Tag Bitcoin

Marc Andreessen has helped a lot of people get rich—including Marc Andreessen. He’s made millions of people’s lives more fun, more efficient, or just a little weirder while making himself into a billionaire.

He is the co-creator of the first widely used web browser and co-founder of the venture capital powerhouse Andreessen Horowitz. Though he hates the term unicorn—industry lingo for a private tech firm valued at more than a billion dollars—he’s a famously successful unicorn wrangler: He was an early investor in Facebook, Pinterest, LinkedIn, Twitter, Lyft, and more.

Andreessen is also aggressively quotable, whether it’s his classic 2011 pronouncement that “software is eating the world” or his more recent “There are no bad ideas, only early ones.” And in 2014 he said, “In 20 years, we’ll be talking about bitcoin the way we talk about the internet today.” A born bull, Andreessen is an optimist who places his hope for the future squarely in the hands of “the 19-year-olds and the startups that no one’s heard of.”

As splashy artificial intelligence such as ChatGPT and DALL-E begin to permeate our daily lives and the predictable panic revs up, Reason Editor in Chief Katherine Mangu-Ward sat down with Andreessen in February for a video and podcast interview about what the future will look like, whether it still will emerge from Silicon Valley, Friedrich Nietzsche, and the role of government in fostering or destroying innovation.

Reason: I tend to be skeptical of people who claim that this time it’s different, with any tech or cultural trend. But with artificial intelligence (A.I.), is this time different?

Andreessen: A.I. has been the fundamental dream of computer science going all the way back to the 1940s. There were five or six A.I. booms where people were really convinced that this time is the time it’s going to happen. Then there were A.I. winters in which it turns out, oops, not yet. For sure, we’re in another one of those A.I. booms.

There are a couple of things that are different about what’s happening right now. There are these very well-defined tests, ways of measuring intelligence-like capabilities. Computers have started to do actually better than people on these tests. These are tests that involve interactions with fuzzy reality. So these aren’t tests like, “Can you do math faster?” These are tests like, “Can you process reality in a superior way?”

The first of those test breakthroughs was in 2012, when computers became better than human beings at recognizing objects in images. That’s the breakthrough that has made the self-driving car a real possibility. Because what’s a self-driving car? It’s basically just processing large amounts of images and trying to understand, “Is that a kid running across the street or is that a plastic bag, and should I hit the brakes or should I just keep going?” Tesla’s self-driving isn’t perfect yet, but it’s starting to work quite well. Waymo, one of our companies: They’re up and running now.

We started to see these breakthroughs in what’s called natural language processing about five years ago, where computers started getting really good at understanding written English. They started getting really good at speech synthesis, which is actually quite a challenging problem. And then most recently, there’s this huge breakthrough in ChatGPT.

ChatGPT is an instance of a broader phenomenon in the field called large language models, or LLMs. A lot of people outside the tech industry are shocked by what that thing can do. And I’ll just tell you, a lot of people inside the tech industry are shocked by what that thing can do.

ChatGPT does feel, to those of us who don’t fundamentally understand what’s going on, like a little bit of a magic trick. Like Arthur C. Clarke’s third law: “Any sufficiently advanced technology is indistinguishable from magic.” And sometimes it really is a trick. But you’re saying this is something real?

Well, it’s also a trick. It’s both. There’s a profound underlying question: What does it mean to be smart? What does it mean to be conscious? What does it mean to be human? Ultimately, all the big questions are not, “What does the machine do?” Ultimately, all the big questions are, “What do we do?”

LLMs are basically very fancy autocompletes. An autocomplete is a standard computer function. If you have an iPhone, you start typing a word and it will offer you an autocompletion of the rest of that word so you don’t have to type that whole word. Gmail has autocomplete now for sentences, where you start typing a sentence—”I’m sorry I can’t make it to your event”—and it will suggest the rest of the sentence. What LLMs are is basically autocomplete across a paragraph. Or maybe an autocomplete across 20 pages or, in the future, maybe an autocomplete across an entire book.

You’ll sit down to write your next book. You’ll type the first sentence, and it will suggest the rest of the book. Are you going to want what it suggested? Probably not. But it’s going to give you a suggestion, and it’s going to give you suggested chapters, it’s going to give you suggested topics, it’s going to be suggested examples, it’s going to give you suggested ways to word things. You can already do this with ChatGPT. You can type in, “Here’s my draft. Here’s five paragraphs I just wrote. How could this be worded better? How could this be worded more simply? How could this be worded in a way that people who are younger can understand it?” And so it’s going to be able to autocomplete in all of these very interesting ways. And then it’s up to the human being who’s steering it to decide what to do with that.

Is that a trick or a breakthrough? It’s both. Yann LeCun, who’s a legend in the field of A.I., who’s at Meta, argues this is more trick than breakthrough. He argues it’s like a puppy: It autocompletes the text it thinks you want to see, but it doesn’t actually understand any of the things it’s saying. It doesn’t actually know who people are. It doesn’t know how physics works. It has this thing that’s called hallucination, where if it doesn’t have an autocomplete that’s factually correct, it’s like a puppy, it still wants to make you happy, and so it will autocomplete a hallucination. It will start making up names and dates and historical events that never happened.

I know the term is hallucination, but the other concept that comes to mind for me is imposter syndrome. I don’t know whether the humans have the imposter syndrome or the A.I.s do, but sometimes we’re all just saying the thing that we think someone wants to hear, right?

This goes to the underlying question: What do people do? And then—this is where things get incredibly uncomfortable for a lot of people—what is human consciousness? How do we form ideas? I don’t know about you, but what I’ve found in my life is that a lot of people on a day-to-day basis are just telling you what they think you want to hear.

Life is full of these autocompletes as it is. How many people are making arguments that they actually have conceived of, that they actually believe, versus how many people are making arguments that are basically the arguments that they think people are expecting them to make? We see this thing in politics—that you guys are an exception to—where most people have the exact same sets of views as everybody else on their side on every conceivable issue. We know that those people have not sat down and talked through all of those issues from first principles. We know that what’s happened, of course, is the social reinforcement mechanism. Is that actually any better than the machine essentially trying to do the same thing? I think it’s kind of the same. I think we’re going to learn that we’re a lot more like ChatGPT than we thought.

Alan Turing created this thing called the Turing test. Basically he said, “Let’s suppose we develop what we think is an A.I. Let’s suppose we develop a program and we think it’s smart in the same way that a person is smart. How will we know that it’s actually smart?” So you have a human subject, and they’re in a chatroom with a human being and with a computer. And both the human being and the computer are trying to convince them that they’re actually the real person and the other one is the computer. If the computer can convince you that it’s a human being, then it effectively is A.I.

The obvious problem with the Turing test is that people are super easy to con. Is a computer that’s good at conning you A.I. or is that just revealing an underlying weakness in what we think of as profoundly human?

There’s no single vector of smart versus not smart. There are certain sets of things humans can do better or worse, there are certain sets of things computers can do better or worse. The things computers can do better are getting really good.

If you try Midjourney or DALL-E, they’re able to produce art that is more beautiful than all but maybe a handful of human artists. Two years ago, did we expect a computer to be making beautiful art? No, we didn’t. Can it do it now routinely? Yes. What does that mean in terms of what human artists do? If there’s only a few human artists that can produce art that beautiful, maybe we’re not that good at making art.

You’ve been using the language of humanity: “Humans are like this.” But some of this is cultural. Should we care if A.I.s are coming out of Silicon Valley versus coming from another place?

I think we should. Among the things we’re talking about here is the future of warfare. You can see it in the self-driving car. If you have a self-driving car, that means you can have a self-flying plane, that means you can have a self-guided submarine, that means you can have smart drones. You have this concept now we see in Ukraine with these so-called loitering munitions, basically a suicide drone—it kills itself. But it just stays in the sky until it sees the target, and it just zeros in and drops a grenade or itself is the bomb.

I just watched the new Top Gun movie, and they allude to this a little bit in the movie: To train an F-16 or F-18 fighter pilot is like, I don’t know, $7, 8, 10, 15 million, plus it’s a very valuable human being. And we put these people in these tin cans and then we fly them through the air at whatever Mach whatever. The plane is capable of maneuvering in ways that will actually kill the pilot. So what the plane can do is actually constrained by what the human body can actually put up with. And then, by the way, the plane that is capable of sustaining human life is very big and expensive and has all these systems to be able to accommodate the human pilot.

A supersonic A.I. drone is not going to have any of those restraints. It’s going to cost a fraction of the price. It doesn’t need to have even the shape that we associate with it today. It can have any shape that’s aerodynamic. It doesn’t need to take into account a human pilot. It can fly faster, it can maneuver faster, it can do all kinds of turns, all kinds of things that the human pilot’s body can’t tolerate. It can make decisions much more quickly. It can generate much more information per second than any human being can. You’re not just going to have one of those at a time, you’re going to have 10 or 100 or 1,000 or 10,000 or 100,000 of those things flying at the same time. The nation-states with the best A.I. capabilities are going to have the best defense capabilities.

Will our A.I.s have American values? Is there a cultural component to the type of A.I. we’re going to get?

Look at the fight that’s happened over social media. There’s been a massive fight over what values are encoded in social media and what censorship controls and what ideologies are allowed to perpetuate.

There’s a constant running fight on that in China, which is the “Great Firewall,” and they’ve got restrictions on what they’ll allow you to show if you’re a Chinese citizen. And then there’s these cross-cultural questions. TikTok as a Chinese platform running in the U.S. with American users, especially American children, using it. A lot of people have theories that the TikTok algorithm is very deliberately steering U.S. kids towards destructive behaviors, and is that some sort of foreign hostile operation?

So anyway, to the extent that these are all big issues in this previous era of social media, I think all of these issues magnify out by a million times in this A.I. area. All of those issues become far more dramatic and important. People only generate so many kinds of content, whereas A.I. is going to be applied to everything.

What you just described, is that a case for early and cautious regulation? Or is that a case for the impossibility of regulation?

What would Reason magazine say about well-intentioned government—

Ha! Well, there are people who are deeply skeptical of governments, who still say, “Maybe this is the moment for guardrails.” Maybe they want to limit how states can use A.I., for instance.

I’ll make your own argument back to you: The road to hell is paved with good intentions. It’s like, “Boy, wouldn’t it be great this time if we could have very carefully calibrated, well-thought-through, rational, reasonable, effective regulation?”

“Maybe this time we can make rent control work, if we’re a little bit smarter about it.” Your own argument obviously, is like, well, that’s not actually what happens, for all the reasons you guys talk about all the time.

So yeah, there’s a theoretical argument for such a thing. We don’t get the abstract theoretical regulation, we get the practical, real-world regulation. And what do we get? Regulatory capture. Corruption. Early incumbent lock-in. Political capture. Skewed incentives.

You’ve talked a lot about the rapid process through which innovative tech startups become enmeshed incumbents, both just with the state and more generally in their business practices. That topic has come up a lot recently with the Twitter Files and revelations of the ways that companies collaborated willingly, but maybe with a looming threat as well, with government agencies.

It seems to me like we’re going to be in for more of that. This blurring of the lines between public and private is our fate. Is that what it looks like to you? Does that threaten innovation, or are there ways in which it could potentially speed things along?

The textbook view of the American economy is that it’s free market competition. Companies are fighting it out. Different toothpaste companies are trying to sell you different toothpaste and it’s a largely competitive market. Every once in a while there’s an externality that requires government intervention and then you get these weird things like the “too big to fail” banks, but those are exceptions.

I can tell you my experience, having been now in startups for 30 years, is that the opposite is true. James Burnham was right. We passed from the original model of capitalism, which he called bourgeois capitalism, into a different model, which he called managerial capitalism, some decades back. And the actual correct model of how the U.S. economy works is basically big companies forming oligopolies, cartels, and monopolies and doing all the things that you expect oligopolies, cartels, and monopolies to do. And then they jointly corrupt and capture the regulatory and government process. They end up controlling their regulators.

So most sectors of the economy are a conspiracy between the big incumbents and their punitive regulators. The purpose of the conspiracy is to perpetuate the long-term existence of those monopolies and cartels and to block new competition. To me, that completely explains the education system, both K-12 and the university system. It completely explains the health care system. It completely explains the housing crisis. It completely explains the financial crisis and the bailouts. It completely explains the Twitter Files.

Are there sectors that are less subject to that dynamic you just described?

The question is always the same: Is there actual competition? The idea of capitalism is basically an economic form of the idea of evolution—natural selection and survival of the fittest and the idea that a superior product ought to win in the market and that markets ought to be open to competition and a new company can come along with a better widget and take out the incumbents because its widget is superior and customers like it better.

Is there actual competition happening or not? Do consumers actually have the ability to fully select among the existing alternatives? Can you actually bring a new widget to market or do you get blocked out? Because the regulatory wall that’s been established makes that prohibitive.

The great example of this is banking, where the big thing in 2008 was, “We need to bail out these banks because they’re ‘too big to fail.'” And so then there were screams of the need to reform the “too big to fail” banks. That led to Dodd-Frank. The result of Dodd-Frank—I call it the Big Bank Protection Act—is that the “too big to fail” banks are now much larger than before and the number of new banks being created in the U.S. has dropped to zero.

The cynical answer is that doesn’t happen in the spaces that don’t matter. Anybody can bring a new toy to market. Anybody can open a restaurant. These are fine and good consumer categories that people really enjoy and so forth, but as contrasted to the health care system or the education system or the housing system or the legal system—

If you want freedom, your business had better be frivolous.

That would be the cynical way of looking at it. If it doesn’t matter in terms of determining the power structure of society, then do whatever you want. But if it actually matters to major issues of policy where the government is intertwined with them, then of course it doesn’t happen there.

I think it’s so self-evident. Why are all these universities identical? Why do they all have identical ideologies? Why isn’t there a marketplace of ideas at the university level? Well, that becomes a question of why aren’t there more universities? There aren’t more universities because you have to get accredited. The accreditation bureau is run by the existing universities.

Why do health care prices do what they do? A major reason for that is because basically they’re paid for by insurance. There’s private insurance and public insurance. The private insurance prices just key off the public prices, because Medicare is the big buyer.

So how are Medicare prices set? A unit inside [the Department of Health and Human Services] runs literal Soviet-style price-fixing boards for medical goods and services. And so once a year, there are doctors who get together in a conference room at, like, a Hyatt Chicago somewhere, and they sit down and they do the exact same thing. The Soviets had a central price-fixing bureau. It didn’t work. We don’t have that for the entire economy, but we have that for the entire health care system. And it doesn’t work for the same reason that the Soviet system didn’t work. We’ve exactly replicated the Soviet system, [but] we’re expecting better results.

You said about 10 years ago that bitcoin is as important as the internet was. We’ve had a little time for that to play out. How is that prediction looking to you?

I wrote a New York Times column back when The New York Times would run things that I write—which, by the way, in case you’re wondering, is no longer true.

Everything in there, I still agree with. The one modification I would make is at the time it looked like bitcoin was going to evolve in a way where it was going to be used for many other things. We thought it was a general technology platform that was going to evolve to be able to make a lot of other applications possible in the same way the internet did. That didn’t happen. Bitcoin itself just basically stalled out. It basically stopped evolving, but a bunch of other projects emerged that took that place. The big one right now is ethereum. So if I wrote that thing today, either I would say ethereum instead of bitcoin or I would just say crypto.

But otherwise, all the same ideas apply. The argument I made in that piece is basically crypto, Web3, blockchain—they’re what I call the other half of the internet. It’s all the functions of the internet that we knew we wanted to have when we originally built the internet as people know it today. But it’s all of the aspects of basically being able to do business and be able to do transactions and have trust. We did not know how to use the internet to do that in the ’90s. With this technological breakthrough of the blockchain, we now know how to do that.

We have the technological foundation to be able to do that: have a network of trust that is overlaid on top of the internet. The internet is an untrusted network. Anybody can pretend to be anybody they want on the internet. Web3 creates layers of trust on top of that. Within those layers of trust, you can represent money, but you can also represent many other things. You can represent claims of ownership. You can represent house titles, car titles, insurance contracts, loans, claims to digital assets, unique digital art. You can have a general concept of an internet contract. You can strike contracts with people online that they’re actually held to. You can have internet escrow services. So for e-commerce, you can have a service. You have two people buying from each other. You can have actually a trusted intermediary now that is internet-native that has an escrow service.

You can build on top of the untrusted internet all of the capabilities that you would need to have a full, global, internet-native economy. And that’s a giant idea. The potential there is extraordinarily high. We’re midway through that process. A lot of those things have worked. Some of those things haven’t worked yet, but I think that they’re going to.

Are there sectors where you think there’s currently the right amount of investment? Insufficient investment? Too much investment because there’s hype?

So there’s the term, research and development, but really those are two different things. Research is basically funding smart people pursuing deep questions around technology and science such that they may not have any idea yet of what kind of product could get built on it or even whether something can work.

And then there’s the other side, which is what we do: the development side. By the time we fund a company to build a product, the basic research has to be finished already. There can’t be open basic research questions, because otherwise you have a startup that you don’t even know whether you’ll even be able to build a thing. Also, it needs to be close enough to commercialization that within five years or something, you can actually commercialize it into a product.

That formula worked really well in the computer industry. There were 50 years of basically government research into information science, computer science, during and after World War II. That translated to the computer industry, software industry, internet. And that worked. By the way, that also worked in biotech.

Those are the two main areas [where] I think actual productive research is happening. Should there be more funding into basic research? Almost certainly. Having said that, the basic research world has a very profound crisis underway right now, which they call the replication crisis. It turns out that a lot of what people thought was basic research has actually basically been fake—and arguably fraud. So among the many problems that our modern universities have, there is a very big problem where most of the research that they’re doing does seem to be fake. So would you recommend more money be put into a system that’s just generating fake results? No. Would you argue that you do need basic research to continue to get new products out the other end? Yes.

On the development side, I’m probably more optimistic. I think generally we don’t lack for money. I think basically all the good entrepreneurs get funded.

The main question on that side of things is not so much the money. [It’s] about competition and how markets work. In what fields of economic activity can there actually be startups? For example, can you actually have education startups? Can you actually have health care startups? Can you actually have housing startups? Can you actually have financial services startups? Can you do a new online bank that works in a different way? And for those fields where you would want to see a lot of progress, the bottleneck is not whether we can fund them; the bottleneck is literally whether the companies will be allowed to exist.

And yet I think there are sometimes places where you might have said it’s settled wisdom that you can’t have a startup in this area, and then it turns out you can. I’m thinking of space. I’m thinking of, to some extent, some subsets of education. I would also put crypto in this category. How can you compete with money? And then here we are, in a quite robust competitive market that is trying to compete with money.

SpaceX is probably your best-case scenario. Talk about a market that’s dominated by the government and has regulations literally to the moon. I don’t even know the last time anybody tried to do a new launch platform. And then the idea that you’re going to put all these satellites up there, there’s massive regulatory issues around that. And then the complexity on top of that. Elon [Musk] wanted the rockets to be reusable, so he wanted them to land on their rear ends, which is something that people thought was impossible. All previous rockets—basically they’re one shot and they’re done. Whereas his rockets get reused over and over again, because they’re able to land themselves. SpaceX climbed a wall of skepticism its entire way, and [Musk] basically just brute-forced his way through it. He and the team there made it work. The big thing we talk about in our business is just, look, that is a much, much harder entrepreneurial journey. That’s just what the entrepreneur has to sign up for to do that and the risks that are involved are just much harder than starting a new software company. It’s just a much higher bar of competence that’s required. It’s much higher risk.

You’re going to lose more of those companies because they’re just going to not be able to make it. They’re going to get blocked in some way. And then you need a certain kind of founder who’s willing to take that on. That founder looks a lot like an Elon Musk or a Travis Kalanick [of Uber] or an Adam Neumann [of WeWork]. In the past, it looked like Henry Ford. This requires Attila the Hun, Alexander the Great, Genghis Khan. To make that kind of company work requires somebody who is so smart and so determined and so aggressive and so fearless and so resistant to injury of many different kinds, and willing to take on just absolutely cosmic levels of vitriol and hate and abuse and security threats. We need more of those people. I wish we could find a way to grow them in tanks.

Why do you think it is that there is this special category of obsessive anger that’s directed at the entrepreneurial billionaire? I mean, U.S. senators tweeting that billionaires should not exist…

I think it’s all in Nietzsche—what he called ressentiment, the toxic blend of resentment and bitterness. It’s the cornerstone of modern culture, of Marxism, of progressivism. We resent people who are better than us.

Christianity too, right?

Yeah, Christianity. The last will be first and the first will be last. A rich man will sooner pass through the eye of a needle than enter the kingdom of God. Christianity is sometimes described as the final religion, the last religion that can ever exist on planet Earth, because it’s the one that appeals to victims. The nature of life is there are always more victims than there are winners, so victims are always in the majority. Therefore, one religion is going to capture all the victims or all the people who think of themselves as victims. And that, by definition, is the majority among lower-class societies. In social science, they’ll sometimes refer to a phenomenon called crabs in a bucket, where if one person starts to do better, the other people will drag them back down.

This is a big problem in education—one kid starts to do good and the other kids start to bully him until he’s no better than the rest. In Scandinavian culture, there’s a term, tall poppy syndrome. The tall poppy gets whacked. Resentment’s like a drug. Resentment is a very satisfying feeling, because it’s the feeling that lets us off the hook. “If they’re more successful than I am, it just proves that they’re worse than I am. Because obviously, they must be immoral. They must have committed crimes. They must be making the world worse.” It’s very deeply wired in.

I guess I’ll say this: The best entrepreneurs we deal with have no trace of it at all. [They] think the entire concept is just absolutely ridiculous. Why would I spend any minute thinking about whatever anybody else has done or whatever anybody else thinks of me?

This interview has been condensed and edited for style and clarity.

Bitcoin Is an Effective Tool for Liberty

Affirmative: Alex Gladstein

There was a time when it was fair to question whether bitcoin was an effective tool for liberty. In its first few years, when the digital currency didn’t have many users, wasn’t worth very much, and lacked global markets, it was more a dream than a lifeline. But those days are long gone. Today, millions of people—especially in dictatorships and collapsing economies—rely on bitcoin to give them liberty that governments and corporations try to steal away.

Most bitcoin users aren’t “freedom fighters” or “dissidents” in the classic sense. Some are: human rights activists in Belarus, investigative journalists in Russia, humanitarians in Ukraine, feminists in Nigeria, pro-democracy organizers in Togo, educators in Taliban-ruled Afghanistan, and even whistleblowers in the West. But the vast majority are simply people finding value in a financial network that can’t be devalued, censored, or stopped. One doesn’t need to see oneself as a revolutionary to want a digital form of cash that doesn’t require ID and doesn’t need permission from the state to operate. One might just be trying to escape from a broken fiat system.

If liberty is freedom and self-sovereignty, then bitcoin is the purest expression of financial liberty. It gives anyone—regardless of birthplace, nationality, age, gender, creed, skin color, education, or wealth—access to the best-performing financial asset of the last decade. It lets anyone with a cellphone send and receive value from anyone else, regardless of what governments think and regardless of borders and political restrictions.

Bitcoin is a superb tool for fundraising for human rights groups and journalists at risk. But it’s also—much more importantly in terms of global economic volume—a superb tool for merchants accepting payments from customers in a different country, for employers making payments to employees or contractors half a world away, or for laborers sending remittances to families overseas.

For people in the Global South, bitcoin might be much more valuable than for people in advanced economies. For example, Africa is still divided by more than 45 central banks and 45 different fiat currencies. It is also exploited by colonial currencies like the French CFA franc, and by a neocolonial payment infrastructure where 80 percent of all inter-African payments are processed by American or European companies and where the average fee to send a $200 cross-border payment or remittance from the U.S. or Europe to sub-Saharan Africa is 7 percent.

Making matters worse, corrupt governments enforce a fake “official rate” of exchange in many countries. In Nigeria, the dollar trades for 750 naira on the street but just 450 at regulated institutions. For many companies in Africa, bitcoin is a major upgrade. It allows them to send and receive value at the real exchange rate in seconds from anywhere in the world, colonial boundaries and rent-seeking intermediaries be damned.

Bitcoin can also be an important tool for liberty for citizens of the United Kingdom or Japan or the United States. What if they have family living in the Global South, where sending money is a persistent problem? What if they have friends or clients in Palestine or Cuba, where economic barriers make it difficult if not impossible to send money digitally through the legacy system? What if they have upset the administrators of the payment platform du jour—Patreon or PayPal, perhaps—and are no longer able to collect donations from their fans? Then despite their financial privilege, bitcoin can be a big help.

At its core, bitcoin protects one of the most fundamental liberties—property rights. All it takes is a few minutes of Wi-Fi to download a bitcoin app, back up the seed phrase, and generate an address. Then voila: You now have a way for anyone else in the world to pay you. No one can confiscate your funds without access to your private key. No one can debase your earnings. No one can prevent you from sending value to anyone else. Before Satoshi Nakamoto invented bitcoin in 2009, property rights existed at the pleasure of the state. A group of men with guns enforced them. Today, in the post-bitcoin world, property rights exist regardless of the state. Now they are protected by math.

Bitcoin inarguably has room to grow. Its privacy, user interface, and liquidity leave much to be desired—and are constantly improving. These upgrades will be desperately needed as the world edges closer to a place where governments consolidate power over citizens through central bank digital currencies and the elimination of paper cash.

Vast strides have been made in each of bitcoin’s weak areas in the past five years. For someone living in war-torn Ukraine or drought-stricken Somalia, it’s easy enough to receive bitcoin from a donor abroad and to sell it for cash, all in minutes. No passport or bank account or technical expertise is required. In sub-Saharan Africa, it’s even possible to use bitcoin (with a few tradeoffs) with no internet whatsoever, through a popular mobile text messaging protocol.

Bitcoin’s critics have generally never had to deal personally with financial repression. When their bank accounts eventually get frozen, when their payment apps deplatform them, when their wages get devalued, or when their government shows up at their doors asking where a certain bank wire came from, then—finally—they’ll understand bitcoin’s value proposition.

Gold, Not Bitcoin, Is the Most Likely Replacement for Fiat Money

Negative: Lawrence White

I come to praise bitcoin, not to bury it. I certainly don’t come to praise government fiat money or central banking, which I’ve been criticizing in print for my entire career. My first two books, Free Banking in Britain and Competition and Currency, present the case for free and decentralized banking over central banking. I would love it if the world economy were to run on a completely private monetary standard with free banking.

My forthcoming book, Better Money: Gold, Fiat, or Bitcoin?, argues that gold would be a better monetary standard than bitcoin, and that gold is the standard more likely to emerge bottom-up from free choice by money users. We should appreciate bitcoin for the remarkable thing that it is, not for what it isn’t and not for what it isn’t likely to become.

Bitcoin has succeeded tremendously at creating a valuable new type of asset. As Alex Gladstein has emphasized, it provides a remarkable censorship-resistant value-transfer system. But, sad to say, it hasn’t replaced government fiat money as an everyday or commonly accepted medium of exchange, and it isn’t getting any closer to doing so. Granted, some people use bitcoin to remit funds across borders, which counts as medium-of-exchange use, but that too is uncommon. There are cheaper routes for ordinary remittances.

Let me unpack the term “medium of exchange.” It means a good that is acquired by trading away a good or service, and which is intended to be spent in acquiring a third good or service.

That’s not a common pattern with bitcoin. Few people are paid in bitcoin. Few people routinely buy or sell goods and services for bitcoin. Fewer than 3,000 merchants in the United States publicly accept bitcoin, according to NerdWallet subsidiary Fundera’s last count. There are economic reasons for that, most importantly that the purchasing power of bitcoin is highly volatile. It would be a dangerous way to hold your rent money, because its value can drop 10 percent in a few days. Mostly, bitcoin is purchased with fiat (or fiat stablecoins) not to be spent, but to be “hodled” (held) as a form of savings or “store of value,” in hopes that its price will rise. When unhodled, it is mostly exchanged back into fiat.

Bitcoin is not on a trajectory to replace established monies. In the last few years it has actually lost the one niche where it was the leading medium of exchange, namely crypto-asset markets. Bitcoin used to be the main exchange medium used in buying and selling Ether, Dogecoin, Zcash, Monero, and the other coins that constitute the other 58 percent of the total crypto-asset market. No longer. The No. 1 medium of exchange on crypto markets is now USD Tether, followed by other U.S. dollar stablecoins.

Following its current trajectory, bitcoin will continue to serve as a savings vehicle and a niche censor-resistant value-transmitting system, and continue to exhibit high price volatility, without ever replacing other monies as a commonly accepted medium of exchange.

Many bitcoin owners are happy with hodling as a way to get rich. To no-coiners they say: “Have fun staying poor.” They don’t feel the need to insist that bitcoin will supplant established monies. But others want to say that bitcoin is bound to, eventually, take the place of fiat monies, including the dollar, and that it is the future of free exchange.

I can’t say it’s logically impossible for bitcoin to replace established fiat monies, but bitcoin’s built-in volatility makes that unlikely.

One bitcoiner has proposed an “inevitability sequence” in which a growing market cap brings declining price volatility, that encourages wider acceptance of bitcoin as a medium of exchange, and that reinforces declining price volatility, generating a positive feedback loop.

One problem: There’s no evidence of declining price volatility after 13 years.

A second problem: There’s no reason to expect it. Demand for bitcoin remains predominantly speculative, and every demand swing is fully reflected in price because the quantity of bitcoin—unlike ordinary commodities—does not respond to changes in demand that change its price. In Econ 101–speak, the bitcoin supply curve is vertical, completely price-inelastic. By contrast, a demand surge that raises the price of toilet paper soon leads to the production of more toilet paper, bringing the price back down. Gold has a slightly elastic supply in the short run, but very elastic supply over the long term.

A single common money emerges spontaneously because of the network property of a medium of exchange. Silver (or salt, or a cowrie shell) is more useful to you as a medium of exchange if a greater number of potential trading partners accept it. An established money therefore has a strong incumbency advantage.

The 6.4 percent inflation rate of January 2023 (over January 2022), even if it persists, will unfortunately not be sufficient to reverse the U.S. dollar’s incumbency advantage. The recent experiences of other countries with high inflation demonstrate that it takes an inflation rate much higher than 6.4 percent to get people to abandon an incumbent currency and start using something else for ordinary exchanges.

When a country hyperinflates and people do switch (as in Venezuela and Lebanon in recent years), they predominantly switch to U.S. dollars. But, you might ask, what if all the major government fiat monies were to become nearly as bad as the Venezuelan bolivar? Even in the unlikely event that all the fiats do hit 20 percent inflation or more, the gold standard would be more likely to reemerge than a bitcoin standard. On top of gold’s relatively limited volatility, the World Gold Council puts nonbank public ownership at $2.8 trillion in gold coins and bullion, versus the less than $0.5 trillion market cap for bitcoin (with the current price below $25,000). Gold has a larger network.

 

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“You buy 1 BTC. I will send $1M USD.”

Those were the stakes that venture capitalist Balaji Srinivasan proposed over Twitter to pseudonymous writer and self-described “tax enthusiast” James Medlock on March 17. The bet? Within 90 days, one bitcoin will be worth $1 million.

Medlock, who had jokingly tweeted earlier that he would “bet anyone $1 million dollars that the US does not enter hyperinflation,” quickly accepted the terms. With bitcoin hovering around $26,000, Srinivasan had made an approximately 38–1 wager that “hyperbitcoinization” would unfold over the next three months as the Federal Reserve devalued the U.S. dollar to backstop the nation’s shaky banks with new infusions of cash.

Critics have said the bet is a promotional ploy to launch a new media brand or to pump the price of bitcoin to increase the value of his holdings. His doubters include George Mason University economist Tyler Cowen, who predicts that “the US will muddle through its current problems and patch up the present at the expense of the future,” and bitcoin mega-booster Saifedean Ammous, author of The Bitcoin Standard, who writes “I feel dirty sounding bearish on bitcoin, but I do not think bitcoin will hit $1m in 90 days & and I do not think the dollar can possibly hyperinflate this quickly.”

So what is Srinivasan thinking?

Find out this Thursday at 1 p.m. Eastern as Srinivasan joins Reason‘s Zach Weissmueller and economist Lawrence White, author of Better Money: Gold, Fiat, or Bitcoin? to discuss the bet and their analyses of the state of the U.S. banking system. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.

Show notes:
Balaji Srinivasan’s bet with James Medlock—https://twitter.com/balajis/status/1636822077775941633

Federal Reserve to provide additional funds for banks, backstopped with $25 billion from the Treasury—https://archive.is/qrZYB#selection-4839.93-4839.251

Bloomberg: Fed could inject up to $2 trillion—https://www.bloomberg.com/news/articles/2023-03-16/jpmorgan-says-fed-s-loans-will-provide-2-trillion-of-liquidity

Study on uninsured bank deposits in 2023—https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

Bloomberg: Fed discount window lending surpasses $164 billion -https://www.bloomberg.com/news/articles/2023-03-16/banks-rush-to-backstop-liquidity-borrow-164-8-billion-from-fed#xj4y7vzkg

St. Louis Fed: Fed balance sheet since 2004—https://fred.stlouisfed.org/graph/?id=WALCL

Tyler Cowen: The banking crisis won’t wreck the economy—https://marginalrevolution.com/marginalrevolution/2023/03/this-banking-crisis-wont-wreck-the-economy.html

Ammous Safeidean: A bank crisis is deflationary—https://twitter.com/saifedean/status/1638453109033664513

FedNow Service launches in July: https://www.federalreserve.gov/newsevents/pressreleases/other20230315a.htm

Jerome Powell addresses banking crisis and rate hikes—https://www.youtube.com/watch?v=WK6EfnYkejc

Janet Yellen voices concern for a ‘few’ banks—https://www.youtube.com/live/je-6S97KKqY?feature=share&t=4049

DeSantis announced Digital Bill of Rights—https://www.youtube.com/watch?v=mLPcqRS8978

Ian Freeman believes he is, as a minister for the Shire Free Church in Keene, New Hampshire, a force for creating a more peaceful and just world. He thinks using and selling bitcoin is a key part of his ministry. As he said on a recent episode of his nationally syndicated radio show Free Talk Live, “I felt my calling to do this mission, to spread peace, and ultimately what bitcoin is doing is undermining the warmonger state. The more dollars are out of circulation, the more disempowered that state is.”

Freeman—not the last name he was born with—moved to New Hampshire from Florida in 2006 as an early participant in the Free State Project (FSP) because he wanted to help create a political unit that respected its citizens’ freedom (he is no longer associated with the organization). The FSP has made many strides in New Hampshire, and Freeman’s early evangelizing efforts helped make Keene, NH, a major center of retail bitcoin commerce.

But Freeman still lives in a nation that considers the freedom to use whatever currency one wants in whatever peaceful way one desires as something that justifies a five-year multi-agency investigation that comes to a head with a squad of armed agents assaulting your home in pre-dawn darkness, throwing grenades, destroying your security cameras, shattering windows and frames with an extending arm from a BearCat G3 armored vehicle, and then locking you up in a cage.

This was all mostly because Freeman didn’t follow federal procedures for permission to do what he did, or give the government what it considers its fair cut of any income he made. The feds took (among other things) about $180,000 in cash, some precious metals, and various computers from Freeman in their March 16, 2021, assault on his home.

Five of Freeman’s associates were also arrested and charged that day in separate raids, but after various plea deals and one total charge dropping, Freeman was the only one to go to trial earlier this month for his alleged crimes. Freeman spent 69 days locked up after his arrest, with the government trying to argue he was a flight risk, eventually getting out on a $200,000 bond. The government imposed on him, as he says in an email this week, “a tracking anklet that would detect if I left my property….Spyware on my computer and phone. Restrictions on not being able to use crypto at all. A list of people I couldn’t contact….The restrictions have destroyed my ability to help local businesses adopt cryptocurrency, which was a major part of my church mission.”

The original indictment on Freeman and his friends insisted they’d “exchanged in excess of $10,000,000 for virtual currency.”

Last week, a federal jury in New Hampshire found Freeman guilty on all the charges that ultimately went to trial. As Freeman’s lawyer Mark Sisti explained in a phone interview this week, 17 out of 25 charges were dropped before the trial, many related to bank fraud and wire fraud; Sisti figures the feds realized it would be hard to convict on those because, among other reasons, there “was no loss to banks” in Freeman’s actions.

Still, as the Department of Justice (DOJ) crowed in a press release, Freeman was convicted “on all counts of money laundering, conspiracy to launder money, operation of an unlicensed money transmitting business, and tax evasion (four counts).”

As per the government’s general obsession with keeping track of every financial move we make, the government was upset Freeman did not, according to its regulations, sufficiently track and keep records on his customers. As the DOJ’s press release spun the situation, “By failing to register his business with the Financial Crimes Enforcement Network as required by law, disabling ‘know your customer’ features on his bitcoin kiosks, and ensuring that bitcoin customers did not tell him what they did with their bitcoin, among other things, Freeman created a business that catered to fraudsters.”

While he insists he deliberately harmed no one selling bitcoin via LocalBitcoins and a series of local bitcoin kiosks, the feds brought what they considered various victims of Freeman’s actions to the stand during the trial. Some scammers had their victims send dollars to Freeman, who turned them into bitcoin which was then sent to the scammers, who were then harder to trace back to the scam/crime.

Freeman asserts in an email that after he became aware some scammers were using his service, he imposed his own version of “know your customer” (KYC) practices. “Typical requirements would be for the person to show ID, and take a selfie with them holding a handwritten note that said something like, ‘I so-and-so am purchasing bitcoin from FTL_Ian on localbitcoins.com. I understand this transaction is non-refundable’ with their signature and phone number,” he says. With those and other practices, sometimes including phone calls to buyers, he notes, he felt he was doing “far more than the banks’ requirements to send wire transfers or deposit cash, but [the banks from which the scam victims sent the money to Freeman] never caught criminal charges for ‘assisting’ scammers.”

“The irony is,” Freeman says, “my KYC records were used against me at trial. The feds had no idea who these people were prior to raiding my house and then got their info from my own computer. I had no idea they were victims of scams.”

As noted by both associates of Freeman’s blogging the trial’s twists and turns, and by a Keene Sentinel reporter, the state seemed unable to get any of those victims (of scams including faked romantic interest to claims the scammer would help the victim with issues with Social Security payments) to say or prove on the stand that Freeman was consciously scamming them, or even aware for sure they were being scammed. Assistant U.S. Attorney Seth Aframe, a prosecutor in the case, in court tried to make the jury see this as Freeman being “willfully blind.” But a government filing in the case spelled out that “the Government does not allege that Freeman conspired with these fraudsters to launder proceeds.”

“Clearly, Ian was not a scammer,” Sisti insists. “It’s that simple. He is not a scammer. Their argument is that scammers used his platform and him to perpetuate their moneymaking scam.”

A money laundering charge Freeman was convicted on was hooked to an undercover agent who Freeman refused to do business with directly after the agent let Freeman know he was a drug dealer. That agent then used one of Freeman’s kiosks to turn cash into bitcoin. Freeman insists he did not encourage or know the person would do this, saying on the stand in the trial, “What should I have done? Tackled him? We don’t have anybody there” guarding the kiosk to make sure no wrongdoer uses it.

The Financial Crimes Enforcement Network (FinCEN) has for years been insisting that even peer-to-peer bitcoin sellers are under its purview, and bitcoin kiosk machines have long been targeted by the DOJ. As Freeman says in his email, “My arrest was one of many similar arrests going on across the country over several years.  I have a higher profile than some of these folks, but the pattern is the same. They target a peaceful bitcoin seller who has not harmed anyone and then hit him with so many charges he taps out for a plea deal.” Freeman thinks it is part of “a really ugly picture of constant, desperate attack by the federal government against the crypto industry.”

But in a motion to dismiss the charges that Freeman joined earlier in the case, it is asserted that FinCEN overstepped its legal power in trying to make Freeman’s style of bitcoin sales illegal.

“The law that applies in this case did not authorize federal agency regulation of those engaged in the transmission or exchange of virtual currency. Virtual currency, which is now a multi-trillion-dollar part of the economy, did not even exist at the time the statute was passed,” the motion asserted, further arguing that Supreme Court doctrine insists that “regulatory agencies cannot presume from a word or two in a statute to have the authority to regulate vast and important sectors of the American economy. FinCEN was not entitled to presume that one word in a 2001 statute predicted the invention of virtual currency in 2008 and delegated to a federal agency full authority to regulate what has become a trillion-dollar sector of the American economy.”

Sisti, Freeman’s lawyer, insists the conviction will be appealed, though he was not prepared to discuss on what grounds specifically. He did, however, mention that motion denying FinCEN’s legitimate power, which might end up a possible line of legal attack.

Freeman’s sentencing is scheduled for April, and prosecutor Aframe told The Keene Sentinel that Freeman could end up with more than eight years behind bars. Freeman is currently out of custody, though he’s surrendered his passport and is under electronic monitoring on both his person and computer, until sentencing and likely appeal.

Freeman holds out hope his conviction will be overturned. But still, he knows “The dinosaur isn’t going into the tar pits without doing some thrashing around. Someone was bound to get hurt in the process of introducing a potential dollar-killer to the marketplace.”