this, let’s go through your background, and then we can jump into everything.
Murad: Sure. So I’m originally from Azerbaijan, was until recently an international student here in America. Got into BitCoin quite heavily after spending a semester abroad in China during the previous bubble in late 2013, early 2014. A lot of the exchanges back there, as you may know, still didn’t have tremendous liquidity yet, and some of my foreign friends were trading BitCoin P-to-P, sort of bringing it into China, selling it, et cetera.
Attended a bunch of Beijing meetups, and sort of been in the rabbit hole since. Murad: Made a small pause, as many of us have, up to 2015, and then as 2016 rolled in, got back into this game. Briefly worked in finance, and then now doing several different crypto things full-time. Pomp: Absolutely.
So let’s just start with the simplest question, right. What is BitCoin? Murad: This is a very good question, and a BitCoin is something that can be described with more than 100 different definitions. A lot of people debate what they are, but to me personally, BitCoin first and foremost is a new form of money. It’s a new form of thinking about money, storing money, transferring money, and just dealing, organizing, and understanding money, and all kinds of second order financial effects that come out of that. Pomp: Absolutely. So let’s walk through some of the core components of BitCoin. Obviously, it’s built on a blockchain, and then it is divisible, it’s fungable, it’s all these things. What are the important components to you? Murad: Blockchain is definitely one of the components.
A lot of people thing that that’s the core one, but really, that’s one out of four or five core moving pieces. I don’t wanna give the term ‘blockchain’ too much legitimacy right now, because it’s really been over-abused, I would say. Up to this point, it has become little other than a marketing term at this point. I mean, I’m not as fascinated with blockchain as I am fascinated with the BitCoin blockchain, but as I said, there are many moving parts.
Murad: Another is the proof of work function of BitCoin, and how the time-stamping and the security come into play in this regard. BitCoin governance, in particular, is very very unique and very very complex and hard to understand, hard to explain.
I just want to underline the fact that it’s not just a currency on a blockchain, it’s really very very interdisciplinary, and multi-variable phenomena, where a lot of different things come into play and blockchain is merely one out of several. Pomp: Absolutely, so let’s go into proof of work. How does that work, and why is it important? Murad: Proof of work is very important because it is the first workable, in my opinion, solution to the double-spending problem at scale. As we know, a lot of different alternative currencies and alternative money forms were created in the 90’s in the early 00’s. Unfortunately though, they didn’t work quite well, because most of them were centralized more often than not, of course.
Murad: When something is centralized, it is very easy to shut down.
A privilege of creating and controlling your own money, let alone a monopoly on it, is something that gives the controllers of that system a tremendous amount of power, arguably more than anything else in the world. With BitCoin, proof of work, once again coupled with several other things, allows the system to be secure and decentralized at scale, as well as allows us to time-stamp transactions on the ledger in a decentralized trustless, or rather, trust-minimized manner. Murad: Which allows BitCoin, for the first time, to be an alternative monetary system and an alternative currency which is several orders of magnitude much harder to shut down, to censor, to stop, and to manipulate, than any other project of a similar variety that has ever arrived in the past. Pomp: Absolutely.
So this idea of the decentralization, right? In a centralized world, whether it’s the traditional banking system or other attempts like DigiCash, Hashcash, BeMoney, et cetera, the centralized versions don’t have the double-spend problem, right? So the double-spend problem is this idea, if I have a single U.S. dollar, physical dollar, and I give it to you, I no longer have a dollar that I can give to anyone else. So I only can spend that dollar one time. Pomp: In a digital currency, the actual unit of value is a digital file.
It could be copied, and so therefore the problem that many of these early attempts to build a digital currency ran into, is the doubles-spend problem you described. That was where I give you one unit of value, one BitCoin, and then I would be able to send that exact same unit of value to somebody else, therefore spending it twice, double-spending it, right? Murad: Right. Pomp: The blockchain structure is what solved this. Do you think that the solving of that double-spend problem is why BitCoin has been able to thrive when other previous attempts didn’t, or do you think it’s something else? Murad: Technically, centralized currencies and centralized financial systems have a double-spend problem as well.
However, in order to solve it, you need to … we need to place our trust in a central party, in a centralized authority, who often control the transactions, they control the settlement, they control the issuance of the currency, they control many different things, right? Murad: Sitoshi, in one of his earliest posts on the cyberpunk email list, he noted that the traditional currencies have several layers of trust that you have to essentially give in to in order to use the system. You need to trust the central banks not to dilute the currency too much. You need to trust commercial banks that they’re going to let your transactions through, et cetera, et cetera, et cetera. Murad: The amazing thing with BitCoin is that, now in a very very unique way, Sitoshi Nakamoto has managed, in a very elegant way, combined several innovations together, one of which is proof of work Hashcash, together with a chain of blocks, as well as several other things that we can get into, to create a digital currency where the double-spending problem is solved in a trustless manner. This allows as Nick Zabos says, for the system to be much more socially scalable than anything else we’ve had before. A lot of anthropologists have argued that expanding social scalability with various technologies that allow us to connect with as many people as possible, in a way where we don’t have to rely on any single party, with more and more inventions of this sort we can really expand the horizons of commerce and human civilization at large. Pomp: Absolutely.
Those previous attempts at this all either had lack of adoption or they had technical problems. There was issues that they couldn’t solve. One of the things that often doesn’t get talked about with BitCoin is the governance. Everyone is focused on the technology itself and how that is executed.
What is so special about the governance of this digital currency? Murad: Governance of BitCoin is not formally defined, and I would argue that in a way, it is a strength rather than a weakness. Technically, the governance has to do a lot with the BitCoin improvement processes, and how those get proposed, and how those get reviewed, how those get added in, et cetera. It’s a very conservative, extremely meticulous process, which I consider a strength. A lot of people consider that, a lot of people complain that BitCoin is not evolving or BitCoin is too slow.
Murad: To me, those people are exhibiting high-time preference and impatience.
I think the alt-coin boom and the ICO boom, a lot of the blockchain boom as well, has it’s origins in part because of this. True BitCoiners understand that this isn’t a six-year get rich quick scheme, but it can be an 80 year project. It’s something that perhaps will continue going on until the end of our lives. So every changes to the system, need to be extremely extremely careful. Murad: I like to compare it to a nuclear reactor or heart surgery or a moon mission, because there’s a lot at stake. 100 billion … more than $100 billion already, and potentially tens of trillions of dollars someday. So this … because it is software, it lends itself to flexibility.
This malleability has allows us to create a money that is harder and sounder than gold, and fiat, of course. But at the same time, this malleability is also makes it fragile in a number of other ways. Murad: Because of this, and precisely because it is software, we need to be extremely careful.
But the governance process of BitCoin is what Pierre Rashad calls a P-to-P anarchic network governance.
The fact that it is slow to change is something that really makes BitCoin far, far stronger than everything else. The number one reason, and I can give dozens of reasons, but the number one reason why alt-coins are far, far behind BitCoin is precisely because they are much more centralized in relative terms, and everything about it is much easier to change. Murad: Currencies, first and foremost, are all about trust. As I like to repeatedly say, these crypto-assets are unlike many people in the VC world, San Francisco, California, they think of these things as software platforms.
They try to apply the late-00’s early-10 tech paradigms to this thing, but really to me, it’s a monetary phenomenon. In very loose terms, I like to describe these things as digital monetary metals. Murad: To me, that’s arguably the closest metaphor for now. I like to even say that they aren’t, BitCoin being compared to digital gold is an understatement. Really what it is, is digital monetary nuclear weapons.
Because if you really dig into the third and the fourth orders game theoretic effects that are likely to arise when this things gets just a little bit bigger, which to me, it inevitably will, there’s just so much that it is going to cause and reorganize in this world. Pomp: Absolutely. One thing that I think about a lot, is if you were to draw a spectrum, and on the left side you have the slow development cycles and carefulness of BitCoin, and on the right side you have optimization for innovation. I think that BitCoin obviously is pretty far on the left side of that spectrum, and a lot of the ICOs and alt-coins, et cetera, are pretty far on the right side. Pomp: They wanna quickly build something, they wanna get it out, they’re trying and experimenting and innovating and doing all these things.
So what ends up happening is, because BitCoin’s speed of development is slower, more methodical, more intentional, it can pull from the things that work on the innovative end, and it can avoid the landmines of the things that don’t work. Do you agree with that? Murad: I agree with that, and I would even add that a lot of people who’ve started alt-coins have gotten into that wave in the last couple years, come from the technology world or the startup world, venture world, and one of the schools of thought, i.
e. move fast and break things, it completely does not work for cryptocurrencies. Because once again, this is not a dog-walking app or a dating app, or a food picture app.
Murad: You need to be extremely extremely careful with this. We want to make it so that a huge chunk of the world financial system eventually gets absorbed into this one digital currency. So conservatism is definitely the way to go here. Some people would even argue that we need to even e more careful and review in an even slower fashion. Murad: I definitely agree with you that BitCoin can definitely take whatever … if there’s ever something that is actually useful and truly innovative that any alt-coin does better in any capacity or function, BitCoin can eventually adopt that, for sure.
However, and this is why I believe that privacy coins or coins with more programmability et cetera, et cetera, they really don’t stand a lot of … they don’t really stand a chance against BitCoin at this point in time. Because I believe people will soon realize the truth, and the truth is that the value aka the price is determined by the monetary premium. Murad: The monetary premium is determined by a combination of the current monetary network effects, monetary liquidity, salability, marketability, recognizability, the Linde effect, and most, first and foremost, the credibility of the monetary policy, and just the general trust. In all of these terms, in all of these criteria, BitCoin is so far ahead than everything else, that the way I see it, yes there may be two or three more mini alt-coin bubbles, particularly as more people enter into the space.
Murad: There’s a natural incentive to find the next big thing, of course. I believe that once BitCoin goes above several trillion dollars or so, a big divergence will happen. Really, all the other cryptocurrencies will be similar to what penny stocks are to the big caps in the equity world right now. Pomp: Got it.
So would it be fair to say that, if you take that same spectrum, on the left side you’ve got security, and on the right side you have low levels of security. BitCoin conservatism pushes it on the extreme end of the left side, around security, right? Do you think that these other blockchains, tokens, et cetera, are lacking focus on security, or do you think they’re making a rational trade-off between security and, let’s call it innovation or something like that? Murad: I think it’s a rational trade-off. The reason for that is because if you even want to compete in BitCoin in any capacity, then you … it’s really difficult to compete against it in terms of monetary disinflation, which really is the most important thing here. Pomp: So what you’re saying is, if somebody wants to compete against BitCoin, another project, you can’t beat it on security today, because of the network effect.
And then you can’t beat it on the monetary policy, and therefore you have to go to other areas in which you may be able to build a competitive advantage. Murad: That is most of the thinking in alt-coin creators heads.
I believe that it has worked a little bit, not really. It might even work a little bit in the upcoming waves.
But it is doomed to fail eventually. Pomp: It’s like winning the second or third most important aspect, right? It’s like saying, look, the most important thing around security- Murad: It’s like sixth or seventh, you know. Pomp: Yep. It’s super interesting.
Okay. So let’s talk about the design of BitCoin. Obviously there’s proof of work, there’s governance, et cetera. But the actual monetary design, walk us through the disinflationary and deflationary nature of the actual design.
Murad: So before I delve into that, I will say, and I think this is something that people will increasingly realize in the coming years.
Uncensorability’s cool, unsiezeability’s cool as well, but to me these really are perks. In terms of the prize going up and this thing taking over the world, if we create a pie chart, then 90% i.e the dominant force which will be doing that, is BitCoin monetary policy.
Really, its unprintability. The fact that nobody can print beyond 21 million. That is by far the strongest and the most important innovation here. Pomp: Okay, so the monetary policy of this system is by far the most important part.
Pomp: Okay. Murad: People need to use something as money. Right now, some of the better currencies are the U.
S. dollar, euro, the Swiss franc, et cetera. But really, people use those because essentially, they’re picking the least bad thing. I believe the supply of the U.S. dollar in the last year has increased by 6.2%. BitCoin’s stock to floor ratio, today, is around 3.
8%, and after the next halving, if you go off of the 21 million number, it’s going to be 1.7%. Murad: Actually, I believe that that switch from low three percents to high one percents is going to be the number one driver of the next big wave in 2020. But to answer your question more directly, unlike other currencies which their respective central banks, in the case of fiat, can print essentially whenever they want, as well as their respective local commercial banks can create more of when issuing that. Murad: BitCoin is limited to strictly 21 million units. Some of them, it is believed that several million have already been lost.
I believe that when all is said and done, the global supply of BitCoin is going to be somewhere between 16 and 17 million. The fact that nobody can print beyond the 21 million limit, and the fact that the users, the miners, and essentially everybody in … the developers, everybody who has as little as one Sitoshi of BitCoin, they are incentivized in having that rule be the number one and the most important rule, and the number one focal point, the number one selling point, which the community is gathered around. Murad: Really, this is the number one thing which allows BitCoin to continuously increase in value. People are already pricing in, it’s extreme scarcity. I like to say we’ve never had an object, let alone a money, as scarce as BitCoin before. Even gold is expanding at a rate of around 1.
6% per year over the last 10 years. I believe that after … by the late 2020’s, that number for BitCoin is going to be lower than one percent. Every year it’s getting lower and lower, so technically, that number is getting lower every ten minutes. Murad: As you might know, every four years there’s a particularly additional sharp drop as well.
I believe that that soundness, that hardness of currency, isn’t palpably felt by people yet. Even a lot of participants in the market, a lot of traders and investors, they don’t really quite grasp this aspect yet. But I believe that this is the revolutionary thing here, and this is why I believe BitCoin is going to be in the hundreds of trillions, in today’s terms, in the future. Pomp: So there’s a couple of key terminology and components that you just described.
There’s the total supply of BitCoin, right? So when it’s all said and done, 21 million BitCoin. We can get into why that is, and if that could change or not later. But for right now, let’s just say that there’s 21 million totally supply of BitCoin. Pomp: At the same time, there’s the circulating supply.
So how many BitCoins have been produced, and are currently available for ownership by people or organizations? And then, what we see is, every ten minutes, every block, there are more BitCoin that are added to the circulating supply, but that 21 million fixed supply never never changes. Pomp: So what occurs is, the disinflationary, right? So yes, the circulating supply continues to expand until it reaches that 21 million, but that number goes down every four years or so, in terms of how many BitCoins every ten minutes are added to the supply. So that’s a disinflationary model. What you described is, once all 21 million BitCoin have been mined or are now part of the quote unquote ‘circulating supply’, we now get into a deflationary model. Pomp: So it’s no longer disinflationary, because actually there’s no more being added, and now we can only go reverse. We can only lose BitCoin in the circulating supply. So let’s talk about the pros and cons of an inflationary system, and the pros and cons of that deflationary system.
I think people hear these terms, but they don’t really know what they mean or why there’s pros and cons to either side.
Murad: We’re taught in a lot of schools and the contemporary mainstream neo-kings, anachonomists argue that mild inflation is best. To me, I think that governments around the world, particularly in the Western world, are incentivized for that kind of academic discourse, to be the dominant one even in the best institutions. Murad: In my research I’ve found that there’s a lot of academic grants and academic sponsorships financing that central banks and ministries of finance, ministries of economics, et cetera, that allocate to certain schools of monetary thought than others. But I believe that those currencies are local monopolies, and those currencies are forced upon us from top down. BitCoin is a free-market phenomenon. Murad: I would argue that BitCoin is an experiment in Austrian economics that so far, in it’s 10 years of existence, is succeeding massively.
My belief is that money is a product, just like anything else. I think we will not have truly pure capitalism and truly pure free markets until money, which is a product that we utilize … which is a product which is a half of every single transaction in our society, is something that originates from the free market as well. Murad: I believe that money is ultimately a product of the market, rather than a product of the state. I think the last 47 years in history have … are a temporary phenomena.
For thousands of years, gold was the predominant money, or gold and silver were the predominant two currencies around the world, until the paper notes became more widespread as a technology. You can think of paper notes as a layer two technology, on top of monetary metals. Murad: At that point, once you had paper notes, which were redeemable for metals, there was no longer … the divisibility problem of gold was solved, so the need for silver was drastically reduced, and thus silver was demonetized further.
It’s very interesting to look at the gold/silver price ratio. After 1881, you see gold skyrocket in silver terms. Murad: But I believe that something similar will happen with BitCoin versus all other monetary instruments, and even other financial assets.
Which is really quite eerie. I think that when all is said and done, BitCoin will be the second or the third single biggest asset class, the single biggest asset in the world. Maybe real estate will be the only one bigger.
Murad: This is my reasoning around this. Right now, it is believed that the total money supply of all fiat currencies around the world is somewhere around $80 trillion. If you consider M1, M2, M3, if you add them all up around the world. I strongly believe that that number is artificially diluted and artificially kept small, because essentially by continuously printing, governments are disincentivizing the world, and disincentivizing investors and even average people, to store too much money in currencies. Pomp: And they’re doing this because, if I take $100 and I put it in my bank account, as they print money, that $100 loses purchasing power every single year.
Murad: For sure. Every single day where the money creation occurs … it’s interesting, because the cost of creating that money for the government is near zero. All it takes is just a push of a button. But essentially, every single unit of fiat currency that gets created, reduces the wealth of the fiat holder around the world.
Murad: BitCoin is an unimaginably new phenomena, where for the first time, nobody can seize your wealth. Not just directly, like they did with gold in the 30’s, but just like they do with stealth inflation in fiat. Nobody can print more. For the first time, you have this currency that you can have full, or at least very strong confidence, that for the rest of your life, the percentage of the money supply of this entire system will always remain the same. Which, really, is completely unprecedented, because even with gold you don’t have that. Murad: So here’s the thing.
The total amount of wealth that is stored in currencies is artificially small. People … essentially, the system doesn’t want us, and doesn’t want people, to have a good robust unseizable store of value, because if that were to exist, then governments and central banks would lose a tremendous amount of seniorage privileges, because every time they print, they essentially enrich themselves at the expense of everyone else a little bit. Murad: So this current system, because the money’s constantly getting diluted, people like surgeons, artisans, dentists, et cetera, engineers, they either have to play part- time investors on the side, or they have to outsource those services to registered investment advisors and brokers, et cetera. That’s part of the reason why the financial system is much bigger than it has to be, and why Wall Street is just a ginormous part of the world’s economy. Murad: If we had something like gold, or better yet, BitCoin, then you could save your wealth and it would actually gain a little bit of purchasing power every year, without having to have this anxiety-riddled wave of activities that you need to do. It’s actually quite crazy how in today, I’m not even talking about the second or third world where this isn’t even an option, even in the first developed, civilized Western world, you have to create a diversified portfolio of equities, bonds, small caps, moonies, commodities, FX, derivatives sometimes, et cetera, just to preserve your wealth. Murad: I’m not even talking about making some termendous outside returns.
I’m talking about just to save your wealth. This is crazy. In the Biblical times, there’s a famous Jewish proverb which says, “Keep a third of your wealth in money,” which was gold, “keep a third of your wealth in land, and keep a third of your wealth in your business.” Even as recently as in the 50’s and 60’s, you could notice that in portfolio allocations, some of the traditional mutual funds and the early big asset allocators, they had a much bigger allocation to cash when the trust in currency was much greater. Murad: You saw that reduced as years went by, and in recent decades with quantitative easing, the trust in currencies gets incrementally reduced.
I believe that if BitCoin were to become global money, which I believe it will, or something like it definitely will, because genie’s out of the bottle and the idea is here to stay forever, the percentage of people’s average portfolio that will be in cash as opposed to today will be much greater. Perhaps not a third, but it will be much higher than it is today, and much closer to a third than it is today.
Murad: Precisely because of that, I believe that the total wealth in the world that is held in a currency, and note that this one currency will not be inhibited by inflation, it will not be inhibited by borders, it will not be inhibited by centralized control. All these things will contribute to it being the single biggest currency in the world. I think that eventually, I incresingly believe that the cryptocurrency market, even soon, not just in the future long-term equilibrium, it will be a winner take all rather than a winner take most game. I believe that BitCoin, as it currently stands, will probably take 94–95% of this entire market. Pomp: So there’s a lot here to unpack, and I think it’s really important. What you’re describing is the idea, an inflationary model like what we have with the U.S. dollar for example, incentivizes me to get out of cash, and get into either hard assets, or to spend that capital, because if I hold it, it loses value.
So that inflationary model, for many people, they spend or they take that cash and they buy real estate, or they buy other investment opportunities, because they know that they have to at least do better than two percent on their yield for the year. Because if they leave it in cash, they’re gonna lose two percent, give or take, based on inflation. Pomp: So the argument that you’re making here is, let’s take, I don’t know, 5–10–20–30% of the real estate market, is actually wealth preservation, right? If people were given the choice, rather than buy real estate, they would rather take that exact same value and hold it in the cash equivalent. They don’t do it because today that loses money.
But if there was a global digital deflationary currency, the- Murad: Deflationary currency. The real estate total market cap would shrink because people would move from real estate back into that global currency, and this would not only happen in real estate but a number of, kind of store of value type asset classes where people today find safety to get out of cash and preserve wealth, but that may not be true in the future. Pomp: Precisely. And I think that this really, the global total [inaudible] market for monetary instruments is a zero sum game.
For bitcoin to win, other things have to lose. Murad: Other currencies or other asset classes, or both? Pomp: Both. Murad: Both. And that is part of the reason I believe that bitcoin, the single currency will be bigger than, in their “market cap” or in the amount of wealth that is stored inside it will be greater than not just any, but all of current Fiat currencies and monetary metals added together because I believe that bitcoin is such a good store value, that it will take more than 95% of the current market cap of Fiat currencies. It will take more than 75% of the current market cap of monetary metals, and then, and this is sort of the interesting part, I think because the current Fiat currencies are inflationary, a lot of the high net worth individuals and asset managers around the world use the stock market, use the fixed income markets, use the real estate markets as a store of value. That is part of the reason why, if you try to buy an apartment in Tokyo, London, or New York, the prices are insane, and this is because both American high net worth individuals and foreign high net worth individuals use these sort of prime city luxury apartments as one of their stores of value.
And I believe that sort of because the Fiat currencies are constantly diluted, at the same time this has caused an artificial sort of increase in the value of other asset classes and other financial instruments as people are hunting for yield. Murad: The aggressive sort of quantitative easing and the aggressive sort of unorthodox negative interest rate monetary policies of some central banks says the financial crisis have exacerbated this effect even further and if you look at the inequality and the Gini coefficient it has increased sharply since 2008, in the last ten years even more.
Murad: One of the reasons for that, out of several, I mean of course it’s a very multi varied topic but one of the reasons because the working class and the lower classes, they mostly store their wealth in cash. Most of them live pay to paycheck and whatever savings they have, they do keep it in cash.This for simplicity’s sake. Murad: Now the asset owners are those who own real estate, stocks, bonds, et cetera, and a lot of the wealth has flown there, and a lot of people although essentially the people who’ve benefited the most from this grand wealth effect experiment are people who are holding these assets. Much of the time it is the central banks themselves who are indiscriminate and price insensitive buyers of these financial instruments. Pomp: So this is imporqtant because there’s a thought process that inflation is merely the act of stealing wealth from the poor and enriching the elite and wealthy. Murad: Right. Pomp: And, so what that means is, if you live paycheck to paycheck, and you leave a high percentage of your net worth in cash, then every year, you’re losing value, or you’re losing purchasing power.
But if you actually have other assets, and a lot of them, inflation continues to drive the price of those assets up and therefore, those that own non-cash assets actually benefit drastically from inflation and are incentivized to keep the party going. Murad: Right. Pomp: And so, if you switch to a deflationary model, actually the people with the preference to have a high percentage of their net worth in the currency will benefit drastically and those in non-cash assets will actually not benefit in this scenario.
Murad: For sure. And I like to describe bitcoin and sort of the entire phenomena as a grand wealth transfer event and I believe that it will be arguably the single biggest wealth transfer event in human history. It will be a wealth transfer from the old to the young, from the tech savvy to the more conservative, from the open minded to the more closed minded. And of course from the people who will be holding these crypto assets, most of all bitcoin, and the losing side in this case, will be the people holding Fiat currencies, gold, et cetera. Pomp: Absolutely.
So, let’s say that everything you’ve described is true, right? And you just laid out the blue print for how this is gonna play out over the next, decade, 2, 3, 4 decades, right? How big is the opportunity? Right? What is the market cap of bitcoin 10 or 20 years from now? Murad: So, before I answer that question I’ll say that as bitcoin, let’s say in six to eight years from now, as it- it’s a bit bigger, much more volume, much more Lindy effect, much more trust, much more credibility, et cetera; much more mainstream. People will simply compare two things and bitcoin, will be in a free market battle against Fiat currencies and gold simultaneously, and even other things when you just isolate the store value component as we have discussed.
Murad: People will simply say, Okay, this thing is expanding at 6% per year in its supply, and this thing is expanding at 1% per year in its supply. Which one should I pick as a store value? Murad: And that’s why to me, sort of this feed back loop is inevitable. It would be so difficult to stop- Pomp: The math becomes undeniable. Murad: Really, if you extrapolate this phenomena and extrapolate this sort of financial change, bitcoin will be a black hole that will absorb a tremendous amount of value. I believe, the total addressable market is somewhere between 100 and 200 trillion. I’d like to say it will be 160 trillion, so if bitcoin, and that is if we go off of the $10 million dollars per bitcoin price, in today’s terms without even counting the inevitable hyperinflation of Fiat currencies.
And, so this is my reasoning – Pomp: So, you think that a single bitcoin will be worth $10 million dollars? Murad: In today’s money, Pomp: mm-hmm (affirmative). Murad: Yes, I do. Pomp: Which would give us a market capital of what? Like a hundred and … Murad: 160 trillion.
Right now the current market cap of bitcoin is 110 billion. I believe when this bare market is done, give or take, will bottom somewhere around 80 billion, and so, that’s a 2,000 x that is still possible between right now and what is probably our death, and I think there is still a tremendous opportunity here. And I think high net worth individuals are more edgy, open-minded, tech savvy institutions, and eventually, government institutions will push this to the extreme. Pomp: These are big numbers you’re talking and you realize that very few people in the world believe what you believe right now. Murad: I realize that but, if you spend months and months studying this, it sort of becomes self-fulfilling prophecy to you.
I’m very confident bitcoin will be bigger than the U.S.
dollar and potentially even bigger than all of them combined. Because, there’s an interesting table that Vijay Boyapati has made and he says that crypto currencies, or bitcoin in particular: are harder to tax, harder to seize, easier to transfer, harder to steal, cheaper, easier, faster to send around the world. They’re borderless, they are uber competitive, they’re highly deflationary, et cetera and there’s dozens and dozens of reasons.
And all of these combined, I believe, will make bitcoin incredibly big. Similar to what the gold standard was in the late 19th century but, given the fact that the economy is much bigger today and given the fact that it is digital and much more fluid, I believe it will be far, far greater than even that, and yeah, these are my thoughts.
So, let’s talk about this idea of hyperinflation in the Fiat currency experience. Our experiment, right? So, 1971, was it, Richard Nixon takes us off the gold standard. The gold standard being the thought process that for every paper currency, every U.S.
dollar, you could go and redeem the equivalent in gold, where it was being held in the central banks. Pomp: At the time, what a lot of people don’t realize is, Richard Nixon said, We’re gonna go back to the gold standard. It was a temporary decision, right? Or, at least that’s how this was presented. Pomp: And so, we obviously didn’t, and since 1971, what we have seen across the world, at different times and different locations is Fiat currencies start to fail.
And these Fiat currencies, where they appear to be failing most, is in regions or countries where a government or the overseeing organization loses discipline, right? And the thought process is, in the developing world, we have much more discipline, right? There’s checks and balances and the Fed can’t press the print button too much, right, because there’s those checks and balances. But let’s say in a country where a dictator comes in to power, there’s less checks and balances. There’s a higher probability that they will lose discipline. They can hit the print button too much and you get into hyperinflation, devaluing other currency, and we know how that ends, right? Pomp: Let’s talk about that hyperinflation period. Why are we seeing this in the countries we’re seeing it today? And do you think that this is gonna happen to every Fiat currency in the world? Why or why not? Murad: I believe it’s a combination of incompetence as well as outright grasping for power. And, I do believe that this will eventually happen to all Fiat currencies around the world, but it will happen stage by stage. Of course, the second and the third world currencies will be the first to collapse, and the more established Euro, then Dollar. The financial leak from there towards bitcoin will be a bit more gradual.
It will be more like an “S” curve and then it will reach a point where the money will just rapidly flow into bitcoin, because as I’ve described, people will realize that this money is harder than the other one.
The other money, there’s people behind it and these people can do whatever they want. However, this is governed by such a strong, unbreakable algorithm and the community of people strengthening it, that I believe the credibility, and the faith, and the trust in bitcoin relative to Fiat currencies will keep growing. And as I’ve said in the beginning, currencies and the cognitive monetary premium that’s placed atop them is, first and foremost, it’s about trust and it’s about credibility.
Murad: The Swiss franc, for example, people like it because the Swiss don’t print too much. They have 300 years of credibility.
They have temperance, they have discipline, as you’ve described. And it’s important,[Savty Namoose 00:45:09], in his work, he often says that hyperinflation has never occurred with metals, because there are natural limits to creation and there are natural free market balances there.
Murad: But, in 99% of cases, it has occurred in Fiat currencies because they are the behest of humans, and [Jorg Gudahusman 00:45:30], who’s arguably the most prominent Austrian communist today in the world. He says that, this money supply inflation has traditionally been the means of financing war. But, as of late, it’s not just used in wartime, it’s being used perpetually. And I’d like to say that, this inflation, it essentially shifts some activity from longterm projects and longterm capital goods production, to more short-term consumption. Murad: I’m a believer that it is not the consumption that really drives the sustainable longterm growth of the economy. The kind that actually increases our quality of life, but rather us engaging in longterm projects, longterm capital goods production. Longterm production of: tools, instruments, research, innovation, and things like that. And really, the best things that have ever been created, they were 10, 20, 30 years efforts.
Rather than us going and buying something useless, right? Murad: And so, I believe that if we have a currency that’s more deflationary, people will be incentivized, instead of going out there and as you’ve described, investing in something else, or even buying a pack of crisps or just new shoes, or really, something that’s really useless right now. Instead, people will be, just due to the deflation and nature of it, it will be seen and felt as more precious. People will be more incentivized to: A) save and B) invest in longterm projects and longterm craft. Pomp: Absolutely.
And so I think with this hyperinflation, right? What we’re seeing for maybe the first time or one of the first times. Humans have a choice. Do I trust the machines, the software code, the math, right, and the algorithms? Or do I trust the humans? And, as more people elect to take Fiat currency and convert it to bitcoin, they are electing to trust the machines over the humans, right? And I’ve described this before as, the machines are unbiased, they’re unemotional, they’re disciplined, and they do what they’re supposed to do. Pomp: The humans are undisciplined and greedy. And, when you lay it out that way, I think this is gonna happen in a lot of different facets of our life, right. You already see some of this with the advent of Uber and that type of stuff.
But, with money specifically, the problems arise from human lack of discipline, and therefore, as more people trust the machines, they are rewarded because money acts how money’s supposed to act. Agree or disagree? Murad: Definitely.
I definitely think we’ll see a similar phenomenon in different sort of facets of technology and capitalism as a whole. And, as I’ve sort of described in the beginning, bitcoin- I don’t wanna use the word entirely trustless, because there are still certain things you can trust- but they are far, far more distributed and in my opinion, harder to change than centralized solutions. And this allows commerce to happen on a global scale, and this allows you to trust this payment rail like never before.
Murad: Bitcoin is extremely secure and it allows us to- I believe another thing that it will do to finance is, it will eliminate the Forex industry completely because if we only have one global currency instead of these dozens of currencies that we have today, hundreds of currencies, then the foreign exchange market will cease to exist because we will just have one currency.
Murad: Hans-Hermann Hoppe describes the current state of affairs and the state of Fiat currencies as a mild state of barter. Whenever one company or one corporation in one country has to do business with another they first have to exchange their currency to another country’s currency, then need to change that for goods, and then need to go back and forth and every time. So it’s kind of like barter, in the sense that you first need to make these extra transactions. But with bitcoin, like several layers of those transactions will just get abstracted away. And I believe that this will expand the economy, and accelerate capitalism and free markets, and borderless commerce even more. Pomp: Absolutely. So, all right.
Here’s what I wanna do.
I wanna play devil’s advocate, right? I wanna take the seat of the bitcoin detractors, the people who don’t believe or think that your view of the world is wrong, right? And so, you- I’m gonna throw some ideas out at you and some detraction and you kind of respond as you see fit.
Pomp: Can bitcoin go to zero? Murad: I believe that theoretically it could. But with every ten minutes that it successfully adds another block to the blockchain and doesn’t fail, the probability of that is reduced every ten minutes or every single day. Pomp: Okay.
So there’s a non zero chance it could happen, but the addition of time makes it less likely. Murad: Precisely.
And this is precisely where our constant discussion of Lindy effect comes from. The longer a piece of technology like this exists, the more likely it is to persist even more in the future.
And the longer it exists, it also gives trust to the people, because say you discovered bitcoin in 2011, a lot of us thought oh, it’s a joke. It’s whatever. We’ve seen that before right? Now you read again in 2013, you’re like oh, this is still not dead? In 2015, you’re like oh, this is still here? Murad: Now in 2025 people are going to be oh, this thing is here for almost 20 years. This is here to stay.
You know and oh, like, they still, in 20 years haven’t printed any additional bitcoin beyond 21 million, this is really, really strong, you know? Bitcoin, yeah, it’s not just the trust in the security, not just the trust in the decentralization. But also the trust in the currency as money is also growing, which is very, very important. And, like I’ve said, trust in market cap over the long term is really the same thing. Pomp: Absolutely.
If it did fail, if it did go to zero. What’s the most likely reason why? Murad: Catastrophic bugs probably. It is software. And software, it’s an increasingly complex software.
So many thousands of lines of code. So many things, so many moving parts at the same time. And really, unfortunately, very few people of that caliber, and that are simultaneously working on these kinds of technologies right now. And so, the main 10 to 15 contributors to the bitcoin project are people.
Sometimes, once every four, five years- they do make mistakes as we’ve seen recently with the bug. Luckily it was fixed pretty quickly.
Murad: There will be bugs.
I mean, as I’ve said, this is a multi decade project. This is a 50–60 year project. This is software we’re likely to see, 3, 4, 5 bugs more before this sort of thing takes over. But this is inevitable and as I like to think, it’s better we take care of these things right now, when it’s only a couple hundred billion, rather than, when it’s a $ 20 trillion dollar system with the world’s economy running on it. Pomp: Of course. Okay. Bitcoin is too volatile to be a store value.
Murad: So, to me, this is the easiest piece of myth or misconception to parry, because you actually want bitcoin to be volatile. Bitcoin cannot go from $1 to being the global digital store value standard global currency without volatility.
In fact, you desperately want bitcoin to be volatile, preferably upwards of course, but you do want it to be volatile especially verse a Fiat. When you use the term volatile you need to understand, volatile verses [vaught] and typically we mean, verses the U.S. dollar, right.
Murad: I think that bitcoin’s volatility is great.
If you zoom out and look over the last years, especially on a log chart, this volatility has been predominantly upwards and this volatility is so good, it shows people that bitcoin’s strength verses Fiat currencies is strengthening. And Fiat currencies per unit of bitcoin are weakening and this volatility isn’t just inevitable, it’s desirable. Murad: By the time bitcoin completely takes over and in the long term equilibrium. But a more practical answer is that, as bitcoin’s trader volume grows, as bitcoin’s liquidity gets deeper, as bitcoin’s order book become more abundant, as more and more people cognitively recognize it, as there are more hodlers, as there are more users, as there’s more infrastructure, as there’s greater security. And most importantly as there’s a bigger market cap, bitcoin’s volatility will decrease.
Pomp: So what this tells me is that bitcoin is a net positive volatile asset, right? There’s violent volatility, but over a long period of time, it continues to increase in value and therefore the only way to go from worthless to worth a lot, you have to have volatility, and that’s a good thing. Murad: Precisely.
I mean you can’t have all these trillions of dollars of wealth stored in one asset, flow into another asset without volatility being there on the way. And money is really a technology. It’s a financial technology that enables us to do a lot of things. And bitcoin, to me, is a far superior technology than any monetary metal or any state currency.
And so people will- the world- because it is a superior technology, it will win in the free market and the world will adopt this better technology, and this better technology will expand everything Pomp: Okay. Bitcoin can’t scale. The transactions, the blockchain can’t handle the number of transactions needed for a global adoption. Murad: So, a lot of people make a very big mistake. They think of a bitcoin as exclusively a payment rail, where it’s only like one of the six things it does. And they compare it to say, VISA or PayPal.
Now, bitcoin, the main blockchain is sort of the layer one of the whole system. You have to think of VISA as, it’s like a layer three or a layer four of the current status quo financial system. Which is like the dollar, then you have the central banks, then you have the commercial banks, then you have rails, and then you have VISA or PayPal, that all sit on top of ts thing. Murad: And so, we will- bitcoin is also as you might know, developing layer two, layer three solutions already. Ad so those are the ones that you will eventually need to compare against VISA and PayPal. Murad: The base layer isn’t so much as a payments rail for daily transactions when you’re buying crisps or a cup of coffee, but it’s a settlement layer for very big, and very serious transactions that require a lot of security.
Eventually, I believe the base layer will be much more expensive than it is today, but rightfully so because most of the security will come from fees. And it will be large institutions and large business transactions, large commercial transactions that will predominantly and ultimately, eventually be settled on layer one. Murad: But I believe that trillions of transactions will be occurring on layer two if not higher. As well as possibly on the sidechains, drivetrains et cetera. But my argument, and Nick Carter has put it very, very well.
He said, These are- the layer one is not partials, it’s containerships. So, they will eventually be used as settlement for very, very big transactions. And if you compare it with gold, for example, today.
Do you know how much it costs- and gold right now is a means of final settlement between central banks, which they do once every several years. Murad: When moving gold from Europe to America or vice-versa, today, takes tens of millions of dollars and months, if not years in time. Bitcoin, even if you’re on the math at the very equilibrium, the price to settle, like several billions of dollars on layer one of bitcoin will still be [inaudible] cheaper than you can do with gold today. Which is still a huge, huge advantage and all of those daily, small, minuscule transactions that doesn’t require hypersecurity and hyperdecentralization, will be done on much cheaper, much faster, layer two, layer three solutions, which sacrifice some security for greater speed, greater availability, et cetera.
Pomp: I think that’s fair, that bitcoin is not being compared, not to the U.S. dollar, which it is superior to in a lot of ways, right. But, it is being compared to payment rails that aren’t accurate comparisons. Murad: Precisely, and a lot of people have pointed out very, very well. [Savty Namoos 00:58:46], I believe, was the first one who pointed this out.
Bitcoin isn’t competing against [inaudible]. It’s not competing against PayPal or VISA.
Bitcoin is competing against central banks or even more precisely, it’s competing against the Bank of International Settlements as a major settlement network for large transactions as well as against central banks for currency issuance. Those are really the two things that, where it has a competitive advantage, and those are the things you need to be comparing and not the small value transactions. Pomp: Absolutely. Okay, bitcoin is not accepted anywhere.
Murad: So, I believe that people and this is sort of what a lot of people behind bitcoin cash and nano ripple, et cetera. Lytecoin, even, they don’t understand. I believe that the monetary progression- and there’s a lot of debate about this, but this is sort of my strong belief- is that money has to move.
A new pre money, a new synthetic commodity that has properties of becoming money. It needs to got through this evolutionary process and if you go on my Twitter page, it’s pinned right on the top. It sort of shows the step by step progression and I believe- and this is historical, what has happened to gold and silver as well- and I believe it’s what’s going to happen to bitcoin. Murad: First, it needs to be a collectable. Then, it needs to become a store value.
Then, it’s going to be a medium of exchange and finally it’s going to be unit of account. So, this sort of merchant adoption, to me , that’s more for later. Right now, we have to develop bitcoin in the criteria that make it as the best store value. I believe that bitcoin right now is still somewhere between the collectable and the store value phases.
But every year it’s moving ever closer to the store value stage. Murad: Early on, a lot of people argued that it was a collectable for cypherpunks, and nerds anarchists, libertarians, et cetera. And right now, as we’ve discussed, as market cap is getting bigger, as liquidity is getting bigger, as the comparisons to gold are becoming ever more obvious, as the market cap increases a bit more, as custody solutions improve, it will be seen more and more as a store value. Murad: Now, as it grows, as we’ve already concluded, volatility decreases. It is my strong belief that prefer their day to day currency, i.e.
their medium of exchange to be relatively priced stable in terms of purchasing power. And that’s why I believe the goal isn’t to spend bitcoin right now, the goal is to make bitcoin as good of a store value. As bitcoin grows, it’s disincentive to spend also decrease. Right now, I’m not spending my bitcoin. Frankly, I’m not going to be spending my bitcoin for another 15 years kor more. I’m not going to spend my bitcoin until it’s at least 15–20 trillion dollars, in today’s terms.
Murad: As bitcoin gets bigger, say its reached 20 trillion, then the amount of gains in percentage terms that you can have from there on until the ultimate future become less. There’s no longer going to be the thousand x still possible today. The maximum from then on is going to be like, what, five, six x and at that point the disincentive to spend that are very, very present today are no longer there. So, you know- everybody knows the pizza story, where in 2011, somebody spent 40,000 bitcoins on a couple of pizzas, and today that could’ve been like, half a billion dollars or something, right.
And so, a lot of people now know that they don’t want to be the pizza guy, right. And so right now the key is to optimize bitcoin for store value. And as more liquidity pours into the system, we will optimize bitcoin for a medium of exchange after, I believe, the store value functionality has been more or less saturated. Murad: Of course in monetary academic terms the medium of exchange and the store value functions of money are an execrable length, but right now, I believe, we need to optimize for the latter and then the former will come with it.
Pomp: Today, bitcoin is 21 million, total supply. Right? That is what is written into the code. Detractors would argue that, that can change through two different ways. One is, if the miners all agreed to allow an increase in the total supply.
Or, two is, a hard fork, like a bitcoin cash, that would incorporate a different supply schedule, would then have bitcoin not be 21 million fixed supply. How do you respond to either one of those? Murad: Yeah, so … the latter is easy to respond. It’s like saying des the printing of Zimbabwe dollar hurt the U.S. dollar? Not really. In fact, I think over the long term, this kind of currency competition is impossible.
If bitcoin is really not government money, that we’re saying, this is the only one that you’re allowed to use, and that it actually needs to win in the free market. And bitcoin still has to win 20 other contenders before- and as it wins these contenders, the trust in those 21 million becomes evermore and people realize that these 21 million are much more precious than all the other stuff.
Murad: And bitcoin is far, far more unique than any other cryptocurrency in this sense. So, once again, bitcoin cash printing their own 21 million, is like if Zimbabwe or Venezuela prints their currency, it doesn’t weaken the U.S. dollar.
Murad: If anything, it makes it stronger because you have wealth into the quality one and over the long term, I actually think these alt coins are good for bitcoin because they’re showing that this one is far, far stronger and over longer term periods, the way monetary instruments work is that you want [inaudible] the risk your wealth as much as possible and your incentivized to instead of being to contrarian, eventually you want to bet on what’s the most converging asset. Murad: And people will eventually- the one that’s less liquid, is riskier to store your wealth in and eventually, I believe that, not just with other financial assets, before it has to fight with gold and Fiat, it will first have to predominantly defeat other cryptocurrencies. Murad: And to answer your first question. Miners aren’t in control of bitcoin. Pomp: Okay Murad: Full nodes, i.
users, are in control of bitcoin and the user activated softfork is something that has essentially proved that. More than 93% of miners wanted to increase the blocksides in sort of their way.
More than 85% of the company’s exchanges wallet providers were on their side as well. Essentially all of the- even many of the wealthiest bit coiners were on their side. However, so, the users, and those people running full nodes, they decide what kind of code to run and as well as what kind transactions to approve. Miners cannot make these changes to the code without consensus and at the end of the day, bitcoin is this impenetrable fortress of full nodes, which really collectively as we’ve previously discussed in a p-to-p network fashion control the network and I strongly recommend StopAndDecrypt’s article … Murad: … The network and I strongly recommend stopping decrypts article titled Bitcoin is an impenetrable fortress of, for more nuanced on this topic. Pomp: Awesome. All right. Let’s switch to the creation of bitcoin. Right.
One of the things that bitcoin is able to point to that most other cryptocurrencies and, and even Fiat currencies cannot, is that the creator of the system is unknown, right? So anonymous, anonymous, et cetera, we don’t know if it was a man, a woman, a group, and there is folklore and myth around who this may be. Who do you think it is? Should we spend our time trying to figure out who it is? Is it important? And if we do figure out he, she, they is Satoshi, is that good or bad for bitcoin? Murad: I have certain suspicions, but I’m not going to say any names out loud precisely because nobody knowing who that is for sure is what makes bitcoin so strong. As a bitcoin evangelist, I am incentivized in this pseudonyms myth and pseudonyms strengths to come to continue going. Frankly, I don’t think that the search for who the bitcoin creator is, is it productive activity and the fact that it is still unknown and it is still nearly a thing of theories is once again, one of the dozen things that makes bitcoin far stronger than 99% of other cryptocurrencies.
Pomp: Absolutely. Because you won’t say names, I think that’s completely fair. Will you at least tip your hand and whether you think it is an individual or a group? Murad: I think it is one person. Pomp: One person. All right.
Well, at some point somebody is going to get that out of you. Murad: Sure, but I mean there are sort of six or seven theories on this topic. Frankly it really doesn’t matter. Even if we found out who it is, it doesn’t matter. It wouldn’t even damage bitcoin at that point.
I mean it’s good right now that we don’t have any quote unquote heads of the dragon to cut and that note, there’s no single party in control of it as well as the myth is a nice sort of cherry on the cake.
But- Pomp: The story is almost just as important as the technology.
Murad: For sure because I mean, you can have an emergence of this neo money phenomenon without just like religious, like wave the accompanying it, right, but it doesn’t matter. The work that has been done on bitcoin since 2010 is so immense, and now there are so many contributing individuals, contributing coders, contributing companies that it wouldn’t even matter. Bitcoin is far bigger than Satoshi right now.
Pomp: Absolutely. All right, we’re going to read quick message from the sponsors and then that will be right back. All right, so what I want to talk about now, I had Travis calling on, right? Travis previously was at Steve Cohen shop. Right now he’s got a crypto fund. One of the things that we talked about was this idea of musical chairs in the institutional world.
There’s a fixed supply of bitcoin 21 million and right now the music is playing and everyone is walking or jogging around the chairs and at some point the music will stop and people will have to grab a chair, they’ll begin to sit down. One of the ideas that Travis presented was this idea that some institutions aren’t going to wait for the music to stop.
Pomp: They’re going to just start sitting down. He recently tweeted and said, “You know look, I talked about musical chairs, Yale came out and it’s now public that they’ve invested in two separate crypto funds.” Travis made the point that Yale just sat down.
Yale just grabbed their seat. The music hasn’t stopped, but Yale sat down and said, “We’re going to make sure we have a seat at the table.” How do you think institutions, central banks, world leaders et cetera, should be thinking about bitcoin, thinking about how to diversify assets into bitcoin and possibly even fearing bitcoin? What do you think that kind of rational thought process should be? Murad: David Swensen, who is the head of the Yale and diamond company, has been the trend setter in the endowment space as well as the large asset sort of allocation space for the last 20 years.
Pomp: Legend, absolute legend. Murad: Right. Now that he has invested in 254 I believe, I strongly believe that we will see other ivy league syndicates, other ivy league endowment companies as well as big asset managers and even hedge funds in general start dabbling in the space. Pomp: It’s important to call out. They invested in funds that aren’t just bitcoin, but it’s not like they just went and bought bitcoin and put it in custody account. Murad: Yes.
Pomp: They invested in funds that from my understanding, a majority will go into liquid kind of late stage opportunities like Bitcoin, Ethereum, et cetera, but some portion of it will still go into ICOs, venture capital equity investments, et cetera.
It’s kind of a broader basket than just bitcoin but bitcoin, Ethereum, these liquid Cryptos or a big percentage of the allocation. Obviously if they had just bought bitcoin and bitcoin alone and just put it in their own custody account, that would be an even bigger deal but this is still pRetty big deal. How do people respond other than just backing funds? If you’re a central bank right now, what do you do? Murad: The two best things to do is to either invest in bitcoin directly or to invest in a GP of one of the top five best funds. The latter, given the superiority of the fund over others, might be the single best decision. Then the third best is to invest in the LP of the best funds of course.
Those three are the best opportunities. I don’t quite agree with the portfolio construction without naming any names of the … I don’t quite personally agree with the portfolio construction of the two funds that are relevant to the story here. I believe that a mildly leveraged play on bitcoin will have a better sharp ratio then dabbling and altcoins. Murad: I think it is … I mean I will personally be having 10 to 15% of my portfolio in two or three premium altcoins as well.
But really my heart predominantly belongs to bitcoin and I believe that at this point in time from a technological perspective, it is fiduciary irresponsible not to have at least 60% of your cryptocurrency portfolio in bitcoin. My own fund will be engaged in a more active management, but the sort of the longterm portion of our portfolio will be prominently bitcoin or long leverage place on it.
Here’s the thing, a lot of people perhaps rightfully believe that the sort of altcoin a game, so to speak, in this blockchain project game will still go on for two or three more cycles and that might be true. Given that, that is true, the two funds that we’re discussing, they have tremendous pedigree and tremendous sort of networks that they can tap into- Pomp: They have the names and they’ve got their track records.
Murad: They also can’t really justify putting three quarters of their portfolio into bitcoin because then essentially many, if not most of their LPs will be able to just do the same themselves. They need to take advantage of sort of the opportunities that they have, the tremendous deep discounts on future altcoins and the future ICO projects that they will receive undoubtedly.
Perhaps even they might, some of these things might outperform bitcoin in the near term and thus if they sort of changed their direction at a precise enough time, they might even make more bitcoin for the investors that way. I actually think that something like this is a strategy. Murad: A lot of sort of similar people that I’ve talked to, they believe that when all is said and done, there will be six or seven currencies.
I think that’s nonsense because if you study monetary history and given sort of the globalized increasingly fluid increasingly interconnected at interoperable nature of these technologies and the world at large, I believe, I used to think it was winner take most as well. I used to think it would be like 70/264 a like in a Pareto distribution type way, but I increasingly believe that it will rather be winner take all rather than winner take most, and I would also say too many of these investors that you have to, you absolutely have to think of these crypto assets as money first and software second. Murad: A lot of people who come from the entrepreneurial VC or the technology world day, they think about it the other way around and I think that is going to lead to a lot of losses. It’s going to lead to a lot of losses and a lot of events, sort of the premium big hedge funds will not perform as well as those who managed to position themselves in accordance to more correct monetary theories. Pomp: Yeah. Look, I’ll even take it a step further. In most cases you have more extreme views than I do, but in this case I may have more than you.
In that, if you’re an institution today and you have zero exposure to the crypto currency asset class or market, you’re violating your fiduciary duty given that it was the best performing asset over the last decade. It has very unique characteristics when it comes to lower levels of correlation, upside the per unit of risk that you take by allocating capital here. Those institutions that are on zero percent exposure have to do what we call get off zero. Pomp: Each portfolio is different, so some it’s 10 basis points, 50, 75, 200, 500, whatever the basis point number is, it’s all about what their goals are, what their current allocations are, all of that, but zero is the wrong number. That’s much easier, I think for longterm macro investors who have experience and even expertise in the alternative space, so Dave Swensen is a perfect example at Yale, but I think that this iS actually true at the central bank level, at the individual level, et cetera. Let’s go into a hypothetical world where the US central bank is playing that game of musical chairs and they sit down and it comes out that the US central bank bought five, 10% of the network on the open market. What happens to bitcoin, the price and kind of the macro economic world, if that was to come to light? Murad: Oh, well then buying five percent would be impossible. Pomp: Why? Murad: Because people need to realize that I’m more than 10 million of bitcoin, I believe somewhere between 10 to 30 million are held and not like actively trading are actively circulating.
Only three or four million are being actively traded. As bitcoin’s price will be increasing, I believe that people will be realizing that there’s really a financial revolution going here and this is something to be kept for a long time. Relative to the amounts of capital that are sloshing around in capital markets around the world, bitcoin is really so small still. It’s really liquid really. As they even tried to buy half a percent, like that very act will raise the price so much in a vertical fashion that just buying the next half a percent will be eight times more expensive and like this continuous compounding in an exponential fashion. Murad: It will need to be done in an extremely stealthy, in an extremely clever, in an extremely patient manner over months, over years maybe even and maybe even then they’ll only be able to get to two and a half percent ballpark.
Here’s what I like to say. Government’s buying bitcoin, really, I think they will be buying bitcoin last.
There’s two things I want to say here. First of all, governments buying bitcoin will essentially be a putting the final nail in the coffin of reducing their own size by half, because bitcoin is unprintable, which you have discussed how it was going to destroy fiat currencies and bitcoin is increasingly on taxable. I mean the privacy technologies around these technologies, as you know, we’ll also keep improving rapidly. This is inevitable.
Murad: I believe that, government’s buying bitcoin will probably be the latest group of people to buy them and that will be the final ultimate credibility because essentially the biggest competitor is capitulating.
Something like that will not just be a rumor or something like that, given bitcoins the liquidity will be extremely difficult to hide.
I like to joke that once a and some asian central bank over, or a sovereign wealth fund announces that they put in two percent of their assets into the portfolio of blue chip cryptocurrencies, it’s game over. I don’t think that central banks will, are really the people by the time they will try to be accumulating any of them, bitcoin will already be huge.
Murad: I actually believe, and this is one of the things that my views differ from many people in the space actually. I actually think that bitcoins are a cent will be driven predominantly by the wealthy. The three people, the three sort of the three initials of investors that will sort of make bitcoin’s price skyrocket over the coming decades, will be open minded, ultra high net worth individuals. It will be a savvy funds and fund managers and it will be, I think politicians and dictators and sort of these fringe, third world, second world individuals who will need this currency perhaps more than anyone else.
Murad: I liKe to joke that, essentially the people and the institutions who bitcoin was designed to destroy will be precisely the people who will drive a bitcoin’s price and bitcoin’s success to the sky. Because if you think about it, the people who censor the most, need uncensorable currency the most. The people who sees the most, need unseasonable assets the most and of course the people who print the most neat unprintable currency the most. These people, every week you read about some fringe countries, wealthy individuals and government officials, bank accounts in Switzerland, in Luxembourg, in the Caribbean, being frozen in America, being blocked, transactions being censored. Murad: This technology allows those very precise people to have unseasonable store value where they can essentially accumulate wealth with absolutely no one else in the world being able to take it away from them. For better or worse, this is how free market … instruments on free market technologies work.
It will be of course, used for the good and the bad, but irregardless of these very people whose bitcoins, it’s fighting against ideologically will be the same people who will helping it financially.
Pomp: Absolutely. I attend to think that you are more right than wrong on that. Before we kind of go into some rapid fire questions, if an institutional CIO, a central bank authority, a government leader, is listening to this, give me your 60 second pitch to them why they should buy bitcoin. Murad: Bitcoin is the soundest hardest currency that has ever been invented in the history of human civilization. This is disinflation is second to none. It’s monetary policies known years in advance and it is becoming increasingly credible. It will also be increasingly a threat to the very currencies that you guys control.
I think getting in before most other central banks and most other sovereign wealth funds and most other rich people will, in the next decade will prove to be one of the smartest investment decisions in the course of human history. If you are able … the countries that are able to stealthily accumulate bitcoin and adopt bitcoin more than other currencies, will thrive in the age of hyper organization while the other countries that haven’t done so will suffer tremendously.
Pomp: Long bitcoin, short the bankers and I think we are in agreement there. All right, so you’ve answered some of these already, but what do you think is your most controversial thought? Is it the opportunity that exists for bitcoin stuff? Murad: I Mean, the opportunity for bitcoin is better than ever.
I would say the risk reward … so the award is technically low in and of itself is lower than it was in like 2013 or whatever, but the risks are also massively reduced. We already have 200 accompany building for this thing, building on the side of this thing, building on top of this thing.
The number of engineers involved are ever greater. If you watch this slides and the lectures from a scaling bitcoin Tokyo that’s happening over the past couple of days, the amount of just genius interventions that are being potentially added to bitcoin and the improvements added to bitcoin are incredible. Murad: The liquidity today and the volumes today and the marketability of the brand today is far greater than back then. Risk reward might even be higher I would say.
The opportunity is still there. It’s at least a couple of hundred x and in the very, very long run more than a thousand x. There’s still a lot of wealth to be created here, doing a mildly leveraged play via various instruments or derivatives is a way to boost returns even further. I believe that the opportunities are, is definitely here and other controversial opinion is what I’ve described is that bitcoin isn’t necessarily sort of going to be adopted bottom up, but rather, and it’s not necessarily going to be adopted pop down either, but it will really be the wealthy who will be adopting it. Unfortunately due to the nature of the world, those are the people with the money and it’s the people with capital who are going to be sort of boosting the market capitalizations of these assets. Pomp: Absolutely.
What’s the most important company in crypto right now? Murad: Chaincode Labs. Pomp: Why? Murad: They have some of the most prolific developers and block stream as well. Of course. Pomp: Got it. Those working on bitcoin? Murad: Yes. John Newbery, Alex Marcos, Matt Corallo, they’re just on a whole nother level of genIus.
Pomp: Absolutely. All right. If you had a magic wand and you could wave it, what’s the one regulation that you would improve or change? Murad: I would reduce taxes and I would prioritize a lot more things around the world. Pomp: Interesting. Murad: I believe that a free market capitalism and individual entrepreneurs are much more efficient at providing solutions and a much more efficient at making world Austrian economists call economic calculations. In very, very crude terms, a thousand clever, smart, talented entrepreneurs with a million dollars each, we’ll do a lot more both for themselves and the world. Then I’m just an emotion’s burka with no connection to that particular money will do with a billion dollars. I believe that a lot of the things that governments do around the world today, if you privatized or even partially privatized, those things that the world will be much more efficient because I’m essentially seven fiercely competitive companies will always achieve the results much better than one sort of bureaucratic, fat government institutions.
Pomp: I don’t think anyone is surprised that you believe that and I tend to, I tend to agree- Murad: of course, Pomp: The most fastest there. Okay, so let’s talk about something for two minutes, that’s non crypto related. So aliens, we just got to admit that they exist. Most people think of aliens as a human equivalent. They’re depicted that way and movies and saifai, et cetera, but nobody ever really talks about alien animals. Do we think that there are multiple species of aliens? And if so, do we think aliens have pets? Murad: Well, if you make the assumption aliens exist, then it is likely that many different kinds of aliens exist. Just due to the vastness of space, statistically speaking, this vastness is so immense that if we do go off of the assumption that at least one other specie exists, it is likely that hundreds of others do as well. It is also likely that several species exist on sort of one planet or ecosystem flora, fauna, whatever together and I wouldn’t be surprised if those civilizations have animals as well.
Yeah. Pomp: Yeah. You think they have pets though? You think they take the animals and they make them their pets in like a domesticated?- Murad: It is hard to say some of the alien species would have pets. I think probabilistically speaking that’s very likely. It really depends sort of on the culture and the order of that particular world. Pomp: Yeah. I think that’s fair. All right.
I end each one of these with allowing the guests asked me one question. What one question do you have for me? Murad: I guess you’ve asked this question to me, but I would like to sort of hear your version as well. I know we’ve already previously talked about this, but I just sort of like to rehash these bullet points in my head as well. You personally and sort of on with your work with Morgan creek and other ventures, how do you go about pitching bitcoin and sort of this ecosystem at large to not individually that says, but the more conservative large asset allocators? Pomp: Yeah. Look, I think that it’s custom given who we’re talking to. There’s kind of different things that we emphasize or deemphasized depending who we’re talking to. A lot of it is informed by who they are, what their current allocation is, what their goals are, et cetera, but there are some common threads through each conversation. One of them is this asset class has some of the highest yield opportunities per unit of risk across the entire world.
Any asset, any asset class, any strategy, this is one of if not the highest potential yield per unit of risk. That’s one.
Two is that the idea of scarcity around bitcoin specifically, is something that they have likely not thought deeply about, nor do they actually understand the gravity of the implications. Pomp: It’s one thing to just understand, okay, if there’s a fixed supply, an increase in demand price should appreciate.
It’s another thing to understand 21 million bitcoin exist and there are hundreds of trillions of dollars of wealth in the world that are going to be competing for those 21 million. Hundreds of trillions of dollars exist. If you manage 500 million, a billion, 10 billion, a hundred billion, you’re nobody. If you don’t have your seat at the table now, you may not get a seat later. Pomp: I think that’s the second one.
Then the third one is, we actually make economic argument looking at other asset classes. The opportunity cost, if you do not invest in cryptocurrencies, bitcoin, block chain, et cetera, what else is out there? What you find, depending on who you listen to, my partner Mark Hughes is very well versed in kind of the endowment model and it comes out of that world and he walks people through this idea that they yield that they target or goal on may not be available in other asset classes. If you look at stocks, bonds, currencies and commodities, and only four assets you can own. Pomp: The ability to drive six and a half, seven, seven and a half, eight percent annualized yield, may not be there over the next decade. If that is true, that doesn’t necessarily mean you should take a hundred percent of your assets and go put it into bitcoin for example, but you should have exposure.
Those three core components make up this kind of verbal campaign that we’re on, called Get off zero. It’s the idea that, if you sitting in a fiduciary seat and you have a zero exposure to the asset or the asset class, you’re wrong. There’s a qualitative argument, there’s a quantitative argument, we’re happy to discuss either one of them, but your wrong. Zero is the wrong number and you have to get off zero. Pomp: Whether it’s 10 basis points, 50, 100, 500, that’s a customized conversation for who it is, what their goals are, what the current allocation, et cetera, but zero is the wrong answer.
What we find is that specific argument of you have no skin in this game and this could be the most important game available really residents. I think that Yale jumping in very big deal. We’ve got some institutions that I think when people find out are going to be shocked and again, more people grabbing seats.
Pomp: I think what we’re going to see over the next, I put it at like 36 months, is a formal or just an inflow of capital from very, very sophisticated people that most of the financial world is not expecting. There’s a, I think it’s Bill Gates says, “We overestimate what we can accomplish in two years and we underestimate what we accomplish in 10 years.
” I’m probably with you in that even the most hardcore bitcoin believers are actually drastically underestimating what we’re talking about here and what the potential is. If that is true, this is the most important piece of technology that the world seen. Murad: Without a doubt and those are amazing points. To add to the discussion on yield, I would say one of my old bosses told me that making money for you guys will in general as an aggregate, as a demographic will be much harder than it was for our generation or the generation before that. As you might know in the 50s or 60s, you could have just a regular job and still be able to buy one house or even two houses, have a big family, et cetera. Today that’s impossible. The world not just America, but the world as a whole is becoming fiercely competitive. We are sort of, obviously not at the end of the esker, but we are sort of, it’s kind of sloping down.
Innovations are harder to create, the technologies are more sophisticated to sort of incrementally push further and the amount of, I guess, ideas that are easy pickings are scarcer nowadays. I generally like obviously becoming wealthy takes a decade at least or more for anybody but I like to say semi jokingly that crypto might be the last easy way to rich in my generation.
Pomp: Look we obviously today have the richest man in the world over a hundred billion dollars of wealth, Ryan Jeff Bezos. It would not surprise me that the richest company in the world which is over a trillion today, is matched by the richest person in the world in the future to we’ll have a trillionaire and the odds of that person comes from the cryptocurrency world, in my opinion, is the highest probability out of any other industry. If that is true, the amount of millionaires centi millionaires, billionaires centi billionaires that will be created in this asset class will be unparalleled and anything else in history. I think that’s part of the excitement. Murad: For sure in monetary terms within that particular asset, a bitcoin will actually increase inequality because the way it is, the distribution is improving with every cycle of course but if hyper bitcoin quantization of work to actually occur, the gini coefficient of bitcoin would probably be higher than any fee at currency today among the predominant ones. We would definitely see a couple of trillionaires and today terms, I think without a doubt.
Pomp: Absolutely. All right man. This is epic. I really, really appreciate the time.
I hope that this is valuable to everybody and want to do this pretty regularly to check back in and see kind of how all this is progressing, so thank you. Murad: For sure.
Thanks for having me. Pomp: Absolutely. .