Peter Thiel (PayPal/Palantir Co-founder) – Bitcoin 2022 Keynote (Apr 2022)

Chapters

Abstract

The Future of Digital Currencies: Navigating the Transformation from Traditional Money to Cryptocurrency

Abstract

In the rapidly evolving world of finance, the shift from traditional monetary systems to digital currencies is a pivotal change. This article explores the multifaceted nature of this transformation, focusing on the rise of cell phone-based transactions, challenges to government control, the evolution of platforms like PayPal, and the nuanced dynamics of various forms of money, particularly Bitcoin and Ethereum. Drawing insights from Peter Thiel and other experts, we delve into the implications of these changes for government sovereignty, market dynamics, and the future of economic transactions.

1. The Digital Money Revolution: Cell Phones at the Forefront

The transition from physical to electronic dollars is increasingly occurring through the internet and mobile platforms. This trend is set to democratize financial access globally, allowing seamless money movements and potentially dollarizing economies in both emerging and developed nations. The shift is expected to occur primarily through the Internet and cell phone platforms. With an expected 1 billion internet-enabled cell phones within five years, this trend is set to democratize financial access globally, allowing seamless money movements and potentially dollarizing economies in both emerging and developed nations.

2. Governments at a Crossroads: Monetary Sovereignty vs. Technological Progress

The proliferation of cell phone-based transactions presents a significant challenge to governments’ control over monetary policies. This technological tide may force governments to choose between disrupting telecommunications networks or relinquishing monetary control, altering the landscape of financial sovereignty. Governments face a choice between shutting down telecommunications networks and restricting cell phone ownership or relinquishing monetary sovereignty. Traceability will become difficult, and governments will face a loss of power derived from monetary sovereignty.

3. PayPal’s Shift: From Vision to Reality

Initially aspiring to supplant central banks with an electronic money system, PayPal eventually pivoted towards a practical model focused on payment processing. This evolution underscores the adaptability and resilience required in the fast-changing financial technology sector. Peter Thiel and PayPal aimed to replace the U.S. central bank with a new form of electronic money, creating a closed-loop system with a network effect. PayPal’s initial vision of a closed-loop monetary system shifted to a more practical funnel model, where money flows in and out quickly, resembling a payment system.

4. Redefining Money: The Network Effect

Money, in its various forms, can be understood through a network effect lens. The spectrum ranges from closed networks offering stability and control to open networks facilitating swift transactions and wider access. This conceptualization is crucial in understanding the dynamics of emerging digital currencies. There are forms of money with high velocity (moving quickly) and low value, and vice versa. Store-of-value money moves slowly and has high value (e.g., gold bullion). High-velocity money moves quickly and has low value (e.g., Visa). PayPal in 1999 was a closed loop with a large store of value. PayPal in 2002 became a high-velocity loop. Bitcoin is at the extreme end of the store-of-value spectrum, like gold. Ethereum aims to be at the extreme end of the high-velocity spectrum.

5. The Velocity of Money and Cryptocurrency Dichotomy

The velocity of money – the speed at which it circulates in an economy – inversely affects the quantity needed. In this context, Bitcoin and Ethereum represent two extremes: Bitcoin as a slow-moving, store-of-value akin to gold, and Ethereum as a high-velocity, frictionless payment system comparable to Visa. Their respective market caps and valuations reflect these fundamental differences and potential growth trajectories. Bitcoin and Ethereum are pioneering cryptocurrencies, but their differences are significant. Bitcoin is primarily viewed as a store of value, while Ethereum serves more as a medium of exchange. This distinction is essential in understanding their roles in the evolving landscape of digital currencies. Ethereum’s current market cap is comparable to Visa, suggesting it is fairly valued as a seamless payment system. For Ethereum to reach its full potential, it needs to become completely frictionless, with lower gas fees. Gold’s market cap is $12 trillion, significantly higher than Bitcoin’s. The question is why Bitcoin, as a potential replacement for gold, is undervalued compared to gold.

6. Insights from Peter Thiel: Bitcoin and Ethereum’s Market Potential

Peter Thiel’s analysis brings to light the varying roles of Bitcoin and Ethereum in the economy. He questions Bitcoin’s undervaluation relative to gold and suggests that Ethereum’s valuation, comparable to Visa’s, is reasonable for its intended purpose. Furthermore, the historical performance of gold, especially during economic downturns, offers a precedent for understanding Bitcoin’s potential as a hedge against economic uncertainty. In the 1970s, gold outperformed stocks, and the ratio of gold’s value to equities’ value was 1:1. Today, the ratio is 10:1 in favor of equities.

Supplemental Update: Peter Thiel’s Perspective on Bitcoin

– Bitcoin is a canary in the coal mine, warning of inflation.

– It reflects the end of fiat money regimes and central bank bankruptcy.

– Bitcoin’s honesty and efficiency make it the most honest market.

– Bitcoin’s success is a political question, not just a technological one.

– Bitcoin has enemies who seek to stop its progress, including Warren Buffett, Jamie Dimon, Larry Fink, and ESG advocates.

– Bitcoin is a revolutionary youth movement against the status quo.

7. Bitcoin in the 21st Century: A Hedge Against Inflation and Control

Bitcoin’s rise in the 2010s, juxtaposed with the economic conditions of the 1970s, positions it as a potential buffer against inflation and government overreach. Thiel’s assertion of Bitcoin as the ‘most honest market’ and its political dimensions further emphasize its role as more than just a digital currency but a symbol of a broader movement against traditional financial systems. In the 1970s, high inflation, regulation, and taxes made cash, bonds, and equities poor investments due to effective capital gains tax rates exceeding 100%. In the 2010s, gold and Bitcoin performed well, but Bitcoin’s primary competitor is the stock market as a whole, which it closely follows in daily trading. Bitcoin’s real competitor is the stock market, not gold or Ethereum. The question is whether we are heading towards a 1970s-style world with higher inflation and regulation, making both stocks and bonds less attractive investments. In such a scenario, Bitcoin could potentially achieve parity with equities, or even a ratio of 100 to 1, due to its lack of government control and quasi-regulation.

8. The Challenge for Institutional Adoption: Regulatory and Practical Hurdles

For Bitcoin to rival traditional financial institutions like the S&P 500, significant policy and regulatory changes are required, especially to enable investment by large-scale entities like pension plans and sovereign wealth funds. Even if Bitcoin’s value increases by a factor of 100, the actual return may be modest in real terms due to inflation and taxation. However, there is still hope for a significant return on investment over the long term.

Supplemental Update: Bitcoin’s Valuation and Challenges

– Bitcoin’s market cap is comparable to the S&P 500.

– Bitcoin’s value could increase if it were allowed to be purchased by pension plans and sovereign wealth funds.

– Regulatory barriers currently prevent institutional investment in Bitcoin.

– Bitcoin is a superior asset due to its limited supply and resistance to inflation.

– Kevin O’Leary believes Bitcoin combines value storage and velocity.

– Bitcoin and Ethereum represent different software platforms with distinct properties.

– Software is not neutral and can be influenced by politics.

9. Ethereum’s Comparative Analysis with Bitcoin

While both Bitcoin and Ethereum are pioneering cryptocurrencies, their differences are significant. Bitcoin is primarily viewed as a store of value, while Ethereum serves more as a medium of exchange. This distinction is essential in understanding their roles in the evolving landscape of digital currencies.

Supplemental Update: Bitcoin and Ethereum Comparison

– Bitcoin is for savings and store of value, while Ethereum is better for transactions.

– Arthur Hayes believes comparing Bitcoin and Ethereum is flawed.

– Jamie Dimon stated that his clients demand Bitcoin, so his bank will accommodate that demand.

Conclusion

As we navigate the transition from traditional monetary systems to digital currencies, understanding the nuances and implications of technologies like Bitcoin and Ethereum is paramount. Their impact extends beyond financial transactions, challenging traditional notions of government control, monetary policy, and the very concept of money. The future of finance is being rewritten, and keeping abreast of these changes is crucial for anyone looking to navigate this new era effectively.

Notes by: OracleOfEntropy