Investment under a Bitcoin Standard. Bitcoin Tech Talk #236

The current system of investment is strange. Stocks with no profits for years soar to crazy heights. Bonds that return negative yields go up in value. There are lots of VCs who put in lots of money to lots of startups hoping for returns in 7-10 years.

Startups are often unprofitable for most, if not all, of that time and are all-in on market capture. It’s considered stupid to earn profits and re-investment into the business to grow such companies is what’s considered wise. Big companies also don’t like keeping cash on their balance sheet and instead buy competitors, or their own stock. Debt is looked upon as a good thing, especially if the interest rate is low.

The current state of affairs is the result of bad incentives. There’s a lot of money being invested because fiat money is such a terrible savings vehicle. Investments are supposed to have risk and that risk comes with a proportional reward. However, because fiat money has infected nearly every investment category, each vehicle has been de-risked through central bank machinations. Thus, the rewards are also proportionally reduced. We’re at a point where the search for yield has led to riskier and riskier investments becoming more and more mainstream. As previously risky investments become more mainstream, governments regulate, ostensibly to keep these investments safe. Central banks follow by de-risking them. This started with cash savings, then bonds, then stocks. Now even hedge funds get central bank intervention on their behalf as we saw with the repo bailouts.

Bitcoin, of course, has thrown a big wrench into this model because there’s an asset that’s outside of the control of central banks and governments. As a result, we have a volatile asset that’s got correspondingly fantastic yield leading to more and more people allocating more and more of their portfolios into it. As Bitcoin takes over the portfolios of so many, either through natural growth or some form of hyperbitcoinization, it’s worth asking, what would a Bitcoin standard investment environment look like? Here are just three thoughts about this environment.

First, much of what we see today would be considered uninvestable. There’s no way anyone buys any government or corporate bonds that pay in fiat money. They simply don’t provide enough yield being denominated in fiat vs. Bitcoin. Any bond or debt offering would have to be denominated in BTC to make investment worthwhile and there can be no de-risking as no central bank can print BTC to bail anyone out. Neither would anyone buy companies that aren’t profitable as new money won’t be so easy to get. Companies will be riskier, especially with the possibility of bankruptcy, which will occur more often given that debt will have be denominated in BTC. VCs would likely not be able to beat BTC and thus the industry would likely be much smaller.

Second, companies would not be focused on growth, but on profit. Instead of the unnatural loss-leading hypergrowth seen in many industries today, there would be organic profit-based growth as equity is not going to raise nearly as much money. There’s not going to be a constant stream of central bank money printing which cause the equity to be so expensive. Profitable companies will have sane P/E multiples and earnings will probably get paid out rather than used to grow faster. Profits cannot simply be pushed out to later as delaying profit now will have serious costs given the natural appreciation of Bitcoin.

Third, there will be a lot more entrepreneurs. Companies will be smaller than they are now as giant companies will no longer benefit from government largess. Smaller companies will be far more nimble and on a Bitcoin standard, will have a level playing field to compete. As such, there will be fewer giant public companies and far more savings in the marketplace. Each person with savings will look specifically for immediately profitable opportunities instead of giant scalable value capture ideas that dominate VC portfolios. Such opportunities will naturally lead to more companies being formed to take advantage of such opportunities on a consistent basis.

Overall, these are all good things for society as there will be a greater number and variety of goods and services in the marketplace. Bitcoin, in other words, will produce real civilization growth.

Bitcoin

Taproot Speedy Trial has been merged! Luke Dash Jr has rejected this as it doesn’t have LOT=True, and he along with other opponents have released their own LOT=True client. This shouldn’t cause any trouble unless the miners decide not to signal for Taproot. Given that they’ve committed to do so, this split in clients is not likely to have any consequences. We’re still on track for about a November 15 activation of Taproot.

Casa supports multisig sub-accounts. This is a completely common feature in single-sig wallets but is tricky to do with multisig. They seem to have figured out a solution and this is a welcome feature, especially for families where multiple members may have the same multisig key setup. I hope other multisig setups such as Caravan and Specter add this feature.

Jeremy Rubin has released Sapio, which is a smart contract creation tool using OP_CHECKTEMPLATEVERIFY. The tool is very well documented and is meant to show the benefits of the feature he’s been wanting for years now. I commend Jeremy for persevering and creating this tool. He’s really trying to get developer consensus on this op code and whatever you may think of it, he’s definitely put in the work and deserves a thorough evaluation of his proposal.

Lightning

LN Markets newsletter talks about OmniBolt. Essentially, Omni, the protocol which used to be called MasterCoin which was a protocol on top of Bitcoin is now doing something similar on Lightning. Much like RGB, this allows for tokens to be issued on top of Lightning. They are most famous for being the platform which originally issued USDT and they seem to want to issue similar assets on Lightning. I’m not really a fan of how they did the Bitcoin-based asset, but will be watching to see if this catches on.

The economics of routing are covered in an excellent article by Lightning Chronicles. The post is thorough and covers liquidity, rebalancing and channel management among other things, and is an excellent read on what it takes to create a routing node to make money. tl;dr: there’s a lot of different considerations and things to learn to run a good lightning routing node.

Economics, Engineering, Etc.

Bitcoin had a big drop because of the hash rate slow down. Apparently, there are rolling blackouts in the part of China where the energy is really cheap. I suspect that a lot of these miners will be moving their operations soon and the hash rate will be back, but incidents like this will only hurt the energy producer as they will lose to other jurisdictions and producers that don’t have random outages like this.

Nic Carter gives the NY Times a well-deserved fisking over their horribly researched article on Bitcoin and energy. As usual, the MSM journalist really didn’t do much research and made questionable claims. Nic identified 10 outright falsehoods and provided evidence for their falseness. I commend his work, but to some degree I don’t think people who get their Bitcoin information from the NY Times really deserve to get into it.

Anicca Research has published a simulation of mining profitability. Similarly, Galaxy Digital has an informative article on mining economics. Learning the economics can be a good way to learn about why most people shouldn’t be mining. I’m still amazed at the number of people that immediately think about mining when they learn about Bitcoin. These two articles can be a good help in pushing them down the right path to Bitcoin enlightenment.

Turkey is banning Bitcoin payments. Unlike China’s ban of exchanges, this seems motivated by their high inflation rate. Turkey is an interesting area for this to happen, given that they span two continents. The development of alternative markets in Turkey will be interesting to watch.

Dylan LeClaire writes how Jim Cramer doesn’t get Bitcoin. Cramer, of course, sold 50% of his position. This is a common first mistake for new Bitcoiners who want to take profits thinking that the price increases aren’t real. Similar people in the past got in at $1 and sold for $4, got in at $50 and sold for $200 and sometimes bought in at $1000 and sold at $300. Cramer is at heart a trader that isn’t good at trading so for me, this is an excellent signal that the top isn’t in yet.

One Ethereum full-node implementation fell out of consensus with the others. Given that there are so few full nodes running, it’s crazy that even those few can’t seem to stay in sync from a coding perspective. I expect a bigger event that halts the network some time in the future.

Events

Later this week, I’ll be speaking at the Culture Summit to talk to church leaders about Bitcoin.

I am going to be at Bitcoin 2021 June 4-5.

My Programming Blockchain seminar is next happening on June 1-2 in Miami and then on August 10-11 in Mexico. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.

Podcasts, Etc.

I have a new Sphinx group for my podcast and newsletter.

On this week’s Bitcoin Fixes This, I talked to awayslice about food. His insights into the role of food in relationships were inspiring. I thoroughly enjoyed the beefsteak event last week and expect the one he’s planning in Miami to be just as delicious and enjoyable.

I also read through last week’s newsletter on clubhouse which you can find here. I was on Tone’s show for the first time in a while discussing Coinbase direct listing among other things.

Here’s the new book:

My other books are here.

Fiat delenda est.