4 Reasons Why Bitcoin Is the Least Uncertain Monetary Asset | Kraken’s Bitcoin Strategist Explains

The amount of uncertainty that humans face day to day far eclipses the amount of risk that they face. Volatility is a risk. It is not an uncertainty. Bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty.

Hi, everyone. I'm Giovanni, and today I have the pleasure to be joined by Pierre Rochard, bitcoin advisor, co founder of the Satoshi Nakamoto Institute and currently bitcoin strategist at Kraken. Thanks for being with us, Pierre.

Yeah, sure thing. Thanks for having me.

You joined Kraken in October last year as the exchange's bitcoin strategist, or as often reported in the press, bitcoin evangelist. So why does Kraken need a bitcoin evangelist?

Yeah, so it started out as kind of tongue in cheek because people describe bitcoin as a religion. So I thought it would be funny to title myself that. But ultimately I think that not everyone shares my sense of humor. So I switched it to bitcoin strategist, which is a little more serious and also just more accurate as to what I'm doing day to day here. And the reason that a cryptocurrency exchange needs a bitcoin strategist is that the mission is the adoption of cryptocurrency. And so from that perspective, figuring out, okay, what is the most effective way of getting the adoption of cryptocurrency to happen and to grow the ecosystem and to ultimately grow the market size for an exchange like Crack, you need to have someone who is focused on that.

Would you define yourself as a bitcoin maximalist?

No, I'm a bitcoin minimalist. So from my perspective, the goal of bitcoin is really about how do we have a system with constraints such that it is able to remain decentralized. And that is actually the biggest challenge, I think, in this space, and why scaling has been such an acrimonious and large debate. So from that perspective, it's not so much about, okay, how can we put everything into the bitcoin protocol? And how can we. That's kind of the maximalist position of how do we get everything into Bitcoin? My view is how do we get as little as possible into Bitcoin? And so really we want to be focused on what are bitcoin's assurances, right? Being permissionless, being censorship resistant, being seizure resistant, and having a sound monetary policy and all of those enforced by the peer to peer network of nodes. And then of course, the proof of work mining on top of that. So when we're trying to think about how to scale Bitcoin and let's say maximize its utility, maximize its efficiency, we're really trying to minimize the footprint, which is the cost on one side and then the benefit on the other side. And so I think that the maximalist label doesn't really apply to me from there. I don't think that financial intermediation necessarily can be trust minimized or trustless in the same way that Bitcoin is. When you're lending money to someone or you're investing in their business, ultimately you do have to trust them. It doesn't actually matter if the contract that you are engaging in is going to have its execution be automated in a blockchain. That's just operational back office efficiency from a database perspective, kind of a technical implementation detail. Ultimately you're still trusting them, you're still trusting them to perform, and you're still trusting them to provide a return on your investment. And so I actually see a very minimal role for the technology on the financial intermediation layer. And I think that the financial intermediation is going to continue to be a essentially a trusted third party service because it doesn't scale otherwise. Otherwise you have to be managing your own credit portfolio. And people throughout history have always outsourced that performance of credit due diligence and credit servicing to other third parties. And I think that will continue to be the case.

Okay, so we have a lot of meat on the fire for this because you mentioned a lot of interesting things. The first thing that I want to clarify is when you say that you want as minimum as possible to be added into Bitcoin, that sounds like being a Bitcoin conservative, like someone who thinks that already Bitcoin is perfect as it is.

So I think that that would be kind of a normative approach of like me wanting that to be the case. But I think that I see it as more of a positive approach of me accepting that that is the case. Because Bitcoin is decentralized, it would actually be very difficult to expand its scope. Expanding its scope actually from a technical perspective requires doing a hard fork and knocking people off the network, whereas reducing its scope is soft fork and is backwards and forwards compatible. And so that allows you to continue to increase Bitcoin's utility without excluding people from the network. And I think that the inclusive approach of, hey, let's try to have a protocol that is very stable and does not exclude others is a better approach than constantly trying to hard fork it.

I'm asking you that because I was reading the website of the Satoshi Nakamoto Institute, which you founded, which says that bitcoin is not the beginning nor is the end. So that means that you imply that there should be some sort of evolution in the way bitcoin works.

Yeah, absolutely. So if we look at the history of the bitcoin protocol, we've seen a number of very successful hard forks occur. The biggest one and the latest one was Segwit. But I think that there will be more. Just on the immediate roadmap, we have Taproot, which is a big change in bitcoin's scripting language. I think that if you constrain the design space to things that are forward and backward compatible, then yes, it does limit what you're going to be able to do. But I think that it's a wild exaggeration to say that that causes protocol ossification of okay, now we can no longer change anything. I don't think that's true from an engineering perspective and it's certainly not true from a historical perspective. So, for example, there've been other soft forks like check sequence, verify, check lock time, verify that these. And then obviously Segwit, these per golly evolutions over the past decade have enabled layer two solutions. Now we're seeing lightning be increasingly looked at as the future of bitcoin. So I think that I do agree that on the Nakamo Institute we need to write more about this. But it's certainly the case that bitcoin is continuing to move forward.

You criticize the core definition of money based on the three main functions. So store of value, medium of exchange and unit of account. So what's wrong with that definition?

It's a fine first attempt at a definition of money, but ultimately I think that the issue with it is that it's not looking at it from the first of all, the subjectivist point of view. Subjectivism is maybe less popular in other schools of thought, but it's a central piece of Austrian economics. So once you start looking at monetary phenomenon, you have to look at it from the perspective of individuals acting in the economy. So why is it that individuals use money? Why do they hold cash balances? What it comes down to is a dichotomy between the concept of risk and uncertainty. This is not exclusive to the Austrian school. In fact, Keynesians and neoclassical economists have written about this as well. And I think that they largely agree on the framework. They just disagree on the implications from a public policy perspective. And then from a normative, what should a monetary system look like. But in any case, risk is quantifiable. So you're able to attach a probability to a certain set of outcomes, a known set of outcomes. And so that's what actuaries do, and that's what insurance is for. In the perfect world, if we only had risk and we were able to quantify all of the future outcomes and the known set of outcomes, then we would actually be able to not hold any cash. All we would have to do is enter into insurance contracts for various contingencies, and money would actually just not even really be a thing in our economy. It's hard for us to conceive of because that's not the reality we live in. The reality we live in is just filled with uncertainty. And in fact, the amount of uncertainty that humans face day to day far eclipses the amount of risk that they face. And so the number of insurable risks that exist in the economy or in life, let's say it's not just economic. The amount of risk that we face is actually very, very small. And so the trend we've actually seen is that governments transform uncertainty into risk. Now, we can endlessly debate about whether that's good or bad. I won't get into it because it's kind of a political question. But from a monetary economics perspective, the reason we hold cash is to hedge future uncertain cash flows. So when we think about uncertain future cash flows, it's not necessarily the case that we're only thinking about them in a negative sense of okay, we're concerned about are we going to have unforeseen losses, so am I going to lose my job? That would be an uncertain future cash flow, or will I be able to sell my product? That would be an uncertain future cash flow for business. That negative side, we've seen it with the COVID 19 pandemic, which impacted some businesses severely and dramatically cut their revenues. Now there's some debate about whether pandemics are risk or uncertainty, but I think they're certainly a mixture of both. There's the negative side, but there's also the positive side of not knowing when are you going to have interesting investment opportunities, for example. And so you don't never know what is going to come across your table as an investor. And that's why investors have to hold some amount of cash, because they don't know what the future opportunity space is going to be like. And that's a fundamental uncertainty. There's no way you could insure yourself against the possibility of having your brother in law Present his great new business plan for his restaurant.

What's the role played by Bitcoin in this uncertainty framework?

Ultimately, when you're thinking about how to hedge anything, the hedging asset, you want it to be the diametric opposite of what is being hedged. If you're hedging against uncertainty, you want to hold the least uncertain asset possible. My argument is that if you look across the different sources of uncertainty in a monetary system, Bitcoin is actually the least uncertain monetary asset in existence today. And so that's why I think that if we look at money from this framework, it actually makes it much more understandable why Bitcoin is interesting. Now, people will react to that and say, well, no, hold on the volatility. There's too much volatility. Volatility is a risk, it is not an uncertainty. And so you can actually insure yourself against volatility by buying puts or by selling futures. And that is what is going to allow you to use Bitcoin's uncertainty minimizing properties and hold Bitcoin while hedging your downside risk of the price going down far more than you want over a certain time frame.

Okay, I agree with you that the volatility can be hedged. But what about uncertainty? What does make Bitcoin so little uncertainty?

Yeah. So if we think about the monetary system and how we interact with it, I see four different key parts. The first one is, are we actually able to even access it? Right. So this is the ability to just receive money, receive the cash. And this is, I think, an area where Bitcoin really shines is the permissionless nature of it. Anyone can generate a private key, derive a public key, encode it into an address, and receive Bitcoin. So from that perspective, I think that there's not now contrast with any other monetary system already, I think bitcoin exceeds their properties. So, for example, gold, you're going to have to be able to send it through the mail, the postal service. You're going to receive some mail with some gold nuggets in it. And then same thing with cash, right? You'd have to put cash in the mail to do that, or you get a bank account. Bank accounts are not permissionless. And so you do have to get permission, whether it's from the financial institution or from the government or some combination of both. So already, whether from an access perspective of being able to receive the monetary asset, I think that it's clear that Bitcoin has less uncertainty than the alternatives.

You're basically saying that something that is permissioned is more uncertain than something that is permissionless.

Oh, just by definition, right. Otherwise. And it doesn't even necessarily have to be that the government or the bank has flagged you as being a bad person. It could just be by accident. Right. Or by a business decision that they've decided not to bank you. So it's not. Or, you know, it's not the postal service that refuses to mail your gold. It's that your mail could get lost in the postal service or an employee steals it. You know, there's. There's all sorts of contingencies there that are uncertainties, not risks and so forth. If you contrast it with how the Bitcoin system works, there's just a lot less uncertainty there. So the second property is the seizure resistance. And so this has to do with, okay, once you have received the cash and it is on your balance sheet, what is the cost of someone else seizing it? So nothing is ever seizure proof. Right. There's no such thing as being seizure proof. But you can have seizure resistance in the sense that the cost of seizing this monetary asset is greater than the cost of seizing any other asset. That's where you look at hardware, wallets, you look at multisig. These are all solutions that are increasing bitcoin seizure resistance. Now contrast it with a bank account. Obviously, that's not seizure resistant at all. Those get seized all the time. Cash gets seized. We hear stories about people at the border, they got $10,000 in cash. It gets se. They don't even have legal protection for it. That's in the United States, civil asset forfeiture. And so there's even a lack of due processing. Gold, same issue, right? You hear about people trying to smuggle gold across borders. So bitcoin is just. Now we can debate about different scenarios, right? But the bottom line is that if you look at the expected cost of seizing bitcoin, it's just greater than the expected cost of seizing gold or physical cash or especially a bank account like this bank account is like the most seizable thing ever. It gets seized all the time.

So actually, I wanted to actually ask you about this. So is bitcoin really unseizable? Because at the end of the day, right now, most of bitcoin is held in centralized financial institutions, like centralized exchanges like Kraken itself. So these centralized entities can be cracked down by governments, Theoretically. So in this case, the government can actually seize your Bitcoin?

Yeah, that's correct. So if you think about when you go to a jewelry store or you're going to go buy a watch. Some watches are waterproof, which means that you can go diving with them. Other watches are water resistant, which means that they can get a little bit of splashing on them. There's a certain cost to getting them wet, right? You got to dive into the water, but then you've got other watches that are not water resistant at all. And if you even get a drop of water on it, it stops working or it starts rusting or whatever. So the way to think about it is that bitcoin is not seizure proof. So there's always a way to seize Bitcoin. And we've seen it happen. We saw it happen in the case of the Silk Road with Ross Ulbricht. How did it get seized? He left his laptop open. And the FBI or the DEA agents were able to access his Bitcoin while it's just on his laptop because they were open. If he had closed his laptop and it had been on an encrypted hard drive, well, now the cost. The cost would have been much greater. They would have had to crack the hard drive. The hard drive's encryption. It's not so much thinking about it from like, okay, is it seizure proof? It's more about when you're running away from a bear. You just need to be faster than the next guy, right? You just need to have a higher cost of seizing it than the next asset. And then from that point on, you can say bitcoin is less uncertain than that asset. The third point is the censorship resistance. So again, here it's not about being censorship proof. Nothing is censorship proof. It's about the cost of censoring bitcoin transactions. So the cost of preventing someone from sending their Bitcoin to someone else. What is that? If you look at the Bitcoin system, the censorship resistance actually comes from the ability, first of all, to broadcast a transaction. So there's a number of different ways of broadcasting a transaction. You could do it over the normal Internet. You could do it over Tor, you can do it over shortwave radio. You could even do it by mail. If you mail someone, if you print out a bitcoin transaction and you mail it to someone, they could broadcast it. So there's all sorts of different creative ways of doing that, because it's actually very little data. If you look at how much data a transaction takes up. And so then from the point that you broadcasted it and then it gets to the miner, then it's about getting the transaction into a block and this is where Bitcoin's game theory really comes into play and really shines is that you have a prisoner's dilemma between the miners where if a miner wants to exclude a transaction, they are going to forego the transaction fee revenue that they would get from including that transaction, from mining it, from including it in a block instead. The next miner who actually does include it in a block will get the transaction fee. Miners are always competing against each other. Mining pools are competing against each other to include transaction fees into the blocks in order to make money as mining pools or as miners. That's where bitcoin censorship resistance comes from. The fourth one is Bitcoin's monetary policy. So when we think about uncertainty in a monetary system, fiat actually maximizes the uncertainty of the monetary policy. And so you'll hear central bankers say things like, we will print as much, we will create as many monetary units as we want to. So they are establishing, they're establishing that they're going to have maximum uncertainty in terms of their monetary policy. Why do they do that? They do that because they are trading that monetary policy uncertainty to minimize the price risk of their currency. Right? They are trying to maximize the price stability of the monetary unit at the expense of the monetary policy uncertainty. Bitcoin does the opposite. Bitcoin maximizes the price risk so that we can minimize the monetary policy uncertainty. Now, different schools of thought are going to disagree on which approach is better. I think the market will decide. And I think that if the market is able to hedge the price risk, then actually there's a cost associated with hedging. Obviously you gotta pay the cost of the futures contract or the cost of buying a put. But ultimately is that cost greater than the cost of maximizing monetary policy uncertainty? For fiat, gold is actually still pretty competitive on monetary policy uncertainty because there's a cost associated with mining gold. But nevertheless, there has been uncertainty in gold supply in the past, right? So for example, when the new world was discovered and gold imports to Europe dramatically increased, that was uncertainty. Same thing. For example, if we did asteroid mining and we brought back an asteroid with a massive amount of gold, that's uncertainty. And so Bitcoin with the halvings with the difficulty adjustments, it really has the least uncertain monetary policy.

On the other hand, other monetary assets like the US Dollar has an history much bigger than the one of Bitcoin. At the end of the day, I think the level of uncertainty doesn't depend also on the period of time the specific monetary system has been battle tested. Bitcoin has 10 years of life, the dollar has far more. Don't you think that also the time has some influence on the level of uncertainty to calculate the uncertainty?

Well, so you're only going to calculate risk, right? So risk is what's quantifiable. And I agree that the dollar's lifespan certainly reduces its risk from a purchasing power perspective. But from an institutional uncertainty perspective, I actually don't think that its lifespan has any effect on that because it has transformed so much over its life. If you look at the history of the dollar, it is a series of reminders of why the dollar is uncertain. It started out where the dollar represented a fixed amount of gold, and today the dollar represents nothing. It represents the credibility of the Federal Reserve.

Thanks for being with us today, Pierre. That was cool.

Yeah, sure thing. Thanks for having me.

That was Pierre Rochard, Bitcoin, strategist at Kraken. As always, if you enjoyed this interview, smash the like button and subscribe to our channel, Cointelegraph.

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