Is Bitcoin the Death of Fiat Currency?: Podcast

Q&A with Michael Goldstein and Pierre Rochard of the Satoshi Nakamoto Institute.


"Bitcoin is not competing with Visa or MasterCard. Bitcoin is competing with the Federal Reserve and the U.S. dollar," says Michael Goldstein, president of the Satoshi Nakamoto Institute and host of the Noded Bitcoin Podcast. His co-host and the institute's treasurer, Pierre Rochard, talk with Nick Gillespie about the meteoric rise of bitcoin, how it can become a viable currency despite volatility, and how it may well spell doom for central banks and the gods of Keynesianism.

The Satoshi Nakamoto Institute is a group devoted to promoting bitcoin and working through many of the theoretical and practical challenges for the world's best-known cryptocurrency. It's named after Satoshi Nakamoto, the pseudonym of a programmer or programmers who launched bitcoin in 2009, in what Nakamoto called "a peer-to-peer electronic cash system."

Bitcoin potentially offers at least two radical things to its users. First is a non-state-based currency, and second is a fully peer-to-peer accounting system in which every actor can verify all transactions virtually instantaneously. The program resides on the computers and servers of its users, decentralized in a manner straight out of a science fiction novel. Inspired by Milton Friedman's and other economists' theories of a noninflationary currency, there is a fixed number of bitcoin that will be mined out over time into computer space, thus limiting the ability of people to inflate or deflate its value, at least in theory. Having said that, bitcoin is in the news now because of its massive spike in cost. Once trading at pennies, it recently neared $20,000 per bitcoin.

Whatever its price, Goldstein and Rochard say that bitcoin is here to stay and that what they call "hyper-bitcoinization" is already well underway.

Audio production by Ian Keyser.

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This is a rush transcript. Check all quotes against the audio for accuracy.

Gillespie: This is the Reason podcast, and I'm your host, Nick Gillespie. Please subscribe to us at iTunes and rate and review us while you're there.

In January 2009, a pseudonymous programmer or set of programmers using the name Satoshi Nakamoto mined the first bitcoin, part of what he called a peer-to-peer electronic cash system, and creating the world's first fully-realized cryptocurrency. Bitcoin potentially offers at least two radical things to its users. First is a non-state-based currency, and second is a fully peer-to-peer accounting system in which every actor can verify all transactions virtually instantaneously. The program resides on the computers and servers of its users, decentralized in a manner straight out of a science fiction novel. Inspired by Milton Friedman's and other economists' theories of a noninflationary currency, there is a fixed number of Bitcoin that will be mined out over time into computer space, thus limiting the ability of people to inflate or deflate its value, at least in theory. Having said that, Bitcoin is in the news now because of its massive spike in cost.

Once trading at pennies per bitcoin, the basic unit, it recently hit around $19,000 per bitcoin. So to talk about Bitcoin, its perils, its promises and its reality, today I'm talking with Michael Goldstein and Pierre Rochard, the president and treasurer of the Satoshi Nakamoto Institute, a group devoted to promoting Bitcoin and working through many of the theoretical and practical challenges for the world's best-known cryptocurrency. They also do a podcast called Noded, N-O-D-E-D, Noded. Go check it out at

Guys, thanks for talking to the Reason podcast today.

Goldstein: Yeah, thank you so much. As a lifelong libertarian, it's an honor to be here.

Gillespie: All right. Well, I hope you feel that way … that's Michael, right? I hope you feel that way when we're done talking. Pierre, how are you?

Rochard: Great. Thanks for having us on, Nick.

Gillespie: Okay. So my first question to you, are either of you guys the creators of Bitcoin?

Goldstein: I can neither confirm nor deny it.

Rochard: I'm not, because I didn't even know how to program back then.

Gillespie: And you guys are both … you met at University of Texas at Austin. Under what circumstances did you meet? And then how did that lead to creating the Satoshi Nakamoto Institute?

Goldstein: Yes. At the University of Texas there is a libertarian group called the Libertarian Longhorns, and as a spinoff we made the Mises Circle, which is dedicated to reading and discussing Austrian economics, so Mises and Hayek and Rothbard and Hoppe, Roberto, de Soto and others. And that's where Pierre and I met. And one of our friends, another co-founder of the Satoshi Nakamoto Institute, Daniel Krawisz, had been into Bitcoin as early as 2011. So it was on our radar. But it was when Cody Wilson of Defense Distributed stopped by to give a talk on a project back in its early days before they even had anything, he sparked our interest in it in a way we couldn't have imagined and introduced us to the ideas of crypto-anarchy and being able to send gold over the internet with Bitcoin. And it was then we started getting interested, and the Mises Circle quickly became much more so the Bitcoin Circle. We were discussing all of the economics of Bitcoin. And later on, in late 2013, after joking with a friend that there's the Ludwig von Mises Institute for Austrian Economics, we need a Satoshi Nakamoto Institute for Crypto-Anarchy.

Gillespie: All right, so you're ruthless cosmopolites, like Ludwig von Mises himself, as long as we're talking about money that not only can freely flow wherever people send it or pull it, but that state governments have no control over, right? In many ways, would you agree that from a libertarian perspective, anyway, that is kind of the real lure of Bitcoin?

Rochard: Absolutely. And we use this word decentralized a lot. And we have to kind of look at why is it decentralized from a technical perspective, and it's that we have a peer-to-peer network of nodes that are communicating to each other. And the node software, people voluntarily choose which version of the software they want to run, and that forms a consensus on the network as to what Bitcoin is. And that peer-to-peer nature and decentralized nature is what makes it impervious to tampering from governments.

Gillespie: We'll get to that, because at a certain point when you want to … I don't disagree with you, but then Bitcoin can exist kind of in the ether of cyberspace or what Al Gore tragically once called 'the information superhighway.' But at some point when you emerge to pay for something, there might be places where the government could grab your hand as it comes up out of the grave. But first, you guys talk about bitcoinization, hyperbitcoinization, after fiat currency fails. What do you mean when you talk in those terms, and why is fiat currency bound to fail? And that is money that is not backed by any particular commodity or good, but is rather just printed up by various governments. Why is fiat currency going to fail? What evidence do we have that it will fail? And then how does hyperbitcoinization come about?

Rochard: Well, I think to say that hyperbitcoinization happens after fiat currency fails is to get the cause and effects backwards. I think that hyperbitcoinization currently and for the past two years has been causing fiat to fail. It's happening from zero. The value of one bitcoin started at zero, and it's been going up from there. And it's basically an economic process of more and more people acknowledging that Bitcoin has a better monetary policy than whatever their local fiat currency is, whether it's the dollar or the Venezuelan bolivar, etc. And so as this circle of people who view Bitcoin as their store values, as their medium of exchange, as their unit of account, as that circle grows, the circle of people who view fiat that way shrinks. And so that's the process of hyperbitcoinization, is essentially an acceleration of that economic process.

Gillespie: Okay. But now as a medium of economic exchange, Bitcoin is terrible right now, isn't it, though, because you don't know is it $19,000, is it $15,000, is it going back down to the low hundreds or back to zero.

Rochard: Well, I think that when we look at the evolution of a money, it has to bootstrap itself, essentially, and that is a very volatile process. But we've seen that the measured volatility has been decreasing, even though if you follow the charts it doesn't feel that way in your gut. But if we look at the quantitative volatility, it has gone down. The other thing, though, is that we're seeing the creation of new financial instruments that will help market participants hedge themselves against that volatility. We recently saw the CME and the CBOE come out with Bitcoin futures. So essentially if you're a merchant who accepts Bitcoin but does not want to take on the volatility associated with that, you can hedge yourself as your bitcoins come in.

So there's that. And then there's just the fact that we have kind of an ideology in Bitcoin, it's called 'hoddling,' which is essentially we're going to hoard bitcoins. And hoarding has a negative connotation in mainstream economics, but in Austrian economics we do recognize that there's always a reason people are engaging in an economic activity. And the reason that Bitcoiners are engaging in hoarding is because we anticipate that Bitcoin has not reached its full potential and its full reach in the global monetary system. So it makes sense to hold onto your bitcoins and to only spend them if you can replenish them. But otherwise it's more of an investment than a method of payment today.

Gillespie: Right. But this is a growing pain through a necessary process of establishing Bitcoin.

Goldstein: Right. Exactly. And as Bitcoin grows and it reaches its full potential, which could be very high, then suddenly it will become more profitable for people to make use of their bitcoins in the sense of being able to purchase specific goods with the bitcoins. But for the time being, all of these ideological hoddlers, the hoarding is the using of it and there's not really a desire to be spending them.

Gillespie: It must be very exciting to be Bitcoin enthusiasts, and seeing it's been around now for going on nine years, and it really has pushed its way fully into the mainstream discussion. Everybody wants a piece of Bitcoin.

Goldstein: Yes. In fact, I remember with the Mises Circle, our first meeting that we did a discussion on Bitcoin was sometime in late 2012, and it was actually very difficult to find any news articles or any resources online beyond and the Bitcoin Wiki to teach people about Bitcoin. And yet you fast forward to today and it's actually difficult to find someone who hasn't heard of Bitcoin. So that's been quite an exciting change.

Gillespie: About 80% of the … this is part of … and at your Institute's page, you can read Satoshi Nakamoto's white paper, the official white paper, that kind of explains how Bitcoin works and what he or they are after in doing it. And there's a set number of Bitcoin that will ever be mined, that will ever be emitted out into reality. About 80% of those are already out, and then the final coin, the actual date may change based on a variety of things, but it's estimated to be mined or out in circulation around 2140. Explain briefly why it's important for kind of the idea behind Bitcoin that there is a limited amount of money in the supply, that everybody knows it's limited, and that after that there is no more.

Rochard: Yeah, so it's interesting, because I think that it would have been okay if Bitcoin had a different monetary policy where essentially it emitted a certain percentage or a certain number of bitcoins every year indefinitely. But Satoshi, he decided to have it be essentially an asymptotic curve so that there would only ever be 21 million bitcoins. And Friedmanites, neoclassical economists, would probably have advised against that and would have said hey, no, you should have like 2% increase in money supply for per. Whereas I think the Austrian perspective on it is that there's actually no difference between those two monetary policies as long as everyone's expectations are the same from the get-go and that there's not a change in the monetary policy. So I think that that's kind of on the purely theoretical economic side. But on the reptilian brain side, I think that knowing that this is a limited edition, 21 million only, hits buttons in our brains that really only luxury goods tap into. And I think that's why … it explains partially why Bitcoin has been so successful and has been gaining so much traction.

Goldstein: And it certainly creates a very strong Schelling point and completely removes a political variable, so as soon as you introduce the idea of well, increase it by 2%, well, why not 3% or 1%?

Gillespie: Right. So let's talk about scaling, because each block in the blockchain of a bitcoin, it can process … my understanding, and correct me, I may have this wrong, but each block can process one megabyte of transactions or activity per 10 minutes. And it is already overloaded. How does the system, and at this point it costs people typically, and I realize people aren't necessarily using it to buy a stick of gum or something like that, but each transaction costs about $10 or more because there is so much congestion on the blockchain. How does Bitcoin scale up from that to the size of something like Visa or MasterCard or a global network of voluntary transactions?

Goldstein: Well, the first thing to note is that Bitcoin is not competing with Visa or MasterCard. Bitcoin is competing with the Federal Reserve and the US Dollar. Visa and MasterCard themselves are a layer two, if not layer three, payment network, so they're built on the system of the US Dollar and other fiat currencies. So really what Bitcoin has to focus on is the underlying reserve asset, the bearer certificates that make up this whole system. And because the blockchain requires having this whole system of mining in order to remain decentralized and sovereign, it's important to be able to pay transaction fees in order to pay for this mining to occur.

Rochard: Right. Because we were describing earlier that the number of bitcoins getting created is going down and down, and ultimately it will be zero. And so if it's at zero and we don't have any transaction fees, then the security of the network would be compromised. So there's the argument of we need to have what's called a fee market and have competition for transactions to get into the blockchain in order to compensate for the decrease in what's called the subsidy, which is the creation of new coins. But I think that it's important to note that while Visa and MasterCard could be Bitcoin denominated, and there's no reason why they wouldn't do that eventually, I think the wider philosophical issue is that wasn't Bitcoin created to send value without going through financial institutions.

And that, I think … when we talk about the white paper describing what Bitcoin is, I think that the white paper describes a vision, which it turns out that the practical reality of Bitcoin scaling properties are such that we're going to have to build a layer two on top of it. And the innovation there has been what's called the Lightning Network, which uses the underlying Bitcoin network to secure a secondary network where the properties of it are significantly different in that you're not transmitting every transaction to every node, and you're thus able to send transactions at a much faster rate and at a much lower fee. And so that currently is under development, and I think there's a lot of frustration within the community that it is still under development and it's not in production yet, whereas Bitcoin's popularity has really outpaced its ability to maintain low fees.

Gillespie: So the lightning network or layer two is going to be laid on top of the Bitcoin system, but doesn't that open up the possibility of fraud or double-dealing, because it's in that space between a transaction being settled, or being made to being settled, that's where all kinds of flimflammery comes into being. That's what happens with Visa cards. Somebody steals your Visa card, they charge a lot of stuff, you don't see it until the next day or even the next month when your account comes in. Then you charge fraud. And then you don't pay that, but that money is spent twice.

Goldstein: So the beauty of the Lightning Network is it's built using Bitcoin payment channels with additional properties, some new op codes, some new scripting has been introduced to the Bitcoin ecosystem that allows for more advanced features. But basically these payments channels, they're made up of individual Bitcoin transactions that are technically valid on the network but do not get broadcast until someone is ready to walk away from the network, so it's closed their channel. And so in this sense, every single Lightning Transaction that's occurring at a high speed, so if you're having millions of them every second, every single one of them is technically a valid Bitcoin transaction that can be where the Bitcoin blockchain can be brought in to adjudicate a dispute, so to speak, but every single one is fully backed by an actual bitcoin on the Bitcoin blockchain.

Gillespie: And you're confident, though, that … I guess for me this is the question. I know when I have fraudulent charges made using a credit card of mine or something, I call Visa or I call my bank and I say, 'Hey, I didn't do that,' and they're like, 'Okay, we'll eat it.' Because if you're waiting to settle a transaction, though, there is that gap there. And isn't that part of like using kind of blockchain technology to settle accounts? This is one of the positive things that people are talking about blockchain, that instead of having to wait five days or more for a financial transaction to settle, working its way through various government stamps and bank stamps and all of that, you can do it instantaneously so that that kind of float disappears. That's where the efficiency and that's where the end of fraud happens. So if there is a float between the transaction being made and settled, it just seems to me like there's going to be fraud.

Goldstein: Each Lightning Transaction is being settled. Whenever you send a transaction, all parties involved are signing each of those transactions and settling it. It's not going to be closed and settled fully on the blockchain, which is a much more expensive process, until later. But even then, with the fraud, that would be something that people can add on top of that, where people can adjudicate different things, because the lightning network can't adjudicate for real goods being sent in the physical world, it can only handle the payments itself. So people can emerge with business models to help provide fraud services for that.

Rochard: So the Lightning Network has the same property as the Bitcoin payment network of being irreversible, in the sense that someone can't take an old lightning transaction and use it against you. If they try to do that, then they will lose all of the money that they've put into that payment channel. And that's how the lightning network essentially punishes people for trying to commit fraud. So I don't think that the reversibility is an issue. It's actually, like you were describing, more of the irreversibility that is a problem, where we do need to have services built on top of lightning network that provide consumer protection.

Gillespie: And I know based on reading your guys' stuff as well as the general worldview that you're coming out of, this is exactly what the market is sussing out now. It's a discovery process and a lot of different things are being tried. But you're confident that all of these sorts of issues are not just going to be worked out, but they're actively being worked out now.

Goldstein: Yes. And I would also say that I don't base my Bitcoin ideology on the specific success of the Lightning Network. The Lightning Network is just one instance of a technology that people have developed that can act as a decentralized payment network on top of Bitcoin. But time will tell what other kind of decentralized and centralized solutions people can come up with that different people using the Bitcoin network will subjectively value as their preferred means of interacting economically with the network.

Gillespie: All right. So this is the dreamworld of many Austrian economists of competing currencies, or of competing models of exchange, right?

Rochard: Well, it's important to distinguish between the monetary properties of Bitcoin and then the payment network properties, because I'm not particularly attached to using the Bitcoin network as a payment network for my day-to-day transactions. What I am attached to is having things be Bitcoin denominated and have Bitcoin be the standard of value that we use in society and have that be our sound money. So I think that it goes back to what Michael was saying, is that yeah, it's not so much the specific implementation details of the payment network that I am enthusiastic about. It's more the monetary policy of the money itself.

Gillespie: But a number of Nobel Prize winners, gold bugs … I mean, there are a lot of people who are arrayed against Bitcoin, saying that it is fantasy, that it's a craze, it's dumber than tulip bulbs because you don't even get a flower at the end. Do you think anything other than either a kind of jealousy or a failure of vision is motivating those criticisms of Bitcoin?

Goldstein: Well, I think it's a fundamental assault on their entire economic vision of the world. And Bitcoin imposes a strict Austrian economic policy on the economy, and it's also something that they don't get a say in. No one called up Paul Krugman to ask him if Bitcoin was a good idea. Someone just wrote the code and put it out there, and all of us adopted it despite these people telling us it's bad for years. We've heard from every economist and pundit how terrible it is, and everyone continues to still buy it. So they don't have the same kind of political clout in the Bitcoin world that they do in government-issued currencies.

Gillespie: So the Keynesian god is failing, and I guess it's even broader than that. A lot of very market-friendly economists seem to be upset by it. What about gold bugs? In libertarian circles, I'd say the enthusiasm for Bitcoin is only matched by a lot of negativity coming from gold bugs, who are calling this a joke or a scam. I understand why a noninflationary monetary system which happens without the benediction of politicians or Nobel Prize-winning economists would piss those people off. What is it about Bitcoin that gets under the skin of gold bugs?

Rochard: I think that its lack of physical, tangible existence. We're just not used to thinking of digital goods as being scarce. We're used to thinking of them as being abundant, and with … Hard drives get bigger and bigger every year, so in a sense we have digital hyperinflation of digital goods, whether it's streaming video or audio or text or blogs and all of this, we have a hyperabundance of digital goods. And so just the idea of 'oh, well, we're going to make a digital money,' to them is laughable, because there's no physical constraints on the production of this money. I think that obviously the part they miss is kind of how the network functions and how a social consensus can form around a technology like this.

Gillespie: Yeah, and in a way it's like super gold, and obviously people like von Mises and many of the Austrian school like the whole promise of gold as a backer of currency is that it's finite, that the supply is finite. Obviously it gets … when a new, big mine is found, or vein, it can change things. But the whole idea is that it takes the creation of money out of the hands of political consideration. So Bitcoin is doing that in a way that is more effective and final than the natural world could.

Rochard: Yeah. The reason I think that it is more effective is that when the price of gold goes up, you see more gold mining happen, because now miners can justify higher costs for digging up gold. And you don't have that with Bitcoin, because the Bitcoin network has something called the mining difficulty, and that adjusts every two weeks to make sure that the schedule is maintained. So in that regard I do think that Bitcoin is actually a sounder money than gold.

Goldstein: Yeah, it's even more scarce than gold. It'd be more difficult to create more Bitcoin than it would be to create a nuclear fission device to create gold out of thin air.

Gillespie: Do you think that other cryptocurrencies will compete with Bitcoin, not just Bitcoin maximalist, but also Bitcoin exceptionalist, that it's really Bitcoin or bust in the cryptocurrency space?

Rochard: I think that they do currently compete with Bitcoin, although it is also a matter of the pie is growing, and these different alt coins appeal to different people and kind of almost different economic thoughts. Like there's one that's called Freicoin, which has a phenomenon called demurrage, where essentially they take coins away from you over time so that you're incentivized to spend it. So each coin kind of has a separate value proposition that it's trying to compete with Bitcoin on. But ultimately at the end of the day, I think that it's a winner-take-most market, the market for money, because the whole point of money is that we avoid barter and that we're all kind of transacting on the same basis. So I think that the natural market process lends itself to Bitcoin maximalism, or amaximalism. And then the reason that there's an exceptionalism for Bitcoin is purely a matter that it was first. It was the first cryptocurrency to gain traction and to succeed on this level. And there I turn to a phenomenon called the Lindy Effect, which is that the longer that something's been around, the longer you can expect it to continue to be around. And I think that's a key heuristic of money.

Gillespie: So two final questions, one philosophical and one kind of gossipy. The philosophical one is that one of the things that gets talked a lot about with blockchain, and you guys alluded to it before, is that it gets rid of the need for intermediaries in all sorts of transactions. You don't need trusted third parties to help make something okay, like kind of valorize or validate something. In a weird way, and this is probably more philosophical than practical in this case, but part of the genius of capitalism, of a free market economy, is precisely those intermediaries who add value. The Marxist critique of capitalism is that there's only these people who get in the way and they suck up all of the value, all of the labor value, and profits are fraud that you just expropriate from people. But really, intermediaries are what make capitalism work. It's people who see sand in the desert that is plentiful and cheap and they bring it to people who need it to make cement or concrete or silicon chips and all of that kind of stuff. Is there a fundamental kind of contradiction at the heart of Bitcoin and blockchain of that it's perfectly capitalistic, and yet it seems to be all about the abolition of intermediaries?

Goldstein: No, I don't think there's a contradiction. Instead, I think what Bitcoin offers that's so fantastic is that it allows people to start thinking about these institutions as being opt-in rather than kind of forced upon them. Right now if I wanted to interact with dollars, I have no choice but to go get a bank account at Chase or Bank of America or wherever and operate on the Visa network and PayPal and just hope that they don't screw with me. While with Bitcoin, it takes us back to square one at the base level and lets us rebuild these institutions in a way that better reflects people's actual needs and desires without the sort of various fraudulent business models or fractionaries or banking or the unfair business practices of freezing people's accounts. People now have to compete at a much more rigorous level to create these business models in a Bitcoin world.

Gillespie: Well, that assuages all of my fears. Thank you for that. Final question. Do you guys have any idea of who … you said it wasn't you, but who is or are Satoshi Nakamoto? Who are the likely candidates, and does it matter?

Rochard: I think that as the leaders of the Satoshi Nakamoto Institute, that it really would be inappropriate for us to even speculate on the matter and lend credence to rumors or gossip. But I do think that there has been … we're starting to see a little too much of hero worship or idealizing Satoshi as a soothsayer, as someone who predicted the future, and his vision is kind of what we should aspire to or intently follow. It's clear to me and to quite a few others in the Bitcoin world that today we understand Bitcoin better than Satoshi did when he left Bitcoin. And that's because we've seen how it has scaled and we've seen how people interact with it, and we just have a better understanding of what Satoshi created. So I think that it is important to its origin story that Satoshi remain pseudonymous, and I also think that it lends itself to a bit of hero worship, which might not be healthy, but ultimately is inconsequential.

Gillespie: All right. Well, we will leave it there. Thank you so much for talking. This has been the Reason podcast, and we've been talking with Michael Goldstein and Pierre Rochard, the president and treasurer, respectively, of the Satoshi Nakamoto Institute, a group devoted to promoting Bitcoin and working on the theoretical and practical implications of the world's most fully-realized cryptocurrency. They also do a podcast called Noded. N-O-D-E-D. Go check it out on For Reason, this is Nick Gillespie. Please subscribe to us at iTunes, and rate and review us while you're there. Thanks so much for listening.