Bitcoin's Economics: A Letter to Peter Schiff
Mr. Schiff, you understand real-world economics better than anyone — you wrote a book about it after all (one of three I’ve read) — and I wonder if you have taken the time to understand the economic system underpinning Bitcoin. I think if you did, you would be less opposed to it than you have been. Hoping so, I am going to give it a shot and explain it the best I can; and perhaps after reading this, you may reconsider your stance — but believe me, I’m not holding my breath.
First off, I’d like to note that I am surprised by your opposition to Bitcoin. It is surprising to me, because you played a large role in my interest of it. With the knowledge shared by you, Ron Paul, Jim Rogers, and Marc Faber, I’ve grown into a sound money advocate that, in principle, believes less is more when it comes to government — especially when it comes to control of the money supply.
I’m sure you know, but with Bitcoin, there is no central bank or politician dictating its money supply. The issuance cannot be increased or decreased on a whim; it is set in stone at 21 million, transparent and open for all to see. To me, this is the most appealing aspect of Bitcoin, and why I’ve wanted to see it flourish since I learned of it in 2013. I imagine you find this lack of control by a centralized entity appealing too — in fact, I am quite certain of it.
How does it work? Well, that’s where the genius of the design comes into play. It works because of its economic/mining system. Miners compete against each other to solve a complex problem every ten minutes, and the first to solve the problem is rewarded with a set amount of Bitcoin, as well as any income generated from transaction fees included during that timeframe. The effect this has, is creating a stable method of issuance that rewards the valuable participants (miners) that take part in its economic game.
Why are those participants valuable? They’re valuable because they secure the network. As mining power over the network increases, so does the security of the network. The more mining power the network has, the more difficult and costly it becomes for a nefarious actor to attempt an attack on it. I won’t go into great detail here, but to attack the network, an attacker requires the capital investment of half the entire network’s mining power to have any effect — and in the end, the economic incentives along with the capital investment cost would dissuade them from doing so. That mining power would be worth more actually mining Bitcoin, rather than trying to temporarily screw it up.
The security of the network is one part of the economic equation; another part is the competitive mining system. Like gold miners, Bitcoin miners invest substantial amounts of capital in equipment that enables them to “dig up” their desired loot, and earn income by selling it to offset the costs of their investment. Just instead of their loot being gold, they earn Bitcoin ledger entries (“coins”) for their efforts. In order to become profitable, just like a normal business, the initial and ongoing costs must be less than the income received from sales. When it comes to this industry, this means a miner must outcompete other miners, and find the Bitcoin reward before other miners do. In order to do this, their mining operation must be substantial enough where they stand a chance to solve the problem before others can. If their system is too slow or not powerful enough, they are likely going to lose out against ones that aren’t. What this does, is create a competitive marketplace where the best and most efficient miners win — just how any market without intervention should operate.
I am sure you can appreciate the fairness of this economic system, and you probably have no argument against what I’ve said thus far, so after appreciating its economic design for a moment, let’s get into the actual argument you have with Bitcoin: What the hell gives these ledger entries any value in the first place?
To start, I understand it is hard to conceptualize giving something value when it has no physical presence or any obvious intrinsic value. My argument for this point is it does have a presence — albeit a digital one — as these ledger entries do exist, in limited quantity, and they can be controlled and used by people to trade for other things. Basically, its value comes from being a worldwide fair form of money where transactions costs are negligible. That’s what gives it value in my eyes. If it doesn’t do that, or do it well, I don’t see how it’s valuable either — which is why you and I are on the same page when it comes to BTC (currently “Bitcoin”). Neither of us sees BTC as valuable, since the network can only process 3–4 transactions per second, with fees that rise substantially during periods of high use. If that’s all a network can do, I agree, there’s not much value in it.
But I don’t feel the same way about Bitcoin-SV (BSV). I do think these ledger entries have value, and over time, I think you will too. The reason being, this version of Bitcoin is taking full advantage of Blockchain technology (which we’ll get into shortly) while fully preserving its superiority as a form of money. That is, you can always expect instant transactions, fees to remain negligible, and VISA+ levels of transactions per second.
Aside from the obvious improvements as a form of money (fairness, limited supply, divisibility, decentralized issuance, speed, instant settlement), with Bitcoin, our privacy is preserved when conducting transactions over the internet; and even though privacy is preserved, that record can also serve as official documentation when needed — which will be important once real-world contracts and other legal transfers are conducted over the BSV Blockchain.
I’m wondering if you see any value in it yet. If not, I’m going to pull one final punch. I watched a segment of your “convince me about Bitcoin” video, where you said there could be value from adding data onto the blockchain; but it didn’t make much sense to you. Well, I think I can explain it so it does. Before I do though, I’d like to note that the segment I watched of you WAS uploaded to the BSV Blockchain, so that capability does exist, in case you were wondering.
For starters, no, you do not need to own a full Bitcoin in order to upload data (such as a sound file, image, or video). The cost to upload data to the Blockchain is much cheaper than that. You just have to pay a reasonable fee to the miners due to the larger size of the data transmitted to it (it’s larger than your typical transaction). Now what does one get from adding data to a Blockchain? One gets a permanently stored file added to a database that cannot be altered or deleted. That means that file will exist forever, and you can forever view or download it from another computer whenever you like. Essentially, the 0 downtime Blockchain can be your own personal data storage system (The Blockchain as a cloud).
To further expand on its innovative nature, the Blockchain allows you to hide the file from public view, and limit viewership to only those who possess the key to unlock it (yourself). When it comes to real-world business use such as contracts, this should be of great value in the future.
But the real beauty of it all is the ability to charge a micropayment fee for other users that want to download your file. With the BSV technology, an entertainer, musician, writer, or some other content creator, could post their creative material (data) to the Blockchain, and earn money from their audience based upon the number of downloads they receive. Due to the automated, programmable nature of Bitcoin, with the click or swipe of a button, content creators can get paid directly from their audience, and avoid the hassles of 3rd parties and intermediaries in the process (publishers, the music industry, advertisers, etc).
So if you, Peter Schiff, wanted to charge $.10 to watch your latest financial video or podcast, you could cut out the middleman, ditch the advertisers, and get paid directly by your viewership at a price that you and your audience finds reasonable. Same could be said when it comes to your books or writings — all made possible by Bitcoin; the immutable Blockchain ledger technology; and the fair economic system that serves as its backbone.
Valuable? I think so, and hopefully after reading this, you do too.
P.S. I’ve refrained from cheerleading Bitcoin-SV too much, but you asked the question why another Blockchain couldn’t copy this feature, and I feel compelled to elaborate why. For one, the necessary infrastructure to enable this has been built only on BSV. Two, other Blockchains don’t see the value of it. And three, in order to enable this capability, the amount of data that can be added to each block must be massive, and only the BSV Blockchain is moving towards the capability of adding large or unlimited amounts of data to each block (this requires substantial improvements in infrastructure that many other Blockchains do not have the resources or expertise to pursue).
And with that said, I have one last Bitcoin economic tidbit for you, followed by a question. The way Bitcoin is designed, the number of Bitcoins miners receive per block decreases as time goes on. Eventually, when all 21 million have been mined, miners won’t receive any additional Bitcoins after solving the equation before the others. They will only receive fees from the transactions (data) added to each block. What this means, is in order for the miners to remain profitable and continue mining (very important), the amount of data added to each block needs to be massive enough to offset the loss of mining reward. So obviously, a Blockchain that intends to survive and thrive indefinitely must bake maximum usage of its Blockchain into the cake. Well, like I said, the only chain that has chosen to take this route is Bitcoin-SV. Others like BTC have instead decided to ignore this economic reality, and have built other systems to prevent transactions from reaching their Blockchain. In other words, they intend to minimize use of their Blockchain, avoid paying miners in the process, and have no plans to supplement mining income through data submissions — as block rewards decrease and eventually hit 0.
So my question to you, as an economics expert, is how wise do you think this is over the long term?
And that’s where I’ll leave you. Thanks for reading.
1 of 1 reviewers say it's worth paying for
0 of 1 reviewers say it's not worth paying for