Thread by @Breedlove22

Many people have asked me to share the notes from my appearance on the @APompliano podcast where we discussed "An Open Letter to @RayDalio re: #Bitcoin"

This thread is a distillation of those notes, let's begin⏬

medium.com/@breedlove22/a…

Everything we say, do, or make starts out as an idea. The purpose of the world economy is to generate and share useful ideas through trade. As we trade, our ideas become better, giving everything we say, do, or make more specialized qualities

Consider how our transportation technologies have gone from wagons, to automobiles, to airplanes. In trade, everything is valued at some ratio of everything else. For instance, this car might be worth 132 chairs, or this house worth 11 cars.

Money is the medium through which we more easily calculate these exchange ratios. Like any other tool, money saves us time. Generating time-savings is the purpose of all tools: for instance, we can dig more holes per hour using a shovel then we can with our bare hands.

Money is a tool that helps us negotiate and execute trades more quickly. It is the medium through which economic actors communicate their preferences, which drives human action.

By choosing to buy a car and sell your house, the economy responds dynamically by producing more cars and less houses. Contrary to popular misconception, money is NOT a government creation. Money arises naturally in any trading society—it is simply the most tradeable thing.

As people seek to satisfy their wants through trade, they steadily seek to trade their things for more tradeable things to get closer to obtaining the thing they want. As this dynamic unfolds, something necessarily becomes “more tradeable” than everything else and becomes money.

As societies advanced, they coalesced around precious metals as money due to their superior monetary traits: durability, divisibility, portability, recognizability, and scarcity.

Gold, the most scarce monetary metal, came to dominate the world, as its supply is the most inflation-resistant or inelastic. Governments coopted gold and over time built a pyramid scheme on top of it called “fiat currency”.

A pyramid scheme is a structure in which those in higher tiers steal value from those in lower tiers. Fiat currency is a pyramid scheme with central banks at the top (who hold the only real money, gold) that generate profits by making loans to successive layers of banks below.

Each higher layer bank profits from the loans it makes to the subsequent layer of banks. It is a leverage-based business that requires steadily more debt accumulation to remain functional; it inevitably breaks down when the debt load becomes unserviceable (as is happening today).

When governments commandeered the market for money, it became unfree or “centrally planned”. In this sense, free markets are natural organizing principles that encourage us find better ways of doing things by making bets with one another.

As we prove others wrong in the marketplace, by finding and selling better ways of doing things, the productivity gains diffuse into society through trade. These gains come in the form of better ways of saying, doing, and making things.

Said differently: productivity gains come from more specialized ideas which come from trade. Free markets are idea meritocracies (which we will talk more about later today).

Free markets are unhampered trade networks that encourage the cultivation and diffusion of the best ideas within society. All regulations are limitations on free market dynamics that reduce their efficacy. The ultimate expression of “regulation” is a monopoly.

In a monopoly, all free market competition is suppressed through coercion or violence. In the world today, the market for money is not a free market, it is forcibly dominated by banking cartels. Fiat currency pyramid schemes are monopolies, which come at a heavy cost to society.

Monopolies increase prices, decrease innovation, and reduce trade. Free markets make mankind become more productive (which is economic). Monopolies, or unfree markets, make mankind become less productive (which is anti-economic).

With this background on money and markets in mind, we are here today to talk about one of the greatest capitalists in history… @RayDalio. Ray is the most successful hedge fund manager in history: he started Bridgewater from his apartment which is today valued at ~$160B.

Ray incepted a cultural paradigm at Bridgewater called the idea meritocracy. In the idea-meritocratic culture, candid reviews of colleagues are encouraged. In Ray’s book, he shares a memo a subordinate shared with the entire firm giving Ray a “D” for his performance in a meeting.

This cultural style promotes the propagation of truth and minimizes office politics. In this spirit, I wrote “An Open Letter to Ray Dalio re: Bitcoin”. I start this essay by giving Ray an “F” for his assessment of Bitcoin for 3 reasons:

First, Ray says that he is sold on “blockchain technology” but not Bitcoin, despite Bitcoin being the only market-proven use case for a blockchain. Blockchain is a mostly unproven buzzword. Bitcoin is the hardest monetary technology in history.

Second, Ray says that Bitcoin could be disrupted by another cryptocurrency, citing iPhone disrupting Blackberry as a comparative example. This is extremely unlikely: Bitcoin is a path-dependent, one-time discovery of absolute scarcity for money:

medium.com/@breedlove22/t…

Third, Ray says that price-stable central bank or corporate issued cryptocurrencies (like Libra) are a better alternative than Bitcoin, as it is too unstable to be used as a medium of exchange. True, central banks already are announcing their attempts at this...

...however one thing they will never do is give up control of monetary policy, which is the means through which they enrich themselves (this goes by many names: the Cantillon effect, confiscation via inflation, the shadow tax, or taxation without representation).

Since Bitcoin has an absolutely scarce money supply (a monetary policy akin to absolute zero), it will continue to appreciate on an exchange ratio basis against fiat currencies, which are inevitably printed into worthlessness over time.

Exchange ratio volatility against fiat currency is a normal consequence of price discovery for an emergent asset: consider Amazon crashing 94% from $85 to $5 beginning in 1999 before growing over 33,000% since on its ascent to market dominance.

Amazon accomplished this feat by gaining control of the digital market for distribution networks. The space which Amazon conquered is driven by scarcity (finite distribution channels) and subject to winner-take-all dynamics (due to network effects and economies of scale).

Similarly, the market for money is driven by scarcity and subject to winner-take-all dynamics—as we saw with gold. In fact, Bitcoin is monetizing along the same path as gold: today it’s being used as a store of value...

...then once it has accrued enough value to incentivize people to spend it, it will become more widely adopted as a medium of exchange, and when it is finally used widely enough it will become the primary denominator of prices worldwide, making it a unit of account.

After reading @RayDalio's book “Principles”, I realized that #Bitcoin positively embodied many of the principles Ray lays out in his book. I decided to write “An Open Letter to Ray Dalio re: Bitcoin” to share my findings, which brings us to the first Principle…

The Idea Meritocracy: An idea meritocracy is a cultural paradigm: a free market for ideas, a way of subjecting ideas to a (simulated) form of natural selection—"a kind of Darwinism for ideas if you will”

An idea meritocracy is an open environment for the proliferation and combination of the most meritorious ideas, free from manmade impediments such as ego, policy, and hierarchy.

Team members at Bridgewater review one another’s work, meeting contributions, and attitude in real-time using a suite of custom-made “Management Tools”, which are software based tools used to gather real-time feedback.

An idea meritocracy is intended to be aligned with reason and impervious to politics. We see this in the world: the more objectively measurable and traceable the outcome of a job, the less political it is, as competence is the primary determinant of who gets the job.

Consider how professional athletes are paid for the points they put on the board or other stats (objective metrics) whereas politicians are paid based on their charisma or cunning (subjective metrics).

Since everything we say, do, or make starts out as an idea—the idea meritocracy is a free market! Markets are necessary to disseminate knowledge because knowledge has a localized dimension to it, meaning:

Every person is most familiar with the prevailing economic circumstances specific to their place in spacetime and industry. Free markets are the best assimilators and disseminators of these localized pools of knowledge within an economy.

A free market is nexus in which many minds become one through the mechanism of price—this is capitalism! Free markets are directed by the collective decisions of all economic actors, whereas centrally planned socialism is directed by the decisions of a handful of bureaucrats

Socialism is top-down, unnatural, despotic (traditional org chart)

Capitalism is bottom-up, natural, democratic (idea-meritocratic org)

So the elephant in the room, then, is why, in light of overwhelming evidence favoring a free market economic system, do we still tolerate central planning in the largest market of all — the market for money?

To understand the differences in free and unfree markets, a set of formulas will help us… Ray gives us the following formula:

The Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making

Which correlates to a free market formula:

Free Markets = Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and Hard Money + “Skin in the Game”-Weighted Decision Making

With these formulas in mind, let’s dive into each of their elements and consider their relationship with markets, money, and Bitcoin… the first formulaic element of Ray’s IM is… The Principle of Radical Truth.

This is the idea that gaining a clear perception of reality is paramount to facing it head on and dealing with it. In markets, it's commonly said that “price is truth”; meaning that all known market realities are expressed in any particular asset’s price at any given moment.

You may remember from Economics 101 that the market price is the intersection of supply (objective) and demand (intersubjective). Put another way, prices are data packets that convey information about scarcity (which is objective) and value (which is intersubjective).

Each entrepreneur’s decision to buy or sell is influenced by prevailing prices and, in turn, communicates back into the market the state of economic conditions relevant to him which again, in turn, influences the same decision-making of all other entrepreneurs...

...within his market; this is intersubjective value. These decisions are based on actual availability of time, resources, and know-how; this is objective scarcity.

Central banks “broke the truthfulness” of money by centralizing gold and issuing depository receipts (dollars redeemable for gold) in excess of their gold reserves
This severed the “skin in the game” of money, and gave central banks a mechanism for perpetually privatizing...

profits from money production (thru seigniorage) and socializing government losses (thru inflation). Skin in the game is a concept from my favorite author: Nassim Nicholas Taleb, who’s wisdom I draw on frequently in my thinking.

SITG is based in symmetry: a balance of incentives and disincentives that is necessary for most systems to function properly. With no disincentives in the fiat currency system, as there is a near-zero cost of money production, central bankers are incentivized to devalue currency.

As a wise man once said: “Inflation is the surest way to fertilize the rich man’s field with the sweat of the poor man’s brow.” Inflation of the money supply is a violation of private property rights, as it reallocates wealth away from its original owners (the citizens)...

...into the hands of those closest to the governors of the monetary system (the politically favored few).
Inflation also distorts the price signals propagated by fiat currency, causing entrepreneurs to overborrow, misallocate capital, and misprice risk.

Think of inflation as a computer virus that corrupts these data packets on value and scarcity called price signals. For the same economic reasons that price fixing led to the starvation of millions in Soviet Russia, fixing the “price” of money (the interest rate) causes...

...recurrent economic calamities—what we today call the business cycle. As with all well-functioning markets, the price of money must emerge through, and constantly reorient itself against, the natural interactions of supply and demand.

Attempts to centrally plan this market only distort truth (in the form of distorted price signals) and trigger overborrowing, recessions, and cause the boom-and-bust business cycle.

Another way to look at the fiat currency price signal distortion is with Wittgenstein’s ruler: Unless you have confidence in a ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.

The less you trust the ruler’s reliability, the more information you are getting about the ruler and the less about the table. Said differently: the more you can trust a unit of measurement, the more signal and less noise it gives you.

With an absolutely fixed supply, Bitcoin will restore the clarity of these economic price signals that are so critical to proper capital allocation, risk assessment, and entrepreneurial coordination across spacetime.

Simply: free market money like gold is a universal system of measurement! Universal units of measurement—such as seconds, meters, or kilograms—are all immutable in value to maximize the coordination of human action across spacetime.

Upon these foundations of standardized measurement, the machinery of global commerce is constructed: builders of skyscrapers, electronics, and transports rely on the constancy of these measurement units when sourcing materials and coordinating labor efforts from around the globe.

The immutable money supply of Bitcoin means that, once it is used widely enough to function as a unit of account, that its price signals will carry more truth than any other money in history. Bitcoin is a monetary channel free from the noise of unexpected supply fluctuations...

...which necessarily means it carries the clearest signals. In this way, Bitcoin is the perfect conveyor of the data packets on value and scarcity known as price signals. I like to say that money is like economic water, and when it comes to price signals…

Fiat currency is inscrutably murky (lots of noise, you can’t tell whether price changes in things are real or inflation-driven). Bitcoin is the opposite: it is crystal clear (pure signal, absolutely zero unexpected inflation.

An economy run on a Bitcoin standard would have fewer and less extreme “booms and busts”. The Bitcoin Standard, by the way, is a book that everyone needs to read! Which brings us to the second formulaic element of Ray’s idea meritocracy… The Principle of Radical Transparency.

In free market capitalism, there are three cornerstones:
Rule of Law (which gives us a means of nonviolent dispute resolution). Private Property Rights (which gives us respect for relationships between people and assets)...

Hard Money (which gives us a free market selected money and an accurate conveyor of price signals). With strong and reliable rules in place, entrepreneurs are then free to “play the game”, accumulating capital and diffusing any innovations gleaned in the process...

...into the whole of society through trade. Imagine a poker player sitting at a table where the hand-rankings changed at the whims of the casino every few hands; without sound rules on which to build a strategy, no player remain engaged in the game for long.

The problem with the perceived safety of the US Dollar is the opacity of the rules which govern its existence, including:
How many dollars are there in existence?
How many will be issued in years to come?
Who gets to decide?
What are their criteria for deciding?, and...

...most importantly: Who stands to profit from its production? Even though the US Dollar today is just an SQL database maintained by The Fed that could choose to open its records to audit, it refuses.

https://twitter.com/_JustinMoon_/status/1159598647815917568

To counterbalance this opacity, an army of macroeconomists, analyst, and market commentators pour over every detail of the statements issued by central bankers including not only their words, but their tone, delivery, and even wardrobes.

To understand how absurd this is: Imagine if a semi-governmental agency was put in charge of setting prices for automobiles… Ask any “free market capitalist” if this seems like a good idea and he will spew vitriol at you for even suggesting such a socialistic method of...

...managing the pricing of automobiles. Any true capitalist will tell you that the only market should determine prices, at the intersection of supply and demand. Then, very smoothly point out to him that The Fed sets the pricing of the US Dollar (the interest rate), which is...

...the United States’ most valuable export market, and does so based on undisclosed criteria and closed-door discussions. Indeed: Fiat currency is antithetical to free market capitalism, it is monetary socialism!

In markets, Sunlight is the best disinfectant; when everyone can see the criteria and process behind a decision they are more likely to deem in trustworthy. With Bitcoin, the algorithm which sets its money supply is totally transparent, meaning people can universally agree...

that the system is fair and unbiased. As an open-source monetary protocol, Bitcoin is essentially the principle of radical transparency in perpetual action.

https://twitter.com/Travis_Kling/status/1181647574861832193

Bankers hate this because: Bitcoin basically automates the functions of a central bank, which are…
1. Maintaining monetary policy.
2. Reaching consensus as to account balances.
3. Facilitating international value flows

Transparency also gives us the restoration of strong property rights in money. Few people realize that monetary inflation is a direct violation of private property rights. Crazily, it is a legally enforced injustice! Printing money is like amending the list of...

...who owns what, a corruption of the private property rights intrinsic to capitalism. #Bitcoin is an uninflatable, confiscation-resistant, and free-market-based money. This provides its users stronger property rights than inflatable, confiscatable, and deauthorizable fiat.

Bitcoin is the purely transparent alternative to the opacity of central banking; it is a beacon of light outcompeting an industry purposefully shrouded in darkness.

Once properly understood, #Bitcoin’s superior visibility inescapably enhances its believability. And once you see truly see it, it cannot be unseen. As you’ve said @RayDalio: “Having nothing to hide relieves stress and builds trust.”

Transparency and reliability are the essence of Bitcoin’s utility as money. It is truly unique in that its supply is absolutely predictable and absolutely scarce. #Bitcoin is the most credible money in history outcompeting the least trustworthy monetary policies in history…

#Bitcoin is rapidly gaining a track-record superior to central banks across all dimensions — reliability, predictability, auditability, cost-effectiveness, and resistance to censorship or manipulation. Bitcoin is thereby further eroding the believability of...

...central bankers, which is in shorter supply with every dollar printed. Which brings us to the third formulaic element of Ray’s idea meritocracy… The Principle of Believability-Weighted Decision Making.

If we look at fiat currency in terms of believability: The best performing central bank fiat currency in history in the British pound, which has only lost 99.5% of its value in its 317 year existence. When it comes to maintaining purchasing power across time, gold has...

...a believable track record, whereas fiat currencies could only barely be less believable. An ounce of gold has roughly equaled the value of a fine man’s suit for over a century, whereas the cost of the same suit in dollars has skyrocketed.

Further, the implementation of fiat currency offers limited to no assurances to its users that their wealth will be protected from confiscation, censorship, inflation, or counterfeit. Even if you believe in central banking, you would be hard pressed to defend the...

...believability of central bankers. As you said Ray, “Think about people’s believability, which is a function of their capabilities and their willingness to say what they think. Keep their track records in mind.” In terms of capabilities, central banks have arrogated...

...themselves virtually unlimited latitude to manipulate the supply and price of fiat currency in pursuit of politically determined ends. They have exercised these privileges based on (largely) undisclosed criteria and are notorious for their veiled communication styles.

In other words, central bankers seem quite unwilling to say what they think and their decision making criteria are shrouded in falsehood. In regards to track records, central bankers likely hold the world record for the most abysmal performance history, causing multiple...

...waves of currency devaluation and unemployment during their reign over money. Since reputation cannot be printed, and must be earned through honesty, it is unsurprising that central banks have struggled in this respect, as their business model is built on deception.

Another way to look at the believability of money is by setting Facts vs. Opinions: Opinions are like soft money, in that they can easily be diluted and distorted (like politics); Facts are like hard money, in that they are rooted in scientific realities.

In the case of gold, these are chemistry and physical rarity in the case of Bitcoin, these are mathematics and thermodynamics . Said simply: do we believe the largest market in the world is best governed by opinion or fact?

In this respect, Buying #Bitcoin is buying a put option on central banker malfeasance; or going long facts and short opinions (Sort of like @APompliano's “long bitcoin, short the bankers” meme!). The reason Central bankers can’t be believed is because they lack skin in the game!

Taleb sums up skin in the game nicely by saying: “Don’t tell me what you think, just show me what’s in your portfolio”
And Regardless of what they say or think, Central bankers have been stuffing their portfolios with gold lately
Money, which is the largest and most...

...critical market in the world, simply cannot evolve without practitioners who are subjected to real world consequences and tradeoffs, in real time. Since central bankers don’t face the consequences of their decisions, they suffer from the “agency problem”, a conflict of...

...interest inherent to any organization where one party is expected to act in the other’s best interest, but is not exposed to the proper balance of incentives and disincentives to do so.
Simply, if you lack skin in the game then you lack believability.

This explains why ancient Roman architects were required by law to stand beneath their monolithic arches when the scaffolding was removed. This (deadly) disincentive to malperformance worked wonders, as some of the oldest arches constructed in this way are still standing at...

over 2,000 years of age. If only central bankers were subjected to the devastation they inflict on economies should their decision-making not work out, then perhaps the world would still be on a gold standard and the dire need for #Bitcoin would be lessened.

Without skin in the game, your interests are inherently conflicted and you suffer from an agency problem when managing other people’s money. This is why most asset allocators prefer hedge fund managers that have substantial amounts of their own net worth tied up in their funds...

...and this is also why central planning always causes moral hazard—its overlords are not exposed to the depravity they inflict on their people.

On the other hand, all market participants in Bitcoin have skin in the game Node operators are incentivized to maintain the rules...

...Miners are incentivized to sanctify the Bitcoin ledger efficiently, Developers expend their time supporting an open-source project, and Bitcoin holders expend resources to acquire their Bitcoin. All of these Bitcoin market participants are just like the...

...ancient Roman architects standing beneath their newly un-scaffolded arches.

Going back to Ray’s formula for the IM and its free market equivalent, we have the…

Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making

Which is equivalent to the free market format of…

Free Markets = Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and Hard Money + “Skin in the Game”-Weighted Decision Making

We can translate these equations into...

Central Banking = Untruthful Price Signals + Transparent and Reliable Rule of Law, Marginalized Private Property Rights (due to violations via inflation), and Soft Money + “Agency Problem”-Weighted Decision Making

And then finally we have…

Bitcoin = (Absolutely) Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and (Absolutely) Hard Money + “Skin in the Game”-Weighted Decision Making

Clearly, only Bitcoin is 100% consistent with the equation for free markets; whereas central banking is almost entirely inconsistent. Since this free market equation is equivalent to the idea-meritocratic equation, we may deduce:

#Bitcoin is completely consistent with Ray’s formulation of the idea meritocracy, and central banking is not.

Finally, going back to Ray’s assessment of Bitcoin…
Assuming Ray’s Principles are stated forthrightly, how can he possibly be a non-believer in Bitcoin?

Bitcoin is both an idea meritocracy and a free market!
As you said @RayDalio, (p.379) “When someone says ‘I believe X,’ ask them: What data are you looking at? What reasoning are you using to draw your conclusion?”

So let me ask you Ray: after Bitcoin’s impeccable performance for over a decade:
It’s had over 99.98% uptime,
It’s never been hacked,
It’s evolved into the most secure computing network in the world,
It is storing roughly $200B in market value, and...

It has cleared over $1T of transactions in total
what data and reasoning are you using to draw your conclusion about #Bitcoin?

@RayDalio, my guess is that like many smart people, you have disregarded #Bitcoin at the outset. In accordance with one of your favorite principles, I implore you to keep an open mind about Bitcoin and, perhaps, you will come to see it as an embodiment of open-mindedness itself.

Finally, here is the link to the live stream of this episode with @APompliano

https://twitter.com/APompliano/status/1233472708559552512

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