DATALAC & Bitcoin’s Enemy

Peter Thiel’s frontal attack on the anti-bitcoin group, specifically the heavyweights in the financial world such as Jerome Powell (chairman of the Fed), Warren Buffett (legendary investor of Berkshire Hathaway and the number one enemy of bitcoin), Jamie Dimon (CEO of JPMorgan Chase), and Larry Fink (CEO of Blackstone, the world’s largest asset management organization), has caused quite a stir at the Bitcoin 2022 conference in Miami. As the founder of the PayPal payment platform and leader of the Thiel Fellowship, which nurtures talents like Vitalik Buterin, the creator of Ethereum, Peter takes us through the history of the financial system, such as a video clip of his prophetic speech at the Independent Institute (Oakland, CA) in 1999 on the topic of “Internet, Security, and Virtual Money.” This was during his time as CEO of Confinity, the organization that created the famous PayPal payment platform and also assembled the Paypal Mafia, a group with deep and wide influence in Silicon Valley and the world of technology as we know it today.

Peter then goes back in time to the 1970s to observe the movements of gold and its correlation with stocks to draw conclusions about the role of bitcoin in 2022, a time when the economy is shaking due to inflation. Bitcoin does not actually compete with Ethereum (which is different in nature — bitcoin is like gold while ETH is like VISA in the crypto world) or gold, but rather the stock market. Peter also introduces an interesting framework, the “spectrum of monetary forms,” while demonstrating that cash made of paper or polymer (physical currency) — something familiar to us — is actually very foreign. The presentation includes many sharp statements that are controversial and satirical to many related parties.

“How to convert from physical dollars to electronic dollars. The basic technologies are gradually being built on the internet. For developing countries, internet-based platforms will be strongly built on cell phones. Follow the numbers, there are now nearly 150 million online accounts created on desktop computers, and this number is predicted to increase to 350 million in the next five years. As for cell phones that can connect to the internet, this device is becoming popular and flowing into people’s lives. Specifically, it has made strong inroads in Japan, Sweden, and Finland, as well as Western Europe and the United States. In the next five years, this number is predicted to increase from 10 million internet-connected cell phones to one billion. At that time, most of the middle class in developing areas will have access to it. China will have nearly 300 million mobile phones (most of which are internet-connected). These are people who have quick access to their bank accounts and can easily transfer money with a safe jurisdiction. Banks cannot fully control the political and economic systems that can be dollarized. Then, we do not need rubles (Russia) or renminbi (China’s currency). Moreover, the movement of money is non-traceable. Even if the Chinese government prohibits holding dollars, it is difficult to monitor. Imagine the complexity of checking citizens’ phones with different security codes. Perhaps the only way to prevent this is to shut down the telecommunications network. Governments like China, India and many others have to choose between giving up monetary sovereignty and great power.

Clearly, some of my observations in 1999 were wrong, which was an effort (somewhat naive) to connect what was happening two decades ago to the future, or specifically to the present time — 2022 (where I am now). When I started PayPal in the 1990s, I often used a typical method in presenting my ideas to investors: holding a hundred-dollar bill to stimulate thinking. This trick is quite effective, people immediately pay attention or seem to be hypnotized. The question “What is money?” has challenged my thinking for a long time. Essentially, money is paper. It’s really not useful like toilet paper or wallpaper, maybe just a pile of crappy fiat money without clear intrinsic value. However, there’s something mysterious about it, a network effect. Well, does anyone want to own the legal tender I’m holding in my hand (Peter takes out a few hundred-dollar bills and when he throws them on the stage, everyone fights for them). It’s interesting that although most of you are bitcoin maximalists, a little bit of legal tender still attracts you.

When we started building PayPal, the founding team had little deep knowledge about money, banking, or payments. The startup idea was built on first principles and inevitably involved many missteps. In the pitch for our seed round in February 1999, we mentioned the novel concept of a MobileWallet, which would capture part of the seigniorage (income from issuing currency or the difference between the face value of currency and the cost to produce it). At that time, for every $500 billion in physical currency printed (by the Treasury), $25 billion was spent on seigniorage (the cost of producing that money). If Confinity (PayPal’s former name) captured 4% of this market share, we would make $1 billion per year. We were very confident that we would gradually replace the Treasury (in issuing currency), and in fact, our goal was to replace the central bank (the Fed). The founding team did not even know the difference between these two giant organizations. We promised investors to create a closed-loop system, a new form of money, a new network effect, an electronic version of money serving the 21st century. However, by the time of PayPal’s IPO in 2002, PayPal’s business model had transformed into a funnel that allowed money to flow in and out very quickly, a type of payment system. PayPal 2002 took a few steps back and was more practical than ambitious in 1999.

What I did not realize in the 1990s was the diversity of forms of money, which lie on a wide spectrum. One end of the spectrum is high-velocity money, which moves extremely quickly and does not require much holding (perhaps only for use as an accounting tool or similar financial forms). The other end is low-velocity money, which is difficult to move and requires much larger holdings (higher value). A kind of inverse relationship flows through many different forms of money (the value of an asset ~ 1/velocity of the asset).

Paypal in 1999 with its closed loop model operated at low velocity and high value, laying the foundation for the development of Paypal in 2002 which operated at high velocity and low value. We can also understand this spectrum by comparing it to VISA and gold bullion. Gold bullion has a high value, but moves slowly (moving back and forth between bank vaults), while VISA is super fast, facilitating the movement of trillions of dollars every year around the world for customers, but VISA itself doesn’t require a lot of money. Most of us confuse these two modalities, even though they are very different (just a little bit of rational thinking can reveal that). The reason is our habit of associating money with the 100-dollar bill I hold at the beginning of the presentation.

Paper money or physical currency is actually a very strange form of money, sitting in the middle of the spectrum I mentioned above: intermediate velocity, intermediate value. It is not really good in terms of velocity or value. You can store money in a piggy bank or hide it under a rug (paper money sometimes encourages strange behavior). You can also use it to pay for a meal at a restaurant, go to a club, or buy a used car. However, we will have a big problem if we use physical money to buy a house. Clearly, physical money is not very good for payment or storing value and is stuck in the middle. We often confuse the two opposing poles of the spectrum — store value and high velocity — because of our psychological orientation towards physical cash. However, in reality, most forms of money fall into the two extremes of the spectrum.

A more familiar example, Bitcoin and Ethereum also lie at opposite ends of the spectrum.

Bitcoin: used for storing value (a type of cryptocurrency with high value that replaces gold), slow moving.

Ethereum: a frictionless payment system, super-fast moving (there is much debate about whether ETH also has high intrinsic value, but perhaps it is difficult to achieve like Bitcoin).

How can we compare and analyze the contrast between BTC and ETH? Currently, the total value of ETH is around $386 billion while BTC is $831 billion. In contrast, the correlation between gold and VISA is $12 trillion and $460 billion, respectively. ETH is currently valued similarly to VISA. This fair pricing level indicates that the value of a smooth and frictionless global payment system will be around $400 billion (ETH surpasses VISA due to its smooth operation and low gas fees — the fees to be paid to transact on the blockchain platform). Currently, gold has a total value of $12 trillion, but if bitcoin can replace gold, then why is its current value so low (undervalued). What will make BTC increase by 10 times to catch up with gold?

To understand why gold soared to $12 trillion, let’s go back to the 1970s. This was a period when investing in gold was very effective, while equities were considered junk. Currently, this correlation has been reversed. At that time, global equities and gold had equal value at 1:1, both reaching $2.5 trillion. However, at present (2022), the value of global equities has increased to $115 trillion, shifting the gold-equity ratio from 1:1 to 1:10. Gold reached a peak of $850/ounce (nominal dollars) during the bull market or growth period in the late 1970s. However, why is the gold-equity ratio no longer 1:1 or 100:1 (gold dominance over equities)? What factors affect this ratio? In the 1970s, cash and bonds were considered trash, while equity investments were considered bad. All of this arose from the context of high inflation, strict regulations from the government, high taxes, and a capital gains tax rate that increased to 100%. Investing in equities became bad because we did not set a basic limit when making decisions or adjust for inflation.

Gold, like Bitcoin, worked quite efficiently in the 2010s. Bitcoin’s real competitor is not Ethereum (which is a payment system) or gold, but the S&P500 (a stock index based on the common stock of 500 companies with the largest market capitalization listed on the NYSE or NASDAQ). In other words, it is the entire stock market. Bitcoin is traded every day exactly like stocks. If stocks go up, then bitcoin goes up. Bitcoin looks a lot like a high-leveraged stock traded daily on the Nasdaq. In such a competitive landscape (bitcoin vs. stocks), are we diving into a market form like the 1970s: high inflation, many regulations, nobody wants cash or bonds, even investing in stocks? Have you witnessed stronger government-linked entities or “socially conscious” companies controlled by the government explode? The form of intervention that politicians cannot do with bitcoin. Would bitcoin soar like gold then? Perhaps from now on, we should observe the ratio between bitcoin and equity (instead of gold). The question to ask is: why is the value of BTC not equal to the current global equity value (global equities), why is the current ratio 100:1 (specifically $115T: $831B).

Of course, everything can happen differently from what we imagine. I believe that over time, the value of fiat money will gradually decrease and be heavily taxed along with many other miscellaneous restrictions. Hopefully, bitcoin will increase by 100 times (overtaking current stocks) and you will earn a truly “modest” amount of money. It is difficult to determine how bitcoin’s price will move (like falling to $43k today after breaking ATH a few months ago). However, BTC is always the most “honest” and efficient market in the world, a canary in a coal mine (an idiom that is an early warning sign that something dangerous is approaching, originating from the habit of Western miners carrying a cage with a canary into the coal mine). BTC tells us that inflation has been coming for the past two years (BTC rose to $5k — $6k then surged 10 times to ~$50k). It informs us that the central bank is slowly going bankrupt and that we are entering the final stage of the fiat currency system (that’s why BTC is valued so high). Veteran bankers, like Mr. Powell (Chairman of the FED), need to be extremely grateful for Bitcoin, as it is the final warning sent to them. If they ignore it and refuse to change, the prices to pay will be very expensive.

So why hasn’t Bitcoin risen to $100k or $1 million, or why hasn’t it surpassed gold or equities? We often discuss business models and technology — how amazing this technology is, how great the code or algorithm is, how miraculous mathematics is — language related to innovation. In fact, we should think more about “political” questions: “Will this movement be successful?” Enemies will do what to stop this movement? Many people are trying to hinder the development of Bitcoin, most of whom are anonymous, hidden by a perspective of prejudice. I will reveal some of them, so that we can fight for Bitcoin to increase 10x or 100x from now on.

The first person is Warren Buffett, the number one enemy of Bitcoin, who claimed that Bitcoin is “rat poison”. To me, this gentleman looks a bit “personality disorder” (parodying Warren’s nickname “Oracle of Omaha”). Perhaps this statement is too honest and straightforward. People like Warren are saying what they have recorded in their own instruction books or ways of thinking, a kind of institutional bias. This list is long, including “woke companies” and those related to the fiat currency system. Clearly, if you are a money manager, you tend to pretend that investing is extremely complicated. If we all buy Bitcoin (even if it seems funny), those on this list will be out of business. The same thing happens if we all own gold (as the anti-group probably doesn’t like gold).

There are always systemic biases or center-left political biases, like the bias of Jamie Dimon (CEO and Chairman of JPMorgan Chase) who stated: “I don’t call bitcoin or altcoin cryptocurrency, they are crypto tokens, because currency has its own laws shaped by central banks and tax authorities.” The next person is Larry Fink of BlackRock who said: “I see a great opportunity in forms of currency related to blockchain and digital encryption (not bitcoin).” The decision to allocate to bitcoin or not by institutional investors — the group that holds retirement funds in the US or trillions of dollars in assets — is purely “political” choices. Clearly, we must collectively push back against this group by buying bitcoin. Larry Fink’s statement is a form of anti-bitcoin sentiment, he wants to create an environment that supports blockchain (pro-blockchain). However, pro-blockchain is anti-bitcoin. It’s like saying, “I love blockchain but I’m not sure about bitcoin. We should spend more time delving into blockchain.” The enemies of bitcoin need a label to attract the public.

The real enemy of Bitcoin is ESG (an abbreviation for the term Environmental, Social and Corporate Governance — referring to the group of Environmental, Social and Governance factors). There are many vague “intentions” in our minds, knowing that we may be judged as intolerant when naming the anti-bitcoin group, but I have to be clear that ESG is the hate factory. For me, ESG and the Chinese Communist Party are no different — they both aim at “social” and “governance”. The “environmental” aspect is often fake. To be fair, ESG binds society in some way (inclusive) to some extent. The point to acknowledge here is the difference between carbon industries and Bitcoin, where some companies are under political control, especially when going public. I always advise CEOs of companies about to go public: “IPO has its advantages such as increasing liquidity, allowing initial investors to withdraw money, and increasing credibility, but it also means unofficially taking over the company from the government.” Some people, related to the government’s nepotism, become more powerful, such as CFOs, lawyers, legal advisors, accountants, and human resources — as an extension of the state within the company. ESG is the big umbrella covering it all.

Bitcoin, intentionally or accidentally (seems intentional), is not a company, it has no board of directors, and no one knows who Satoshi is. The idea of Bitcoin sounded extreme in the early 2010s in the context of low inflation and relatively mild government regulations. However, Bitcoin has gradually found its place in the world of the 2020s. If we were to summarize the opposition to Bitcoin in a framework, it would be the phrase “finance gerontocracy” — a group of “old” people associated with the old system for too long and now competing with a rising “youth movement,” partly led by those attending the conference here in Miami.

By Quan Nguyen Ha