15 Sep, 28 tweets, 5 min read
I've been doing a deep dive into money - what it is, how it works, history, etc.

Money is taken for granted by most, but it's really the first principle of the economy (and society). Money is the base layer, and everything else is built on top.
The base layer / first principle of a complex system is profoundly important and should not be meddled with, because the second, third, and nth order consequences are not predictable.

Well-intentioned changes to the base layer can unexpectedly wreck the entire system.
Another feature of such a complex system like the economy is that there are a lot of (complicated) arguments for which factors drive certain effects.
You can read entire books on what's allegedly driving the wealth inequality gap, inflation, etc. Most explanations range anywhere from 'complete hogwash' to 'directionally correct but missing the point.'
Instead of looking at all sorts of complex equations and assumptions, perhaps it makes more sense to just look at the base layer: money.

Simply put, if you change the distribution of the allocation of money, there will be unintended consequences to the rest of the system.
So, if I own 1% of all the available dollars, and then the Fed prints money and puts it in my bank account to where I now own 5% of all the available dollars, that's clearly great for me.
There is an informational asymmetry to my advantage: I can spend my extra share of dollars before anyone else catches on that they have a smaller share of dollars than they did yesterday.
Whoever is closest to the source of new money will have an advantage over everyone else. They will have a larger share of all dollars while everyone else will have a smaller share of all dollars, but the *average* share of dollars across the entire population will stay the same.
This is a classic x != f(x) problem. If you have \$100,000 distributed evenly across 10 people, the average person will own 10% of all dollars. If you then give \$1 billion to 1 of these 10 people, the average person will still own 10% of all dollars, but one person owns 99.99%.
Put simply, whenever new dollars are added to the system, asymmetries are created: whoever is closest to the source of the new dollars will have an advantage at the expense of everyone else.
Once people figure this out, then the game can shift from trying to increase your size of the existing pie of dollars, to trying to figure out how to get first in line for the expansion of the pie of dollars.
This is the key reason why gold has held value for so long: you can't get more gold by gaming the system.

It is far easier to increase your share of the total gold by delivering value to others than by trying to be first in line to a new supply of gold (i.e. mining).
In other words, you could start a business and use your profits to acquire an ounce of gold far easier than you could go out and mine an ounce of gold. This makes the distribution of gold much more equitable than the distribution of dollars.
If I tell you that someone who had zero gold in February has 10 ounces today, you can be very certain that they gave up value in exchange for this gold.

This isn't true with dollars: a new supply of dollars could go to a failing company deemed 'too big to fail.'
Put another way:

- It is nearly impossible to obtain more gold without providing value in exchange for this gold

- It is very possible to obtain more dollars without providing value in exchange for these dollars
So the only way to get closer to a new gold supply is to put in a huge amount of effort to mine gold. Contrast that with dollars, where I could gain an advantage over you simply by being born into a hyper wealthy banking family that happens to get bailout money.
This is also why Bitcoin has gone from \$0 to a \$200B market cap in a decade. The only way to be first in line to a new supply of Bitcoin is to put in the effort to mine it (with computing power).
Bitcoin's key advantage over gold is that the new supply has a predefined schedule that is verifiable by anyone. We don't know exactly how much gold exists today, nor how much new gold will be discovered tomorrow. We know both for Bitcoin.
With gold, we can estimate what the supply will be 100 years from now, but there will be an error rate. With Bitcoin, we know exactly what the supply will be 100 years from now.
This isn't to say that Bitcoin can't fail. While Bitcoin is better money in theory, gold has the advantage of being used for thousands of years as a store of value, so the burden of proof is on Bitcoin to show that it truly is better money than gold in practice.
But, to dismiss Bitcoin as worthless or Internet funny money or a bubble seems very wrong at this point. It is a decentralized, provably scarce asset whose supply cannot be gamed, which is incredibly hard to come by.
Every day that I hold Bitcoin, I can know my *exact* percentage share of the total Bitcoin in existence, and I can know the *exact* amount of Bitcoin that has been created.
This gives us information *symmetry* that has never existed in money before: everyone can know how much money they have relative to everyone else today and, critically, at any point in the future.
If I put \$2,000, 1 oz of gold, and 0.2 BTC in a vault and let it sit for 120 years, which one will be more valuable in 2140?
1 oz of gold will almost definitely be more valuable than the \$2,000, but even gold has a ~1% inflation rate each year due to mining.
We don't *see* the inflation of gold in a chart of the gold price, because the gold price is quoted in USD, which is inflating at a higher rate than gold.
Each year that BTC continues to work, it becomes more and more likely that the 0.1 BTC will be the best of the three long-term, as its inflation rate predictably drifts from <2% this year to <1% in a few years, and eventually to zero.
BTC is not a guarantee to ultimately unseat the dollar or gold - its still relatively young and the future is inherently uncertain. But based on everything we know about it right now, it has distinct advantages over both the dollar and gold.

• • •

Missing some Tweet in this thread? You can try to force a refresh

This Thread may be Removed Anytime!

Twitter may remove this content at anytime! Save it as PDF for later use!

# More from @WittyUsername30

22 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 10:

1. If your metric is not useful during times of crisis, then your metric is simply not useful.
Many metrics are some variation of reward divided by risk, where 'risk' can be further broken down as: measured risk divided by hidden risk.

If you increase your hidden risks, it artificially increases your reward to risk ratio.
It's very difficult to increase the expected return, so many will increase hidden risk in order to provide the illusion of a high reward-to-risk metric.
21 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 9:

1. It took us decades to figure out that trans fats were harmful. GMOs can have the same problem.

Just because we don't have evidence of a problem does not mean that there is no problem.
2. When implementing a tail risk hedge strategy (whether in finance or other domains), your goal is to be at a point where you are okay with your worst case scenario.
3. Finance vs. Engineering.

In finance, tail risk hedging is often scorned. In engineering, tail risk hedging is the entire point (i.e. you are ensuring your bridge won't collapse).
20 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 8:

1. To deal with bad actors in a system, ensure damages to the system will also damage the bad actor.

This is difficult to do in practice, but Bitcoin accomplishes it.
The value of Bitcoin is largely based on trust of the system. So if bad actors are able to break the trust of the system, the value of Bitcoin could crater, making the bad actors' heist of Bitcoin lose its value.
The bad actors are concave (low upside, huge downside) in this scenario. It makes more sense for the bad actor to steal cash and buy Bitcoin with it or steal Bitcoin from a custodian like Coinbase, than to attack the network directly.
19 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 7:

1. Just because x is normally distributed does not mean that f(x) is normally distributed.
In other words, just because you can predict a specific variable / input for a model does NOT mean that the model itself should be used to forecast.
This is because x could be solely probability-based and have no second-order consequences. f(x), however, is based on the *effect* of that probability, which introduces second-order consequences (i.e. degrees of separation between the probability and the end result).
18 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 6:

1. Chaotic systems occur when tiny differences in initial conditions result in wildly different results (e.g. changing a variable from 10 to 10.0001 gives a completely different result).
To predict a system like this, you would need infinite precision, which you don't have. These systems are "unpredictable but characterizable," as you can predict the possible states but not where it will be at any given point.
Example: You can't predict the weather 1 year from now, but you can know the range of outcomes of what the weather could be 1 year from now.
14 Aug
Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 5:

1. Optionality provides you with convexity: you can throw out the bad option and choose a better option.
Optionality is worth something, so the whole idea is to avoid paying too much for it. Many times, it isn't priced in at all (e.g. a restaurant reservation that you can cancel for free if you find a better one).
2. In any field, what you actually need to know is not what outsiders think you should know. As a practitioner, you gain a deep understanding of the properties that outsiders (e.g. academics) simply can't obtain.