EP13 Narration - Author - Pierre Rochard - Speculative Attack.

Welcome back to the bit by bit podcast. In today's episode, I'm going to be reading through what I believe to be one of the most important articles ever written in the Bitcoin space. I hope you enjoy speculative attack by Pierre Rashard published July 4th, 2014, introduction.

Bitcoin naysayers ring their hands over how Bitcoin can't go mainstream. They gleefully worry that Bitcoin will not make it across the innovation chasm. It's too complicated. It doesn't have the right governance structure. The security is too hard to get right. Existing

and upcoming fiat payment systems are or will be superior. It's too volatile. The government will ban it. It won't scale. The response from the Bitcoin community is to either endlessly argue over the points above or to find their inner Bitcoin Jonah with platitudes like Bitcoin,

the currency doesn't matter. It's the blockchain technology that matters. It would be better if the blockchain technology was used by banks and governments. Bitcoin should continue to be a niche system for the bit curious. It's just an experiment. Fiat and Bitcoin will live side by side happily

ever after. Bitcoin is the myspace of virtual currency. The above softisms are each worth their own article, if just to analyze the psychosocial archetypes of the relevant parrots. A few of the criticisms mentioned earlier are correct, yet they are complete non-secretors.

Bitcoin will not be eagerly adopted by mainstream. It will be forced upon them, forced as in compelled by economic reality. People will be forced to pay with bitcoins, not because of the technology, but because no one will accept their worthless fiat for payments.

Contrary to popular belief, good money drives out bad. This "driving out" has started as a small fiat bleed. It will repeatedly escalate into class 4 hemorrhaging due to speculative attacks on weak fiat currencies. The end result will be hyper-iconization, i.e. your money is no

good here. Theres law, good money drives out bad. Historically, it has been good strong currencies that have driven out bad weak currencies. Over the span of several millennia, strong currencies have driven out weak in international competition. The Persian Derek, the Greek Drakmar, the Macedonian

Steiter, and the Roman Denarius did not become dominant currencies of the ancient world, because they were bad or weak. The florins, dukits, and sequins of the Italian city states did not become the dollars of the Middle Ages, because they were bad coins. They were among the

best coins ever made. The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak. Consistency, stability, and high quality have been the attributes of great currencies that have won the competition

for use as international money. Bitcoins are not just good money, they are the best money. The Bitcoin network has the best monetary policy and the best brand. We should therefore expect that bitcoins will drive out bad, weak currencies by what process will bitcoins become

the dominant currency? Which fiat currencies will be the first to disappear? These are the interesting questions of the day, as the necessary promises for those questions are already established truths. fiat bleed. Bitcoin's current trend is to increase in value on an exponential trend line

as new users arrive in waves. The good money is slowly driving out bad. Two factors drive this. One, reduction in information asymmetry. People are learning about Bitcoin and coming to the realization that bitcoins are indeed the best money. Possible overlapping motives. ADHD.

Compulsive novelty fetishism induced by post-war consumer, culture, and/or innate biological processes. FOMO. Fear of missing out. PISD. Post-internet stress disorder. AKA disruption. The next big thing.

Internet of money. Two, increasing liquidity. Buying bitcoins is more convenient and has fewer fees attached today than a year ago. One can reasonably predict that this will also be the case a year from now. Why? Because selling bitcoins is a profitable and competitive business.

Why? Because people want bitcoins, see above. Due to group psychology, these newcomers arrive in waves. The waves have a destabilizing effect on the exchange rate. Speculators are unsure of the amplitude or wavelength of adoption, and amateurish punters let their excitement as well as subsequent fear overwhelm them.

Regardless, once the tide has pulled back and the weekends have folded, the price is a few times higher than the wave before. This slow bleed is the current adoption model. And commentators generally assume one of the following. One, slow bleed never occurs, its fiction based on misleading

data. Two, slow bleed has stopped. The above motives only affect lulberterians and angry teens. Three, the process will taper off now as all the super tech savvy people are already getting on board. My own prediction is that slow bleed has been accelerating and is only the first step.

The second step will be speculative attacks that use bitcoin as a platform. Third and final step will be hyper bitcoinization. Currency crisis. It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.

Once it gets bootstrapped, there are so many applications. If you could effortlessly pay a few cents to a website as easily as dropping coins in a vending machine. Satoshi Nakamoto. 17th of the first 2009. Slow bleed leads to currency crisis as the expected

value of bitcoin solidifies in people's minds. At first, they are conservative. They invest what they can afford to lose. After 12-18 months, their small stash of bitcoins has dramatically increased in value. They see no reason why this long-term trend should reverse.

The fundamentals have improved and yet adoption remains low. Their confidence increases. They buy more bitcoins, they rationalize well, it's only 1-5% of my investments. They see the price crash a few times due to bubbles bursting or just garden variety panic sales. It entices

them to buy more, a bargain. Bitcoin grows on the asset side of their balance sheet. On the liability side of the bitcoin as balance sheet are the mortgages, student loans, car loans, credit cards, etc. Everyone admonishes people to not borrow in order to buy bitcoins.

The reality is that money is fungible. If you buy bitcoins instead of paying down your mortgages principle, you are a leveraged bitcoin investor. Almost everyone is a leveraged bitcoin investor because it makes economic sense within reason. The cost of borrowing annualized interest

rates ranging from 0-25% is lower than the expected return of owning bitcoins. How leveraged someone's balance sheet is depends on the ratio between assets and liabilities. The appeal of leveraging up increases if people believe that fiat-denominated

liabilities are going to decrease in real terms, i.e. if they expect inflation to be greater than the interest rate they pay. At that point it becomes a no-brainer to borrow the weak local currency using whatever collateral a bank will accept, invest in a stronger foreign

currency and pay back the loan later with realized gains. In this process, banks create more weak currency amplifying the problem. The effect of people, businesses or financial institutions borrowing their local currency to buy bitcoins is that the price of bitcoin in the currency would go

up relative to other currencies. To illustrate, let's say that middle class Indians trickle into bitcoin. Thousands of buyers turn into hundreds of thousands of buyers. They borrow Indian rupees using whatever unacumbered collateral they have. Homes, businesses, gold, jewellery, etc. They use these rupees to buy

bitcoins. The price of bitcoins in Indian rupees goes up. A premium develops relative to other currency pairs. A bitcoin in India might be worth $600, while in the US it trades at 500. Traders would buy bitcoins in the US and sell them in India to net $100 again.

They would then sell their Indian rupees for dollars. This would weaken the Indian rupee, causing import inflation and losses for foreign investors. The Indian central bank would have to either increase interest rates to break the cycle, impose capital controls or spend their foreign

currency reserves trying to prop up the rupees exchange rate. Only raising interest rates would be a sustainable solution, though it would throw the country into a recession. There's a huge problem with Indian central banks raising interest rates. Bitcoin's historical return is 500% per year.

Even if investors expected future return is one-tenth of that, the central bank would have to increase interest rates to unconscionable levels to break the attack. The result is evident. Everyone would flee the rupee and adopt bitcoin due to economic duress rather than technological enlightenment.

This example is purely illustrative. It could happen in a small country at first, or it could happen simultaneously around the world. Who leverages their balance sheet and how is impossible to predict, and it will be impossible to stop when the dam cracks.

Which countries are most vulnerable to a currency crisis? Business Insider provides a helpful list. Bitcoins will have to reach certain threshold of liquidity indicated by a solid exchange in every financial centre and a real money supply, i.e. market cap of at least 50 billion before they

can be used as an instrument in a speculative attack. This will either coincide with or cause a currency crisis. (3) Hyper Bitcoinization A speculative attack that seems isolated to one or a few weak currencies, but causes the purchasing power of bitcoins to go up dramatically,

will rapidly turn into a contagion. For example, the Swiss will see the price of bitcoins go up tenfold, and then a hundredfold. At the margin, they will buy bitcoins simply because they want to speculate on their value, not due to an inherent problem with the Swiss franc.

The reflexivity here entails that production in demand for Swiss francs would actually cause higher than expected inflation, and thus an inherent problem with the Swiss franc. The feedback loop between fear, inflation, and bitcoin deflation will throw the world into

full hyper Bitcoinization, explained here by Daniel. For anyone who actually wants to go through and click some of these links, you'll have to actually go onto the Nakamoto Institute. I'll put the link in the show notes anyway. With this article, it's definitely worth doing that because there's loads

of links here to dig a little bit deeper. It's definitely worth having a look when you have some time, conclusion. Bitcoin will become mainstream. The Bitcoin skeptics don't understand this due to their biases and lack of financial knowledge. First, they are in as strong an echo chamber as

Bitcoiners. They rabidly search for evidence that confirms their view of Bitcoin. Second, they misunderstand how strong currencies like Bitcoin overtake weak currencies like the dollar. It is through speculative attacks and currency crisis caused by investors,

not through the careful evaluation of tech journalists and mainstream consumers. To honour these soon-to-be extinct skeptics, the Nakamoto Institute has launched a tribute to bold assertions. Right, so in summary, there's not a lot I can really add to that, to be honest.

Just a couple of points really. Firstly, information asymmetry is mentioned. It's one of the reasons I believe there's so much upside still to come from Bitcoin. I've spoken about it many times on the podcast and when people ask me, "Well, how can there be so much upside?" That's one of the

first things I will point to because it's still so misunderstood. And the other thing I'll point out is this article was written in 2014. Everything that Pierre has talked about in this article has either already happened or is happening in front of our eyes. When this article was published

in 2014, Bitcoin was at $250. What we can really take from this article is, "When Pierre speaks, you should really be listening. Pay attention. I've recently interviewed him. It was a real planet to speak with him. And if you haven't already listened to it, I suggest you go back

and have a listen." Anyway, I think that's all I can really say on that article. If anyone has any questions, please do reach out. I'm happy to answer any if I can. And if I can't, I'll try and get in touch with Pierre and get an answer from him. Once again, thanks very much for listening. I hope it was helpful and speak again soon.